TIDMENV TIDMENVS
RNS Number : 4445A
Enova Systems, Inc.
30 March 2012
Enova Systems, Inc
Results for Year Ended December 31 2011
For Immediate release 29th of March 2012
Enova Systems, Inc., (NYSE Amex: ENA and AIM: ENV and ENVS), a
leading developer and manufacturer of electric, hybrid and fuel
cell digital power management systems, announces results for the
fiscal year ended December 31, 2011.
Inquires:
Enova Systems
Mike Staran, Chief Executive Officer +1(310) 527-2800 x137
Michael Staran, Chief Executive Officer +1(310) 527-2800 x137
John Micek, Chief Financial Officer +1(310) 527-2800 x103
Daniel Stewart & Company Plc
Jamie Barklem +44 (0) 20 7776 6550
HIGHLIGHTS
For and as of the
Year Ended
December 31,
2011 2010
Revenues $ 6,622,000 $ 8,572,000
Cost of revenues 6,364,000 7,159,000
Gross income 258,000 1,413,000
Operating expenses
Research and development 2,039,000 1,838,000
Selling, general & administrative 5,075,000 6,558,000
Total operating expenses 7,114,000 8,396,000
Operating loss (6,856,000) (1,714,000)
Other income and (expense)
Interest and other income
(expense) (128,000) (437,000)
Total other income and
(expense) (128,000) (437,000)
Net loss (6,984,000) $ (7,420,000)
For the Years Ended December 31, 2011 compared December 31,
2010
Net Revenues. Net revenues were $6,622,000 for the year ended
December 31, 2011, representing a decrease of $1,950,000 or 23%
from net revenues of $8,572,000 during the same period in 2010.
Revenues in the current year benefited from fulfillment of major
orders from Smith Electric Vehicles, Freightliner and Navistar Inc.
in the first half of 2011. In the second half of 2011, revenues
decreased due to tightened government and school district budgets
resulting in decreased demand for vehicles of our major customers'
vehicles. Smith Electric Vehicles, Navistar, FAW and HCATT
comprised 52%, 16%, 16% and 10% of our 2011 revenues, respectively.
In the prior year, Smith Electric Vehicles, Navistar and FAW
comprised 45%, 26% and 14% of our 2010 revenues, respectively. The
Company continued its strategy to concentrate support to core
customers in 2011 in our migration to a first tier production
company, recording sales with several OEMs, including Freightliner
and Smith Electric Vehicles in the United States and FAW in China.
Although we have seen indications for future production growth,
there can be no assurance there will be continuing demand for our
products and services.
Cost of Revenues. Cost of revenues were $6,364,000 for the year
ended December 31, 2011, compared to $7,159,000 for the year ended
December 31, 2010, representing a decrease of $795,000, or 11%.
Cost of revenues decreased in 2011 compared to the same period in
the prior year primarily due to the decrease in revenue. In
addition, cost of revenues was affected by charges to increase
inventory reserve associated with certain obsolete parts. 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. Our
customers continue to require additional integration and support
services to customize, integrate and evaluate our products. We
believe that a portion of these costs are initial, one-time costs
for these customers and anticipate similar costs to be incurred
with respect to new customers as we pursue a greater market share.
Typically we do not incur these same types of costs for customers
who have been using our products for over one year.
Gross Margin. The gross margin for the year ended December 31,
2011 was 3.9% compared to 16.5% in the prior year, a decrease of
12.6 percentage points. The decrease in gross margin is primarily
attributable to lower production volumes, to a change in product
mix towards lower profitability components, to charges to increase
the inventory reserve in the fourth quarter of 2011 associated with
certain obsolete parts as well as charges to the warranty reserve
due to higher than anticipated warranty claims. We continued our
focus on key customer production contracts, maturity of our supply
chain, and efficiencies gained through focus on manufacturing and
inventory processes to tighten controls over production costs. As
we make deliveries on production contracts in 2012, we expect to
achieve benefit from these initiatives, although we may continue to
experience variability in our gross margin.
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, 2011 were $2,039,000 compared to $1,838,000 for the same period
in 2010, an increase of $201,000 or approximately 11%. R&D
costs were higher in 2011 as we continued to devote engineering
personnel resources to the development of our next generation Omni
motor control unit, charger and DC/DC converter. In addition, we
focused effort into integration of new electric motors into our
system, which culminated in our entering into a formal supply
agreement with Remy Corporation in March 2012. We also continued to
allocate necessary resources to the development and testing of
upgraded proprietary control software, new battery technologies and
internal development of automated testing equipment. We intend to
continue to research and develop new technologies and products,
both internally and in conjunction with our alliance partners and
other manufacturers as we deem beneficial to our global growth
strategy.
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 $1,483,000, or
23%, during the year ended December 31, 2011 to $5,075,000 from
$6,558,000 in the prior year, primarily due to decreases in
headcount which in turn resulted in reduced personnel expenses, and
decreases in incentive bonuses and share-based compensation
charges.
Interest and Other Income (Expense). For the year ended December
31, 2011, interest and other expense was $128,000, a decrease of
$309,000 or 71%, from an expense of $437,000 in 2010. The primary
reason for the decrease is due to our recording a charge of
approximately $328,000 in 2010 for partial settlement of litigation
with Arens, as detailed in Item 3 - Legal Proceedings of this Form
10-K.
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, 2011 were financed by product sales,
working capital reserves and an equity offering in December 2011
that resulted in net proceeds of $1,245,000. As of December 31,
2011, the Company had $3,096,000 of cash and cash equivalents and
short term investments.
On June 30, 2010, the Company entered into a secured a revolving
credit facility with a financial institution for $200,000 which was
secured by a $200,000 certificate of deposit. The facility is for a
period of 3 years and 6 months from July 1, 2010 to December 31,
2013. The interest rate on a drawdown from the facility is the
certificate of deposit rate plus 1.25% with interest payable
monthly and the principal due at maturity. The financial
institution also renewed the $200,000 irrevocable letter of credit
for the full amount of the credit facility in favor of Sunshine
Distribution LP, with respect to the lease of the Company's
corporate headquarters at 1560 West 190th Street, Torrance,
California.
Net cash used in operating activities was $6,302,000 for the
year ended December 31, 2011, compared to $4,319,000 for the year
ended December 31, 2010. Cash used in operating activities was
primarily affected by the cost of revenue, R&D, personnel and
general operating costs, which were partially mitigated by our
utilization of existing inventory balances to fulfill customer
orders in 2011. Non-cash items included expenses for stock-based
compensation, depreciation and amortization, inventory reserve,
impairment loss, loss on litigation settlement, reserve for
doubtful accounts and issuance of common stock for services.
Net cash used in investing activities was $275,000 for the year
ended December 31, 2011, compared to net cash used of $317,000 for
the year ended December 31, 2010. In 2011 and 2010, investing
activities consisted of capital expenditures expended mainly for
the acquisition and integration of test vehicles and for test
equipment utilized in R&D and production.
Net cash provided from financing activities totaled $1,242,000
for the year ended December 31, 2011, compared to net cash used in
financing activities of $11,000 for the year ended December 31,
2010. Financing activities in 2011 were primarily attributable to a
private offering of common stock. We sold 11,250,000 shares of
common stock at $0.15 per share to certain accredited investors,
resulting in gross proceeds of $1,687,500 and net proceeds of
$1,245,000 after costs related to the equity raise. In 2010, net
cash used in financing activities was attributable to proceeds from
stock options and payments made on notes payable agreements.
The Company maintained the same certificate of deposit with
Union Bank with a balance of $200,000 in 2011 and 2010, which is
used to secure a credit facility.
Accounts receivable decreased by $2,091,000, or 73%, to $759,000
as of December 31, 2011 from $2,850,000 as of December 31, 2010.
The decrease in receivables as of December 31, 2011 as compared to
the prior year end is attributable to normal collections of
receivables and the reduction in sales volume. In addition,
receivables increased as of December 31, 2010 due to the
fulfillment of several large shipments to Smith Electric Vehicles,
Navistar and FAW in the fourth quarter of 2010, which were
collected during 2011.
Inventory decreased by $419,000, or 9%, from $4,455,000 as of
December 31, 2010 to $4,036,000 as of December 31, 2011. The
decrease resulted from net inventory activity made up of receipts
of $4,476,000, which included approximately $1,200,000 received in
the first quarter in connection with the Arens litigation
settlement, consumption of $4,050,000 from sales, research and
development, and warranty utilization, and an inventory reserve
charge of $845,000 primarily attributable to increases in the
reserve on obsolete inventory.
Prepaid expenses and other current assets decreased by $240,000,
or approximately 50%, to $242,000 as of December 31, 2011 from a
balance of $482,000 as of December 31, 2010. The decrease was
primarily attributable to decreases in the deposits made to vendors
for certain purchase orders as purchased inventory was received in
the first half of 2011.
Long term accounts receivable decreased by $21,000, or 21%, to
$79,000 as of December 31, 2011 compared to $100,000 at December
31, 2010. The Company agreed to defer collection of accounts
receivable as requested by a customer for the term of the Company's
warranty period. The Company has remedied all past and current
warranty claims and anticipates full collection of the
receivable.
Property and equipment decreased by $244,000 or approximately
21%, net of accumulated depreciation, to $928,000 as of December
31, 2011 from a balance of $1,172,000 as of December 31, 2010. The
decrease was primarily due to recording of depreciation expense
during 2011 and due to fewer additions to fixed assets in 2011
compared to 2010. For the year ended December 31, 2011, the Company
recognized depreciation expense of $495,000 and recorded additions
to fixed assets totaling $300,000.
Accounts payable decreased by $1,493,000, or approximately 81%,
to $354,000 at December 31, 2011 from $1,847,000 at December 31,
2010. The decrease was primarily due to payments in 2011 for
inventory purchases made in 2010 in support of customer sales in
the fourth quarter of 2010 and first quarter of 2011.
Deferred revenue increased by $289,000, or approximately 932%,
to $320,000 as of December 31, 2011 from $31,000 as of December 31,
2010. The balance at December 31, 2011 is anticipated to be
realized into revenue in the first half of 2012, and is associated
with prepayments on purchases orders from certain customers.
Accrued payroll and related expenses decreased by $656,000, or
71%, to $266,000 as of December 31, 2011 from $922,000 at December
31, 2010. The change is primarily due to the accrual in 2010 of
executive incentive and employee bonuses which were paid in 2011
and decreases in accrued payroll and accrued vacation balances as
of December 31, 2011 compared to the same period in 2010 due to a
decrease in employee headcount in the second half of 2011.
Other accrued liabilities decreased by $1,222,000, or 70%, to
$517,000 at December 31, 2011 from $1,739,000 at December 31, 2010.
The decrease was primarily due to payments made in January 2011 for
losses accrued in 2010 on the partial litigation settlement with
Arens Controls Company L.L.C. in January 2011 and other payments
made during 2011 for professional services accrued in 2010. In
addition, the accrued warranty balance at December 31, 2011
compared to December 31, 2010 decreased as costs for warranty
repairs were greater than warranty accruals for sales during
2011.
Accrued interest increased by $81,000, or 7%, to $1,237,000 at
December 31, 2011 from $1,156,000 at December 31, 2010. 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
Our ongoing operations and anticipated growth will require us to
make necessary investments in human and production resources,
regulatory compliance, as well as sales and marketing efforts. We
do not currently have adequate internal liquidity to meet these
objectives in the long term. To do so, we will need to continue to
look for partnering opportunities and other external sources of
liquidity, including the public and private financial markets and
strategic partners. 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, 2011. As of December 31, 2011, we had an accumulated
deficit of approximately $151.1 million, working capital of
approximately $6.8 million and total shareholders' equity of
approximately $5.3 million.
In October 2011, we launched an expense reduction program
designed to improve our cost structure and to deliver improved
operational growth, which included reductions in our employee
headcount. We did not incur any significant restructuring charges
as a result of this cost reduction program, which was completed by
the end of 2011.
In December 2011, we successfully raised approximately
$1,245,000, net of financing costs of $442,500 through an equity
issuance to certain accredited investors. See Note 11 -
Stockholders' Equity for further analysis of the equity issuance.
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.
ITEM 1. BUSINESS
General
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.
Enova believes it is 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 is to develop and
produce advanced proprietary software and hardware for applications
in these alternative power markets. Our focus is powertrain systems
including digital power conversion, power management and system
integration, focusing chiefly on vehicle power generation.
Specifically, we develop, design 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 is to design and introduce to
market successively advanced products, each based on our core
technical competencies. In each of our product/market segments, we
provide products and services to leverage our core competencies in
digital power management, power conversion and system integration.
We believe that the underlying technical requirements shared among
the market segments will allow us to more quickly transition from
one emerging market to the next, with the goal of capturing early
market share.
Enova's primary market focus centers 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. As we penetrate new market areas, we are continually
refining both our market strategy and our product line to maintain
our leading 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, programs 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. We have also added
a supplementary section to our website via www.greenforfree.com.
The Green for Free(TM) program allows fleet executives to purchase
all-electric vehicles for the cost of a diesel-powered commercial
vehicle. The savings that fleets benefit through the reduced
maintenance and fuel savings of the electric vehicles (EVs) is then
used over a period of time to cover the incremental expense for the
technology.
We continue to develop existing relationships and enter into new
development programs with both governmental and private industry
with regards to both commercial and military application of our
electric and hybrid electric drive systems and fuel cell power
management technologies. Although we believe that current
negotiations with several parties may result in development and
production contracts during 2012 and beyond, there are no
assurances that such additional agreements will be realized.
During 2011, we continued to produce electric and hybrid
electric drive systems and components for First Auto Works of China
("FAW"), Smith Electric Vehicles ("Smith"), Freightliner Custom
Chassis Corporation ("Freightliner"), Navistar Corporation
("Navistar"), Optare Bus ("Optare") and the US Military 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.
Enova continues to believe that its business outlook will
improve in line with the recovery of the world economy and in light
of messages from the governments in the United States, China and
the United Kingdom regarding their intentions to mandate the
reduction of greenhouse gas emissions in the future as well as
intentions to provide government incentives that may induce
consumption of our products and services.
In 2011, the Company delivered a total of 305 full systems and
85 additional motor controller units of Enova drive systems to its
customers. Enova delivered 170 all-electric drive systems to Smith
in 2011. Enova also delivered 112 pre-transmission hybrid drive
systems to FAW for their Jiefang 103 passenger hybrid bus and 11
charge depleting bus systems to Navistar during 2011.
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 Europe and Asia 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 continuing strategy is to adapt ourselves to the
ever-changing environment of alternative fuel markets for mobile
applications. Originally focusing on pure electric drive systems,
we are currently 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. In 2011, Enova furthered
its penetration into the U.S. and Asian markets. 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.
Some highlights of our accomplishments in 2011:
-- Green For Free(TM). In November 2011, Enova announced its
Green for Free(TM) Program, which is designed to allow fleet
executives to operate full 100% electric commercial vehicles (EVs)
for similar life cycle costs as those of diesel-powered commercial
vehicles. The anticipated savings fleets are expected to realize
from the reduced maintenance and fuel cost of electricity of the
electric vehicles are used over a period of time to cover the
incremental expense for the technology. Fleet vehicles targeted
with the Green for Free(TM) Program stand out as possessing unique
characteristics that make them clear beneficiaries of electric
drive technology. With more than 16.3 million vehicles in
operation, the nation's fleets possess enough capacity to drive
initial ramp-up scale in the EV OEM supply chains. This is the
first program that is engineered to eliminate the overall
incremental costs associated with buying and operating an
all-electric vehicle, making the Green for Free(TM) Program
attractive to fleets that are both large and small.
-- Freightliner Custom Chassis Corporation ("FCCC"), a division
of Daimler Trucks North America. Enova and FCCC began deploying new
and retrofit all-electric vehicles to major fleet customers. The
resulting integration of our all-electric drive system into the
MT-45 chassis provides FCCC an all-electric product offering: the
FCCC MT-EV. The MT-EV (the FCCC model name) chassis boasts a GVWR
of 14,000 to 19,500 lbs. The durable steel straight-rail chassis
frame reduces flex and bowing to minimize stress while carrying
heavy payloads. The quiet operation of the all-electric MT-EV also
makes for an enjoyable driver experience. The MT-EV has a flat-leaf
spring front and rear suspension, allowing for a smooth, solid ride
that minimizes cargo shifts on uneven road surfaces. Enova and FCCC
also jointly announced intentions to deploy 3000 vehicles via the
Green for Free(TM) Program (described above).
-- 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 nearly
500 vehicles, all 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.
-- U.S. General Services Administration ("GSA"). GSA extended
its contract with Enova as the exclusive supplier contract of the
all-electric step van. GSA procures vehicles for government
agencies and the armed forces. Under this contract, Enova will
coordinate the supply of MT-EV all-electric walk-in step vans to
GSA under the Cargo Vans category. Enova continues to benefit from
federal fleet penetration via GSA with the Smith Newton product
offering in the Medium and Heavy Duty vehicle category. The Smith
Newton is another exclusive, all-electric medium and heavy duty
truck offering on the GSA product menu. Moreover, Navistar
continued to demonstrate its leadership in the American school bus
market with its exclusive GSA contract to supply hybrid school
buses. Enova is supplies hybrid electric drive systems to IC Bus,
an affiliated division of Navistar.
-- Remy Inc. ("Remy"). Enova and Remy signed a long-term
electric motor supply agreement. Under the five-year agreement,
Remy will provide its electric motors to Enova for its all-electric
drive systems. With more than 2500 drive systems sold, deployed,
and integrated, Enova's clean electric and hybrid electric vehicle
technologies are powering fleets around the globe. Remy motors
feature the company's patented High Voltage Hairpin (HVH) winding
technology, which is claimed to increase torque and power density
for greater speed and range in electric vehicles.
-- Smith Electric Vehicles N.A. Inc. ("Smith") - Enova continues
to supply Smith with electric drive systems. 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.
Smith most recently announced its intention to deploy vehicles
in the all-electric school bus sector. The 42-passenger Newton
school bus travels up to 100 miles on a single charge at speeds of
up to 50 mph, and is intended for the fixed routes in urban areas
most school buses take each day.
-- Optare plc("Optare") awarded Enova a contract as the
production drive system supplier for their all electric buses.
Enova has shipped systems to Optare that are currently being
integrated into buses. Optare designs, manufactures and sells
single deck and double deck buses and mini coaches. Its buses
operate in the UK, Continental Europe, and North America.
Throughout 2011, we finalized the development of our next
generation Omni power management and drive system component. We are
also finalizing design of a next generation on-board 10kW charger.
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. We also are continuing our current research
and development programs and formulating new programs with the U.S.
government and other private sector companies for electric and
hybrid systems.
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 2011 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 believes it is 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. Our products
can be found in a variety of OEM vehicles including those from
Freightliner Customer Chassis Corporation, Navistar Corporation,
First Auto Works, trucks and buses for Smith Electric Vehicles,
Wright Bus, Optare Plc. and the U.S. Military, as well as digital
power systems for EDO and other major manufacturers.
We continue to support our customers in their efforts to
maximize exposure in the market. We have been involved in large
shows throughout the USA and look to continue increasing our
exposure at future worldwide events. The exposure via shows and
direct interface were aggressively pursued throughout 2011 in an
effort to promote our drive system for medium and heavy duty
applications.
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.
Certificate of deposit, restricted
The certificate of deposit, used to secure a revolving credit
facility, matured on January 13, 2012 and is being renewed
monthly.
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, 2011 and 2010,
the Company maintained a reserve of $18,000 and $29,000 for
doubtful accounts receivable. There was bad debt expense recorded
of $71,000 in 2011 and $0 in 2010, 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 record 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.
Impairment of Intangible Assets
The Company evaluates the recoverability of identifiable
intangible assets whenever events or changes in circumstances
indicate that an intangible asset's carrying amount may not be
recoverable. Such circumstances could include, but are not limited
to: (1) a significant decrease in the market value of an asset, (2)
a significant adverse change in the extent or manner in which an
asset is used, or (3) an accumulation of costs significantly in
excess of the amount originally expected for the asset. The Company
measures the carrying amount of the asset against the estimated
undiscounted future cash flows associated with it. Should the sum
of the expected future net cash flows be less than the carrying
value of the asset being evaluated, an impairment loss would be
recognized. The impairment loss would be calculated as the amount
by which the carrying value of the asset exceeds its fair value.
The fair value is measured based on quoted market prices, if
available. If quoted market prices are not available, the estimate
of fair value is based on various valuation techniques, including
the discounted value of estimated future cash flows. The evaluation
of asset impairment requires the Company to make assumptions about
future cash flows over the life of the asset being evaluated. These
assumptions require significant judgment and actual results may
differ from assumed and estimated amounts. For the year ended
December 31, 2010, the Company recognized an impairment loss
$55,000 on the book value of intangible assets with no similar
expense in 2011(see Note 6).
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, 2011 and 2010, 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, 2011 and 2010.
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 consolidated 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
consolidated 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 2011 and 2010, 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 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,
2011 2010
Options to purchase common
stock............................................................................ 2,529,000 1,393,000
Series A and B preferred stock
conversion................................................................ 83,000 84,000
Potential equivalent shares
excluded........................................................................... 2,612,000 1,477,000
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
In May of 2011, the FASB issued ASU 2011-04, "Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements
in U. S. GAAP & IFRS," which results in common fair value
measurement and disclosure requirements in U.S. GAAP and IFRS.
Consequently, the amendments change the wording used to describe
many of the requirements in U.S. GAAP for measuring fair value and
for disclosing information about fair value measurements. ASU
2011-04 is effective for interim and annual periods beginning after
December 15, 2011. The future adoption of ASU 2011-04 is not
expected to have a material impact on the Company's consolidated
financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of
Comprehensive Income. This standard eliminates the current option
to report other comprehensive income and its components in the
statement of changes in equity. The standard is intended to enhance
comparability between entities that report under US GAAP and those
that report under IFRS, and to provide a more consistent method of
presenting non-owner transactions that affect an entity's equity.
Under the ASU, an entity can elect to present items of net income
and other comprehensive income in one continuous statement,
referred to as the statement of comprehensive income, or in two
separate, but consecutive, statements. Each component of net income
and each component of other comprehensive income, together with
totals for comprehensive income and its two parts, net income and
other comprehensive income, would need to be displayed under either
alternative. The statement(s) would need to be presented with equal
prominence as the other primary financial statements. The ASU does
not change items that constitute net income and other comprehensive
income, when an item of other comprehensive income must be
reclassified to net income or the earnings-per-share computation
(which will continue to be based on net income). The new US GAAP
requirements are effective for public entities as of the beginning
of a fiscal year that begins after December 15, 2011 and interim
and annual periods thereafter. Early adoption is permitted, but
full retrospective application is required under the accounting
standard. The Company does not expect that the adoption of this
standard will have a material impact on our results of operations,
cash flows, and financial position.
In December 2011, the FASB issued ASU No. 2011-12, Deferral of
Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive
Income in ASU 2011-05, which defers the requirement in ASU No.
2011-05 that companies present reclassification adjustments for
each component of accumulated other comprehensive income. All other
requirements of ASU No. 2011-05 remain unchanged.
Other recent accounting pronouncements issued by the FASB, the
American Institute of Certified Public Accountants ("AICPA") and
the SEC did not or are not believed by management to have a
material impact on the Company's present condensed consolidated
financial statements.
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.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As reported in our Form 10-Q for the first quarter of fiscal
2011, six of the eight counts in the litigation between Enova and
Arens Controls Company, L.L.C. were settled. The two counts that
were not settled remain outstanding and there have been no material
developments with respect thereto during the period covered by this
report. We intend to continue to contest the remaining unresolved
counts.
From time to time, we are subject to legal proceedings arising
out of the conduct of our business, including matters relating to
commercial transactions. 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.
Given the uncertainty inherent in litigation, we do not believe
it is possible to develop estimates of the range of reasonably
possible loss for these matters. Considering our past experience,
we do not expect the outcome of these matters, either individually
or in the aggregate, to have a material adverse effect on our
consolidated financial position. Because 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.
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.
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 $6,984,000 for the fiscal year ended
December 31, 2011 and our accumulated deficit was $151,112,000 as
of December 31, 2011. 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, 2011.
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. We typically enter into supply agreements with
major customers establishing product and price standards for future
periods. Subsequent events may change the needs of the customer,
requiring us to make corresponding adjustments. In the fiscal year
ended December 31, 2011, Smith accounted for 52% of our total
revenues and our four largest customers, inclusive of Smith,
comprised 94% 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, 2011, the two highest
outstanding accounts receivable balances totaled approximately
$780,000 which represents 91% 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 success is largely dependent on the performance of our key
management and technical personnel, the loss of one or more of whom
could adversely affect our business. Additionally, in order to
successfully implement our anticipated growth, we will be dependent
on our ability to hire additional qualified personnel. There can be
no assurance that we will be able to retain or hire other 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 continued ability to attract, retain, and motivate
additional 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December December
31, 31,
2011 2010
ASSETS
Current assets:
Cash and cash equivalents $ 3,096,000 $ 8,431,000
Certificate of deposit,
restricted 200,000 200,000
Accounts receivable, net 759,000 2,850,000
Inventories and
supplies, net 4,036,000 4,455,000
Prepaid expenses and other current assets 242,000 482,000
Total current
assets 8,333,000 16,418,000
Long term accounts
receivable 79,000 100,000
Property and equipment,
net 928,000 1,172,000
Total assets $ 9,340,000 $ 17,690,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 354,000 $ 1,847,000
Deferred revenues 320,000 31,000
Accrued payroll and related expenses 266,000 922,000
Other accrued liabilities 517,000 1,739,000
Current portion
of notes payable 62,000 63,000
Total current
liabilities 1,519,000 4,602,000
Accrued interest
payable 1,237,000 1,156,000
Notes payable, net of current portion 1,286,000 1,286,000
Total liabilities 4,042,000 7,044,000
Stockholders'
equity:
Series A convertible preferred stock
- no par value, 30,000,000 shares authorized;
2,642,000 and 2,652,000 shares issued
and outstanding; liquidating preference
at $0.60 per share as of December 31,
2011 and December 31, 2010, respectively 528,000 530,000
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, 2011 and December
31, 2010 1,094,000 1,094,000
Common Stock - no par value, 750,000,000
shares authorized; 42,765,000 and 31,479,000
shares issued and outstanding as of
December 31, 2011 and December 31, 2010,
respectively 145,380,000 144,110,000
Additional paid-in
capital 9,408,000 9,040,000
Accumulated
deficit (151,112,000) (144,128,000)
Total stockholders'
equity 5,298,000 10,646,000
Total liabilities and stockholders'
equity $ 9,340,000 $ 17,690,000
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Twelve Months
Ended
December 30,
2011 2010
Revenues $ 6,622,000 $ 8,572,000
Cost of revenues 6,364,000 7,159,000
Gross income 258,000 1,143,000
Operating expenses
Research and development 2,039,000 1,838,000
Selling, general & administrative 5,075,000 6,548,000
Total operating expenses 7,114,000 5,714,000
Operating loss (4,690,000) (5,052,000)
Other income and (expense)
Interest and other income
(expense) (128,000) (437,000)
Total other income and
(expense) (128,000) (437,000)
Net loss $ (6,984,000) $ (7,420,000)
Basic and diluted loss
per share $ (0.22) $ (0.24)
Weighted average number
of common shares outstanding 31,537,000 31,422,000
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
Cash flows from operating
activities: 2011 2010
-------------------- ----------------------
Net loss $(6,984,000) $ (7,420,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Reserve for doubtful
accounts 71,000 -
Inventory reserve 845,000 232,000
Depreciation and
amortization 495,000 539,000
Loss on asset disposal 49,000 -
Loss on asset impairment - 55,000
Loss on litigation
settlement 41,000 328,000
Issuance of common
stock for employee
services - 95,000
Stock option expense 368,000 704,000
(Increase) decrease
in:
Accounts receivable 2,020,000 (1,408,000)
Inventory and supplies (426,000) 918,000
Prepaid expenses
and other current
assets 240,000 (219,000)
Long term accounts
receivable 21,000 (100,000)
Increase (decrease)
in:
Accounts payable (1,493,000) 1,432,000
Deferred revenues 289,000 (326,000)
Accrued payroll and
related expense (656,000) 645,000
Other accrued liabilities (1,263,000) 124,000
Accrued interest
payable 81,000 82,000
----------------------
Net cash used in
operating activities (6,302,000) (4,319,000)
-------------------- ----------------------
Cash flows from investing
activities:
Purchases of property
and equipment (275,000) (317,000)
-------------------- ----------------------
Net cash used in
investing activities (275,000) (317,000)
-------------------- ----------------------
Cash flows from financing
activities:
Payment on notes
payable (26,000) (31,000)
Net proceeds from
the exercise of stock
options 23,000 20,000
Net proceeds from
the issuance of common
stock 1,245,000 -
-------------------- ----------------------
Net cash provided
by (used in) financing
activities 1,242,000 (11,000)
-------------------- ----------------------
Net decrease in cash
and cash equivalents (5,335,000) (4,647,000)
Cash and cash equivalents,
beginning of period 8,431,000 13,078,000
-------------------- ----------------------
Cash and cash equivalents,
end of period $ 3,096000 $ 8,431,000
==================== ======================
Supplemental disclosure
of cash flow information:
Interest paid 6,000 $ 5,000
==================== ======================
Assets acquired through
financing arrangements $ 25,000 $ 26,000
==================== ======================
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Preferred Additional Total
Stock
Series Series B Common Stock Paid-in Accumulated Stockholders'
A
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
Balance,
December $(136,708,000
31, 2009 2,652,000 $530,000 546,000 $1,094,000 31,404,000 $143,995,000 $8,336,000 ) $17,247,000
Issuance of
common
stock upon
exercise
of stock
options 50,000 20,000 20,000
Issuance of
common
stock for
employee
services 25,000 95,000 95,000
Stock
option
expense 704,000 704,000
(7,420,000 (7,420,000
Net loss ) )
Balance,
December $(144,128,000
31, 2010 2,652,000 $530,000 546,000 $1,094,000 31,479,000 $144,110,000 $9,040,000 ) $10,646,000
Issuance of
common
stock for
cash 11,250,000 $1,245,000 $ 1,245,000
Issuance of
common
stock upon
exercise
of stock
options 36,000 23,000 23,000
Issuance of
common
stock upon
conversion
of
preferred
stock (10,000) (2,000) - 2,000 -
Stock
option
expense 368,000 368,000
(6,984,000 (6,984,000
Net loss ) )
Balance,
December $(151,112,000
31, 2011 2,642,000 $528,000 546,000 $1,094,000 42,765,000 $145,380,000 $9,408,000 ) $ 5,298,000
The accompanying notes are an integral part of these financial
statements.
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Twelve months ended December 31, 2011 and 2010
General
Enova Systems, Inc., (the "Company"), is a California
corporation that develops, designs and produces drive systems and
related components for electric, hybrid electric, and fuel cell
systems for mobile 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 consolidated 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, debt and lease financing. During 2011, the Company's
growth and working capital needs have been funded primarily through
a combination of product sales, existing cash reserves and equity
financing. As of December 31, 2011, the Company had approximately
$3.1 million of cash and cash equivalents. At December 31, 2011,
the Company had net working capital of approximately $6.8 million
as compared to $11.8 million at December 31, 2010, representing a
decrease of $5.0 million.
Management is focused on managing costs in line with estimated
total revenue, including contingencies for cost reductions if
projected revenue is not fully realized. 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 a reduced employee
headcount in the fourth quarter of 2011, and stringent controls
over inventory purchases and administrative expenses. The Company
will continue to conserve available cash by closely scrutinizing
expenditures and extensively utilizing current inventory for sales
during 2012. The Company may need to raise additional capital to
accomplish all of its business objectives over the next year. In
addition, the Company may in the future selectively pursue possible
acquisitions of businesses, technologies, content, or products
complementary to those of the Company in order to expand its
presence in the marketplace and achieve operating efficiencies. 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, 2011, the Company had an accumulated
deficit of approximately $151.1 million, working capital of
approximately $6.8 million and shareholders' equity of
approximately $5.3 million. Over the past years, the Company has
been funded through a combination of debt, lease financing and
public equity offerings. As of December 31, 2011, the Company had
approximately $3.1 million in cash and cash equivalents.
The Company expects that it will need to raise additional
capital to fully pursue its business plan 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 delay, reduce the scope of, or eliminate one or more of its
development programs. Without substantial reductions or
eliminations of its development programs, the Company does not
expect that its cash and cash equivalents will be sufficient to
fund its operating and capital needs for the twelve months
following December 31, 2011. In October 2011, we launched an
expense reduction program designed to improve our cost structure
and to deliver improved operational growth, which included
reductions in our employee headcount. We did not incur any
significant restructuring charges as a result of this cost
reduction program, most of which was completed by the end of
2011.
In December 2011, we successfully raised approximately
$1,245,000, net of financing costs of $442,500, through an equity
issuance to certain accredited investors. See Note 11 -
Stockholders' Equity for further analysis of the equity issuance.
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.
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:
2011 2010
Raw
materials.......................................................................
............................................................... $ 4,431,000 $ 3,898,000
Work-in-process.................................................................
................................................................ 144,000 872,000
Finished
goods...........................................................................
........................................................ 644,000 314,000
Reserve for
obsolescence....................................................................
............................................. (1,183,000) (629,000)
$ 4,036,000 $ 4,455,000
Inventory reserve charged to operations amounted to $845,000 and
$232,000 during 2011 and 2010, respectively. Inventory valuation
adjustments and other inventory write-offs in 2011 and 2010
amounted to $291,000 and $582,000, respectively.
4. Property and Equipment
Property and equipment consisted of the following at December
31:
2011 2010
Computers and
software..................................................................
.............................................................. $ 618,000 $ 601,000
Machinery and
equipment.................................................................
............................................................ 892,000 958,000
Furniture and office
equipment.................................................................
.................................................... 98,000 98,000
Demonstration vehicles and
buses.....................................................................
......................................... 774,000 650,000
Leasehold
improvements..............................................................
................................................................. 1,348,000 1,348,000
Construction in
progress...................................................................
............................................................ 39,000 -
3,769,000 3,655,000
Less accumulated depreciation and
amortization..............................................................
......................... (2,841,000) (2,483,000)
Total....................................................................
.........................................................................
.................... $ 928,000 $ 1,172,000
Fixed assets totaling $187,000 and $0 were retired or disposed
of in the years ended December 31, 2011 and 2010, respectively.
Depreciation and amortization expense was $495,000 and $534,000 for
the years ended December 31, 2011 and 2010, respectively, which
included amortization expense of leasehold improvements of $262,000
and $268,000 for the years ended December 31, 2011 and 2010,
respectively.
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following at December
31:
2011 2010
Accrued inventory
received.......................................................................
......................................................... $ 2,000 $ 54,000
Accrued professional
services.......................................................................
..................................................... 150,000 525,000
Accrued
warranty.......................................................................
........................................................................... 227,000 510,000
Accrued litigation
settlement.....................................................................
.......................................................... - 525,000
Other..........................................................................
...............................................................................
............... 138,000 125,000
Total.........................................................................
..............................................................................
................. $ 517,000 $ 1,739,000
Accrued warranty consisted of the following activities for the
years ended December 31:
2011 2010
Balance at beginning of
year...............................................................................
............................ $ 510,000 $ 558,000
Accruals for warranties issued during
the period........................................................................ 470,000 427,000
Warranty
claims.............................................................................
.................................................... (753,000) (475,000)
Balance at end of
year...............................................................................
........................................ $ 227,000 $ 510,000
6. Intangible Assets
Intangible assets consisted of legal fees directly associated
with patent licensing. The Company has been granted three patents
which were capitalized and being amortized on a straight-line basis
over a period of 20 years.
Amortization expense charged to operations was $0 and $5,000 for
the years ended December 31, 2011 and 2010, respectively. As of
December 31, 2010, the Company performed an impairment analysis to
its intangible assets and determined that the technologies covered
by the Company's patents did not have any future economic value.
The Company recorded an impairment loss of $55,000 during 2010
which resulted in a zero book value as of December 31, 2010.
7. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
December December
31, 2011 31, 2010
Secured note payable to Credit Managers Association
of California, bearing interest at prime plus 3%
(6.25% as of December 31, 2011), 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 $39,000, bearing interest
at 4.99% per annum, payable in 48 equal monthly installments
of principal and interest through September 1,
2011.................................................................................................. - 8,000
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................................................................................................... 18,000 25,000
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..................................................................................................... 12,000 15,000
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............................................................................................................ 18,000 23,000
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....................................................................................................... 22,000 -
1,348,000 1,349,000
Less current portion of notes
payable............................................................................................... (62,000) (63,000)
Notes payable, net of current
portion............................................................................................... $ 1,286,000 $ 1,286,000
As of December 31, 2011 and 2010, the balance of long term
interest payable with respect to the Credit Managers Association of
California note amounted to $1,209,000 and $1,132,000,
respectively. Interest expense on notes payable amounted to
approximately $88,000 during each of the years ended December 31,
2011 and 2010, respectively.
Future minimum principal payments of notes payable at December
31, 2011 consisted of the following:
Year Ending Principal
December 31 Amounts
2012................................................................................................................................................................................................... 62,000
2013................................................................................................................................................................................................... 24,000
2014................................................................................................................................................................................................... 16,000
2015................................................................................................................................................................................................... 8,000
2016................................................................................................................................................................................................... 1,238,000
Thereafter......................................................................................................................................................................................... -
Total................................................................................................................................................................................................. $ 1,348,000
8. Revolving Credit Agreement
On June 30, 2010, the Company entered into a secured a revolving
credit facility with a financial institution for $200,000 which was
secured by a $200,000 certificate of deposit. The facility is for a
period of 3 years and 6 months from July 1, 2010 to December 31,
2013. The interest rate on a drawdown from the facility is the
certificate of deposit rate plus 1.25% with interest payable
monthly and the principal due at maturity. The financial
institution also renewed the $200,000 irrevocable letter of credit
for the full amount of the credit facility in favor of Sunshine
Distribution LP, with respect to the lease of the Company's
corporate headquarters at 1560 West 190th Street, Torrance,
California.
9. Deferred Revenues
The Company had deferred $320,000 and $31,000 in revenue related
to production and development contracts at December 31, 2011 and
2010, respectively. The Company anticipates that the December 31,
2011 deferred revenue balance will be recognized in the first half
of 2012.
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 expires January 1, 2013. The
total base monthly rent is approximately $39,000. Under the Lease,
Enova pays 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 is secured by an irrevocable standby letter of
credit in the amount of $200,000 and naming the Landlord as the
beneficiary. Enova also had an office in Hawaii rented on a
month-to-month basis at $3,400 per month, which was closed in
November 2011. Rent expense was approximately $611,000 and $556,000
for the years ended December 31, 2011, and 2010, respectively.
Future minimum lease payments under non-cancelable operating
lease obligations at December 31, 2011 were as follows:
Year Ending Operating
December 31 Leases
2012....................................................................................................................................................................................................... $ 472,000
Total..................................................................................................................................................................................................... $ 472,000
11. Stockholders' Equity
Common Stock
On December 30, 2011, the Company sold 11,250,000 shares of
common stock ("Investor Shares") at $0.15 per share for an
aggregate purchase price of $1,687,500, together with warrants (the
"Warrants") to purchase up to 11,250,000 shares of common stock
("Warrant Shares"), to a total of seventeen investors. As required
by the Purchase Agreement, in connection with the closing of the
offering, the Company and the Investors entered into a Registration
Rights Agreement, dated December 30, 2011. The Registration Rights
Agreement required the Company to file with the SEC a registration
statement to cover the resale of the Investor Shares and Warrant
Shares, which registration statement was filed in February 2012.
The Company has certain customary obligations with respect to the
required registration statement. The Investors are required to
provide the Company with certain information to assist in the
registration of the Investor Shares and Warrant Shares. The
Registration Rights Agreement contains customary indemnification
and contribution provisions.
As further required by the Purchase Agreement, in connection
with the closing of the offering, the Company issued to the
Investors Warrants, dated December 30, 2011. The Warrants cover an
aggregate of 11,250,000 shares of Enova's Common Stock. The
Warrants are subject to appropriate adjustment for stock splits,
combinations, reclassifications and the like. The Warrants are
exercisable for a period of five years, with earlier termination in
the case of certain extraordinary transactions and earlier call by
Enova as set forth below. The Warrants are exercisable at the
option of the holder at an exercise price of $0.22 per share, which
amount equals the volume weighted average price of the Company's
Common Stock for the twenty trading days immediately prior to
December 30, 2011, the date of the closing of the sale of the
Investor Shares (the "Exercise Price"). The Warrants further
provide that if, for a twenty (20) consecutive trading day period,
the average of the closing bid and asked prices of the Common Stock
quoted in the Over-The-Counter market or the last reported sale
price of the Common Stock or the closing price quoted on the NYSE
Amex or any other U.S. exchange on which the Common Stock is
listed, whichever is applicable (or such other reference reasonably
relied upon by the Company if not so published), is greater than or
equal to two times the Exercise Price with at least an average of
ten thousand (10,000) shares traded per day (appropriately adjusted
for stock splits, combinations, reclassifications and the like)
during such period (the "Early Termination Event"), then, on the
10th calendar day following written notice from the Company
notifying the Warrant holders of the Early Termination Event, any
holder who has not, by such date, elected to exercise its Warrants
for cash, such Warrants will be deemed automatically exercised on
such 10th calendar day pursuant to the cashless/net exercise
provisions under the Warrants.
Costs related to the December 2011 equity raise were
approximately $442,500. Merriman Capital, Inc. acted as the sole
placement agent for the offering pursuant to the Purchase
Agreement.
Series A Preferred Stock
Series A preferred stock is currently unregistered. Each share
is 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 have the same voting rights as common
stockholders. The stock has 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
have been declared on the Series A preferred stock.
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, 2011 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. The 2006 Plan has a total of
3,000,000 shares reserved for issuance, of which 1,405,000 and
104,000 were granted in 2011 and 2010, respectively.
Stock-based compensation expense related to stock options was
$368,000 and $704,000 for the years ended December 31, 2011 and
2010, respectively. As of December 31, 2011, the total compensation
cost related to non-vested awards not yet recognized is $336,000.
The remaining period over which the future compensation cost is
expected to be recognized is 25 months.
Stock-based compensation expense recognized in the Statement of
Operations for the years ended December 31, 2011 and 2010 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, 2011 and
2010:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Share Price Life Value(1)
Options
Outstanding at December 31,
2009................................................................................. 1,410,000 $ 2.10 7.65 $ -
Granted................................................................................
.............................................. 104,000 $ 1.34 9.94 $ -
Exercised..............................................................................
.............................................. (50,000) $ 0.41 - $ 42,000
Forfeited or
Cancelled..............................................................................
....................... (71,000) $ 2.93 - $ -
Outstanding at December 31,
2010................................................................................. 1,393,000 $ 2.06 6.92 $ 267,000
Granted................................................................................
.............................................. 1,405,000 $ 0.30 6.13 $ -
Exercised..............................................................................
.............................................. (36,000) $ 0.63 - $ -
Forfeited or
Cancelled..............................................................................
....................... (233,000) $ 2.36 - $ -
Outstanding at December 31,
2011................................................................................. 2,529,000 $ 1.07 6.09 $ -
=========
Exercisable at December 31,
2011.................................................................................... 1,126,000 $ 2.01 6.33 $ -
=========
Vested and expected to
vest(2).................................................................................
...... 2,402,000 $ 1.07 6.12 $ -
=========
____________
(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.
At December 31, 2011, there were 436,000 shares available for
grant under the 2006 plan. The exercise prices of the options
outstanding at December 31, 2011 ranged from $0.19 to $4.35. The
weighted-average grant date fair value of the options granted
during the years ended December 31, 2011 and 2010 was $0.23 and
$1.22, respectively.
Unvested share activity for the year ended December 31, 2011 is
summarized below:
Unvested Weighted-Average
Number Grant Date Fair
of Value
Options
Unvested balance at December 31,
2010....................................................................................................... 435,000 $ 0.93
Granted...................................................................................................
........................................................... 1,405,000 $ 0.23
Vested....................................................................................................
............................................................ (344,000) $ 0.91
Forfeited.................................................................................................
........................................................... (93,000) $ 0.91
Unvested balance at December 31,
2011....................................................................................................... 1,403,000 $ 0.26
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,
2011 and 2010:
Years Ended
December 31,
2011 2010
Total intrinsic value of stock options
exercised.......................................... $ 25,000 $ 42,000
Cash received from stock option exercises.................................................. $ 23,000 $ 20,000
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, 2011 and 2010 were estimated on the date
of grant using the following range of assumptions:
Years Ended
December 31,
2011 2010
Expected life (in
years)................................................................................
................................................... 2.5- 6.5 5.5
Average risk-free interest
rate..................................................................................
.................................... 1.63% 2%
Expected
volatility............................................................................ 107% -
.............................................................. 132% 143%
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.
Restricted Stock
During the year ended December 31, 2010, the Company issued
25,000 restricted shares of the Company's common stock to its
employees and directors. The Company recorded compensation expense
of $95,000 in 2010. There were no restricted shares issued in 2011.
There are no unvested restricted stock awards granted to employees
or directors as of December 31, 2011.
13. 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:
2011 2010
Deferred tax assets
Net operating loss
carry-forwards........................................................
........................................... $ 25,701,000 $ 28,186,000
Stock based
compensation..........................................................
..................................................... 772,000 488,000
Other,
net..................................................................
.....................................................................
..... (743,000) (598,000)
25,730,000 28,076,000
Less valuation
allowance..............................................................
..................................................... (25,730,000) (28,076,000)
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 decreased by $2,346,000 in 2011 compared to an
increase of $2,809,000 in 2010. As of December 31, 2011, the
Company had net operating loss carry forwards for federal and state
income tax purposes of approximately $63,094,000 and $48,060,000,
respectively. These operating loss carry forwards will expire in
2012 through 2031.
The provision for income taxes differs from the amount computed
by applying the U.S. federal statutory tax rate (34% in 2011 and
2010) to income taxes as follows:
December December 31,
31,
2011 2010
Tax benefit computed at
34%......................................................................
............................ $ (2,375,000) $ (2,523,000)
Change in valuation
allowance................................................................
............................... (2,346,000) 2,809,000
State tax (net of Federal
benefit).................................................................
............................ (406,000) (431,000)
Change in carryovers and tax
attributes...............................................................
................. 5,127,000 145,000
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, 2011 and 2010.
14. 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, 2011 and 2010, the
Company did not make any contributions to the plan.
15. 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:
2011 2010
United States.......................................................... $ 4,474,000 $ 6,752,000
China..................................................................
.............. 1,075,000 1,187,000
United
Kingdom................................................................
......... 1,070,000 427,000
Italy..................................................................
............................. - 206,000
Japan............................................................... 3,000
........................... -
Total..................................................................
........................... $ 6,622,000 $ 8,572,000
16. Concentration
During the year ended December 31, 2011, the Company's sales
were concentrated with a few large customers. Sales to four
customers comprised 52%, 16%, 16% and 10% of total revenues and two
customers accounted for 62% and 37% of gross accounts receivable,
respectively. During the year ended December 31, 2010, the Company
had sales to three customers that comprised 45%, 26% and 14% of
total revenues and accounted for 42%, 20% and 21% 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, 2011, 16% of purchases were concentrated
with one vendor and during the year ended December 31, 2010, 25%
and 13% of purchases were concentrated with two vendors.
17. Subsequent Events
The Company has evaluated subsequent events and has determined
that there were no subsequent events to recognize or disclose in
these financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures which
are designed to provide reasonable assurance that information
required to be disclosed in the Company's periodic Securities and
Exchange Commission ("SEC") reports is recorded, processed,
summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and
communicated to its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
As required by Rule 13a-15(b) under the Securities and Exchange
Act of 1934, as amended, 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 for
the period covered by this report. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's internal control over disclosure
controls and procedures was effective as of December 31, 2011.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the three months ended September 30, 2011 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
FR WGUQGWUPPUBU
Enova (LSE:ENV)
Historical Stock Chart
From Sep 2024 to Oct 2024
Enova (LSE:ENV)
Historical Stock Chart
From Oct 2023 to Oct 2024