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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file no. 1-33001
ENOVA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
1560 West 190th Street, Torrance, California 90501
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
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 R No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R
As of April 30, 2012, there were 44,317,330 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
See accompanying notes to these financial statements.
NOTES TO FINANCIAL STATEMENTS
Enova Systems, Inc., (“Enova”, “We” or “the Company”), a California corporation, was incorporated in July 1976, and trades on the NYSE Amex Equities under the trading symbol “ENA” and on the London Stock Exchange under the symbol “ENV” or “ENVS”. The Company is a globally recognized leader as a supplier of efficient, environmentally-friendly digital power components and systems products, in conjunction with associated engineering services. The Company’s core competencies are focused on the commercialization of power management and conversion systems for mobile and stationary applications.
Basis of Presentation — Interim Financial Statements
The financial information as of and for the three months ended March 31, 2012 and 2011 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair statement of its financial position at such dates and the operating results and cash flows for those periods. The year-end balance sheet data was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules or regulations; however, the Company believes the disclosures made are adequate to make the information presented not misleading.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions are adequate, actual results could differ from the estimates and assumptions used.
The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the fiscal year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K for the year then ended.
On April 17, 2112, the Company received a notice from the NYSE Amex LLC (the “Exchange”) indicating that it is not in compliance with continued listing standards as set forth in Part 10 Section 1003(a)(iii) of the Exchange’s Company Guide with stockholders’ equity of less than $6,000,000 and losses from continuing operations and net losses in five consecutive fiscal years. The Company is taking steps to prepare a plan for submission to the Exchange by May 17, 2012 to regain compliance with the continued listing standards of the Exchange. Per the Notice, if the Company does not submit a plan or the plan is not accepted by the Exchange, the Company will become subject to delisting proceedings. Furthermore, if the plan is accepted but the Company is not in compliance with the continued listing standards of the Company Guide by October 15, 2013 or if the Company is not making progress consistent with the plan, the Exchange staff will initiate delisting procedures as appropriate. In such event, the Company may appeal an Exchange staff determination to initiate delisting proceedings in accordance with Section 1010 and Part 12 of the Company Guide.
Liquidity and Going Concern
To date, the Company has incurred recurring net losses and negative cash flows from operations. At March 31, 2012, the Company had an accumulated deficit of approximately $153.3 million, working capital of approximately $4.9 million and shareholders’ equity of approximately $3.2 million. Until the Company can generate significant cash from its operations, the Company expects to continue to fund its operations with existing cash resources, proceeds from one or more private placement agreements, as well as potentially through debt financing or the sale of equity securities. However, the Company may not be successful in obtaining additional funding. In addition, the Company cannot be sure that its existing cash and investment resources will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or its stockholders.
Our ongoing operations and anticipated growth will require us to make necessary investments in human and production resources, regulatory compliance, as well as sales and marketing efforts. We do not currently have adequate internal liquidity to meet these objectives in the long term. To do so, we will need to continue to look for partnering opportunities and other external sources of liquidity, including the public and private financial markets and strategic partners. Having insufficient funds may require the Company to delay or potentially eliminate some or all of its development programs, relinquish some or even all rights to product candidates at an earlier stage of development or negotiate less favorable terms than it would otherwise choose. Failure to obtain adequate financing also may adversely affect the launch of the Company’s product candidates or its ability to continue in business. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations, as well as covenants and specific financial ratios that may restrict its ability to operate its business.
In October 2011, we launched an expense reduction program designed to improve our cost structure, which included reductions in our employee headcount. We have continued to closely scrutinize our cost structure in 2012 to reduce ongoing operating costs. Market acceptance of our products in sufficiently profitable production volume is closely tied to the development of a reliable and cost effective battery solution by the industry. Further delays in battery availability, in conjunction with unanticipated delays in OEM acceptance, could result in further actions by Enova to focus on cash management.
We have also accessed the capital markets to obtain additional operating funds. In December 2011, we raised approximately $1,245,000, net of financing costs of $442,500 through an equity issuance to certain accredited investors, which was disclosed in our Form 10-K filed on March 29, 2012. In addition, as summarized in the liquidity discussion in our Management Discussion and Analysis and in Note 12 “Subsequent Events” of this Form 10-Q, we entered into two Purchase Agreements with Lincoln Park Capital Fund in April to issue up $10,000,000 in shares of our common stock and received gross proceeds of $250,000 from the initial purchase of shares of Common Stock from Lincoln Park.
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.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Significant Accounting Policies
The accounting and reporting policies of the Company conform to US GAAP. There have been no significant changes in the Company's significant accounting policies during the three ended March 31, 2012 compared to what was previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
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:
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.
The Company recognizes revenues as earned. Amounts billed in advance of the period in which service is rendered are recorded as a liability under deferred revenues. The Company has entered into several production and development contracts with customers. The Company has evaluated these contracts, ascertained the specific revenue generating activities of each contract, and established the units of accounting for each activity. Revenue on these units of accounting is not recognized until a) there is persuasive evidence of the existence of a contract, b) the service has been rendered and delivery has occurred, c) there is a fixed and determinable price, and d) collectability is reasonable assured.
The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which revenue is recognized. Our products are generally warranted to be free of defects in materials and workmanship for a period of 12 to 24 months from the date of installation, subject to standard limitations for equipment that has been altered by other than Enova Systems personnel and equipment which has been subject to negligent use. Warranty provisions are based on past experience of product returns, number of units repaired and our historical warranty incidence over the past twenty-four month period. The warranty liability is evaluated on an ongoing basis for adequacy and may be adjusted as additional information regarding expected warranty costs becomes known.
Stock Based Compensation
We measure the compensation cost for stock-based awards classified as equity at their fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest, net of estimated forfeitures.
See Note 9 Stock Options for further information on stock-based compensation expense.
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:
Inventory write-offs were $15,000 and $63,000 for the three months ended March 31, 2012 and 2011, respectively.
Property and equipment consisted of the following at:
Depreciation and amortization expense was $119,000 and $124,000 for the three months ended March 30, 2012 and 2011, respectively, and within those total expenses, the amortization of leasehold improvements was $66,000 for the three months ended March 31, 2012 and 2011, respectively.
Other accrued liabilities consisted of the following at:
Accrued warranty consisted of the following activities during the three months ended March 31:
Notes payable consisted of the following at:
As of March 31, 2012 and December 31, 2011, the balance of long term interest payable with respect to the Credit Managers Association of California note amounted to $1,257,000 and $1,237,000, respectively. Interest expense on notes payable amounted to $22,000 during each of the three months ended March 31, 2012 and 2011, respectively.
On June 30, 2010, the Company entered into a secured a revolving credit facility with a financial institution for $200,000 which was secured by a $200,000 certificate of deposit. The facility is for a period of 3 years and 6 months from July 1, 2010 to December 31, 2013. The interest rate on a drawdown from the facility is the certificate of deposit rate plus 1.25% with interest payable monthly and the principal due at maturity. The financial institution also renewed the $200,000 irrevocable letter of credit for the full amount of the credit facility in favor of Sunshine Distribution LP, with respect to the lease of the Company’s corporate headquarters at 1560 West 190th Street, Torrance, California.
During the three ended March 31, 2012 and 2011, the Company did not issue any shares of common stock to directors or employees as compensation. During the three months ended March 31, 2011, 10,000 shares of the Company’s Series A Preferred Stock were converted into 222 shares of its common stock. There were no conversions of the Company’s Series A Preferred Stock for the comparable period in 2012.
Stock Option Program Description
As of March 31, 2012, the Company had two equity compensation plans, the 1996 Stock Option Plan (the “1996 Plan”) and the 2006 equity compensation plan (the “2006 Plan”). The 1996 Plan has expired for the purposes of issuing new grants. However, the 1996 Plan will continue to govern awards previously granted under that plan. The 2006 Plan has been approved by the Company’s Shareholders. Equity compensation grants are designed to reward employees and executives for their long term contributions to the Company and to provide incentives for them to remain with the Company. The number and frequency of equity compensation grants are based on competitive practices, operating results of the company, and government regulations.
The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which 494,000 shares were available for grant as of March 31, 2012. All stock options have terms of between three and ten years and generally vest and become fully exercisable from one to three years from the date of grant or vest according to the price performance of our shares.
As of March31, 2012, the total compensation cost related to non-vested awards not yet recognized is $192,000. The weighted average period over which the future compensation cost is expected to be recognized is 21 months.
The following table summarizes information about stock options outstanding and exercisable at March 31, 2012:
The exercise prices of the options outstanding at March 31, 2012 ranged from $0.18 to $4.35. The weighted average grant-date fair value of option s granted during the three months ended March 31, 2012 and 2011 were $0.15 and $0.93, respectively. The Company’s policy is to issue shares from its authorized shares upon the exercise of stock options.
Unvested share activity for the three months ended March 31, 2012 is summarized below: