SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d) of the
Securities and Exchange Act of 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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 (I.R.S. Employer Identification Number)
incorporation or organization)
19850 South Magellan Drive, Torrance, California 90502
(Address of principal executive offices, including zip code)
(310) 527-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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 period 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2004 (the last business day of
the registrant's more recently completed second quarter) was $7,958,000. For
purposes of this calculation only, (i) shares of Series A and Series B Preferred
Stock have been included in the calculation, (ii) shares of Common Stock and
Series A Preferred Stock are deemed to have a market value of $0.06 per share,
and the Series B Preferred Stock is deemed to have a market value of $0.12 per
share, based on the average of the bid and ask prices of the Common Stock on
June 30, 2004, and (iii) each of the executive officers, directors and persons
holding 5% or more of the outstanding Common Stock (including Series A and B
Preferred Stock on an as-converted basis) is deemed to be an affiliate.
The number of shares of Common Stock outstanding as of March 30, 2005 was
415,601,000.
ENOVA SYSTEMS, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business................................................................................. 3
Item 2. Properties................................................................................ 15
Item 3. Legal Proceedings......................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................................... 16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities....................................................... 17
Item 6. Selected Financial Data..................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................. 27
Item 8. Financial Statements and Supplementary Data................................................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 27
Item 9A. Controls and Procedures..................................................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 29
Item 11. Executive Compensation..................................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.......................................................... 35
Item 13. Certain Relationships and Related Transactions............................................. 37
Item 14. Principal Accountant Fees and Services..................................................... 37
PART IV
Item 15. Exhibits and Financial Statement Schedules................................................. 38
SIGNATURES........................................................................................... 41
2
PART I
The matters addressed in this report on Form 10-K, with the exception
of the historical information presented, may contain 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 those set forth under the heading "Certain
Factors That May Affect Future Results" in the Management's Discussion and
Analysis section and elsewhere in this report.
Item 1. Business
General
In July 2000, we changed our name to Enova Systems, Inc. Our company,
previously known as U.S. Electricar, Inc., a California corporation (the
"Company"), was incorporated on July 30, 1976.
Enova believes it is a leader in the development and production of
proprietary, commercial digital power management systems for transportation
vehicles and stationary power generation systems. Power management systems
control and monitor electric power in an 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
hydrogen 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.
A fundamental element of Enova's strategy is to develop and produce
advanced proprietary software, firmware and hardware for applications in these
alternative power markets. Our focus is digital power conversion, power
management, and system integration, 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 hydrogen 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.
Enova's primary market focus centers on both series and parallel
heavy-duty drive systems 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.
Additionally, Enova management believes that this area will see significant
growth over the next several years. As we penetrate 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.
Our website, www.enovasystems.com, contains up-to-date information on
us, our products, programs and current events. We are implementing an aggressive
strategy to utilize our website and the internet as a prime focal point for
current and prospective customers, investors and other affiliated parties
seeking data on us.
During 2004, we experienced a slowdown in sales due to a number of
internal and external developments. Internally, we reorganized our senior
management by moving our vice president of marketing and sales, Edward Moore, to
the position of Chief Operating Officer, which resulted in an interim period
without a dedicated sales executive. During the fourth quarter of 2004, we
selected Michael Staran to head our marketing department. Additionally, we
appointed Edwin Riddell, a director of Enova since 1994, to the position of
president and Chief Executive Officer to replace Carl Perry during the third
quarter of 2004. Mr. Perry was appointed as our Vice-Chairman. We believe our
market focus is more defined with sales and market potential improving during
2005. In 2004, we also continued to see our current and prospective customers
seek more development programs, or evaluation systems, than actual demand for
production systems. We believe this trend is the reason our current customers
ordered additional drive systems and components in the first quarter of 2005
with forecasts to order more during the next three fiscal quarters of 2005. We
anticipate potential customers will use references from our current customer
base in their decision process which may lessen order cycle timing and increase
sales volume.
3
Our decreases in production and development revenues are primarily 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. As yet, however, no
particular type of systems has gained a major foothold in the marketplaces in
which we compete. Management's strategy in this regard is to provide a dual path
approach in offering both a series and parallel hybrid drive systems solution
which we commenced in 2004. We have developed or are developing a variety of
heavy-duty drive system solutions including our series hybrid drive system
featuring our diesel generator set; a post-transmission parallel hybrid system
and two variations of a pre-transmission parallel hybrid drive system. Many of
these systems are currently being utilized in our customer's trucks and buses
such as the Mack R-11 refueler vehicle which utilizes our post-transmission
parallel hybrid and WrightBus of the United Kingdom's 10m bus which utilizes our
series hybrid drive system.
Additionally, to offset this temporary decline in production sales, we
continue to pursue privately and governmental funded development programs. This
allows us to increase our revenue base, form new alliances with major OEMs and
participate in the latest trends in alternative fuel technologies. The decrease
in R&D revenues for the year ended December 31, 2004 is primarily due to
customer requirement slippage during the year, all of which, we believe, will be
realized in 2005. Research and development revenues are a result of engineering
services for the Mack/Volvo hybrid drive system, the EDO minesweeper project,
the First Auto Work (FAW) parallel hybrid program and various Hawaii Center for
Advanced Transpiration Technologies (HCATT) programs.
We continue to receive greater recognition from both governmental and
private industry with regards to both commercial and military application of its
hybrid drive systems and fuel cell power management technologies. Although we
believe that current negotiations with several parties may result in development
and production contracts during 2005 and beyond, there are no assurances that
such additional agreements will be realized.
During 2004, we continued to advance its technologies and products for
greater market penetration for 2005 and beyond. We continue to develop
independently and in conjunction with the Hyundai-Enova Innovative Technology
Center's (ITC) progress on several fronts to produce commercially available
heavy-duty, series and parallel hybrid drive systems. Enova continued its
expansion into the Chinese hybrid vehicle markets by securing contracts for
hybrid buses and trains in China and Singapore, respectively. In July of 2004,
we entered into an agreement with Tomoe and Hyundai Heavy Industries of Korea
for the development and production of eight, 36-ton battery electric locomotives
for the Singapore Land Transport Authority for anticipated delivery in late 2005
to early 2006.
During the year ended December 31, 2004, we continued to develop and
produce electric and hybrid electric drive systems and components for
Mack/Volvo, First Auto Works of China, 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.
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. We have furthered its
development and production of systems for both mobile and stationary fuel cell
powered systems with major companies such as Ford and Hydrogenics, a fuel cell
developer in Canada.
Our potential in China is growing with the addition of two (2) more bus
manufacturers, First Auto Group (FAW) and Top-Electric. Our contract with FAW is
for the development and evaluation of a parallel hybrid drive system for buses,
in conjunction with the proposed/possible production of up to 1,000 hybrid
vehicles for the 2008 Summer Olympics in Beijing. The development contract is
scheduled to run through early/mid 2005 to deliver three pre-transmission
parallel hybrid motors and controllers. FAW has discussed ordering three
additional systems in mid 2005 upon completion of the evaluation of the initial
systems. Successful completion of this project could lead to additional
development and production contracts with FAW, however, we cannot assure that
such additional orders will be forthcoming.
For the year ended December 31, 2004, the following customers accounted
for more than ten percent (10%) of our total revenues:
Customer Percent
----------------------------------------------
Ford Motor Company 16.0%
EDO New York 13.0%
Hyundai Motor Company 10.0%
Heavy-Duty Drive Systems - Buses, Trucks, Vans and Other Industrial Vehicle
Applications
- --------------------------------------------------------------------------------
Enova's primary market focus centers on both series and parallel
heavy-duty drive systems for multiple vehicle and marine applications. We
believe series-hybrid and parallel hybrid heavy-duty drive system sales offer
4
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. 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.
During 2004, we introduced our latest hybrid, the HybridPower Series
Hybrid, at the Electric Drive Transportation Association's annual symposium in
Orlando Florida. Enova's new diesel generator set, the power component within
the hybrid drive system, delivers 60 kilowatts volts of continuous power,
enabling it to integrate seamlessly with Enova's 240kW or 120kW drive motors and
other digital power management components. The series hybrid genset consists of
a 60kW electric motor, a motor controller and a diesel engine meeting stringent
Euro 3 or Euro 4 emission specifications. The genset is distinctively designed
to allow end users to choose the engine best suited for their commercial needs,
permitting a wide variety of engine choices.
In early 2004, we sold three HybridPower 120kW drive systems to
Tsinghua University in China for fuel cell hybrid bus development. China intends
to use hybrid-electric buses to shuttle athletes and guests at the 2008 Beijing
Summer Olympics and the 2010 World's Expo in Shanghai. China is seeking up to
1,000 full-size hybrid-electric buses to support these global events. We believe
Tsinghua is the premier research university in China. Its automotive engineering
department selected Enova's drive systems for its government funded hybrid fuel
cell bus development. 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 (FAW) and Top-Electric. FAW entered into an agreement with us to purchase
three medium-duty, parallel hybrid drive systems, the first of which was
delivered in late 2004. Enova now sells its hybrid drive systems to three bus
developers in China, including Tsinghua University of China. 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 HybridPowerTM 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 begin being 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. During the first
quarter of 2005, Tomoe issued a purchase order for three post transmission
parallel hybrid drive systems for another train project in South Korea. For the
year ended December 31, 2004 we billed approximately $175,000 for these various
systems. Although we anticipate additional orders for these systems in 2005 and
beyond, there are no assurances that such additional orders will be forthcoming.
WrightBus, one of the largest low-floor bus manufacturers in the United
Kingdom, continues to purchase our diesel genset-,powered, series hybrid drive
systems for their medium and large bus applications. WrightBus ordered 4 120kW
drive systems and one 240kW drive system in 2004 for a total of $166,000. In
late 2004, we entered into an exclusive agreement with WrightBus for the sale of
certain Enova products for specific vehicles in the United Kingdom. WrightBus
has issued additional purchase orders for product in 2005 and notified us of
their potential requirements for 2005 through 2007. At this time, however, there
are no assurances that such additional orders will be forthcoming.
Eneco of the United Kingdom, a vehicle integrator which utilizes
Enova's HybridPower 120kW drive systems in its hybrid bus applications,
purchased six 120kW systems in 2004 for a total of $170,000. Eneco has notified
us of its plans to order additional 120kw systems in 2005 for its bus programs.
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 2004 for service and maintenance parts for
its fleet of buses powered by HybridPowerTM 120kw drive systems. Since our
teaming with EcoPower, we have sold 42 drive systems 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 notified Enova of its requirements for additional drive
systems in 2005, however, there are no assurances that such additional orders
will be forthcoming.
MTrans of Malaysia has integrated two of our standard HybridPower 120kW
drive system into a hybrid 10-meter bus with a Capstone microturbine as its
power source. MTrans has discussed the potential of utilizing Enova drive
systems for all of its hybrid and monorail requirements in 2005 and beyond. At
this time, however, there are no assurances that such additional orders will be
forthcoming.
5
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 2005.
There are no assurances, however, that these discussions will result in any
sales of the HybridPower 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 HybridPowerTM 120kW drive systems in its hybrid bus applications,
purchased two HybridPowerTM 90kW drive systems for integration into delivery
vans.
Our 90kW motor controller is also utilized in the parallel hybrid drive
system designed for FAW. In conjunction with the 90kW motor, FAW and Enova are
evaluating this latest employ of our hybrid technologies. As noted earlier, we
anticipate additional demand for these systems. 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
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 in 2005. 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 and other fuel cell powered systems such as the Hyundai fuel
cell vehicle. Both of these projects are further detailed in the research and
development programs section.
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, which commenced in late 2004, will
last over five years 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
vehicles 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
mid 2005 followed by an evaluation period of approximately three to nine months.
The program generated $150,000 in revenues for us in 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.
6
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 $342,000 was received in 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 is nearing its completion in June 2005 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 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. During 2004, we 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 2004, this program generated $250,000 in revenues from development and
hardware sales. Although we believe there is potential for further production of
these drive system components and other development programs in 2005, there can
be no assurances at this time that such orders will be realized.
In the fourth quarter of 2004, Enova completed the design and
integration of its 120kw drive system with a Capstone microturbine into a MB4
tow tractor for the U.S. Air Force through a contract with the Volpe National
Transportation Systems Center. The objectives of this program include the
integration of microturbine technology into the hybrid electric tow tractor,
field testing and evaluation of the benefits of microturbine technology in a
hybrid electric vehicle, integration of grid-charging technology, DC-DC
converter, and a data acquisition system into an electric tow tractor, and
validation of the technology effect on the original system and performance.
During 2004, the program generated $165,000 in revenues for Enova. There is a
potential for other upgrades of this type and we anticipate entering into more
of these contracts in 2005 with the U.S. Air Force. There can be no assurances
at this time, however, that such contracts will be realized.
We also commenced a program with Hydrogenics to integrate a HybridPower
120kW hybrid drive system into a step-van for Purolator as a hydrogen fuel cell
hybrid vehicle. In integrating this new system, we utilized several new power
management systems including our dual 8kW inverter and our Mobile Fuel Cell
Generator that utilizes our High Voltage Converters. This fuel cell vehicle
application utilized a Hydrogenics 20kW fuel cell power generation module
underscoring our technologies ability to optimize fuel cell performance across a
range of fuel cell products. The program is in its final stage of evaluation. As
a result of this program, we have also commenced a similar fuel cell step van
conversion program for HCATT and the U.S. Air Force.
Also in the fourth quarter of 2004, we commenced integration of a fuel
cell powered step-van similar to the aforementioned Hydrogenics program for
HCATT and the U.S. Air Force. The program is scheduled to continue through the
third quarter of 2005 ending with an evaluation phase. We are experiencing a
notable increase in interest from both government and military organizations for
our products and integration services. For the year ended December 31, 2004, we
billed approximately $96,000 for all of our HCATT programs.
We intend to establish new development programs with the Hawaii Center
for Advanced Transportation Technologies 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 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.
Environmental Initiatives and Legislation
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"). We believe 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 continually modifying its
7
limits for low emission vehicles. Recently, CARB proposed additional amendments
to the regulations. Furthermore, several car manufacturers have challenged these
mandates in court and have obtained injunctions to delay these mandates. There
can be no assurance that further legislation will be enacted 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
vehicles. Extensions, modifications or reductions of current federal and state
legislation, mandates and potential tax incentives could adversely affect our
business prospects if implemented.
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.
Strategic Alliances, Partnering and Technology Developments
Our continuing strategy is to adapt ourselves to the ever-changing
environment of alternative power markets for both stationary and mobile
applications. Originally focusing on pure electric drive systems, we believe we
are now positioned as a global supplier of drive systems for electric, hybrid
and fuel cell applications. Enova is now entering stationary power markets with
its power management systems and intends to develop other systems to monitor and
control the complex fuel cell and ancillary device systems being developed for
distributed generation and mobile applications.
Enova continues to seek and establish alliances with major players in
the automotive, stationary power and fuel cell fields. For instance, the Hyundai
Group of Korea and Enova are partnering in the development of advanced hybrid
and hydrogen fuel cell drive-train technology and related systems.
Enova's alliances with other major OEMs in the automotive, transit,
commercial and energy sectors continue to expand. In 2004, Enova entered the
Chinese hybrid vehicle market with alliances with First Auto Works and Tsinghua
University for heavy-duty hybrid drive systems and technologies. Additionally,
we expanded on our alliances with Mack/Volvo, Tomoe, Hyundai Motor Company
(HMC), MTrans of Malaysia, Eneco, Hydrogenics of Canada, the Southwest Research
Institute, the U.S. Air Force and other commercial and industrial intermediaries
and OEMs to find new markets and applications for our products and technologies.
We continue our strategy as a "systems integrator" by establishing relationships
to utilize other independently developed technologies such as those provided by
HHI, UTC Fuel Cells, Hydrogenics and national universities. We have implemented
our plans to outsource manufacturing of our components to companies such as HHI,
Ricardo, and other Asian manufacturers. We believe that one of our competitive
advantages is our ability to identify, attract and integrate the latest
technology available to produce state of the art products at competitive prices.
Our joint venture alliance with Hyundai Heavy Industries (HHI) is a
prime example of our partnering strategy to maximize the utilization of Enova's
knowledge and expertise in power management and control. Teaming with HHI may
lead to other additive technologies and products which Enova can market to
current and prospective customers. The joint venture corporation, Hyundai-Enova
Innovative Technology Center (ITC), commenced operations in the second quarter
of 2003. The advanced technology center focuses on leading-edge technologies in
power management and power conversion for industrial, commercial, residential
and vehicle applications. The ITC has been instrumental in bringing our diesel
genset system into commercialization. Other projects slated for development for
the ITC include commercial inverters and other power management systems which
build on Enova's and HHI's technology base. It is our intent to utilize the
resources provided through the ITC to optimize Enova's current product line for
greater performance and production cost efficiencies, while we continue new
research and development for the next generation of digital power management
systems for mobile and stationary applications.
Products
Our focus is digital power management, power conversion, and system
integration. Our proprietary software, firmware and hardware manage and control
the power that drives a vehicle or device produced under the HybridPowerTM brand
name. They convert the power into the appropriate forms required by the vehicle
or device, whether DC to AC, AC to DC or DC to DC, and they manage the flow of
this energy to protect the battery, the vehicle or device, and the driver or
operator. Our systems work "from drive train to drive wheel" for both vehicle
and stationary applications.
The latest state-of-the-art technologies, such as hybrid vehicles, fuel
cell and micro turbine based systems, and stationary power generation, all
require some type of power management and conversion mechanism. Enova, utilizing
our enabling technologies, supplies these essential components. We believe our
drive train systems will work with any kind of fuel/power source, from electric
to hybrid to fuel cell to turbine. They are essential components for any
vehicle, system or device that uses power.
8
We are moving to expand its product base into new markets outside of
the traditional electric and hybrid-electric automotive fields. Key areas which
we have begun to penetrate include energy management in distributed generation
in the utility industry, and stand-by/backup power generation in the commercial
electronics industry. Both of these markets can be served with our existing
energy management and power control products. We have entered into agreements,
or commenced negotiations, with various alternative power generation
manufacturers such as Hydrogenics, Capstone Turbine and Ballard Power as well as
others. We believe our enabling technologies will prove beneficial to these
types of companies in their strategies to bring these new power systems to
commercialization.
We have embraced fuel cell technology and have begun to develop various
power management and control systems to enable fuel cell manufacturers and their
ancillary industries to achieve greater efficiencies from their systems. These
systems are also designed to provide added reliability and safety by monitoring,
adjusting and reporting on operation of the unit.
HybridPowerTM Electric and Hybrid-Electric Drive Systems
Enova's HybridPower drive system family, along with its drive system
accessories are designed to provide our customers with a complete solution to
their drive system needs for both light-duty through heavy-duty vehicle markets.
Enova's HybridPower hybrid electric drive system provides all the functionality
one would find under the hood of an internal combustion engine powered vehicle.
The HybridPower system consists of an enhanced electric motor and the electronic
controls that regulate the flow of electricity to and from the batteries at
various voltages and power to propel the vehicle. In addition to the motor and
controller, the system includes a gear reduction/differential unit which ensures
the desired propulsion and performance. The system is designed to be installed
as a "drop in," fully integrated turnkey fashion, or on a modular, "as-needed"
basis. Regardless of power source (battery, fuel cell, diesel generator or
turbine) the HybridPower electric motor is designed to meet the customer's drive
cycle requirements.
The HybridPower drive system family is targeted to meet the demands of
light-duty through heavy-duty vehicle markets. Enova's family of light-duty
drive systems includes:
o 30kilowatt (kW), 60kW, 90kW all-electric drives
o 90kW series-hybrid drive
o combinations of these systems based on customer requirements.
Our family of heavy-duty electric drive systems includes:
o 120kW all-electric drive
o 120/60kW peak series hybrid system
o 240/60kW peak series hybrid system
o 90kW peak mild, pre-transmission parallel hybrid system
o 100kW peak post-transmission parallel hybrid systems
o 100kW peak pre-transmission parallel hybrid system.
Enova's drive systems, in conjunction with, internal combustion
engines, microturbines, fuel cells, flywheels, and generators sets provide state
of the art hybrid-electric propulsion systems.
Hybrid vehicles are those that utilize an electric motor and batteries
in conjunction with an internal combustion engine (ICE), whether piston or
turbine. With a hybrid system, a small piston or turbine engine - fueled by
gasoline or diesel, compressed natural gas (CNG), methane, etc., in a tank -
supplements the electric motor and battery. These systems are self-charging, in
that the operating ICE recharges the battery.
There are two types of hybrid systems: series and parallel. A series
hybrid system is one where only the electric motor connects to the drive shaft;
a parallel hybrid system is one where both the internal combustion engine and
the electric motor are connected to the drive shaft. In a series hybrid system,
the ICE turns the generator, which charges the battery, which -- through a
control unit - powers the electric motor, which turns the wheels. In a parallel
hybrid system, both the electric motor and the ICE can operate simultaneously to
drive the wheels. In both hybrid systems and in pure electric systems,
regenerative braking occurs, which assists in the charging of the batteries.
The parallel hybrid system is ideally suited for conditions where most
of the driving is done at constant speed cruising, with a smaller amount of the
driving involving random acceleration, such as "up hill" or with "stop and go"
conditions. For acceleration, the controller causes the electric motor to kick
in to assist the ICE, both running simultaneously. When speed is steady or the
ground is flat, only the ICE runs. Additionally, when the batteries are low, the
controller causes the ICE and motor to charge the batteries. As a result, the
series hybrid system is best suited for starts and stops, and is ideal for
applications such as urban transit buses and urban garbage trucks. The design of
the series hybrid system is based on a driving cycle with a high percentage of
random acceleration conditions.
9
- ---------------------------- -------------------------- ----------------------------------------- ------------------------
System Applications Advantages Disadvantages
- ---------------------------- -------------------------- ----------------------------------------- ------------------------
Series Driving with high Optimally-sized IC engine Full size electric
Hybrid percentage stop and go Advanced engine/turbine may be used drive system required
and/or hilly terrain Simplified transmission Generator and
Independent control converter required
- ---------------------------- -------------------------- ----------------------------------------- ------------------------
Parallel Driving with high No generator and converter needed Complex transmission
Hybrid percentage constant The drive system may be smaller and clutch system
speed cruising Complex control
Limited to low speed
engines
- ---------------------------- -------------------------- ----------------------------------------- ------------------------
Hybrid Drive Configurations
Enova has identified three primary configurations based upon how well
they meet market needs economic requirements. We have developed all of the
relevant technology required to produce these drive systems and is currently
introducing the Hybrid Power product line worldwide. All of our innovative
hybrid drive systems are compatible with wide range of fuel sources and engine
configurations.
Hybrid Drive Motors
The electric drive unit is essentially an electric motor with
additional features and functionality. The motor is liquid-cooled,
environmentally sealed, designed to handle automotive shock and vibration, and
includes parking pawl, which stops the vehicle when the driver parks the car. It
also permits regenerative braking to provide power recovery, in which the
mechanical energy of momentum is converted into electrical energy as the motor
slows during braking or deceleration. The optional gear reduction unit takes the
electric motor's high rpm and gears it down to the lower rpm required by the
vehicle's conventional drive shaft. As the revolutions per minute (rpm) go down,
the torque of the electric motor increases.
The HybridPower drive systems exclusively utilize induction AC motors
for their high performance, power density, and low cost. The AC drive system is
scaleable and can be customized for different applications. Due to the large
operating range that these propulsion systems offer, all parameters can be
optimized; the user will not have to choose between acceleration, torque or
vehicle speed.
Hybrid Motor Controllers
The controller houses all the components necessary to control the
powering of a vehicle, in one easy-to-install package. Our main component is an
inverter, which converts DC electricity to AC electricity. Enova also offers
optional controllers for the air conditioning, power steering and heat pump,
12VDC/24VDC DC-to-DC converter for vehicle auxiliary loads such as cell phones,
radio, lights, and a 6.6kW AC-to-DC on-board conductive charger which allows for
direct 110 VAC or 220 VAC battery charging. These are located in the same
housing as the controller, thus extra interconnects are not required. This
approach simplifies the vehicle wiring harness and increases system reliability.
Using our proprietary WindowsTM based software package, vehicle
interfaces and control parameters can be programmed in-vehicle. Real-time
vehicle performance parameters can be monitored and collected.
Hybrid Drive Systems
The Enova hybrid drive family currently includes a 120/60kW peak series
hybrid system, a 240/60kW peak series hybrid system, a 90kW peak mild,
pre-transmission parallel hybrid system, a 100kW peak post-transmission parallel
hybrid systems and our 100kW peak pre-transmission parallel hybrid system to be
introduced later this year.
The Enova HybridPower hybrid-electric drive systems are based on the
component building blocks of the electric drive family, including the motor,
controller and optional components. As an example, the 120/60 kW series hybrid
system uses the 120kW electric drive components to propel the vehicle, and uses
a 60kW diesel generator (genset)to generate power while the vehicle is in
operation. This synergy of design reduces the development cost of our hybrid
systems by taking advantage of existing designs. The diesel genset has been
designed to take advantage of many different models of internal combustion
10
engines for greater penetration into the burgeoning heavy-duty hybrid vehicle
markets. Enova's genset will accept any engine with an industry standard bell
housing and flywheel. Enova's control protocols are designed to easily interface
with any standard engine controller with analog throttle inputs. Accessories for
these drives include battery management systems, chargers and 12 or 24 volt
power supplies.
Our hybrid systems are designed to work with a variety of hybrid power
generation technologies. In our 120/60kW hybrid system, an internal combustion
engine connected to a motor and motor controller performs the power generation.
Other power options include liquid fueled turbines, such as the Capstone system,
fuel cells, such as the Hydrogenics or Ballard system, or many others. In all of
these examples, Enova's battery management system provides the power management
to allow for proper power control.
Drive System Accessories
Enova's drive system accessories range from battery management systems
to hybrid controllers, to rapid charging systems. These critical components are
designed to complement the HybridPower drive system family by providing the
elements necessary to create a complete technical solution for alternative
energy drive systems.
Enova's drive system accessories are not only integral, but are also
the perfect complement to our drive systems and are designed to provide our
customers with a complete solution to their drive system needs.
Battery Care Unit
Enova's Battery Care Unit (BCU) monitors, manages, protects, and
reports on the condition of the vehicles battery pack. It controls and manages
battery performance, temperature, voltage and current to avoid harm to the
batteries, to the entire system, and to the driver, operator and passengers. It
also allows for monitoring for service to the battery and drive system. The BCU
reports state-of-charge, amp hours and kilowatt-hours.
The BCU monitors the battery pack voltage and 28 additional individual
voltages with a range of 0 to 18vDC. Optional expansion modules allow 28
additional inputs per module, with up to 16 modules permitted. The BCU has eight
user-programmable outputs and four user-programmable inputs to allow full
integration into the vehicle. These can be used to customize input and output
parameters, and to provide for other custom monitoring and battery pack control.
The device is approximately 7.1 inches by 4.3 inches by 1.6 inches.
The BCU directly interfaces with the HybridPower and other drive
systems, and controls the Safety Disconnect Unit (SDU). It is capable of
supporting any battery technology, and provides each type with optimized
charging and protection algorithms. An internal real-time clock allows the BCU
to wake up at user-specified times to initiate battery charging or pack
monitoring. A precision shunt allows it to offer a wide dynamic range for
monitoring charging and motoring current, without the errors commonly associated
with other types of sensors.
The non-volatile RAM allows the BCU to update, store and report key
battery pack parameters such as amp hours, kilowatt-hours and state of change.
Using Enova's proprietary Windows -based diagnostic software, the BCU control
parameters can be programmed "live" in-vehicle. Additionally, battery
performance can be monitored in real-time. Reports can be output to a laptop
computer for precise results and "customer friendly" usage.
Hybrid Control Unit
Enova's Hybrid Control Unit (HCU) continuously monitors the condition
of the battery pack through communications with the BCU, monitors the driver
commands through communications with the motor controller, and the state of the
hybrid generator. Based upon the data received, the HCU provides continuous
updates to the hybrid generator with instructions on mode of operation and power
level. This innovative control loop ensures that the entire system is optimized
to provide quick response to driver commands while providing the best possible
system efficiency.
11
Safety Disconnect Unit
The Safety Disconnect Unit (SDU) is under the control of the BCU, and
allows vehicle systems to easily connect and disconnect from the battery pack,
when necessary, to prevent damage or harm. It also disconnects the battery pack
during charging, protects it from surges, and constantly verifies that the
battery pack is isolated from the vehicle chassis. In the event a ground
isolation fault is detected, the BCU commands the SDU to break the battery
connection thus ensuring a safe environment for the vehicle and operator. The
SDU is available in two configurations to match the requirements of the drive
systems.
High Voltage Disconnect Unit
The High Voltage Disconnect Unit (HVDU) is a reduced feature version of
the Safety Disconnect Unit. The pre-charge board has been eliminated in order to
provide a lower cost method of safely switching high voltage systems on the
vehicle that do not require the soft start feature.
12
Wiring Harness Connector Kits
Enova provides complete mating connector kits to help the vehicle OEM
with their production process. By using the Enova supplied kit the vehicle
manufacturer is ensuring that they will have all of the necessary connectors to
complete the vehicle build.
Distributed Power Generation for Industrial / Commercial / Residential
Applications
Enova's distributed generation products are virtually identical in
system configuration to that of a series hybrid vehicle, including a controller
and battery management. For this market segment, we intend to provide DC-DC and
DC-AC power conversion components to convert power supplied by batteries, fuel
cells, generators and turbines to AC power that will be used by the end
customer. Additionally, our BCU will provide power management functions to
control the entire system. The main difference is that the 3-phase AC power
typically supplied to the motor for propulsion power is, in this case, sent to
the customer to supply power for their household or business.
20kW bi-directional Fuel Cell Power Conditioning System
Enova's 20kW bi-directional Fuel Cell Power Conditioning System,
originally designed to meet the demands of an automotive Fuel Cell propulsion
system, is now being applied to the stationary market for distributed generation
applications.
This unique unit, not much larger than a conventional briefcase,
provides a transparent interface between the Fuel Cell or Turbine, the battery
pack, accessory loads, and the output load. Fast response time allows the output
load to be serviced without interruption while the Fuel Cell or Turbine ramps
up.
This unit is designed to interface directly with the Master Controller
of the Stationary Generation System over a CAN bus. Other communications
protocols supported are SAE J-1850, RS-232, and RS-485. Our proprietary package
diagnostic software allows all key parameters of the Power Conditioner to be
monitored and control boundaries to be adjusted.
Fuel Cell Management Unit
Enova has reconfigured its Battery Management Unit to perform the
functions required to monitor, manage, and report on the status of a Fuel Cell
Stack. The FCU monitors the fuel cell voltage and 28 additional individual
voltages with a range of 0 to 18vDC. Optional expansion modules allow 28
additional inputs per module, with up to 16 modules permitted. The FCU has eight
(8) user-programmable outputs and four (4) user-programmable inputs to allow
full integration into the distributed generation system. These can be used to
customize input and output parameters, and to provide for other custom
monitoring and battery pack control.
Research and Development Strategy
Enova maintains a strategy of continual enhancement of its current
product line and development of more efficient and reliable products for the
ever-changing alternative energy sectors. Management believes R&D must be
continued in order to remain competitive, minimize production cost and meet our
customers' specifications. Because microprocessors and other components continue
to advance in speed, miniaturization and reduction of cost, Enova must
re-examine its designs to take advantage of such developments. Enova endeavors
to fund its R&D through customer contracts where applicable, however it will
provide internal funding where technology developed is critical to its future.
Enova's commitment to advancing technological superiority is evidenced
by its internal efforts as well as its joint venture with HHI for future
technologies.
Manufacturing Strategy
Our products are "production-engineered," meaning they are designed so
they can be commercially produced without additional development. All formats
and files are designed with manufacturability in mind from the start. For the
automotive market, Enova designs its products to ISO 900X manufacturing and
quality standards. We believe that our redundancy of systems, robustness of
design, and rigorous quality standards result in higher performance and reduced
risk. For every component and piece of hardware, there are detailed performance
specifications. Each piece is tested and evaluated against these specifications,
which enhances the value of the systems to OEM customers.
We have developed a multi-tiered manufacturing strategy that allows the
company to meet the market's demand for high quality production goods while
optimizing cost of goods sold across the spectrum of low to high volumes. At the
core of this strategy is a strong reliance on pre-selected highly qualified
outside manufacturing houses that specialize in various aspects of the
manufacturing process. It is through this closely managed outsourcing strategy
that Enova is able to achieve improved gross margins while minimizing fixed
costs within the organization.
13
All tiers of manufacturing of electronic components begin with a
complete engineering design package that includes a drawing tree, bill of
material, electrical and mechanical drawings, and control software where
appropriate. The control software and the design package are internally
reviewed, validated, and released through our configuration management process.
For low volume manufacturing, where volumes are less than 10 to 20
units, the process is similar to that for prototyping. Low volume manufacturing
and testing is performed in-house.
For higher volume manufacturing, Enova has established strategic
alliances with ISO-900X certified manufacturers that can take on all aspects of
the process from component sourcing, to circuit card assembly, to component
assembly, to final unit assembly and test. These completed components and units
are shipped to our facility where complete drive systems that meet the
customer's unique requirements are packaged and shipped.
As our market continues to grow and individual customers begin to order
higher quantities of fixed drive system configurations, we will transition to a
system where the final assembly is drop shipped directly to the end customer.
This critical concept has already been discussed with our strategic
manufacturing partners.
Competitive Conditions
Competition within the mobile and stationary hybrid power sector is
still somewhat fragmented, although there are indications of some consolidation
at this time. The market is still divided into very large players such as
Allison, Siemens, BAE and Eaton; or smaller competitors such as ISE Research,
Azure Dynamics/Solectria; PEI, Unique Mobility and others. The larger companies
tend to still focus on single solutions but maintain the capital and wherewithal
to aggressively market such. The smaller competitors offer a more diversified
product line, but do not have the market presence to generate significant
penetration at this juncture.
Our research and experience has indicated that our target market
segments certainly focus on price, but would buy based on reliability,
performance and quality support when presented the life-cycle business model for
hybrid technologies for their application. Enova has good indications that many
would pay a 10-20% premium for hybrids from a secure vendor providing warrantied
performance, quality service and support.
The competition to develop and market electric, hybrid and fuel cell
powered vehicles has increased during the last year and we expect this trend to
continue. The competition consists of development stage companies as well as
major U.S. and international companies. Our future prospects are highly
dependent upon the successful development and introduction of new products that
are responsive to market needs and can be manufactured and sold at a profit.
There can be no assurance that we will be able to successfully develop or market
any such products.
The development of hybrid-electric and alternative fuel vehicles, such
as compressed natural gas, fuel cells and hybrid cars poses a competitive threat
to our markets for low emission vehicles or LEVs but not in markets where
government mandates call for zero emission vehicles or ZEVs. Enova is involved
in the development of hybrid vehicles and fuel cell systems in order to meet
future requirements and applications.
Various providers of electric vehicles have proposed products or offer
products for sale in this emerging market. These products encompass a wide
variety of technologies aimed at both consumer and commercial markets. The
critical role of technology in this market is demonstrated through several
product offerings. As the industry matures, key technologies and capabilities
are expected to play critical competitive roles. Our goal is to position
ourselves as a long term competitor in this industry by focusing on electric,
hybrid and fuel cell powered drive systems and related sub systems, component
integration, technology application and strategic alliances. The addition of new
strategies to penetrate stationary power markets with current technologies will
assist in creating a more diversified product mix. We believe that this strategy
will enhance our position as a power management and conversion components
supplier to both the mobile and stationary power markets.
Research and Development
Enova believes that timely development and introduction of new
technology and products are essential to maintaining a competitive advantage. We
are currently focusing our development efforts primarily in the following areas:
* Power Control and Drive Systems and related technologies for
vehicle applications;
* Stationary Power Management and Conversion and related
technologies;
* Heavy Duty Drive System development for Buses; Trucks, Industrial,
Military and Marine applications
* Fuel Cell Generation system power management and process control
* Systems Integration of these technologies;
* Technical and product development under DOE/DOT/DOD and Hyundai
Group Contracts
* OEM Technical and Product development.
14
For the years ended December 31, 2004, 2003 and 2002, we spent
$935,000, $799,000, and $1,152,000, respectively, on internal research and
development activities. Enova is continually evaluating and updating the
technology and equipment used in developing each of its products. The power
management and conversion industry utilizes rapidly changing technology and we
will endeavor to modernize our current products as well as continue to develop
new leading edge technologies to maintain our competitive edge in the market.
Intellectual Property
Enova currently holds four U.S. patents and has one patent pending, in
power management and control, with an additional patent in crash management
safety, which was originally issued in 1997. We also have trademarks or service
marks in the United States and have been filing for international patents as
well. We continually review and append our protection of proprietary technology.
We continue to place emphasis on the development and acquisition of patentable
technology, however, a majority of our intellectual property is contained within
our software which is best protected under trade secret provision of U.S. patent
law. Under such provisions, Enova does not have to publish its proprietary code
in order to maintain protection.
We maintain an internal review and compensation process to encourage
our employees to create new patentable technologies. The status of patents
involves complex legal and factual questions, and the breadth of claims allowed
is uncertain. Accordingly, there can be no assurance that patent applications
filed by us will result in patents being issued. Moreover, there can be no
assurance that third parties will not assert claims against us with respect to
existing and future products. Although we intend to vigorously protect our
rights, there can be no assurance that these measures will be successful. In the
event of litigation to determine the validity of any third party claims, such
litigation could result in significant expense to Enova. Additionally, the laws
of certain countries in which our products are or may be developed, manufactured
or sold may not protect our products and intellectual property rights to the
same extent as the laws of the United States.
Enova's success depends in part on its ability to protect its
proprietary technologies. Enova's pending or future patent applications may not
be approved and the claims covered by such applications may be reduced. If
allowed, patents may not be of sufficient scope or strength, others may
independently develop similar technologies or products, duplicate any of Enova's
products or design around its patents, and the patents may not provide Enova
with competitive advantages. Further, patents held by third parties may prevent
the commercialization of products incorporating Enova's technologies or third
parties may challenge or seek to narrow, invalidate or circumvent any of Enova's
pending or future patents. Enova also believes that foreign patents, if
obtained, and the protection afforded by such foreign patents and foreign
intellectual property laws, may be more limited than that provided under United
States patents and intellectual property laws. Litigation, which could result in
substantial costs and diversion of effort by Enova, may also be necessary to
enforce any patents issued or licensed to Enova or to determine the scope and
validity of third-party proprietary rights. Any such litigation, regardless of
outcome, could be expensive and time-consuming, and adverse determinations in
any such litigation could seriously harm Enova's business.
Enova relies on unpatented trade secrets and know-how and proprietary
technological innovation and expertise which are protected in part by
confidentiality and invention assignment agreements with its employees, advisors
and consultants and non-disclosure agreements with certain of its suppliers and
distributors. These agreements may be breached, Enova may not have adequate
remedies for any breach or Enova's unpatented proprietary intellectual property
may otherwise become known or independently discovered by competitors. Further,
the laws of certain foreign countries may not protect Enova's products or
intellectual property rights to the same extent as do the laws of the United
States.
Employees
As of December 31, 2004, we had 28 full time employees. Additionally,
we employ three individuals as independent contractors, engaged on an hourly
basis, one of whom is domiciled in South Korea. The departmental breakdown of
these individuals includes 4 in administration, 1 in sales, 11 in engineering
and research and development, and 12 in production.
Item 2. Properties
Enova's corporate offices are located in Torrance, California, in
leased office space of approximately 20,000 square feet. This facility houses
our various departments, including engineering, operations, executive, finance,
planning, purchasing, investor relations and human resources. This lease
terminates in February 2008. The monthly lease expense is $13,500. Enova also
has a leased office in Hawaii which is rented on a month-to-month basis at
$1,500 per month and an office in South Korea which is also rented on a
month-to-month basis at $500 per month. We believe that these offices are
suitable and adequate for our current and readily foreseeable needs.
15
Item 3. Legal Proceedings
We may from time to time become a party to various legal proceedings
arising in the ordinary course of business. At December 31, 2004, the Company
had no known current, pending or threatened litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2004.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
16
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
Our Common Stock is presently traded in the over-the-counter market and
quoted on the National Association of Securities Dealers (NASD) "Bulletin Board"
under the symbol "ENVA." The following table sets forth the high and low bid
prices of the Common Stock as reported on the NASD Bulletin Board by the
National Quote Bureau for the fiscal quarters indicated. The following
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions.
Common Stock Average Daily
High Price Low Price Volume
---------- --------- ------
Calendar 2003
First Quarter .................... $ 0.09 $ 0.06 172,237
Second Quarter ................... $ 0.09 $ 0.06 119,057
Third Quarter .................... $ 0.10 $ 0.05 465,683
Fourth Quarter ................... $ 0.14 $ 0.07 463,240
Calendar 2004
First Quarter .................... $ 0.21 $ 0.09 1,000,685
Second Quarter ................... $ 0.19 $ 0.09 479,857
Third Quarter .................... $ 0.15 $ 0.12 293,817
Fourth Quarter ................... $ 0.15 $ 0.09 308,098
On March 30, 2005, the last reported high bid price of the Common Stock
was $0.10 and the last reported low asking price was $0.095. As of March 30,
2005, there were approximately 9,750 holders of record of our Common Stock. As
of March 30, 2005, approximately 106 shareholders, many of who are also Common
Stock shareholders, held our Series A Preferred Stock. Approximately 34
shareholders as of March 30, 2005 held our Series B Preferred Stock. The number
of holders of record excludes beneficial holders whose shares are held in the
name of nominees or trustees.
Stock Issuances
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. Additionally, we received approximately
$783,000 in equity capital during the year as a result of our employees
exercising incentive stock options, a majority of which expired in July 2004.
In September 2004, the Company issued 11,335,315 restricted 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 was used to fund Enova's
joint venture interest in the Hyundai-Enova Innovative Technology Center as
previously noted, with the $500,000 balance of 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 and Section 4(2) of the
Securities Act of 1933, as amended, as the exemption from registration for the
issuance of these shares.
During 2004, we issued, or accrued for issuance, an aggregate of
701,255 shares of common stock to the non-executive board directors in
accordance with the September 1999 Board of Directors compensation package for
outside directors, as amended to date. For each meeting attended in person, each
outside director is entitled to receive $2,000 in cash and $4,000 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 entitled 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; and for each meeting of a Board
committee attended in person, a committee member is entitled to receive $1,000
in cash and $1,000 of stock valued on the date of the meeting at the average of
the closing ask and bid prices. All Directors are also reimbursed for
out-of-pocket expenses incurred in connection with attending Board and committee
meetings.
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 December 31, 2004, an aggregate of 3,539,784 shares
had been issued, or accrued for issuance, under the above compensation plan for
Directors.
17
Dividend Policy
To date, we have neither declared nor paid any cash dividends on shares
of our Common Stock or Series A or B Preferred Stock. We presently intend to
retain all future earnings for our business and do not anticipate paying cash
dividends on our Common Stock or Series A or B Preferred Stock in the
foreseeable future. We are required to pay dividends on our Series A and B
Preferred Stock before dividends may be paid on any shares of Common Stock. At
December 31, 2004, Enova had an accumulated deficit of approximately
$100,459,000 and, until this deficit is eliminated, will be prohibited from
paying dividends on any class of stock except out of net profits, unless it
meets certain asset and other tests under Section 500 et. seq. of the California
Corporations Code.
Item 6. Selected Financial Data
The following selected financial data tables set forth selected
financial data for the years ended December 31, 2004, 2003, 2002, 2001 and 2000.
The statement of income data and balance sheet data for and as of the end of the
years ended December 31, 2004, 2003, 2002, 2001 and 2000 are derived from the
audited financial statements of Enova. The following selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
including the notes thereto, appearing elsewhere in this 10K.
As of and for the year ended December 31
(in thousands, except per share data),
2004 2003 2002 2001 2000
-------------------------------------------------------------------------
NET SALES $ 2,554 $ 4,310 $ 4,455 $ 3,780 $ 2,883
COST OF SALES 2,239 3,304 3,784 2,783 2,013
-------------------------------------------------------------------------
GROSS MARGIN 315 1,006 671 997 870
-------------------------------------------------------------------------
OTHER COSTS AND EXPENSES
Research and development 925 799 1,152 879 626
Selling, general and administrative 2,325 2,919 2,837 2,894 1,999
Interest and financing fees 255 234 199 113 174
Other expenses (income) -- 200 -- (7) 6
Equity in losses of equity method investee 192 40 -- -- --
Legal settlements -- -- 81 900 75
-------------------------------------------------------------------------
Total other costs and expenses 3,697 4,192 4,269 4,779 2,880
-------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (3,382) (3,186) (3,598) (3,782) (2,010)
GAIN ON DEBT RESTRUCTURING -- -- -- 354 1,551
-------------------------------------------------------------------------
NET LOSS $ (3,382) $ (3,186) $ (3,598) $ (3,428) $ (459)
=========================================================================
PER COMMON SHARE:
Loss from continuing operations $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Gain on debt restructuring -- -- -- -- 0.01
-------------------------------------------------------------------------
Net loss per common share $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ 0.00
=========================================================================
WEIGHTED AVERAGE NUMBER
COMMON SHARES OUTSTANDING 397,685 334,840 326,390 275,189 235,199
=========================================================================
Total Assets $ 5,887 $ 4,870 $ 6,224 $ 4,340 $ 3,094
=========================================================================
Long-term debt $ 3,335 $ 3,347 $ 3,332 $ 3,332 $ 3,332
=========================================================================
Shareholder's equity (deficit) $ 103 $ (864) $ 287 $ (232) $ (1,648)
=========================================================================
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with our 2004 Financial
Statements and Notes thereto. 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 those set forth under the
heading "Certain Factors That May Affect Future Results" and elsewhere in this
report.
Cautionary Note on Forward-looking Statements
Some of the matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this Form 10-K include forward-looking statements.
We have based these forward-looking statements on our current expectations and
projections about future events.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "predicts," "potential,"
"continue," "expects," "anticipates," "future," "intends," "plans," "believes,"
"estimates" and similar expressions. These statements are based on our current
beliefs, expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those implied by the forward-looking
statements. These forward-looking statements are made as of the date of this
Form 10-K, and, except as required under applicable securities law, we assume no
obligation to update them or to explain the reasons why actual results may
differ.
OVERVIEW
Enova Systems believes it is a leading supplier of efficient,
environmentally-friendly digital power components and systems products in
conjunction with our associated engineering services. Our core competencies are
focused on the development and commercialization of power management and
conversion systems for mobile and stationary applications. Enova applies unique
`enabling technologies' in the areas of alternative energy propulsion systems
for light and heavy-duty vehicles as well as power conditioning and management
systems for distributed generation systems. Our products can be found in a
variety of OEM vehicles including those from Hyundai Motor Company and Ford
Motor Company, trucks and buses for First Auto Works of China, Mack Truck,
WrightBus of the U.K. and the U.S. Military, as well as digital power systems
for EDO, Hydrogenics and UTC Fuel Cells, a division United Technologies.
Enova's product focus is digital power management and power conversion
systems. Its software, firmware, and hardware manage and control the power that
drives either a vehicle or stationary device(s). They convert the power into the
appropriate forms required by the vehicle or device and manage the flow of this
energy to optimize efficiency and provide protection for both the system and its
users. Our products and systems are the enabling technologies for power systems.
The latest state-of-the-art technologies such as hybrid vehicles, fuel
cell and micro turbine based systems, and stationary power generation, all
require some type of power management and conversion mechanism. Enova Systems
supplies these essential components. Enova drive systems are 'fuel-neutral,'
meaning that they have the ability to utilize any type of fuel including diesel,
liquid natural gas (LNG) or bio-diesel fuels. We also develop, design and
produce power management and power conversion components for stationary power
generation - both on-site distributed power and on-site telecommunications
back-up power applications. These stationary applications also employ fuel
cells, microturbines and advanced batteries for power storage and generation.
Additionally, Enova performs significant research and development to augment and
support others' and our internal related product development efforts.
Our products are "production-engineered." This means they are designed
so they can be commercially produced (i.e., all formats and files are designed
with manufacturability in mind, from the start). For the automotive market,
Enova designs its products to ISO 9000X manufacturing and quality standards.
Enova's redundancy of systems and rigorous quality standards result in high
performance and reduced risk. For every component and piece of hardware, there
are detailed performance specifications. Each piece is tested and evaluated
against these specifications, which enhances and confirms the value of the
systems to OEM customers. Our engineering services focus on system integration
support for product sales and custom product design.
The financial statements present the financial position of Enova
Systems, Inc. as of December 31, 2004 and 2003 and the results of operations and
cash flows for the year ended December 31, 2004, 2003 and 2002.
19
Critical Accounting Policies
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the notes to the financial statements includes a
summary of the significant accounting policies and methods used in the
preparation of our financial statements. The following is a brief discussion of
the more significant accounting policies and methods that we use.
Our discussion and analysis of our financial condition and result of
operations are based on our financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Our preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. We based our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances. The most significant estimates and assumptions relate to revenue
recognition and potential allowances for doubtful accounts. Actual amounts may
differ from such estimates under different assumptions or conditions. The
following summarizes our critical accounting policies and significant estimates
used in preparing our consolidated financial statements:
o Inventories are priced at the lower of cost or market using standard
costs, which approximate actual costs on a first-in, first-out (FIFO)
basis. We maintain a perpetual inventory system and continuously record
the quantity on-hand and standard cost for each product, including
purchased components, subassemblies and finished goods. We maintain the
integrity of perpetual inventory records through periodic physical
counts of quantities on hand. Finished goods are reported as
inventories until the point of transfer to the customer. Generally,
title transfer is documented in the terms of sale.
Standard costs are generally re-assessed at least annually and reflect
achievable acquisition costs, generally the most recent vendor contract
prices for purchased parts, currently obtainable assembly and test
labor, and overhead for internally manufactured products. Manufacturing
labor and overhead costs are attributed to individual product standard
costs at a level planned to absorb spending at average utilization
volumes.
We maintain an allowance against inventory for the potential future
obsolescence or excess inventory that is based on our estimate of
future sales. A substantial decrease in expected demand for our
products, or decreases in our selling prices could lead to excess or
overvalued inventories and could require us to substantially increase
its allowance for excess inventory. If future customer demand or market
conditions are less favorable than our projections, additional
inventory write-downs may be required, and would be reflected in cost
of sales in the period the revision is made.
o Stock based compensation - we periodically issue common stock or stock
options to employees and non-employees for services rendered. For
common stock issuances, the cost of these services is recorded based
upon the fair value of our common stock on the date of issuance. SFAS
No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. We have elected to use the intrinsic value based method
and has disclosed the pro forma effect of using the fair value based
method to account for its stock-based compensation. For issuances of
stock options to employees and directors we measure compensation costs
using the intrinsic value method, or APB Opinion No. 25. Stock options
granted to non-employees are accounted for under the fair value method.
The fair value of stock options granted is calculated using the Black
Scholes option pricing model based on the weighted average assumptions
as detailed in the notes to our financial statements.
o Allowance for Doubtful Accounts - we maintain allowances for doubtful
accounts for estimated losses resulting from the inability of its
customers to make required payments. A considerable amount of judgment
is required in assessing the ultimate realization of accounts
receivable including the current credit-worthiness of each customer. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.
o Contract Services Revenue and Cost 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 and 104,
"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. Under FAS Concepts No. 5, revenues are not
recognized until earned.
20
The Company manufactures proprietary products and other products based
on design specifications provided by its customers. Revenue from sales
of products are generally recognized at the time title to the goods and
the benefits and risks of ownership passes to the customer which is
typically when products are shipped based on the terms of the customer
purchase agreement. Revenue relating to long-term fixed price contracts
is recognized using the percentage of completion method. Under the
percentage of completion method, contract revenues and related costs
are recognized based on the percentage that costs incurred to date bear
to total estimated costs. Changes in job performance, estimated
profitability and final contract settlements may result in revisions to
cost and revenue, and are recognized in the period in which the
revisions are determined. Contract costs include all direct materials,
subcontract and labor costs and other indirect costs. General and
administrative costs are charged to expense as incurred. At the time a
loss on a contract becomes known, the entire amount of the estimated
loss is accrued. The aggregate of costs incurred and estimated earnings
recognized on uncompleted contracts in excess of related billings is
shown as a current asset, and billings on uncompleted contracts in
excess of costs incurred and estimated earnings is shown as a current
liability.
These accounting policies are applied consistently for all years
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.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Over the next few years, we expect
to incur losses from operations as we continue to develop future products and
market our current products. We will need to raise additional capital through
debt or equity financings or collaborative arrangements with industry partners
to continue its business operations.
Our ability to continue as a going concern is dependent on its success
at obtaining additional capital sufficient to meet its obligations on a timely
basis, and to ultimately attain profitability. Management is actively engaged in
seeking to raise capital through product licensing, co-development programs, or
public or private equity financing. We believe we have demonstrated the ability
to raise the necessary funds for our growth and development activities. However,
there is no assurance that we will raise capital sufficient to enable us to
continue its operations through the end of the fiscal year.
In the event we are unable to successfully obtain additional capital,
it is unlikely that we will have sufficient cash flows and liquidity to finance
our business operations as currently contemplated. Accordingly, in the event
additional capital is not obtained, we will likely further downsize the
organization, defer marketing programs, reduce general and administrative
expenses and delay or reduce the scope of research and development projects
until we are able to obtain sufficient financing to do so.
These factors could significantly limit our ability to continue as a
going concern. The balance sheets do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the amounts of
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
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 developer 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 are seeking new investment capital to fund research and development
and create new market opportunities. In order to fuel our growth in the
stationary power market, we will need additional capital to further these
development programs and augment our intellectual properties. However, our
current sources of funds are not sufficient to provide the working capital for
material growth, and we will need to obtain additional debt or equity financing
to support such growth. As of March 30, 2005, we continue to seek private
accredited investors to purchase Enova common stock. We have been in discussions
with several private institutions and investment banks to acquire such
financings. As of March 30, 2005, there were no other firm commitments for such
funds. Currently, we are seeking up to $10 million in new investment funding.
Our operations during the year ended December 31, 2004 were financed by
development contracts and product sales, as well as from working capital
reserves.
During the year ended December 31, 2004, our operations required
$2,156,000 more in cash than was generated. Enova continues to increase
marketing and development spending as well as administrative expenses necessary
for expansion to meet customer demand. Accounts receivable decreased by $281,000
from $803,000, or approximately 35% from the balance at December 31, 2003 (net
of write-offs). The decrease is due to a continued delay in acquiring new
business in the third and fourth quarters of 2004. We are beginning to observe
an increase in sales activity for our drive systems, components and development
services which commenced in the fourth quarter of 2004, which we anticipate will
21
increase receivables in future quarters. Inventory decreased slightly by
$570,000 from $1,606,000 or 36% from December 31, 2003 balances. The decrease
was due to utilization of inventory stock for sales as well as write-offs for
obsolete and slow-moving inventory. We charged off approximately $113,000 of
this reduction of our inventory relating to raw materials for the Ballard/Ford
Th!nk city program which was terminated in 2003. This was inventory specific to
that program which we believed may be useable in other components, or would be
purchased by third parties, but was not due to our increased focus on the
heavy-duty hybrid markets. We also charged off an additional $162,000 in
obsolete or slow moving inventory during 2004.
Prepaid expenses increased by net $226,000 during 2004 from the
December 31, 2003 balance of $78,000 or almost 300% due to two customer deposits
from Tomoe Engineering totaling $220,000 as an element of the Singapore Land
Transit Authority program. These deposits are against component sales which are
anticipated to be completed in late 2005 and early 2006.
Fixed assets increased by $175,000 or 11%, before depreciation, for the
year ended December 31, 2004 from the prior year balance of $1,579,000 primarily
due to the purchase of our heavy-duty diesel series-hybrid demonstration truck
and a company vehicle which accounted for $160,000 of the total. Additional
purchases of computer equipment and software accounted for the balance.
Investments increased by $808,000 during 2004, net of our pro-rata
share of losses attributable to the investment, which reflects our forty percent
(40%) interest in the Hyundai-Enova Innovative Technology Center as noted
elsewhere in this Form 10-K. For the year ended December 31, 2004, the ITC
generated a net loss of approximately $481,000, resulting in a charge to Enova
of $192,000 utilizing the equity method of accounting for our interest in the
ITC. Based on contractual obligations of our Joint Venture Agreement with
Hyundai Heavy Industries Co., we made an additional investment of $1,000,000 in
2004 which was funded by HHI through a stock purchase in September 2004 as noted
in Part II, Item 5 of this Form 10-K.
Other assets decreased by $108,000 during 2004 from $404,000 in 2003 as
we continued to amortize the asset relating to the Ford Value Participation
Agreement. Intellectual property assets, including patents and trademarks
remained unchanged at $92,000 at December 31, 2004.
Accounts payable decreased in 2004 by over 88% from $768,000 at
December 31, 2003 to $66,000 at December 31, 2004. We paid down the remaining
HHI payables as well as other payables during the year from both cash flows from
operations, invested capital and our bank line of credit. Our line of credit
balance increased to $229,000 at December 31, 2004 from $120,000 at December 31,
2003 as we utilized such to reduce other liabilities with higher interest rates.
Deferred revenue increased to $392,000 during 2004 in conjunction with the Tomoe
Singapore project. These revenues will be recognized throughout 2005 and early
2006 as we progress on the development and production phases of that contract.
Accrued salaries and wages increased by a net of $74,000 including monies
payable to Carl Perry, our former CEO, in conjunction with his agreement with
us.
Accrued interest increased by $256,000 for the year ended December 31,
2004, an increase of 23%. The increase was due to interest on the Note due the
Credit Managers Association of California for $3.2 million per the terms of the
Note as well as the Schulz note payable. Other accrued expenses and payables
decreased by $85,000 during 2004 from $98,000 at December 31, 2003 as we paid
off the liabilities comprising these amounts during the year.
The future unavailability or inadequacy of financing to meet future
needs could force us to delay, modify, suspend or cease some or all aspects of
our planned operations.
RESULTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
Net sales of $2,554,000 for the twelve months ended December 31, 2004
decreased $1,756,000 or 41% from $4,310,000 during the same period in 2003. The
decrease in sales was attributable primarily to those factors listed elsewhere
in this Form 10-K. During 2004, we experienced a slowdown in sales due to a
number of internal and external developments including personnel changes, and
customer delays in ordering caused by continued evaluation of our systems or
awaiting orders for their products.
Our sources of revenue for 2004 came relatively equally from product
sales and development contracts. Product sales as a percentage of total revenues
of 57% in 2004 were consistent with the 2003 product sales to total revenues
percentage of 56%. Sales of our HybridPower 120kW drive systems accounted for a
majority of our product sales in 2004. We believe this trend will continue over
the next several years. However we continue to seek out and contract for new
development programs with both our current partners such as Ford, Mack/Volvo,
FAW, Tomoe, Hyundai and our other U.S., Asian and European alliance partners, as
well as with new alliances with other vehicle manufacturers and energy
companies.
Cost of sales consists of component and material costs, direct labor
costs, integration costs and overhead related to manufacturing our products.
Product development costs incurred in the performance of engineering development
22
contracts for the U.S. Government and private companies are charged to cost of
sales for this contract revenue. During 2004, our trend of establishing new
customers and strengthening current alliances with customers, such as Tomoe and
MTrans in the heavy-duty drive system market continued. Our new customers
continue to require additional integration and support services to customize,
integrate and evaluate our products. We believe these costs to be initial,
one-time costs for these customers and anticipate similar costs to be incurred
with respect to new customers as we gain additional market share. Customers who
have been using our products over one year do not incur these same types of
initial costs. Cost of sales for the year ended December 31, 2004 decreased
$1,065,000, or 32%, from $3,304,000 for the year ended December 31, 2003. This
decrease is primarily attributable to the decrease in sales for the year,
although we are experiencing a reduction in integration support costs. We
anticipate there may be an increase in cost of sales for products in 2005 due to
foreign exchange rate fluctuations of the U.S. dollar versus those currencies of
our primary manufacturers. We anticipate this to be offset by a reduction in
costs associated with manufacturing these products due to increasing purchases,
improving our gross margins. Cost of sales, as a percentage of gross sales were
higher than in prior years due to the aforementioned write downs of inventory
for the Ford Th!nk program and due to obsolescence. Additionally, during 2004,
we modified the method to account for cost of sales to a more accurate approach
which includes more detailed analysis of costs associated with the various
projects and components we sell.
Research and development expenses consist primarily of personnel,
facilities, equipment and supplies for our research and development activities.
Non-funded development costs are reported as research and development expense.
Research and development expense increased in 2004 to $925,000 from $799,000 for
the same period in 2003, an increase of $126,000, or 16%. During 2004,
externally funded research and development from partners such as FAW,
Mack/Volvo, Hyundai, and the U.S. Government offset certain costs of development
for new products in the areas of mobile and stationary power management and
conversion, thereby reducing the need for internal funding. Programs included
our new parallel hybrid drive systems, our diesel generation engine/motor system
for our heavy-duty drive systems, and upgrades and improvements to our current
power conversion and management components. Additionally, we continued to
enhance our technologies to be more universally adaptable to the requirements of
our current and prospective customers. By modifying our software and firmware,
we believe we should be able to provide a more comprehensive, adaptive and
effective solution to a larger base of customers and applications. We will
continue to research and develop new technologies and products, both internally
and in conjunction with our alliance partners and other manufacturers as we deem
beneficial to our global growth strategy.
Selling, general and administrative expenses consist primarily of
personnel and related costs of sales and marketing employees, consulting fees
and expenses for travel, trade shows and promotional activities and personnel
and related costs for general corporate functions, including finance,
accounting, strategic and business development, human resources and legal.
Selling, general and administrative expenses decreased in 2004 from 2003 levels
due to lower consulting, legal, and accounting costs and expenses as well as
continued efforts to maintain a reduction in overall non-revenue generating
expenditures. For the year ended December 31, 2004, these expenses totaled
$2,325,000 from $2,919,000 for the similar period in 2003. This represents a
$594,000 decrease, or 20%, in these expenses. We are continually reviewing
operations to lower overhead costs and increase operational efficiencies
For the year ended December 31, 2004, interest and financing fees
increased by $21,000 to $255,000, an increase of 8%. The increase was due solely
to an increase in 2004 in the interest rate on the Note due the Credit Managers
Association of California for $3.2 million per the terms of the Note.
In 2004, we charged off approximately $275,000 in obsolete and slow
moving inventory from our books. Approximately 40% of this consisted of raw
materials associated with the Ford Th!nk city program which was terminated in
2002. We do not anticipate further material write downs of our inventory.
Our $3,382,000 net loss for the year ended December 31, 2004 is
$196,000 more than the loss incurred in 2003 of $3,186,000, an increase of 6%.
The increase is due primarily to write-offs of obsolete and slow-moving
inventory during the year increased internal development for new products and
costs associated with the annual meeting and other regulatory compliance.
Management will continue to seek operational efficiencies and methods to reduce
manufacturing and overhead costs as well as increase revenues to enhance our
goal of profitability.
During the fourth quarter of fiscal 2004, we:
o wrote-down inventory by a net of $275,000 for obsolete and slow-moving
inventory. We charged off approximately $113,000 of this reduction of
our inventory relating to raw materials for the Ballard/Ford Th!nk city
program which was terminated in 2002. This was inventory specific to
that program which we believed may be useable in other components, or
would be purchased by third parties, but was not due to our increased
focus on the heavy-duty hybrid markets. We also charged off an
additional $162,000 in obsolete or slow moving inventory during 2004.
This resulted in an increase of cost of sales by $275,000 for the year.
o allocated certain expenses to cost of sales, which had been charged to
general and administrative expense, based on our improved method of
apportioning such costs. This resulted in an increase in cost of sales
of approximately $147,000 in the fourth quarter, a portion of which may
have been attributable to prior quarters in 2004 but none that we
believe would have a material impact on the presentation of those
quarters.
23
The above two adjustments (i) increased cost of sales by $422,000 in the
fourth quarter, (ii) reduced gross profit by $422,000, (iii) increased loss from
operations by $275,000 and (iv) reduced net loss by $275,000.
Years Ended December 31, 2003 and 2002
Net sales of $4,310,000 for the twelve months ended December 31, 2003
decreased $145,000 or 3% from $4,455,000 during the same period in 2002. Our
sources of revenue for 2003 came primarily from product sales. Product sales as
a percentage of total revenues of 56% in 2003 were consistent to the 2002
product sales to total revenues percentage of 59%. Sales of our HybridPower
120kW drive systems accounted for a majority of our product sales in 2003.
Cost of sales consists of component and material costs, direct labor
costs, integration costs and overhead related to manufacturing our products.
Product development costs incurred in the performance of engineering development
contracts for the U.S. Government and private companies are charged to cost of
sales for this contract revenue. Cost of sales for the year ended December 31,
2003 decreased $480,000, or 12%, from $3,784,000 for the year ended December 31,
2002. This decrease was attributable to follow-on orders from existing customers
such as EPT and MTrans, which no longer require as much integration support, and
from decreased pricing from our contract manufacturers as our order quantities
rise.
Research and development expense decreased in 2003 to $799,000 from
$1,152,000 for the same period in 2002, a decrease of $353,000, or 31%. During
2003, we reduced non-essential expenses for internal research and development
without sacrificing that development necessary to maintain our competitive edge
in our markets. We supplemented this reduction by teaming with other companies
in our sector such as Mack/Volvo, Hyundai, and the U.S. Government to offset the
costs of development for new products in the areas of mobile and stationary
power management and conversion. Programs included our advanced power management
systems for fuel cells, our diesel generation engine/motor system for our
heavy-duty drive systems, a dual 8kW inverter, and upgrades and improvements to
our current power conversion and management components. Additionally, we
continued to enhance our technologies to be more universally adaptable to the
requirements of our current and prospective customers.
Selling, general and administrative expenses were further reduced in
2003 from 2002 levels continuing a trend from prior years. Net of the $595,000
AVS bad debt write-off, our selling, general and administrative expenses
decreased $513,000 in the year ended December 31, 2003, to $2,324,000 from
$2,837,000 for the similar period in 2002. This represents an 18% reduction in
these expenses as a result of management's cost reduction programs implemented
throughout 2003 including workforce cutbacks, elimination of non-essential
expenses and exercising tighter constraint over overhead costs in general.
For the year ended December 31, 2003, interest and financing fees
increased by $22,000 to $242,000, an increase of 10%. The increase was due
solely to an increase in 2003 in the interest rate on the Note due the Credit
Managers Association of California for $3.2 million per the terms of the Note.
Our $3,186,000 net loss for the year ended December 31, 2003 is
$412,000 less than the loss incurred in 2002 of $3,598,000, a decrease of 11%.
Excluding the bad debt charge of $595,000 for the AVS bankruptcy and the
write-down of the Hawaii tram of $200,000, our loss for the year would have been
$1,207,000 less, or $2,391,000 for the year ended December 31, 2003, over 34%
lower than that incurred in 2002.
Hyundai-Enova Innovative Technology Center
- ------------------------------------------
In September 2003, Hyundai Heavy Industries, Co. Ltd. (HHI) and we
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. Of this amount, we 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. In
September 2004, HHI invested an additional $1,500,000 in Enova and $1,500,000 in
the HEITC under the same terms as the initial investment. In this second
tranche, HHI purchased 11,335,315 restricted shares of common stock in
accordance with the Joint Venture Agreement increasing HHI's ownership to 8.0%
in Enova. 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.
Recent accounting pronouncements
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
24
statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not expect adoption
of SFAS No. 151 to have a material impact, if any, on our financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
Estate Time-Sharing Transactions". The FASB issued this statement as a result of
the guidance provided in AICPA Statement of Position (SOP) 04-2, "Accounting for
Real Estate Time-Sharing Transactions". SOP 04-2 applies to all real estate
time-sharing transactions. Among other items, the SOP provides guidance on the
recording of credit losses and the treatment of selling costs, but does not
change the revenue recognition guidance in SFAS No. 66, "Accounting for Sales of
Real Estate", for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152
also amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of
Real Estate Projects", to state that SOP 04-2 provides the relevant guidance on
accounting for incidental operations and costs related to the sale of real
estate time-sharing transactions. SFAS No. 152 is effective for years beginning
after June 15, 2005, with restatements of previously issued financial statements
prohibited. Management does not expect adoption of SFAS No. 152 to have a
material impact, if any, on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions". SFAS No. 153 eliminates certain differences in the guidance in
Opinion No. 29 as compared to the guidance contained in standards issued by the
International Accounting Standards Board. The amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect adoption
of SFAS No. 153 to have a material impact, if any, on our financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No.123(R) requires that the cost of share-based payment
transactions (including those with employees and non-employees) be recognized in
the financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in amounts
based (even in part) on the price of our shares or other equity instruments, or
(2) that require (or may require) settlement by the issuance of a company's
shares or other equity instruments. This statement is effective (1) for public
companies qualifying as SEC small business issuers, as of the first interim
period or fiscal year beginning after December 15, 2005, or (2) for all other
public companies, as of the first interim period or fiscal year beginning after
June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal year
beginning after December 15, 2005. Management is currently assessing the impact
of this statement on its financial position and results of operations.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-K 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. 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 have experienced recurring losses from operations and
had an accumulated deficit of $100,459,000 at December 31, 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 year ended December 31, 2004, 2003 and 2002, we had
net losses of $3,382,000, $3,186,000 and $3,598,000, respectively, on sales of
$2,554,000, $4,310,000, and $4,455,000, respectively.
Our independent auditors' opinion on our audited financial statements includes a
going concern qualification.
Our independent auditors have included an explanatory paragraph in their audit
report issued in connection with our financial statements which states that our
recurring operating losses raise substantial doubt about our ability to continue
as a going concern. Our financial statements do not include any adjustments to
the amounts and classification of assets and liabilities that may be necessary
should we be unable to continue as a going concern. Our ability to continue as a
going concern is dependent upon our ability to generate profitable operations in
the future and/or to obtain the necessary financing to meet our obligations and
repay our liabilities arising from normal business operations when they come
due. The outcome of these matters cannot be predicated with any certainty at
this time.
The Company's ability to continue as a going concern is dependent on its success
at obtaining additional capital sufficient to meet its obligations on a timely
basis, and to ultimately attain profitability. Management is actively engaged in
seeking to raise capital through product licensing, co-promotional arrangements,
or public or private equity financing. The Company believes it has demonstrated
the ability to raise the necessary funds for the Company's growth and
development activities. However, there is no assurance that the Company will
raise capital sufficient to enable the Company to continue its operations
through the end of the fiscal year.
In the event the Company is unable to successfully obtain additional capital, it
is unlikely that the Company will have sufficient cash flows and liquidity to
finance its business operations as currently contemplated. Accordingly, in the
event additional capital is not obtained, the Company will likely further
downsize the organization, defer marketing programs, reduce general and
administrative expenses and delay or reduce the scope of research and
development projects until it is able to obtain sufficient financing to do so.
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.
25
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.
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.
Changed legislative climate. Because vehicles powered by internal combustion
engines cause pollution, there has been significant public pressure in Europe
and Asia, and enacted or pending legislation in the United States at the federal
level and in certain states, to promote or mandate the use of vehicles with no
tailpipe emissions ("zero emission vehicles") or reduced tailpipe emissions
("low emission vehicles"). Legislation requiring or promoting zero or low
emission vehicles is necessary to create a significant market for electric
vehicles. The California Air Resources Board (CARB) is continuing to modify its
regulations regarding its mandatory limits for zero emission and low emission
vehicles. Furthermore, several car manufacturers have challenged these mandates
in court and have obtained injunctions to delay these mandates.
There are substantial risks involved in the development of unproven products. In
order to remain competitive, we must adapt existing products as well as develop
new products and technologies. In fiscal years 2004, 2003 and 2002, we spent
collectively in excess of $2,850,000 on research and development of new products
and technology. Despite our best efforts a new product or technology may prove
to be unworkable, not cost effective, or otherwise unmarketable. We can give you
no assurance that any new product or technology we may develop will be
successful or that an adequate market for such product or technology will ever
develop.
We may be unable to effectively compete with other companies who have
significantly greater resources than we have. Many of our competitors, in the
automotive, electronic and other industries, are larger, more established
companies that have substantially greater financial, personnel, and other
resources than we do. These companies may be actively engaged in the research
and development of power management and conversion systems. Because of their
greater resources, some of our competitors may be able to adapt more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sales of their products than we can. We
believe that developing and maintaining a competitive advantage will require
continued investment in product development, manufacturing capability and sales
and marketing. We cannot assure you however that we will have sufficient
resources to make the necessary investments to do so. In addition, current and
potential competitors may establish collaborative relationships among themselves
or with third parties, including third parties with whom we have relationships.
Accordingly, new competitors or alliances may emerge and rapidly acquire
significant market share.
Future equity financings may dilute your holdings in our company. We need to
obtain additional funding through public or private equity or debt financing,
collaborative agreements or from other sources. If we raise additional funds by
issuing equity securities, current shareholders may experience significant
dilution of their holdings. We may be unable to obtain adequate financing on
acceptable terms, if at all. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate research, development or marketing programs, or cease operations
altogether.
Potential intellectual property, shareholder or other litigation could adversely
impact our business. Because of the nature of our business, we may face
litigation relating to intellectual property matters, labor matters, product
liability or shareholder disputes. Any litigation could be costly, divert
management attention or result in increased costs of doing business. Although we
intend to vigorously defend any future lawsuits, we cannot assure you that we
would ultimately prevail in these efforts. An adverse judgment could negatively
impact the price of our common stock and our ability to obtain future financing
on favorable terms or at all.
We may be exposed to product liability or tort claims if our products fail,
which could adversely impact our results of operations. A malfunction or the
inadequate design of our products could result in product liability or other
tort claims. Accidents involving our products could lead to personal injury or
physical damage. Any liability for damages resulting from malfunctions could be
substantial and could materially adversely affect our business and results of
operations. In addition, a well-publicized actual or perceived problem could
adversely affect the market's perception of our products. This could result in a
decline in demand for our products, which would materially adversely affect our
financial condition and results of operations.
26
We are highly subject to general economic conditions. The financial success of
our company is sensitive to adverse changes in general economic conditions, such
as inflation, unemployment, and consumer demand for our products. These changes
could cause the cost of supplies, labor, and other expenses to rise faster than
we can raise prices. Such changing conditions also could significantly reduce
demand in the marketplace for our products. We have no control over any of these
changes.
We are an early growth stage company. Although our Company was originally
founded in 1976, many aspects of our business are still in the early growth
stage development, and our proposed operations are subject to all of the risks
inherent in a start-up or growing business enterprise, including the likelihood
of continued operating losses. Enova is relatively new in focusing its efforts
on electric systems, hybrid systems and fuel cell management systems. The
likelihood of our success must be considered in light of the problems, expenses,
difficulties, complications, and delays frequently encountered in connection
with the growth of an existing business, the development of new products and
channels of distribution, and current and future development in several key
technical fields, as well as the competitive and regulatory environment in which
we operate.
We operate in a highly regulated business environment and changes in regulation
could impose costs on us or make our products less economical. 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.
We are highly dependent on a few key personnel and will need to retain and
attract such personnel in a labor competitive market. Our success is largely
dependent on the performance of our key management and technical personnel,
including Edwin Riddell, our Chief Executive Officer, Larry Lombard, our Chief
Financial Officer, Edward Moore, our Chief Operating Officer and Don Kang, our
Vice President of Engineering, the loss of one or more of whom could adversely
affect our business. Additionally, in order to successfully implement our
anticipated growth, we will be dependent on our ability to hire additional
qualified personnel. There can be no assurance that we will be able to retain or
hire other necessary personnel. We do not maintain key man life insurance on any
of our key personnel. We believe that our future success will depend in part
upon our continued ability to attract, retain, and motivate additional highly
skilled personnel in an increasingly competitive market.
There are minimal barriers to entry in our market. We presently license or own
only certain proprietary technology and, therefore, have created little or no
barrier to entry for competitors other than the time and significant expense
required to assemble and develop similar production and design capabilities. Our
competitors may enter into exclusive arrangements with our current or potential
suppliers, thereby giving them a competitive edge which we may not be able to
overcome, and which may exclude us from similar relationships.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
None.
Item 8. Financial Statements and Supplementary Data
The response to this Item is submitted as a separate section of this Form 10-K.
See Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures
We conducted an evaluation of the effectiveness of the design and
operation of our "disclosure controls and procedures" (Disclosure Controls) as
of the end of the period covered by this Annual Report. The controls evaluation
was done under the supervision and with the participation of management,
including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Attached as exhibits to this Annual Report are certifications of the
CEO and the CFO, which are required in accord with Rule 13a-15(e) of the
Exchange Act. This Controls and Procedures section includes the information
concerning the controls evaluation referred to in the certifications and it
should be read in conjunction with the certifications for a more complete
understanding of the topics presented.
27
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably
assure that information required to be disclosed in our reports filed under the
Exchange Act, such as this Annual Report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed to reasonably assure that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Our
Disclosure Controls include components of our internal control over financial
reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with US generally accepted
accounting principles. To the extent that components of our internal control
over financial reporting are included within our Disclosure Controls, they are
included in the scope of our periodic controls evaluation.
Limitations on the Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of a simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Scope of the Controls Evaluation
The evaluation of our Disclosure Controls included a review of the
controls' objectives and design, our implementation of the controls and the
effect of the controls on the information generated for use in this Annual
Report. In the course of the controls evaluation, we sought to identify data
errors, controls problems or acts of fraud and confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation is performed on a quarterly basis so that the conclusions of
management, including the CEO and CFO, concerning controls effectiveness can be
reported in our Quarterly Reports on Form 10-Q and in our Annual Report on Form
10-K. Many of the components of our Disclosure Controls are also evaluated on an
ongoing basis by personnel in our Finance organization, as well as our
independent auditors who evaluate them in connection with determining their
auditing procedures related to their report on our annual financial statements
and not to provide assurance on our controls. The overall goals of these various
evaluation activities are to monitor our Disclosure Controls, and to modify them
as necessary.
Among other matters, we also considered whether our evaluation
identified any "significant deficiencies" or "material weaknesses" in our
internal control over financial reporting, and whether the Company had
identified any acts of fraud involving personnel with a significant role in our
internal control over financial reporting. This information was important both
for the controls evaluation generally, and because item 5 in the certifications
of the CEO and CFO require that the CEO and CFO disclose that information to our
Board's Audit Committee and to our independent auditors. In the professional
auditing literature, "significant deficiencies" are referred to as "reportable
conditions," which are deficiencies in the design or operation of controls that
could adversely affect our ability to record, process, summarize and report
financial data in the financial statements. Auditing literature defines
"material weakness" as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and the risk that such
misstatements would not be detected within a timely period by employees in the
normal course of performing their assigned functions.
Conclusions
Based upon the controls evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, as of the end of the period
covered by this Annual Report, our Disclosure Controls were effective to provide
reasonable assurance that material information relating to the Company is made
known to management, including the CEO and CFO.
28
PART III
Item 10. Directors and Executive Officers of the Registrant
Our directors and executive officers hold office until the first
meeting of the Board of Directors following the annual meeting of stockholders
and until their successors are duly chosen and qualified, or until they resign
or are removed from office in accordance with our By-laws. The following table
sets forth certain information with respect to the current Directors and
executive officers of Enova:
Name Age Position
- ---- --- --------
Anthony N. Rawlinson 49 Chairman of the Board
Edwin O. Riddell 62 Chief Executive Officer,
President and Director
Carl D. Perry 72 Vice chairman
Bjorn Ahlstrom (1) 70 Director
Dr. Malcolm Currie (1) 77 Director
John J. Micek, III (2) (3) 52 Director
Donald H. Dreyer (2) 67 Director
John Wallace 56 Director
Larry B. Lombard 44 Chief Financial Officer
Edward M. Moore 43 Chief Operating Officer
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Anthony Rawlinson, Chairman of the Board. Mr. Rawlinson was appointed
Chairman of the Board in July 1999. He is Managing Director of The Global Value
Investment Portfolio Management Pte. Ltd., a Singapore-based international fund
management company managing discretionary equity portfolios for institutions,
pension funds and clients globally from 1996 to the present. Mr. Rawlinson is
also a director of Calvalley Petroleum. a Canadian listed public company with
Yemen oil interests and chairman of Cardsoft Inc., a privately-held company
which supplies software for a secure Java environment that meets financial
standards.
Edwin O. Riddell, President, CEO and Director. Mr. Riddell was
appointed President and Chief Executive Officer on August 20, 2004. Mr. Riddell
has been a Director of the Company since 1995. Since 1999, Mr. Riddell has been
President of CR Transportation Services, a consultant to the electric vehicle
industry. From 1992 to 1999, Mr. Riddell was Product Line Manager of the
Transportation Business Unit at the Electric Power Research Institute, and from
1985 until 1992, he served with the Transportation Group, Inc. as Vice
President, Engineering, working on electric public transportation systems. From
1979 to 1985, he was Vice President, General Manager and COO of Lift-U, Inc.,
the leading manufacturer of handicapped wheelchair lifts for the transit
industry. Mr. Riddell has also worked with Ford, Chrysler, and General Motors in
the area of auto design, and has worked as a member of senior management for a
number of public transit vehicle manufacturers. Mr. Riddell has been a member of
the American Public Transportation Association's (APTA) Member Board of
Governors for over 15 years, and has served on APTA's Board of Directors. Mr.
Riddell was also Managing Partner of the U.S. Advanced Battery Consortium.
Carl D. Perry, Director, Vice Chairman of the Board. Mr. Perry served
as Chief Executive Officer, President and a Director of the Company until August
2004 when he stepped down from his positions to accept the position of vice
chairman of the Board. Mr. Perry served as a Director and as an Executive Vice
President of the Company from 1993 until 1997. In 1997, Mr. Perry was elected as
Chairman of the Board and Chief Executive Officer of the Company, and was
elected President in June 1999. In July 1999, Mr. Perry resigned his position as
Chairman of the Board to allow Mr. Anthony Rawlinson to become Chairman.
Bjorn Ahlstrom, Director. Mr. Ahlstrom was elected to the Board of
Directors in June 2004. Mr. Ahlstrom currently is a consultant in the heavy-duty
vehicle industry. Mr. Ahlstrom retired as Chairman of Volvo Group North America,
Inc. on April 1, 2004. Prior to that, Mr. Ahlstrom was President and Chief
Executive Officer of Volvo North America Corporation from 1971 until 1994.
During this term, Volvo North America Corporation owned and operated Volvo's
businesses in the United States and Canada. Under Mr. Ahlstrom's leadership,
29
VNAC grew from a $50 million car importer in the early 1970s to a $6 billion
company with manufacturing and marketing operations for cars, trucks, marine
engines, and financial services. In 1981, Mr. Ahlstrom received the Royal Order
of the North Star from King Carl XVI Gustaf of Sweden. The United States
Government awarded him the Medal of Peace and Commerce in 1983. He received the
Ellis Island Medal of Honor in 1990. Mr. Ahlstrom has been awarded honorary
Doctor of Law degree from St John's University, NY, and Ramapo College of New
Jersey.
Malcolm R. Currie, Ph.D, Director. Dr. Currie was re-elected to the
Board of Directors in 1999. Dr. Currie had served as a Director of the Company
from 1995 through 1997. From 1986 until 1992, Dr. Currie served as Chairman and
Chief Executive Officer of Hughes Aircraft Co., and from 1985 until 1988, he was
the Chief Executive Officer of Delco Electronics. His career in electronics and
management has included research with many patents and papers in microwave and
millimeter wave electronics, laser, space systems, and related fields. He has
led major programs in radar, commercial satellites, communication systems, and
defense electronics. He served as Undersecretary of Defense for Research and
Engineering, the Defense Science Board, and currently serves on the Boards of
Directors of LSI Logic, Inamed Corp., Innovative Micro Technology, Regal One,
and Currie Technologies. He is past president of the American Institute of
Aeronautics and Astronautics, and is a Member of the Board of Trustees of the
University of Southern California.
John R. Wallace, Director. Mr. Wallace was elected as a Director of the
Company in 2002. Mr. Wallace retired from the Ford Motor Company in 2002. From
2002 to the present, he has been working independently as a consultant in the
alternative energy sector Prior to his retirement, he was executive director of
TH!NK Group. He has been active in Ford Motor Company's alternative fuel vehicle
programs since 1990, serving first as: Director, Technology Development
Programs; then as Director, Electric Vehicle Programs; Director, Alternative
Fuel Vehicles and finally Director, Environmental Vehicles. He is past Chairman
of the Board of Directors of TH!NK Nordic; he is past chairman of the United
States Advanced Battery Consortium; Co-Chairman of the Electric Vehicle
Association of the Americas, and past Chairman of the California Fuel Cell
Partnership. He served as Director of Ford's Electronic Systems Research
Laboratory, Research Staff, from 1988 through 1990. Prior to joining Ford
Research Staff, he was president of Ford Microelectronics, Inc., in Colorado
Springs. His other experience includes work as program manager with Intel
Corporation. He also served as Director, Western Development Center, for
Perkin-Elmer Corporation and as President of Precision Microdesign, Inc.
Donald H. Dreyer, Director. Mr. Dreyer was elected a Director of the
Company in January 1997. Mr. Dreyer is President and CEO of Dreyer & Company,
Inc., a consultancy in credit, accounts receivable and insolvency services,
which he founded in 1990. Mr. Dreyer has served as Chairman of the Board of
Credit Managers Association of California during the 1994 to 1995 term and
remains a current member. Mr. Dreyer is also a member of the American Bankruptcy
Institute and the National Advisory Committee of Dun & Bradstreet, Inc.
John J. Micek III, Director. Mr. Micek was elected a Director of the
Company in April 1999. Mr. Micek has been Managing Director of Silicon Prairie
Partners, LP from August 1998 to the present. From June 1997 to August 1998, Mr.
Micek was COO of Pelion Systems, Inc. Mr. Micek served as our Vice President,
General Counsel and Secretary from March 1994 to March 1997. He also is a
practicing attorney specializing in corporate finance and business development
in Palo Alto, CA. He is a Board Member of Universal Warranty and also sits on
the boards of UTEK Corp., Pelion Systems, Inc., Universal Assurors Agency, Inc.,
and Armanino Foods.
Larry B. Lombard, Chief Financial Officer. Mr. Lombard was appointed
Chief Financial Officer in November 2004. He was appointed was appointed Chief
Financial Officer in November 2004. He has served as Director of Finance and
Administration at Enova Systems, Inc. since 1998. Mr. Lombard has over twenty
years experience in management and finance for a wide range of companies
including software development, insurance, petroleum and banking. He received
his BA in Business Economics, University of California at Los Angeles and his
MBA in Global Management from the University of Phoenix.
Edward M. Moore, Chief Operating Officer. Mr. Moore was appointed Chief
Operating Officer in March 2004. He has served as Vice President, Marketing and
Sales at Enova Systems, Inc. since 2000. Mr. Moore was vice president, sales for
E-Bus from 1999 to 2000. Mr. Moore has experience in creating and implementing
strategic marketing plans for both domestic and international markets. He has an
extensive background in the alternative fuels and drive system industry, having
worked with GM Hughes, AeroEnvironment and E-Bus in both the technology and
marketing fields. He received his BS, Occupational Education from Southern
Illinois University and his MBA from the University of Phoenix.
Audit Committee
We have a standing Audit Committee established in accordance with
section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, which is
composed of Donald H. Dreyer and John J. Micek, III. The Audit Committee has
adopted an Audit Committee Charter, which is on file at our corporate
headquarters in Torrance California.
30
Audit Committee Financial Expert
As required by the Sarbanes-Oxley Act of 2002, our Board of
Directors has determined that one member of our Audit Committee, John J. Micek
III, is qualified to be an "audit committee financial expert" within the meaning
of SEC regulations. The Board reached its conclusion as to the qualifications of
Mr. Micek based on his education and experience in analyzing financial
statements of a variety of companies.
Relationships Among Directors or Executive Officers
There are no family relationships among any of the Directors or
executive officers of Enova.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires our Directors,
executive officers and persons who own more than 10% of our Common Stock
(collectively, "Reporting Persons") to file reports of ownership and changes in
ownership of our Common Stock to the Securities and Exchange Commission ("SEC").
Copies of these reports are also required to be delivered to Enova.
We believe, based solely on our review of the copies of such reports
received or written representations from certain Reporting Persons, that each of
Messrs. Rawlinson, Riddell, Currie, Micek, Wallace and Dreyer, each of whom is a
Director of Enova, failed to file on a timely basis one Form 4, each of which
Form 4 reported one transaction, namely the issuance of shares of Common Stock
in partial payment of directors' fees for August 2004.
Code of Ethics
Enova has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller and all persons performing similar functions, if any. We will provide
to any person without charge, upon request, a copy of such code of ethics.
Requests should be made in writing to:
Enova Systems, Inc.
Larry Lombard, Chief Financial Officer
19850 S. Magellan Drive
Torrance, CA 90502
31
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth all compensation earned by our Chief
Executive Officer and each of the other most highly compensated executive
officers of Enova whose annual salary and bonus exceeded $100,000 for the years
ended December 31, 2004, 2003 and 2002 (collectively, the "Named Executive
Officers"). Mr. Carl D. Perry was the sole executive officer of Enova whose
salary currently exceeded $100,000 prior to December 31, 2003.
Name and Principal Position
- ---------------------------
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------------------------
Year Salary Bonus
---- ------ -----
Edwin O. Riddell (1) 2004 $114,000 --
Chief Executive Officer and President 2003 -- --
2002 -- --
Larry B. Lombard (2) 2004 $127,000 --
Chief Financial Officer 2003 -- --
2002 -- --
Edward M. Moore (3) 2004 $147,000 $30,000 (earned in 2003)
Chief Operating Officer 2003 -- --
2002 -- --
Carl D. Perry (4) 2004 $195,000 --
Former Chief Executive Officer and 2003 $140,000 --
President 2002 $150,000 $30,000 (earned in 2000)
(1) Mr. Riddell was elected Chief Executive Officer and president in August
2004. Mr. Riddell commenced employment as a full-time employee in January
2005 at a salary of $208,000 per year. For the period from August 2004 to
December 2004, Mr. Riddell was compensated for services on a contractual
basis at the rate of $4,000 per week totaling $99,000 in cash during 2004
and $15,000 in director's fees for his service as a director prior to
becoming an officer of the company.
(2) Mr. Lombard was elected Chief Financial Officer in November 2004. He was
elected Acting Chief Financial Officer in March 2004. Mr. Lombard's annual
salary is $145,000 per year. Prior to 2004, Mr. Lombard was not an officer
of the Company.
(3) Mr. Moore was elected Chief Operating Officer in March 2004. Mr. Moore's
annual salary is $150,000 per year. Prior to 2004, Mr. Moore was not an
officer of the Company.
(4) Mr. Perry was elected Chief Executive Officer and president in November
1997 and resigned those positions in August 2004. Mr. Perry's current
salary was $120,000 per year which terminated per agreement at December 31,
2004. Upon termination, Mr. Perry is entitled to approximately $75,000 in
deferred salary, bonus and vacation pay which will be paid in 2005. Mr.
Perry served as Acting Chief Financial Officer during the periods reflected
in the above chart through March 6, 2004.
32
Option/SAR Grants
The following grants of stock options or stock appreciation rights
("SARs") were made during 2004 to the Named Executive Officers.
Option Grants During Fiscal 2004
Number of
Securities Percentage of Total Potential Realizable Value of
Underlying Options Granted to Exercise Assumed Annual Rates of Stock Price
Name of Individual Options Employee in Price Expiration Appreciation for the Option
and Position Granted Fiscal 2004 Per Share Date Term (1)
------------ ------- ----------- --------- ---- ------------------------------------
5% 10%
-- ---
Larry B. Lombard, Chief
Financial Officer 1,000,000 50.0% $0.115 1-25-06 $ 5,750 $ 11,500
Edward M. Moore, Chief
Operating Officer 1,000,000 50.0% $0.115 1-25-06 $ 5,750 $ 11,500
(1) Calculated on the basis of $0.115 representing the average of the high bid
and low ask prices of the Common Stock on December 31, 2004
Option Exercises and Option Values
The following table sets forth information concerning option exercises
during 2004, and the aggregate value of unexercised options as of December 31,
2004, held by each of the Named Executive Officers:
Aggregated Option/SAR Exercises in 2004
and Option Values at December 31, 2004
Number of Securities
Aggregate Underlying Unexercised Value of Unexercised
Option Options at In-the-Money Options at
Exercises in 2004 December 31, 2004 (#) December 31, 2004 ($) (1)
---------------------------- -------------------------- ---------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Edwin O. Riddell -- -- -- -- --(1) N/A
Larry B. Lombard -- -- 2,000,000 -- --(1) N/A
Edward M. Moore 1,133,234 $110,800 2,000,000 -- --(1) N/A
(1) Calculated on the basis of $0.00 representing the average of the high bid
and low ask prices of the Common Stock on December 31, 2004 of $0.115 per
share, minus the exercise price.
Compensation of Directors
During 2004, we issued, or accrued for issuance, an aggregate of
701,255 shares of common stock to the non-executive board members in accordance
with the September 1999 Board of Directors compensation package for outside
directors, as amended to date. For each meeting attended in person, each outside
director is entitled to receive $2,000 in cash and $4,000 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 entitled 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; and for each meeting of a Board committee attended
in person, a committee member is entitled to receive $1,000 in cash and $1,000
of stock valued on the date of the meeting at the average of the closing ask and
bid prices. All Directors are also reimbursed for out-of-pocket expenses
incurred in connection with attending Board and committee meetings.
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 December 31, 2004, an aggregate of 3,539,784 shares
had been issued, or accrued for issuance, under the above compensation plan for
Directors.
33
Edwin O. Riddell
The Company entered into a consulting agreement with Edwin Riddell,
doing business as CR Transportation Services, wherein the Company compensates
CR Transportation at the rate of $4,000 per week plus reasonable expenses for
consulting services rendered. Upon Mr. Riddell becoming an employee of Enova in
January 2005, this agreement was terminated. Mr. Riddell is not compensated per
this agreement when acting in the capacity of a director of the Company. During
2004, the Company paid Mr. Riddell $99,000 in cash for consulting services and
expenses and $15,000 for directors fees (which latter amount includes the cash
paid and the value of the stock issued to him pursuant to the outside
directors' compensation package described above).
Donald Dreyer
The Company utilizes the consulting service of Donald Dreyer wherein
the Company compensates Mr. Dreyer at the rate of $150 per hour plus reasonable
expenses for consulting services rendered. Mr. Dreyer is not compensated when
acting in the capacity of a director of the Company other than the fees noted
above. During 2004, the Company paid Mr. Dreyer $2,000 in cash for consulting
services and expenses and $29,000 for directors fees (which latter amount
includes the cash paid and the value of the stock issued to him pursuant to the
outside directors' compensation package described above).
Compensation Committee Interlocks and Insider Participation
The Compensation Committee held two meetings in the year ended December
31, 2004. The Compensation Committee currently consists of Mr. Bjorn Ahlstrom
and Dr. Malcolm Currie, neither of who have been officers of the Company. Prior
to August 2004, Mr. Edwin Riddell was a member of the Compensation Committee.
Mr. .Riddell resigned from the committee upon his appointment as Chief Executive
Officer. The Compensation Committee's functions are to establish and apply our
compensation policies with respect to our Executive Officers, and to administer
our stock option plans.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
34
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information known to the Company with
respect to beneficial ownership of our Common Stock as of March 30, 2005, by (i)
each shareholder known to the Company to own beneficially more than 5% of our
Common Stock; (ii) each of our Directors; (iii) the Named Executive Officer; and
(iv) all Executive Officers and Directors as a group. Except as indicated in the
footnotes to this table and subject to applicable community property laws, the
persons named in the table, based on information provided by such persons, have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
Shares Percentage of Shares Voting
Name Beneficially Owned (1) Beneficially Owned (2) Percentage (3)
---- ---------------------- ---------------------- --------------
Jagen, Pty., Ltd. 145,000,000 33.53% 34.41%
9 Oxford Street, South Ybarra 3141
Melbourne, Victoria Australia
Hyundai Heavy Industries, Co. 34,412,238 7.96% 8.17%
1 Cheona-Dong, Dong-Ku
Ulsan, Korea
Citibank N.A 29,405,754 6.80% 6.98%
111 Wall Street, 8th Floor
New York, NY 10043
Anthony N. Rawlinson 25,545,001 5.91% 6.06%
c/o Enova Systems, Inc.
19850 South Magellan Drive
Torrance, CA 90502
Edwin O. Riddell 1,712,119(4) * *
c/o Enova Systems, Inc.
19850 South Magellan Drive
Torrance, CA 90502
Carl D. Perry 10,045,045 2.32% 2.38%
John J. Micek III 1,644,267(5) * *
Bjorn Ahlstrom 114,242 * *
Dr. Malcolm Currie 679,369 * *
Donald H. Dreyer 620,287 * *
John R. Wallace 200,433 * *
Delphi Delco Electronics 1,278,720(6) * *
Jean Schulz 1,329,111(7) * *
Larry B. Lombard 2,800,000(8) * *
Edward M. Moore 2,030,000(9) * *
All directors and executive officers 45,390,763(10) 10.50% 9.70%
as a group (10 persons)
* Indicates less than 1%
(1) Number of Common Stock shares includes Series A Preferred Stock, Series
B Preferred Stock and Common Stock shares issuable pursuant to stock
options, warrants and other securities convertible into Common Stock
beneficially held by the person or class in question which may be
exercised or converted within 60 days after March 30, 2005.
35
(2) The percentages are based on the number of shares of Common Stock,
Series A Preferred Stock and Series B Preferred Stock owned by the
shareholder divided by the sum of: (i) the total Common Stock
outstanding, (ii) the Series A Preferred Stock owned by such
shareholder; (iii) the Series B Preferred Stock owned by such
shareholder; and (iv) Common Stock issuable pursuant to warrants,
options and other convertible securities exercisable or convertible by
such shareholder within sixty (60) days after March 30, 2005.
(3) The percentages are based on the number of shares of Common Stock,
Series A Preferred Stock and/or Series B Preferred Stock owned by the
shareholder divided by the sum of: (i) the total Common Stock
outstanding, (ii) the total Series A Preferred Stock outstanding and
(iii) the total Series B Preferred Stock outstanding. This percentage
calculation has been included to show more accurately the actual voting
power of each of the shareholders, since the calculation takes into
account the fact that the outstanding Series A Preferred Stock and
Series B Preferred Stock are entitled to vote together with the Common
Stock as a single class on certain matters to be voted upon by the
shareholders.
(4) Includes 1,000,000 shares of Common Stock issuable pursuant to stock
options exercisable at a price of $.115.
(5) Includes 1,000,000 shares of Common Stock issued to Silicon Prairie
Partners, LP, a limited partnership in which John J. Micek III is the
general partner.
(6) The number of shares shown represents the ownership of 639,360 shares
of Series B Preferred Stock, each of which is convertible into two
shares of Common Stock. These 639,360 shares represent more than 5% of
the outstanding shares of Series B Preferred Stock.
(7) The number of shares shown represents the ownership of 1,329,111 shares
of Series A Preferred Stock, each of which is convertible into one
share of Common Stock. These 1,329,111 shares represent more than 5% of
the outstanding shares of Series A Preferred Stock.
(8) Includes 2,000,000 shares of Common Stock issuable pursuant to stock
options exercisable at a price from $.115 to $.16.
(9) Includes 2,000,000 shares of Common Stock issuable pursuant to stock
options exercisable at prices from $.0115 to $.20.
(10) Includes 5,000,000 shares of Common Stock issuable pursuant to stock
options exercisable at prices from $.115 to $.20 per share and
1,000,000 shares of Common Stock issued to Silicon Prairie Partners,
LP, a limited partnership in which John J. Micek III is the general
partner.
Equity Compensation Plan Information
The following table provides information regarding our equity compensation plans
as of December 31, 2004:
Equity Compensation Plan Information
Number of securities
remaining available
for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected
warrants and rights warrants and rights in column (a))
Plan category (a) (b) (c)
------------- --- --- ---
Equity compensation plans approved
by security holders 9,984,167 $0.14 41,844,000
Equity compensation plans not
approved by security holders -- -- --
Total 9,984,167 $0.14 41,844,000
Our board of directors adopted the 1996 Employee and Consultant Stock
Option Plan in October 1996 which was subsequently approved by our shareholders
in May 1997. A total of 15,000,000 shares were reserved for issuance under the
1996 Plan. Options granted under the 1996 Plan may be either incentive stock
36
options, as defined in Section 422 of the Internal Revenue Code of 1986, or
nonstatutory stock options. The 1996 Plan provides that options may be granted
to employees (including officers and directors who are also employees),
directors and consultants. Incentive stock options may only be granted to
employees. In 1999, our board of directors and shareholders approved an
amendment to the 1996 Plan to increase the number of shares of common stock
reserved for issuance thereunder by 30,000,000 shares and in 2004, our board of
directors and shareholders approved an amendment to the 1996 Plan to increase
the number of shares of common stock reserved for issuance thereunder by
20,000,000 shares, bringing the total number of shares issuable under the 1996
Plan to 65,000,000. The share increases to the 1996 Plan assured that a
sufficient reserve of common stock are available to provide us with the
continuing opportunity to utilize equity incentives to attract and retain the
services of employees essential to our long-term growth and financial success. A
copy of the actual 1996 Plan document was previously filed with the Securities
and Exchange Commission.
Options granted under the amended 1996 Plan will vest over such periods
as may be determined by the board of directors and will generally have an
exercise price equal to the closing price for our stock on the NASDAQ OTC
Bulletin Board on the last trading day immediately prior to the date of grant.
As of December 31, 2004, the Company had reserved 41,844,000 common shares for
issuance under the 1996 Plan, as amended. Options to purchase 2,000,000 shares
of Enova common stock were granted to employees in 2004.
Item 13. Certain Relationships and Related Transactions
The following are certain transactions entered into between Enova and
its officers, directors and principal shareholders and their affiliates since
January 1, 2004.
During 2004, Hyundai Heavy Industries, Co. (HHI) purchased 11,335,315
shares increasing their ownership in Enova Systems, Inc. to 7.96%. Additionally,
during 2004, we purchased from HHI approximately $246,000 in components,
materials and services for manufacture of our drive systems and power management
systems. These purchases were made on terms and conditions equal to or better
than our standard commercial terms with other vendors. At the year ended
December 31, 2004, our outstanding payables balance due HHI was approximately
$2,000.
The Company entered into a consulting agreement with Edwin Riddell,
doing business as CR Transportation Services, wherein the Company compensates
CR Transportation at the rate of $4,000 per week plus reasonable expenses for
consulting services rendered. Upon Mr. Riddell becoming an employee of Enova in
January 2005, this agreement was terminated. Mr. Riddell is not compensated per
this agreement when acting in the capacity of a director of the Company. During
2004, the Company paid Mr. Riddell $99,000 in cash for consulting services and
expenses and $15,000 for directors fees (which latter amount includes the cash
paid and the value of the stock issued to him pursuant to the outside
directors' compensation package described above).
Pursuant to a written agreement approved by the Board of Directors and
its Audit Committee, a finder's fee of $92,500 was accrued to be paid, through
the issuance of restricted shares of common stock in Enova, totaling 608,553
shares at a price of $0.15 per share, in conjunction with a private placement
funding in the first quarter of 2004 to The Global Value Investment Portfolio
Management Pte Ltd, a Singapore Company which is substantially owned by two
affiliated parties: Anthony Rawlinson, Chairman of the Board of our Company and
Borl partnership, owned by Boris Liberman Family Trusts, which is also
affiliated with Jagen Pty Ltd., a large affiliate shareholder in Enova. Said
shares were subsequently issued in the first quarter of 2005.
Item 14. Principal Accountant Fees and Services
Singer Lewak Greenbaum & Goldstein LLP were engaged on November 21,
2003 to audit our financial statements for the fiscal year ended December 31,
2004 and 2003. Moss Adams, LLP served as our auditors prior to November 21, 2003
and audited our financial statements for the fiscal year ended December 31,
2002.
Audit Fees
- ----------
The aggregate fees billed during the last two fiscal years for
professional services rendered by Singer Lewak Greenbaum & Goldstein LLP for the
audit of Enova's financial statements for the fiscal year ended December 31,
2004 and for its review of financial statements included in Enova's Form 10-Q-s
during the last two fiscal years and other services that are normally provided
by an accountant in connection with statutory and regulatory filings or
engagements during such fiscal years were $73,970 for fiscal 2004 and $7,500 for
fiscal 2003.
The aggregate fees billed during the last two fiscal years for
professional services rendered by Moss Adams, LLP for its review of financial
statements included in Enova's Form 10-Q-s and other services that are normally
provided by an accountant in connection with statutory and regulatory filings or
engagements during such fiscal years were $31,050 for fiscal 2003 and $87,210
for fiscal 2002.
37
Audit-Related Fees
- ------------------
Singer Lewak Greenbaum & Goldstein LLP did not perform for Enova any
assurance and related services that were reasonably related to the performance
of the audit of our financial statements for the fiscal year ended December 31,
2004.
Moss Adams, did not perform for Enova any assurance and related
services that were reasonably related to the performance of the audit of our
financial statements for the fiscal year ended December 31, 2004.
Tax Fees
- --------
Singer Lewak Greenbaum & Goldstein LLP did not perform for Enova any
tax compliance, tax advice and tax planning services in fiscal 2003 or fiscal
2004.
Moss Adams, LLP did not perform for Enova any tax compliance, tax
advice and tax planning services in fiscal 2003.
All Other Fees
- --------------
Neither Singer Lewak Greenbaum & Goldstein LLP nor Moss Adams, LLP
performed any other services for fees other than audit fees in fiscal 2004 or
2003.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)1. Financial Statements
The financial statements filed as a part of this report are
identified in the Index to Financial Statements on page F-1.
(a)2. Financial Statement Schedule
No financial statement schedules are filed as a part of this report.
(a)3. Exhibits
See Item 15 (c) for Index of Exhibits.
(b) Reports on Form 8-K
On February 2, 2005, Registrant filed a Form 8-K, with date of
earliest event reported of September 20, 2004, reporting under items
1 and 3.
(c) Exhibits
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Articles of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10K
for the year ended December 31, 2000 filed on March 30, 2001 and
incorporated herein by reference).
3.2 Bylaws of Registrant (filed as Exhibit 3.12 to the Registration
Statement on Form 10 filed on November 29, 1994, and incorporated
herein by reference).
4.1 Cashless Exercise Warrants dated October 25, 1996 issued to Fontal
International, Ltd. (filed as Exhibit 4.1 to the Registrant's Annual
Report on Form 10-K for the year ended July 31, 1996, as filed on
November 12, 1996, and incorporated herein by reference).
10.1 Form of Stock Option Agreement under 1993 Employee and Consultant
Stock Plan (filed as Exhibit 10.15 to the Registration Statement on
Form 10 filed on November 29, 1994, and incorporated herein by
reference).
10.2 Form of Solar Electric Engineering, Inc. 1993 Employee and Consultant
Stock Plan (filed as Exhibit 10.16 to the Registration Statement on
Form 10 filed on November 29, 1994, and incorporated herein by
reference).
38
10.3 Form of Confidential Private Placement Memorandum and Debt
Restructuring Disclosure Statement of U.S. Electricar, Inc., dated
January 2, 1996, delivered by Enova to certain of its unsecured trade
creditors, including exhibits (filed as Exhibit 10.91 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1996, as filed on March 18, 1996, and incorporated herein
by reference).
10.4 Form of Stock Purchase, Note and Debt Exchange Agreement dated
January 2, 1996 between Enova and certain unsecured trade creditors
(filed as Exhibit 10.92 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1996, as filed on March 18,
1996, and incorporated herein by reference).
10.5 Form of Indemnification Agreement (filed as Exhibit 10.63 to the
Registration Statement on Form 10 filed on November 29, 1994, and
incorporated herein by reference).
10.6 Form of Security Agreement made as of May 31, 1995, between Enova and
Credit Managers Association of California, Trustee (filed as Exhibit
10.85 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1996, as filed on June 14, 1996, and
incorporated herein by reference).
10.7 Amended 1996 Employee and Consultant Stock Option Plan (filed as
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for
fiscal year ended July 31, 1999, as filed on October 29, 1999, and
incorporated herein by reference).
10.8 Stock Purchase Agreement and Technology License Agreement dated
February 27, 1997, by and between Enova and Hyundai Motor Company and
Hyundai Electronics Industries Co., Ltd. (filed as Exhibit 10.98 to
the Registrant's Quarterly Report on Form 10-Q for fiscal quarter
ended January 31, 1997, as filed on March 14, 1997, and incorporated
herein by reference).
10.9 Letter of Intent between Registrant and a domestic supplier, dated
December 9, 1999, to design, develop and manufacture low voltage
electric drive system components (filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K for fiscal year ended
December 31, 2000 and incorporated herein by reference).
10.10 Put/Call Option to sell Itochu shares between Registrant and Carl D.
Perry dated September 1, 1999 (filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K for fiscal year ended
December 31, 2000 and incorporated herein by reference).
10.11 Agreement (redacted) between the Registrant and a customer dated June
14, 2001, to develop and produce power management systems. (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
Six Months ended June 30, 2001 and incorporated herein by reference).
10.12 Agreement (redacted) between the Registrant and Eco Power Technology,
dated June 12, 2001, to produce and sell power drive systems (filed
as Exhibit 10.19 to Amendment No. 6 to the Registrant's Registration
Statement on Form S-1, No. 333-85308, and incorporated herein by
reference).
10.13 Agreement (redacted) between the Registrant and Tomoe
Electro-Mechanical Engineering and Manufacturing, Inc., dated
November 19, 2001, to produce and sell power drive systems (filed as
Exhibit 10.20 to Amendment No. 6 to the Registrants Registration
Statement on Form S-1, No. 333-85308, and incorporated herein by
reference).
10.14 Agreement (redacted) between the Registrant and Moriah Corporation,
dated January 22, 2002, to produce and sell power drive systems
(filed as Exhibit 10.21 to Amendment No. 6 to the Registrant's
Registration Statement on Form S-1, No. 333-85308, and incorporated
herein by reference).
10.15 Form of Stock Purchase Agreement dated June 7, 2002 between
Registrant and each of the selling shareholders listed in a
Prospectus dated July 26, 2002 (filed as Exhibit 10.22 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1, No.
333-96829, and incorporated herein by reference).
10.16 Form of Registration Rights Agreement dated June 7, 2002 between
Registrant and each of the selling shareholders listed in a
Prospectus dated July 26, 2002 (filed as Exhibit 10.23 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1, No.
333-96829, and incorporated herein by reference).
10.17 Joint Venture Agreement (redacted**) to form advanced research and
development corporation, dated as of March 18, 2003, by and between
the Registrant and Hyundai Heavy Industries Co. Ltd. (filed as
Exhibit 10.24 to the Registrant's Quarterly Report on Form 10-Q for
Three Months ended March 31, 2003 and incorporated herein by
reference).
39
10.18 Securities Purchase Agreement dated as of March 18, 2003, by and
between the Registrant and Hyundai Heavy Industries Co. Ltd. (filed
as Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q
for Three Months ended March 31, 2003 and incorporated herein by
reference).
10.19 Form of Stock Purchase Agreement dated March 30, 2004 between
Registrant and various investors. (filed as Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-Q for Three Months ended
March 31, 2004 and incorporated herein by reference).
10.20 Form of Registration Rights Agreement dated March 30, 2004 between
Registrant and various investors. (filed as Exhibit 10.20 to the
Registrant's Quarterly Report on Form 10-Q for Three Months ended
March 31, 2004 and incorporated herein by reference).
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.
(filed as Exhibit 10.21 to the Registrant's Quarterly Report on Form
10-Q for Six Months ended June 30, 2004 and incorporated herein by
reference).
23.1* Consent of Singer Lewak Greenbaum & Goldstein LLP, Independent
Registered Public Accounting Firm
23.2* Consent of Moss Adams, LLP, Independent Registered Public Accounting
Firm
24* Power of Attorney (included on signature page)
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act Of 2002
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32* Certification Pursuant to 18 U.S.C. Section 1350
- ----------------------
* Filed herewith.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ENOVA SYSTEMS, INC.
By: /s/ Larry B. Lombard
--------------------------------
Larry B. Lombard, Chief Financial Officer
Dated: March 31, 2005
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry B. Lombard, with full power to act
alone, his true and lawful attorney-in-fact and agent, with full power of
substitution for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to the annual report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated. Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the date
indicated.
Signature Title Date
- --------- ----- ----
/s/ Larry B. Lombard Chief Financial Officer
- ------------------------------------- (Principal Financial Officer) March 31, 2005
Larry B. Lombard
/s/ Edwin O. Riddell Chief Executive Officer March 31, 2005
- ------------------------------------- and Director
Edwin O. Riddell (Principal Executive Officer)
/s/ Anthony N. Rawlinson Chairman March 31, 2005
- ------------------------------------
Anthony N. Rawlinson
/s/ Carl D. Perry Vice Chairman March 31, 2005
- -------------------------------------
Carl D. Perry
/s/ Malcolm Currie Director March 31, 2005
- -------------------------------------
Malcolm Currie
/s/ Bjorn Ahlstrom Director March 31, 2005
- -------------------------------------
Bjorn Ahlstrom
/s/ John J. Micek, III Director March 31, 2005
- -------------------------------------
John J. Micek, III
/s/ Donald H. Dreyer Director March 31, 2005
- -------------------------------------
Donald H. Dreyer
/s/ John R. Wallace Director March 31, 2005
- -------------------------------------
John R. Wallace
41
ENOVA SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2004, 2003, AND 2002
ENOVA SYSTEMS, INC.
CONTENTS
December 31, 2004
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM F1 - F2
FINANCIAL STATEMENTS
Balance Sheets F3 - F5
Statements of Operations F6
Statements of Stockholders' Equity (Deficit) F7 - F8
Statements of Cash Flows F9 - F10
Notes to Financial Statements F11 - F28
SUPPLEMENTAL INFORMATION
Report of Independent Registered Public
Accounting Firm on Financial Statement Schedule F30
Valuation and Qualifying Accounts - Schedule II F31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Enova Systems, Inc.
Torrance, California
We have audited the balance sheets of Enova Systems, Inc. as of December 31,
2004 and 2003, and the related statements of operations, stockholders'
equity/(deficit), and cash flows for each of the two years in the period ended
December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enova Systems, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and negative cash flows from operations. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 10, 2005
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Enova Systems, Inc.
We have audited the statements of operations, stockholders' equity, and cash
flows of Enova Systems, Inc., for the year ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Enova Systems, Inc.'s, operations and cash
flows for the year ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ MOSS ADAMS LLP
Santa Rosa, California
February 24, 2003
2
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
ASSETS
2004 2003
---------- ----------
Current assets
Cash and cash equivalents $1,575,000 $ 530,000
Accounts receivable 522,000 803,000
Inventories and supplies 1,036,000 1,606,000
Note receivable - related party -- 8,000
Prepaid expenses and other current assets 304,000 78,000
---------- ----------
Total Current Assets 3,437,000 3,025,000
Property and equipment, net 387,000 481,000
Equity method investment 1,768,000 960,000
Other assets 296,000 404,000
---------- ----------
Total assets $5,888,000 $4,870,000
========== ==========
The accompanying notes are an integral part of these financial statements.
3
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2004 2003
---------- ----------
Current liabilities
Accounts payable $ 66,000 $ 768,000
Deferred revenues 392,000 --
Line of credit 229,000 120,000
Accrued payroll and related expense 194,000 120,000
Other accrued expenses 13,000 98,000
Current portion of notes payable 166,000 131,000
Current portion of capital lease obligations 6,000 23,000
---------- ----------
Total current liabilities 1,066,000 1,260,000
Accrued interest payable 1,378,000 1,122,000
Capital lease obligations, net of current portion -- 5,000
Notes payable, net of current portion 3,341,000 3,347,000
---------- ----------
Total liabilities $5,785,000 $5,734,000
---------- ----------
Commitments and contingencies
The accompanying notes are an integral part of these financial statements.
4
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (continued)
2004 2003
------------- -------------
Stockholders' equity (deficit)
Series A convertible preferred stock - no par value
30,000,000 shares authorized
2,748,000 and 2,820,000 shares issued and
outstanding
Liquidating preference at $0.60 per share, aggregating
$1,648,507 and $1,692,000 $ 1,774,000 $ 1,837,000
Series B convertible preferred stock - no par value
5,000,000 shares authorized
1,217,000 and 1,217,000 shares issued and outstanding
Liquidating preference at $2 per share aggregating $2,434,000 2,434,000 2,434,000
Common Stock, no par value
500,000,000 shares authorized
415,265,000 and 378,341,000 shares issued and
outstanding 90,465,000 86,054,000
Common stock subscribed 165,000 60,000
Stock notes receivable (1,176,000) (1,203,000)
Additional paid-in capital 6,900,000 7,031,000
Accumulated deficit (100,459,000) (97,077,000)
------------- -------------
Total stockholders' equity (deficit) 103,000 (864,000)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 5,888,000 $ 4,870,000
============= =============
The accompanying notes are an integral part of these financial statements.
5
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net revenues
Research and development contracts $ 1,070,000 $ 1,889,000 $ 1,843,000
Production 1,484,000 2,421,000 2,612,000
------------- ------------- -------------
Total net revenues 2,554,000 4,310,000 4,455,000
------------- ------------- -------------
Cost of revenues
Research and development contracts 499,000 1,326,000 1,288,000
Production 1,627,000 1,978,000 2,496,000
Writedown Ford Think program inventory 113,000 -- --
------------- ------------- -------------
Total cost of revenues 2,239,000 3,304,000 3,784,000
------------- ------------- -------------
Gross profit 315,000 1,006,000 671,000
------------- ------------- -------------
Other costs and expenses
Research & development 925,000 799,000 1,152,000
Selling, general & administrative 2,325,000 2,919,000 2,837,000
Interest and financing fees, net 255,000 234,000 199,000
Equity in losses of equity method investee 192,000 40,000 --
Asset impairment -- 200,000 --
Legal settlements -- -- 81,000
------------- ------------- -------------
Total other costs and expenses 3,697,000 4,192,000 4,269,000
------------- ------------- -------------
Net loss $ (3,382,000) $ (3,186,000) $ (3,598,000)
============= ============= =============
Basic loss and diluted loss per share $ (0.01) $ (0.01) $ (0.01)
============= ============= =============
Weighted-average number of
shares outstanding 397,435,175 334,839,700 326,390,422
============= ============= =============
The accompanying notes are an integral part of these financial statements.
6
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock
---------------------------------------------------------------
Series A Series B Common Stock
----------------------------- ----------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------- ------------ ------------- ----------- -------------
Balance, December 31, 2000 2,844,000 $ 1,867,000 1,217,000 $ 2,434,000 244,249,000 $ 75,680,000
Issuance of common stock for
Exercise of warrants 50,000,000 3,000,000
Exercise of options 1,805,000 181,000
Services 448,000 98,000
Legal settlement 6,000,000 900,000
Warrants issued for
value participation
agreement
Net loss -- -- --
------------ ------------- ------------ ------------- ----------- -------------
Balance, December 31, 2001 2,844,000 1,867,000 1,217,000 2,434,000 302,502,000 79,859,000
Conversion of Series
A preferred stock (20,000) (25,000) 20,000 25,000
Issuance of common
stock for
Cash, net of offering
costs of $206,000 41,100,000 3,904,000
Exercise of options 30,000 3,000
Services 1,242,000 190,000
Legal settlement 300,000 45,000
Stock notes receivable
Net loss
------------ ------------- ------------ ------------- ----------- -------------
Common Stock
Subscribed Stock Additional
---------------------------- Notes Paid-In Accumulated
Shares Amount Receivable Capital Deficit Total
------------ ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2000 45,000 $ 13,000 $ (1,149,000) $ 6,372,000 $ (86,865,000) $ (1,648,000)
Issuance of common stock for
Exercise of warrants 3,000,000
Exercise of options (59,000) 122,000
Services 955,000 147,000 245,000
Legal settlement 900,000
Warrants issued for
value participation
agreement 577,000 577,000
Net loss -- (3,428,000) (3,428,000)
------------ ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 1,000,000 160,000 (1,208,000) 6,949,000 (90,293,000) (232,000)
Conversion of Series
A preferred stock --
Issuance of common
stock for
Cash, net of offering
costs of $206,000 1,000,000 100,000 4,004,000
Exercise of options 3,000
Services (628,000) (130,000) 60,000
Legal settlement 45,000
Stock notes receivable 5,000 5,000
Net loss (3,598,000) (3,598,000)
------------ ------------- ------------- ------------- ------------- -------------
7
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock
---------------------------------------------------------------
Series A Series B Common Stock
----------------------------- ----------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------- ------------ ------------- ----------- -------------
Balance, December 31, 2002 2,824,000 $ 1,842,000 1,217,000 $ 2,434,000 345,194,000 $ 84,026,000
Conversion of Series
A preferred stock (4,000) (5,000) 4,000 5,000
Issuance of common
stock for
Cash 23,077,000 1,500,000
Issuance of subscribed
common stock 1,000,000 100,000
Exercise of options 8,694,000 389,000
Stock option
Services 372,000 34,000
Net loss
------------ ------------- ------------ ------------- ----------- -------------
Balance, December 31, 2003 2,820,000 $ 1,837,000 1,217,000 $ 2,434,000 378,341,000 $ 86,054,000
Conversion of Series
A preferred stock (73,000) (63,000) 73,000 63,000
Issuance of common stock for
Cash 27,585,000 3,450,000
Issuance of subscribed
common stock 367,000 60,000
Exercise of options 8,464,000 783,000
Stock option conversions 321,000 39,000
Services 114,000 16,000
Net loss
------------ ------------- ------------ ------------- ----------- -------------
Balance, December 31, 2004 2,747,000 $ 1,774,000 1,217,000 $ 2,434,000 415,265,000 $ 90,465,000
============ ============= ============ ============= =========== =============
Common Stock
Subscribed Stock Additional
---------------------------- Notes Paid-In Accumulated
Shares Amount Receivable Capital Deficit Total
------------ ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 1,372,000 $ 130,000 $ (1,203,000) $ 6,949,000 $ (93,891,000) $ 287,000
Conversion of Series
A preferred stock --
Issuance of common
stock for
Cash 1,500,000
Issuance of subscribed
common stock (1,000,000) (100,000) --
Exercise of options 389,000
Stock option 82,000 82,000
Services 754,000 30,000 64,000
Net loss (3,186,000) (3,186,000)
------------ ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 1,126,000 $ 60,000 $ (1,203,000) $ 7,031,000 $ (97,077,000) $ (864,000)
Conversion of Series
A preferred stock --
Issuance of common stock for
Cash 27,000 3,477,000
Issuance of subscribed
common stock (1,126,000) (60,000) --
Exercise of options 783,000
Stock option conversions (39,000) --
Services 1,196,000 165,000 (92,000) 89,000
Net loss (3,382,000) (3,382,000)
------------ ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 1,196,000 $ 165,000 $ (1,176,000) $ 6,900,000 $(100,459,000) $ 103,000
============ ============= ============= ============= ============= =============
8
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities
Net loss $(3,382,000) $(3,186,000) $(3,598,000)
Adjustments to reconcile net loss
to net cash used by operating activities
Depreciation and amortization 377,000 351,000 134,000
Provision for asset impairment -- 200,000 --
Equity in losses 192,000 40,000 --
Issuance of common stock for services 89,000 34,000 60,000
Issuance of common stock for
legal settlement -- -- 45,000
(Increase) decrease in
Accounts receivable 281,000 457,000 (19,000)
Inventory and supplies 570,000 48,000 (727,000)
Note receivable - related party 8,000 24,000 25,000
Prepaid expenses and other current assets (226,000) 29,000 (20,000)
Other assets -- (14,000) 76,000
Increase (decrease) in
Accounts payable (702,000) (424,000) 1,025,000
Accrued expenses (11,000) (112,000) 87,000
Deferred revenues 392,000 -- --
Accrued interest payable 256,000 234,000 212,000
----------- ----------- -----------
Net cash used by operating activities (2,156,000) (2,319,000) (2,700,000)
----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment $ (175,000) $ (113,000) $ (613,000)
----------- ----------- -----------
Net cash used in investing activities (175,000) (113,000) (613,000)
----------- ----------- -----------
Cash flows from financing activities
Net increase from line of credit $ 109,000 $ 106,000 $ 14,000
Payment on notes payable and
capital lease obligations (33,000) (1,000) (24,000)
Proceeds from notes payable 40,000 -- --
Proceeds from sales of common stock 2,450,000 600,000 4,210,000
Offering costs -- -- (206,000)
Proceeds from exercise of stock options 783,000 389,000 3,000
Payments on stock notes receivable 27,000 -- 5,000
----------- ----------- -----------
Net cash provided by financing activities 3,376,000 1,094,000 4,002,000
----------- ----------- -----------
Net increase (decrease) in cash and 1,045,000 (1,338,000) 689,000
cash equivalents
Cash and cash equivalents,
beginning of year 530,000 1,868,000 1,179,000
----------- ----------- -----------
Cash and cash equivalents,
end of year $ 1,575,000 $ 530,000 $ 1,868,000
=========== =========== ===========
9
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Supplemental disclosure of cash
flow information
Interest paid $ 10,000 $ 9,000 $ 8,000
=========== =========== ===========
Income taxes paid $ -- $ -- $ --
=========== =========== ===========
Supplemental schedule of non- cash
investing and financing activities
Equipment acquired under capital lease agreements $ -- $ -- $ 52,000
=========== =========== ===========
Conversion of preferred stock to common stock $ 63,000 $ (5,000) $ 25,000
=========== =========== ===========
Acquired investment under common stock purchase $ 1,000,000 $ 1,000,000 $ --
=========== =========== ===========
Offering costs on common stock purchases $ 92,500 $ -- $ --
=========== =========== ===========
Common stock issued for purchase of options $ 39,000 $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
10
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
Enova Systems, Inc. (the "Company") is a California corporation that
develops drive trains and related components for electric, hybrid
electric, and fuel cell systems for mobile and stationary applications.
The Company retains development and manufacturing rights to many of the
technologies created, whether such research and development is
internally or externally funded. The Company develops and sells
components in the United States and Asia, and sells components in
Europe.
Liquidity
---------
At December 31, 2004, the Company had a net working capital of
approximately $2,365,000 as compared to $1,765,000 at December 31,
2003, representing an increase of $600,000. This increase is due
primarily to capital raised during the year offset by losses from
operations. Operating and investing activities used approximately
$2,157,000 and $175,000, respectively, while financing activities
provided $3,377,000. During the year ended December 31, 2004, the
Company increased its headcount minimally to control expenses and still
maintain its competitive edge in power management systems. The
Company's business plan for 2005 provides for raising additional
capital in order to continue with the Company's operations until it
becomes profitable. The Company will also continue to search for areas
in which to further reduce expenses and increase sales.
Stock Purchase Agreement
------------------------
The Company has entered into a joint venture agreement (the Agreement)
with Hyundai Heavy Industries of Korea ("HHI") to create a joint
venture corporation, Hyundai-Enova Innovative Technology Center (the
"ITC") to be domiciled in Torrance, California. In conjunction with
this Agreement, HHI and the Company entered into a stock purchase
agreement in which HHI agreed to make a $3 million investment in the
Company through the purchase of shares of the Company's authorized and
unissued common stock pursuant to Regulation D of the Securities Act of
1933. This investment was made in two installments of $1.5 million
each. The first installment was made in June 2003 upon incorporation of
the ITC and in consideration for the issuance to HHI by the Company of
23,076,923 shares of common stock at $0.065 per share.
The second installment was made in September 2004 in consideration for
the issuance to HHI by the Company of 11,335,315 shares of common stock
at $0.1323 per share.
The Company invested $1 million of each installment into the ITC in
consideration for the issuance to the Company of a 40% equity interest
in the ITC (the balance of the installments, in the amount of $500,000
each, is to be retained by Enova). HHI acquired a 60% equity interest
in ITC by investing $3 million in the ITC in two installments of $1.5
million each, to be made concurrently with the two installment payments
to be paid by HHI for the Company's common stock. HHI and the Company
have invested an aggregate of $5 million in the ITC.
11
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management's Plans Related to Liquidity and Capital Needs
---------------------------------------------------------
The Company has incurred significant losses from operations. During the
year ended December 31, 2004, the Company incurred a net loss of
$3,382,000, and it had negative cash flows from operations of
$2,156,000. At December 31, 2004 the Company had an accumulated deficit
of $100,460,000. Such losses have resulted principally from research
and development costs, sales and marketing costs and general and
administrative costs associated with the development of the Company's
technologies and products and expanding its level of operations.
The Company is subject to all of the many risks inherent in growing a
new enterprise, and the development and commercialization of new
products, including changing technologies, competition from companies
offering the same or similar products, managing growth and lack of
financial resources. As with any growing enterprise, there can be no
assurance that the Company will achieve or sustain profitability or
positive cash flow from operations.
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Over the
next few years the Company expects to incur losses from operations as
it continues to develop future products and market its current
products. The Company will need to raise additional capital through
debt or equity financings or collaborative arrangements with industry
partners to continue its business operations.
The Company's ability to continue as a going concern is dependent on
its success at obtaining additional capital sufficient to meet its
obligations on a timely basis, and to ultimately attain profitability.
Management is actively engaged in seeking to raise capital through
product licensing, co-promotional arrangements, or public or private
equity financing. The Company believes it has demonstrated the ability
to raise the necessary funds for the Company's growth and development
activities. However, there is no assurance that the Company will raise
capital sufficient to enable the Company to continue its operations
through the end of the fiscal year.
In the event the Company is unable to successfully obtain additional
capital, it is unlikely that the Company will have sufficient cash
flows and liquidity to finance its business operations as currently
contemplated. Accordingly, in the event additional capital is not
obtained, the Company will likely further downsize the organization,
defer marketing programs, reduce general and administrative expenses
and delay or reduce the scope of research and development projects
until it is able to obtain sufficient financing to do so.
These factors could significantly limit the Company's ability to
continue as a going concern. The balance sheets do not include any
adjustments relating to recoverability and classification of recorded
asset amounts or the amounts of classification of liabilities that
might be necessary should the Company be unable to continue in
existence.
12
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Contract Services Revenue and Cost Recognition
----------------------------------------------
The Company manufactures proprietary products and other products based
on design specifications provided by its customers. Revenue from sales
of products are generally recognized at the time title to the goods and
the benefits and risks of ownership passes to the customer which is
typically when products are shipped based on the terms of the customer
purchase agreement.
Revenue relating to long-term fixed price contracts is recognized using
the percentage of completion method. Under the percentage of completion
method, contract revenues and related costs are recognized based on the
percentage that costs incurred to date bear to total estimated costs.
Changes in job performance, estimated profitability and final contract
settlements may result in revisions to cost and revenue, and are
recognized in the period in which the revisions are determined.
Contract costs include all direct materials, subcontract and labor
costs and other indirect costs. General and administrative costs are
charged to expense as incurred. At the time a loss on a contract
becomes known, the entire amount of the estimated loss is accrued.
The aggregate of costs incurred and estimated earnings recognized on
uncompleted contracts in excess of related billings is shown as a
current asset, and billings on uncompleted contracts in excess of costs
incurred and estimated earnings is shown as a current liability.
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's financial
statements since the Company did not have any changes in equity from
non-owner sources.
Cash and Cash Equivalents
-------------------------
Highly liquid investments with an original maturity of three months or
less are considered cash equivalents.
13
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable
-------------------
Receivables are reported at net realizable value and are considered
past due when payments have not been received for 90 days. In general,
receivables are charged off as uncollectible upon exhausting all
avenues of collection. Receivables older than 90 days totaled $165,000
(without reserve) and $678,000 (of which $595,000 had been reserved
for) at December 31, 2004 and 2003, respectively. The Company believes
the $165,000 will be collected in its entirety in 2005 pending
resolution of various customer requests.
Allowance for Doubtful Accounts
-------------------------------
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. A considerable amount of judgment is required in assessing
the ultimate realization of accounts receivable including the current
credit-worthiness of each customer. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
As of December 31, 2004, the Company did not maintain any allowances
for doubtful accounts as all prior uncollectible balances have been
charged to bad debt expense.
Inventories and Supplies
------------------------
Inventories and supplies are comprised of materials used in the design
and development of electric, hybrid electric, and fuel cell drive
systems, and other power and ongoing management and control components
for production and ongoing development contracts, and is stated at the
lower of cost (first-in, first-out) or market. During 2004, the Company
charged off $107,000 of inventory related to a prior project with Ford
Th!nk program which was terminated in 2003. Additionally, the Company
charged-off approximately $167,000 for obsolete or slow-moving
inventory for a total of $274,000 during the year ended December 31,
2004.
Property and Equipment
----------------------
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets, which range from three to seven years. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate the sum of expected cash flows from use of the asset is less
than its carrying value. Long-lived assets that management commits to
sell or abandon are reported at the lower of carrying amount or fair
value less cost to sell.
Equity Method Investment
------------------------
Investment in joint venture (see Note 1) is accounted for by the equity
method.
14
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses, approximate fair value due to the short maturity of these
instruments. The carrying value of all other financial instruments is
representative of their fair values. The Company's short and long term
debt may be substantially less than the carrying value since there is
no readily ascertainable market for the debt given the financial
position of the Company.
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. Summary of Statement
SFAS No. 148 "Accounting for Stock-Based Compensation--Transition and
Disclosure" amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company has elected to use the intrinsic value based method and has
disclosed the pro forma effect of using the fair value based method to
account for its stock-based compensation. The Company has adopted only
the disclosure provisions of SFAS No. 123. It applies APB Opinion No.
25 and related interpretations in accounting for its plans and does not
recognize compensation expense for its stock-based compensation plans
other than for restricted stock and options issued to outside third
parties.
For purposes of adjusted pro forma disclosures, the estimated fair
value of the options is amortized to expense over the vesting period.
15
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (continued)
------------------------------------
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under this plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net loss
and loss per share would be reduced to the pro forma amounts indicated
below for the years ended December 31, 2004, 2003, and 2002:
2004 2003 2002
----------- ----------- -----------
Loss applicable to common stockholders $(3,382,000) $(3,186,000) $(3,598,000)
Stock-based employee compensation
expense determined under fair value
presentation for all options (76,000) (315,000) (197,000)
Pro forma net loss $(3,458,000) $(3,501,000) $(3,795,000)
Basic and diluted loss per
common share
As reported $ (0.01) $ (0.01) $ (0.01)
Pro forma $ (0.01) $ (0.01) $ (0.01)
For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and
directors is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the years ended
December 31, 2004, 2003, and 2002: dividend yields of 0%, 0%, and 0%,
respectively; expected volatility of 73%, 88%, and 83%, respectively;
risk-free interest rates of 4%, 4%, and 4%, respectively; and expected
lives of one, three, and five years, respectively. The weighted-average
fair value of options granted during the year ended December 31, 2004
for which the exercise price equals the market price on the grant date
was $0, and the weighted-average exercise price was $0.115.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
Advertising Expense
-------------------
The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the years
ended December 31, 2004, 2003, and 2002 was $12,000, $21,000, and
$20,000, respectively.
16
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
------------------------
Costs of researching and developing new technology or significantly
altering existing technology is expensed as incurred.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Loss Per Share
--------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common stockholders by
the weighted-average number of common shares outstanding. Diluted loss
per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Common equivalent shares are excluded from the computation if their
effect is anti-dilutive. The Company's common share equivalents consist
of stock options.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Concentrations of Credit Risk
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and
accounts receivable. The Company places its cash and cash equivalents
with high credit, quality financial institutions. At times, such cash
and cash equivalents may be in excess of the Federal Deposit Insurance
Corporation insurance limit of $100,000. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents. With
respect to accounts receivable, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes
that the receivable credit risk exposure is limited.
17
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Major Customers
---------------
During the year ended December 31, 2004, the Company conducted business
with five customers whose sales comprised 16%, 13%, 10%, 9% and 8% of
total revenues. As of December 31, 2004, these customers accounted for
0%, 9%, 33%, 0% and 13%, respectively, of total accounts receivable.
In addition, one of the Company's stockholders accounted for 10%, 1%,
and 16% of total revenues during the years ended December 31, 2004,
2003, and 2002, respectively. This stockholder holds less than 5% of
the total issued and outstanding common stock. Demand deposits are
placed with known, creditable financial institutions.
Recently Issued Pronouncements
------------------------------
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) under
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5
of ARB No. 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires
that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this
statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not
expect adoption of SFAS No. 151 to have a material impact, if any, on
the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
Estate Time-Sharing Transactions". The FASB issued this statement as a
result of the guidance provided in AICPA Statement of Position (SOP)
04-2, "Accounting for Real Estate Time-Sharing Transactions". SOP 04-2
applies to all real estate time-sharing transactions. Among other
items, the SOP provides guidance on the recording of credit losses and
the treatment of selling costs, but does not change the revenue
recognition guidance in SFAS No. 66, "Accounting for Sales of Real
Estate", for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS
No. 152 also amends SFAS No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects", to state that SOP 04-2
provides the relevant guidance on accounting for incidental operations
and costs related to the sale of real estate time-sharing transactions.
SFAS No. 152 is effective for years beginning after June 15, 2005, with
restatements of previously issued financial statements prohibited.
Management does not expect adoption of SFAS No. 152 to have a material
impact, if any, on the Company's financial position or results of
operations.
18
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Pronouncements (continued)
------------------------------------------
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29, "Accounting for
Nonmonetary Transactions". SFAS No. 153 eliminates certain differences
in the guidance in Opinion No. 29 as compared to the guidance contained
in standards issued by the International Accounting Standards Board.
The amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of nonmonetary assets that do not
have commercial substance. Such an exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective
for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in periods beginning after December 16, 2004.
Management does not expect adoption of SFAS No. 153 to have a material
impact, if any, on the Company's financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No.123(R) requires that the cost of share-based
payment transactions (including those with employees and non-employees)
be recognized in the financial statements. SFAS No. 123(R) applies to
all share-based payment transactions in which an entity acquires goods
or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP)
or by incurring liabilities (1) in amounts based (even in part) on the
price of the company's shares or other equity instruments, or (2) that
require (or may require) settlement by the issuance of a company's
shares or other equity instruments. This statement is effective (1) for
public companies qualifying as SEC small business issuers, as of the
first interim period or fiscal year beginning after December 15, 2005,
or (2) for all other public companies, as of the first interim period
or fiscal year beginning after June 15, 2005, or (3) for all nonpublic
entities, as of the first fiscal year beginning after December 15,
2005. Management is currently assessing the impact of this statement on
its financial position and results of operations.
Fourth Quarter Adjustments
--------------------------
During the fourth quarter of fiscal 2004, the Company:
o wrote-down inventory by a net of $275,000 for obsolete and
slow-moving inventory. The Company charged off approximately
$113,000 of this reduction for inventory relating to raw materials
for the Ballard/Ford Th!nk city program which was terminated in
2003. This was inventory specific to that program which the
Company believed may be useable in other components, or would be
purchased by third parties, but was not due to the Company's
increased focus on the heavy-duty hybrid markets. The Company also
charged off an additional $162,000 in obsolete or slow moving
inventory during 2004. This resulted in an increase of cost of
sales by $275,000 for the year.
19
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fourth Quarter Adjustments (continued)
--------------------------------------
o allocated certain expenses to cost of sales, which had been
charged to general and administrative expense, based on the
Company's improved method of apportioning such costs. This
resulted in an increase in cost of sales of approximately $147,000
in the fourth quarter, a portion of which may have been
attributable to prior quarters in 2004 but none that the Company
believes would have a material impact on the presentation of those
quarters.
The above two adjustments (i) increased cost of sales by $422,000
in the fourth quarter, (ii) reduced gross profit by $422,000, (iii)
increased loss from operations by $275,000 and (iv) reduced net loss by
$275,000.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consisted of the
following:
2004 2003
---------- ----------
Computers $ 229,000 $ 213,000
Machinery and equipment 709,000 715,000
Furniture and office equipment 192,000 192,000
Demonstration vehicles and buses 461,000 297,000
Equipment under capital lease obligations 94,000 94,000
Leasehold improvements 68,000 68,000
---------- ----------
1,754,000 1,579,000
Less accumulated depreciation and amortization 1,367,000 1,098,000
---------- ----------
Total $ 387,000 $ 481,000
========== ==========
Depreciation and amortization expense was $377,000, $351,000, and
$134,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.
20
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - EQUITY METHOD INVESTMENT
During the year ended December 31, 2004, the Company invested
$1,000,000 of the proceeds received from sale of common stock to HHI
into a joint venture formed with HHI in 2003 (see Note 1). The
Company's share of income and losses is 40% as stated in the agreement.
During the year ended December 31, 2004, the Company recorded $192,000
as its proportionate share of losses in the joint venture.
The following is the condensed financial position and results of
operations of ITC, as of and for the year ended December 31, 2004:
Financial position
Current assets $ 4,406,000
Property and equipment, net 15,000
Liabilities (3,000)
----------------
Equity $ 4,418,000
================
Operations
Net revenues $ -
Expenses (481,000)
----------------
Net loss $ (481,000)
================
Companies proportionate share of net loss $ (192,000)
================
NOTE 5 - OTHER ASSETS
During the year ended December 31, 2002, the Company incurred legal
costs of $78,000 associated with two patents. These patents have been
capitalized and are being amortized over their estimated useful lives.
In June 2001, a strategic relationship with Ford Motor Company was
entered into to develop and manufacture a high power, high voltage
conversion module for Ford's fuel cell vehicle. Warrants were issued to
Ford Motor Company in exchange for Ford's commitment to enter into a
five-year agreement. The issuance of the warrants was recorded as a
non-current asset (Value Participation Agreement) at its fair market
value of $577,000, which was determined using the Black-Scholes option
pricing model, and is being amortized on a straight-line basis over the
life of the contract.
2004 2003
-------- --------
Patents $ 92,000 $ 92,000
Valuation Participation Agreement 577,000 577,000
-------- --------
669,000 669,000
Less accumulated amortization 373,000 265,000
-------- --------
Total $296,000 $404,000
======== ========
21
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 6 - LINE OF CREDIT
The Company has available $250,000 revolving line of credit from a bank
with interest payable monthly at 3.25%. The line of credit is secured
by $250,000 Certificate of Deposit and its maturity has been extended
until April 2005.
NOTE 7- DEFERRED REVENUES - Tomoe LTA Long-Term Contract
The Company has entered into a development and production contract with
Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. 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. The contract commenced in August 2004 and completion of the
contract will take approximately 15-18 months and is valued at
approximately $3,100,000. The Company is recording revenues for this
long-term, fixed price contract on the basis of the
percentage-of-completion method. The contract contains several
deliverables over its life and therefore the Company will divide these
deliverables into separate units of accounting based on relative fair
values. Revenue recognition criteria will be assessed separately for
each separate unit of accounting. As of December 31, 2004, the Company
recorded revenues of $68,000 related to the development portion of this
contract.
22
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 8- NOTES PAYABLE
Notes payable at December 31, consisted of the following:
2004 2003
--------------- ----------------
Secured note payable to Credit Managers Association of
California, bearing interest at 6% per annum during 2003 and
at prime plus 3% per annum in 2004 and through maturity.
Principal and unpaid interest due in April 2016. A sinking
fund escrow is required to be funded with 10% of future
equity financing, as defined in the agreement. $ 3,332,000 $ 3,332,000
Unsecured note payable, bearing interest at 10%
per annum. This note payable is in default. 120,000 120,000
Secured note payable to a Coca Cola Enterprises
in the original amount of $40,000, bearing
interest at 5% per annum. Principal and
unpaid interest due in July 2005. 40,000 -
Secured note payable to a financial institution in the original
amount of $33,000, bearing interest at 8% per annum, payable
in 36 equal monthly installments. 15,000 26,000
--------------- ----------------
3,507,000 3,478,000
Less current portion 166,000 131,000
--------------- ----------------
Long-term portion $ 3,341,000 $ 3,347,000
=============== ================
Future minimum principal payments of notes payable at December 31, 2004
consisted of the following:
Year Ending
December 31,
2005 $ 166,000
2006 9,000
2007 -
2008 -
2009 -
Thereafter 3,332,000
----------
Total $3,507,000
==========
23
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 9- COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases its facilities under an operating lease agreement,
which requires monthly payments of $13,250 and expires in February
2008. At March 2005, the monthly payments will increase to $13,700 per
the terms of the lease agreement. In addition, the Company rents
manufacturing and office equipment under various capital lease
agreements.
Future minimum lease payments under these non-cancelable operating and
capital lease obligations at December 31, 2004 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ --------- --------
2005 $ 164,000 $ 6,000
2006 155,000 --
2007 166,000 --
2008 28,000 --
--------- --------
$ 513,000 6,000
=========
Less amount representing interest --
--------
Less current portion 6,000
--------
Long-term portion $ --
========
Rent expense was $140,000, $150,000, and $206,000 for the years ended
December 31, 2004, 2003, and 2002, respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock
------------
During the year ended December 31, 2004, the Company issued 27,585,000
shares of common stock for cash totaling $3,450,000. In addition, the
Company issued 481,000 shares of common stock to directors as
compensation totaling $47,000.
Common Stock Subscribed
-----------------------
At December 31, 2004, the Company was committed to issue 1,196,000
shares of common stock totaling $165,000 as compensation and as
finder's fees to its directors.
In the prior year, the Company incorrectly reported the number of
subscribed common stock. The actual shares subscribed as of December
31, 2003 totaling 367,000 shares differed from the previously reported
number of shares by 760,000 shares, totaling $29,000. The effect of
this error was not material to the reported results. This difference
has been corrected in the current year's financial statements.
24
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
Series A Preferred Stock
------------------------
Series A preferred stock is currently unregistered and convertible into
common stock on a one-to-one basis at the election of the holder or
automatically upon the occurrence of certain events including: sale of
stock in an underwritten public offering; registration of the
underlying conversion stock; or the merger, consolidation, or sale of
more than 50% of the Company. Holders of Series A preferred stock have
the same voting rights as common stockholders. The stock has a
liquidation preference of $0.60 per share plus any accrued and unpaid
dividends in the event of voluntary or involuntary liquidation of the
Company. Dividends are non-cumulative and payable at the annual rate of
$0.036 per share if, when, and as declared by, the Board of Directors.
No dividends have been declared on the Series A preferred stock.
Substantially all of the stock notes receivable stem from a Board of
Directors plan for the sale of shares of Series A preferred stock in
1993 to certain officers and directors (Participants). In general, the
Participants could purchase the preferred stock for a combination of
cash, promissory notes payable to the Company, and conversion of debt
and deferred compensation due to the Participants. All shares issued
under this plan were pledged to the Company as security for the notes.
The notes provided for interest at 8% per annum payable annually, with
the full principal amount and any unpaid interest due on January 31,
1997. The notes remain outstanding. The likelihood of collecting the
interest on these notes is remote; therefore, accrued interest has not
been recorded since the fiscal year ended July 31, 1997.
Series B Preferred Stock
------------------------
Series B preferred stock is currently unregistered and each share is
convertible into shares of common stock on a two-for-one basis at the
election of the holder or automatically upon the occurrence of certain
events including: sale of stock in an underwritten public offering, if
the offering results in net proceeds of $10,000,000, and the per share
price of common stock is at least $2.00; and the merger, consolidation,
or sale of common stock or sale of substantially all of the Company's
assets in which gross proceeds received are at least $10,000,000.
The Series B preferred stock has certain liquidation and dividend
rights prior and in preference to the rights of the common stock and
Series A preferred stock. The stock has a liquidation preference of
$2.00 per share together with an amount equal to, generally, $0.14 per
share compounded annually at 7% per year from the filing date, less any
dividends paid. Dividends on the Series B preferred stock are
non-cumulative and payable at the annual rate of $0.14 per share if,
when, and as declared by, the Board of Directors. No dividends have
been declared on the Series B preferred stock.
25
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Stock Options and Warrants
--------------------------
During the year ended December 31, 2004, the Company issued 8,464,000
shares of common stock from the exercise of options by certain
employees in exchange for cash totaling $783,000.
During 2004, the stockholders of the Company approved an increase of
20,000,000 shares for the 1996 Stock Option Plan for incentive and
non-statutory stock options during the period of the Plan, which
expires in 2006. The Plan now reserves 65,000,000 shares under the
plan. Options under the 1996 Plan expire over a period not to exceed
ten years. The following summarizes common stock option activity:
1996 Plan 1993 Plan Other
---------------------------- ----------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
Outstanding,
December 31, 2001 20,866,000 $ 0.10 9,654,000 $ 0.52 1,495,000 $ 1.70
Granted 900,000 $ 0.10 -- $ -- -- $ --
Exercised -- $ -- (35,000) $ 0.10 -- $ --
Forfeited (439,000) $ 0.10 (2,565,000) $ 0.52 -- $ --
---------- ---------- ----------
Outstanding,
December 31, 2002 21,327,000 $ 0.11 7,054,000 $ 0.52 1,495,000 $ 1.70
Granted 9,998,000 $ 0.05 -- $ -- -- $ --
Exercised (8,638,000) $ 0.05 -- $ -- -- $ --
Forfeited (1,556,000) $ 0.11 (7,054,000) $ 0.52 (1,495,000) $ 1.70
---------- ---------- ----------
Outstanding,
December 31, 2003 21,131,000 $ 0.12 -- $ -- -- $ --
Granted 2,000,000 $ 0.12 -- $ -- -- $ --
Exercised (10,981,000) $ 0.10 -- $ -- -- $ --
Forfeited (4,795,000) $ 0.12 -- $ -- -- $ --
---------- ---------- ----------
Outstanding ,
December 31, 2004 7,355,000 $ 0.12 -- $ -- -- $ --
========== ========== ==========
Exercisable,
December 31, 2004 6,418,000 $ 0.12 -- $ -- -- $ --
========== ========== ==========
The weighted-average remaining contractual life of the options
outstanding at December 31, 2004 was 1.2 years. The exercise prices of
the options outstanding at December 31, 2004 ranged from $0.11 to
$0.30. Options exercisable were 6,418,000, 20,898,000, 28,304,228 at
December 31, 2004, 2003 and 2002.
26
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Stock Options and Warrants (Continued)
--------------------------
The agreement with Ford Motor Company (see Note 5) included issuing
warrants to Ford to purchase 4.6% of the fully diluted common stock of
the Company over a 66 month period. The number of shares to be acquired
will be adjusted from time to time for increases in the Company's fully
diluted common stock. The vesting of these warrants is dependent upon
Ford meeting specific purchase requirements.
The fair value of warrants granted were estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 102%,
risk-free interest rate of 4.76% and an expected life of the warrants
of 66 months. Warrants issued and vested under this agreement totaled
2,500,000 at an exercise price of $0.29 per share during the year ended
December 31, 2001. No warrants were vested under this program during
2004 and 2003. As of June 30, 2004, Ford is no longer eligible for
further vesting of its warrants per the terms of the Value
Participation Agreement.
NOTE 11 - INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31, 2004
and 2003 consisted of the following:
2004 2003
----------- -----------
Deferred tax assets
Federal tax loss carry-forward $31,542,000 $31,286,000
State tax loss carry-forward 893,000 712,000
Basis difference 1,610,000 1,610,000
Other, net 555,000 555,000
----------- -----------
36,027,000 34,163,000
Less valuation allowance 36,027,000 34,163,000
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
As of December 31, 2004, the Company had net operating loss carry
forwards for federal and state income tax purposes of approximately
$95,571,000 and $9,393,000, respectively. The net operating loss carry
forwards began expiring in 2003.
NOTE 12 - RELATED PARTY TRANSACTIONS
During 2004, the Company purchased approximately $246,000 in
components, materials and services from HHI. The outstanding balance
owed to HHI at December 31, 2004 was approximately $2,000.
27
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
- --------------------------------------------------------------------------------
NOTE 12 - RELATED PARTY TRANSACTIONS (continued)
During 2004, the Company paid a total of $101,000 to two of its
directors in consulting fees.
During 2004, pursuant to a written agreement approved by the Board of
Directors and its Audit Committee, a finder's fee of $92,500 was
accrued to be paid, through the issuance of restricted shares of common
stock in Enova, totaling 608,553 shares at a price of $0.15 per share,
in conjunction with a private placement funding in the first quarter of
2004 to The Global Value Investment Portfolio Management Pte Ltd, a
Singapore Company which is substantially owned by two affiliated
parties: Anthony Rawlinson, Chairman of the Board of our Company and
Borl partnership, owned by Boris Liberman Family Trusts, which is also
affiliated with Jagen Pty Ltd., a large affiliate shareholder in Enova.
Said shares were subsequently issued in the first quarter of 2005.
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing plan covering substantially all
employees. Eligible employees may elect to contribute a percentage of
their annual compensation, as defined, to the plan. The Company may
also elect to make discretionary contributions. For the years ended
December 31, 2004, 2003, and 2002 the Company did not make any
contributions to the plan.
NOTE 14 - GEOGRAPHIC AREA DATA
The Company operates as a single reportable segment and attributes
revenues to countries based upon the location of the entity originating
the sale. Revenues by geographic area are as follows:
2004 2003 2002
---------- ---------- ----------
United States $1,465,000 $2,672,000 $2,478,000
Italy 32,000 213,000 1,040,000
Korea 258,000 297,000 726,000
Japan 1760,000 146,000 87,000
China 256,000 738,000 --
Malaysia -- 184,000 65,000
Ireland 166,000 -- 59,000
Canada -- 738,000 --
England 203,000 60,000 --
---------- ---------- ----------
Total $2,554,000 $4,310,000 $4,455,000
========== ========== ==========
28
SUPPLEMENTAL INFORMATION
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Enova Systems, Inc.
Torrance, California
Our audits were conducted in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 10, 2005
30
ENOVA SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
- -------------------------------------------------------------------------------------------------
Balance, Additions Deductions Balance,
Beginning Charged to from End
of Year Operations Reserve of Year
-------- --------- -------- --------
Allowance for doubtful accounts
December 31, 2004 $595,000 $ -- $595,000 $ --
======== ========= ======== ========
December 31, 2003 $ -- $ 595,000 $ -- $595,000
======== ========= ======== ========
December 31, 2002 $ -- $ -- $ -- $ --
======== ========= ======== ========
Reserve for obsolete inventories
December 31, 2004 $ 80,000 $ -- $ -- $ 80,000
======== ========= ======== ========
December 31, 2003 $ 80,000 $ -- $ -- $ 80,000
======== ========= ======== ========
December 31, 2002 $ 80,000 $ -- $ -- $ 80,000
======== ========= ======== ========
The accompanying notes are an integral part of these financial statements.
31