TIDMENVS
RNS Number : 5378X
Enova Systems,Inc(S)
20 November 2014
20 November 2014
ENOVA SYSTEMS, INC
("Enova" or "the Company")
Enova Reports 3rd 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 and nine month period ended 30 September 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
September
30,
2014
December
(unaudited) 31, 2013
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ 1,000
Inventories and supplies, net 368,000 427,000
Prepaid expenses and other current assets 7,000 42,000
------------ ------------
Total current assets 375,000 470,000
Property and equipment, net 51,000 80,000
------------ ------------
Total assets $ 426,000 $ 550,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 547,000 $ 642,000
Loans from employees 29,000 36,000
Deferred revenues 213,000 213,000
Accrued payroll and related expenses 208,000 194,000
Accrued loss for litigation settlement 2,014,000 2,014,000
Other accrued liabilities 426,000 294,000
Current portion of notes payable 40,000 40,000
------------ ------------
Total current liabilities 3,469,000 3,433,000
Accrued interest payable 1,461,000 1,401,000
Notes payable, net of current portion 1,238,000 1,238,000
------------ ------------
Total liabilities 6,176,000 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 September
30, 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 September
30, 2014 and December 31, 2013 1,094,000 1,094,000
Common Stock to be issued 553,000 528,000
Common Stock - no par value, 750,000,000 shares
authorized; 64,520,000 and 44,520,000 shares
issued and outstanding as of September 30,
2014 and December 31, 2013, respectively 145,735,000 145,512,000
Additional paid-in capital 9,613,000 9,595,000
Accumulated deficit (162,745,000) (162,251,000)
------------ ------------
Total stockholders' deficit (5,750,000) (5,522,000)
------------ ------------
Total liabilities and stockholders' deficit $ 426,000 $ 550,000
============ ============
See accompanying condensed notes to these financial
statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended September Nine Months Ended
30 September 30
------------------------------- ------------------------------
2014 2013 2014 2013
------------ ---------------- ------------ ---------------
Revenues $ - $ 140,000 $ - $ 425,000
Cost of revenues - 1,179,000 60,000 1,660,000
---------- --------------- ----------- --------------
Gross loss - (1,039,000) (60,000) (1,235,000)
---------- --------------- ----------- --------------
Operating expenses
Research and development - - - -
Selling, general &
administrative 87,000 216,000 342,000 754,000
---------- --------------- ----------- --------------
Total operating expenses 87,000 216,000 342,000 754,000
---------- --------------- ----------- --------------
Operating loss (87,000) (1,255,000) (402,000) (1,989,000)
---------- --------------- ----------- --------------
Other income and (expense)
Interest and other income
(expense) (20,000) (115,000) (92,000) (127,000)
---------- --------------- ----------- --------------
Total other income and
(expense) (20,000) (115,000) (92,000) (127,000)
---------- --------------- ----------- --------------
Net loss $ (107,000) $ (1,370,000) $ (494,000) $ (2,116,000)
========== =============== =========== ==============
Basic and diluted loss per
share $ (0.00) $ (0.03) $ (0.01) $ (0.05)
========== =============== =========== ==============
Weighted average number of
common
shares outstanding 64,520,000 44,520,000 58,659,000 44,520,000
========== =============== =========== ==============
Nine Months Ended
September 30
--------------------------------
Cash flows from operating activities: 2014 2013
------------------ -----------
Net loss $ (494,000) $(2,116,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Reserve for doubtful accounts - (46,000)
Inventory reserve 59,000 1,207,000
Depreciation and amortization 29,000 114,000
Loss on asset disposal - 4,000
Loss on asset impairment 32,000 45,000
Stock option expense 18,000 10,000
(Increase) decrease in:
Accounts receivable - 118,000
Inventory and supplies - 125,000
Prepaid expenses and other current assets 3,000 155,000
Long term receivables - 20,000
Increase (decrease) in:
Accounts payable (95,000) 85,000
Deferred revenues - 95,000
Accrued payroll and related expense 14,000 64,000
Other accrued liabilities 132,000 (38,000)
----------------- ----------
Accrued interest payable 60,000 62,000
----------------- ----------
Net cash used in operating activities (242,000) (96,000)
Cash flows from investing activities
----------------- ----------
Proceeds from the sale of fixed assets - 29,000
----------------- ----------
Net cash provided by investing activities - 29,000
Cash flows from financing activities:
Proceeds from bank overdraft 2,000
Net proceeds from the issuance of common stock 223,000 -
Proceeds from related party loans 18,000 19,000
----------------- ----------
Payment on notes payable - (11,000)
----------------- ----------
Net cash provided by financing activities 241,000 10,000
Net increase (decrease) in cash and cash equivalents (1,000) (57,000)
----------------- ----------
Cash and cash equivalents, beginning of period 1,000 57,000
================= ==========
Cash and cash equivalents, end of period $ - $ -
Supplemental Non-Cash Financing Activity:
Conversion of related party loans to Common
Stock $ 25,000 $ -
Supplemental disclosure of cash flow information:
Interest Paid $ 1,000
See accompanying condensed notes to these financial
statements.
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Company and its Business
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 $4.7 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 and nine
months ended September 30, 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 September 30, 2014, the
Company had an accumulated deficit of approximately $162.7 million,
cash and cash equivalents of $0, working capital of approximately
negative $3.1 million and shareholders' deficit of approximately
$5.75 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 September 30, 2014, the Company had $0 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 nine months ended
September 30, 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.
Nine Months Ended
September 30,
-----------------------
2014 2013
----------- ----------
Options to purchase common stock 8,891,000 5,210,000
Warrants to purchase common stock 11,250,000 11,250,000
Common shares to be issued for debt conversion 1,250,000 -
Series A and B preferred shares conversion 83,000 83,000
---------- ----------
Potential equivalent shares excluded 21,474,000 16,543,000
========== ==========
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:
September December
30, 31,
2014 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 (3,401,000) (3,342,000)
---------- ----------
$ 368,000 $ 427,000
========== ==========
The Company did not have production operations in the nine
months ended September 30, 2014. Inventory valuation adjustments
for the nine months ended September 30, 2014 and 2013 were $59,000
and $1,207,000, respectively.
4. Property and Equipment
Property and equipment consisted of the following at:
September December
30, 31,
2014 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
-------- --------
Gross assets 523,000 523,000
Less accumulated depreciation and amortization (472,000) (443,000)
-------- --------
Total $ 51,000 $ 80,000
======== ========
Depreciation and amortization expense was $29,000 and $114,000
for the nine months ended September 30, 2014 and 2013,
respectively, and within those total expenses, the amortization of
leasehold improvements was $0 and $22,000 for the nine months ended
September 30, 2014 and 2013, respectively. Depreciation and
amortization expense was $9,000 and $23,000 for the three months
ended September 30, 2014 and 2013, respectively, and within those
total expenses, the amortization of leasehold improvements was $0
for the three months ended September 30, 2014 and 2013. The
Company's headquarters lease expired on January 31, 2013 and the
balance of leasehold improvements was decreased to $0.
For the three and nine months ended September 30, 2013, fixed
assets with an original book value of $272,000 were exchanged in
settlement of vendor payables, two vehicles were sold and one
vehicle was repossessed. In addition, three vehicles were
repossessed in October 2013. For the three months ended September
30, 2013, the Company recorded a loss on the impairment of fixed
assets of $65,000 for the three vehicles repossessed in October.
For the nine months ended September 30, 2013, the Company recorded
proceeds from the sale of fixed assets of $29,000, a loss on the
impairment of fixed assets of $45,000 and a loss on the disposal of
fixed assets of $4,000. There was no impairment charge on fixed
assets recorded in the three and nine months ended September 30,
2014.
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following at:
September December
30, 31,
2014 2013
----------- --------
Accrued inventory received $ 10,000 $ 10,000
Accrued professional services 260,000 161,000
Accrued warranty 74,000 74,000
Other 43,000 49,000
------- -------
Total $ 387,000 $294,000
======= =======
Accrued warranty consisted of the following activities during
the nine months ended September 30:
2014 2013
------- ---------
Balance at beginning of year $74,000 $ 117,000
Accruals for warranties issued during the
period - 96,000
Warranty claims - (117,000)
------ --------
Balance at end of quarter $74,000 $ 96,000
====== ========
Accrued warranty consisted of the following activities during
the three months ended September 30:
2014 2013
------- --------
Balance at beginning of quarter $74,000 $111,000
Accruals for warranties issued during the
period - 39,000
Warranty claims - (54,000)
------ -------
Balance at end of quarter $74,000 $ 96,000
====== =======
6. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
September
30,
December
2014 31, 2013
---------- ----------
Secured note payable to Credit Managers Association
of California, bearing interest at prime plus
3% (6.25% as of September 30, 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 September 30, 2014 and December 31, 2013, the balance of
long term interest payable amounted to $1,461,000 and $1,401,000,
respectively, of which the Credit Managers Association of
California note amounted to $1,422,000 and $1,365,000,
respectively. Interest expense on notes payable amounted to
approximately $20,000 and $21,000 for the three months ended
September 30, 2014 and 2013, respectively. Interest expense on
notes payable amounted to approximately $60,000 and $64,000 for the
nine months ended September 30, 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 September 30, 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 September 30, 2014 and December 31, 2013, respectively.
7. Deferred Revenues
The Company has deferred $213,000 in revenue related to a
production contract at September 30, 2014 and December 31, 2013.
The Company's management does not expect it will be able to
complete the order in 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.
On May 23, 2014, Enova Systems, Inc. and John Micek, the
President and Chief Executive Officer of Enova, orally agreed that
Enova will sell to John Micek, and Mr. Micek agreed to purchase
from Enova, 1,250,000 shares of Enova's Common Stock at a purchase
price of US $0.02 per share in consideration of the conversion of
$25,000 in debt owed by Enova to Mr. Micek. As of September 30,
2014, the shares had not been issued.
Mr. Micek is an "accredited" investor (as such term is defined
under Regulation D promulgated by the Securities and Exchange
Commission ("SEC")). The Shares are expected to be sold in a
transaction exempt from the registration requirements under Section
5 of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Section 4(2) thereof and in reliance upon Rule 506 of
Regulation D promulgated by the SEC.
During the three and nine months ended September 30, 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 September 30, 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, 3,750,000 and 0 were granted in the
nine months ended September 30, 2014 and 2013 and 30,000 shares
were available for grant as of September 30, 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.
On May 23, 2014, the Board approved the grant to (x) John Micek
of an option to purchase 2,000,000 shares of the Common Stock of
Enova at an exercise price of $0.02 per share, (y) to each of the
other three Board members of Enova other than Mr. Micek of an
option to purchase 500,000 shares of the Common Stock of Enova at
an exercise price of $0.02 per share and (z) a contractor of an
option to purchase 250,000 shares of the Common Stock of Enova at
an exercise price of $0.02 per share. The vesting of all such
options was made conditional upon the Board approving, and Enova
entering into definitive agreements covering and thereafter
consummating, (w) a sale of Enova's equity for cash consideration
in an amount of no less than $1 Million in one transaction or a
series of related transactions or (x) a sale of all or
substantially all of Enova's assets or (y) the acquisition of Enova
by another entity by means of a merger, share exchange, tender
offer or other similar transaction or (z) the acquisition by Enova
of another entity by means of a merger, share exchange, tender
offer or other similar transaction, whereby the stockholders of
Enova prior to any such transaction under (y) or (z) no longer own
a majority of the voting stock of Enova after such transaction.
Concurrently with the grant of these options, the vesting
provisions of Mr. Micek's August 27, 2013, option grant previously
disclosed were modified to conform to the aforementioned vesting
criteria.
Stock-based compensation expense related to stock options was
$18,000 and $10,000 for the nine months ended September 30, 2014
and 2013, respectively. As of September 30, 2014, the total
compensation cost related to non-vested awards not yet recognized
is $58,000. 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 September 30, 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 3,750,000 $ 0.02 2.65 $ -
Exercised - $ - - $ -
Forfeited or Cancelled 69,000 $ 1.26 - $ -
--------- ------- ------------ ----------------
Outstanding at September 30, 2014 8,891,000 $ 0.07 2.23 $ -
========= ======= ============ ================
Exercisable at September 30, 2014 679,000 $ 0.63 2.11 $ -
========= ======= ============ ================
Vested and expected to vest (2) 8,891,000 $ 0.07 2.23 $ -
========= ======= ============ ================
(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,
2014 ranged from $0.02 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 nine months ended September 30,
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 3,750,000 $ 0.01
Vested (72,000) $ 0.07
Forfeited - $ -
--------- --- --------
Unvested balance at September 30, 2014 8,213,000 $ 0.01
========= === ========
The fair values of all stock options granted are estimated on
the date of grant using the Black-Scholes option-pricing model.
Options granted during the six months ended June 30, 2014 were
3,750,000. There were no options granted during the six months
ended June 30, 2013.
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 June 30, 2014:
Weighted
Number Weighted Average
of Average Remaining
Share Exercise Contractual
Options Price Life
------------- --------------- ------------------
Outstanding at December 31, 2013 111,250,000 $ 0.22 3.00
============ === ========== ==================
Granted - $ - -
Exercised - $ - -
Forfeited or Cancelled - $ - -
------------ --- ---------- ------------------
Outstanding at September 30, 2014 11,250,000 $ 0.22 2.25
============ === ========== ==================
Exercisable at September 30, 2014 11,250,000 $ 0.22 2.25
============ === ========== ==================
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 September 30, 2014
and December 31, 2013, respectively.
The Company's revenues are concentrated with few customers. The
Company did not have revenue for the nine months ended September
30, 2014, and for the three and nine months ended September 30,
2013, two customers represented 63% and 32% of gross revenues and
two customers represented 76% and 19% of gross revenues,
respectively.
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 work to refine 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 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, 2014, we had an accumulated deficit of
approximately $162.7 million, working capital of approximately
negative $3.1 million and shareholders' deficit of approximately
$5.75 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 September 30, 2014, the Company had $0 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 supplied 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 SEV 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 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 and Nine Months Ended September 30, 2014 compared to Three
and Nine Months Ended September 30, 2013
Third Quarter of Fiscal 2014 vs. Third Quarter of Fiscal
2013
As a % of
Revenues
Three Months Ended September
September 30, 30,
------------------------------------------------ ----------------------
2014 2013 % Change 2014 2013
-------------------- ------------ ---------- ----------- ---------
Revenues $ - $ 140,000 -100% n/a 100%
Cost of revenues - 1,179,000 -100% n/a 842%
------------------- ----------- ------ ----------- ---------
Gross loss - (1,039,000) -100% n/a -742%
Operating expenses
Research and
development - - - n/a 0%
Selling, general
&
administrative 87,000 216,000 -60% n/a 154%
------------------- ----------- ------ ----------- ---------
Total operating
expenses 87,000 216,000 -60% n/a 154%
------------------- ----------- ------ ----------- ---------
Operating loss (87000) (1,255,000) -83% n/a -896%
------------------- ----------- ------ ----------- ---------
Other income
(expense)
Interest and
other income
(expense) (20,000) (115,000) -83% n/a -82%
------------------- ----------- ------ ----------- ---------
Total other
income
(expense) (20,000) (115,000) -83% n/a -82%
------------------- ----------- ------ ----------- ---------
Net loss $ (107,000) $ (1,370,000) -92% n/a -979%
=================== =========== ====== =========== =========
First Nine Months of Fiscal 2014 vs. First Nine Months of Fiscal
2013
Nine Months Ended As a % of Revenues
September 30, September 30,
------------------------------------------------------ --------------------------
2014 2013 % Change 2014 2013
-------------------- ------------------ ---------- ------------ ------------
Revenues $ - $ 425,000 -100% n/a 100%
Cost of revenues 60,000 1,660,000 -96% n/a 391%
------------------- ----------------- ----- ------------ ------------
Gross loss (60,000) (1,235,000) -95% n/a -291%
Operating expenses
Research and
development - - - n/a 0%
Selling, general
&
administrative 342,000 754,000 -55% n/a -177%
------------------- ----------------- ----- ------------ ------------
Total operating
expenses 342,000 754,000 -55% n/a -177%
------------------- ----------------- ----- ------------ ------------
Operating loss (402,000) (1,989,000) -80% n/a -468%
------------------- ----------------- ----- ------------ ------------
Other income
(expense)
Interest and
other income
(expense) (92,000) (127,000) -28% n/a -30%
------------------- ----------------- ----- ------------ ------------
Total other
income
(expense) (92,000) (127,000) -28% n/a -30%
------------------- ----------------- ----- ------------ ------------
Net loss $ (494,000) $ (2,116000) -77% n/a -498%
=================== ================= ===== ============ ============
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 and nine
months ended September 30, 2014 compared to the same period in 2013
was mainly due to our inability to sustain production in 2014.
Revenues in the first nine 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 and nine
months ended September 30, 2014 decreased primarily due to the
reduction in our operations.
Gross Loss. The decrease in gross loss for the three and nine
months ended September 30, 2014 compared to the same period in the
prior year is primarily attributable to the decrease in inventory
valuation expenses incurred in the three and nine months ended
September 30, 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,
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, 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 continue to 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 and nine months ended September 30,
2014 increased compared to the same period in the prior year
primarily due to the timing of recording asset impairment charges
and income from the sale of test vehicles in the second quarter of
2013.
Net Loss. The decrease in the net loss for the three and nine
months ended September 30, 2014 compared to the same periods 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
nine months ended September 30, 2014 were financed from working
capital reserves and a capital raise in March 2014.
Net cash used in operating activities was $242,000 for the nine
months ended September 30, 2014, a decrease of $146,000 compared to
net cash used in operating activities of $96,000 for the nine
months ended September 30, 2013. Operating cash used in the first
nine months of 2014 decreased compared to the prior year period
primarily due to payments of accounts payable in the current year
and 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
$1,196,000 for the nine months ended September 30, 2014 as compared
to the same period in the prior year primarily due to decreased
inventory charges to write down the value of our inventory and
lower depreciation expense in 2014 resulting from termination of
our lease at our former headquarters in January 2013 and a 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 costs 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, 2014, the Company had $0 of cash and cash equivalents
compared to $1,000 as of December 31, 2013.
Net cash used in investing activities was $0 for the nine months
ended September 30, 2014, a decrease of $29,000 from net cash from
investing activities of $29,000 for the nine months ended September
30, 2013. The Company sold fixed assets in the second quarter of
2013 to settle payables with a vendor and to obtain operating cash.
The Company halted capital expenditures after the reduction in work
force in June 2012.
Net cash from financing activities was $241,000 for the nine
months ended September 30, 2014, an increase of $231,000 compared
to net cash used in financing activities of $10,000 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.
Net accounts receivable were $0 at September 30, 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 $368,000 as of September 30,
2014, a decrease of $59,000, or 14%, from $427,000 as of December
31, 2013. The Company's operations were halted in the first quarter
of 2014 due to the Company's lack of resources to complete customer
orders and the inventory reserve was increased by $59,000 to
approximately $3.4 million to reflect management's assessment of
inventory valuation.
Prepaid expenses and other current assets decreased by $35,000,
or 83%, to $7,000 at September 30, 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
September 30, 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 determined to
fully reserve the long-term accounts receivables as of December 31,
2013.
Property and equipment, net of depreciation, decreased by
$29,000, or 36%, to $51,000 at September 30, 2014 compared to a
balance of $80,000 at December 31, 2013. The decrease is primarily
due to depreciation expense of $29,000.
Accounts payable decreased by $95,000, or 15%, to $547,000 at
September 30, 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 decreased by $7,000, or 19%, to $29,000 at
September 30, 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, and a portion of the loans were repaid subsequent to the
equity funding in March 2014.
Deferred revenues were unchanged at $213,000 at September 30,
2014 and December 31, 2013, respectively. The Company's management
does not anticipate that funding can be obtained to complete the
order in 2014.
Accrued payroll and related expenses increased by $14,000, or
7%, to $208,000 at September 30, 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 nine months of 2014
resulting from the financial condition of the Company.
Accrued loss for litigation settlement was unchanged at
September 30, 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 $132,000, or 45%, to
$426,000 at September 30, 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 and equity exchange fees
incurred in the first nine months of 2014.
Accrued interest payable increased by $60,000, or 4%, to
$1,461,000 at September 30, 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 $1,422,000 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, 2014, the
Company had an accumulated deficit of approximately $162.7 million,
working capital of approximately negative $3.1 million and
shareholders' deficit of approximately $5.75 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 September 30, 2014, the Company had approximately $0 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 September 30, 2014. Based on that evaluation, our
management, including the Chief Executive Officer and Chief
Financial Officer, concluded that as of September 30, 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 September 30, 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 September 30, 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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