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 September 30, 2002
or
(___) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From To .
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Commission File No. 0-25184
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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 November 13, 2002, there were 345,844,000 shares of Common Stock, no par
value, 2,824,000 shares of Series A Preferred Stock, no par value, and 1,217,000
shares of Series B Preferred Stock, no par value, outstanding.
1
INDEX
ENOVA SYSTEMS, INC.
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).................................3
Balance Sheets:
September 30, 2002 and December 31, 2001.........................3
Statements of Operations:
Nine months ended September 30, 2002 and 2001....................4
Statements of Cash Flows:
Nine months ended September 30, 2002 and 2001....................5
Notes to Financial Statements:
Nine months ended September 30, 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
Item 4. Control and Procedures..........................................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
CERTIFICATIONS ............................................................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
September 30 ,2002 December 31, 2001
-------------------- -----------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 2,720 $ 1,179
Accounts receivable 1,413 1,237
Inventory 1,492 926
Stockholder receivable 33 25
Prepaids and other current assets 153 87
--------------------- --------------------
Total Current Assets 5,811 3,454
PROPERTY, PLANT AND EQUIPMENT - NET 785 280
OTHER ASSETS, NET 520 606
--------------------- --------------------
TOTAL ASSETS $ 7,116 $ 4,340
===================== ====================
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITES:
Accounts payable $ 702 $ 167
Accrued payroll and related expense 83 194
Other accrued expenses 57 53
Notes payable 120 129
--------------------- --------------------
Total Current Liabilities 962 543
ACCRUED INTEREST PAYABLE 836 677
CAPITAL LEASE OBLIGATIONS 62 20
LONG TERM DEBT 3,332 3,332
--------------------- --------------------
TOTAL LIABILITIES $ 5,192 $ 4,572
--------------------- --------------------
SHAREHOLDERS EQUITY (DEFICIT):
Series A preferred stock - No par value; 30,000,000 shares authorized;
2,824,000 and 2,844,000 shares issued and outstanding at 9/30/02 and 1,842 1,867
12/31/01 Series B preferred stock - No par value; 5,000,000 shares
authorized; 1,217,000 shares issued and outstanding at 9/30/02 and 2,434 2,434
12/31/01 Stock notes receivable (1,253) (1,208)
Common Stock - No par value; 500,000,000 shares authorized; 345,844,000
and 302,502,000 shares issued and outstanding at 9/30/02 and 12/31/01 84,021 79,859
Common stock subscribed 100 160
Additional paid-in capital 6,949 6,949
Accumulated deficit (92,169) (90,293)
--------------------- --------------------
Total Shareholders Equity (Deficit) 1,924 (232)
--------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) $ 7,116 $ 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 share and per share data)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ---------------------------
2002 2001 2002 2001
-------------- -------------- ------------- -------------
NET SALES $ 1,320 $ 690 $ 3,735 $ 2,577
COST OF SALES 1,147 638 3,010 1,801
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GROSS MARGIN 173 52 725 776
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OTHER COSTS AND EXPENSES:
Research & development 165 204 622 714
Selling, general & administrative 561 622 1,748 1,900
Interest and financing fees 55 55 165 114
Other (income)/expense 37 (4) 82 (4)
Interest income (10) (16) (16) (47)
------------- ------------- ------------- -------------
Total other costs and expenses 808 861 2,601 2,677
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LOSS FROM CONTINUING OPERATIONS $ (635) $ (809) $ (1,876)$ (1,901)
------------- ------------- ------------- -------------
GAIN ON DEBT RESTRUCTURING 0 33 0 68
NET LOSS $ (635) $ (776) $ (1,876)$ (1,833)
NET LOSS PER COMMON SHARE: $ (0.01) $ (0.01) $ (0.01)$ (0.01)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 345,627,095 297,520,941 345,627,095 297,520,941
4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except for share and per share data)
- --------------------------------------------------------------------------------
Nine Months Ended September 30
------------------------------
2002 2001
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OPERATIONS
Net loss $(1,876) $(1,833)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and Amortization 186 142
Gain on Debt Restructuring 0 (68)
Gain on Sale of Property, Plant and Equipment 0 (4)
Stock issued for Services (178) 20
Change in operating assets and liabilities:
Accounts Receivable (176) (155)
Inventory (566) (623)
Stockholder receivable (8) 25
Prepaids and other assets (59) (91)
Accounts payable and accrued expenses 587 156
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Net cash used by operating activities (2,090) (2,431)
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INVESTING:
Purchases of property, plant and equipment, net of (612) (172)
disposals Proceeds on sale of property, plant
and equipment 0 4
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Net cash used by investing activities (612) (168)
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FINANCING:
Net borrowing on leases and notes payable 33 (8)
Proceeds from issuance of common stock 4,210 3,040
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Net cash provided by financing activities 4,243 3,032
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,541 433
CASH AND EQUIVALENTS:
Beginning of period 1,179 1,310
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End of period $ 2,720 $ 1,743
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5
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(Unaudited)
(In thousands, except for share and per share data)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
-------------------------------
2002 2001
------------ ------------
Cash paid for interest $ - $ -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Series A preferred stock to common stock $ 25 $ -
Issuance of common stock for services $ 25 $ 20
Issuance of common stock for receivables $ - $ 133
6
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Nine Months Ended September 30, 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 September 30, 2002 and the interim
results of operations and cash flows for the nine months ended September 30,
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 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 September 30, 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 nine months ended September 30, 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):
September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
Raw materials 1,395 563
WIP 1 272
Finished Goods 96 91
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$1,492 $ 926
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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):
September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
Secured subordinated promissory note -
CMAC as exclusive agent for
Non-Qualified Creditors; interest at 3%
for 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, 2001 and
September 30, 2002. 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. 3,332 3,332
120 120
Other ------ ------
3,452 3,452
Less current maturities 120 120
------ ------
$3,332 $3,332
Total ====== ======
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 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 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 are 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
In July 2000, the Company changed its name to Enova Systems, Inc. The Company,
previously U.S. Electricar, 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
9
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. 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 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.
During the nine months ended September 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 including Advanced Vehicle Systems of Tennessee, Eco Power
Technology of Italy and Wright Bus of the United Kingdom. We also are continuing
on our current research and development programs with Hyundai Motor Company and
the U.S. Department of Transportation (DOT) as well as developing new programs
with Hyundai Motor Company, Hyundai Heavy Industries, the federal government and
other private sector companies.
Ford Motor Company
The High Voltage Energy Converter (HVEC) development program with Ford Motor
Company for their fuel cell vehicle continues to advance on schedule. This
converter is a key component in Ford's Focus Fuel Cell Vehicle, which was
featured at the New York International Auto Show in February 2002,. It converts
high voltage power from the fuel cell into a lower voltage for use by the drive
system and electronic accessories. The system is performing to our expectations
and is entering the advanced testing and final prototype phase prior to
production. These prototypes are scheduled to be released in early 2003. We
anticipate receiving an order for limited production in early 2003, however, we
can give no assurance at this time that such sales will occur. In the nine
months ended September 30, 2002, we billed approximately $295,000 from this Ford
program.
Ballard Power Systems
Our development and production program with Ballard Power Systems for low
voltage 30kW electric drive system components for use in Ford's Global Th!nk
City has been placed on hold pending further actions by Ford and Th!nk Nordic.
Ford Motor Company has announced that they will no longer fund development and
production of the city vehicle and Enova is awaiting a final decision regarding
the status of this program. Currently, approximately $450,000 of current
inventory is materials purchased for the initial production of the drive system
component. Additionally, there are other additional material, tooling and
engineering costs that may become due to our suppliers in the event of
termination. These additional costs are approximately $500,000. Under the terms
of our agreement with Ballard and Ford, we believe full
10
reimbursement for these costs is warranted if the program is terminated although
no final determination on such reimbursement has been made. During the first
nine months of 2002, we had revenues of $868,000 from Ballard.
Hyundai Motor Company Programs
Hyundai has procured several of our High Energy Converter modules for use in
their hybrid fuel cell programs. These systems are also being analyzed for
application in their mobile fuel cell programs. We have also delivered advanced
control components for two other Hyundai Motor Company fuel cell programs which
are currently in the test and evaluation phase.
In regards to the parallel hybrid program, Hyundai has completed its evaluation
of the prototype system and is reviewing other programs to which the system
could be applicable.
Development programs with Hyundai generated approximately $656,000 in sales for
the nine months ended September 30, 2002.
Light-Duty Drive Systems
We also produce and market our proprietary Panther 90kW drive systems. This 90kW
controller, motor and gear unit is utilized in light duty vehicles such as
midsize automobiles and delivery vehicles. As part of our corporate strategy to
outsource manufacturing, Hyundai Heavy Industries produces the Panther 90kW
drive system for Enova.
We have received a purchase order Panther 90kW drive systems for delivery in
2002 and 2003 from Phoenix Motor Cars of California, an integrator of specialty
vehicles. We have begun initial delivery of these systems in 2002, however, we
can give no assurance at this time that such sales for 2003 will occur.
We continue to cross-sell our systems to new and current customers in the light
and medium duty vehicle markets both domestically and globally.
Heavy-Duty Drive Systems
A major market for Enova's higher-end drive systems is in the filed of
heavy-duty bus and truck applications. Our PantherTM 120kW and PantherTM 240kW
drive systems are in production and performing above our expectations in global
markets. Sales of our PantherTM 120kW and 240kW 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 has also been selected as our outsource manufacturer
for the Panther 120kW controller, as well as the manufacturer of the motor and
controller for our Panther 240kW drive systems.
Eco Power Technology of Italy has purchased 27 Panther 120kW electric and hybrid
electric drive systems the delivery of which we anticipate will be completed 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 for the European shuttle bus market with key customers in
Turin and Genoa, Italy. Total sales for the nine months ended September 30, 2002
from Eco Power were $803,600.
Wrights Environment, a division of Wrights Bus, one of the largest low-floor bus
manufacturers in the United Kingdom, has integrated into one of its buses our
hybrid electric PantherTM 120kW drive system, which utilizes a 30kW m Capstone
microturbine as its power source. The bus is currently in field service and is
performing to specifications. Wrights has integrated our hybrid electric 120kW
system into a second midsize bus and is currently in an evaluation mode.
Further, we are in negotiations with Wrights to purchase our 240kW drive system.
Although we anticipate additional orders for both electric and hybrid-electric
120kW drive systems during 2002, at this time there are no assurances that such
additional orders will be forthcoming.
11
Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. of Japan has also
purchased our 120kW drive system and is now integrating it into an industrial
vehicle. We are working closely with Tomoe to ensure a successful integration
and future sales. Although we anticipate that they will purchase additional
systems during 2003, there are no assurances that any such 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 to progress. Our system is intended to power the vehicle as well as
the auxiliary utility accessories eliminating the need for a separate diesel
generator normally trailered behind the vehicle. These systems have been
delivered and are being integrated into the vehicle.
In the high performance heavy-duty drive system area, Enova's proprietary 240kW
drive system has been successfully integrated into a heavy-duty application and
its performance is exceeding our expectations. We are in production of these
systems for sale in 2002 and 2003. We are in the process of completing our first
delivery, to Advanced Vehicle Systems "AVS" of Tennessee, of six electric 240kW
systems for their 38 foot buses. AVS has also integrated one of our 240kW
systems into a Class 8 urban delivery truck. Product sales to AVS for the nine
months ended September 30, 2002 total approximately $328,000.
Additionally, we are in discussions with Wrights and other bus manufacturers
regarding the purchase of our heavy-duty, high performance, 240kW drive systems
in 2002 and 2003. There are no assurances that these discussions will result in
any sales of the Panther 240kW drive system.
Research and Development Programs
We have completed our contract for conversion of an Eldorado 30-foot bus from a
gasoline-powered drive system to our PantherTM 120kW drive system, for the
Hickam Air Force base in Hawaii. The bus is currently in operation and meeting
all performance specifications. The U.S. Air Force and the State of Hawaii are
in the process of negotiating with us a new contract to integrate a hybrid drive
system into a second 30-foot bus for the Hickman Air Force base. There are no
assurances, at this time, that such a contract will be finalized.
In conjunction with the State of Hawaii, the all-electric Hyundai Santa Fe SUV
demonstration project is entering its second year of test and evaluation. The
vehicles are meeting specifications with the results of the project, thus far,
meeting the expectations of the State of Hawaii, Hyundai and Enova.
All of these programs are funded in conjunction with the Hawaii Electric Vehicle
Development Project, the U.S. DOT and the State of Hawaii. Development programs
with these agencies have generated revenues of $337,000 for the nine months
ended September 30, 2002.
We intend 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
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. There are no assurances that we will successfully
develop such applications or that any such applications will find acceptance in
the marketplace.
In that regard, we recently concluded a development contract with Texaco Energy
Systems, Inc., a subsidiary of ChevronTexaco Technology Ventures (CTTV), to
design a process controller for their fuel reformer for a stationary fuel cell
application. Initial review and analysis has commenced with the majority of the
development to be completed in 2003. Anticipated initial revenue from this
contract is not anticipated to exceed $500,000 during the life of the contract.
12
Our Fuel Cell Care (FCU) 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.
We believe the stationary power market will play a key role in our future and 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. We believe we have obtained adequate financing
to meet general operations and research and development expenditures through
2003, although there are no assurances that we may not require additional
outside funds in 2003.
During the nine months ended September 30, 2002, we spent $2,090,000 in cash on
operating activities to fund our net loss of $1,876,000 resulting from factors
explained in the following section of this discussion and analysis. Accounts
receivable increased by $176,000 from December 31, 2001 balances due to
increased billings primarily to Ballard for additional engineering on the Th!nk
city program and increased heavy-duty systems sales to AVS and EPT. Inventory
increased by $566,000 from December 31, 2001 to September 30, 2002 as we
continued to build up our inventories for the Ballard production, which is
currently on hold as previously discussed above, and other products such as our
120kW and 240kW drive system for sale to AVS, EPT, Wrights and other bus
manufacturers.
Current liabilities increased by a net of $422,000, not including accrued
interest, from December 31, 2001 to September 30, 2002 due to purchases of
materials made in connection with various on-going production programs.
Capital lease obligations increased by $33,000 during the nine months ended
September 30, 2002 from December 31, 2001 due to additional equipment and
software being purchased for our testing and production divisions.
Interest accruing on notes payable increased by $165,000 for the nine months
ended September 30, 2002 from December 31, 2001 per the terms of our notes
payable.
The operations of the Company during the third 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 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.
13
RESULTS OF OPERATIONS
Net sales for the nine months ending September 30, 2002 increased by $1,158,000
from the corresponding period in 2001 or an increase of 45%. Net sales for the
quarter ended September 30, 2002 increased by $630,000 or over 90% compared to
the same period in 2001. The increase in revenues is attributable to increase
product sales of PantherTM 240kW and 120kW drive systems, additional engineering
services on the Ballard 30kW inverter program for the Th!nk city vehicle and
development work on the Ford HVEC program.
Development contracts with Hyundai Motor Company and the Federal Government and
product sales to Ballard Power Systems (for the Ford Th!nk city Car), Eco Power
Technology and AVS accounted for a majority of the Company's sales in the first
nine months of 2002.
Cost of sales for the nine months ended September 30, 2002 increased to
$3,010,000 compared to cost of sales of $1,801,000 for the same nine-month
period in 2001. Cost of sales increased to $1,147,000 for the quarter ended
September 30, 2002 from $638,000 for the quarter ended September 30, 2001. An
increase in revenues for the comparable periods as well as increased initial
start-up and integration costs to develop new customers accounted for a majority
of the increase in costs of sales over the periods reported. Additionally,
increased costs for the Ballard programs accounted for a portion of the increase
during the first six months of 2002.
Internal research and development expenses decreased in the nine months ended
September 30, 2002 to $622,000 as compared with $714,000 in the same period in
2001 and to $165,000 for the quarter ended September 30, 2002 from $204,000 for
the quarter ended September 30, 2001. The decrease was due to resources for
internal research and development being allocated toward other externally funded
development programs with Hyundai Motor Company, Ford and Ballard.
Selling, general and administrative expenses decreased $152,000 to $1,748,000
for the nine months ended September 30, 2002 from the previous year's comparable
period. Additionally, these expenses decreased from $622,000 for the three
months ended September 30, 2001 to $561,000 for the three months ended September
30, 2002. We continue to attempt to reduce general and administrative expenses
wherever possible. We incurred additional professional fees in the amount of
approximately $100,000 in connection with the registration statement filings
during the nine months ended September 30, 2002 as well as increased costs
associated with regulatory oversight.
Interest and financing fees increased to $165,000 in the first nine months of
2002 from $114,000 in the same period in 2001, but remained consistent for the
comparative three-month periods in 2001 and 2002. Year to date 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 loss from continuing operations of $635,000 in the third quarter
of 2002 compared to a loss of $809,000 in the third quarter of 2001. The
decrease was due to increased revenues as well as the reduction in overhead
expenses for the quarter. The loss for the nine months ended September 30, 2002
was $1,876,000 compared to $1,901,000 for the comparable period in 2001. The
reduction of loss is attributable to our efforts to increase margins on product
sales as well as to decrease general and administrative costs. We will continue
to review all costs and develop methods to produce our systems more efficiently
by utilizing contract manufacturers where applicable.
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
14
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 $92,169,000 at September 30, 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 nine months ended September 30, 2002 and 2001, we had
losses from continuing operations of $1,876,000 and $1,901,000 respectively on
sales of $3,735,000 and $2,577,000, 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. 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) confirmed 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. 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.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURE
Within the 90-day period prior to the filing of this report, an evaluation was
carried out by Carl Perry, the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, Mr. Perry concluded that these disclosure
controls and procedures were effective. No significant changes were made in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
16
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. However, we are not currently a party to any
material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
In December 2001, we issued 6,000,000 shares of common stock at a rate of $0.15
per share for a total of $900,000 in settlement of litigation brought against us
by Fontal International, Ltd. In April 2002, in connection with this settlement,
we issued an additional 100,000 shares of common stock at a rate of $0.15 per
share for a total of $15,000. In May 2002, also in connection with this
settlement, we issued another 100,000 shares of common stock at a rate of $0.15
per share for a total of $15,000. In June 2002, also in connection with this
settlement, we issued another 100,000 shares of common stock at a rate of $0.15
per share for a total of $15,000. We did not receive any cash in connection with
any of these transactions. Fontal International, Ltd. represented to us that it
was an accredited investor. We relied on Rule 506 and Section 4(2) of the
Securities Act for the exemption of the issuance of these shares.
In June 2002, several accredited investors, including existing affiliates of the
Company or our directors, purchased 42,100,000 shares common stock through a
private placement offering at $0.10 per share for a total cash purchase of
$4,210,000. 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.
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:
99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K
The Company filed no current reports on Form 8-K during the quarter
ended September 30, 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: November 14, 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)
CERTIFICATIONS
I, Carl D. Perry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enova Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
18
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/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)
19