UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(_x_) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31 ,2004
or
(___) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From To .
------------ ---------------
Commission File No. 0-25184
ENOVA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3056150
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(State or other jurisdiction of (IRS employer identification
incorporation or organization) number)
19850 South Magellan Drive Torrance, CA 90502
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(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (310) 527-2800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (_X_) No (___)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of May 13, 2004, there were 396,575,000 shares of Common Stock, no par value,
2,800,000 shares of Series A Preferred Stock, no par value, and 1,217,000 shares
of Series B Preferred Stock, no par value, outstanding.
INDEX
ENOVA SYSTEMS, INC.
Page No.
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).........................................3
Balance Sheets:
March 31, 2004 and December 31, 2003.....................................3
Statements of Operations:
Three months ended March 31, 2004 and 2003...............................4
Statements of Cash Flows:
Three months ended March 31, 2004 and 2003...............................5
Notes to Financial Statements:
Three months ended March 31, 2004 and 2003...............................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................9
Item 3. Quantitative and Qualitative Disclosure about Market Risk...............17
Item 4. Control and Procedures..................................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................................18
Item 2. Changes in Securities and Use of Proceeds...............................18
Item 3. Defaults upon Senior Securities.........................................18
Item 4. Submission of Matters to a Vote of Security Holders.....................18
Item 5. Other Information.......................................................18
Item 6. Exhibits and Reports on Form 8-K........................................19
SIGNATURE ........................................................................20
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except for share and per share data)
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As of As of
March 31, 2004 December 31, 2003
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ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 587 $ 530
Accounts receivable, net of allowance of $595,000 each 958 803
Inventory 1,529 1,606
Stockholder receivable 8 8
Prepaids and other current assets 66 78
------------ ------------
Total Current Assets 3,148 3,025
PROPERTY, PLANT AND EQUIPMENT - NET 424 481
INVESTMENTS in JOINT VENTURE 916 960
OTHER ASSETS 376 404
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TOTAL ASSETS $ 4,864 $ 4,870
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LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITES:
Accounts payable $ 674 $ 768
Line of credit 117 120
Accrued payroll and related expense 122 120
Other accrued expenses 90 98
Current portion of notes payable and capital lease obligations 143 154
------------ ------------
Total Current Liabilities 1,146 1,260
ACCRUED INTEREST PAYABLE 1,184 1,122
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 0 5
NOTES PAYABLE, NET OF CURRENT PORTION 3,355 3,347
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TOTAL LIABILITIES $ 5,685 $ 5,734
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COMMITMENTS AND CONTINGENCIES 0 0
SHAREHOLDERS' DEFICIT:
Series A convertible preferred stock - No par value; 30,000,000 shares
authorized; 2,800,000 and 2,820,000 shares issued and outstanding
at 3/31/04 and 12/31/03 liquidating preference at $0.60 1,812 1,837
per share aggregating $1,680,000 and $1,682,400
Series B convertible preferred stock - No par value; 5,000,000 shares authorized;
1,217,000 shares issued and outstanding at 3/31/04 and 12/31/03 2,434 2,434
liquidating preference at $2.00 per share aggregating $2,434,000
Common Stock - No par value; 500,000,000 shares authorized; 380,144,000
and 378,591,000 shares issued and outstanding at 3/31/04 and 12/31/03 86,167 86,054
Common stock subscribed 176 60
Stock notes receivable (1,203) (1,203)
Additional paid-in capital 7,031 7,031
Accumulated deficit (97,238) (97,077)
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Total Shareholders' deficit (821) (864)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 4,864 $ 4,870
============ ============
Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date.
See notes to financial statements.
3
ENOVA SYSTEMS, INC.
INCOME and EXPENSE STATEMENTS
(Unaudited)
(In thousands, except for share and per share data)
--------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------------------
2004 2003
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NET REVENUES
Research and development contracts $ 436 $ 323
Production $ 672 $ 1,016
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$ 1,108 $ 1,339
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COST OF REVENUES
Research and development contracts 305 212
Production 353 765
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658 977
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GROSS MARGIN 450 362
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OPERATING EXPENSES:
Research & development 32 208
Engineering 96 280
Selling, general & administrative 353 485
Depreciation & amortization 85 82
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Total operating expenses 566 1,055
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NET OPERATING LOSS (116) (693)
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OTHER COSTS AND EXPENSES:
Interest and financing fees 64 55
Other (income)/expense (19) 0
Interest income 0 (5)
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Total other costs and expenses 45 50
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NET LOSS $ (161) $ (743)
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BASIC AND DILUTED NET LOSS
PER COMMON SHARE: $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 374,644,000 345,394,000
4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
----------------------------------------------------------------------------------------------------
Three Months Ended March 31,
-------------------------------
2004 2003
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OPERATIONS
Net loss $ (161) $ (743)
Adjustments to reconcile net loss to net cash used
by operating activities:
Change in allowance of uncollectible receivable 0 0
Depreciation and amortization 85 82
Equity in losses 44 0
Stock and stock options issued for services 16 0
Change in operating assets and liabilities:
Accounts receivable (155) (298)
Inventory 77 44
Stockholder receivable 0 0
Prepaids and other assets 12 3
Accounts payable and accrued expenses (38) (30)
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Net cash used by operating activities (120) (942)
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INVESTING:
Purchases of property, plant and equipment, net of disposals 0 (23)
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Net cash used by investing activities 0 (23)
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FINANCING:
Borrowing (repayments) on leases and notes payable (8) (9)
Borrowing on line of credit (3) 0
Proceeds from issuance of common stock and
exercise of stock options 188 0
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Net cash provided (used) by financing activities 177 (9)
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 57 (974)
CASH AND EQUIVALENTS:
Beginning of period 530 1,868
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End of period $ 587 $ 894
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5
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(UNAUDITED)
(In thousands)
--------------------------------------------------------------------------------
Three Months Ended March 31
---------------------------
2004 2003
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NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for services $ 16 $ 12
Conversion of Series A preferred stock to
common stock $ 25 $ --
6
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2004 and 2003
NOTE 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared from the
records of our company without audit and have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not contain all the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position at March 31, 2004 and the interim results
of operations and cash flows for the three months ended March 31, 2004 have been
included. The balance sheet at December 31, 2003, presented herein, has been
prepared from the audited financial statements of our company for the year then
ended.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. The March 31,
2004 and December 31, 2003 inventories are reported at market value. Inventories
have been valued on the basis that they would be used, converted and sold in the
normal course of business. Certain reclassifications have been made to the prior
periods financial statements to conform with the current periods presentation.
The amounts estimated for the above, in addition to other estimates not
specifically addressed, could differ from actual results; and the difference
could have a significant impact on the financial statements.
Accounting policies followed by us are described in Note 1 to the audited
financial statements for the fiscal year ended December 31, 2003. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted for purposes of the interim
financial statements. The financial statements should be read in conjunction
with the audited financial statements, including the notes thereto, for the year
ended December 31, 2003, which are included in our Form 10-K Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as filed
with the Securities and Exchange Commission.
Basic and diluted net loss per common share is computed using the weighted
average number of common shares outstanding. Since a loss from operations
exists, diluted earnings per share number is not presented because the inclusion
of common stock equivalents, consisting of Series A and B preferred stock,
unexercised stock options and warrants, would be anti-dilutive.
The results of operations for the three months ended March 31, 2004 presented
herein are not necessarily indicative of the results to be expected for the full
year.
7
NOTE 2 - Notes Payable, Long-Term Debt and Other Financing
Notes payable and long-term debt is comprised of the following (in thousands):
March 31, 2004 December 31, 2003
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(unaudited)
Secured subordinated promissory note - CMAC
as exclusive agent for Non-Qualified
Creditors; interest at 3% through 2001, 6% in
2002 and 2003, and then at prime plus 3%
thereafter through the date of maturity;
interest payments are made upon payment of
principal, with principal and interest due no
later than April 2016; with an interest in a
sinking fund escrow with a zero balance as of
December 31, 2003 and March 31, 2004. The
sinking fund escrow requires the Company to
fund the account with 10% of future equity
financing, including convertible debt
converted to equity, based upon approval of
the new investors per the terms of the note.
No additions were made to the sinking fund
with respect to the equity investment from
the accredited investors at the investors'
option. 3,332 3,332
Unsecured note payable 120 120
Secured note payable 23 26
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3,475 3,478
Less current maturities 120 131
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Total $ 3,355 $ 3,347
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8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the interim
financial statements and the notes thereto in Part I, Item I of this Quarterly
Report and with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's Annual report on Form 10-K for
the year ended December 31, 2003. The matters addressed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, with
the exception of the historical information presented contains certain
forward-looking statements involving risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks discussed in this
Item 2 and specifically discussed in this report under the heading "Certain
Factors That May Affect Future Results" following this Management's Discussion
and Analysis section, and elsewhere in this report.
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in the preparation of its financial statements in conformity with
accounting principles generally accepted in the United States. Actual results
could differ significantly from those estimates under different assumptions and
conditions. The Company believes that the following discussion addresses the
Company's most critical accounting policies, which are those that are most
important to the portrayal of the Company's financial condition and results. The
Company constantly re-evaluates these significant factors and makes adjustments
where facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the necessary estimates
inherent in the preparation of financial statements. Estimates and assumptions
include, but are not limited to, customer receivables, inventories, equity
investments, fixed asset lives, contingencies and litigation. The Company has
also chosen certain accounting policies when options were available, including:
o The first-in, first-out (FIFO) method to value our inventories;
o The intrinsic value method, or APB Opinion No. 25, to account for our
stock options;
o Review of customers' receivable to determine the need for an allowance
for credit losses based on estimates of customers' ability to pay. If
the financial condition of our customers were to deteriorate,
additional allowances may be required.
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 consolidated financial statements.
GENERAL
Enova Systems, Inc., a California Corporation ("Enova" or the "Company"), was
incorporated on July 30, 1976. The Company's fiscal year ends December 31. All
year references refer to fiscal years.
Enova believes it is a leader in the development and production of commercial
digital power management systems. Power management systems control and monitor
electric power in an automotive or commercial application such as an automobile
or a stand-alone power generator. Drive systems are comprised of an electric
motor, an electronics control unit and a gear unit which power an electric
vehicle. Hybrid systems, which are similar to pure electric drive systems,
contain an internal combustion engine in addition to the electric motor,
eliminating external recharging of the battery system. A fuel cell based system
9
is similar to a hybrid system, except that instead of an internal combustion
engine, a fuel cell is utilized as the power source. A fuel cell is a system
which combines hydrogen and oxygen in a chemical process to produce electricity.
Stationary power systems utilize similar components to those which are in a
mobile drive system in addition to other elements. These stationary systems are
effective as power-assist or back-up systems, alternative power, for
residential, commercial and industrial applications.
Enova develops and produces advanced software, firmware and hardware for
applications in these alternative power markets. Our focus is digital power
conversion, power management, and system integration, for two broad market
applications - vehicle power generation and stationary power generation.
Specifically, we develop, design and produce drive systems and related
components for electric, hybrid-electric, fuel cell and microturbine-powered
vehicles. We also develop, design and produce power management and power
conversion components for stationary distributed power generation systems. These
stationary applications can employ fuel cells, microturbines, or advanced
batteries for power storage and generation. Additionally, we perform research
and development to augment and support others' and our own related product
development efforts.
Our product development strategy is to design and introduce to market
successively advanced products, each based on our core technical competencies.
In each of our product / market segments, we provide products and services to
leverage our core competencies in digital power management, power conversion and
system integration. We believe that the underlying technical requirements shared
among the market segments will allow us to more quickly transition from one
emerging market to the next, with the goal of capturing early market share.
The Company continues to receive much greater recognition from both governmental
and private industry with regards to U.S. military applications of its hybrid
drive systems and fuel cell power management technologies. During the first
quarter of 2004, Enova expanded its market reach into China, capturing new
customers Shenzhen Minghua Environmental Protection Vehicle Co., Ltd. and
Tsinghua University of China and entering into negotiations with several other
bus manufacturers for sales of Panther 120kW and advanced parallel hybrid drive
systems for implementation for the 2008 Beijing Summer Olympics. Management
believes that current negotiations with these will result in development and
production contracts during 2004 and beyond; however at this time; there are no
assurances that such additional contracts will be consummated.
During the quarter ended March 31, 2004, we continued to develop and produce
electric and hybrid electric drive systems and components for Mack/Volvo, Ford
Motor Company (Ford), Wright Bus and Eneco of the United Kingdom, EcoPower
Technology of Italy, Tomoe of Japan and several other domestic and international
vehicle and bus manufacturers. Our various electric and hybrid-electric drive
systems, power management and power conversion systems are being used in
applications including Class 8 trucks, monorail systems, transit buses and
industrial vehicles. Enova has furthered its development and production of
systems for both mobile and stationary fuel cell powered systems with major
companies such as Ford, ChevronTexaco and Hydrogenics, a fuel cell developer in
Canada.
Heavy-Duty Drive Systems - Buses, Trucks, Vans and Other Industrial Vehicle
Applications
--------------------------------------------------------------------------------
Enova's primary market focus continues to center around the heavy-duty drive
systems sector for multiple vehicle and marine applications. We believe
series-hybrid and parallel hybrid heavy-duty drive system sales offer Enova the
greatest return on investment in both the short and long term. Although this
market sector has developed more slowly than anticipated, management believes
that this area will see significant growth over the next several years.
10
Our PantherTM 120kW and PantherTM 240kW drive systems were developed completely
in-house and are in production and operating in global markets giving Enova a
potential edge on other competitors in this sector. As the Company penetrates
more market areas, we are continually refining and optimizing both our market
strategy and our product line to maintain our leading edge in power management
and conversion systems for mobile applications.
During the first quarter of 2004, we sold six PantherTM 120kW drive systems to
two new customers in China, Shenzhen Minghua Environmental Protection Vehicle
Co., Ltd. for diesel-hybrid buses and Tsinghua University for fuel cell hybrid
bus development. China intends to use hybrid-electric buses to shuttle athletes
and guests at the 2008 Beijing Summer Olympics and the 2010 World's Expo in
Shanghai. China is seeking up to 1,000 full-size hybrid-electric buses to
support these global events. Tsinghua is the premier research university in
China, its automotive engineering department selecting Enova's drive systems for
its government funded hybrid fuel cell bus development. Additionally, we are in
negotiations to sell our PantherTM 120kW drive systems and other hybrid-electric
components to other potential China-based bus manufacturers in 2004 and beyond.
At this time, however, there are no assurances that such additional orders will
be forthcoming.
In Japan, Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. is
developing many new applications for our electric and hybrid-electric drive
systems. During the first quarter of 2004, Tomoe integrated our PantherTM 120kw
drive system into another of its industrial applications, a mine tunnel crawler.
This crawler is an ideal employment of Enova's technology, benefiting from its
high torque, low emissions and increased fuel efficiency. In the past few years,
Enova successfully integrated its PantherTM drive systems into Tomoe's
heavy-duty Isuzu dump truck application, three passenger trams and the mine
tunnel crawler. The three Tomoe passenger trams are currently in service in
Okinawa. Tomoe and Enova continue to develop other commercial and industrial
applications for our drive systems including potential light rail applications.
Although we anticipate additional orders for these systems in 2004 and beyond,
there are no assurances that such additional orders will be forthcoming.
Wrights Environment, a division of Wrights Bus, one of the largest low-floor bus
manufacturers in the United Kingdom, increased its volume of hybrid electric
PantherTM 120kW drive systems, ordering an additional four drive systems in the
first quarter of 2004 as well as one of our PantherTM 240kW drive systems.
Additionally, Wright Bus has agreed to partially fund development of our diesel
generator system for diesel engines compatible with their driveline. Such
development is scheduled to commence in the second half of 2004. Wrights has
notified us of additional purchase requirements for the latter half of 2004. At
this time, however, there are no assurances that such additional orders will be
forthcoming.
EcoPower Technology of Italy continues to purchase components for its hybrid
electric drive systems during the first quarter of 2004 for service and
maintenance parts for its fleet of buses powered by PantherTM 120kw drive
systems. To date, we have sold 42 drive systems to EcoPower forming one of the
largest fleets of hybrid buses in the world. EcoPower is one of the largest
integrators of medium size transit buses for the European shuttle bus market,
with key customers in five Italian cities namely Turin, Genoa, Brescia, Ferrara
and Vicenza. EcoPower has notified Enova of its requirements for additional
drive systems in 2004, however, there are no assurances that such additional
orders will be forthcoming.
Additionally, we are in discussions with other bus manufacturers and industrial,
commercial and military vehicle manufacturers regarding the purchase of our
heavy-duty, high performance, 240kW drive systems in 2004. There are no
assurances, however, that these discussions will result in any sales of the
PantherTM 240kW or 120kW drive systems.
11
Light-Duty Drive Systems - Automobiles and Delivery vehicles
------------------------------------------------------------
Our 90kW controller, motor and gear unit is utilized in light duty vehicles such
as midsize automobiles and delivery vehicles. The topology of this system is
being adapted to also be utilized as a parallel hybrid motor and controller
system. We are beginning to receive more interest in our light-duty systems from
both European and Asian customers.
Eneco of the United Kingdom, a vehicle integrator which utilizes Enova's
PantherTM 120kW drive systems in its hybrid bus applications, purchased two
PantherTM 90kW drive systems for integration into delivery vans. Eneco plans to
order a total of eight 90kw systems as well as additional PantherTM 120kW
systems for its bus programs. At this time, however, there are no assurances
that such additional orders will be forthcoming.
Enova's Hawaii division completed its upgrade of the remaining two S-10 trucks
in the City of Honolulu's fleet to our Panther 90kW drive system during the
first quarter of 2004. We are discussing additional vehicle upgrades with
several local and State agencies in Hawaii.
We continue to cross-sell our systems to new and current customers in the light
and medium duty vehicle markets, both domestically and globally.
Fuel Cell Technologies
----------------------
The High Voltage Energy Converter (HVEC) development program with Ford Motor
Company for their fuel cell vehicle was essentially completed in 2003. This
converter is a key component in Ford's Focus Fuel Cell Vehicle (FCV) which
utilizes the Ballard fuel cell system. It converts high voltage power from the
fuel cell into a lower voltage for use by the drive system and electronic
accessories. Enova delivered 36 HVEC production systems to Ford in the first
quarter of 2004 valued at approximately $410,000. These systems will be
integrated into the Ford Focus FCV which will be part of an evaluation program
into be implemented by Ford later in 2004. There is a potential for additional
production orders from Ford in 2004; however at this time, there are no
assurances that such additional orders will be forthcoming.
Furthermore, we are applying the technology and components derived from this
program to other applications. The HVEC is a critical component of our Fuel Cell
bus programs, noted below in development programs, and other fuel cell powered
systems such as the Hyundai fuel cell vehicle noted below under research and
development programs.
Enova's fuel cell enabling components are part of the proposed fleets of fuel
cell vehicles being utilized by both Ford Motor Company - the Ford Focus FCV-
and Hyundai Motor Company - the Hyundai Tucson fuel cell hybrid electric vehicle
- in response to the U.S. Department of Energy's solicitation, entitled
"Controlled Hydrogen Fleet and Infrastructure Demonstration and Validation
Project." This government funded project will last over five years, commencing
in late 2004, evaluating the economic and performance feasibility of fuel cell
vehicles and infrastructure across the U.S.
The Company will continue to explore new applications for this versatile
technology in both mobile and stationary systems.
12
Research and Development Programs
---------------------------------
We are aggressively pursuing several government and commercially sponsored
development programs for both ground and marine heavy-duty drive system
applications.
Our program with Mack Truck, Inc., Powertrain division - a unit of The Volvo
Group, Sweden, for the development and manufacture of a motor controller,
electric motor and battery management systems for a new parallel hybrid drive
system continues on schedule. The new parallel hybrid vehicle program is part of
the Air Force's efforts to improve efficiency, reduce fuel and maintenance
costs, provide re-generative brake energy and reduce emissions. The refueler
fleet consists of approximately 300 vehicles and, upon successful completion and
evaluation of the refueler vehicle, there is the potential for additional
upgrades to the parallel hybrid drive system. As part of the program, Mack
Trucks will also evaluate the applicability of the drive system to commercial
vehicle commencing with its Class 8 Refuse Hauler. Mack Trucks currently
produces approximately 3,000 refuse vehicles per annum for major customers such
as Waste Management. This development program is anticipated to be completed in
late 2004 followed by an evaluation period of approximately three to six months.
The program generated $75,000 in revenues for us in the first quarter of 2004.
This program has opened several avenues within Mack and Volvo for Enova to
develop and manufacture advanced drive system components. However at this time,
there are no assurances that such additional orders will be forthcoming.
Our development contract, with EDO Corporation of New York for the design and
fabrication of a high voltage DC-DC power conversion system utilizing a Capstone
microturbine as the primary power source for the U.S. Navy unmanned minesweeper
project, also continues to progress during the first quarter of 2004. The
electronics package will include Enova's advanced power components including a
new, enhanced 50V, 700A DC-DC power converter, our Battery Care Unit and Hybrid
Control Unit which will power the minesweeper's electromagnetic detection
system. Our power management and conversion system will be used to provide
on-board power to other accessories on the platform. We believe that the
aggregate value of the program will be approximately $420,000, of which $188,000
was billed in the first quarter of 2004. Although this program also has the
potential for additional system sales following the demonstration phase, there
are no assurances that such additional orders will be forthcoming.
The all-electric Hyundai Santa Fe SUV demonstration project in Honolulu Hawaii
has been extended for another two years for three of the vehicles. Fast-charging
capabilities and performance will be the primary focus of this continued
evaluation. This is a continuation of the State of Hawaii and Hyundai Motor
Company's program for pure electric vehicle performance.
Enova continues its development for Hyundai Motor Company of the fuel cell power
management and conversion components for Hyundai's latest fuel cell hybrid
electric vehicle, the Tucson, which was unveiled at the Geneva Auto Show in
March 2004. Enova is developing the next generation hybrid-electric drive-train,
motor and control unit based on its prior development work on both light and
heavy-duty power-trains for both electric and hybrid-electric vehicle platforms.
Enova is working in conjunction with UTC Fuel Cells, part of the UTC Power unit
of United Technologies Corporation, to develop the power electronics for this
vehicle. This program will continue through the second quarter of 2004. Although
we believe there is potential for further production of these drive system
components in late 2004, there can be no assurances at this time that such
orders will be realized.
Several other programs are in discussion in conjunction with the U.S. Air Force,
and several other government agencies and private corporations. We anticipate
finalizing these contracts in the second half of 2004. There can be no
assurances at this time, however, that such contracts will be realized.
13
We intend to establish new development programs with the Hawaii High Technology
Development Corporation in mobile and marine applications as well as other state
and federal government agencies as funding becomes available.
Stationary Power Applications
-----------------------------
Enova continues to attract new partners and customers from both fuel cell
manufacturers and petroleum companies. It is our belief that utilizing our power
management systems for stationary applications for fuel cells will open new
markets for our Company.
Our process controller for ChevronTexaco Technology Ventures (CTTV) for their
fuel reformer for a stationary fuel cell application is currently in test and
evaluation as it is integrated into CTTV's overall systems.
We believe the stationary power market will play a role in our future. We
continue to pursue alliances with leading manufacturers in this area. There are,
however, no assurances that this market will develop as anticipated or that such
alliances will occur.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced cash flow shortages due to operating losses primarily
attributable to research, development, marketing and other costs associated with
our strategic plan as an international manufacturer and supplier of electric
propulsion and power management systems and components. Cash flows from
operations have not been sufficient to meet our obligations. Therefore, we have
had to raise funds through several financing transactions. At least until we
reach breakeven volume in sales and develop and/or acquire the capability to
manufacture and sell our products profitably, we will need to continue to rely
on cash from external financing sources. In the first quarter of 2004, Enova
entered into several stock purchase agreements to issue 16,250,000 shares of our
common stock through a private placement offering at $0.12 per share for a total
cash purchase of $1,950,000. The funds were received and the shares were issued
in April 2004. These investors represented that they were accredited investors.
We relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933, as amended, for the exemption from registration of the sale of such
shares. Enova continues to seek additional investment capital to fund its
operations, development and expansion plans. As of May 12, 2004, there were no
other firm commitments. Enova also has a commitment from Hyundai Heavy
Industries to invest, in June 2004, an additional $1,500,000 in Enova under the
same terms as the initial investment, subject to stock price adjustments, in
accordance with the terms of the Joint Venture Agreement.
During the three months ended March 31, 2004, we spent $120,000 in cash on
operating activities to fund our net loss of $161,000 resulting from factors
explained in the following section of this discussion and analysis. Accounts
receivable increased by $155,000 from December 31, 2003 balances as the Company
billed for development contracts and production sales primarily for the Ford
JVEC program. Inventory decreased by $77,000 from December 31, 2003 to March 31,
2004 as the Company worked down inventories from sales of production systems.
Current liabilities decreased by a net of $38,000 from December 31, 2003 to
March 31, 2004 due primarily to reductions of outstanding vendor payables
primarily due Hyundai Heavy Industries in connection with additional power
management and conversion component inventory and Hyundai Autonet for materials
associated with the terminated Ballard/Ford Th!nk city program.
Capital lease obligations decreased by $8,000 during the three months ended
March 31, 2004, from December 31, 2003, also due to scheduled payments of these
liabilities.
14
Interest accruing on notes payable increased by $62,000 for the three months
ended March 31, 2004.
The operations of the Company during the first quarter of fiscal 2004 were
financed primarily by the funds received on engineering contracts and sales of
drive system components as well as cash reserves provided by equity financings.
It is management's intention to continue to support current operations through
sales of products and engineering contracts, as well as to seek additional
financing through private placements and other means to increase inventory
reserves and to continue internal research and development.
The future unavailability or inadequacy of financing to meet future needs could
force the Company to delay, modify, suspend or cease some or all aspects of its
planned operations this year.
RESULTS OF OPERATIONS
Net revenues for the three months ending March 31, 2004 were $1,108,000 as
compared to $1,339,000 for the corresponding period in 2003. Net production
sales for the quarter ended March 31, 2004 decreased to $672,000 from $1,016,000
in the same period in 2003. The decrease in production revenues is a result of
the overall slowdown in heavy-duty alternative fuel drive system sales as
manufacturers assess the various new types of systems on the market. There has
been a greater shift to parallel hybrid type systems, however, as yet, no
particular type of systems has gained a major foothold. Management's strategy,
in this regard, is to provide a dual path approach in offering both a series and
parallel hybrid drive systems solution commencing in 2004. To offset this
temporary decline in production sales, the Company is aggressively pursuing
privately and governmental funded development programs. This allows the Company
to increase its revenue base, form new alliances with major OEMs and participate
in the latest trends in alternative fuel technologies. Research and development
revenues increased to $436,000 from $323,000 during the same period in 2003.
Research and development revenues are a result of engineering services for the
Mack/Volvo hybrid drive system, the EDO minesweeper project and the HEVDP Hickam
fuel cell bus program.
Cost of revenues for the three months ended March 31, 2004 decreased to $658,000
compared to cost of revenues of $977,000 for the same three-month period in
2003. The decrease in cost of sales is directly attributable to lower sales
volumes for the quarter.
Internal research, development and engineering expenses decreased in the three
months ended March 31, 2004 to $128,000 as compared with $488,000 in the same
period in 2003. Due to an increase in externally funded development programs and
the decrease in the Company's workforce, Enova has allocated less of its own
funds to new product development. Enova continues to allocate increased
resources to the development of its diesel generation motor, upgraded
proprietary control software, enhanced DC-DC converters and advanced digital
inverters and other power management firmware. The Company is utilizing external
funding, however, for a greater percentage of these development costs.
Selling, general and administrative expenses decreased $132,000 to $353,000 for
the three months ended March 31, 2004 from the previous year's comparable
period. The decrease is a direct result of management's cost reduction
strategies which the Company will strive to maintain in 2004 in its efforts to
achieve profitability, although management cannot assure that profitability will
be achieved.
Interest and financing fees remained relatively constant at approximately
$64,000 for the first quarter of 2004, up slightly from the same period in 2003
due to an increase in the interest rate charged per the terms of our long term
note.
We incurred a loss from continuing operations of $161,000 in the first quarter
of 2004 compared to a loss of $743,000 in the first quarter of 2003 which
represents a 78% reduction in loss. As noted above, this decrease was primarily
15
due to aggressive cost reduction strategies implemented by management and
workforce restructurings. By increasing sales revenues while maintaining these
cost management strategies, the Company believes it will be able to reduce its
annual loss from operations as compared with prior years results; however,
management cannot assure that these results will be achieved.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements concerning our existing and
future products, markets, expenses, revenues, liquidity, performance and cash
needs as well as our plans and strategies. Forward-looking statements may be
identified by the use of terminology such as "may," "anticipate," "estimate,"
"plans," "expects," "believes," "will," "potential" and by other comparable
terminology or the negative of any of the foregoing. These forward-looking
statements involve risks and uncertainties and are based on current management's
expectations and we are not obligated to update this information. Many factors
could cause actual results and events to differ significantly from the results
anticipated by us and described in these forward looking statements including,
but not limited to, the following risk factors.
Net Operating Losses. We experienced recurring losses from operations and had an
accumulated deficit of $97,238,000 at March 31, 2004. There is no assurance,
however, that any net operating losses will be available to us in the future as
an offset against future profits for income tax purposes.
Continued Losses. For the three months ended March 31, 2004 and 2003, we had
losses from continuing operations of $161,000 and $743,000 respectively on sales
of $1,108,000 and $1,339,000, respectively.
Nature of Industry. The mobile and stationary power markets, including electric
vehicle and hybrid electric vehicles, continue to be subject to rapid
technological change. Most of the major domestic and foreign automobile
manufacturers: (1) have already produced electric and hybrid vehicles, and/or
(2) have developed improved electric storage, propulsion and control systems,
and/or (3) are now entering or have entered into production, while continuing to
improve technology or incorporate newer technology. Various companies are also
developing improved electric storage, propulsion and control systems. In
addition, the stationary power market is still in its infancy. A number of
established energy companies are developing new technologies. Cost-effective
methods to reduce price per kilowatt have yet to be established and the
stationary power market is not yet viable.
Our current products are designed for use with, and are dependent upon, existing
technology. As technologies change, and subject to our limited available
resources, we plan to upgrade or adapt our products in order to continue to
provide products with the latest technology. We cannot assure you, however, that
we will be able to avoid technological obsolescence, that the market for our
products will not ultimately be dominated by technologies other than ours, or
that we will be able to adapt to changes in or create "leading-edge" technology.
In addition, further proprietary technological development by others could
prohibit us from using our own technology.
Changed Legislative Climate. Our industry is affected by political and
legislative changes. In recent years there has been significant public pressure
to enact legislation in the United States and abroad to reduce or eliminate
automobile pollution. Although states such as California have enacted such
legislation, we cannot assure you that there will not be further legislation
enacted changing current requirements or that current legislation or state
mandates will not be repealed or amended, or that a different form of zero
emission or low emission vehicle will not be invented, developed and produced,
and achieve greater market acceptance than electric or hybrid electric vehicles.
Extensions, modifications or reductions of current federal and state
legislation, mandates and potential tax incentives could also adversely affect
our business prospects if implemented.
16
Because vehicles powered by internal combustion engines cause pollution, there
has been significant public pressure in Europe and Asia, and enacted or pending
legislation in the United States at the federal level and in certain states, to
promote or mandate the use of vehicles with no tailpipe emissions ("zero
emission vehicles") or reduced tailpipe emissions ("low emission vehicles").
Legislation requiring or promoting zero or low emission vehicles is necessary to
create a significant market for electric vehicles. The California Air Resources
Board (CARB) is continuing to modify its regulations regarding its mandatory
limits for zero emission and low emission vehicles. Furthermore, several car
manufacturers have challenged these mandates in court and have obtained
injunctions to delay these mandates.
Our products are subject to federal, state, local and foreign laws and
regulations, governing, among other things, emissions as well as laws relating
to occupational health and safety. Regulatory agencies may impose special
requirements for implementation and operation of our products or may
significantly impact or even eliminate some of our target markets. We may incur
material costs or liabilities in complying with government regulations. In
addition, potentially significant expenditures could be required in order to
comply with evolving environmental and health and safety laws, regulations and
requirements that may be adopted or imposed in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), an evaluation was carried out by the Company's President, Chief
Executive Officer and its acting Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
(as defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of the
end of the quarter ended March 31, 2004. Based upon that evaluation of these
disclosure controls and procedures, the President, Chief Executive Officer and
acting Chief Financial Officer concluded that the disclosure controls and
procedures were effective as of the end of the quarter ended March 31, 2004 to
ensure that material information relating to the Company was made known to him
particularly during the period in which this quarterly report on Form 10-Q was
being prepared.
Changes in internal controls over financial reporting.
There was not any change in the Company's internal control over financial
reporting that occurred during the quarter ended March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We may from time to time become a party to various legal proceedings arising in
the ordinary course of business. As of May 12, 2004, the Company was not
involved in any legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
In the first quarter of 2004, Enova entered into several stock purchase
agreements to issue 16,250,000 shares of our common stock through a private
placement offering at $0.12 per share for a total cash purchase of $1,950,000.
The funds were received and the shares were issued in April 2004. These
investors represented that they were accredited investors. We relied on Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for
the exemption from registration of the sale of such shares.
Pursuant to an agreement approved by the Board of Directors and its Audit
Committee, a finder's fee of $92,500 was paid, through the issuance of
restricted shares of common stock in Enova, totaling 608,553 shares at a price
of $0.15 per share, in conjunction with this private placement funding to The
Global Value Investment Portfolio Management Pte Ltd, a Singapore Company which
is substantially owned by two affiliated parties: Anthony Rawlinson, Chairman of
the Board of our Company and Borl partnership, owned by Boris Liberman Family
Trusts, which is also affiliated with Jagen Pty Ltd., a large affiliate
shareholder in Enova.
During the three months ended March 31, 2004, the Company has issued or accrued
common stock of Enova Systems to the non-executive board directors in accordance
with the September 1999 Board of Directors compensation package for outside
directors. For each meeting attended in person, each outside director is to
receive $1,000 in cash and $2,000 of stock valued on the date of the meeting at
the average of the closing ask and bid prices; for each telephonic Board
meeting, each outside director is to receive $250 in cash and $250 of stock
valued on the date of the meeting at the average of the closing ask and bid
prices; for each meeting of a Board committee attended in person, the committee
chairperson is to receive $500 in cash and $500 of stock valued on the date of
the meeting at the average of the closing ask and bid prices. As of January
2002, this package was amended to include like compensation of $500 in cash and
$500 in stock to all committee members in attendance at each committee meeting.
During the three months ended March 31, 2004, 114,286 shares of common stock
were issued to the Board of Directors at a price of $0.14 per share for full
board meetings and committee meetings during that period. As of March 31, 2004,
2,952,814 shares had been issued under the above compensation plan for
Directors.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
--------
10.19* Form of Stock Purchase Agreement dated March 30, 2004 between
Registrant and various investors.
10.20* Form of Registration Rights Agreement dated March 30, 2004
between Registrant and various investors.
31.1* Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act Of 2002.
31.2* Certification of Acting Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification Pursuant to 18 U.S.C. Section 1350.
* - attached herewith
(b) Reports on Form 8-K
-------------------
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2004
ENOVA SYSTEMS, INC.
(Registrant)
/s/ LARRY B. LOMBARD
----------------------------------------------------
By: Larry B. Lombard, Acting Chief Financial Officer
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