TIDMENVS TIDMENV
RNS Number : 6633H
Enova Systems,Inc(S)
21 May 2014
21 May 2014
ENOVA SYSTEMS, INC
("Enova" or "the Company")
Enova Reports 1st Quarter 2014 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 month period ended 31 March 2014.
For further information please contact:
Enova Systems, Inc
John Micek, Chief Executive Officer +1(650) 346-4770
Daniel Stewart & Company Plc
Paul Shackleton +44 (0) 20 7776 6550
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
March 31,
2014
December
(unaudited) 31, 2013
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 114,000 $ 1,000
Accounts receivable, net - -
Inventories and supplies, net 427,000 427,000
Prepaid expenses and other current assets 30,000 42,000
------------ ------------
Total current assets 571,000 470,000
Long term accounts receivable - -
Property and equipment, net 69,000 80,000
------------ ------------
Total assets $ 640,000 $ 550,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 546,000 $ 642,000
Loans from employees 68,000 36,000
Deferred revenues 213,000 213,000
Accrued payroll and related expenses 217,000 194,000
Accrued loss for litigation settlement 2,014,000 2,014,000
Other accrued liabilities 346,000 294,000
Current portion of notes payable 40,000 40,000
------------ ------------
Total current liabilities 3,444,000 3,433,000
Accrued interest payable 1,420,000 1,401,000
Notes payable, net of current portion 1,238,000 1,238,000
------------ ------------
Total liabilities 6,102,000 6,072,000
------------ ------------
Stockholders' deficit:
Series A convertible preferred stock - no
par value, 30,000,000 shares authorized; 0
shares issued and outstanding; liquidating
preference at $0.60 per share as of March
31, 2014 and December 31, 2013 - -
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 March 31,
2014 and December 31, 2013 1,094,000 1,094,000
Common Stock to be issued 528,000 528,000
Common Stock - no par value, 750,000,000 shares
authorized; 64,520,000 and 44,520,000 shares
issued and outstanding as of March 31, 2014
and December 31, 2013, respectively 145,735,000 145,512,000
Additional paid-in capital 9,599,000 9,595,000
Accumulated deficit (162,418,000) (162,251,000)
------------ ------------
Total stockholders' deficit (5,462,000) (5,522,000)
------------ ------------
Total liabilities and stockholders' deficit $ 640,000 $ 550,000
============ ============
See accompanying condensed notes to these financial
statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
--------------------------
2014 2013
------------ -----------
Revenues $ - $ 53,000
Cost of revenues - 56,000
---------- ----------
Gross income (loss) - (3,000)
---------- ----------
Operating expenses
Research and development - -
Selling, general & administrative 136,000 383,000
---------- ----------
Total operating expenses 136,000 383,000
---------- ----------
Operating loss (136,000) (386,000)
---------- ----------
Other income and (expense)
Interest and other income (expense) (31,000) (20,000)
---------- ----------
Total other income and (expense) (31,000) (20,000)
---------- ----------
Net loss $ (167,000) $ (406,000)
========== ==========
Basic and diluted loss per share $ (0.00) $ (0.01)
========== ==========
Weighted average number of common
shares outstanding 46,742,000 44,520,000
========== ==========
See accompanying condensed notes to these financial
statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
-----------------------
Cash flows from operating activities: 2014 2013
---------- ----------
Net loss $ (167,000) $ (406,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Inventory reserve - 11,000
Inventory write-off - (11,000)
Depreciation and amortization 11,000 58,000
Loss on asset disposal - 10,000
Stock option expense 4,000 2,000
(Increase) decrease in:
Accounts receivable - 123,000
Inventory and supplies - (29,000)
Prepaid expenses and other current assets 12,000 (49,000)
Long term receivables - 25,000
Increase (decrease) in:
Accounts payable (96,000) (96,000)
Deferred revenues - 315,000
Accrued payroll and related expense 23,000 (23,000)
Other accrued liabilities 52,000 20,000
Accrued interest payable 19,000 21,000
--------- ---------
Net cash used in operating activities (142,000) (29,000)
--------- ---------
Cash flows from investing activities:
Net cash used in investing activities - -
--------- ---------
Cash flows from financing activities:
Net proceeds from the issuance of common
stock 223,000 -
Proceeds from related party loans 32,000 -
Payment on notes payable - (6,000)
--------- ---------
Net cash provided by (used in) financing
activities 255,000 (6,000)
--------- ---------
Net decrease in cash and cash equivalents 113,000 (35,000)
Cash and cash equivalents, beginning of period 1,000 57,000
--------- ---------
Cash and cash equivalents, end of period $ 114,000 $ 22,000
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ - $ 2,000
========= =========
See accompanying condensed 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
believes it has been 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.
THE DISCUSSION SET FORTH BELOW AND ELSEWHERE IN THIS 10-Q IS
QUALIFIED IN ITS ENTIRETY BY THE FOLLOWING: ENOVA REMAINS INSOLVENT
AND OWES IN EXCESS OF $4.5 MILLION IN THE AGGREGATE TO ITS TWO
PRINCIPAL CREDITORS, THE CREDIT MANAGERS ASSOCIATION AND ARENS
CONTROLS COMPANY, L.L.C. ("ARENS"). WITHOUT IMMEDIATE ADDITIONAL
FINANCING OR COLLECTION OF RECEIVABLES, THE COMPANY WILL NEED TO
CEASE OPERATIONS. THE COMPANY CURRENTLY HAS NO VISIBILITY AS TO
EITHER ADDITIONAL FINANCING OR THE COLLECTION OF RECEIVABLES.
SPECIFICALLY, WITHOUT A MUTUALLY ACCEPTABLE SETTLEMENT OF THE ARENS
JUDGMENT ARISING OUT OF ARENS CONTROLS COMPANY, L.L.C. v. ENOVA
SYSTEMS, INC., CASE NO. 13-1102 (7TH CIRCUIT) IN THE AMOUNT OF $2.0
MILLION, THE COMPANY DOES NOT CURRENTLY BELIEVE IT HAS ANY
ALTERNATIVE OTHER THAN TO CEASE OPERATIONS. THE COMPANY CURRENTLY
EMPLOYS ONLY TWO PERSONNEL, JOHN MICEK, THE COMPANY'S CEO, CFO AND
SECRETARY, AND ONE ADDITIONAL INDIVIDUAL IN THE FINANCE
DEPARTMENT.
ON SEPTEMBER 24, 2013, THE COMPANY ENTERED INTO A SETTLEMENT
AGREEMENT AND MUTUAL RELEASE WITH ARENS PROVIDING A PERIOD OF 120
DAYS TO SETTLE THE JUDGMENT FOR THE AMOUNT OF $300,000. THE COMPANY
WAS NOT ABLE TO MAKE THE PAYMENT BY THE DUE DATE OF JANURY 22,
2014. THEREFORE, THE JUDGMENT AGAINST THE COMPANY CAN BE ENFORCED
WITHOUT FURTHER NOTICE.
2. Summary of Significant Accounting Policies
Basis of Presentation - Interim Financial Statements
The financial information as of and for the three ended March
31, 2014 and 2013 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 year. These interim financial statements should be
read in conjunction with the audited financial statements for the
year ended December 31, 2013, which are included in the Company's
Annual Report on Form 10-K for the year then ended.
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 March 31, 2014, the Company
had an accumulated deficit of approximately $162.4 million, cash
and cash equivalents of $114,000, working capital of approximately
negative $2.9 million and shareholders' deficit of approximately
$5.5 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 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, 2012, 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. As a result of having insufficient funds, the Company has
delayed all of its product development. Failure to obtain adequate
financing also will adversely affect the Company's 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.
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 March 31, 2014, the Company had approximately $114,000 in
cash and cash equivalents and does not anticipate that its
anticipated receivables collections will be sufficient to meet its
projected operating requirements through December 2014 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 months ended March
31, 2014 compared to what was previously disclosed in the Company's
Annual Report on Form 10-K for the year ended December 31,
2013.
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. When the Company enters into
production and development contracts with customers, an evaluation
is made to ascertain the specific revenue generating activities of
each contract and establishes 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.
Loss 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, warrants and preferred stock.
The potential shares, which are excluded from the determination
of basic and diluted net loss per share as their effect is
anti-dilutive, are as follows:
Three Months Ended
March 31,
-----------------------
2014 2013
Options to purchase common stock 5,210,000 810,000
Warrants to purchase common stock 11,250,000 11,250,000
Series A and B preferred shares conversion 83,000 83,000
---------- ----------
Potential equivalent shares excluded 16,543,000 12,143,000
========== ==========
Accounting Changes and Recent Accounting Pronouncements
Certain accounting standards that have been issued or proposed
by the FASB or other standards-setting bodies are not expected to
have a material impact on the Company's financial position, results
of operations and cash flows.
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:
March December
31, 2014 31, 2013
----------- -----------
Raw materials $ 3,098,000 $ 3,098,000
Work-in-process 222,000 222,000
Finished goods 449,000 449,000
Reserve for obsolescence (3,342,000) (3,342,000)
---------- ----------
$ 427,000 $ 427,000
========== ==========
The Company did not have production operations in the three
months ended March 31, 2014. Therefore, there was no change the
balance of inventory between December 31, 2013 and March 31, 2014.
Inventory valuation adjustments and other inventory write-offs
amounted to $11,000 for the three months ended March 31, 2013.
4. Property and Equipment
Property and equipment consisted of the following at:
March 31, December
2014 31, 2013
------------------- ----------
Computers and software $ 59,000 $ 59,000
Machinery and equipment 251,000 251,000
Furniture and office equipment 86,000 86,000
Demonstration vehicles and buses 127,000 127,000
523,000 523,000
Less accumulated depreciation and amortization (454,000) (443,000)
-------- --------
Total $ 69,000 $ 80,000
======== ========
Depreciation and amortization expense was $11,000 and $58,000
for the three months ended March 31, 2014 and 2013, respectively,
and within those total expenses, the amortization of leasehold
improvements was $0 and $22,000 for the three months ended March
31, 2014 and 2013. The Company's headquarters lease expired on
January 31, 2013 and the balance of leasehold improvements was
decreased to $0. In addition, an evaluation of fixed assets as of
March 31, 2013 identified $367,000 in obsolete fixed assets which
were disposed of or abandoned and a loss on disposal of fixed
assets of $10,000 was recorded in the three months ended March 31,
2013. There was no impairment charge recorded in the three months
ended March 31, 2014.
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following at:
December
March 31, 31,
2014 2013
----------- --------
Accrued inventory received $ 10,000 $ 10,000
Accrued professional services 219,000 161,000
Accrued warranty 74,000 74,000
Other 43,000 49,000
------- -------
Total $ 346,000 $294,000
======= =======
Accrued warranty consisted of the following activities during
the three months ended March 31:
2014 2013
------- --------
Balance at beginning of year $74,000 $117,000
Accruals for warranties issued during the
period - 10,000
Warranty claims - (34,000)
------ -------
Balance at end of quarter $74,000 $ 93,000
====== =======
6. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
March December
31, 2014 31, 2013
---------- ---------
Secured note payable to Credit Managers Association
of California, bearing interest at prime plus
3% (6.25% as of March 31, 2014), 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 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
--------- ---------
1,278,000 1,278,000
Less current portion of notes payable (40,000) (40,000)
--------- ---------
Notes payable, net of current portion $1,238,000 $1,238,000
========= =========
As of March 31, 2014 and December 31, 2013, the balance of long
term interest payable amounted to $1,420,000 and $1,401,000,
respectively, of which the Credit Managers Association of
California note amounted to $1,383,000 and $1,365,000,
respectively. Interest expense on notes payable amounted to
approximately $19,000 and $21,000 for the three months ended March
31, 2014 and 2013, respectively.
In June 2013, the vehicle that secured the note payable due
March 10, 2016 was repossessed by the secured lender. The Company
was invoiced by the lender for $8,000 for final settlement, which
is included in accounts payable at March 31, 2014 and December 31,
2013, respectively. In the fourth quarter of 2013, three vehicles
that secured notes due on February 19, 2014, August 25, 2014 and
April 9, 2015 were repossessed by the secured lenders. The Company
has accrued approximately $18,000 for final settlements for the
three vehicles, which is included in other accrued liabilities at
March 31, 2014 and December 31, 2013, respectively.
7. Deferred Revenues
The Company had deferred $213,000 in revenue related to a
production contract at March 31, 2014 and December 31, 2013. The
Company's management is attempting to obtain funding to complete
the order in the second quarter of 2014.
8. Stockholders' Equity
On February 23, 2014, Enova Systems, Inc, entered into
Subscription Agreements with various offshore investors to sell
approximately GBP 150,000 (approximately US$249,000) in gross
proceeds by a private subscription of 19,999,998 common shares to
be newly issued on the Alternative Investment Market of the London
Stock Exchange (the "AIM Exchange"). The common shares were issued
at a price of 0.0075 pence (approximately US$0.01per share) to
certain eligible offshore investors (the "Subscription"). In
connection with the Subscription, Enova entered into an Agreement
for the Provision of Receiving Agent Services (the "Agreement")
with Daniel Stewart & Company PLC (UK) for receiving agent
services. Daniel Stewart presently serves as the Nominated Adviser
for the listing of Enova's common shares on the AIM Exchange. The
newly issued common shares for the Subscription were issued in
three tranches of approximately GBP 50,000 each.
Daniel Stewart received an introducing agent's fee of 10% of the
aggregate funds raised pursuant to the subscription in addition to
reimbursement of expenses. Factoring in the commission, legal and
other expenses of the offering, Enova received approximately
US$223,000 in net proceeds.
The offer and sale of the shares were made pursuant to
Regulation S under the Securities Act of 1933, as amended (the
"Securities Act"). Among other things, each investor purchasing
shares of Enova's common stock in the offering represented that the
investor is not a United States person as defined in Regulation S.
In addition, neither Enova nor the receiving agent conducted any
selling efforts directed at the United States in connection with
the offering. All shares of common stock issued in the offering
included a restrictive legend indicating that the shares were
issued pursuant to Regulation S under the Securities Act and are
deemed to be "restricted securities." As a result, the purchasers
of such shares will not be able to resell the shares unless in
accordance with Regulation S, pursuant to a registration statement,
or upon reliance of an applicable exemption from registration under
the Securities Act. The shares to be sold pursuant to the
Subscription Agreements were not registered under the Securities
Act, and there is no obligation on the part of Enova to so register
such shares.
During the three months ended March 31, 2014 and 2013, the
Company did not issue any shares of common stock to directors or
employees as compensation.
9. Stock Options
Stock Option Program Description
As of March 31, 2014, 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 maximum number of shares issuable over the term of the 1996
Plan was limited to 65 million shares (without giving effect to
subsequent stock splits). Options granted under the 1996 Plan
typically have an exercise price of 100% of the fair market value
of the underlying stock on the grant date and expire no later than
ten years from the grant date. On August 27, 2013, the Board of
Directors of Enova Systems approved amendments to Enova's 2006
Equity Compensation Plan (a) to increase the number of shares
authorized for issuance from 3,000,000 shares to 9,000,000 shares
and (b) to increase the number of shares of common stock that may
be issued to an individual in any calendar year from 500,000 shares
to 5,000,000 shares. Of the 9,000,000 shares reserved for issuance
under the amended 2006 Plan, none were granted in the three months
ended March 31, 2014 and 2013 and 3,780,000 shares were available
for grant as of March 31, 2014. Options granted under the 2006 Plan
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.
Stock-based compensation expense related to stock options was
$4,000 and $2,000 for the three months ended March 31, 2014 and
2013, respectively. As of March 31, 2014, the total compensation
cost related to non-vested awards not yet recognized is $37,000.
The remaining period over which the future compensation cost is
expected to be recognized is 27 months.
The following table summarizes information about stock options
outstanding and exercisable at March 31, 2014:
Weighted
Average
Weighted Remaining
Number Average Contractual Aggregate
of Share Exercise Term in Intrinsic
Options Price Years Value(1)
---------- ----------- ------------ ----------------
Outstanding at December 31,
2013 5,210,000 $ 0.12 2.72 $ -
Granted - $ - - $ -
Exercised - $ - - $ -
Forfeited or Cancelled 69,000 $ 1.26 - $ -
--------- ------- ------------ ---------------
Outstanding at March 31, 2014 5,141,000 $ 0.10 2.42 $ -
========= ======= ============ ===============
Exercisable at March 31, 2014 632,000 $ 0.67 2.65 $ -
========= ======= ============ ===============
Vested and expected to vest
(2) 5,141,000 $ 0.10 2.42 $ -
========= ======= ============ ===============
(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 March 31, 2014
ranged from $0.07 to $4.35. The Company's policy is to issue shares
from its authorized shares upon the exercise of stock options.
Unvested share activity for the three months ended March 31,
2014 is summarized below:
Weighted
Unvested Average
Number Grant Date
of Fair
Options Value
---------- -------------
Unvested balance at December 31, 2013 4,535,000 $ 0.02
Granted - $ -
Vested (25,000) $ 0.11
Forfeited - $ -
--------- --- --------
Unvested balance at March 31, 2014 4,510,000 $ 0.02
========= === ========
The fair values of all stock options granted are estimated on
the date of grant using the Black-Scholes option-pricing model.
During the three months ended March 31, 2014 and 2013 no options
were granted.
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. Warrants
In December 2011, the Company completed a private equity
placement of 11,250,000 shares of common stock for $1,245,000
together with warrants to purchase up to 11,250,000 shares of
common stock to a group of 17 shareholders (the "Low-Beer Managed
Accounts"). 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.
The following is a summary of changes to outstanding warrants
during the quarter ended March 31, 2014:
Weighted
Number Weighted Average
of Average Remaining
Share Exercise Contractual
Options Price Life
------------- --------------- ------------------
Outstanding at December 31, 2013 111,250,000 $ 0.22 2.75
============ === ========== ==================
Granted - $ - -
Exercised - $ - -
Forfeited or Cancelled - $ - -
------------ --- ---------- ------------------
Outstanding at March 31, 2014 11,250,000 $ 0.22 2.75
============ === ========== ==================
Exercisable at March 31, 2014 11,250,000 $ 0.22 2.75
============ === ========== ==================
11. Concentrations
The Company's trade receivables are concentrated with a few
customers. The Company performs credit evaluations on its
customers' financial condition and generally requires no collateral
from its customers. Concentrations of credit risk, with respect to
accounts receivable, exist to the extent of amounts presented in
the financial statements. Two customers represented 62% and 38%,
respectively, of gross accounts receivable at March 31, 2014 and
December 31, 2013, respectively.
The Company's revenues are concentrated with a few customers.
The Company did not have revenue for the three months ended March
31, 2014, and for the three months ended March 31, 2013, three
customers represented 60%, 24% and 14% of gross revenues.
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, 2013, 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, 2013.
Enova believes it has been 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 has been to develop
and produce advanced proprietary software and hardware for
applications in these alternative power markets. Our focus has been
on powertrain systems including digital power conversion, power
management and system integration, focusing chiefly on vehicle
power generation. Specifically, we have developed, designed and
produce drive systems and related components for electric, hybrid
electric and fuel cell powered vehicles in both the new and
retrofit markets. We also perform internal research and development
("R&D") and funded third party R&D to augment our product
development and support our customers.
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 has been centered 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. Provided we generate
necessary resources, we will continue to work refining both our
market strategy and our product line to maintain our edge in power
management and conversion systems for vehicle applications.
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 March 31, 2014, we had an accumulated deficit of approximately
$162.4 million, working capital of approximately negative $2.9
million and shareholders' deficit of approximately $5.5 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 left the Company. We
continue to evaluate strategic opportunities to leverage resources
and assist with 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. As of March 31, 2014, the Company had approximately
$114,000 in cash and cash equivalents and we do not anticipate that
our anticipated receivables collections will be sufficient to meet
projected operating requirements through the end of 2014 to
continue operations and market trading.
Customer Highlights
FIRST AUTO WORKS (FAW) - Enova continued to supply drive systems
to FAW for their hybrid buses in 2013. Since the 2008 Olympics in
Beijing, Enova Systems and First Auto Works have deployed over 500
vehicles utilizing Enova's pre-transmission hybrid drive system
components.
SMITH ELECTRIC VEHICLES (SEV) - Enova continued to supply drive
system components to SEC in 2013. SEV is a leader in the all EV
market in North America and Europe.
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. Our Omni-series 10kW on-board battery charger for
plug-in hybrid-electric and all-electric vehicles is a CAN control
based unit that 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 anticipate continuing development and
marketing of these two products, which we believe can gain broad
market acceptance.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2014 compared to Three Months Ended
March 31, 2013
First Quarter of Fiscal 2014 vs. First Quarter of Fiscal
2013
Three Months Ended As a % of Revenues
March 31, March 31,
---------------------------------------------- --------------------------
2014 2013 % Change 2014 2013
--------------------- --------- ---------- ------------ ------------
Revenues $ - $ 53,000 -100% n/a 100%
Cost of revenues - 56,000 -100% n/a 106%
-------------------- -------- ------ ------------ ------------
Gross loss - (3,000) 100% n/a -6%
Operating expenses
Research and
development - - - n/a 0%
Selling, general &
administrative 136,000 383,000 64% n/a 723%
-------------------- -------- ------ ------------ ------------
Total operating
expenses 136,000 383,000 64% n/a 723%
-------------------- -------- ------ ------------ ------------
Operating loss (136,000) (386,000) 57% n/a -728%
-------------------- -------- ------ ------------ ------------
Other income (expense)
Interest and other
income (expense) (31,000) (20,000) -55% n/a -38%
-------------------- -------- ------ ------------ ------------
Total other income
(expense) (31,000) (20,000) -55% n/a -38%
-------------------- -------- ------ ------------ ------------
Net loss $ (167,000) $(406,000) 51% n/a -766%
==================== ======== ====== ============ ============
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 uncertainty over the Company's ability to continue operations
after our restructuring in June 2012, which reduced our capacity to
pursue new business. The decrease in revenue for the three months
ended March 31, 2014 compared to the same period in 2013 was mainly
due to our inability to sustain production in 2014. Revenues in the
first three months of 2013 were mainly attributed to shipments to
First Auto Works in China and the Smith Electric Vehicles in the
U.S. We will have fluctuations in revenue from quarter to quarter
and 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 months
ended March 31, 2014 decreased primarily due to the reduction in
our operations.
Gross Loss. The decrease in gross loss for the three months
ended March 31, 2014 compared to the same period in the prior year
is primarily attributable to the decrease in operating expense in
the three months ended March 31, 2014.
Research and Development ("R&D"). The Company halted R&D
activities as our engineering staff was eliminated 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 of 2012.
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 months ended March 31, 2014 compared to the same period
in the prior year is attributable to the resignation of
approximately 80% of the Company's workforce from June 2012 and the
maintenance of only minimal operations. We continually monitor S, G
& A in light of our business outlook and take steps to control
these costs.
Interest and Other Income (Expense). The interest and other
income (expense) for the three months ended March 31, 2014
increased compared to the same period in the prior year primarily
due to the timing of recording asset impairment charges.
Net Loss. The decrease in the net loss for the three months
ended March 31, 2014 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 and the
maintenance on only minimal operations.
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 2013. 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
three months ended March 31, 2014 were financed from working
capital reserves and a capital raise in March 2014.
Net cash used in operating activities was $142,000 for the three
months ended March 31, 2014, a decrease of $113,000 compared to net
cash used in operating activities of $29,000 for the three months
ended March 31, 2013. Operating cash used in the first three months
of 2014 decreased compared to the prior year period primarily due
to collections of accounts receivables and the receipt of customer
deposits for production orders in the prior year. Non-cash items
include expense for stock-based compensation, depreciation and
amortization and other losses. These non-cash items decreased by
$66,000 for the three months ended March 31, 2014 as compared to
the same period in the prior year primarily due to lower
depreciation expense in 2014 resulting from termination of our
lease at our former headquarters in January 2013 and decrease in
depreciation for other fixed assets that were impaired or disposed
of. The decrease in net loss was primarily due to a decrease in
administrative 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 March 31, 2014, the
Company had $114,000 of cash and cash equivalents compared to
$1,000 as of December 31, 2013.
Net cash used in investing activities was $0 for the three
months ended March 31, 2014 and 2013, respectively. The Company
halted capital expenditures after the reduction in work force in
June 2012.
Net cash from financing activities was $255,000 for the three
months ended March 31, 2014, an increase of $261,000 compared to
net cash used in financing activities of $6,000 in 2013. The
increase was primarily attributable to net proceeds of $223,000
from the issuance of Common Stock during first quarter of 2014 as
explained in Note 8 - Stockholders' Equity to the financial
statements included in Item 1 of this Form 10-Q and the receipt of
related party loans of $32,000 during the first quarter of
2014.
Net accounts receivable were $0 at March 31, 2014 and December
31, 2013, respectively. The Company wrote down the value of its
receivables at the end of 2013 due to management's concern over the
ability of the Company to continue as a going concern and collect
receivables in the normal course of business.
Net inventory and supplies were unchanged at $427,000 as of
March 31, 2014 and December 31, 2013, respectively. The Company's
operations were halted in the first quarter of 2014 due to the
Company's lack of resources to complete customer orders.
Prepaid expenses and other current assets decreased by $12,000,
or 29%, to $30,000 at March 31, 2014, compared to a balance of
$42,000 at December 31, 2013. The decrease was primarily due to a
write down in a deposit to a vendor reflecting management's concern
that the product can be utilized in future operations.
Long term accounts receivable were unchanged at $0 as of March
31, 2014 and December 31, 2013, respectively. The Company agreed to
defer collection of certain accounts receivable as requested by a
customer for the term of the Company's warranty guarantee. Due to
its financial condition, the Company is not servicing warranty
claims with the customer, which could delay collection of the
receivable. Therefore, management has determined to fully reserve
the long-term accounts receivables as of December 31, 2013.
Property and equipment, net of depreciation, decreased by
$11,000, or 14%, to $69,000 at March 31, 2014 compared to a balance
of $80,000 at December 31, 2013. The decrease is primarily due to
depreciation expense of $11,000.
Accounts payable decreased by $96,000, or 15%, to $546,000 at
March 31, 2014 compared to a balance of $642,000 at December 31,
2013. The decrease was primarily due to partial payment of legal
and exchange fees from the proceeds of the equity issuance in March
2014.
Loans from employees increased by $32,000, or 89%, to $68,000 at
March 31, 2014 compared to a balance of $36,000 at December 31,
2013. Due the financial condition of the company, employees loaned
funds to the Company to pay for certain necessary administrative
costs.
Deferred revenues were unchanged at $213,000 at March 31, 2014
and December 31, 2013, respectively. The Company's management is
attempting to obtain funding in order to sub-contract out the
completion of the orders in the second quarter of 2014.
Accrued payroll and related expenses increased by $23,000, or
12%, to $217,000 at March 31, 2014 compared to a balance of
$194,000 at December 31, 2013. The increase was primarily due to an
increase in unpaid compensation in the first quarter of 2014
resulting from the financial condition of the Company.
Accrued loss for litigation settlement was unchanged at March
31, 2014 compared to the balance at December 31, 2013. As disclosed
under the heading "Judgment entered in Arens Controls Litigation"
below, on December 12, 2012, a judgment was entered in favor of
Arens Controls Company, L.L.C. by the United States District Court
Northern District of Illinois in the amount of $2,014,169 in the
case of Arens Controls Company, L.L.C. v. Enova Systems, Inc. See
also Item 1 of Part II of this report on Form 10-Q.
Other accrued liabilities increased by $52,000, or 18%, to
$346,000 at March 31, 2014 compared to a balance of $294,000 at
December 31, 2013. The increase was primarily due to an increase in
the accrual for professional services incurred in the first three
months of 2014.
Accrued interest payable increased by $19,000, or 1%, to
$1,420,000 at March 31, 2014 compared to a balance of $1,401,000 at
December 31, 2013. The increase was due to interest related to our
debt instruments, primarily the interest on the secured note
payable in the amount of $1,344,000 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 March 31, 2014, the Company
had an accumulated deficit of approximately $162.4 million, working
capital of approximately negative $2.9 million and shareholders'
deficit of approximately $5.5 million. Until the Company can
generate significant cash from its operations, the Company expects
to continue to fund its operations with existing working capital,
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 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, 2012, 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 has required the Company to
eliminate its product development, and may result in relinquishing
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 will adversely affect the
Company's 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 March 31, 2014, the Company had approximately $114,000 in
cash and cash equivalents and we do not anticipate that our
existing anticipated receivables collections will be sufficient to
meet projected operating requirements through the end of 2014 to
continue operations and market trading.
Judgment entered in Arens Controls Litigation
On December 12, 2012, a judgment was entered by the United
States District Court Northern District of Illinois in favor of
Arens Controls Company, L.L.C. in the amount of $2,014,169
regarding claims for two counts. In 2008, Arens Controls Company,
L.L.C. ("Arens") filed claims against Enova with the United States
District Court Northern District of Illinois. A Partial Settlement
Agreement, as amended on January 14, 2011, resolved certain claims
made by Arens. However, the claims were preserved under two
remaining counts concerning i) anticipatory breach of contract by
Enova for certain purchase orders that resulted in lost profit to
Arens and ii) reimbursement for engineering and capital equipment
costs incurred by Arens exclusively for the fulfillment of certain
purchase orders received from Enova.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages whatsoever that occurred
prior to the date of the Settlement Agreement. The Company was not
able to comply with the due date for such payment by January 22,
2014. Therefore, the judgment against the Company can be enforced
without further notice.
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 SEC Rule 13a-15(b) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), 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 (as defined in Rule 13a-15(e) under the Exchange
Act) as of March 31, 2014. Based on that evaluation, our
management, including the Chief Executive Officer and Chief
Financial Officer, concluded that as of March 31, 2014, our
disclosure controls and procedures were not effective to ensure the
information required to be disclosed by an issuer in the reports it
files or submits under the Securities Exchange Act of 1934, is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules
and forms relating to us, and was accumulated and communicated to
our management, including our Chief Executive Officer and Chief
Financial Officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required
disclosure. There are inherent limitations to the effectiveness of
any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of
achieving their control objectives.
Changes in Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in
Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. We
maintain internal control over financial reporting designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
In June 2012, all but two of the Company's employees resigned,
and such staff reduction resulted in our inability to complete
documentation of proper accounting procedures and management
review. Not all fully implemented fundamental elements of an
effective control were present as of March 31, 2014, including
formalized monitoring procedures. Based on this evaluation,
management has concluded that the aforementioned factors
constituted a material weakness in the Company's internal control
over financial reporting as of March 31, 2014.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As reported in our Form 10-K for the fiscal year 2012, 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
remained outstanding. The two remaining counts concerned i)
anticipatory breach of contract by Enova for certain purchase
orders that resulted in lost profit to Arens and ii) reimbursement
for engineering and capital equipment costs incurred by Arens
exclusively for the fulfillment of certain purchase orders received
from Enova.
On December 12, 2012, a judgment was entered under the two
remaining counts by the United States District Court Northern
District of Illinois in favor of Arens Controls Company, L.L.C. in
the amount of $2,014,169.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages whatsoever that occurred
prior to the date of the Settlement Agreement. The Company was not
able to comply with the due date for such payment by January 22,
2014. Therefore, the judgment against the Company can be enforced
without further notice
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
Our Annual Report on Form 10-K for the fiscal year ended
December 31, 2013 lists risk factors for the Company. There have
been no material changes from the risk factors as previously
disclosed in such Annual Report on Form 10-K.
ITEM 2. Unregistered Sales of Equity and Use of Proceeds
On February 23, 2014, Enova Systems, Inc, entered into
Subscription Agreements with various offshore investors to sell
approximately GBP 150,000 (approximately US$249,000) in gross
proceeds by a private subscription of 19,999,998 common shares to
be newly issued on the Alternative Investment Market of the London
Stock Exchange (the "AIM Exchange"). The common shares were issued
at a price of 0.0075 pence (approximately US$0.01per share) to
certain eligible offshore investors (the "Subscription"). In
connection with the Subscription, Enova entered into an Agreement
for the Provision of Receiving Agent Services (the "Agreement")
with Daniel Stewart & Company PLC (UK) for receiving agent
services. Daniel Stewart presently serves as the Nominated Adviser
for the listing of Enova's common shares on the AIM Exchange. The
newly issued common shares for the Subscription were issued in
three tranches of approximately GBP 50,000 each.
Daniel Stewart received an introducing agent's fee of 10% of the
aggregate funds raised pursuant to the subscription in addition to
reimbursement of expenses. Factoring in the commission, legal and
other expenses of the offering, Enova received approximately
US$223,000 in net proceeds.
The offer and sale of the shares were made pursuant to
Regulation S under the Securities Act of 1933, as amended (the
"Securities Act"). Among other things, each investor purchasing
shares of Enova's common stock in the offering represented that the
investor is not a United States person as defined in Regulation S.
In addition, neither Enova nor the receiving agent conducted any
selling efforts directed at the United States in connection with
the offering. All shares of common stock issued in the offering
included a restrictive legend indicating that the shares were
issued pursuant to Regulation S under the Securities Act and are
deemed to be "restricted securities." As a result, the purchasers
of such shares will not be able to resell the shares unless in
accordance with Regulation S, pursuant to a registration statement,
or upon reliance of an applicable exemption from registration under
the Securities Act. The shares to be sold pursuant to the
Subscription Agreements were not registered under the Securities
Act, and there is no obligation on the part of Enova to so register
such shares.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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