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, 2002
---------------
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.
-------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3056150
- ---------- ----------
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
19850 South Magellan Drive Torrance, CA 90502
----------------------------------------------
(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 (___)
As of May 13, 2002, there were 302,732,000 shares of Common Stock, no par value,
2,844,000 shares of Series A Preferred Stock and 1,217,000 shares of Series B
Preferred Stock outstanding.
INDEX
ENOVA SYSTEMS, INC.
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)......................................3
Balance Sheets:
March 31, 2002 and December 31, 2001..................................3
Statements of Operations:
Three months ended March 31, 2002 and 2001............................4
Statements of Cash Flows:
Three months ended March 31, 2002 and 2001............................5
Notes to Financial Statements:
for the Three months ended March 31, 2002 and 2001....................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............16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................17
Item 2. Changes in Securities and Use of Proceeds............................17
Item 3. Defaults upon Senior Securities......................................17
Item 4. Submission of Matters to a Vote of Security Holders..................17
Item 5. Other Information....................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................17
SIGNATURE.....................................................................18
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except for share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
As of As of
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 793 $ 1,179
Accounts receivable 878 1,237
Inventory 1,346 926
Stockholder receivable 25 25
Prepaids and other current assets 81 87
------------- -------------
Total Current Assets 3,123 3,454
PROPERTY, PLANT AND EQUIPMENT - NET 417 280
OTHER ASSETS 581 606
------------- -------------
TOTAL ASSETS $ 4,121 $ 4,340
============= =============
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITES:
Accounts payable $ 599 $ 167
Accrued payroll and related expense 181 194
Other accrued expenses 16 53
Bonds and notes payable 120 129
------------- -------------
Total Current Liabilities 916 543
ACCRUED INTEREST PAYABLE 730 677
CAPITAL LEASE OBLIGATIONS 76 20
LONG TERM DEBT 3,332 3,332
------------- -------------
TOTAL LIABILITIES $ 5,054 $ 4,572
------------- -------------
SHAREHOLDERS' (DEFICIT):
Series A preferred stock - No par value; 30,000,000 shares authorized;
2,844,000 shares issued and outstanding at 3/31/02 and 12/31/01 1,867 1,867
Series B preferred stock - No par value; 5,000,000 shares authorized;
1,217,000 shares issued and outstanding at 3/31/02 and 12/31/01 2,434 2,434
Stock notes receivable (1,208) (1,208)
Common Stock - No par value; 500,000,000 shares authorized; 302,532,000
and 302,502,000 shares issued and outstanding at 3/31/02 and 12/31/01 79,862 79,859
Common stock subscribed 160 160
Additional paid-in capital 6,949 6,949
Accumulated deficit (90,997) (90,293)
------------- -------------
Total Shareholders' (Deficit) (933) (232)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) $ 4,121 $ 4,340
============= =============
Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date.
See notes to financial statements.
3
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except for per share and share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
-----------------------------------------
2002 2001
------------- -------------
NET SALES $ 941 $ 1,115
COST OF SALES 702 658
------------- -------------
GROSS MARGIN 239 457
------------- -------------
OTHER COSTS AND EXPENSES:
Research & development 275 267
Selling, general & administrative 615 448
Interest and financing fees 55 28
Interest income (2) (16)
------------- -------------
Total other costs and expenses 943 727
------------- -------------
LOSS FROM CONTINUING OPERATIONS $ (704) $ (270)
------------- -------------
GAIN ON DEBT RESTRUCTURING 0 0
NET LOSS $ (704) $ (270)
============= =============
NET LOSS PER COMMON SHARE: $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 302,532,000 224,271,333
4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
----------------------------------
2002 2001
-------- --------
OPERATIONS
Net loss $ (704) $ (270)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and Amortization 38 46
Change in operating assets and liabilities:
Accounts Receivable 359 (433)
Inventory (420) (277)
Prepaids and other assets 31 (58)
Accounts payable and accrued expenses 434 219
------- -------
Net cash used by operating activities (263) (773)
------- -------
INVESTING:
Purchases of property, plant and equipment, net of disposals (174) (19)
------- -------
Net cash used by investing activities (174) (19)
------- -------
FINANCING:
Issuance of notes payable 47 (3)
Proceeds from issuance of common stock 3 6
------- -------
Net cash provided by financing activities 50 3
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (387) (789)
CASH AND EQUIVALENTS:
Beginning of period 1,179 1,310
------- -------
End of period $ 792 $ 521
======= =======
5
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(UNAUDITED)
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
---------------------------------------
2002 2001
--------------- ---------------
Cash paid for interest $ - $ -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Series A preferred stock to common stock $ - $ -
Conversion of debt to common stock $ - $ -
Conversion of accrued interest to equity $ - $ -
Issuance of common stock for services $ - $ 1
6
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2002 and 2001
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, 2002 and the interim results
of operations and cash flows for the three months ended March 31, 2002 have been
included. The balance sheet at December 31, 2001, presented herein, has been
prepared from the audited financial statements of our company for the fiscal
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 December
31, 2001 and March 31, 2002 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 accrued expenses are based upon
an analysis of future costs expected to be incurred in meeting contracted
obligations. 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, 2001. 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, 2001, which are included in the 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.
Loss per common share is computed using the weighted average number of common
shares outstanding. Since a loss from operations exists, a 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, 2002 presented
herein are not necessarily indicative of the results to be expected for the full
year.
7
NOTE 2 - Inventories
Inventories are comprised of the following (in thousands):
March 31, 2002 December 31, 2001
(unaudited)
-----------
Raw materials 700 563
WIP 472 272
Finished Goods 174 91
$1,346 $ 926
====== =======
NOTE 3 - Notes and Bonds Payable, Long-Term Debt and Other Financing
Notes and bonds payable and long-term debt are comprised of the following (in
thousands):
March 31, 2002 December 31, 2001
-------------- -----------------
Secured subordinated promissory note -
CMAC as exclusive agent for
Non-Qualified Creditors; interest at 3%
for the first 5 years, 6% for years 6
and 7, and then at prime plus 3% through
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, 2001 and March 31,
2002. The sinking fund escrow requires
the Company to fund the account with 10%
of future equity financing, including
convertible debt converted to equity. 3,332 3,332
Other 120 120
------- ------
3,452 3,452
120 120
------- ------
Less current maturities $ 3,332 $3,332
======= ======
8
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 consolidated
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, 2001. 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 herein
and in the 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 are applied consistently for all years 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
In July 2000, the Company changed its name to Enova Systems, Inc. The Company,
previously U.S. Electricar, Inc., a California Corporation (the "Company"), was
incorporated on July 30, 1976.
The Company's fiscal year ends December 31. All year references refer to fiscal
years.
Enova Systems 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. Our business
9
activities focus on the development of electric and hybrid electric drive
systems and related components, fuel cell power management systems for both
mobile and stationary power applications, vehicle systems integration and the
performance of various engineering contracts for government and commercial
enterprises. 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 outside recharging of the
battery system. A 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.
The Company's business activities continue to be focused on the development of
electric and hybrid electric drive systems and related components, fuel cell
power management systems for both mobile and stationary power applications,
vehicle systems integration and the performance of various engineering
contracts.
Enova develops and produces advanced software, firmware and hardware for
applications in the alternative power industry. 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 power generation - both on-site distributed
power and on-site telecommunications back-up power applications. These
stationary applications also employ fuel cells, microturbines and 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.
During the three months ended March 30, 2002, we continued to develop and
produce electric and hybrid electric drive systems and components for Ford Motor
Company, Hyundai Motor Company and several domestic and international vehicle
and bus manufacturers. We also are continuing on our current research and
development programs with Hyundai Motor Company and the U.S. Department of
Transportation as well as developing new programs with Hyundai and the federal
government.
Ford Motor Company
Our program with Ford Motor Company to develop and manufacture a high power,
high voltage conversion module for their fuel cell vehicle is progressing well.
The High Voltage Energy Converter was a key component in Ford's Focus FCV, which
was featured at the New York International Auto Show in February 2002. The high
voltage conversion module converts high voltage power from the fuel cell into a
lower voltage. We are currently in the second phase of this program and the
units are meeting expectations in performance and reliability. In the three
months ended March 31, 2002, we billed approximately $70,000 from this Ford
program.
Ballard Power
Our development and production program with Ballard Power for low voltage
electric drive system components for use in Ford's Global Th!nk City has moved
into its production phase. Ford has announced
10
that the all-electric vehicle is scheduled to be introduced in 2002 for markets
in North America and Europe. We have designed and are commencing high-volume
manufacturing of the electronics for the drive system including the power
inverter, charger and controller. In conjunction with Hyundai Autonet of Korea,
we are finalizing production planning for initial production systems to be
delivered in mid 2002. Gross revenues for the three months ended March 31, 2002
from this Ballard program were approximately $69,000. Additional revenues for
non-recurring engineering will be realized in the second quarter and production
revenues should commence in the third quarter of 2002 based on projections we
have received from Ford and Ballard. We anticipate that sales of these systems
will provide significant revenues in the upcoming years, however, we cannot
assure that there will be any such future revenues.
Hyundai Motor Company Programs
Hyundai continues to contract with our company for the development of advanced
hybrid and fuel cell powered drive systems. In regards to passenger vehicle
programs, we have developed a commercially viable parallel hybrid motor and
controller for Hyundai's new hybrid vehicle to be introduced in 2004. We have
teamed with SL Montevideo of Minnesota and Hyundai Heavy Industries of Korea to
build this new motor and controller. The prototype drive system for this program
was delivered to Hyundai Motor Company in February 2002. We expect to learn the
results of Hyundai's evaluation of the prototype during the second quarter of
2002.
Additionally, Hyundai Motor is procuring a number of our High Energy Converter
modules for use in their hybrid fuel cell programs. Hyundai has indicated that
they will purchase additional systems for other programs during 2002.
Development programs with Hyundai generated approximately $470,000 in sales for
the quarter ended March 31, 2002. We anticipate additional contracts for both
development and purchase of our components during 2002 for Hyundai's alternative
vehicle applications, however we cannot assure that such additional contracts
will be realized.
Light-Duty Drive Systems
In addition to the 30kW motor controller, charger and DC-DC converter that we,
in alliance with Hyundai Autonet, are manufacturing for Ballard Power, we are
also marketing and manufacturing our Panther 90kW drive systems. Our 90kW
controller, motor and gear unit provide outstanding performance for light duty
vehicles such as midsize automobiles and delivery vehicles. Our outsource
manufacturer for the Panther 90kW drive system is Hyundai Heavy Industries.
We have received a purchase order for over 200 Panther 90kW drive systems for
delivery in 2002 and 2003 from Voltage Vehicles of California, an integrator of
specialty vehicles. We have begun delivery of these systems and anticipate
producing approximately 100 systems representing approximately $1,000,000 in
gross revenues this year. Additionally, we are discussing further sales of this
system configuration to other domestic and international customers; however, we
can give no assurance at this time that such discussions will result in any
further sales.
Heavy-Duty Drive Systems
Sales of our PantherTM 120kW drive systems continue to provide increased
revenues for our company. We have entered into supplier agreements with
manufacturers in Europe and Japan as well as domestically. Hyundai Heavy
Industries is also our outsource manufacturer for the Panther 120kW as well as
the motor and controller for our Panther 240kW drive systems.
Eco Power Technology of Italy has purchased an additional 27 Panther 120kW
electric and hybrid electric drive systems which will be delivered in 2002. The
hybrid electric drive systems include the Capstone 30kW microturbine as their
power source. Eco Power is one of the largest integrators of medium size transit
buses
11
for the European shuttle bus market with key customers in Rome and Genoa. Total
sales for the quarter ended March 31, 2002 from Eco Power were $152,000 which
does not include the new systems sales.
Wrights Environment, a division of Wrights Bus, one of the largest low-floor bus
manufacturers in the United Kingdom, has integrated our hybrid electric
PantherTM 120kW drive system, which utilizes a microturbine from Capstone
Turbine Corporation as its power source. The bus is currently performing to
specifications and has been tested at the Milford Test facility, a highly
renowned European bus test location. Wrights has purchased additional pure
electric drive systems for their midsize buses for sale in the United Kingdom
and the European Continent. Further, we are in negotiations with them to
purchase both our new 240kW drive system and our Fast Charger system. We
anticipate additional orders for both electric and hybrid-electric P120 drive
systems during 2002; however, we cannot assure at this time that such additional
contracts will be realized. . Tomoe Electro-Mechanical Engineering and
Manufacturing, Inc. and Moria Corporation of Japan have both received our 120kW
drive systems and have begun integrating them into their bus platforms. We are
working closely with these companies to ensure a successful integration and
future sales. We anticipate that both companies will purchase additional systems
during 2002, however we can make no assurance that any purchases will occur.
The development of a utility vehicle for Southern California Edison, in
partnership with the South Coast Air Quality Management District, utilizing our
120kW drive system and a Capstone Turbine Corporation 30kW microturbine
continues on schedule. We are completed the development and production of our
additional power management accessories for this vehicle so that it can run
power applications such as drills and motors used by the Southern California
Edison technicians. The purpose of this project is to demonstrate and evaluate
this unique hybrid power drive system. Our system will be able to power the
vehicle as well as the auxiliary utility accessories which will eliminate the
need for a separate diesel generator normally trailered behind the vehicle.
These systems have been delivered and are being integrated into the vehicle.
This line service truck will be a demonstration vehicle, which we anticipate
will lead to sales to utility companies throughout the U.S. We cannot assure at
this time that such sales will occur.
In the high performance heavy-duty drive system area, our 240kW drive system has
been successfully integrated into a heavy-duty application and its performance
is exceeding expectations. We have currently produced five initial systems and
have begun on the next order for five to ten more. Advanced Vehicle Systems
"AVS" of Tennessee has purchased one electric 240kW system and is in the process
of integration and performance evaluation. The 240kW drive system is designed
for heavy-duty applications such as transit buses and heavy-duty trucks. We are
finalizing an agreement with Hyundai for the purchase of this 240kW system for
their heavy-duty vehicle applications which will be combined with a fuel cell
for urban and transit bus applications. Additionally, we are in discussions with
Wrights of the United Kingdom and other bus manufacturers regarding the purchase
of these drive systems in 2002. We can make no assurance that these discussions
will result in any sales of the Panther 240kW drive system.
Research and Development Programs
Our research and development programs with the U.S. department of Transportation
and the State of Hawaii continue to provide us with new insights and innovations
in the development and integration of our electric vehicle programs.
The Hyundai Santa Fe electric vehicle program has provided us with valuable data
regarding performance, battery life and vehicle maintenance. The program
utilizes Hawaii's rapid charging stations, manufactured by AeroVironment, and
has enabled us to fine tune our power management systems to the specifications
of numerous battery manufacturers. The contract has two elements, one for
integration of our BCU II battery care unit, which allows the vehicles to accept
fast charging, and a second contract for maintenance of the vehicles over the
two-year program. The participants in the program include state and local
offices as well as Hickam Air Force base. The vehicles are performing well and
reports on their performance and handling continue to be positive.
12
Our contract with the DOT to design and test a three-car tram utilizing the
PantherTM 120kW drive system has been completed and has been delivered to the
High Technology Development Corporation's facility in Honolulu. This tram,
capable of carrying 100 passengers, will now be delivered to the Honolulu
International Airport for further test and evaluation. If successful, we intend
to market this tram system to international markets for application to other
airports, national and recreational parks and other high capacity transit
applications.
The Eldorado 30-foot bus conversion utilizing our PantherTM 120kW drive system
for the Hickam Air Force base is nearing completion. The success of this program
is leading to a potential new contract with Hickam to integrate a hybrid drive
system into a second 30-foot bus for the Air Force base. We cannot assure at
this time that such a contract will be finalized.
All of these programs are funded in conjunction with the Hawaii Electric Vehicle
Development Project, the DOT and the State of Hawaii.
We will continue to establish new development programs with the Hawaii High
Technology Development Corporation as well as other state and federal government
agencies as funding becomes available.
Stationary Power Applications
Our stationary power programs continue to attract new potential 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. We are also developing
applications for these products in the telecommunications and distributed
generation markets. We can make no assurance that we will successfully develop
such applications or that any such applications will find acceptance in the
marketplace.
Our fuel cell care units are being delivered to UTC Fuel Cells, a division of
United Technologies Corp., for use in their stationary fuel cell systems. To
date, UTC Fuel Cells and Hamilton Sundstrand, an aerospace division of United
Technologies have ordered approximately 30 fuel cell care units. The Hyundai
companies have also expressed interest in working with us on the development of
advanced fuel cell management technologies and we are currently in negotiations
with a domestic energy company for stationary applications of our fuel cell
management system. We believe this market will play a key role in our future and
we continue to pursue alliances with leading manufacturers in this area,
however, we can make no assurance 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
the our strategic plan to become 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 as they came due. We
have therefore had to raise funds through several financial transactions. At
least until we reach breakeven volume in sales and develop and/or acquire the
capability to manufacture and sell its products profitably, we will need to
continue to rely on cash from external financing. We anticipate that it will
require additional outside financing to meet research and development
expenditures through 2003.
We have completed the restructuring of our prior liabilities and debt. It is our
intention to continue to seek additional financing through private placements
and other means to increase research and development spending, procure inventory
and seek additional alliances to market our products. As of May 6, 2002, we have
received a commitment from Jagen Pty, Ltd to fund up to $2,000,000 during 2002.
During the three months ended March 31, 2002, we spent $387,000 in cash on
operating activities to fund
13
the net loss of $704,000 resulting from factors explained in the following
section of this discussion and analysis. Accounts receivable decreased by
$359,000 due to aggressive collection of receivables. Inventory increased by
$420,000 from December 31, 2001 as we continue to build up our raw materials and
work in progress inventories for the Ballard production commencing in second
quarter 2002 and other programs such as our 120kW drive system sales to
EcoPower, Wrights and other bus manufacturers.
Current liabilities increased by a net of $434,000 due to purchases made in
connection with various on-going development programs. As we expand our customer
base and produce higher inventories for sales, we have negotiated extended terms
with several of our key suppliers, which allows us improved cash flows. Interest
accruing on notes payable increased by $27,000 for the three months ended March
31, 2002 compared with the similar period in 2001 due to an increase in the
interest rate on the $3.3 million CMAC note per the terms of that agreement.
The operations of the Company during the first quarter of fiscal 2002 were
financed primarily by the funds received on engineering contracts and sales of
drive system components as well as cash reserves provided by prior equity
financings. It is management's intention to continue to support current
operations through sales of products and technology consulting, as well as seek
additional financing through private placements and other means to increase
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.
14
RESULTS OF OPERATIONS
Net sales in the three months ending March 31, 2002 decreased by $174,000 from
the corresponding quarter in 2001. The decrease as compared with the prior year
was primarily due to carry forward of the Ballard billings which would have
increased sales over the prior year had they been included in this quarter. Due
to milestone restrictions set forth by Ballard, these revenues will not be
earned until the final hardware is proven.
We believe these revenues will be booked during the second quarter of 2002.
Development contracts with Hyundai Motor Company, Ballard Power Systems (for the
Ford Th!nk city Car) and Eco Power Technology account for a majority of the
Company's sales in the first quarter of 2002.
Cost of sales in the quarter ended March 31, 2002 increased to $702,000 compared
to cost of sales of $658,000 for the same three-month period in 2001. Costs
incurred with respect to the Ballard development program have been recorded to
cost of sales prior to the booking of the revenues associated with that program
due to certain contract limitations set forth by Ballard. We believe these
associated revenues will be recorded in the second quarter of 2002.
Research and development expense increased in the first quarter of 2002 to
$275,000 as compared with $267,000 in the first quarter of 2001. We intend to
utilize internal research and development as well as seek partners in the mobile
and stationary alternative energy fields to develop new and enhanced products
for drive system and distributed generation markets.
Selling, general and administrative expense increased $167,000 to $615,000 for
the three months ended March 31, 2002 from the previous year's comparable
period. We incurred additional professional fees in the amount of approximately
$100,000 in connection with a Form S1 prospectus filing during the first quarter
of 2002. Additionally, we incurred additional marketing and travel expenses in
our efforts to attract new customers and partners for the sale and distribution
of our products.
Interest and financing fees increased to $55,000 in the first quarter of 2002
from $28,000 in the first quarter of 2001. Interest costs have increased due to
a change in interest accrual for our $3.3 million CMAC note in accordance with
the original terms of that note.
We incurred a net loss from continuing operations of $704,000 in the first
quarter of 2002 compared to a net loss of $270,000 in the first quarter of 2001.
As discussed above, the net loss for the first quarter was significantly
affected by the exclusion of the Ballard revenues, which could not be included.
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. 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 have experienced recurring losses from operations and
had an accumulated deficit of $90,997,000 at March 31, 2002. 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, 2002 and 2001, we had net
losses of $704,000 and $270,000 respectively on sales of $941,000 and
$1,115,000, respectively.
15
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. 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) has recently confirmed its
mandatory limits for zero emission and low emission vehicles. There can be no
assurance, however, that further legislation will be enacted 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
vehicles. Extensions, modifications or reductions of current federal and state
legislation, mandates and potential tax incentives could adversely affect the
Company's business prospects if implemented.
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.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
---------
None
(b) Reports on Form 8-K
-------------------
The Company filed no current reports on Form 8-K during the quarter
ended March 31, 2002.
17
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 15, 2002
ENOVA SYSTEMS, INC.
(Registrant)
/s/ Carl D. Perry
- --------------------------------------------------------------------------------
By: Carl D. Perry, Chief Executive Officer and Acting Chief Financial Officer
(Duly Authorized Officer, Principal Financial Officer and Principal
Accounting Officer)
18