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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 June 30 ,2004
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, 2004, there were 403,334,000 shares of Common Stock, no par
value, 2,747,500 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:
June 30, 2004 and December 31, 2003......................................3
Statements of Operations:
Three and Six months ended June 30, 2004 and 2003........................4
Statements of Cash Flows:
Six months ended June 30, 2004 and 2003..................................5
Notes to Financial Statements:
Six months ended June 30, 2004 and 2003..................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............18
Item 4. Controls and Procedures.................................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................................19
Item 2. Changes in Securities and Use of Proceeds...............................19
Item 3. Defaults upon Senior Securities.........................................19
Item 4. Submission of Matters to a Vote of Security Holders.....................19
Item 5. Other Information.......................................................19
Item 6. Exhibits and Reports on Form 8-K........................................20
SIGNATURE ........................................................................21
CERTIFICATIONS ........................................................................26
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, 2004 December 31, 2003
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 2,676 $ 530
Accounts receivable 638 803
Inventory 1,320 1,606
Stockholder receivable -- 8
Prepaids and other current assets 94 78
----------- -----------
Total Current Assets 4,728 3,025
PROPERTY AND EQUIPMENT - NET 489 481
INVESTMENTS in JOINT VENTURE 872 960
OTHER ASSETS 350 404
----------- -----------
TOTAL ASSETS $ 6,439 $ 4,870
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITES:
Accounts payable $ 151 $ 768
Line of credit 233 120
Accrued payroll and related expense 182 120
Other accrued expenses 66 98
Current portion of notes payable and captial lease obligations 190 154
----------- -----------
Total Current Liabilities 822 1,260
ACCRUED INTEREST PAYABLE 1,246 1,122
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 0 5
NOTES PAYABLE, NET OF CURRENT PORTION 3,340 3,347
----------- -----------
TOTAL LIABILITIES $ 5,408 $ 5,734
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Series A convertible preferred stock - No par value; 30,000,000 shares
authorized; 2,747,500 and 2,820,000 shares issued and outstanding
at 6/30/04 and 12/31/03 1,773 1,837
liquidating preference at $0.60 per share aggregating $1,680,000 and $1,692,000
Series B convertible preferred stock - No par value; 5,000,000 shares authorized;
1,217,000 shares issued and outstanding at 6/30/04 and 12/31/03
liquidating preference at $2.00 per share aggregating $ 2,434,000 2,434 2,434
Common Stock - No par value; 500,000,000 shares authorized; 403,334,000
and 378,341,000 shares issued and outstanding at 6/30/04 and 12/31/03 88,789 86,054
Common stock subscribed 21 60
Stock notes receivable (1,176) (1,203)
Additional paid-in capital 7,031 7,031
Accumulated deficit (97,841) (97,077)
----------- -----------
Total Shareholders' deficit 1,031 (864)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 6,439 $ 4,870
=========== ===========
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date. See notes to financial statements.
3
INCOME and EXPENSE STATEMENTS
(Unaudited)
(In thousands, except for share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- ---------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
NET REVENUES
Research and development contracts $ 262 $ 405 $ 698 $ 728
Production $ 456 $ 950 $ 1,128 $ 1,966
------------- ------------- ------------- -------------
$ 718 $ 1,355 $ 1,826 $ 2,694
------------- ------------- ------------- -------------
COST OF REVENUES
Research and development contracts 188 200 493 412
Production 331 1,002 684 1,767
------------- ------------- ------------- -------------
519 1,202 1,177 2,179
------------- ------------- ------------- -------------
GROSS MARGIN 199 153 649 515
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Research & development 96 114 128 322
Engineering 85 225 181 505
Selling, general & administrative 449 879 804 1,364
Depreciation and amortization 92 87 175 169
------------- ------------- ------------- -------------
Total operating expenses 722 1,304 1,288 2,359
------------- ------------- ------------- -------------
NET OPERATING LOSS (523) (1,151) (639) (1,844)
OTHER COSTS AND EXPENSES:
Interest and financing fees 63 54 127 109
Other (income)/expense 20 0 1 0
Interest income (4) (2) (4) (7)
------------- ------------- ------------- -------------
Total other costs and expenses 79 52 124 102
------------- ------------- ------------- -------------
NET LOSS $ (602) $ (1,203) $ (763) $ (1,946)
------------- ------------- ------------- -------------
NET LOSS PER COMMON SHARE: $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 383,344,000 345,594,000 383,344,000 345,594,000
4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
----------------------------
2004 2003
------- -------
OPERATIONS
Net loss $ (763) $(1,946)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 175 168
Equity in losses 88 0
Stock and stock options issued for services 37 16
Change in operating assets and liabilities:
Accounts receivable 165 263
Inventory 286 338
Stockholder receivable 8 0
Prepaids and other assets (16) (39)
Accounts payable and accrued expenses (464) 421
------- -------
Net cash used by operating activities (484) (779)
------- -------
INVESTING:
Purchases of property, plant and equipment, net of disposals (129) (74)
------- -------
Net cash used by investing activities (129) (74)
------- -------
FINANCING:
Borrowing (repayments) on leases and notes payable 24 (16)
Borrowing on line of credit 113 0
Proceeds from issuance of common stock, exercise of
stock options and remittances on stock notes receivable 2,622 0
------- -------
Net cash provided (used) by financing activities 2,759 (16)
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,146 (869)
CASH AND EQUIVALENTS:
Beginning of period 530 1,868
------- -------
End of period $ 2,676 $ 999
======= =======
5
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(UNAUDITED)
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
-----------------------------
2004 2003
------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for services $ 37 $ 12
Conversion of Series A preferred stock to common stock $ 64 $ 5
6
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Six months ended June 30, 2004 and 2003
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 of America 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
of America 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, 2004 and the interim
results of operations for the three and six months ended June 30, 2004 and cash
flows for the six months ended June 30, 2004 have been included. The balance
sheet at December 31, 2003, 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 of America 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 June
30, 2004 and December 31, 2003 inventories are reported at market value.
Inventories have been valued on the basis that they would be used, converted and
sold in the normal course of business. Certain reclassifications have been made
to the prior periods financial 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, 2003. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America 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, 2003, 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.
Basic and diluted net 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, 2004
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, 2004 December 31,
(unaudited) 2003
------------- ------------
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, 2003 and June 30, 2004. 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
the accredited investors at the investors'
option. 3,332 3,332
Unsecured note payable - Schulz 120 120
Secured note payable - CCE, Inc. 40 0
Secured note payable - Microsoft 20 26
------ ------
3,512 3,478
Less current maturities 172 131
------ ------
Total $3,340 $3,347
====== ======
NOTE 3 - Shareholders Deficit
In the first quarter of 2004, Enova entered into several stock purchase
agreements to issue 16,250,000 shares of our common stock through a private
placement offering at $0.12 per share for a total cash purchase of $1,950,000.
The funds were received and the shares were issued in April 2004.
Additionally, we received approximately $650,000 in equity capital during the
six months ended June 30, 2004 as a result of our employees exercising incentive
stock options, a majority of which expires in July 2004.
On May 4, 2004, 140,000 shares of restricted common stock were issued to the
Board of Directors at a price of $0.15 per share for full board meetings and
committee meetings during that the second quarter of 2004.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the 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, 2003. 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 of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results. The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from those determined using the necessary
estimates inherent in the preparation of financial statements. Estimates and
assumptions include, but are not limited to, customer receivables, inventories,
equity investments, fixed asset lives, contingencies and litigation. The Company
has also chosen certain accounting policies when options were available,
including:
o The first-in, first-out (FIFO) method to value our inventories;
o The intrinsic value method, or APB Opinion No. 25, to account for our
stock options;
o Review of customers' receivable to determine the need for an allowance
for credit losses based on estimates of customers' ability to pay. If
the financial condition of our customers were to deteriorate,
additional allowances may be required.
o Revenue recognition - The Company is required to make judgments based
on historical experience and future expectations, as to the
reliability of shipments made to its customers. These judgments are
required to assess the propriety of the recognition of revenue based
on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition,"
and related guidance. The Company makes these assessments based on the
following factors: i) customer-specific information, ii) return
policies, and iii) historical experience for issues not yet
identified.
These accounting policies were applied consistently for all periods presented.
Our operating results would be affected if other alternatives were used.
Information about the impact on our operating results is included in the
footnotes to our financial statements.
9
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 second quarter of 2004, the Company's technologies and products made
further in-roads in the areas of heavy-duty hybrid vehicle applications.
Notably, Enova completed negotiations for two development and production
contracts for Asian markets. Enova continued its expansion into the Chinese
hybrid vehicle markets by securing contracts for hybrid buses and trains in
China and Singapore respectively.
Enova's potential in China is growing with the addition of two more bus
manufacturers, First Auto Works and Top-Electric. Enova now sells its hybrid
drive systems to four bus developers in China, including Shenzhen Minghua
Environmental Protection Vehicle Co., Ltd. and Tsinghua University of China.
Each of these companies is seeking a share of the hybrid bus and vehicle
production for the 2008 Beijing Summer Olympics. Management believes that these
development and initial production programs will result in additional production
contracts during 2005 and beyond; however at this time; there are no assurances
that such additional contracts will be consummated.
During the quarter ended June 30, 2004, we continued to develop and produce
electric and hybrid electric drive systems and components for Mack/Volvo, Ford
Motor Company (Ford), Wright Bus and Eneco of the United Kingdom, and Tomoe of
Japan and several other domestic and international vehicle and bus
manufacturers. In July of 2004, we entered into an agreement with Tomoe and
Hyundai Heavy Industries of Korea for the development and production of eight,
10
36-ton battery electric locomotives for the Singapore Land Transport Authority
for anticipated delivery in late 2005 or early 2006.
Our various electric and hybrid-electric drive systems, power management and
power conversion systems are being used in applications including Class 8
trucks, train locomotives, transit buses and industrial vehicles as well as in
non-transportation applications such as fuel-cell management and power
management systems including the EDO minesweeper. 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
Hydrogenics, a fuel cell developer in Canada.
Heavy-Duty Drive Systems - Buses, Trucks, Vans and Other Industrial Vehicle
- --------------------------------------------------------------------------------
Applications
- ------------
Enova's primary market focus continues to center around the heavy-duty drive
systems sector for multiple vehicle and marine applications. We believe
series-hybrid and parallel hybrid heavy-duty drive system sales offer Enova the
greatest return on investment in both the short and long term. Although this
market sector has developed more slowly than anticipated, management believes
that this area will see significant growth over the next several years.
Our PantherTM 120kW and PantherTM 240kW drive systems were developed completely
in-house and are in production and operating in global markets giving Enova a
potential edge on other competitors in this sector. As the Company penetrates
more market areas, we are continually refining and optimizing both our market
strategy and our product line to maintain our leading edge in power management
and conversion systems for mobile applications.
In July 2004, Enova completed negotiations for two development and production
contracts for Asian markets. Enova continued its expansion into the Chinese
hybrid vehicle markets by securing contracts for hybrid buses and trains in
China and Singapore respectively. Enova's potential in China is growing with the
addition of two more bus manufacturers, First Auto Works and Top-Electric. Enova
now sells its hybrid drive systems to four bus developers in China, including
Shenzhen Minghua Environmental Protection Vehicle Co., Ltd. and Tsinghua
University of China. Each of these companies is seeking a share of the hybrid
bus and vehicle production for the 2008 Beijing Summer Olympics. Tsinghua is the
premier research university in China, its automotive engineering department
selecting Enova's drive systems for its government funded hybrid fuel cell bus
development. During the second quarter of 2004, Enova delivered 3 PantherTM
120kW drive systems to Tsinghua for their development program. Engineers at
Tsinghua have been pleased with the results of Enova drive systems and are in
discussions for further activity. Management believes that these development and
initial production programs will result in additional production contracts
during 2005 and beyond; however at this time; there are no assurances that such
additional contracts will be consummated.
In Japan, Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. has
entered into a development and production contract with Enova for eight
battery-electric locomotives for the Singapore Land Transport Authority for
service vehicles for the Singapore Mass Rapid Transit Circle Line system for
maintenance, repair, shunting and recovery of passenger trains. Over the last
several years, Enova successfully integrated its PantherTM drive systems into
Tomoe's heavy-duty Isuzu dump truck application, three passenger trams and a
mine tunnel crawler. It is anticipated that the hybrid drive train components
will be delivered in late 2005 at Tomoe's Japan-based facilities. Enova
anticipates the total contract to exceed US$3 million over the life of the
contract. This latest market penetration in Asia enhances not only Enova's
alliances with both Tomoe and HHI, but also advances Enova's hybrid-electric
technologies in high voltage power management components. As part of this
contract, Enova will develop a high voltage charging system to enable the
locomotive to receive a direct battery charge from the high voltage rail. Tomoe
and Enova continue to develop other commercial and industrial applications for
our drive systems including potential light rail applications. Although we
anticipate additional orders for these systems in 2004 and beyond, there are no
assurances that such additional orders will be forthcoming.
11
Wrights Environment, a division of Wrights Bus, one of the largest low-floor bus
manufacturers in the United Kingdom, continues to negotiate with Enova regarding
our diesel genset ,powered, series hybrid drive systems for their medium and
large bus applications. Wright Bus has agreed to partially fund development of
our diesel generator system for diesel engines compatible with their driveline.
Such development is scheduled to commence in the second half of 2004. Wrights
has notified us of additional purchase requirements for the 2004 through 2006.
At this time, however, there are no assurances that such additional orders will
be forthcoming.
EcoPower Technology of Italy continues to purchase components for its hybrid
electric drive systems during the first half of 2004 for service and maintenance
parts for its fleet of buses powered by PantherTM 120kw drive systems. To date,
we have sold 42 drive systems to EcoPower forming one of the largest fleets of
hybrid buses in the world. EcoPower is one of the largest integrators of medium
size transit buses for the European shuttle bus market, with key customers in
five Italian cities namely Turin, Genoa, Brescia, Ferrara and Vicenza. EcoPower
has notified Enova of its requirements for additional drive systems in 2004,
however, there are no assurances that such additional orders will be
forthcoming.
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, 120kW and 240kW drive systems in 2004. There are
no assurances, however, that these discussions will result in any sales of the
PantherTM 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. The topology of this system is
being adapted to also be utilized as a parallel hybrid motor and controller
system. We are beginning to receive more interest in our light-duty systems from
both European and Asian customers.
Eneco of the United Kingdom, a vehicle integrator which utilizes Enova's
PantherTM 120kW drive systems in its hybrid bus applications, purchased two
PantherTM 90kW drive systems for integration into delivery vans. Eneco plans to
order PantherTM 120kW systems for its bus programs in the latter half of 2004
for its hybrid bus programs. At this time, however, there are no assurances that
such additional orders will be forthcoming.
We continue to cross-sell our systems to new and current customers in the light
and medium duty vehicle markets, both domestically and globally.
Fuel Cell Technologies
- ----------------------
The High Voltage Energy Converter (HVEC) development program with Ford Motor
Company for their fuel cell vehicle was essentially completed in 2003. This
converter is a key component in Ford's Focus Fuel Cell Vehicle (FCV) which
utilizes the Ballard fuel cell system. It converts high voltage power from the
fuel cell into a lower voltage for use by the drive system and electronic
accessories. Enova delivered 8 additional HVEC production systems to Ford in the
second quarter of 2004 valued at approximately $100,000. These systems will be
integrated into the Ford Focus FCV which will be part of an evaluation program
being implemented by Ford later in 2004. There is a potential for additional
production orders for HVEC units from Ford in 2005 and beyond; however at this
time, there are no assurances that such additional orders will be forthcoming.
Furthermore, we are applying the technology and components derived from this
program to other applications. The HVEC is a critical component of our Fuel Cell
bus programs, noted below in development programs, and other fuel cell powered
12
systems such as the Hyundai fuel cell vehicle noted below under research and
development programs.
Enova's fuel cell enabling components are part of the proposed fleets of fuel
cell vehicles being utilized by both Ford Motor Company - the Ford Focus FCV-
and Hyundai Motor Company - the Hyundai Tucson fuel cell hybrid electric vehicle
- - in response to the U.S. Department of Energy's solicitation, entitled
"Controlled Hydrogen Fleet and Infrastructure Demonstration and Validation
Project." This government-funded project will last over five years, commencing
in late 2004, evaluating the economic and performance feasibility of fuel cell
vehicles and infrastructure across the U.S.
The Company will continue to explore new applications for this versatile
technology in both mobile and stationary systems.
Research and Development Programs
- ---------------------------------
We continue to aggressively pursue government and commercially sponsored
development programs for both ground and marine heavy-duty drive system
applications.
Our program with Mack Truck, Inc., Powertrain division - a unit of The Volvo
Group, Sweden, for the development and manufacture of a motor controller,
electric motor and battery management systems for a new parallel hybrid drive
system continues on schedule. The new parallel hybrid vehicle program is part of
the Air Force's efforts to improve efficiency, reduce fuel and maintenance
costs, provide re-generative brake energy and reduce emissions. The refueler
fleet consists of approximately 300 vehicles and, upon successful completion and
evaluation of the refueler vehicle, there is the potential for additional
upgrades to the parallel hybrid drive system. As part of the program, Mack
Trucks will also evaluate the applicability of the drive system to commercial
vehicle commencing with its Class 8 Refuse Hauler. Mack Trucks currently
produces approximately 3,000 refuse vehicles per annum for major customers such
as Waste Management. This development program is anticipated to be completed in
late 2004 followed by an evaluation period of approximately three to six months.
The program generated $75,000 in revenues for us in the first half of 2004. This
program has opened several avenues within Mack and Volvo for Enova to develop
and manufacture advanced drive system components. However, at this time, there
are no assurances that such additional orders will be forthcoming.
Our development contract, with EDO Corporation of New York for the design and
fabrication of a high voltage DC-DC power conversion system utilizing a Capstone
microturbine as the primary power source for the U.S. Navy unmanned minesweeper
project, also continues to progress during the first quarter of 2004. The
electronics package will include Enova's advanced power components including a
new, enhanced 50V, 700A DC-DC power converter, our Battery Care Unit and Hybrid
Control Unit which will power the minesweeper's electromagnetic detection
system. Our power management and conversion system will be used to provide
on-board power to other accessories on the platform. During the second quarter
of 2004, Enova completed and presented the hardware to EDO which is now
undergoing functional testing. We believe that the aggregate value of the
program will be approximately $420,000, of which $297,000 was billed in the
first half of 2004. Although this program also has the potential for additional
system sales following the demonstration phase, there are no assurances that
such additional orders will be forthcoming.
The all-electric Hyundai Santa Fe SUV demonstration project in Honolulu Hawaii
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. This is a continuation of the State of Hawaii and Hyundai Motor
Company's program for pure electric vehicle performance.
Enova continues its development for Hyundai Motor Company (HMC) of the fuel cell
power management and conversion components for Hyundai's latest fuel cell hybrid
electric vehicle, the Tucson, which was unveiled at the Geneva Auto Show in
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March 2004. During the second quarter of 2004, Enova completed the development
of this next generation hybrid-electric motor and control unit based on its
prior development work on both light and heavy-duty power-trains for both
electric and hybrid-electric vehicle platforms. As of June 2004, we have
delivered 8 systems to HMC for test, evaluation and integration into vehicles.
Enova is working in conjunction with UTC Fuel Cells, part of the UTC Power unit
of United Technologies Corporation, to develop the power electronics for this
vehicle. During the second quarter of 2004, this program generated $223,000 in
revenues from development and hardware sales. Although we believe there is
potential for further production of these drive system components in late 2004,
there can be no assurances at this time that such orders will be realized.
Several other programs are in discussion in conjunction with the U.S. Air Force,
and several other government agencies and private corporations for both fuel
cell hybrid and hybrid-electric vehicles. We anticipate finalizing these
contracts in the second half of 2004. 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.
Our process controller for ChevronTexaco Technology Ventures (CTTV) for their
fuel reformer for a stationary fuel cell application continues to undergo test
and evaluation as it is integrated into CTTV's overall systems at
ChevronTexaco's office in Texas.
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.
In the first quarter of 2004, Enova entered into several stock purchase
agreements to issue 16,250,000 shares of our common stock through a private
placement offering at $0.12 per share for a total cash purchase of $1,950,000.
The funds were received and the shares were issued in April 2004. These
investors represented that they were accredited investors. We relied on Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for
the exemption from registration of the sale of such shares. Enova continues to
seek additional investment capital to fund its operations, development and
expansion plans. As of August 12, 2004, there were no other firm commitments.
Enova also has a commitment from Hyundai Heavy Industries to invest, in the
third quarter of 2004, an additional $1,500,000 in Enova under the same terms as
the initial investment, subject to stock price adjustments, in accordance with
the terms of the Joint Venture Agreement. Additionally, we received
14
approximately $650,000 in equity capital during the six months ended June 30,
2004 as a result of our employees exercising incentive stock options, a majority
of which expires in July 2004. On May 4, 2004, 140,000 shares of restricted
common stock were issued to the Board of Directors at a price of $0.15 per share
for full board meetings and committee meetings during that the second quarter of
2004.
During the six months ended June 30, 2004, we spent $484,000 in cash on
operating activities to fund our net loss of $763,000 resulting from factors
explained in the following section of this discussion and analysis. Accounts
receivable decreased by $165,000, net of the $595,000 allowance for
uncollectible accounts receivable from December 31, 2003 balances as remittances
for prior quarters' sales were greater than current period sales. Management
believes this trend will not continue in the third and fourth quarter of 2004.
Inventory decreased by $286,000 from December 31, 2003 to June 30, 2004 as the
Company worked down inventories from sales of production systems, notably 120kW
drive systems.
Current liabilities decreased by a net of $438,000 from December 31, 2003 to
June 30, 2004 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. At June 30,
2004, accounts payable were $151,000 from a balance of $768,000 at December 31,
2003, a decrease of $617,000 or 87%. The offsetting increases of $179,000 during
the six-month period were due mainly to draws on our bank line of credit, which
are being repaid during the remainder of the year.
Capital lease obligations decreased to $18,000 from $28,000 during the six
months ended June 30, 2004, from December 31, 2003 as a result of scheduled
payments of these liabilities. Short term notes payable increased by $40,000
during the six months ended June 30, 2004 in connection with the $125,000
purchase of an International Class 8 truck which will be used for demonstration
of Enova's new diesel genset powered drive system.
Interest accruing on notes payable increased by $124,000 for the six months
ended June 30, 2004 as per the terms of the liabilities discussed in Note 2 of
the financial statements.
The operations of the Company during the first quarter of fiscal 2004 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 and six month periods ending June 30, 2004 were
$718,000 and $1,826,000, respectively, as compared with $1,355,000 and
$2,694,000 for the corresponding periods in 2003. Net production revenues for
the quarter ended June 30, 2004 decreased to $456,000 from $950,000 for the same
period in 2003. Net R&D revenues for the quarter ended June 30, 2004 decreased
to $262,000 from $405,000 for the quarter ended June 30, 2003, however for the
six month period, the decrease was only $30,000 from $728,000 to $698,000 as
compared with 2003. For the six months ended June 30, 2004, the decrease in
revenues as compared to the prior year was $868,000. The decreases in production
and development revenues are a result of an ongoing slowdown in heavy-duty
alternative fuel drive system sales as manufacturers assess the various new
types of systems on the market. There has been a greater shift to parallel
hybrid type systems, however, as yet, no particular type of systems has gained a
major foothold. Management's strategy, in this regard, is to provide a dual path
15
approach in offering both a series and parallel hybrid drive systems solution
commencing in 2004. To offset this temporary decline in production sales, the
Company is aggressively pursuing privately and governmental funded development
programs. This allows the Company to increase its revenue base, form new
alliances with major OEMs and participate in the latest trends in alternative
fuel technologies. Research and development revenues decreased in 2004 to
$698,000 from $728,000 during the six-month period in 2003. This decrease was
due to customer requirement slippage during the quarter. Research and
development revenues are a result of engineering services for the Mack/Volvo
hybrid drive system, the EDO minesweeper project, the HEVDP Hickam fuel cell bus
program and the Hyundai Motor Company fuel cell project.
Cost of revenues for the three months ended June 30, 2004 decreased to $519,000
from $1,202,000 for the same period in 2003. For the six months ended June 30,
2004, the decrease in cost of revenues was to $1,177,000 from $2,179,000 for the
same six-month period in 2003. The decrease in cost of sales is directly
attributable to lower sales volumes for these periods.
Internal research, development and engineering expenses decreased in the three
months ended June 30, 2004 to $181,000 as compared with $339,000 in the same
period in 2003. For the six months ended June 30, 2004, such expenses decreased
from $827,000 to $309,000 in 2003. 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. This reduction in
engineering expense is also a result of our cost reduction programs resulting in
higher productivity per employee in the areas of new and sustaining development
engineering. We continue to allocate engineering resources to the development of
our diesel generation motor, upgrading proprietary control software, enhancing
DC-DC converters and advance digital inverters and other power management
firmware. The Company will continue to seek external funding, however, for a
greater percentage of these development costs.
Selling, general and administrative expenses decreased from $879,000 to $449,000
for the three months ended June 30, 2004 from the previous year's comparable
period. For the six months ended June 30, 2004, the decrease was from $1,364,000
to $804,000 or over a 41% reduction. These decreases are a direct result of
management's cost reduction strategies, which the Company will strive to
maintain in 2004 in its efforts to achieve profitability, although management
cannot assure that profitability will be achieved.
Interest and financing fees remained relatively constant at approximately
$63,000 for the second quarter of 2004, up slightly from the same period in 2003
due to an increase in the interest rate charged per the terms of our long term
note.
We incurred a loss from continuing operations of $523,000 in the second quarter
of 2004 compared to a loss of $1,151,000 in the second quarter of 2003, which
represents a 55% reduction in loss. For the six months ending June 30, 2004, the
loss decreased from $1,844,000 to $639,00 or a 65% reduction. As noted above,
this decrease is primarily due to aggressive cost reduction strategies
implemented by management and increases in productivity throughout company
operations. By increasing sales revenues while maintaining these cost management
strategies, the Company believes it will be able to reduce its annual loss from
operations as compared with prior years results; however, management cannot
assure that these results will be achieved.
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
16
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 $97,841,000 at June 30, 2004. There is no assurance,
however, that any net operating losses will be available to us in the future as
an offset against future profits for income tax purposes.
Continued Losses. For the three months ended June 30, 2004 and 2003, we had
losses from continuing operations of $523,000 and $1,151,000 respectively on
sales of $718,000 and $1,355,000, respectively. For the six months ended June
30, 2004 and 2003, we had losses from continuing operations of $639,000 and
$1,844,000 respectively on sales of $1,826,000 and $2,694,000, 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 of America 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 of America 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
17
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 and
Chief Executive Officer and its 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, 2004. Based upon that
evaluation of these disclosure controls and procedures, the President and 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, 2004 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 contros 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, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
18
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. As of August 12, 2004, the Company was not
involved in any legal proceedings.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
During the three months ended June 30, 2004, the Company has issued or accrued
common stock of Enova 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.
All Directors are also reimbursed for out-of-pocket expenses incurred in
connection with attending Board and committee meetings. In May 2004, the
Company's Board of Directors unanimously approved an increase in compensation
for outside directors, which doubled the amount of cash and stock paid for the
various directors' meetings.
On May 4, 2004, 140,000 shares of restricted common stock were issued to the
Board of Directors at a price of $0.15 per share for full board meetings and
committee meetings during that the second quarter of 2004. We relied on Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for
the exemption from registration of the sale of such shares. As of June 30, 2004,
3,092,814 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:
10.21* Form of finder's fee agreement dated April 1, 2004 between Registrant
and The Global Value Investment Portfolio Management Pte Ltd as
disclosed in our Form 10-Q for the quarter ended March 31, 2004.
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act Of 2002.
19
31.2* Certification of Acting Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification Pursuant to 18 U.S.C. Section 1350 of President and
Chief Executive Officer.
32.2* Certification Pursuant to 18 U.S.C. Section 1350 of Acting Chief
Financial Officer.
* - 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: August 16, 2004
ENOVA SYSTEMS, INC.
(Registrant)
/s/ LARRY B. LOMBARD
- ----------------------------------------------------
By: Larry B. Lombard, Acting Chief Financial Officer
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