TIDMENVS TIDMENV
RNS Number : 3011G
Enova Systems,Inc(S)
06 May 2014
For Immediate release 2(nd) of May 2014
Enova Systems, Inc., (OTCQB: ENVS and AIM: ENV and ENVS), a
developer and manufacturer of electric, hybrid and fuel cell
digital power management systems, announces results for the fiscal
year ended December 31, 2013.
Inquires:
Enova Systems
John Micek, Chief Executive Officer and Chief Financial Officer +1(650) 346-4770
Daniel Stewart & Company Plc
James Thomas +44 (0) 20 7776 6550
HIGHLIGHTS
For and as of the
Year Ended
December 31,
2013 2012
Revenues $ 426,000 $ 1,103,000
Cost of revenues 2,078,000 2,407,000
Gross income (1,652,000) (1,304,000)
Operating expenses
Research and development _ 805,000
Selling, general & administrative 1,081,000 3,915,000
Total operating expenses 1,081,000 4,720,000
Operating loss (2,733,000) (6,024,000)
Other income and (expense)
Loss on litigation _ (2,014,000)
Interest and other income
(expense) (171,000) (197,000)
Total other income and
(expense) (171,000) (2,211,000)
Net loss (2,904,000) (8,235,000)
For the Years Ended December 31, 2013 compared December 31,
2012
Results of Operations
Net Revenues. Net revenues were $426,000 for the year ended
December 31, 2013, representing a decrease of $677,000 or 61% from
net revenues of $1,103,000 during the same period in 2012. Revenues
in the current year were negatively affected by uncertainty over
the Company's ability to continue operations after our
restructuring in June 2012, which reduced our capacity to pursue
new business. The decrease in revenue for the twelve months ended
December 31, 2013 compared to the same period in 2012 was mainly
due to a decrease in deliveries to our core customer base in the
United States. Revenues in 2013 were mainly attributable to
shipments to First Auto Works in China and Smith Electric Vehicles,
N.A.. We will have fluctuations in revenue from quarter to quarter
and there can be no assurance there will be continuing demand for
our products and services.
Cost of Revenues. Cost of revenues were $2,078,000 for the year
ended December 31, 2013, compared to $2,407,000 for the year ended
December 31, 2012, representing a decrease of $329,000, or 14%.
Cost of revenues decreased in 2013 compared to the same period in
the prior year primarily due to the decrease in revenue. We
recorded a charge of approximately $1,660,000 and $1,436,000 during
2013 and 2012, respectively, increasing our inventory obsolescence
reserve after management updated its estimate of the realizable
value of inventory. Cost of revenues consists of component and
material costs, direct labor costs, integration costs and overhead
related to manufacturing our products as well as warranty accruals
and inventory valuation reserve amounts. Product development costs
incurred in the performance of engineering development contracts
for the U.S. Government and private companies are charged to cost
of sales.
Gross Margin. The gross margin for the year ended December 31,
2013 was negative 387.8% compared to a negative 118.2% in the prior
year. The decrease in gross margin is primarily attributable to
lower production volumes and charges to increase the inventory
reserve in 2013 associated with certain obsolete parts.
Research and Development Expenses. Research and development
expenses consist primarily of personnel, facilities, equipment and
supplies for our research and development activities. Non-funded
development costs are reported as research and development expense.
Research and development expenses during the year ended December
31, 2013 were $0 compared to $805,000 for the same period in 2012,
a decrease of $805,000 or 100%. We reduced engineering staff in
June 2012 due to the Company's lack of financial resources. As a
result, the Company's development of its next generation
Omni-series motor control unit and 10kW charger was put on hold
from the beginning of the second half of 2012.
Selling, General and Administrative Expenses.Selling, general
and administrative expenses consist primarily of sales and
marketing costs, including consulting fees and expenses for travel,
promotional activities and personnel and related costs for the
quality and field service functions and general corporate
functions, including finance, strategic and business development,
human resources, IT, accounting reserves and legal costs. Selling,
general and administrative expenses decreased by $2,834,000, or
72%, during the year ended December 31, 2013 to $1,081,000 from
$3,915,000 in the prior year, which decrease is attributable the
Company's implementation of reduced operational capacity, the
termination of employment with the Company by approximately 90% of
the Company's workforce and other cost savings measures. We
continually monitor S, G & A in light of our business outlook
and are taking proactive steps to control these costs.
Loss on Litigation. For the year ended December 31, 2012, loss
on litigation was $2,014,000 due to our recording a charge for a
judgment entered in the litigation with Arens Controls, as detailed
in Item 3 - Legal Proceedings of this Form 10-K.
Interest and Other Income (Expense). For the year ended December
31, 2013, interest and other expense was $171,000, an increase of
$26,000 or 13%, from an expense of $197,000 in 2012. The primary
reason for the increase is due to reduced impairment charges on the
write-down of fixed assets.
Liquidity and Capital Resources
We have experienced losses primarily attributable to research,
development, marketing and other costs associated with our
strategic plan as an international developer and supplier of
electric drive and power management systems and components.
Historically cash flows from operations have not been sufficient to
meet our obligations and we have had to raise funds through several
financing transactions. At least until we reach breakeven volume in
sales and develop and/or acquire the capability to manufacture and
sell our products profitably, we will need to continue to rely on
cash from external financing sources. Our operations during the
year ended December 31, 2013 were financed by product sales working
capital reserves and an equity offering in May 2012 that resulted
in net proceeds of $132,000. As of December 31, 2013, the Company
had $1,000 of cash and cash equivalents.
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 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 fourth quarter of 2012,
the irrevocable letter of credit was fully drawn down by Sunshine
Distribution L.P. in order to pay rent on our corporate
headquarters, and the certificate of deposit was fully utilized to
fund draws on the secured facility. Therefore, the facility was
fully drawn and expired on December 31, 2012.
Net cash used in operating activities was $74,000 for the year
ended December 31, 2013, an increase of $3,314,000 compared to
$3,388,000 for the year ended December 31, 2012. Operating cash
used increased in 2013 compared to the prior year primarily due to
decreases in our operating expenses that resulted from the
reduction of our operational capacity from June 2012 and the use of
our existing cash resources to fund our current operations.
Non-cash items include expense for stock-based compensation,
depreciation and amortization, inventory reserve and other losses.
These non-cash items decreased by $2,524,000 for the year ended
December 31, 2013 as compared to the same period in the prior year
primarily due to the accrual of the Arens litigation judgment in
December 2012 and a decrease in depreciation due to the end of the
lease for our former headquarters, which lease expired in January
2013. The decrease in net loss was primarily due the decrease in
our operating expenses of $3,639,000 as compared to 2012 and a
decrease in other net expenses of $2,040,000. As of December 31,
2013, the Company had $1,000 of cash and cash equivalents compared
to $57,000 as of December 31, 2012.
Net cash from investing activities was $29,000 for the year
ended December 31, 2013, compared to net cash $237,000 for the year
ended December 31, 2012. In 2013 and 2012, proceeds from the sale
of fixed assets were $29,000 and $53,000, respectively. In 2012, a
certificate of deposit investment of $200,000 was redeemed in order
to fund drawdowns from an irrevocable letter of credit by Sunshine
Distribution L.P. to pay rent on our corporate headquarters during
the fourth quarter of 2012, and investing expenditures of $16,000
for capital expenditures were expended mainly for the acquisition
and integration of test vehicles and for test equipment utilized in
R&D and production.
Net cash used in financing activities totaled $11,000 for the
year ended December 31, 2013, a decrease of $123,000 compared to
net cash provided by financing activities of $112,000 for the year
ended December 31, 2012.
Financing activities in 2013 and 2012 for payments on vehicle
notes were $11,000 and $20,000, respectively. In 2012, we received
proceeds of $132,000 from the issuance of Common Stock during
second quarter of 2012 from the Lincoln Park facility, as explained
in Note 11 - Stockholders' Equity to the financial statements
included in this Form 10-K..
Net accounts receivable decreased by $208,000, or 100%, to $0 as
of December 31, 2013 from $208,000 as of December 31, 2012. The
decrease in the receivable balance was primarily due to an increase
in the Reserve for Doubtful Accounts. As of December 31, 2013 and
December 31, 2012, the Company maintained a reserve for doubtful
accounts receivable of $404,000 and $313,000, respectively,
primarily related to financial instability at a major customer and
concern over the Company's capacity to collect on overdue
receivables.
Inventory decreased by $1,776,000, or 81%, from $2,203,000 as of
December 31, 2012 to $427,000 as of December 31, 2013. The decrease
resulted from net inventory activity including receipts totaling
$305,000, consumption of $421,000 and an inventory reserve charge
of $1,660,000.
Prepaid expenses and other current assets decreased by $200,000,
or 83%, to $42,000 at December 31, 2013 compared to a balance of
$242,000 at December 31, 2012. The decrease was primarily due to a
decrease in deposits to vendors in support of a customer purchase
orders and decreases in prepaid rent and insurance in the first
half of 2013.
Long term accounts receivable decreased by $38,000, or 100%, to
$0 at December 31, 2013 compared to a balance of $38,000 at
December 31, 2012. The decrease is primarily due to
reclassification of amounts that will be due within one year to
current accounts receivable and an increase in the reserve for
doubtful accounts . The Company agreed to defer collection of
certain accounts receivable as requested by a customer for the term
of the Company's warranty guarantee. Due to its financial
condition, the Company is not servicing warranty claims with the
customer, which could delay collection of the receivable.
Therefore, management has determined to reserve the full amount of
the long-term receivable.
Property and equipment, net of depreciation, decreased by
$227,000, or 74%, to $80,000 at December 31, 2013 compared to a
balance of $307,000 at December 31, 2012. The decrease is primarily
due to depreciation expense of $130,000 and a loss on disposed and
impaired assets of $34,000.
Accounts payable increased by $84,000, or 15%, to $642,000 at
December 31, 2013 compared to a balance of $558,000 at December 31,
2012. The increase was primarily due to inventory purchases made in
the second quarter of 2013 in support of a customer order and
payment deferrals due to the financial condition of the
Company.
Loans from employees increased by $36,000, or 100%, to $36,000
at December 31, 2013 compared to a balance of $0 at December 31,
2012. Due the financial condition of the company, employees loaned
funds to the Company to pay for certain necessary administrative
costs.
Deferred revenues increased by $95,000, or 81%, to $213,000 at
December 31, 2013 compared to a balance of $118,000 at December 31,
2012. The Company received prepayments on purchase orders from
certain customers. The Company's management is attempting to obtain
funding to complete the orders in the second quarter of 2014.
Accrued payroll and related expenses increased by $96,000, or
98%, to $194,000 at December 31, 2013 compared to a balance of
$98,000 at December 31, 2012. The increase was primarily due to an
increase in unpaid compensation in the second and third quarters of
2013 resulting from the financial condition of the Company.
Accrued loss for litigation settlement was unchanged at December
31, 2013 compared to the balance at December 31, 2012. As disclosed
in Item 3. Legal Proceedings of Part I of this Form 10-K, on
December 12, 2012, a judgment was entered in favor of Arens
Controls Company, L.L.C. by the United States District Court
Northern District of Illinois in the amount of $2,014,169 in the
case of Arens Controls Company, L.L.C. v. Enova Systems, Inc.
Other accrued liabilities increased by $39,000, or 15%, to
$294,000 at December 31, 2013 compared to a balance of $255,000 at
December 31, 2012. The increase was primarily due to an increase in
accruals for professional fees and a reserve for costs associated
with the return of repossessed vehicles.
Accrued interest increased by $83,000, or 6%, to $1,401,000 at
December 31, 2013 from $1,318,000 at December 31, 2012. The
majority of the increase is associated with the interest accrued on
the $1.2 million note due the Credit Managers Association of
California.
Going concern
To date, the Company has incurred recurring net losses and
negative cash flows from operations. At December 31, 2013, the
Company had an accumulated deficit of approximately $162.3 million,
working capital of approximately negative $3.0 million and
shareholders' equity deficit of approximately $5.5 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 shareholders.
Our operations will require us to make necessary investments in
human and production resources, regulatory compliance, as well as
sales and marketing efforts. We do not currently have adequate
internal liquidity to meet these objectives. On June 21, 2012, we
reported in a Form 8-K filing that, as part of cost cutting
measures in response to our decrease in revenue amid continued
delays in industry adoption of EV technology resulting from ongoing
battery cost and reliability concerns, in excess of 80% of our
workforce left our Company, including the resignation of members of
our senior management. We continue to evaluate strategic partnering
opportunities and other external sources of liquidity, including
the public and private financial markets and strategic partners.
Having insufficient funds has caused the Company to delay all of
its product development activities. Failure to obtain adequate
financing also may adversely affect the Company's ability to
continue in business. If the Company raises additional funds by
issuing equity securities, substantial dilution to existing
stockholders would likely result. If the Company raises additional
funds by incurring debt financing, the terms of the debt may
involve significant cash payment obligations, as well as covenants
and specific financial ratios that may restrict its ability to
operate its business.
As of December 31, 2013, the Company had approximately $1,000 in
cash and cash equivalents and we do not anticipate that our
existing cash and anticipated receivables collections will be
sufficient to meet projected operating requirements through the end
of 2014 to continue operations and market trading.
We have also accessed the capital markets to obtain limited operating funds. In April 2012, we entered into two Purchase Agreements (the facility) with Lincoln Park Capital Fund to issue up to $10,000,000 in shares of our common stock and received proceeds of $132,000, net of financing costs of $152,000, from the initial purchase of shares of Common Stock from Lincoln Park in the second quarter. Access to funding under the facility is dependent upon our shares being listed on a national exchange, and as our shares were delisted from the NYSE MKT LLC on October 31, 2012, the Company can no longer raise funds from the facility. In February 2014, the Company entered into Subscription Agreements with various offshore investors to sell approximately 19,999,998 common shares of newly issued shares at a price of 0.0075 pence (approximately US$0.01per share) to certain eligible offshore investors on the Alternative Investment Market of the London Stock Exchange (the "AIM Exchange") for GBP 150,000 (approximately US$248,000) in gross proceeds by a private subscription. The net proceeds from the offering were approximately US$223,000.
Judgment entered in Arens Controls Litigation
On December 12, 2012, a judgment was entered by the United
States District Court Northern District of Illinois in favor of
Arens Controls Company, L.L.C. in the amount of $2,014,169
regarding claims for two counts. In 2008, Arens Controls Company,
L.L.C. ("Arens") filed claims against Enova with the United States
District Court Northern District of Illinois. A Partial Settlement
Agreement, as amended on January 14, 2011, resolved certain claims
made by Arens. However, the claims were preserved under two
remaining counts concerning i) anticipatory breach of contract by
Enova for certain purchase orders that resulted in lost profit to
Arens and ii) reimbursement for engineering and capital equipment
costs incurred by Arens exclusively for the fulfillment of certain
purchase orders received from Enova.
The Company filed a notice of appeal in January 11, 2013. The
Company believes the court committed errors leading to the verdict
and judgment, and the Company is evaluating its options on appeal.
However, there can be no assurance that the appeal will be
successful or a negotiated settlement can be attained or that Arens
will assert its claim in the state of California, and thereby cause
the Company to go into bankruptcy.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages whatsoever that occurred
prior to the date of the Settlement Agreement. The Company was not
able to comply with the due date for such payment by January 22,
2014. Therefore, the judgment against the Company can be enforced
without further notice.
Off-Balance Sheet Arrangements
Other than contractual obligations incurred in the normal course
of business, we do not have any off-balance sheet financing
arrangements or liabilities.
ITEM 1. BUSINESS
In July 2000, we changed our name to Enova Systems, Inc.
("Enova" or "the Company"). Our company, previously known as U.S.
Electricar, Inc., a California corporation, was incorporated on
July 30, 1976.
THE FOLLOWING BUSINESS DISCUSSION SET FORTH BELOW AND ELSEWHERE
IN THIS 10-K IS QUALIFIED IN ITS ENTIRETY BY THE FOLLOWING: ENOVA
REMAINS INSOLVENT AND OWES IN EXCESS OF $4.6 MILLION IN THE
AGGREGATE TO ITS TWO PRINCIPAL CREDITORS, THE CREDIT MANAGERS
ASSOCIATION AND ARENS CONTROLS COMPANY, L.L.C. ('ARENS"). WITHOUT
IMMEDIATE ADDITIONAL FINANCING OR COLLECTION OF RECEIVABLES, THE
COMPANY WILL NEED TO CEASE OPERATIONS. THE COMPANY CURRENTLY HAS NO
VISIBILITY AS TO EITHER ADDITIONAL FINANCING OR THE COLLECTION OF
RECEIVABLES. SPECIFICALLY, WITHOUT A MUTUALLY ACCEPTABLE SETTLEMENT
OF THE ARENS JUDGMENT ARISING OUT OF ARENS CONTROLS COMPANY, L.L.C.
v. ENOVA SYSTEMS, INC., CASE NO. 13-1102 (7TH CIRCUIT) IN THE
AMOUNT OF $2.0 MILLION, THE COMPANY DOES NOT CURRENTLY BELIEVE IT
HAS ANY ALTERNATIVE OTHER THAN TO CEASE OPERATIONS. THE COMPANY
CURRENTLY EMPLOYS ONLY TWO PERSONNEL, JOHN MICEK, THE COMPANY'S
CEO, CFO AND SECRETARY, AND ONE ADDITIONAL INDIVIDUAL IN THE
FINANCE DEPARTMENT.
ON SEPTEMBER 24, 2013, THE COMPANY ENTERED INTO A SETTLEMENT
AGREEMENT AND MUTUAL RELEASE WITH ARENS PROVIDING A PERIOD OF 120
DAYS TO SETTLE THE JUDGMENT FOR THE AMOUNT OF $300,000. THE COMPANY
WAS NOT ABLE TO MAKE THE PAYMENT BY THE DUE DATE OF JANURY 22,
2014. THEREFORE, THE JUDGMENT AGAINST THE COMPANY CAN BE ENFORCED
WITHOUT FURTHER NOTICE.
Enova believes it has been a leader in the development, design
and production of proprietary, power train systems and related
components for electric and hybrid electric buses and medium and
heavy duty commercial vehicles. Electric drive systems are
comprised of an electric motor, electronics control unit and a gear
unit which power a vehicle. Hybrid electric systems, which are
similar to pure electric drive systems, contain an internal
combustion engine in addition to the electric motor, and may
eliminate external recharging of the battery system. A hydrogen
fuel cell based system is similar to a hybrid system, except that
instead of an internal combustion engine, a fuel cell is utilized
as the power source. A fuel cell is a system which combines
hydrogen and oxygen in a chemical process to produce
electricity.
A fundamental element of Enova's strategy has been to develop
and produce advanced proprietary software and hardware for
applications in these alternative power markets. Our focus has been
on powertrain systems including digital power conversion, power
management and system integration, focusing chiefly on vehicle
power generation.
Specifically, we have developed, designed and produce drive
systems and related components for electric, hybrid electric and
fuel cell powered vehicles in both the new and retrofit markets. We
also perform internal research and development ("R&D") and
funded third party R&D to augment our product development and
support our customers.
Our product development strategy has been to design and
introduce to market successively advanced products, each based on
our core technical competencies. In each of our product/market
segments, we provide products and services to leverage our core
competencies in digital power management, power conversion and
system integration. We believe that the underlying technical
requirements shared among the market segments will allow us to more
quickly transition from one emerging market to the next, with the
goal of capturing early market share.
Enova's primary market focus has been centered on aligning
ourselves with key customers and integrating with original
equipment manufacturers ("OEMs") in our target markets. We believe
that alliances will result in the latest technology being
implemented and customer requirements being met, with an optimized
level of additional time and expense. Provided we generate
necessary resources, we will continue to work refining both our
market strategy and our product line to maintain our edge in power
management and conversion systems for vehicle applications.
Our website, www.enovasystems.com, contains up-to-date
information on our company, our products and current events. Our
website is a prime focal point for current and prospective
customers, investors and other affiliated parties seeking
additional information on our business.
Due to the reduction in our operations in June 2012, our ability
to produce electric and hybrid electric drive systems and
components was severely restricted.. In 2013, we had limited sales
for systems and components to First Auto Works of China ("FAW") and
Smith Electric Vehicles ("Smith") as well as other domestic and
international vehicle and bus manufacturers. Our various electric
and hybrid-electric drive systems, power management and power
conversion systems are being used in applications including several
light, medium and heavy duty trucks, train locomotives, transit
buses and industrial vehicles.
For the year ended December 31, 2013, the following customers
each accounted for more than ten percent (10%) of our total
revenues:
Customer Percent
----------------------------------- --------
First Auto Works Group Corporation 76%
Smith Electric Vehicles, N.A. 19%
Please refer to the Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 below and
our financial statements in Item 8 below for further analysis of
our results.
Climate Change Initiatives and Environmental Legislation
Because vehicles powered by internal combustion engines cause
pollution (greenhouse gasses), there has been significant public
pressure in throughout the world to reduce these emissions. Thus,
the US (federal and state levels) and countries in Europe and Asia
have enacted legislation to promote the use of zero or low emission
vehicles. We believe legislation requiring or promoting zero or low
emission vehicles is necessary to create a significant market for
both hybrid electric ("HEV") and electric vehicles ("EV").
As our products reduce emissions and dependence on foreign
energy, they 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.
Strategic Alliances, Partnering and Technology Developments
Our strategy has been to adapt ourselves to the ever-changing
environment of alternative fuel markets for mobile applications.
Originally focusing on pure electric drive systems, we have the
potential to be positioned as a global supplier of drive systems
for electric, hybrid and fuel cell applications.
We continue to seek and establish alliances with major players
in the automotive and fuel cell fields. We believe the medium and
heavy-duty hybrid market's best chances of significant growth lie
in identifying and pooling the largest possible numbers of early
adopters in high-volume applications. We seek to utilize our
competitive advantages, including customer alliances, to gain
greater market share. By aligning ourselves with key customers in
our target market(s), we believe that the alliance will result in
the latest technology being implemented and customer requirements
being met, with a minimal level of additional time or expense.
-- First Auto Works ("FAW") - Enova continues to supply FAW
drive systems for their hybrid buses. Since the 2008 Olympics
in Beijing, Enova Systems and First Auto Works have deployed
over 500 vehicles utilizing Enova's pre-transmission hybrid
drive system components. First Auto Works is one of China's
largest vehicle producers, manufacturing in excess of 1,000,000
vehicles annually. The Enova drive system is integrated and
branded under the name of Jiefang CA6120URH hybrid. The Jiefang
40 ft. long hybrid city bus can carry up to 103 passengers
and travel at a speeds of over 50 miles per hour. With the
Enova hybrid system components, the Jiefang bus meets Euro
III emission standards, consumes only 7.84 miles per gallon
and achieves a reduction of 20 percent in harmful emissions.
-- Smith Electric Vehicles N.A. Inc. ("Smith") - Enova continues
to supply Smith with electric drive system components. Smith
has deployed several hundred vehicles utilizing Enova's electric
drive system. Smith develops, produces and sells zero-emission
commercial electric vehicles that are designed to be an alternative
to traditional diesel trucks, providing higher efficiency
and lower total cost of ownership. Smith has manufacturing
facilities in Kansas City, Missouri, and outside of Newcastle,
UK. Smith's vehicle designs leverage more than 80 years of
market knowledge from selling and servicing electric vehicles
in the United Kingdom. Smith produces the Newton and the
Edison.
Through the first half of 2012, we continued development of our
next generation Omni-series 200kVA-capable power inverter for
hybrid-electric and all-electric vehicles power management and
drive system component. The inverter has undergone a series of
rigorous tests, based on specifications from FCCC, Navistar, Ford
and Enova's own internal requirements. We are also progressed in
the design of a next generation on-board 10kW charger, which is
designed to be compatible with a wide range of vehicle drive
systems and motors, and can be configured for HEV, PHEV and EV
applications. Our various electric and hybrid-electric drive
systems, power management and power conversion systems continue to
be used in applications including Class 3-6 trucks, transit buses
and heavy industrial vehicles.
Research and development programs included our advanced power
management systems for fuel cells and upgrades and improvements to
our current power conversion and management components. Provided we
can obtain additional resources, we intend to continue to research
and develop new technologies and products, both internally and in
conjunction with alliance partners and other manufacturers.
Electric and Hybrid-Electric Drive Products
Enova's hybrid and electric drive systems provide all the
functionality one would find under the hood of an internal
combustion engine powered vehicle. The hybrid and electric power
system consists of an enhanced electric motor and the electronic
controls that regulate the flow of electricity to and from the
batteries at various voltages and power to propel the vehicle. In
addition to the motor and controller, the system includes a gear
reduction/differential unit which ensures the desired propulsion
and performance. The system is designed to be installed as a "drop
in," fully integrated turnkey fashion, or on a modular, "as-needed"
basis. Regardless of power source (battery, fuel cell, diesel
generator or turbine) the hybrid and electric power system is
designed to meet the customer's drive cycle requirements. Enova's
all electric drive systems use largely the same designs as the
hybrid systems, except that there is no internal combustion engine
in the vehicle.
Hybrid vehicles are those that utilize an electric motor and
batteries in conjunction with an internal combustion engine
("ICE"), whether piston or turbine. With a hybrid system, a small
piston or turbine engine - fueled by gasoline or diesel, CNG,
methane, etc., in a tank - supplements the electric motor and
battery. These systems are self-charging, in that the operating ICE
recharges the battery.
There are two types of hybrid systems: series and parallel. In a
series hybrid system, only the electric motor connects to the drive
shaft and in a parallel hybrid system, both the internal combustion
engine and the electric motor connect to the drive shaft. In a
series hybrid system, the ICE turns the generator, which charges
the battery, which - through a control unit - powers the electric
motor that turns the wheels. In a parallel hybrid system, both the
electric motor and the ICE can operate simultaneously to drive the
wheels (see diagrams below). In both hybrid systems and in pure
electric systems, regenerative braking occurs which assists in the
charging of the batteries.
The parallel hybrid system is ideally suited for conditions
where most of the driving is done at constant speed cruising, with
a smaller amount of the driving involving random acceleration, such
as "uphill" or with "stop and go" conditions. For acceleration, the
controller causes the electric motor to assist the ICE, both
running simultaneously. When speed is steady or the ground is flat,
only the ICE runs. Additionally, when the batteries are low, the
controller causes the ICE and motor to charge the batteries. As a
result, the series hybrid system is best suited for starts and
stops, and is ideal for applications such as urban transit buses
and urban garbage trucks. The design of the series hybrid system is
based on a driving cycle with a high percentage of random
acceleration conditions.
Manufacturing Strategy
We have developed a multi-tiered manufacturing strategy that
allows us to meet the market's demand for high quality production
goods while optimizing cost of goods sold across the spectrum of
low to high volumes. At the core of this strategy is a strong
reliance on pre-selected highly qualified outside manufacturing
houses that specialize in various aspects of the manufacturing
process. This outsourcing strategy helps Enova control product
costs while also minimizing fixed costs within the
organization.
Competitive Conditions
The competition to develop and market electric, hybrid and fuel
cell powered vehicles continued to accelerate during the last year
and we expect this trend to continue as governments in our target
markets adopt initiatives to reduce greenhouse gas emissions. In
the event governments in our target markets completely rescinded
their support for the reduction of greenhouse gas emissions and
sustainability initiatives, our business model would be adversely
and significantly affected. Moreover, although competition within
the mobile hybrid sector is still somewhat fragmented, there are
indications of some consolidation at this time. The competition
consists of development stage companies as well as major U.S. and
international companies. The larger companies tend to focus on
single solutions and maintain the capital and wherewithal to
aggressively market such. The smaller competitors offer a more
diversified product line, but do not have the market presence to
generate significant penetration at this juncture.
Our research and experience has indicated that our target market
segments certainly focus on price, but would buy based on
reliability, performance and quality support when presented the
life-cycle business model for EV-HEV technologies for their
application. Our future prospects are highly dependent upon the
successful development and introduction of new products that are
responsive to market needs and can be manufactured and sold at a
profit. There can be no assurance that we will be able to
successfully develop or market any such products.
The development of hybrid-electric and alternative fuel
vehicles, such as compressed natural gas, fuel cells and hybrid
cars poses a competitive threat to our markets for low emission
vehicles or LEVs but not in markets where government mandates call
for zero emission vehicles or ZEVs. Enova is involved in the
development of hybrid vehicles and fuel cell systems in order to
meet future government requirements and applications.
Various providers of electric vehicles have proposed products or
offer products for sale in this emerging market. These products
encompass a wide variety of technologies aimed at both consumer and
commercial markets. As the industry matures, key technologies and
capabilities are expected to play critical competitive roles. Our
goal is to position ourselves as a long term competitor in this
industry by focusing on all-electric, hybrid and fuel cell powered
drive systems and related sub systems, component integration,
technology application and strategic alliances.
We believe the hybrid and electric vehicle market is poised for
growth over the medium and long term and that Enova's products are
positioned to capitalize on demands being placed on the market by
offering solutions. Enova believes that our competitive advantages
include:
-- Providing a full product line of power management and power
conversion, and supporting system integration
-- Providing products that allow the hardware to be software
programmable and configurable
-- Offering a product line designed for the most advanced new
fuel systems: electric, hybrid, fuel cell and solar power
applications
-- Providing fully integrated, "drop-in" energy management
and conversion system in "one box"
-- Offering systems with reduced footprint and weight, high
functionality and low cost - characteristics essential for
all market applications
-- Meeting changing and sophisticated requirements of emerging
alternative power markets and applications.
-- Positioning ourselves as a strategic ally with our global
customer base, manufacturers and our R&D partners.
By building a business based on long-standing relationships with
clients such as Freightliner Custom Chassis Corporation, Smith
Electric Vehicles, First Auto Works and Optare, we believe we are
building defenses against competition by securing customers with
global reach and OEM status. Teaming with recognized global
manufacturers allows Enova to avoid devoting resources to
manufacturing infrastructure and allows us access to production
capacity at relatively low costs.
Research and Development
Enova's strategy has been one of continual enhancement of its
current product line and development of more efficient and reliable
products for alternative energy sectors. Subject to available
resources, management believes R&D must be continued in order
to be remain competitive, minimize production costs and meet
customer specifications. We seek to provide internal funding where
technology development is critical to our future.
For the years ended December 31, 2013, and 2012, we spent $0 and
$805,000, respectively, on internal research and development
activities. In June 2012, our engineering staff was eliminated due
to the Company's lack of financial resources. As a result, the
Company's development of its next generation Omni-series motor
control unit and 10kW charger was put on hold at the end of the
second quarter of 2012.
Intellectual Property
Enova relies on unpatented trade secrets and know-how and
proprietary technological innovation and expertise which are
protected in part by confidentiality and invention assignment
agreements with its employees, advisors and consultants and
non-disclosure agreements with certain of its suppliers and
distributors. If these agreements are breached, Enova may not have
adequate remedies for any breach and Enova's unpatented proprietary
intellectual property may otherwise become known or independently
discovered by competitors.
Enova will evaluate technology protection on its Omni Drive
System that may be pursued. The Omni system contains many areas
where Enova will have unique advantages in comparison to existing
technologies and the company intends to fully protect these areas.
This process involves complex legal and factual questions, and the
breadth of claims allowed is uncertain. Accordingly, there can be
no assurance that patent applications filed by us will result in
patents being issued. Moreover, there can be no assurance that
third parties will not assert claims against us with respect to
existing and future products. Although we intend to vigorously
protect our rights, there can be no assurance that these measures
will be successful. In the event of litigation to determine the
validity of any third party claims, such litigation could result in
significant expense to Enova.
Employees
As of December 31, 2013, we had a total of 1 full-time and 1
part-time employee. We also employ one individual as a part-time
independent contractor engaged on a monthly basis.
Available and Additional Information
Included in Item 8 of this 10K are audited financial statements
which include revenues, a measure of profit or loss and total
assets.
We file electronically with the SEC our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We
make available free of charge on or through our website copies of
these reports as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
The SEC maintains an internet site that contains reports, proxy and
information statements and other information regarding our filings
at www.sec.gov. You may also read and copy any of our materials
filed with the SEC at the SEC's Public Reference Room at 100 F
Street, NE, Washington, DC 20549. Information regarding the
operation of the Public Reference Room can be obtained by calling
the SEC at 1-800-SEC-0330. Our website address is
www.enovasystems.com. Information found on, or that can be accessed
through, our website is not incorporated by reference into this
annual report.
ITEM 1A. RISK FACTORS
The statements in this Section describe the major risks to our
business and should be considered carefully. In addition, these
statements constitute our cautionary statements under the Private
Securities Litigation Reform Act of 1995 and apply to all sections
of this Form 10-K.
This annual report on Form 10-K, including the documents that we
incorporate by reference, contains statements indicating
expectations about future performance and other forward-looking
statements that involve risks and uncertainties. We usually use
words such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "future," "intend,"
"potential," or "continue" or the negative of these terms or
similar expressions to identify forward-looking statements. These
statements appear throughout the Form 10-K and are statements
regarding our current intent, belief, or expectation, primarily
with respect to our operations and related industry developments.
Examples of these statements include, but are not limited to,
statements regarding the following: our expansion plans, our future
operating expenses, our future losses, our future expenditures for
research and development and the sufficiency of our cash resources.
You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this annual report.
Our actual results could differ materially from those anticipated
in these forward-looking statements for many reasons, including the
risks faced by us and described in this "Risk Factors" section and
elsewhere in this annual report.
We cannot guarantee that any forward-looking statement will be
realized, although we believe we have been prudent in our plans and
assumptions. Achievement of future results is subject to risks,
uncertainties and potentially inaccurate assumptions. Should known
or unknown risks or uncertainties materialize, or should underlying
assumptions prove inaccurate, actual results could differ
materially from past results and those anticipated, estimated or
projected. You should bear this in mind as you consider
forward-looking statements.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events
or otherwise. You are advised, however, to consult any further
disclosures we make on related subjects in our 10-Q and 8-K reports
to the SEC. Also note that we provide the following cautionary
discussion of risks, uncertainties and possibly inaccurate
assumptions relevant to our businesses. These are factors that,
individually or in the aggregate, we think could cause our actual
results to differ materially from expected and historical results.
We note these factors for investors as permitted by the Private
Securities Litigation Reform Act of 1995. You should understand
that it is not possible to predict or identify all such factors.
Consequently, you should not consider the following to be a
complete discussion of all potential risks or uncertainties.
We may be forced into bankruptcy if we cannot reach a settlement
with our two major creditors
Enova owes in excess of $4.6 million in aggregate to its two
principal creditors, Arens Controls Company, L.L.C. ("Arens") and
the Credit Managers Association. Without immediate additional
financing or collection of receivables, the Company will need to
cease operations. The Company currently has no visibility as to
either additional financing or the collection of receivables.
Specifically, without a mutually acceptable settlement of the Arens
Judgment arising out of Arens Controls Company, L.L.C. v. Enova
Systems, Inc., Case No. 13-1102 (7th Circuit) in the amount of
$2,014,169, the Company does not currently believe it has any
alternative other than to cease operations.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages whatsoever that occurred
prior to the date of the Settlement Agreement. The Company was not
able to comply with the due date for such payment by January 22,
2014. Therefore, the judgment against the Company can be enforced
without further rnotice.
Raising additional funds by issuing securities, engaging in debt
financings or through licensing arrangements may cause substantial
dilution to existing stockholders, restrict our operations or
require us to relinquish proprietary rights.
To the extent that we raise additional capital by issuing equity
securities as we did in 2011, April 2012, May 2012 and February
2014, our existing stockholders' ownership may be substantially
diluted. Any debt financing we enter into may involve covenants
that restrict our operations or our ability to enter into other
funding arrangements. These restrictive covenants may include
limitations on additional borrowing and specific restrictions on
the use of our assets, as well as prohibitions on our ability to
create liens, pay dividends, redeem our stock or make investments.
In addition, if we raise additional funds through licensing
arrangements, it may be necessary to relinquish potentially
valuable rights to our potential products or proprietary
technologies, or grant licenses on terms that are not favorable to
us.
Our history of operating losses and our expectation of
continuing losses may hurt our ability to reach profitability or
continue operations.
We have experienced significant operating losses since our
inception. Our net loss was $2,904,000 for the year ended December
31, 2013 and our accumulated deficit was $162,251,000 as of
December 31, 2013. It is likely that we will continue to incur
substantial net operating losses for the foreseeable future, which
may adversely affect our ability to continue operations. To achieve
profitable operations, we must successfully develop and market our
products at higher margins. We may not be able to generate
sufficient product revenue to become profitable. Even if we do
achieve profitability, we may not be able to sustain or increase
our profitability on a quarterly or yearly basis.
We are dependent on access to capital markets in order to fund
continued operations of the Company.
We do not currently have adequate internal liquidity to fund the
Company's operations on an ongoing basis. 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. We may not be able to obtain financing
arrangements in amounts or on terms acceptable to us in the future.
In the event we are unable to obtain additional financing when
needed, and without substantial reductions in development programs
and strategic initiatives, we do not expect that our cash and cash
equivalents and short-term investments will be sufficient to fund
our operating and capital needs for the twelve months following
December 31, 2013.
Because we depend upon sales to a limited number of customers,
our revenues will be reduced if we lose a major customer
Our revenue is dependent on significant orders from a limited
number of customers. In the fiscal year ended December 31, 2013,
our two largest customers comprised 95% of revenues. We believe
that revenues from major customers will continue to represent a
significant portion of our revenues. This customer concentration
increases the risk of quarterly fluctuations in our revenues and
operating results. The loss or reduction of business from one or a
combination of our significant customers could adversely affect our
revenues, financial condition and results of operations. Moreover,
our success will depend in part upon our ability to obtain orders
from new customers, as well as the financial condition and success
of our customers and general economic conditions.
Our future growth depends on consumers' willingness to accept
hybrid and electric vehicles
Our growth is highly dependent upon the acceptance by consumers
of, and we are subject to an elevated risk of any reduced demand
for, alternative fuel vehicles in general and electric vehicles in
particular. If the market for electric vehicles does not develop as
we expect or develops more slowly than we expect, our business,
prospects, financial condition and operating results will be
materially and adversely affected. The market for alternative fuel
vehicles is relatively new, rapidly evolving, characterized by
rapidly evolving and changing technologies, price competition,
additional competitors and changing consumer demands or behaviors.
Factors that may influence the acceptance of alternative fuel
vehicles include:
-- perceptions about alternative fuel vehicles safety (in
particular with respect to lithium-ion battery
packs), design, performance and cost, especially if adverse
events or accidents occur that are
linked to the quality or safety of alternative fuel vehicles;
-- volatility in the cost of oil and gasoline;
-- consumer's perceptions of the dependency of the United
States on oil from unstable or hostile countries;
-- improvements in fuel of the internal combustion engine;
-- the environmental consciousness of consumers;
-- government regulation
-- Macroeconomics
We extend credit to our customers, which exposes us to credit
risk
Most of our outstanding accounts receivable are from a limited
number of large customers. At December 31, 2013, the two highest
outstanding accounts receivable balances totaled approximately
$420,000 which represents 100% of our gross accounts receivable. If
we fail to monitor and manage effectively the resulting credit risk
and a material portion of our accounts receivable is not paid in a
timely manner or becomes uncollectible, our business would be
significantly harmed, and we could incur a significant loss
associated with any outstanding accounts receivable.
Our business is affected by current economic and financial
market conditions in the markets we serve
Current global economic and financial markets conditions,
including severe disruptions in the credit markets and the
significant and potentially prolonged global economic recession,
may materially and adversely affect our results of operations and
financial condition. We are particularly impacted by any global
automotive slowdown and its effects on OEM inventory levels,
production schedules, support for our products and decreased
ability to accurately forecast future product demand.
The nature of our industry is dependent on technological
advancement and is highly competitive
The mobile power market, including electric vehicle and hybrid
electric vehicles, continue to be subject to rapid technological
changes. Most of the major domestic and foreign automobile
manufacturers: (1) have already produced electric and hybrid
vehicles, (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.
Our industry is affected by political and legislative
changes
In recent years there has been significant legislation enacted
in the United States and abroad to reduce or eliminate automobile
pollution, promote or mandate the use of vehicles with no tailpipe
emissions ("zero emission vehicles") or reduced tailpipe emissions
("low emission vehicles"). Although states such as California have
enacted such legislation, we cannot assure you that there will not
be further legislation enacted changing current requirements or
that current legislation or state mandates will not be repealed or
amended, or that a different form of zero emission or low emission
vehicle will not be invented, developed and produced, and achieve
greater market acceptance than electric or hybrid electric
vehicles.
We may be unable to effectively compete with other companies who
have significantly greater resources than we have
Many of our competitors, in the automotive, electronic, and
other industries, have substantially greater financial, personnel,
and other resources than we do. Because of their greater resources,
some of our competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sales of their
products than we can.
We may be exposed to product liability or tort claims if our
products fail, which could adversely impact our results of
operations
A malfunction or the inadequate design of our products could
result in product liability or other tort claims. Any liability for
damages resulting from malfunctions could be substantial and could
materially adversely affect our business and results of operations.
In addition, a well-publicized actual or perceived problem could
adversely affect the market's perception of our products.
We are highly dependent on a few key personnel and will need to
retain and attract such personnel in a labor competitive market
Our ability to continue in business is dependent on the
performance of key management and technical personnel, the loss of
whom could severely affect our business. Additionally, in order to
successfully implement any future growth, we will be dependent on
our ability to generate resources necessary to hire qualified
personnel. There can be no assurance that we will be able to retain
or hire necessary personnel. We do not maintain key man life
insurance on any of our key personnel. We believe that our future
success will depend in part upon our ability to attract, retain,
and motivate highly skilled personnel in an increasingly
competitive market.
We are highly dependent on a few vendors for key system
components made to our engineering specifications and disruption of
vendor supply could adversely impact our results of operations.
Our product specifications often involve upfront investment in
tooling and machinery, which result in our commitment to a limited
number of high quality vendors that can meet our manufacturing
standards. Any disruption to our supply of key components from the
suppliers would have an adverse impact on our business and results
of operations.
There are minimal barriers to entry in our market
We presently license or own only certain proprietary technology,
and therefore have created little or no barrier to entry for
competitors other than the time and significant expense required to
assemble and develop similar production and design
capabilities.
Our competitors may enter into exclusive arrangements with our
current or potential suppliers, thereby giving them a competitive
edge which we may not be able to overcome, and which may exclude us
from similar relationships.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read this Management's Discussion and Analysis of
Financial Condition and Results of Operations in conjunction with
our 2013 Financial Statements and accompanying Notes. The matters
addressed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain certain
forward-looking statements involving risks and uncertainties.
Overview
Enova Systems has been a leading innovator of proprietary hybrid
and electric drive systems propelling the alternative energy
industry. Our core competencies are focused on the development and
commercialization of power management and conversion systems for
mobile applications. Enova applies unique 'enabling technologies'
in the areas of alternative energy propulsion systems for medium
and heavy-duty vehicles as well as power conditioning and
management systems for distributed generation systems.
Enova's product focus has been on digital power management and
power conversion systems. Its software and hardware manage and
control the power that drives a vehicle, converting the power into
the appropriate forms required by the vehicle or device and manage
the flow of this energy to optimize efficiency and provide
protection for both the system and its users. Our products and
systems are the enabling technologies for power systems.
The latest state-of-the-art technologies in hybrid and electric
vehicles and fuel cell systems all require some type of power
management and conversion mechanism. Enova Systems supplies these
essential components. Enova drive systems are 'fuel-neutral,'
meaning that they have the ability to utilize any type of fuel,
including diesel, liquid natural gas or bio-diesel fuels. Enova has
performed significant research and development to augment and
support others' and our internal product development efforts.
Our products are "production-engineered." This means they are
designed so they can be commercially produced (i.e., all formats
and files are designed with manufacturability in mind, from the
start). For the automotive market, Enova designs its products to
ISO 9001 manufacturing and quality standards. We believe Enova's
redundancy of systems and rigorous quality standards result in high
performance and reduced risk. For every component and piece of
hardware, there are detailed performance specifications. Each piece
is tested and evaluated against these specifications, which
enhances and confirms the value of the systems to OEM
customers.
The Company acknowledges the principal barrier to
commercialization of our drive systems is cost. The cost of
engineering proprietary software and hardware for our drive systems
is high because economies of production in specialized hybrid drive
system component parts, batteries, and vehicle integration have not
been achieved. Therefore, the cost of our products and engineering
services are currently higher than our gasoline and diesel
competitor counterparts. We also believe maturation into
commercialization of our drive systems will result in decreases to
our long run average costs of materials and services as volume
increases over time.
Critical Accounting Policies
The preparation of financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate
our estimates, including those related to product returns, bad
debts, inventories, intangible assets, income taxes, stock-based
compensation, warranty obligations, contingencies, and litigation.
We base our estimates on historical experience and on various other
assumptions believed to be reasonable under the circumstances,
including current and anticipated worldwide economic conditions,
both in general and specifically in relation to the hybrid and
electric vehicle markets, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
Our significant accounting policies are described in Note 2 to
the financial statements included in Item 8 of this Form 10-K. We
believe the following critical accounting policies necessitated
that significant judgments and estimates be used in the preparation
of its financial statements. We have reviewed these policies with
our Audit Committee.
Revenue Recognition - We generally recognizes revenue at the
time of shipment when title and risk of loss have passed to the
customer, persuasive evidence of an arrangement exists, performance
of our obligation is complete, our price to the buyer is fixed or
determinable, and we are reasonably assured of collection. If a
loss is anticipated on any contract, a provision for the entire
loss is made immediately. Determination of these criteria, in some
cases, requires management's judgment. Should changes in conditions
cause management to determine that these criteria are not met for
certain future transactions, revenue for any reporting period could
be adversely affected.
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, 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 billed are classified as
current assets under contract work-in-progress. 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.
Warranty - 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.
Allowance for doubtful accounts - The allowance for doubtful
accounts is the Company's best estimate of the amount of probable
credit losses in the Company's existing accounts receivable;
however, changes in circumstances relating to accounts receivable
may result in a requirement for additional allowances in the
future. Past due balances over 90 days and other higher risk
amounts are reviewed individually for collectibility. If the
financial condition of the Company's customers were to deteriorate
resulting in an impairment of their ability to make payment,
additional allowances may be required. In addition, the Company
maintains a general reserve for all invoices by applying a
percentage based on the age category. Account balances are charged
against the allowance after all collection efforts have been
exhausted and the potential for recovery is considered remote.
Inventory - Inventories include material, labor, and
manufacturing overhead are priced at the lower of cost or market
utilizing the first-in, first-out (FIFO) cost flow assumption. We
maintain a perpetual inventory system and continuously record the
quantity on-hand and standard cost for each product, including
purchased components, subassemblies and finished goods. We maintain
the integrity of perpetual inventory records through periodic
physical counts of quantities on hand (i.e., cycle counts).
Finished goods are reported as inventories until the point of
transfer to the customer. Generally, title transfer is documented
in the terms of sale.
Inventory reserve - We maintain an allowance against inventory
for the potential future obsolescence or excess inventory. A
substantial decrease in expected demand for our products, or
decreases in our selling prices could lead to excess or overvalued
inventories and could require us to substantially increase our
allowance for excess inventory. If future customer demand or market
conditions are less favorable than our projections, additional
inventory write-downs may be required and would be reflected in
cost of revenues in the period the revision is made.
Property and Equipment - Property and equipment are stated at
cost and depreciated over the estimated useful lives of the related
assets, which range from three to seven years using the
straight-line method for financial statement purposes. The Company
uses other depreciation methods (generally, accelerated
depreciation methods) for tax purposes where appropriate.
Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease term
or the estimated useful lives of the improvements.
Repairs and maintenance are expensed as incurred. Expenditures
that increase the value or productive capacity of assets are
capitalized. When property and equipment are retired, sold, or
otherwise disposed of, the asset's cost and related accumulated
depreciation are removed from the accounts and any gain or loss is
included in operations.
Impairment of Long-Lived Assets - The Company reviews the
carrying value of property and equipment for impairment whenever
events and circumstances indicate that the carrying value of an
asset may not be recoverable from the estimated future cash flows
expected to result from its use and eventual disposition. In cases
where undiscounted expected future cash flows are less than the
carrying value, an impairment loss is recognized equal to an amount
by which the carrying value exceeds the fair value of assets. The
factors considered by management in performing this assessment
include current operating results, trends, and prospects, as well
as the effects of obsolescence, demand, competition, and other
economic factors. Long-lived assets that management commits to sell
or abandon are reported at the lower of carrying amount or fair
value less cost to sell.
Stock-Based Compensation - The Company measures and recognizes
compensation expense for all share-based payment awards made to
employees and directors, including employee stock options based on
the estimated fair values at the date of grant. The compensation
expense is recognized over the requisite service period.
The Company's determination of estimated fair value of
share-based awards utilizes the Black-Scholes option-pricing model.
The Black-Scholes model is affected by the Company's stock price as
well as assumptions regarding certain highly complex and subjective
variables. These variables include, but are not limited to; the
Company's expected stock price volatility over the term of the
awards as well as actual and projected employee stock option
exercise behaviors.
Deferred Income Taxes - We evaluate the need for a valuation
allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. We have considered future
taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. We
determined that we may not be able to realize all or part of its
net deferred tax asset in the future, thus a full valuation
allowance was recorded against our deferred tax assets.
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.
Research and Development - Research, development, and
engineering costs are expensed in the period incurred. Costs of
significantly altering existing technology are expensed as
incurred.
Recent Accounting Pronouncements
Certain accounting standards that have been issued or proposed
by the FASB or other standards-setting bodies are not expected to
have a material impact on the Company's financial position, results
of operations and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate offices are located at a manufacturing and
warehouse facility at 2945 Columbia Street, Torrance, California
which we are sub-leasing on a month-to-month basis. We believe our
facilities are adequate for our current needs. The lease on our
former corporate offices ended on January 31, 2013.
ITEM 3. LEGAL PROCEEDINGS
Given the nature of our business, we are subject from time to
time to lawsuits, investigations and disputes (some of which
involve substantial amounts claimed) arising out of the conduct of
our business, including matters relating to commercial
transactions. Other than the Arens matter outlined below, we are
not aware of any other pending legal matters. We recognize a
liability for any contingency that is probable of occurrence and
reasonably estimable. We continually assess the likelihood of
adverse outcomes in these matters, as well as potential ranges of
probable losses (taking into consideration any insurance
recoveries), based on a careful analysis of each matter with the
assistance of outside legal counsel and, if applicable, other
experts.
Most contingencies are resolved over long periods of time,
potential liabilities are subject to change due to new
developments, changes in settlement strategy or the impact of
evidentiary requirements, which could cause us to pay damage awards
or settlements (or become subject to equitable remedies) that could
have a material adverse effect on our results of operations or
operating cash flows in the periods recognized or paid.
The Company reported in a 8-K filed January 20, 2011 that we
entered into a Partial Settlement Agreement, as amended on January
14, 2011, with Arens Controls Company, L.L.C. ("Arens") to resolve
certain claims made by Arens in connection with its action
captioned Arens Controls Company, L.L.C. v. Enova Systems, Inc.,
filed in 2008 with the Northern District of Illinois of the U.S.
District Court (the "Legal Action"). In the Legal Action, Arens
asserted eight counts against Enova, including certain claims
regarding inventory asserted by Arens to be valued at $1,671,000
(the "Inventory Claim"), a claim for payment under certain
invoices, and claims for certain other monetary obligations of
Enova to Arens.
Under the terms of the Settlement Agreement, we paid $327,000
directly to Arens and Arens dismissed with prejudice all but two of
the counts under the Legal Action. Additionally, under the
Settlement Agreement (as amended), on January 14, 2011, we acquired
the inventory that was the subject of the Inventory Claim (the
"Inventory") for payment of $1,498,000, net of an agreed upon
reduction of $173,000 for the acquisition price of such Inventory.
In return, Arens was deemed to have released us from any further
liability on the Inventory Claim. However, per the terms of the
Settlement Agreement (as amended), Arens preserved it claims under
two of the counts in the Legal Action.
The two remaining counts concerned i) anticipatory breach of
contract by Enova for certain purchase orders that resulted in lost
profit to Arens and ii) reimbursement for engineering and capital
equipment costs incurred by Arens exclusively for the fulfillment
of certain purchase orders received from Enova. On December 12,
2012, a judgment was entered under the two remaining counts by the
United States District Court Northern District of Illinois in favor
of Arens Controls Company, L.L.C. in the amount of $2,014,169. The
Company filed an appeal of the judgment in the 7th Circuit Court of
Appeals on January 15, 2013. The Company believes the court
committed errors leading to the verdict and judgment. However,
there can be no assurance that the appeal will be successful, a
negotiated settlement can be attained, or that Arens will enforce
its claim in the state of California and thereby cause the Company
to go into bankruptcy.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages whatsoever that occurred
prior to the date of the Settlement Agreement. The Company was not
able to comply with the due date for such payment by January 22,
2014. Therefore, the judgment against the Company can be enforced
without further notice.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
-----------------------------
2013 2012
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,000 $ 57,000
Accounts receivable, net - 208,000
Inventories and supplies, net 427,000 2,203,000
Prepaid expenses and other current assets 42,000 242,000
------------ ------------
Total current assets 470,000 2,710,000
Long term accounts receivable - 38,000
Property and equipment, net 80,000 307,000
------------ ------------
Total assets $ 550,000 $ 3,055,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 642,000 $ 558,000
Loans from employees 36,000 -
Deferred revenues 213,000 118,000
Accrued payroll and related expenses 194,000 98,000
Accrued loss for litigation settlement 2,014,000 2,014,000
Other accrued liabilities 294,000 255,000
Current portion of notes payable 40,000 66,000
------------ ------------
Total current liabilities 3,433,000 3,109,000
Accrued interest payable 1,401,000 1,318,000
Notes payable, net of current portion 1,238,000 1,262,000
------------ ------------
Total liabilities 6,072,000 5,689,000
------------ ------------
Stockholders' deficit:
Series A convertible preferred stock - no par
value, 30,000,000 shares authorized; 0 shares
issued and outstanding; liquidating preference
at $0.60 per share as of December 31, 2013 and
December 31, 2012 - -
Series B convertible preferred stock - no par
value, 5,000,000 shares authorized; 546,000 shares
issued and outstanding; liquidating preference
at $2 per share as of December 31, 2013 and December
31, 2012 1,094,000 1,094,000
Common Stock to be issued 528,000 528,000
Common Stock - no par value, 750,000,000 shares
authorized; 44,520,000 shares issued and outstanding
as of December 31, 2013 and December 31, 2012 145,512,000 145,512,000
Additional paid-in capital 9,595,000 9,579,000
Accumulated deficit (162,251,000) (159,347,000)
------------ ------------
Total stockholders' deficit (5,522,000) (2,634,000
------------ ------------
Total liabilities and stockholders' deficit $ 550,000 $ 3,055,000
============ ============
The accompanying notes are an integral part of these financial
statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years
Ended
December 31,
2013 2012
---------------- ----------
Revenues $ 426,000 $ 1,103,000
Cost of revenues 2,078,000 2,407,000
------------ ------------
Gross loss (1,652,000 ) (1,304,000)
------------ ------------
Operating expenses
Research and development - 805,000
Selling, general & administrative 1,081,000 3,915,000
------------ ------------
Total operating expenses 1,081,000 4,720,000
------------ ------------
Operating loss (2,733,000 ) (6,024,000)
------------ ------------
Other income and (expense), net
Loss on litigation - (2,014,000)
Interest and other income (expense) (171,000 ) (197,000)
------------ ------------
Total other income and (expense), net (171,000 ) (2,211,000)
------------ ------------
Net loss $ (2,904,000 )$ (8,235,000)
============ ============
Basic and diluted loss per share $ (0.07 )$ (0.19)
============ ============
Weighted average number of common shares outstanding 44,520,000 43,952,000
============ ============
The accompanying notes are an integral part of these financial
statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years
Ended
December 31
--------------------------
Cash flows from operating activities: 2013 2012
------------ -----------
Net loss $ (2,904,000) $(8,235,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Bad debt expense 108,000 296,000
Inventory reserve expense 1,660,000 1,436,000
Depreciation and amortization 130,000 466,000
Loss on disposal of property and equipment 29,000 28,000
Loss on asset impairment 34,000 90,000
Loss on litigation - 2,014,000
Stock option expense 16,000 171,000
(Increase) decrease in operating assets:
Accounts receivable 118,000 255,000
Inventory and supplies 116,000 397,000
Prepaid expenses and other current assets 166,000 -
Long term accounts receivable 20,000 41,000
Increase (decrease) in operating liabilities:
Accounts payable 84,000 204,000
Loans from employees 36,000 -
Deferred revenues 95,000 (202,000)
Accrued payroll and related expense 96,000 (168,000)
Other accrued liabilities 39,000 (262,000)
Accrued interest payable 83,000 81,000
----------- ----------
Net cash used in operating activities (74,000) (3,388,000)
----------- ----------
Cash flows from investing activities:
Sale of certificate of deposit, restricted - 200,000
Proceeds from the sale of fixed assets 29,000 53,000
Purchases of property and equipment - (16,000)
----------- ----------
Net cash provided by investing activities 29,000 237,000
----------- ----------
Cash flows from financing activities:
Payment on notes payable (11,000) (20,000)
Net proceeds from the issuance of common stock - 132,000
----------- ----------
Net cash provided by (used in) financing activities (11,000) 112,000
----------- ----------
Net decrease in cash and cash equivalents (56,000) (3,039,000)
Cash and cash equivalents, beginning of period 57,000 3,096,000
----------- ----------
Cash and cash equivalents, end of period $ 1,000 $ 57,000
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 1,000 $ 5,000
=========== ==========
Non-cash investing and financing activities
Assets repossessed and notes payable relieved $ 39,000 $ -
=========== ==========
The accompanying notes are an integral part of these financial
statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible Preferred
Stock
-----------------------------------------------------------------
Common Stock
Series A Series B to be Issued Common Stock
-------------------------------- --------------------------- --------------------- ------------------------------------
Total
Additional Stockholders'
Paid-in Accumulated Equity
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit)
---------------- ---------- ----------- ---------- --------- --------- -------------- ------------ ---------- ------------- -------------
Balance,
December
31,
2011 2,642,000 $ 528,000 546,000 $1,094,000 42,765,000 $145,380,000 $9,408,000 $(151,112,000) $ 5,298,000
Issuance
of
common
stock for
cash 1,755,000 132,000 132,000
Stock option
expense 171,000 171,000
Conversion
to common
stock (2,642,000) (528,000) (528,000)
Common
stock to
be issued 59,000 528,000 528,000
Net loss (8,235,000) (8,235,000)
Balance,
December
31,
2012 - $ - 546,000 $1,094,000 59,000 528,000 44,520,000 $145,512,000 $9,579,000 $(159,347,000) $ (2,634,000)
Stock option
expense 16,000 16,000
Net loss (2,904,000) (2,904,000)
Balance,
December
31,
2013 - $- 546,000 $1,094,000 59,000 $ 528,000 44,520,000 $145,512,000 $9,595,000 $(162,251,000) $(5,522,000)
=== =========== ========= ======= ========= ======== ========= ========== =========== ========= ============ ============
The accompanying notes are an integral part of these financial
statements.
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Twelve months ended December 31, 2013 and 2012
1. Description of Business
General
Enova Systems, Inc., (the "Company" or "Enova"), is a California
corporation that develops, designs and produces drive systems and
related components for electric, hybrid electric, and fuel cell
systems for mobileg applications. The Company retains development
and manufacturing rights to many of the technologies created,
whether such research and development is internally or externally
funded. The Company sells drive systems and related components in
the United States, Asia and Europe.
Liquidity
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company has sustained recurring losses and negative cash flows from
operations. Management believes that the Company's losses in recent
years have primarily resulted from a combination of insufficient
product and service revenue to support the Company's skilled and
diverse technical staff believed to be necessary to support
exploitation of the Company's technologies. Historically, the
Company's growth and working capital needs have been funded through
a combination of private and public equity offerings, and debt
financing. During 2013, the Company's working capital needs have
been funded primarily through a combination of product sales, asset
sales and existing cash reserves. As of December 31, 2013, the
Company had approximately $1,000 of cash and cash equivalents. At
December 31, 2013, the Company had net working capital of negative
$2,963,000 compared to negative $399,000 at December 31, 2012,
representing a decrease of approximately $2,564,000.
Management manages costs in line with estimated total revenue.
However, there can be no assurance that anticipated revenue will be
realized or that the Company will successfully implement its plans.
Management implemented measures to conserve cash, including the
reduction of over 80% of employee headcount in the second quarter
of 2012, and stringent controls over inventory purchases and
administrative expenses. The Company will continue to conserve
available cash by closely scrutinizing expenditures during 2014.
The Company will need to raise additional capital to accomplish
continue in business over the next year. The Company can make no
assurance with respect to either the availability or terms of such
financing and capital when it may be required.
Going Concern
The Company has experienced and continues to experience
operating losses and negative cash flows from operations, as well
as an ongoing requirement for substantial additional capital
investment. At December 31, 2013, the Company had an accumulated
deficit of approximately $162.3 million, working capital of
approximately negative $2,963,000 and shareholders' equity deficit
of approximately $5.5 million. Over the past years, the Company has
been funded through a combination of debt financing and private
equity offerings. As of December 31, 2013, the Company had
approximately $1,000 in cash and cash equivalents.
The Company will need to raise additional capital to pursue
recovery of its business over the long term and is currently
pursuing a variety of funding options. There can be no assurance as
to the availability or terms upon which such financing and capital
might be available. If the Company is not successful in its efforts
to raise additional funds, the Company may be required to cease its
business operations.
In February 2014, the Company entered into Subscription
Agreements with various offshore investors to sell approximately
19,999,998 common shares of newly issued shares at a price of
0.0075 pence (approximately US$0.01per share) to certain eligible
offshore investors on the Alternative Investment Market of the
London Stock Exchange (the "AIM Exchange") for GBP 150,000
(approximately US$248,000) in gross proceeds by a private
subscription. The net proceeds from the offering were approximately
US$223,000. The Company continues to pursue other options to raise
additional capital fund continuing 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.
Judgment entered in Arens Controls Litigation
On December 12, 2012, a judgment was entered by the United
States District Court Northern District of Illinois in favor of
Arens Controls Company, L.L.C. in the amount of $2,014,169
regarding claims for two counts concerning i) anticipatory breach
of contract by Enova for certain purchase orders that resulted in
lost profit to Arens and ii) reimbursement for engineering and
capital equipment costs incurred by Arens exclusively for the
fulfillment of certain purchase orders received from Enova.
The Company filed an appeal of the judgment in the 7th Circuit
Court of Appeals on January 15, 2013. The Company believes the
court committed errors leading to the verdict and judgment.
However, there can be no assurance that the appeal will be
successful, a negotiated settlement can be attained, or that Arens
will enforce its claim in the state of California and thereby cause
the Company to go into bankruptcy.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages whatsoever that occurred
prior to the date of the Settlement Agreement. The Company was not
able to comply with the due date for such payment by January 22,
2014. Therefore, the judgment against the Company can be enforced
without further notice.
2. Summary of Significant Accounting Policies
Basis of Presentation
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
Reclassifications
Certain amounts in the prior year have been reclassified to
conform to the current year presentation. This change in
classification does not affect previously reported cash flows from
operating or financing activities in the Company's previously
reported Statements of Cash Flows, or the Company's previously
reported Statements of Operations for any period.
Revenue Recognition
The Company manufactures proprietary products and other products
based on design specifications provided by its customers.
The Company recognizes revenue only when all of the following
criteria have been met:
-- Persuasive evidence of an arrangement exists;
-- Delivery has occurred or services have been rendered;
-- The fee for the arrangement is fixed or determinable;
and
-- Collectibility is reasonably assured.
Persuasive Evidence of an Arrangement - The Company documents
all terms of an arrangement in a written contract signed by the
customer prior to recognizing revenue. Receipt of a customer
purchase order is the primary method of determining that persuasive
evidence of an arrangement exists.
Delivery Has Occurred or Services Have Been Rendered - The
Company performs all services or delivers all products prior to
recognizing revenue. Professional consulting and engineering
services are considered to be performed when the services are
complete. Equipment is considered delivered upon delivery to a
customer's designated location. In certain instances, the customer
elects to take title upon shipment.
The Fee for the Arrangement is Fixed or Determinable - Prior to
recognizing revenue, a customer's fee is either fixed or
determinable under the terms of the written contract. Fees
professional consulting services, engineering services and
equipment sales are fixed under the terms of the written contract.
The customer's fee is negotiated at the outset of the arrangement
and is not subject to refund or adjustment during the initial term
of the arrangement.
Collectibility is Reasonably Assured - The Company determines
that collectibility is reasonably assured prior to recognizing
revenue. Collectibility is assessed on a customer-by-customer basis
based on criteria outlined by management. New customers are subject
to a credit review process, which evaluates the customer's
financial position and ultimately its ability to pay. The Company
does not enter into arrangements unless collectibility is
reasonably assured at the outset. Existing customers are subject to
ongoing credit evaluations based on payment history and other
factors. If it is determined during the arrangement that
collectibility is not reasonably assured, revenue is recognized on
a cash basis. Amounts received upfront for engineering or
development fees under multiple-element arrangements are deferred
and recognized over the period of committed services or
performance, if such arrangements require the Company to provide
on-going services or performance. All amounts received under
collaborative research agreements or research and development
contracts are nonrefundable, regardless of the success of the
underlying research.
Since some customer orders contain multiple items such as
equipment and services which are delivered at varying times, the
Company determines whether the delivered items can be considered
separate units of accounting. Delivered items are considered
separate units of accounting if delivered items have value to the
customer on a standalone basis, there is objective and reliable
evidence of the fair value of undelivered items, and if delivery of
undelivered items is probable and substantially in the Company's
control. The recognition of revenue from milestone payments is over
the remaining minimum period of performance obligation. As
required, the Company evaluates its sales contract to ascertain
whether multiple element agreements are present.
The Company 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,
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 billed
are classified as current assets under contract work-in-progress.
Amounts billed to clients in excess of revenues recognized to date
are classified as current liabilities under advance billings 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.
Deferred Revenues
The Company recognizes revenues as earned. Amounts billed in
advance of the period in which service is rendered are recorded as
a liability under deferred revenues. 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.
Warranty Costs
The Company provides product warranties for specific product
lines and accrues for estimated future warranty costs in the period
in which revenue is recognized. Our products are generally
warranted to be free of defects in materials and workmanship for a
period of 12 to 24 months from the date of installation, subject to
standard limitations for equipment that has been altered by other
than Enova Systems personnel and equipment which has been subject
to negligent use. Warranty provisions are based on past experience
of product returns, number of units repaired and our historical
warranty incidence over the past twenty-four month period. The
warranty liability is evaluated on an ongoing basis for adequacy
and may be adjusted as additional information regarding expected
warranty costs becomes known.
Shipping and Handling Costs
The Company includes shipping and handling costs associated with
inbound and outbound freight in costs of goods sold.
Cash and Cash Equivalents
Short-term, highly liquid investments with an original maturity
of three months or less are considered cash equivalents.
Certificates of deposits that have a penalty for early withdrawal
are excluded from cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is
the Company's best estimate of the amount of probable credit losses
in the Company's existing accounts receivable; however, changes in
circumstances relating to accounts receivable may result in a
requirement for additional allowances in the future. Past due
balances over 90 days and other higher risk amounts are reviewed
individually for collectability. If the financial condition of the
Company's customers were to deteriorate resulting in an impairment
of their ability to make payment, additional allowances may be
required. In addition, the Company maintains a general reserve for
all invoices by applying a percentage based on the age category.
Account balances are charged against the allowance after all
collection efforts have been exhausted and the potential for
recovery is considered remote. As of December 31, 2013 and 2012,
the Company maintained a reserve of $404,000 and $313,000 for
doubtful accounts receivable. There was bad debt expense recorded
of $108,000 in 2013 and $296,000 in 2012, respectively.
Inventory
Inventories and supplies are comprised of materials used in the
design and development of electric, hybrid electric, and fuel cell
drive systems, and other power and ongoing management and control
components for production and ongoing development contracts,
finished goods and work-in-progress, and is stated at the lower of
cost or market utilizing the first-in, first-out (FIFO) cost flow
assumption. The Company maintains a perpetual inventory system and
continuously records the quantity on-hand and standard cost for
each product, including purchased components, subassemblies and
finished goods. The Company maintains the integrity of perpetual
inventory records through periodic physical counts of quantities on
hand. Finished goods are reported as inventories until the point of
transfer to the customer. Generally, title transfer is documented
in the terms of sale.
Inventory reserve
The Company maintains an allowance against inventory for the
potential future obsolescence or excess inventory. A substantial
decrease in expected demand for our products, or decreases in our
selling prices could lead to excess or overvalued inventories and
could require us to substantially increase our allowance for excess
inventory. If future customer demand or market conditions are less
favorable than our projections, additional inventory write-downs
may be required and would be reflected in cost of revenues in the
period the revision is made.
Property and Equipment
Property and equipment are stated at cost and depreciated over
the estimated useful lives of the related assets, which range from
three to seven years using the straight-line method for financial
statement purposes. The Company uses other depreciation methods
(generally, accelerated depreciation methods) for tax purposes
where appropriate. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the
remaining lease term or the estimated useful lives of the
improvements.
Repairs and maintenance are expensed as incurred. Expenditures
that increase the value or productive capacity of assets are
capitalized. When property and equipment are retired, sold, or
otherwise disposed of, the asset's cost and related accumulated
depreciation are removed from the accounts and any gain or loss is
included in operations.
Impairment of Long-Lived Assets
The Company reviews the carrying value of property and equipment
for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds
the fair value of assets. The factors considered by management in
performing this assessment include current operating results,
trends, and prospects, as well as the effects of obsolescence,
demand, competition, and other economic factors. Long-lived assets
that management commits to sell or abandon are reported at the
lower of carrying amount or fair value less cost to sell.
Fair Value of Financial Instruments
The carrying amount of financial instruments, including cash and
cash equivalents, certificates of deposit, accounts receivable,
accounts payable and other accrued liabilities, approximate fair
value due to the short maturity of these instruments. The recorded
values of notes payable and long-term debt approximate their fair
values, as interest approximates market rates.
The Company defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants
on the measurement date. At December 31, 2013 and 2012, the Company
had no financial assets or liabilities periodically re-measured at
fair value.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all
share-based payment awards made to employees and directors,
including employee stock options based on the estimated fair values
at the date of grant. The compensation expense is recognized over
the requisite service period.
The Company's determination of estimated fair value of
share-based awards utilizes the Black-Scholes option-pricing model.
The Black-Scholes model is affected by the Company's stock price as
well as assumptions regarding certain highly complex and subjective
variables. These variables include, but are not limited to the
Company's expected stock price volatility over the term of the
awards as well as actual and projected employee stock options
exercise behaviors.
The cash flows from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those
options are to be classified as financing cash flows. Due to the
Company's loss position, there were no such tax benefits for the
years ended December 31, 2013 and 2012.
The Company determines the fair value of the restricted stock
awards utilizing the quoted market prices of the Company's shares
on the date they were granted.
Research and Development
Research development, and engineering costs are expensed in the
period incurred. Costs of significantly altering existing
technology are expensed as incurred.
Income Taxes
The Company accounts for income taxes under an asset and
liability approach. This process involves calculating the temporary
and permanent differences between the carrying amounts of the
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The temporary differences can
result in deferred tax assets and liabilities, which would be
recorded on the Company's balance sheets. The Company must assess
the likelihood that its deferred tax assets will be recovered from
future taxable income and, to the extent the Company believes that
recovery is not likely, the Company must establish a valuation
allowance. Changes in the Company's valuation allowance in a period
are recorded through the income tax provision on the statements of
operations.
Uncertainty in income taxes are recognized in the Company's
financial statements based on the recognition threshold and
measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. The impact
of an uncertain income tax position on the income tax return must
be recognized at the largest amount that is more-likely-than-not to
be sustained upon audit by the relevant taxing authority. An
uncertain income tax position will not be recognized if it has less
than a 50% likelihood of being sustained. During 2013 and 2012, the
Company did not recognize any liability for unrecognized income tax
benefits.
Loss Per Share
Basic loss per share is computed by dividing loss available to
common stockholders by the weighted-average number of common shares
outstanding. Diluted loss per share is computed similar to basic
loss per share except that the denominator is increased to include
the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if
the additional common shares were dilutive. Common equivalent
shares are excluded from the computation if their effect is
anti-dilutive. The Company's common share equivalents consist of
stock options, warrants and preferred stock.
The potential shares, which are excluded from the determination
of basic and diluted net loss per share as their effect is
anti-dilutive, are as follows:
Fiscal Years
Ended December
31,
-----------------------
2013 2012
----------- ----------
Options to purchase common stock 5,210,000 810,000
Warrants to purchase common stock 11,250,000 11,250,000
Common shares to be issued 59,000 59,000
Series B preferred shares conversion 24,000 24,000
---------- ----------
Potential equivalent shares excluded 16,543,000 12,143,000
========== ==========
Commitments and Contingencies
Certain conditions may exist as of the date the financial
statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events
occur or fail to occur. The Company's management and its legal
counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against
the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought therein. If the assessment of a contingency indicates that
it is probable that a material loss has been incurred and the
amount of the liability can be estimated, then the estimated
liability would be accrued in the Company's financial statements.
If the assessment indicates that a potentially material loss
contingency is not probable, but is reasonably possible, or is
probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss
if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed
unless they involve guarantees, in which case the nature of the
guarantee would be disclosed.
Estimates
The preparation of financial statements in accordance 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents
and accounts receivable. The Company places its cash and cash
equivalents with high credit, quality financial institutions. The
Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash
and cash equivalents. With respect to accounts receivable, the
Company routinely assesses the financial strength of its customers
and, as a consequence, believes that the receivable credit risk
exposure is limited.
Recent Accounting Pronouncements
Certain accounting standards that have been issued or proposed
by the FASB or other standards-setting bodies are not expected to
have a material impact on the Company's financial position, results
of operations and cash flows.
3. Inventory
Inventories, consisting of materials, labor, and manufacturing
overhead, are stated at the lower of cost (first-in, first-out) or
market and consist of the following at December 31:
2013 2012 2011
Raw
materials....................................................
.............................................................
..................... $ 3,098,000 $ 3,988,000 $ 4,431,000
Work-in-process..............................................
.............................................................
...................... 222,000 2,000 144,000
Finished
goods........................................................
.............................................................
.............. 449,000 587,000 644,000
Reserve for
obsolescence.................................................
.............................................................
... (3,342,000) (2,374,000) (1,183,000)
$ 427,000 $ 2,203,000 $ 4,036,000
Inventory reserve charged to operations amounted to $1,660,000
and $1,436,000 during 2013 and 2012, respectively. Inventory
valuation adjustments and other inventory write-offs in 2013 and
2012 amounted to $692,000 and $245,000, respectively.
4. Property and Equipment
Property and equipment consisted of the following at December
31:
2013 2012
Computers and
software...............................................................
................................................................. $ 59,000 $ 580,000
Machinery and
equipment..............................................................
............................................................... 251,000 535,000
Furniture and office
equipment..............................................................
....................................................... 86,000 87,000
Demonstration vehicles and
buses..................................................................
............................................ 127,000 675,000
Leasehold
improvements...........................................................
.................................................................... - 1,327,000
----------------------- -------------------
523,000 3,204,000
Less accumulated depreciation and
amortization...........................................................
............................ (443,000) (2,897,000)
Total.................................................................
......................................................................
.......................... $ 80,000 $ 307,000
Depreciation and amortization expense was $130,000 and $466,000
for the years ended December 31, 2013 and 2012, respectively, which
included amortization expense of leasehold improvements of $23,000
and $262,000 for the years ended December 31, 2013 and 2012,
respectively.
Fixed assets totaling $405,000 and $482,000 were retired or
disposed of in the years ended December 31, 2013 and 2012,
respectively. For the year ended December 31, 2013, fixed assets
with an original book value of $272,000 were exchanged in
settlement of vendor payables, two vehicles were sold and four
vehicles was repossessed. For the year ended December 31, 2013, the
Company recorded proceeds from the sale of fixed assets of $29,000
and a loss on the disposal of fixed assets of $29,000. In addition,
the Company's headquarters lease expired on January 31, 2013, which
resulted in a decrease in gross leasehold improvements in the
amount of $1,327,000 and a net book value of zero. For the year
ended December 31, 2012, the Company recorded an impairment loss of
$90,000 and loss on the disposal of fixed assets of $28,000.
5. Litigation judgment
On December 12, 2012, a judgment was entered by the United
States District Court Northern District of Illinois in favor of
Arens Controls Company, L.L.C. in the amount of $2,014,169
regarding claims for two counts. In 2008, Arens Controls Company,
L.L.C. ("Arens") filed claims against Enova with the United States
District Court Northern District of Illinois. A Partial Settlement
Agreement, as amended on January 14, 2011, resolved certain claims
made by Arens. However, the claims were preserved under two
remaining counts concerning i) anticipatory breach of contract by
Enova for certain purchase orders that resulted in lost profit to
Arens and ii) reimbursement for engineering and capital equipment
costs incurred by Arens exclusively for the fulfillment of certain
purchase orders received from Enova.
The Company filed an appeal of the judgment in the 7th Circuit
Court of Appeals on January 15, 2013. The Company believes the
court committed errors leading to the verdict and judgment.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages whatsoever that occurred
prior to the date of the Settlement Agreement. The Company was not
able to comply with the due date for such payment by January 22,
2014. Therefore, the judgment against the Company can be enforced
without further notice.
There can be no assurance that a negotiated settlement can be
attained, or that Arens will enforce its claim in the state of
California and thereby cause the Company to go into bankruptcy.
6. Other Accrued Liabilities
Other accrued liabilities consisted of the following at December
31:
2013 2012 2011
Accrued inventory
received.....................................................
.............................................................
.............. $ 10,000 $ 14,000 $ 2,000
Accrued professional
services.....................................................
.............................................................
.......... 161,000 45,000 150,000
Accrued
warranty.....................................................
.............................................................
................................ 74,000 117,000 227,000
Other........................................................
.............................................................
................................................... 49,000 79,000 138,000
Total.......................................................
............................................................
..................................................... $ 294,000 $ 255,000 $ 517,000
Accrued warranty consisted of the following activities for the
years ended December 31:
2013 2012 2011
Balance at beginning of
year..............................................................
............................................. $ 117,000 $ 227,000 $ 510,000
Accruals for warranties issued during
the
period............................................................
............ 96,000 141,000 470,000
Warranty
claims............................................................
..................................................................
... (139,000) (251,000) (753,000)
Balance at end of
year..............................................................
......................................................... $ 74,000 $ 117,000 $ 227,000
7. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
December December
31, 2013 31, 2012
Secured note payable to Credit Managers Association
of California, bearing interest at prime plus 3%
(6.25% as of December 31, 2013), and is adjusted
annually in April through maturity. Principal and
unpaid interest due in April 2016. A sinking fund
escrow may be funded with 10% of future equity financing,
as defined in the Agreement............................... $ 1,238,000 $ 1,238,000
Secured note payable to a Coca Cola Enterprises in
the original amount of $40,000, bearing interest
at 10% per annum. Principal and unpaid interest due
on demand................................ 40,000 40,000
Secured note payable to a financial institution in
the original amount of $38,000, bearing interest
at 8.25% per annum, payable in 60 equal monthly installments
of principal and interest through February 19,
2014................................................................................................... - 11,000
Secured note payable to a financial institution in
the original amount of $19,000, bearing interest
at 10.50% per annum, payable in 60 equal monthly
installments of principal and interest through August
25, 2014..................................................................................................... - 8,000
Secured note payable to a financial institution in
the original amount of $26,000, bearing interest
at 7.91% per annum, payable in 60 equal monthly installments
of principal and interest through April 9,
2015............................................................................................................ - 14,000
Secured note payable to a financial institution in
the original amount of $25,000, bearing interest
at 7.24% per annum, payable in 60 equal monthly installments
of principal and interest through March 10,
2016....................................................................................................... - 17,000
1,278,000 1,328,000
Less current portion of notes
payable............................................................................................... (40,000) (66,000)
Notes payable, net of current
portion............................................................................................... $ 1,238,000 $ 1,262,000
As of December 31, 2013 and 2012, the balance of long term
interest payable amounted to $1,401,000 and $1,318,000,
respectively, of which the Credit Managers Association of
California note amounted to $1,365,000 and $1,286,000,
respectively. Interest expense on notes payable amounted to
approximately $85,000 and $88,000 during the years ended December
31, 2013 and 2012, respectively. In June 2013, the vehicle that
secured the note payable due March 10, 2016 was repossessed by the
secured lender. The Company was invoiced by the lender for $8,000
for final settlement, which is included in accounts payable at
December 31, 2013. In the fourth quarter of 2013, three vehicles
that secured notes due on February 19, 2014, August 25, 2014 and
April 9, 2015 were repossessed by the secured lenders. The Company
has accrued approximately $18,000 for final settlements for the
three vehicles, which is included in other accrued liabilities at
December 31, 2013.
Future minimum principal payments of notes payable at December
31, 2012 consisted of the following:
Year Ending Principal
December 31 Amounts
2014................................................................................................................................................................................................... 40,000
2015................................................................................................................................................................................................... -
2016................................................................................................................................................................................................... 1,238,000
Thereafter......................................................................................................................................................................................... -
Total................................................................................................................................................................................................. $ 1,278,000
8. Revolving Credit Agreement
On June 30, 2010, the Company entered into a secured 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 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 fourth quarter of 2012, the irrevocable letter of
credit was fully drawn down by Sunshine Distribution L.P. in order
to pay rent on our corporate headquarters, and the certificate of
deposit was fully utilized to fund draws on the secured facility.
Therefore, the facility was fully drawn and expired on December 31,
2012.
9. Deferred Revenues
The Company had deferred $213,000 and $118,000 in revenue
related to production and development contracts at December 31,
2013 and 2012, respectively. The Company's management is attempting
to obtain funding to complete the orders in the second quarter of
2014.
10. Commitments and Contingencies
Leases
In October 2007, the Company entered into a lease agreement with
Sunshine Distribution LP ("Landlord"), with respect to the lease of
an approximately 43,000 square foot facility located at 1560 West
190th Street, Torrance, California (the "Lease"). The lease term
commenced on November 1, 2007, and expired January 31, 2013. Our
corporate offices are currently located at a manufacturing and
warehouse facility at 2945 Columbia Street, Torrance, California
which we are sub-leasing on a month-to-month basis.
The total base monthly rent at our former headquarters was
approximately $39,000. Under the Lease, Enova paid the Landlord
certain commercially reasonable and customary common area
maintenance costs of approximately $5,000 per month, increasing
ratably as these costs are increased to the Landlord. The Lease was
secured by an irrevocable standby letter of credit in the amount of
$200,000 and naming the Landlord as the beneficiary. Rent expense
was approximately $111,000 and $537,000 for the years ended
December 31, 2013, and 2012, respectively.
11. Stockholders' Equity
Common Stock
On April 23, 2012, the Company entered into a $6,600,000
purchase agreement with Lincoln Park Capital Fund pursuant to which
the Company has the right to sell to Lincoln Park up to $6,600,000
in shares of the Company's common stock, and on April 24, 2012, the
Company entered into another purchase agreement with Lincoln Park
Capital Fund pursuant to which the Company has the right to sell to
Lincoln Park up to $3,400,000 in additional shares of the Company's
common stock, subject to certain limitations. We issued a total of
1,754,974 shares of common stock in the second quarter of 2012, of
which 1,450,000 shares were issued for cash proceeds of $132,000,
net of financing costs of $152,000, as consideration for its
commitment to purchase common stock under the $3,400,000 Purchase
Agreement and commissions on each drawdown, the Company issued to
Lincoln Park a total of 304,974 shares of common stock. The
purchase agreement stipulates that our shares be listed on a
national exchange in order to access the facility. As the company's
shares were delisted from the NYSE MKT LLC on October 31, 2012, the
Company is no longer able to sell shares to Lincoln Park under the
facility.
On February 23, 2014, Enova Systems, Inc, entered into
Subscription Agreements with various offshore investors to sell
approximately GBP 150,000 (approximately US$248,000) in gross
proceeds by a private subscription of 19,999,998 common shares to
be newly issued on the Alternative Investment Market of the London
Stock Exchange (the "AIM Exchange"). The common shares were issued
at a price of 0.0075 pence (approximately US$0.01per share) to
certain eligible offshore investors (the "Subscription"). In
connection with the Subscription, Enova entered into an Agreement
for the Provision of Receiving Agent Services (the "Agreement")
with Daniel Stewart & Company PLC (UK) for receiving agent
services. Daniel Stewart presently serves as the Nominated Adviser
for the listing of Enova's common shares on the AIM Exchange. The
newly issued common shares for the Subscription were issued in
three tranches of approximately GBP 50,000 each.
Daniel Stewart received an introducing agent's fee of 10% of the
aggregate funds raised pursuant to the subscription in addition to
reimbursement of expenses. Factoring in the commission, legal and
other expenses of the offering, Enova received approximately
US$223,000 in net proceeds.
The offer and sale of the shares were made pursuant to
Regulation S under the Securities Act of 1933, as amended (the
"Securities Act"). Among other things, each investor purchasing
shares of Enova's common stock in the offering represented that the
investor is not a United States person as defined in Regulation S.
In addition, neither Enova nor the receiving agent conducted any
selling efforts directed at the United States in connection with
the offering. All shares of common stock issued in the offering
included a restrictive legend indicating that the shares were
issued pursuant to Regulation S under the Securities Act and are
deemed to be "restricted securities." As a result, the purchasers
of such shares will not be able to resell the shares unless in
accordance with Regulation S, pursuant to a registration statement,
or upon reliance of an applicable exemption from registration under
the Securities Act. The shares to be sold pursuant to the
Subscription Agreements were not registered under the Securities
Act, and there is no obligation on the part of Enova to so register
such shares.
During the twelve months ended December 31, 2013 and 2012, the
Company did not issue any shares of common stock to directors or
employees as compensation.
Series A Preferred Stock
Series A preferred stock was convertible into 1/45 of a share of
common stock at the election of the holder or automatically upon
the occurrence of certain events including: sale of stock in an
underwritten public offering; registration of the underlying
conversion stock; or the merger, consolidation, or sale of more
than 50% of the Company. Holders of Series A preferred stock had
the same voting rights as common stockholders. The stock had a
liquidation preference of $0.60 per share plus any accrued and
unpaid dividends in the event of voluntary or involuntary
liquidation of the Company. Dividends are non-cumulative and
payable at the annual rate of $0.036 per share if, when, and as
declared by, the Board of Directors. No dividends were declared on
the Series A preferred stock.
On October 26, 2012, the Company registered 58,714 shares of
common stock through a Form S-3 Registration Statement, which
became effective on November 21, 2012. Therefore, all 2,642,159
outstanding shares of Series A Preferred Stock were automatically
converted into 58,714 of common stock as of the effectiveness of
the registration statement. The Company has not issued the common
shares as of December 31, 2013.
Series B Preferred Stock
Series B preferred stock is currently unregistered. Each share
is convertible into 2/45 of a share of common stock at the election
of the holder or automatically upon the occurrence of certain
events including: sale of stock in an underwritten public offering,
if the offering results in net proceeds of $10,000,000, and the per
share price of common stock is at least $2.00; and the merger,
consolidation, or sale of common stock or sale of substantially all
of the Company's assets in which gross proceeds received are at
least $10,000,000. The Series B preferred stock has certain
liquidation and dividend rights prior and in preference to the
rights of the common stock and Series A preferred stock. The stock
has a liquidation preference of $2.00 per share together with an
amount equal to, generally, $0.14 per share compounded annually at
7% per year from the filing date, less any dividends paid.
Dividends on the Series B preferred stock are non-cumulative and
payable at the annual rate of $0.14 per share if, when, and as
declared by, the Board of Directors. No dividends have been
declared on the Series B preferred stock.
12. Stock Options
Stock Option Program Description
For the year ended December 31, 2013 the Company had two equity
compensation plans, the 1996 Stock Option Plan (the "1996 Plan")
and the 2006 equity compensation plan (the "2006 Plan"). The 1996
Plan has expired for the purposes of issuing new grants. However,
the 1996 Plan will continue to govern awards previously granted
under that plan. The 2006 Plan has been approved by the Company's
Shareholders. Equity compensation grants are designed to reward
employees and executives for their long term contributions to the
Company and to provide incentives for them to remain with the
Company. The number and frequency of equity compensation grants are
based on competitive practices, operating results of the Company,
and government regulations.
The maximum number of shares issuable over the term of the 1996
Plan was limited to 65 million shares (without giving effect to
subsequent stock splits). Options granted under the 1996 Plan
typically have an exercise price of 100% of the fair market value
of the underlying stock on the grant date and expire no later than
ten years from the grant date. On August 27, 2013, the Board of
Directors of Enova Systems, Inc. approved amendments to the
Company's 2006 Equity Compensation Plan to (a) increase the number
of shares authorized for issuance thereunder from 3,000,000 shares
to 9,000,000 shares and (b) to increase the number of shares of
common stock that may be issued to an individual in any calendar
year from 500,000 shares to 5,000,000 shares. The 2006 Plan has a
total of 4,400,000 and 270,000 shares that were granted in 2013 and
2012, respectively.
Stock-based compensation expense related to stock options was
$16,000 and $171,000 for the years ended December 31, 2013 and
2012, respectively. As of December 31, 2013, the total compensation
cost related to non-vested awards not yet recognized is $42,000.
The remaining period over which the future compensation cost is
expected to be recognized is 26 months.
Stock-based compensation expense recognized in the Statement of
Operations for the years ended December 31, 2013 and 2012 has been
based on awards ultimately expected to vest. Forfeitures are
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. If the actual number of forfeitures differs from that
estimated by management, additional adjustments to compensation
expense may be required in future periods.
The following is a summary of changes to outstanding stock
options during the fiscal year ended December 31, 2013 and
2012:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Share Price Life Value(1)
Options
Outstanding at December 31,
2011................................................................................. 2,529,000 $ 1.07 6.09 $ -
Granted................................................................................
.............................................. 270,000 $ 0.08 3.96 $ -
Exercised...............................................................................
............................................. - $ - - $ -
Forfeited or
Cancelled..............................................................................
....................... (1.989,000) $ 1.11 - $ -
Outstanding at December 31,
2012................................................................................. 810,000 $ 0.64 4.06 $ -
Granted................................................................................
.............................................. 4,400,000 $ 0.02 2.66 $ -
Exercised...............................................................................
............................................. - $ - - $ -
Forfeited or
Cancelled...............................................................................
...................... - $ - - $ -
Outstanding at December 31,
2012................................................................................. 5,210,000 $ 0.12 2.72 $ -
==========
Exercisable at December 31,
2012.................................................................................... 675,000 $ 0.75 3.26 $ -
==========
Vested and expected to
vest(2).................................................................................
...... 5,210,000 $ 0.64 4.06 $ -
==========
____________
(1) Aggregate intrinsic value represents the value of the closing
price per share of our common stock on the last trading day
of the fiscal period in excess of the exercise price multiplied
by the number of options outstanding or exercisable, except
for the "Exercised" line, which uses the closing price on
the date exercised.
(2) Number of shares includes options vested and those expected
to vest net of estimated forfeitures.
During 2013 and 2012, the Company granted 4,400,000 and 270,000
options for fair value of $39,500 and $13,500, respectively. During
2013 and 2012, zero and 1,989,000 options were forfeited.
At December 31, 2013, there were 3,790,000 shares available for
grant under the 2006 plan. The exercise prices of the options
outstanding at December 31, 2013 ranged from $0.02 to $4.35. The
weighted-average grant date fair value of the options granted
during the years ended December 31, 2013 and 2012 was $0.01 and
$0.05, respectively.
Unvested share activity for the year ended December 31, 2013 is
summarized below:
Unvested Weighted-Average
Number Grant Date Fair
of Value
Options
Unvested balance at December 31,
2012....................................................................................................... 236,000 $ 0.04
Granted...................................................................................................
........................................................... 4,400,000 $ 0.02
Vested....................................................................................................
............................................................ (101,000) $ 0.11
Forfeited..................................................................................................
.......................................................... - $ -
Unvested balance at December 31,
2012....................................................................................................... 4,535,000 $ 0.02
The Company settles employee stock option exercises with newly
issued common shares. The table below presents information related
to stock option activity for the fiscal years ended December 31,
2013 and 2012:
Years Ended
December 31,
2013 2012
Total intrinsic value of stock options
exercised.......................................... $ - $ -
Cash received from stock option exercises.................................................. $ - $ -
Gross income tax benefit from the exercise
of stock options.................... $ - $ -
Valuation and Expense Information
The fair value of stock-based awards to officers and employees
is calculated using the Black-Scholes option pricing model. The
Black-Scholes model requires subjective assumptions, including
future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options
granted is calculated by using the SAB 107 "simplified method" of
estimating the expected term which is derived by taking the average
of the time to vesting and the full term of the option. The
risk-free rate selected to value any particular grant is based on
the bond equivalent yields that corresponds to the pricing term of
the grant effective as of the date of the grant. The expected
volatility is based on the historical volatility of the Company's
stock price. These factors could change in the future, affecting
the determination of stock-based compensation expense in future
periods.
The fair values of all stock options granted during the fiscal
years ended December 31, 2013 and 2012 were estimated on the date
of grant using the following range of assumptions:
Years Ended
December 31,
2013 2012
Expected life (in
years)..................................................................................
................................................. 1.5 1.5- 6.5
Average risk-free interest
rate...................................................................................
................................... 1.66% 1.66%
Expected
volatility............................................................................. 108% -
............................................................. 118% 135%
Expected dividend
yield..................................................................................
.............................................. 0% 0%
Forfeiture
rate...................................................................................
............................................................... 3% 3%
The estimated fair value of grants of stock options to
nonemployees of the Company is charged to expense, if applicable,
in the financial statements. These options vest in the same manner
as the employee options granted under each of the option plans as
described above.
13. Warrants
In December 2011, the Company completed a private equity
placement of 11,250,000 shares of common stock for $1,245,000
together with warrants to purchase up to 11,250,000 shares of
common stock to a group of 17 shareholders (the "Low-Beer Managed
Accounts"). The warrants are exercisable for a period of five years
and exercisable at a price of $0.22 per share. The warrants further
provide that if, for a twenty consecutive trading day period, the
average of the closing price quoted on the OTCQB market is greater
than or equal to $0.44 per share, with at least an average of
10,000 shares traded per day, then, on the 10th calendar day
following written notice from the Company, any outstanding warrants
will be deemed automatically exercised pursuant to the cashless/net
exercise provisions under the warrants.
The following is a summary of changes to outstanding warrants
during the fiscal year ended December 31, 2013 and 2012:
Weighted
Number Weighted Average
of Average Remaining
Share Exercise Contractual
Options Price Life
----------- ------------ ---------------
Outstanding at December 31, 2011 11,250,000 $ 0.22 5.00
Granted - $ - -
Exercised - $ - -
Forfeited or Cancelled - $ - -
---------- -------- ---------------
Outstanding at December 31, 2012 11,250,000 $ 0.22 4.00
========== ======== ===============
Granted - $ - -
Exercised - $ - -
Forfeited or Cancelled - $ - -
---------- -------- ---------------
Outstanding at December 31, 2013 11,250,000 $ 0.22 3.00
========== ======== ===============
Exercisable at December 31, 2013 11,250,000 $ 0.22 3.00.
========== ======== ===============
14. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31,
consisted of the following:
2013 2012 2011
Deferred tax assets
Net operating loss
carry-forwards.................................
...............................................
................... $ 27,516,000 $ 25,079,000 $ 25,701,000
Stock based
compensation...................................
...............................................
............................. 852,000 845,000 772,000
Other,
net...........................................
..............................................
..............................................
..... 36,000 (406,000) (743,000)
28,404,000 27,518,000 25,730,000
Less valuation
allowance.......................................
................................................
............................ (28,404,000) (27,518,000) (25,730,000)
Net deferred tax
assets........................................
..............................................
.............................. $ - $ - $ -
The Tax Reform Act of 1986 limits the use of net operating loss
carryforwards in certain situations where changed occur in the
stock ownership of a company. In the event the Company has had a
change in ownership, utilization of the carryforwards could be
restricted.
Deferred taxes arise from temporary differences in the
recognition of certain expenses for tax and financial reporting
purposes. The deferred tax assets have been offset by a valuation
allowance since management does not believe the recoverability of
these in future years is more likely than not to occur. The
valuation allowance increased by $887,000 in 2013 compared to a
increase of $1,788,000 in 2012. As of December 31, 2013, the
Company had net operating loss carry forwards for federal and state
income tax purposes of approximately $67,817,000 and $50,428,000,
respectively. These operating loss carry forwards will expire in
2014 through 2033.
The provision for income taxes differs from the amount computed
by applying the U.S. federal statutory tax rate (34% in 2013 and
2012) to income taxes as follows:
December December 31, December 31,
31,
2013 2012 2011
Tax benefit computed at
34%................................................
.................................................. $ (987,000) $ (2,800,000) $ (2,375,000)
Change in valuation
allowance..........................................
...................................................
.. 887,000 1,788,000 (2,346,000)
State tax (net of Federal
benefit)...........................................
.................................................. (169,000) (480,000) (406,000)
Change in carryovers and tax
attributes.........................................
....................................... 269,000 1,492,000 5,127,000
Net tax
benefit............................................
...................................................
............................. $ - $ - $ -
The Company files federal income tax returns in the U.S. and in
various state jurisdictions. The Company has not been audited by
the Internal Revenue Service or any state for income taxes. The
Company reviews its recognition threshold and measurement process
for recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. The Company reviews
all material tax positions for all years open to statute to
determine whether it is more likely than not that the positions
taken would be sustained based on the technical merits of those
positions. The Company did not recognize any adjustments for
uncertain tax positions as of and during the years ended December
31, 2013 and 2012.
15. Employee Benefit Plan
The Company has a 401(k) profit sharing plan covering
substantially all employees. Eligible employees may elect to
contribute a percentage of their annual compensation, as defined,
to the plan. The Company may also elect to make discretionary
contributions. For the years ended December 31, 2013 and 2012, the
Company did not make any contributions to the plan. The Company
closed the 401(k) plan in 2013.
16. Geographic Area Data
The Company operates as a single reportable segment and
attributes revenues to countries based upon the location of the
entity originating the sale. Revenues by geographic area are as
follows:
2013 2012
United
States...............................................................
.....................................................................
................... $ 87,000 $ 142,000
China................................................................
.....................................................................
................................ 324,000 716,000
United
Kingdom..............................................................
.....................................................................
............... 8,000 243,000
South 7,000 -
Korea................................................................
.....................................................................
....................
Japan................................................................
.....................................................................
................................ - 2,000
Total................................................................
.....................................................................
................................. $ 426,000 $ 1,103,000
17. Concentration
During the years ended December 31, 2013 and 2012, the Company's
sales were concentrated with a few large customers. During the year
ended December 31, 2013, sales to two customers comprised 76% and
19% of total revenues and two customers accounted for 62% and 38%
of gross accounts receivable, respectively. During the year ended
December 31, 2012, sales to two customers comprised 63% and 20% of
total revenues and two customers accounted for 61% and 39% of gross
accounts receivable, respectively. The Company performs ongoing
credit evaluations of certain customers' financial condition and
generally requires no collateral from its customers. The Company's
inventory purchases are concentrated with certain key vendors that
produce components according to our engineering specifications.
During the year ended December 31, 2013, 47% of purchases were
concentrated with one vendor and during the year ended December 31,
2012, 39% of purchases were concentrated with one vendor.
18. Subsequent Events
The Company has evaluated subsequent events and has determined
that other than noted below, there were no subsequent events to
recognize or disclose in these financial statements.
On February 23, 2014, Enova Systems, Inc, entered into
Subscription Agreements with various offshore investors to sell
approximately GBP 150,000 in gross proceeds by a private
subscription of 19,999,998 common shares to be newly issued on the
Alternative Investment Market of the London Stock Exchange (the
"AIM Exchange"). The common shares were issued at a price of 0.0075
pence (approximately US$0.01per share) to certain eligible offshore
investors (the "Subscription"). In connection with the
Subscription, Enova entered into an Agreement for the Provision of
Receiving Agent Services (the "Agreement") with Daniel Stewart
& Company PLC (UK) for receiving agent services. Daniel Stewart
presently serves as the Nominated Adviser for the listing of
Enova's common shares on the AIM Exchange. The newly issued common
shares for the Subscription were issued in three tranches of
approximately GBP50,000 each.
Daniel Stewart received an introducing agent's fee of 10% of the
aggregate funds raised pursuant to the subscription in addition to
reimbursement of expenses. Factoring in the commission, legal and
other expenses of the offering, Enova received approximately
US$223,000 in net proceeds.
The offer and sale of the shares were made pursuant to
Regulation S under the Securities Act of 1933, as amended (the
"Securities Act"). Among other things, each investor purchasing
shares of Enova's common stock in the offering represented that the
investor is not a United States person as defined in Regulation S.
In addition, neither Enova nor the receiving agent conducted any
selling efforts directed at the United States in connection with
the offering. All shares of common stock issued in the offering
included a restrictive legend indicating that the shares were
issued pursuant to Regulation S under the Securities Act and are
deemed to be "restricted securities." As a result, the purchasers
of such shares will not be able to resell the shares unless in
accordance with Regulation S, pursuant to a registration statement,
or upon reliance of an applicable exemption from registration under
the Securities Act. The shares to be sold pursuant to the
Subscription Agreements were not registered under the Securities
Act, and there is no obligation on the part of Enova to so register
such shares.
19. Related Party Transactions
As of December 31, 2013, Mr. Micek, who serves as Chief
Executive Officer, and another employee, have loaned the Company a
total of $36,000 in support of continued operations. In addition,
in an 8-K filed on March 6, 2014, Mr. Micek orally agreed to loan
the Company the amount of $50,000, with repayment due on demand. As
of April 23, 2014, Mr. Micek has advanced $43,000 to the
Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by SEC Rule 13a-15(b) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Company carried
out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange
Act) as of December 31, 2013. Based on that evaluation, our
management, including the Chief Executive Officer and Chief
Financial Officer, concluded that as of December 31, 2013, our
disclosure controls and procedures were not effective to ensure the
information required to be disclosed by an issuer in the reports it
files or submits under the Securities Exchange Act of 1934, is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules
and forms relating to us, and was accumulated and communicated to
our management, including our Chief Executive Officer and Chief
Financial Officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required
disclosure. There are inherent limitations to the effectiveness of
any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of
achieving their control objectives.
Management's Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in
Rule 13a-15(f) promulgated under the Exchange Act. We maintain
internal control over financial reporting designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision and with the participation of management,
including the Company's Chief Executive Officer and Chief Financial
Officer, the Company conducted an evaluation of the effectiveness
of its internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
This evaluation included an assessment of the design of the
Company's internal control over financial reporting and testing of
the operational effectiveness of its internal control over
financial reporting.
In June 2012, all but two of the Company's employees resigned,
and such staff reduction resulted in our inability to complete
documentation of proper accounting procedures and management
review. Not all fully implemented fundamental elements of an
effective control were present as of December 31, 2013, including
formalized monitoring procedures. Based on this evaluation,
management has concluded that the aforementioned factors
constituted a material weakness in the Company's internal control
over financial reporting as of December 31, 2013.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. We were not required to have, nor have we
engaged our independent registered public accounting firm, to
perform an audit of internal control over financial reporting
pursuant to the rules of the Securities and Exchange Commission
that permits us to provide only management's report in this annual
report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over
financial reporting during the quarter ended December 31, 2013 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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