TIDMENV TIDMENVS
RNS Number : 1725R
Enova Systems, Inc.
15 November 2012
15 November 2012
ENOVA SYSTEMS, INC
("Enova" or "the Company")
Enova Reports 3(rd) Quarter 2012 Results
Enova Systems, Inc., (NYSE Amex: ENA and AIM: ENV and ENVS), a
leading developer and manufacturer of electric, hybrid and fuel
cell digital power management systems, announces results for the
three and nine month periods ended 30 September 2012.
For further information please contact:
Enova Systems, Inc
John Micek, Chief Executive Officer +1(310) 527-2800 x103
Daniel Stewart & Company Plc
Paul Shackleton/ Jamie Barklem +44 (0) 20 7776 6550
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
September December
30, 31,
2012 2011
------------- --------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 108,000 $ 3,096,000
Certificate of deposit, restricted 200,000 200,000
Accounts receivable, net 322,000 759,000
Inventories and supplies, net 2,860,000 4,036,000
Prepaid expenses and other current assets 148,000 242,000
------------ -------------
Total current assets 3,638,000 8,333,000
Long term accounts receivable 73,000 79,000
Property and equipment, net 525,000 928,000
------------ -------------
Total assets $ 4,236,000 $ 9,340,000
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 233,000 $ 354,000
Deferred revenues 18,000 320,000
Accrued payroll and related expenses 103,000 266,000
Other accrued liabilities 405,000 517,000
Current portion of notes payable 63,000 62,000
------------ -------------
Total current liabilities 822,000 1,519,000
Accrued interest payable 1,298,000 1,237,000
Notes payable, net of current portion 1,268,000 1,286,000
------------ -------------
Total liabilities 3,388,000 4,042,000
------------ -------------
Stockholders' equity:
Series A convertible preferred stock - no par
value, 30,000,000 shares authorized; 2,642,000
shares issued and outstanding; liquidating preference
at $0.60 per share as of September 30, 2012 and
December 31, 2011 528,000 528,000
Series B convertible preferred stock - no par
value, 5,000,000 shares authorized; 546,000 shares
issued and outstanding; liquidating preference
at $2 per share as of September 30, 2012 and
December 31, 2011 1,094,000 1,094,000
Common Stock - no par value, 750,000,000 shares
authorized; 44,520,000 and 42,765,000 shares
issued and outstanding as of September 30, 2012
and December 31, 2011, respectively 145,512,000 145,380,000
Additional paid-in capital 9,577,000 9,408,000
Accumulated deficit (155,863,000) (151,112,000)
------------ -------------
Total stockholders' equity 848,000 5,298,000
------------ -------------
Total liabilities and stockholders' equity $ 4,236,000 $ 9,340,000
============ =============
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- -------------------------
2012 2011 2012 2011
------------ ----------- ----------- -----------
Revenues $ 152,000 $ 508,000 $ 1,055,000 $ 5,984,000
Cost of revenues 140,000 434,000 1,722,000 5,108,000
---------- ---------- ---------- ----------
Gross income (loss) 12,000 74,000 (667,000) 876,000
---------- ---------- ---------- ----------
Operating expenses
Research and development 1,000 528,000 805,000 1,532,000
Selling, general & administrative 731,000 1,172,000 3,129,000 4,034,000
---------- ---------- ---------- ----------
Total operating expenses 732,000 1,700,000 3,934,000 5,566,000
---------- ---------- ---------- ----------
Operating loss (720,000) (1,626,000) (4,601,000) (4,690,000)
---------- ---------- ---------- ----------
Other income and (expense)
Interest and other income (expense) (29,000) (20,000) (150,000) (113,000)
---------- ---------- ---------- ----------
Total other income and (expense) (29,000) (20,000) (150,000) (113,000)
---------- ---------- ---------- ----------
Net loss $ (749,000) $(1,646,000) $(4,751,000) $(4,803,000)
========== ========== ========== ==========
Basic and diluted loss per share $ (0.02) $ (0.05) $ (0.11) $ 0.15
========== ========== ========== ==========
Weighted average number of common
shares outstanding 44,520,000 31,515,000 43,757,000 31,503,000
========== ========== ========== ==========
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
-------------------------
Cash flows from operating activities: 2012 2011
----------- -----------
Net loss $(4,751,000) $(4,803,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Reserve for doubtful accounts 197,000 53,000
Inventory reserve 945,000 281,000
Depreciation and amortization 351,000 373,000
Loss on asset disposal - 49,000
Loss on asset impairment 68,000 -
Loss on litigation settlement - 41,000
Stock option expense 169,000 282,000
(Increase) decrease in:
Accounts receivable 240,000 173,000
Inventory and supplies 231,000 (867,000)
Prepaid expenses and other current assets 94,000 175,000
Long term receivables 6,000 19,000
Increase (decrease) in:
Accounts payable (121,000) (1,448,000)
Deferred revenues (302,000) 29,000
Accrued payroll and related expense (163,000) (387,000)
Other accrued liabilities (112,000) (1,250,000)
Accrued interest payable 61,000 61,000
---------- ----------
Net cash used in operating activities (3,087,000) (7,219,000)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (16,000) (237,000)
---------- ----------
Net cash used in investing activities (16,000) (237,000)
---------- ----------
Cash flows from financing activities:
Payment on notes payable (17,000) (20,000)
Net proceeds from the exercise of stock options - 23,000
Net proceeds from the issuance of common stock 132,000 -
---------- ----------
Net cash provided by financing activities 115,000 3,000
---------- ----------
Net decrease in cash and cash equivalents (2,988,000) (7,453,000)
Cash and cash equivalents, beginning of period 3,096,000 8,431,000
---------- ----------
Cash and cash equivalents, end of period $ 108,000 $ 978,000
========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 4,000 $ 5,000
========== ==========
Assets acquired through financing arrangements $ - $ 25,000
========== ==========
Supplemental disclosure of non-cash investing
and financing:
Shares issued for services $ 62,000 $ -
========== ==========
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Company and its Business
Enova Systems, Inc., ("Enova", "We" or "the Company"), a
California corporation, was incorporated in July 1976, and trades
on the OTCQB under the trading symbol "ENVS" and on the London
Stock Exchange under the symbol "ENV" or "ENVS". The Company is a
globally recognized leader as a supplier of efficient,
environmentally-friendly digital power components and systems
products, in conjunction with associated engineering services. The
Company's core competencies are focused on the commercialization of
power management and conversion systems for mobile and stationary
applications.
2. Summary of Significant Accounting Policies
Basis of Presentation - Interim Financial Statements
The financial information as of and for the three and nine
months ended September 30, 2012 and 2011 is unaudited but includes
all adjustments (consisting only of normal recurring adjustments)
that the Company considers necessary for a fair statement of its
financial position at such dates and the operating results and cash
flows for those periods. The year-end balance sheet data was
derived from audited financial statements, and certain information
and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
SEC rules or regulations; however, the Company believes the
disclosures made are adequate to make the information presented not
misleading.
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles 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 revenues and expenses during the reporting
period. Although management believes these estimates and
assumptions are adequate, actual results could differ from the
estimates and assumptions used.
The results of operations for the interim periods presented are
not necessarily indicative of the results of operations to be
expected for the fiscal year. These interim financial statements
should be read in conjunction with the audited financial statements
for the year ended December 31, 2011, which are included in the
Company's Annual Report on Form 10-K for the year then ended.
Delisting from the NYSE MKT
On October 24, 2012, the Company received notification from the
NYSE MKT (the "Exchange") stating that, because the Company was not
in compliance with certain of the Exchange's continued listing
standards, the Exchange intended to strike the common stock of the
Company from the Exchange by filing a delisting application with
the Securities and Exchange Commission (the "SEC"). The Company
previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24,
2012 the provisions of the Exchange's continued listing standards
with which the Company was not in compliance. The Company requested
a formal appeal of the Exchange's delisting determination, which
hearing before the Committee on Securities has been scheduled on
December 19, 2012.
Effective October 31, 2012, trading of the Company's common
shares ceased on the Exchange and, on the same date, trading of the
Company's shares commenced on the OTCQB Marketplace under the
trading symbol "ENVS". The OTCQB is a market tier operated by the
OTC Market Group Inc. for over-the-counter traded companies. The
Company anticipates that the delisting will be completed once the
Exchange files a Form 25-NSE Notification of Delisting with the
SEC. The delisting and transition to the OTCQB does not change the
Company's obligations to file periodic and other reports with the
SEC under applicable federal securities laws.
The admission of the Company's common stock for trading on
London Stock Exchange's AIM market is unaffected by the NYSE MKT's
determination.
Liquidity and Going Concern
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
However, historically the Company has experienced significant
recurring net losses and operating cash flow deficits. The
Company's ability to continue as a going concern is dependent on
many factors, including among others, its ability to raise
additional funding, and its ability to successfully restructure
operations to lower manufacturing costs and reduce operating
expenses.
To date, the Company has incurred recurring net losses and
negative cash flows from operations. At September 30, 2012, the
Company had an accumulated deficit of approximately $155.9 million,
cash and cash equivalents of $108,000 and working capital of
approximately $2.8 million and shareholders' equity of
approximately $0.8 million. Until the Company can generate
significant cash from its operations, the Company expects to
continue to fund its operations with existing cash resources,
proceeds from one or more private placement agreements, as well as
potentially through debt financing or the sale of equity
securities. However, the Company may not be successful in obtaining
additional funding. In addition, the Company cannot be sure that
its existing cash and investment resources will be adequate or that
additional financing will be available when needed or that, if
available, financing will be obtained on terms favorable to the
Company or its stockholders.
Our ongoing operations will require us to make necessary
investments in human and production resources, regulatory
compliance, as well as sales and marketing efforts. We do not
currently have adequate internal liquidity to meet these objectives
in the long term. To do so, we will need to continue to look for
partnering opportunities and other external sources of liquidity,
including the public and private financial markets and strategic
partners. Having insufficient funds may require the Company to
delay or potentially eliminate some or all of its development
programs, relinquish some or even all rights to product candidates
at an earlier stage of development or negotiate less favorable
terms than it would otherwise choose. Failure to obtain adequate
financing also may adversely affect the launch of the Company's
product candidates or its ability to continue in business. If the
Company raises additional funds by issuing equity securities,
substantial dilution to existing stockholders would likely result.
If the Company raises additional funds by incurring debt financing,
the terms of the debt may involve significant cash payment
obligations, as well as covenants and specific financial ratios
that may restrict its ability to operate its business.
As previously reported, 80% of our workforce terminated their
employment with the Company in June 2012. We continue to evaluate
strategic opportunities to leverage our resources and assist with
continuing operations.
We have accessed the capital markets to obtain additional
operating funds. In December 2011, we raised approximately
$1,245,000, net of financing costs of $442,500, through an equity
issuance to certain accredited investors, which was disclosed in
our Form 10-K filed on March 29, 2012. In addition, as summarized
in Note 8-Stockholders' Equity, to our financial statements
contained in this Form 10-Q we entered into two Purchase Agreements
(the facility) with Lincoln Park Capital Fund in April 2012 to
issue up $10,000,000 in shares of our common stock and received
proceeds of $132,000, net of financing costs of $152,000, from the
initial purchase of shares of Common Stock from Lincoln Park in the
second quarter of 2012. Access to funding under the facility is
dependent upon our share price maintaining a floor price of at
least $0.15 per share. Our share price decreased below that
threshold in May 2012 and, until our share price increases above
the threshold level, we cannot raise additional funds from the
facility.
The Company continues to pursue other options to raise
additional capital to fund its operations; however, there can be no
assurance that we can successfully raise additional funds through
the capital markets.
As of September 30, 2012, the Company had approximately $0.1
million in cash and cash equivalents currently and anticipates that
its existing cash and anticipated receivables collections will be
sufficient to meet its projected operating requirements through
mid-December 2012 to continue operations and market trading.
Significant Accounting Policies
The accounting and reporting policies of the Company conform to
US GAAP. There have been no significant changes in the Company's
significant accounting policies during the three and nine months
ended September 30, 2012 compared to what was previously disclosed
in the Company's Annual Report on Form 10-K for the year ended
December 31, 2011.
Revenue Recognition
The Company manufactures proprietary products and other products
based on design specifications provided by its customers. The
Company recognizes revenue only when all of the following criteria
have been met:
-- Persuasive Evidence of an Arrangement - The Company documents
all terms of an arrangement in a written contract signed by the
customer prior to recognizing revenue.
-- Delivery Has Occurred or Services Have Been Rendered - The
Company performs all services or delivers all products prior to
recognizing revenue. Professional consulting and engineering
services are considered to be performed when the services are
complete. Equipment is considered delivered upon delivery to a
customer's designated location. In certain instances, the customer
elects to take title upon shipment.
-- The Fee for the Arrangement is Fixed or Determinable - Prior
to recognizing revenue, a customer's fee is either fixed or
determinable under the terms of the written contract. Fees for
professional consulting services, engineering services and
equipment sales are fixed under the terms of the written contract.
The customer's fee is negotiated at the outset of the arrangement
and is not subject to refund or adjustment during the initial term
of the arrangement.
-- Collectability is Reasonably Assured - The Company determines
that collectability is reasonably assured prior to recognizing
revenue. Collectability is assessed on a customer-by-customer basis
based on criteria outlined by management. New customers are subject
to a credit review process which evaluates the customer's financial
position and ultimately its ability to pay. The Company does not
enter into arrangements unless collectability is reasonably assured
at the outset. Existing customers are subject to ongoing credit
evaluations based on payment history and other factors. If it is
determined during the arrangement that collectability is not
reasonably assured, revenue is recognized on a cash basis. Amounts
received upfront for engineering or development fees under
multiple-element arrangements are deferred and recognized over the
period of committed services or performance, if such arrangements
require the Company to provide on-going services or performance.
All amounts received under collaborative research agreements or
research and development contracts are nonrefundable, regardless of
the success of the underlying research.
The Company recognizes revenue from milestone payments over the
remaining minimum period of performance obligations.
The Company also recognizes engineering and construction
contract revenues using the percentage-of-completion method, based
primarily on contract costs incurred to date compared with total
estimated contract costs. Customer-furnished materials, labor, and
equipment, and in certain cases subcontractor materials, labor, and
equipment, are included in revenues and cost of revenues when
management believes that the company is responsible for the
ultimate acceptability of the project. Contracts are segmented
between types of services, such as engineering and construction,
and accordingly, revenue and gross margin related to each activity
is recognized as those separate services are rendered.
Changes to total estimated contract costs or losses, if any, are
recognized in the period in which they are determined. Claims
against customers are recognized as revenue upon settlement.
Revenues recognized in excess of amounts received are classified as
current assets. Amounts billed to clients in excess of revenues
recognized to date are classified as current liabilities on
contracts.
Changes in project performance and conditions, estimated
profitability, and final contract settlements may result in future
revisions to engineering and development contract costs and
revenue.
These accounting policies were applied consistently for all
periods presented. Our operating results would be affected if other
alternatives were used. Information about the impact on our
operating results is included in the footnotes to our financial
statements.
Several other factors related to the Company may have a
significant impact on our operating results from year to year. For
example, the accounting rules governing the timing of revenue
recognition related to product contracts are complex and it can be
difficult to estimate when we will recognize revenue generated by a
given transaction. Factors such as acceptance of services provided,
payment terms, creditworthiness of the customer, and timing of
delivery or acceptance of our products often cause revenues related
to sales generated in one period to be deferred and recognized in
later periods. For arrangements in which services revenue is
deferred, related direct and incremental costs may also be
deferred.
Deferred Revenues
The Company recognizes revenues as earned. Amounts billed in
advance of the period in which service is rendered are recorded as
a liability under deferred revenues. The Company has entered into
several production and development contracts with customers. The
Company has evaluated these contracts, ascertained the specific
revenue generating activities of each contract, and established the
units of accounting for each activity. Revenue on these units of
accounting is not recognized until a) there is persuasive evidence
of the existence of a contract, b) the service has been rendered
and delivery has occurred, c) there is a fixed and determinable
price, and d) collectability is reasonable assured.
Warranty Costs
The Company provides product warranties for specific product
lines and accrues for estimated future warranty costs in the period
in which revenue is recognized. Our products are generally
warranted to be free of defects in materials and workmanship for a
period of 12 to 24 months from the date of installation, subject to
standard limitations for equipment that has been altered by other
than Enova Systems personnel and equipment which has been subject
to negligent use. Warranty provisions are based on past experience
of product returns, number of units repaired and our historical
warranty incidence over the past twenty-four month period. The
warranty liability is evaluated on an ongoing basis for adequacy
and may be adjusted as additional information regarding expected
warranty costs becomes known.
Stock Based Compensation
We measure the compensation cost for stock-based awards
classified as equity at their fair value on the date of grant and
recognize compensation expense over the service period for awards
expected to vest, net of estimated forfeitures.
See Note 9 Stock Options for further information on stock-based
compensation expense.
3. Inventory
Inventory, consisting of materials, labor and manufacturing
overhead, is stated at the lower of cost (first-in, first-out) or
market and consisted of the following at:
September December
30, 31,
2012 2011
----------- -----------
Raw Materials $ 4,237,000 $ 4,431,000
Work In Progress 3,000 144,000
Finished Goods 587,000 644,000
Reserve for Obsolescence (1,967,000) (1,183,000)
---------- ----------
Total $ 2,860,000 $ 4,036,000
========== ==========
Inventory write-offs were $161,000 and $203,000 for the nine
months ended September 30, 2012 and 2011, respectively.
4. Property and Equipment
Property and equipment consisted of the following at:
September December
30, 31,
2012 2011
----------- -----------
Computers and software $ 618,000 $ 618,000
Machinery and equipment 947,000 892,000
Furniture and office equipment 98,000 98,000
Demonstration vehicles and buses 675,000 774,000
Leasehold improvements 1,348,000 1,348,000
Construction in process - 39,000
---------- ----------
3,686,000 3,769,000
Less accumulated depreciation and amortization (3,161,000) (2,841,000)
---------- ----------
Total $ 525,000 $ 928,000
========== ==========
Depreciation and amortization expense was $351,000 and $373,000
for the nine months ended September 30, 2012 and 2011,
respectively, and within those total expenses, the amortization of
leasehold improvements was $196,000 for the nine months ended
September 30, 2012 and 2011. Depreciation and amortization expense
was $113,000 and $120,000 for the three months ended September 30,
2012 and 2011, respectively, and within those total expenses, the
amortization of leasehold improvements was $65,000 for the three
months ended September 30, 2012 and 2011. In addition, the Company
recorded an impairment loss of $0 and $68,000 for the three and
nine months ended September 30, 2102 and a loss on disposal of
fixed assets in the amount of $0 and $49,000 was recorded in the
three and nine months ended September 30, 2011.
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following at:
September December
30, 31,
2012 2011
----------- --------
Accrued inventory received $ 15,000 $ 2,000
Accrued professional services 194,000 150,000
Accrued warranty 105,000 227,000
Other 91,000 138,000
------- -------
Total $ 405,000 $517,000
======= =======
Accrued warranty consisted of the following activities during
the nine months ended September 30:
2012 2011
--------- ---------
Balance at beginning of quarter $ 227,000 $ 510,000
Accruals for warranties issued during the period 94,000 392,000
Warranty claims (216,000) (610,000)
-------- --------
Balance at end of quarter $ 105,000 $ 292,000
======== ========
Accrued warranty consisted of the following activities during
the three months ended September 30:
2012 2011
-------- ---------
Balance at beginning of quarter $140,000 $ 408,000
Accruals for warranties issued during the period 14,000 107,000
Warranty claims (49,000) (223,000)
------- --------
Balance at end of quarter $105,000 $ 292,000
======= ========
6. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
September December
30, 31,
2012 2011
---------- ----------
Secured note payable to Credit Managers Association
of California, bearing interest at prime plus 3%
(6.25% as of September 30, 2012), and is adjusted
annually in April through maturity. Principal and
unpaid interest due in April 2016. A sinking fund
escrow may be funded with 10% of future equity financing,
as defined in the Agreement $1,238,000 $1,238,000
Secured note payable to a Coca Cola Enterprises
in the original amount of $40,000, bearing interest
at 10% per annum. Principal and unpaid interest
due on demand 40,000 40,000
Secured note payable to a financial institution
in the original amount of $38,000, bearing interest
at 8.25% per annum, payable in 60 equal monthly
installments of principal and interest through February
19, 2014 12,000 18,000
Secured note payable to a financial institution
in the original amount of $19,000, bearing interest
at 10.50% per annum, payable in 60 equal monthly
installments of principal and interest through August
25, 2014 9,000 12,000
Secured note payable to a financial institution
in the original amount of $26,000, bearing interest
at 7.91% per annum, payable in 60 equal monthly
installments of principal and interest through April
9, 2015 14,000 18,000
Secured note payable to a financial institution
in the original amount of $25,000, bearing interest
at 7.24% per annum, payable in 60 equal monthly
installments of principal and interest through March
10, 2016 18,000 22,000
--------- ---------
1,331,000 1,348,000
Less current portion of notes payable (63,000) (62,000)
--------- ---------
Notes payable, net of current portion $1,268,000 $1,286,000
========= =========
As of September 30, 2012 and December 31, 2011, the balance of
long term interest payable with respect to the Credit Managers
Association of California note amounted to $1,267,000 and
$1,209,000, respectively. Interest expense on notes payable
amounted to $65,000 and $66,000 during the nine months ended
September 30, 2012 and 2011, respectively. Interest expense on
notes payable amounted to $22,000 and $22,000 during the three
months ended September 30, 2012 and 2011, respectively.
7. Revolving Credit Agreement
On June 30, 2010, the Company entered into a secured a revolving
credit facility with a financial institution for $200,000 which was
secured by a $200,000 certificate of deposit. The facility is for a
period of 3 year and 6 months from July 1, 2010 to December 31,
2013. The interest rate on a drawdown from the facility is the
certificate of deposit rate plus 1.25% with interest payable
monthly and the principal due at maturity. The financial
institution also renewed the $200,000 irrevocable letter of credit
for the full amount of the credit facility in favor of Sunshine
Distribution LP, with respect to the lease of the Company's
corporate headquarters at 1560 West 190th Street, Torrance,
California.
On November 7, 2012, Sunshine Distribution LP initiated a
drawdown from the irrevocable standby letter of credit in order to
pay October rent and unpaid retro-active rent adjustments for the
Company's corporate headquarters in the amount of $72,735. The
financial institution redeemed part of the certificate of deposit
in the same amount to fund the drawdown on the irrevocable standby
letter of credit.
8. Stockholders' Equity
On April 23, 2012, the Company entered into a $6,600,000
purchase agreement with Lincoln Park Capital Fund pursuant to which
the Company has the right to sell to Lincoln Park up to $6,600,000
in shares of the Company's common stock, and on April 24, 2012, the
Company entered into another purchase agreement with Lincoln Park
Capital Fund pursuant to which the Company has the right to sell to
Lincoln Park up to $3,400,000 in shares of the Company's common
stock, subject to certain limitations. We received proceeds of
$132,000, net of financing costs of $152,000, under the $3,400,000
Purchase Agreement and issued a total of 1,754,974 shares of common
stock in the second quarter of 2012. As consideration for its
commitment to purchase common stock under the $3,400,000 Purchase
Agreement, the Company issued to Lincoln Park 281,030 shares of
common stock. At September 30, 2012, the Company is not able to
sell shares to Lincoln Park under this agreement due to the
Company's quoted market share price.
During the three and nine months ended September 30, 2012 and
2011, the Company did not issue any shares of common stock to
directors or employees as compensation. During the nine months
ended September 30, 2011, 10,000 shares of the Company's Series A
Preferred Stock were converted into 222 shares of its common stock.
There were no conversions of the Company's Series A Preferred Stock
for the comparable period in 2012.
9. Stock Options
Stock Option Program Description
As of September 30, 2012, the Company had two equity
compensation plans, the 1996 Stock Option Plan (the "1996 Plan")
and the 2006 equity compensation plan (the "2006 Plan"). The 1996
Plan has expired for the purposes of issuing new grants. However,
the 1996 Plan will continue to govern awards previously granted
under that plan. The 2006 Plan has been approved by the Company's
shareholders. Equity compensation grants are designed to reward
employees and executives for their long term contributions to the
Company and to provide incentives for them to remain with the
Company. The number and frequency of equity compensation grants are
based on competitive practices, operating results of the company,
and government regulations.
The 2006 Plan has a total of 3,000,000 shares reserved for
issuance, of which 2,091,000 shares were available for grant as of
September 30, 2012. All stock options have terms of between three
and ten years and generally vest and become fully exercisable from
one to three years from the date of grant or vest according to the
price performance of our shares.
As of September 30, 2012, the total compensation cost related to
non-vested awards not yet recognized is $21,000. The weighted
average period over which the future compensation cost is expected
to be recognized is 12 months.
The following table summarizes information about stock options
outstanding and exercisable at September 30, 2012:
Weighted
Average
Weighted Remaining
Number of Average Contractual Aggregate
Share Exercise Term in Intrinsic
Options Price Years Value(1)
------------- ----------- ------------ ------------
Outstanding at December 31,
2011 2,529,000 $ 1.07 6.09 $ -
Granted 270,000 $ 0.08 - $ -
Exercised - $ - - $ -
Forfeited or Cancelled (1,969,000) $ 1.08 - $ -
------------ ------- ------------ --------
Outstanding at September 30,
2012 830,000 $ 0.73 4.22 $ 10,000
============ ======= ============ ========
Exercisable at September 30,
2012 568,000 $ 1.01 4.49 $ 1,000
============ ======= ============ ========
Vested and expected to vest
(2) 830,000 $ 0.73 5.80 $ -
============ ======= ============ ========
(1) Aggregate intrinsic value represents the value of the closing price
per share of our common stock on the last trading day of the fiscal
period in excess of the exercise price multiplied by the number
of options outstanding or exercisable, except for the "Exercised"
line, which uses the closing price on the date exercised.
(2) Number of shares includes options vested and those expected to
vest net of estimated forfeitures.
The exercise prices of the options outstanding at September 30,
2012 ranged from $0.07 to $4.35. The weighted average grant-date
fair value of options granted during the nine months ended
September 30, 2012 and 2011 were $0.05 and $0.79, respectively. The
Company's policy is to issue shares from its authorized shares upon
the exercise of stock options.
Unvested share activity for the nine months ended September 30,
2012 is summarized below:
Weighted
Average
Unvested Grant Date
Number of Fair
Options Value
----------- -------------
Unvested balance at December 31, 2011 1,403,000 $ 0.26
Granted 270,000 $ 0.05
Vested (892,000) $ 0.19
Forfeited (519,000) $ 0.29
---------- --- --------
Unvested balance at September 30, 2012 262,000 $ 0.05
========== === ========
The fair values of all stock options granted during the nine
months ended September 30, 2012 and 2011 were estimated on the date
of grant using the Black-Scholes option-pricing model with the
following range of assumptions:
For the nine months
ended
---------------------------
September September
30, 30,
2012 2011
------------ -------------
2.5 -
Expected life (in years) 1.5 - 6.5 6.5
Average risk-free interest rate 1.66 % 2.00 %
Expected volatility 108 - 136 % 107 - 132 %
Expected dividend yield 0 % 0 %
Forfeiture rate 3 % 3 %
The estimated fair value of grants of stock options to
nonemployees of the Company is charged to expense in the financial
statements. These options vest in the same manner as the employee
options granted under each of the option plans as described
above.
10. Concentrations
The Company's trade receivables are concentrated with few
customers. The Company performs credit evaluations on its
customers' financial condition. Concentrations of credit risk, with
respect to accounts receivable, exist to the extent of amounts
presented in the financial statements. Two customers represented
56% and 36%, respectively, of gross accounts receivable at
September 30, 2012, and two customers represented 62% and 37%,
respectively, of gross accounts receivable at December 31,
2011.
The Company's revenues are concentrated with few customers. For
the three and nine months ended September 30, 2012, two customers
represented 65% and 31% of gross revenues and two customers
represented 66% and 21% of gross revenues, respectively. For the
three and nine months ended September 30, 2011, two customers
represented 58% and 39% of gross revenues and four customers
represented 55%, 17%, 10% and 10% of gross revenues,
respectively.
11. Recent Accounting Pronouncements
Effective January 1, 2012, the Company adopted revised guidance
related to the presentation of comprehensive income that increases
comparability between U.S. GAAP and International Financial
Reporting Standards. This guidance eliminates the current option to
report other comprehensive income (OCI) and its components in the
statement of changes in stockholders' equity. The Company adopted
this guidance during the first quarter of 2012, which had no impact
on the Company's financial position, operations, or cash flows. The
Company currently does not have any components of other
comprehensive income or loss.
In May 2011, the Financial Accounting Standards Board ("FASB")
issued new guidance to achieve common fair value measurement and
disclosure requirements between GAAP and International Financial
Reporting Standards. This new guidance amends current fair value
measurement and disclosure guidance to include increased
disclosures regarding valuation inputs and investment
categorization. The adoption of this new accounting guidance in
2012 did not have a material impact on the Company's financial
position, operations or cash flows.
12. Subsequent Events
On October 24, 2012, the Company received notification from the
NYSE MKT (the "Exchange") stating that, because the Company was not
in compliance with certain of the Exchange's continued listing
standards, the Exchange intended to strike the common stock of the
Company from the Exchange by filing a delisting application with
the Securities and Exchange Commission (the "SEC"). The Company
previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24,
2012 the provisions of the Exchange's continued listing standards
with which the Company was not in compliance. The Company requested
an appeal of the Exchange's delisting determination, which hearing
before the Committee on Securities has been scheduled on December
19, 2012.
Effective October 31, 2012, trading of the Company's common
shares ceased on the Exchange and, on the same date, trading of the
Company's shares commenced on the OTCQB Marketplace under the
trading symbol "ENVS". The OTCQB is a market tier operated by the
OTC Market Group Inc. for over-the-counter traded companies. The
Company anticipates that the delisting will be completed once the
Exchange files a Form 25-NSE Notification of Delisting with the
SEC. The delisting and transition to the OTCQB does not change the
Company's obligations to file periodic and other reports with the
SEC under applicable federal securities laws.
The admission of the Company's common stock for trading on
London Stock Exchange's AIM market is unaffected by the NYSE MKT's
determination.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains statements
indicating expectations about future performance and other
forward-looking statements that involve risks and uncertainties. We
usually use words such as "may," "will, " "should," "expect,"
"plan," "anticipate," "believe," "estimate," "predict," "future,"
"intend," "potential," or "continue" or the negative of these terms
or similar expressions to identify forward-looking statements.
These statements appear throughout this Quarterly Report on Form
10-Q and are statements regarding our current intent, belief or
expectation, primarily with respect to our operations and related
industry developments. Examples of these statements include, but
are not limited to, statements regarding the following: our future
operating expenses, our future losses, our future expenditures for
research and development and the sufficiency of our cash resources.
You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Quarterly
Report on Form 10-Q. Our actual results could differ materially
from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us and described in our
Annual Report on Form 10-K for the year ended December 31, 2011, as
updated by the disclosure contained in Item 1A of Part II of this
Form 10-Q.
The following discussion and analysis should be read in
conjunction with the unaudited interim financial statements and
notes thereto included in Part I, Item 1 of this Quarterly Report
on Form 10-Q and with the financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K
for the year ended December 31, 2011.
Overview
Enova believes it is a leader in the development, design and
production of proprietary, power train systems and related
components for electric and hybrid electric buses and medium and
heavy duty commercial vehicles. Electric drive systems are
comprised of an electric motor, electronics control unit and a gear
unit which power a vehicle. Hybrid electric systems, which are
similar to pure electric drive systems, contain an internal
combustion engine in addition to the electric motor, and may
eliminate 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.
A fundamental element of Enova's strategy is to develop and
produce advanced proprietary software and hardware for applications
in these alternative power markets. Our focus is powertrain systems
including digital power conversion, power management and system
integration, focusing chiefly on vehicle power generation.
Specifically, we develop, design and produce drive systems and
related components for electric, hybrid electric and fuel cell
powered vehicles in both the new and retrofit markets.
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 aligning ourselves with
key customers and integrating with original equipment manufacturers
("OEMs") in our target markets. We believe that alliances will
result in the latest technology being implemented and customer
requirements being met, with an optimized level of additional time
and expense.
Our website, www.enovasystems.com, contains up-to-date
information on our company, our products, programs and current
events. Our website is a prime focal point for current and
prospective customers, investors and other affiliated parties
seeking additional information on our business.
Enova has incurred significant operating losses in the past. As
of September 30, 2012, we had an accumulated deficit of
approximately $155.9 million. As reported in our Form 8-K filing on
June 21, 2012, due to continued delays in industry adoption of EV
technology, the Company's revenues continue to significantly
decrease. As part of cost cutting measures, we implemented a
reduction in our workforce whereby in excess of 80% of our
employees have left the Company. We continue to evaluate strategic
opportunities to leverage resources and assist with continuing
operations. We expect to incur additional operating losses until we
re-position the company in order to achieve a level of product
sales sufficient to cover our operating and other expenses.
Following reductions in the Company's expense base, the Company
currently believes it has sufficient working capital in the short
term through year end to continue operations and market
trading.
Delisting from the NYSE MKT
On October 24, 2012, the Company received notification from the
NYSE MKT (the "Exchange") stating that, because the Company was not
in compliance with certain of the Exchange's continued listing
standards, the Exchange intended to strike the common stock of the
Company from the Exchange by filing a delisting application with
the Securities and Exchange Commission (the "SEC"). The Company
previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24,
2012 the provisions of the Exchange's continued listing standards
with which the Company was not in compliance. The Company requested
an appeal of the Exchange's delisting determination, which hearing
before the Committee on Securities has been scheduled on December
19, 2012.
Effective October 31, 2012, trading of the Company's common
shares ceased on the Exchange and, on the same date, trading of the
Company's shares commenced on the OTCQB Marketplace under the
trading symbol "ENVS". The OTCQB is a market tier operated by the
OTC Market Group Inc. for over-the-counter traded companies. The
Company anticipates that the delisting will be completed once the
Exchange files a Form 25-NSE Notification of Delisting with the
SEC. The delisting and transition to the OTCQB does not change the
Company's obligations to file periodic and other reports with the
SEC under applicable federal securities laws.
The admission of the Company's common stock for trading on
London Stock Exchange's AIM market is unaffected by the NYSE MKT's
determination.
Customer Highlights
FREIGHTLINER CUSTOM CHASSIS CORPORATION (FCCC) - Enova and FCCC
began deploying new and retrofit all-electric vehicles to major
fleet customers in 2011. The resulting integration of our
all-electric drive system into the MT-45 chassis provides FCCC an
all-electric product offering: the FCCC MT-EV. The MT-EV (the FCCC
model name) chassis boasts a GVWR of 14,000 to 19,500 lbs. Enova
and FCCC also jointly announced, in November 2011, intentions to
deploy 3000 vehicles via the Green for Free(TM) Program, which is
designed to allow fleet executives to operate full 100% electric
commercial vehicles (EVs) and/or Hybrid Electric Vehicles (HEVs)
for similar life cycle costs as those of diesel-powered commercial
vehicles. The anticipated savings fleets are expected to realize
from the reduced maintenance and fuel cost of electricity of the
electric vehicles are used over a period of time to cover the
incremental expense for the technology. FCCC had begun, in early
2011, showcasing the Enova/FCCC EV step van at numerous events on
the West Coast, as well as the recent NTEA Work Truck show in
Indianapolis. This program is currently on hold, pending Enova's
ability to continue operations and FCCC's decision on battery
sourcing, which has been delayed due to concerns over recent
negative reports regarding battery reliability.
FIRST AUTO WORKS (FAW) - Enova continues to supply FAW drive
systems for their hybrid buses. Since the 2008 Olympics in Beijing,
Enova Systems and First Auto Works have deployed over 500 vehicles,
all utilizing Enova's pre-transmission hybrid drive system
components. First Auto Works is one of China's largest vehicle
producers, manufacturing in excess of 1,000,000 vehicles
annually.
SMITH ELECTRIC VEHICLES (SEV) - Enova continues to be SEVs
supplier of drive systems. SEV, a leader in the all EV market, is
currently in the process of an IPO. A successful IPO could result
in increased opportunity for Enova.
CSR CORPORATION LIMITED (CSR) - Enova completed its initial
contract with CSR to integrate our all electric drive system into
its commercial bus applications. CSR is approved by the State-owned
Assets Supervision and Administration Commission of the State
Council and was co-founded by China South Locomotive and Rolling
Stock Industry Group Corporation and Beijing Railway Industry
Economic and Trade Company with a total equity capital of $7
billion USD. CSR was established in December 2007 with sixteen (16)
fully funded holding companies and over 80,000 employees
distributed in 10 provinces and cities around the country.
OPTARE PLC - Enova fulfilled an order in the second quarter of
2012 for eight 120kW systems for integration into Optare's Solo and
Versa Electric Bus models. Optare has chosen Enova as the
production drive system supplier for its all electric buses. Optare
designs, manufactures and sells single deck and double deck buses
and mini coaches and operates in the UK, Continental Europe, and
North America. In January 2012, Optare shareholders gave approval
for Ashok Leyland and its associated companies to increase their
holdings in Optare to 75.1% in order to re-finance its operations.
Ashok Leyland has annual turnover of approximately $2.5 billion and
is a market leader in the medium and heavy commercial vehicle
segment in India with a market share of about 25.7% in 2010/2011.
Ashok is a market leader in the Indian bus market selling over
23,000 buses annually and including overseas plants, has current
global capacity of over 150,000 buses and trucks.
Technology Highlights
OMNI INVERTER. Power-source and motor design agnostic, Enova's
new Omni-series inverter/vehicle controller offers increased
flexibility and ease-of-integration. With plug-and-play
connectivity, it is compatible with a wide range of vehicle drive
systems and motors, and can be configured for HEV, PHEV and EV
applications. The inverter is fully production validated.
OMNI CHARGER. We continued development of our new Omni-series
10kW on-board battery charger for plug-in hybrid-electric and
all-electric vehicles. CAN control based, the new Omni charger
offers increased flexibility, ease-of-integration and compatibility
with a wide range of vehicle platforms.
Enova has delayed further introduction of the Omni Inverter and
Charger with customers due to the reduction in our workforce and
current financial resource constraints. Provided additional
resources are obtained, we will continue development and marketing
of these two products, which we believe can gain broad market
acceptance.
We continue to receive recognition from both governmental and
private industry with regards to commercial application of our
all-electric and hybrid drive systems and fuel cell power
management technologies. Although we believe that current
negotiations with above named parties may result in additional
production contracts during 2012 and beyond, there are no
assurances that such additional agreements will be realized.
Critical Accounting Policies
In the ordinary course of business, the Company has made a
number of estimates and assumptions relating to the reporting of
results of operations and financial condition in the preparation of
its financial statements in conformity with accounting principles
generally accepted in the United States of America. The Company
constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Estimates and
assumptions include, but are not limited to, customer receivables,
inventories, equity investments, fixed asset lives, contingencies
and litigation. There have been no material changes in estimates or
assumptions compared to our most recent Annual Report for the
fiscal year ended December 31, 2011.
The following represents a summary of our critical accounting
policies, defined as those policies that we believe: (a) are the
most important to the portrayal of our financial condition and
results of operations and (b) involve inherently uncertain issues
which require management's most difficult, subjective or complex
judgments.
Cash and cash equivalents - Cash consists of currency held at
reputable financial institutions.
Inventory - Inventories are priced at the lower of cost or
market utilizing first-in, first-out ("FIFO") cost flow assumption.
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.
Inventory reserve - We maintain an allowance against inventory
for the potential future obsolescence or excess inventory. 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 our
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 revenues in the period the revision is made.
Allowance for doubtful accounts - We maintain allowances for
doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. The assessment of the
ultimate realization of accounts receivable including the current
credit-worthiness of each customer is subject to a considerable
degree to the judgment of our management. 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.
Stock-based Compensation - The Company measures and recognizes
compensation expense for all share-based payment awards made to
employees and directors, including employee stock options based on
the estimated fair values at the date of grant. The compensation
expense is recognized over the requisite service period.
Revenue recognition - Effective January 1, 2011, we adopted the
provisions of Accounting Standards Update, or ASU, 2009-13,
Multiple-Deliverable Revenue Arrangements, or ASU 2009-13, which is
included within the Codification as Revenue Recognition-Multiple
Element Arrangements, on a prospective basis. Under the provisions
of ASU 2009-13, we no longer rely on objective and reliable
evidence of the fair value of the elements in a revenue arrangement
in order to separate a deliverable into a separate unit of
accounting, and the use of the residual method has been eliminated.
We instead use a selling price hierarchy for determining the
selling price of a deliverable, which is used to determine the
allocation of consideration to each unit of accounting under an
arrangement. The selling price used for each deliverable will be
based on vendor-specific objective evidence, if available,
third-party evidence if vendor-specific objective evidence is not
available or estimated selling price if neither vendor-specific
objective evidence nor third-party evidence is available. As of
September 30, 2012, we had not applied the provisions of ASU
2009-13 to any of our revenue arrangements as we had not entered
into any new, or materially modified any of our existing, revenue
arrangements since our adoption of ASU 2009-13. Therefore, there
was no material impact on our financial position or results of
operations from adopting ASU 2009-13. However, the provisions of
ASU 2009-13 could have a material impact on the revenue recognized
from any collaboration agreements that we enter into in future
periods.
We generally recognize revenue at the time of shipment when
title and risk of loss have passed to the customer, persuasive
evidence of an arrangement exists, performance of our obligation is
complete, our price to the buyer is fixed or determinable, and we
are reasonably assured of collection. If a loss is anticipated on
any contract, a provision for the entire loss is made immediately.
Determination of these criteria, in some cases, requires
management's judgment. Should changes in conditions cause
management to determine that these criteria are not met for certain
future transactions, revenue for any reporting period could be
adversely affected.
The Company also recognizes engineering and construction
contract revenues using the percentage-of-completion method, based
primarily on contract costs incurred to date compared with total
estimated contract costs. Customer-furnished materials, labor, and
equipment, and in certain cases subcontractor materials, labor, and
equipment, are included in revenues and cost of revenues when
management believes that the company is responsible for the
ultimate acceptability of the project. Contracts are segmented
between types of services, such as engineering and construction,
and accordingly, gross margin related to each activity is
recognized as those separate services are rendered.
These accounting policies were applied consistently for all
periods presented. Our operating results would be affected if other
alternatives were used. Information about the impact on our
operating results is included in the footnotes to our financial
statements.
Several other factors related to the Company may have a
significant impact on our operating results from year to year. For
example, the accounting rules governing the timing of revenue
recognition related to product contracts are complex and it can be
difficult to estimate when we will recognize revenue generated by a
given transaction. Factors such as acceptance of services provided,
payment terms, creditworthiness of the customer, and timing of
delivery or acceptance of our products often cause revenues related
to sales generated in one period to be deferred and recognized in
later periods. For arrangements in which services revenue is
deferred, related direct and incremental costs may also be
deferred.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2012 compared to Three
and Nine Months Ended September 30, 2011
Third Quarter of Fiscal 2012 vs. Third Quarter of Fiscal
2011
Three Months Ended As a % of Revenues
September 30, September 30,
------------------------------------ ----------------------
2012 2011 % Change 2012 2011
--------- ----------- ---------- ------------ ----
Revenues $ 152,000 $ 508,000 -70% 100% 100%
Cost of revenues 140,000 434,000 -68% 92% 85%
-------- ---------- ----- ------------ ----
Gross income (loss) 12,000 74,000 -84% 8% 15%
Operating expenses
Research and development 1,000 528,000 -99% 1% 104%
Selling, general &
administrative 731,000 1,172,000 -38% 481% 231%
-------- ---------- ----- ------------ ----
Total operating expenses 732,000 1,700,000 -57% 482% 335%
-------- ---------- ----- ------------ ----
Operating loss (720,000) (1,626,000) 56% -474% -320%
-------- ---------- ----- ------------ ----
Other income (expense)
Interest and other
income (expense) (29,000) (20,000) -45% -19% -4%
-------- ---------- ----- ------------ ----
Total other income
(expense) (29,000) (20,000) -45% -19% -4%
-------- ---------- ----- ------------ ----
Net loss $(749,000) $(1,646,000) 55% -493% -324%
======== ========== ===== ============ ====
First Nine Months of Fiscal 2012 vs. First Nine Months of Fiscal
2011
Nine Months Ended As a % of Revenues
September 30, September 30,
------------------------------------ --------------------------
2012 2011 % Change 2012 2011
----------- ----------- -------- ------------- -----------
Revenues $ 1,055,000 $ 5,984,000 -82 % 100 % 100 %
Cost of revenues 1,722,000 5,108,000 -66 % 163 % 85 %
---------- ---------- -------- -------- -------
Gross income (loss) (667,000) 876,000 -176 % -63 % 15 %
Operating expenses
Research and development 805,000 1,532,000 -47 % 76 % 26 %
Selling, general &
administrative 3,129,000 4,034,000 -22 % 297 % 67 %
---------- ---------- -------- -------- -------
Total operating expenses 3,934,000 5,566,000 -30 % 373 % 93 %
---------- ---------- -------- -------- -------
Operating loss (4,601,000) (4,690,000) -2 % -436 % -78 %
---------- ---------- -------- -------- -------
Other income and (expense)
Interest and other
income (expense) (150,000) (113,000) 33 % -14 % -2 %
---------- ---------- -------- -------- -------
Total other income
(expense) (150,000) (113,000) 33 % -14 % -2 %
---------- ---------- -------- -------- -------
Net loss $(4,751,000) $(4,803,000) -1 % -450 % -80 %
========== ========== ======== ======== =======
The sum of the amounts and percentages may not equal the totals
for the period due to the effects of rounding.
Computations of percentage change period over period are based
upon our results, as rounded and presented herein.
Revenues. Revenues in the current year were negatively affected
by continued uncertainty over battery performance and
non-recoverable engineering costs associated with battery
development. As a result, OEM and other customers have delayed
major all-electric vehicle marketing initiatives, resulting in
decreased demand for our systems. The decrease in revenue for the
three and nine months ended September 30, 2012 compared to the same
period in 2011 was mainly due to a decrease in deliveries to our
core customer base in the United States. Revenues in the first nine
months of 2012 were mainly attributed to continued shipments to
First Auto Works in China and the Optare Group in the U.K. We will
have fluctuations in revenue from quarter to quarter. Although we
have seen indications from our customers to support future
production growth, there can be no assurance there will be
continuing demand for our products and services.
Cost of Revenues. Cost of revenues consists of component and
material costs, direct labor costs, integration costs and overhead
related to manufacturing our products as well as inventory
valuation reserve amounts. Cost of revenues for the three and nine
months ended September 30, 2012 decreased primarily due to the
decrease in revenue for the three and nine months ended September
30, 2012 compared to the same period in the prior year. We recorded
a charge of approximately $945,000 during the first nine months of
2012 increasing our inventory obsolescence reserve after management
updated its estimate of the realizable value of inventory.
Gross Profit. The decrease in gross profit for the three and
nine months ended September 30, 2012 compared to the same period in
the prior year is primarily attributable to the decrease in
revenues and the recording of an increase in the inventory
obsolescence reserve in the first nine months of 2012.
Research and Development ("R&D"). R&D costs decreased
for the three and nine months ended September 30, 2012 compared to
the same periods in the prior year as we reduced engineering staff
in June 2012 due to the Company's lack of financial resources. As a
result, the Company's development of its next generation
Omni-series motor control unit and 10kW charger was put on hold at
the end of the second quarter.
Selling, General, and Administrative Expenses ("S, G & A").
S, G & A is comprised of activities in the executive, finance,
marketing, field service and quality departments' compensation as
well as related payroll benefits, and non-cash charges for
depreciation and options expense. The decrease in S, G & A for
the three and nine months ended September 30, 2012 compared to the
same period in the prior year is attributable the Company's
implementation of staff reductions, the termination of employment
with the Company by approximately 80% of the Company's workforce
and other cost savings measures. We continually monitor S, G &
A in light of our business outlook and are taking proactive steps
to control these costs.
Interest and Other Income (Expense). The interest and other
income (expense) increased in the nine months ended September 30,
2012 compared to the same period in the prior year primarily due to
$68,000 of fixed asset impairment charge recorded in the second
quarter of 2012.
Net Loss. The decrease in the net loss for the three and nine
months ended September 30, 2012 compared to the same period in the
prior year was mainly due to the reduction in our workforce in the
second quarter of 2012 which resulted in lower operating costs in
2012.
Comparability of Quarterly Results. Our quarterly results have
fluctuated in the past and we believe they will continue to do so
in the future. Certain factors that could affect our quarterly
operating results are described in Part I, Item 1A-Risk Factors
contained in our Form 10-K for 2011, as updated by the disclosure
contained in Item 1A of Part II of this Form 10-Q. Due to these and
other factors, we believe that quarter-to-quarter comparisons of
our results of operations are not meaningful indicators of future
performance.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced losses primarily attributable to research,
development, marketing and other costs associated with our
strategic plan as an international developer and supplier of
electric drive and power management systems and components.
Historically cash flows from operations have not been sufficient to
meet our obligations and 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. Our operations during the
nine months ended September 30, 2012 were financed by product
sales, equity financing, as well as from working capital
reserves.
On June 30, 2010, the Company entered into a secured a revolving
credit facility with a financial institution for $200,000 which was
secured by a $200,000 certificate of deposit. The facility is for a
period of 3 years and 6 months from July 1, 2010 to December 31,
2013. The interest rate on a drawdown from the facility is the
certificate of deposit rate plus 1.25% with interest payable
monthly and the principal due at maturity. The financial
institution also renewed the $200,000 irrevocable letter of credit
for the full amount of the credit facility in favor of Sunshine
Distribution LP, with respect to the lease of the Company's
corporate headquarters at 1560 West 190th Street, Torrance,
California. On November 7, 2012, Sunshine Distribution LP drew down
on the letter of credit in the amount of $72,735 in order to pay
for October rent and a remaining payable for a retroactive rent
increase. The financial institution redeemed part of the
certificate of deposit in the same amount to fund the drawdown on
the irrevocable standby letter of credit.
Net cash used in operating activities was $3,087,000 for the
nine months ended September 30, 2012; a decrease of $4,132,000
compared to $7,219,000 for the nine months ended September 30,
2011. Operating cash used in the first nine months of 2012
decreased compared to the prior year period due mainly to decreases
in our sales volume in 2012 and the use of our existing cash
resources to fund our current operations. Non-cash items include
expense for stock-based compensation, depreciation and
amortization, issuance of common stock for employee services and
other losses. These non-cash items increased by $650,000 for the
nine months ended September 30, 2012 as compared to the same period
in the prior year primarily due to larger increase in the inventory
reserve and reserve for doubtful accounts. The decrease in net loss
was primarily due to a decrease in administrative and R&D
expenses related to over 80% of our workforce leaving the Company
in June 2012 and our restricting other administrative expenditures
to conserve cash resources. As of September 30, 2012, the Company
had $108,000 of cash and cash equivalents compared to $3,096,000 as
of December 31, 2011.
Net cash used in investing activities for capital expenditures
was $16,000 for the nine months ended September 30, 2012 compared
to $237,000 for the nine months ended September 30, 2011. The
decrease was primarily attributable to a decrease in acquisitions
of test vehicles and equipment in the first nine months of
2012.
Net cash provided by financing activities was $115,000 for the
nine months ended September 30, 2012, compared to net cash provided
by financing activities of $3,000 for the nine months ended
September 30, 2011. The increase was primarily attributable to
proceeds of $132,000 from the issuance of Common Stock during
second quarter of 2012 from the Lincoln Park facility, as explained
in Note 8 - Stockholders' Equity to the financial statements
included in Item 1 of this Form 10-Q.
Net accounts receivable decreased by $437,000, or 58%, to
$322,000 at September 30, 2012 compared to a balance of $759,000 at
December 31, 2011. The decrease in the receivable balance was
primarily due to collections of receivables due and an increase in
the Reserve for Doubtful Accounts due to financial instability at a
major customer, Smith Electric Vehicles. As of September 30, 2012
and December 31, 2011, the Company maintained a reserve for
doubtful accounts receivable of $214,000 and $18,000,
respectively.
Net inventory and supplies decreased by $1,176,000, or 29%, to
$2,860,000 at September 30, 2012 compared to a balance of
$4,036,000 at December 31, 2011. The decrease resulted from net
inventory activity including receipts totaling $544,000,
consumption of $775,000 and an inventory reserve charge of
$945,000.
Prepaid expenses and other current assets decreased by $94,000,
or 39%, to $148,000 at September 30, 2012 compared to a balance of
$242,000 at December 31, 2011. The decrease was primarily due to a
decrease in prepaid rent and other expenses as the Company reduced
expenditures to conserve cash in the third quarter of 2012.
Long term accounts receivable decreased by $6,000, or 8%, to
$73,000 at September 30, 2012 compared to a balance of $79,000 at
December 31, 2011. The decrease is primarily due to
reclassification of amounts that will be due within one year to
current accounts receivable. The Company agreed to defer collection
of certain accounts receivable as requested by a customer for the
term of the Company's warranty guarantee. The Company continues to
remedy all warranty claims and therefore anticipates collection of
this receivable.
Property and equipment, net of depreciation, decreased by
$403,000, or 43%, to $525,000 at September 30, 2012 compared to a
balance of $928,000 at December 31, 2011. The decrease is primarily
due to depreciation expense of $351,000 and an asset impairment
charge of $68,000, which was partially offset by additions to fixed
assets totaling $16,000 in the first nine months of 2012.
Accounts payable decreased by $121,000, or 34%, to $233,000 at
September 30, 2012 compared to a balance of $354,000 at December
31, 2011. The decrease was primarily due to decreases in inventory
purchases made in 2012 as sales activity decreased.
Deferred revenues decreased by $302,000, or 94%, to $18,000 at
September 30, 2012 compared to a balance of $320,000 at December
31, 2011 as revenue was recognized in the second and third quarter
of 2012 associated with prepayments on purchase orders from certain
customers.
Accrued payroll and related expenses decreased by $163,000, or
61%, to $103,000 at September 30, 2012 compared to a balance of
$266,000 at December 31, 2011. The decrease was primarily due to
the reduction in our workforce by over 80% in June 2012 which
resulted in a pay out of accrued vacation of approximately $143,000
in the second quarter.
Other accrued liabilities decreased by $112,000, or 22%, to
$405,000 at September 30, 2012 compared to a balance of $517,000 at
December 31, 2011. The decrease was primarily due to a decrease in
the accrued warranty balance as costs for warranty claims were
greater than warranty accruals during the first nine months of
2012.
Accrued interest payable increased by $61,000, or 5%, to
$1,298,000 at September 30, 2012 compared to a balance of
$1,237,000 at December 31, 2011. The increase was due to interest
related to our debt instruments, primarily the secured note payable
in the amount of $1,267,000 to the Credit Managers Association of
California.
Going concern
To date, the Company has incurred recurring net losses and
negative cash flows from operations. At September 30, 2012, the
Company had an accumulated deficit of approximately $155.8 million,
working capital of approximately $2.8 million and shareholders'
equity of approximately $0.9 million. Until the Company can
generate significant cash from its operations, the Company expects
to continue to fund its operations with existing cash resources,
proceeds from one or more private placement agreements, as well as
potentially through debt financing or the sale of equity
securities. However, the Company may not be successful in obtaining
additional funding. In addition, the Company cannot be sure that
its existing cash and investment resources will be adequate or that
additional financing will be available when needed or that, if
available, financing will be obtained on terms favorable to the
Company or its shareholders.
Our ongoing operations will require us to make necessary
investments in human and production resources, regulatory
compliance, as well as sales and marketing efforts. We do not
currently have adequate internal liquidity to meet these objectives
in the long term. On June 21, 2102, we reported in a Form 8-K
filing that, as part of cost cutting measures in response to our
decrease in revenue amid continued delays in industry adoption of
EV technology resulting from ongoing battery cost and reliability
concerns, in excess of 80% of our workforce left our Company,
including the resignation of members of our senior management. We
continue to evaluate strategic partnering opportunities and other
external sources of liquidity, including the public and private
financial markets and strategic partners. Having insufficient funds
may require the Company to delay or potentially eliminate some or
all of its development programs, relinquish some or even all rights
to product candidates at an earlier stage of development or
negotiate less favorable terms than it would otherwise choose.
Failure to obtain adequate financing also may adversely affect the
launch of the Company's its ability to continue in business. If the
Company raises additional funds by issuing equity securities,
substantial dilution to existing stockholders would likely result.
If the Company raises additional funds by incurring debt financing,
the terms of the debt may involve significant cash payment
obligations, as well as covenants and specific financial ratios
that may restrict its ability to operate its business.
As of September 30, 2012, the Company had approximately $0.1
million in cash and cash equivalents and we anticipate that our
existing cash and anticipated receivables collections will be
sufficient to meet projected operating requirements through year
end to continue operations and market trading.
We have also accessed the capital markets to obtain additional
operating funds. In December 2011, we raised approximately
$1,245,000, net of financing costs of $442,500 through an equity
issuance to certain accredited investors, which was disclosed in
our Form 10-K filed on March 29, 2012. Additionally, we entered
into two Purchase Agreements (the facility) with Lincoln Park
Capital Fund in April to issue up $10,000,000 in shares of our
common stock and received proceeds of $132,000, net of financing
costs of $152,000, from the initial purchase of shares of Common
Stock from Lincoln Park in the second quarter. Access to funding
under the facility is dependent upon our share price maintaining a
floor price of at least $0.15 per share. Our share price decreased
below that threshold in May 2012 and until our share price
increases above the threshold level, we cannot raise additional
funds from the facility.
The Company continues to pursue other options to raise
additional capital to fund its operations, including potential
strategic partnerships; however, there can be no assurance that we
can successfully raise additional funds through the capital
markets.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures which
are designed to provide reasonable assurance that information
required to be disclosed in the Company's periodic Securities and
Exchange Commission ("SEC") reports is recorded, processed,
summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and
communicated to its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
As required by Rule 13a-15(b) under the Securities and Exchange
Act of 1934, as amended, the Company carried out an evaluation,
under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures for
the period covered by this report. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer has
concluded that the Company's internal control over disclosure
controls and procedures was effective as of September 30, 2012.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the nine months ended September 30, 2012 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As reported in our Form 10-K for the fiscal year 2011, six of
the eight counts in the litigation between Enova and Arens Controls
Company, L.L.C. were settled. The two counts that were not settled
remain outstanding. There have been no material developments with
respect thereto during the period covered by this report. We intend
to continue to contest the remaining unresolved counts.
From time to time, we are subject to legal proceedings arising
out of the conduct of our business, including matters relating to
commercial transactions. We recognize a liability for any
contingency that is probable of occurrence and reasonably
estimable. We continually assess the likelihood of adverse outcomes
in these matters, as well as potential ranges of probable losses
(taking into consideration any insurance recoveries), based on a
careful analysis of each matter with the assistance of outside
legal counsel and, if applicable, other experts.
Given the uncertainty inherent in litigation, we do not believe
it is possible to develop estimates of the range of reasonably
possible loss for these matters. Considering our past experience,
we do not expect the outcome of these matters, either individually
or in the aggregate, to have a material adverse effect on our
consolidated financial position. Because most contingencies are
resolved over long periods of time, potential liabilities are
subject to change due to new developments, changes in settlement
strategy or the impact of evidentiary requirements, which could
cause us to pay damage awards or settlements (or become subject to
equitable remedies) that could have a material adverse effect on
our results of operations or operating cash flows in the periods
recognized or paid.
ITEM 1A. Risk Factors
The additional risk factors included below supplement and update
the risk factors previously discussed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2011. There have been
no other material changes from the risk factors as previously
disclosed in such Annual Report on Form 10-K.
Our common stock has been delisted from the NYSE MKT
On October 24, 2012, the Company received notification from the
NYSE MKT (the "Exchange") stating that, because the Company was not
in compliance with certain of the Exchange's continued listing
standards, the Exchange intended to strike the common stock of the
Company from the Exchange by filing a delisting application with
the Securities and Exchange Commission (the "SEC"). The Company
previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24,
2012 the provisions of the Exchange's continued listing standards
with which the Company was not in compliance. The Company did not
request an appeal of the Exchange's delisting determination.
Effective October 31, 2012, the Company's common shares were
delisted from the Exchange and, on the same date, trading of the
Company's shares commenced on the OTCQB Marketplace under the
trading symbol "ENVS". The OTCQB is a market tier operated by the
OTC Market Group Inc. for over-the-counter traded companies. The
Company anticipates that the delisting will be completed once the
Exchange files a Form 25-NSE Notification of Delisting with the
SEC. The delisting and transition to the OTCQB does not change the
Company's obligations to file periodic and other reports with the
SEC under applicable federal securities laws.
As a result of the delisting of our common stock from the NYSE
MKT, we believe that the price and liquidity of our common stock,
and our ability to raise funds from the sale of equity in the
future, will be materially affected.
The sale or issuance of our common stock to Lincoln Park may
cause dilution and the sale of the shares of common stock acquired
by Lincoln Park, or the perception that such sales may occur, could
cause the price of our common stock to fall
On April 24, 2012, we entered into the $3,400,000 Purchase
Agreement with Lincoln Park pursuant to which we may issue to
Lincoln Park from time to time over a 36-month period up to
$3,400,000 worth of our common stock subject to certain limitations
defined in the prospectus supplement and 567, 681 shares to be
issued to Lincoln Park at no cost as a fee for its commitment to
purchase such shares. In addition, on April 23, 2012, we entered
into the $6,600,000 Purchase Agreement with Lincoln Park, pursuant
to which Lincoln Park committed to purchase an additional
$6,600,000 worth of our common stock, from time to time over a
36-month period commencing after the SEC has declared effective a
registration statement for the resale of such shares that we must
file with the SEC within 120 business days after the date of such
agreement.
Other than Lincoln Park's initial purchase under the $3,400,000
Purchase Agreement of 1,250,000 shares of our common stock at a
price per share of $0.20 for an aggregate amount of $250,000, or
the Initial Purchase, the purchase price for the shares that we may
sell to Lincoln Park will fluctuate based on the price of our
common stock. It is anticipated that shares will be sold over a
period of up to 36 months after the date of the prospectus
supplement. Depending on market liquidity at the time, sales of
shares we issue to Lincoln Park may cause the trading price of our
common stock to fall.
We generally have the right to control the timing and amount of
any sales of our shares to Lincoln Park, except that, pursuant to
the terms of our agreements with Lincoln Park, we would be unable
to sell shares to Lincoln Park if and when the market price of our
common stock is below $0.15 per share. Sales of our common stock,
if any, to Lincoln Park will depend upon market conditions and
other factors to be determined by us. As such, other than the
Initial Purchase, Lincoln Park may ultimately purchase all, some or
none of the shares of our common stock offered pursuant to this
prospectus supplement and, after it has acquired shares, Lincoln
Park may sell all, some or none of those shares. Therefore, sales
to Lincoln Park by us pursuant to either the $3,400,000 Purchase
Agreement or the $6,600,000 Purchase Agreement could result in
substantial dilution to the interests of other holders of our
common stock. Additionally, the sale of a substantial number of
shares of our common stock to Lincoln Park, or the anticipation of
such sales, could make it more difficult for us to sell equity or
equity-related securities in the future at a time and at a price
that we might otherwise wish to effect sales.
Raising additional funds by issuing securities, engaging in debt
financings or through licensing arrangements may cause substantial
dilution to existing stockholders, restrict our operations or
require us to relinquish proprietary rights.
To the extent that we raise additional capital by issuing equity
securities as we did in 2011, April 2012 and May 2012, our existing
stockholders' ownership may be substantially diluted. Any debt
financing we enter into may involve covenants that restrict our
operations or our ability to enter into other funding arrangements.
These restrictive covenants may include limitations on additional
borrowing and specific restrictions on the use of our assets, as
well as prohibitions on our ability to create liens, pay dividends,
redeem our stock or make investments. In addition, if we raise
additional funds through licensing arrangements, it may be
necessary to relinquish potentially valuable rights to our
potential products or proprietary technologies, or grant licenses
on terms that are not favorable to us.
One group of our shareholders holds a large percentage of our
outstanding common stock, and, should they choose to do so, may
have significant influence over the outcome of corporate actions
requiring stockholder approval.
Approximately 25.4% of our outstanding common stock is held by a
group of 17 shareholders (the "Low-Beer Managed Accounts") who
invested in our December 2011 placement of 11,250,000 shares of
common stock together with warrants to purchase up to 11,250,00
shares of common stock. The warrants are exercisable for a period
of five years and exercisable at a price of $0.22 per share. The
warrants further provide that if, for a twenty consecutive trading
day period, the average of the closing price quoted on the OTCQB
market is greater than or equal to $0.44 per share, with at least
an average of 10,000 shares traded per day, then, on the 10th
calendar day following written notice from the Company, any
outstanding warrants will be deemed automatically exercised
pursuant to the cashless/net exercise provisions under the
warrants. Accordingly, the Low-Beer Managed Accounts, should they
choose to do so, may be able to significantly influence the outcome
of any corporate transaction or other matter submitted to our
stockholders for approval, including the election of directors, any
merger, consolidation or sale of all or substantially all of our
assets or any other significant corporate transaction, and such
group of investors could delay or prevent a change of control of
our company, even if such a change of control would benefit our
other stockholders. The interests of the Low-Beer Managed Accounts
may differ from the interests of our other stockholders.
Funding from our equity lines of credit may be limited or be
insufficient to fund our operations or to implement our
strategy.
Under our purchase agreements with Lincoln Park, we may direct
Lincoln Park to purchase up to $3,400,000 of shares of common stock
over a 36 month period, and, upon effectiveness of a registration
statement for resale of the shares and subject to other conditions,
we also may direct Lincoln Park to purchase up to $6,600,000 of our
shares of common stock over a 36 month period. The amounts
available for purchase is limited under each purchase agreement.
The extent to which we rely on Lincoln Park as a source of funding
will depend on a number of factors including, the amount, if any,
of additional working capital needed, the prevailing market price
of our common stock and the extent to which we are able to secure
working capital from other sources. If we are unable to sell enough
of our products to finance our working capital requirements and if
sufficient funding from Lincoln Park were to prove unavailable or
prohibitively dilutive, we would need to secure another source of
funding. Even if we sell all $10,000,000 under the aggregate
purchase agreements to Lincoln Park, there can be no assurance this
would be sufficient to support our operations or implement our
growth plans in all cases.
We will need to secure adequate funding to complete the
development program for Omni Product Line and Green For Free
(GFF).
Our current cash reserves are not sufficient to fully fund GFF
development and commence production of the Omni product line, and
as a result, we will need additional funding to complete the
development of these product initiatives and to fund operations
generally. We may seek to enter potential strategic partnerships
related to both GFF and Omni production to provide funding for
continued development of the Omni platform, support of our
commercialization operations with respect to GFF and support
funding of general operations. However, there can be no assurance
that such a strategic partnership would be completed or on terms
that are favorable to us. If we are unable to reach agreement with
a potential strategic partner or if a strategic partnership does
not provide adequate funding, we may need to obtain additional
funding to complete the development of GFF. Raising additional
equity capital may be difficult due to our share price trading at
near historical lows and the delisting of our stock. If we are
unable to raise sufficient capital to fund our development programs
and operations generally, we may be unable to proceed with the
development of GFF and our business and financial condition may be
adversely affected.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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