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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Enova Regs | LSE:ENVS | London | Ordinary Share | COM SHS NPV (REGS) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 3.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMENV TIDMENVS
RNS Number : 6350L
Enova Systems, Inc.
15 August 2013
ENOVA SYSTEMS, INC
("Enova" or "the Company")
Enova Reports 1st Quarter 2013 Results
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 three and six month period ended 30 June 2013.
For further information please contact: Enova Systems, Inc John Micek, Chief Executive Officer +1(310) 483-9883 Daniel Stewart & Company Plc Paul Shackleton +44 (0) 20 7776 6550
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
Hot Features
Premium
December
June 30, 31,
2012
2013 (audited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,000 $ 57,000
Accounts receivable, net 178,000 208,000
Inventories and supplies, net 2,033,000 2,203,000
Prepaid expenses and other current assets 119,000 242,000
------------ ------------
Total current assets 2,338,000 2,710,000
Long term accounts receivable 11,000 38,000
Property and equipment, net 183,000 307,000
------------ ------------
Total assets $ 2,532,000 $ 3,055,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 588,000 $ 558,000
Deferred revenues 274,000 118,000
Accrued payroll and related expenses 119,000 98,000
Accrued loss for litigation settlement 2,014,000 2,014,000
Other accrued liabilities 251,000 255,000
Current portion of notes payable 56,000 66,000
------------ ------------
Total current liabilities 3,302,000 3,109,000
Accrued interest payable 1,360,000 1,318,000
Notes payable, net of current portion 1,244,000 1,262,000
------------ ------------
Total liabilities 5,906,000 5,689,000
------------ ------------
Stockholders' equity:
Series A convertible preferred stock - no par
value, 30,000,000 shares authorized; 2,642,000
shares issued and outstanding; liquidating preference
at $0.60 per share as of June 30, 2013 and December
31, 2012 528,000 528,000
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 June 30, 2013 and December
31, 2012 1,094,000 1,094,000
Common Stock - no par value, 750,000,000 shares
authorized; 44,520,000 shares issued and outstanding
as of June 30, 2013 and December 31, 2012 145,512,000 145,512,000
Additional paid-in capital 9,585,000 9,579,000
Accumulated deficit (160,093,000) (159,347,000)
------------ ------------
Total stockholders' equity (3,374,000 (2,634,000)
------------ ------------
Total liabilities and stockholders' equity $ 2,532,000 $ 3,055,000
============ ============
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2013 2012 2013 2012
Revenues $ 232,000 $ 543,000 $ 285,000 $ 903,000
Cost of revenues 425,000 746,000 481,000 1,582,000
Gross loss (193,000) (203,000) (196,000) (679,000)
Operating expenses
Research and development - 338,000 - 804,000
Selling, general &
administrative 155,000 1,145,000 538,000 2,398,000
Total operating expenses 155,000 1,483,000 538,000 3,202,000
Operating loss (348,000) (1,686,000) (734,000) (3,881,000)
Other income and (expense)
Interest and other income
(expense) 8,000 (101,000) (12,000) (121,000)
Total other income and
(expense) 8,000 (101,000) (12,000) (121,000)
Net loss (340,000) (1,787,000) $ (746,000) $ (4,002,000)
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------------------------
Cash flows from operating activities: 2013 2012
---------------- -----------------
Net loss $ (746,000) $ (4,002,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Reserve for doubtful accounts (59,000) 196,000
Inventory reserve 200,000 893,000
Depreciation and amortization 91,000 238,000
Loss on asset disposal 4,000 -
Loss on asset disposal - 68,000
Stock option expense 6,000 166,000
(Increase) decrease in:
Accounts receivable 89,000 (151,000)
Inventory and supplies (30,000) 67,000
Prepaid expenses and other current assets 123,000 39,000
Long term receivables 27,000 6,000
Increase (decrease) in:
Accounts payable 30,000 92,000
Deferred revenues 156,000 (198,000)
Accrued payroll and related expense 21,000 (248,000)
Other accrued liabilities (4,000) (174,000)
Accrued interest payable 42,000 40,000
--------------- ----------------
Net cash used in operating activities (50,000) (2,968,000)
--------------- ----------------
Cash flows from investing activities:
Proceeds from the sale of fixed assets 29,000 -
Purchases of property and equipment - (16,000)
--------------- ----------------
Net cash provided by (used in) investing activities 29,000 (16,000)
--------------- ----------------
Cash flows from financing activities:
Payment on notes payable (28,000) (11,000)
132,000
--------------- ----------------
Net cash provided by (used in) financing activities (28,000) 121,000
--------------- ----------------
Net decrease in cash and cash equivalents (49,000) (2,863,000)
Cash and cash equivalents, beginning of period 57,000 3,096,000
--------------- ----------------
Cash and cash equivalents, end of period $ 8,000 $ 233,000
=============== ================
Supplemental disclosure of cash flow information:
Interest paid $ 1,000 $ 2,000
=============== ================
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Company and its Business
Enova Systems, Inc., ("Enova", "We" or "the Company"), a California corporation, was incorporated in July 1976, and trades on the OTCQB under the trading symbol "ENVS" and on the London Stock Exchange under the symbol "ENV" or "ENVS". The Company believes it has been a globally recognized leader as a supplier of efficient, environmentally-friendly digital power components and systems products, in conjunction with associated engineering services. The Company's core competencies are focused on the commercialization of power management and conversion systems for mobile and stationary applications.
THE DISCUSSION SET FORTH BELOW AND ELSEWHERE IN THIS 10-Q IS QUALIFIED IN ITS ENTIRETY BY THE FOLLOWING: ENOVA REMAINS INSOLVENT AND OWES IN EXCESS OF $4.5 MILLION IN THE AGGREGATE TO ITS TWO PRINCIPAL CREDITORS, THE CREDIT MANAGERS ASSOCIATION AND ARENS CONTROLS COMPANY, L.L.C. ("ARENS"). WITHOUT IMMEDIATE ADDITIONAL FINANCING OR COLLECTION OF RECEIVABLES, THE COMPANY WILL NEED TO CEASE OPERATIONS. THE COMPANY CURRENTLY HAS NO VISIBILITY AS TO EITHER ADDITIONAL FINANCING OR THE COLLECTION OF RECEIVABLES. SPECIFICALLY, WITHOUT A MUTUALLY ACCEPTABLE SETTLEMENT OF THE ARENS JUDGMENT ARISING OUT OF ARENS CONTROLS COMPANY, L.L.C. v. ENOVA SYSTEMS, INC., CASE NO. 13-1102 (7TH CIRCUIT) IN THE AMOUNT OF $2.0 MILLION, THE COMPANY DOES NOT CURRENTLY BELIEVE IT HAS ANY ALTERNATIVE OTHER THAN TO CEASE OPERATIONS. THE COMPANY CURRENTLY EMPLOYS ONLY TWO PERSONNEL, JOHN MICEK, THE COMPANY'S CEO, CFO AND SECRETARY, AND ONE ADDITIONAL INDIVIDUAL IN THE FINANCE DEPARTMENT.
2. Summary of Significant Accounting Policies
Basis of Presentation - Interim Financial Statements
The financial information as of and for the three and six months ended June 30, 2013 and 2012 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair statement of its financial position at such dates and the operating results and cash flows for those periods. The year-end balance sheet data was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules or regulations; however, the Company believes the disclosures made are adequate to make the information presented not misleading.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions are adequate, actual results could differ from the estimates and assumptions used.
The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2012, which are included in the Company's Annual Report on Form 10-K for the year then ended.
Liquidity and Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, historically the Company has experienced significant recurring net losses and operating cash flow deficits. The Company's ability to continue as a going concern is dependent on many factors, including among others, its ability to raise additional funding, and its ability to successfully restructure operations to lower manufacturing costs and reduce operating expenses.
To date, the Company has incurred recurring net losses and negative cash flows from operations. At June 30, 2013, the Company had an accumulated deficit of approximately $160.1 million, cash and cash equivalents of $8,000, working capital of approximately negative $964,000 and shareholders' deficit of approximately $3.4 million. Until the Company can generate significant cash from its operations, the Company expects to continue to fund its operations with existing cash resources, proceeds from one or more private placement agreements, as well as potentially through debt financing or the sale of equity securities. However, the Company may not be successful in obtaining additional funding. In addition, the Company cannot be sure that its existing cash and investment resources will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or its stockholders.
Our operations will require us to make necessary investments in human and production resources, regulatory compliance, as well as sales and marketing efforts. We do not currently have adequate internal liquidity to meet these objectives in the long term. On June 21, 2012, we reported in a Form 8-K filing that, as part of cost cutting measures in response to our decrease in revenue amid continued delays in industry adoption of EV technology resulting from ongoing battery cost and reliability concerns, in excess of 80% of our workforce left our Company, including the resignation of members of our senior management. We continue to evaluate strategic partnering opportunities and other external sources of liquidity, including the public and private financial markets and strategic partners. As a result of having insufficient funds, the Company has delayed all of its product development and may relinquish some or even all rights to product candidates at an earlier stage of development or negotiate less favorable terms than it would otherwise choose. Failure to obtain adequate financing also may adversely affect the Company's ability to continue in business. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations, as well as covenants and specific financial ratios that may restrict its ability to operate its business.
The Company continues to pursue other options to raise additional capital to fund its operations; however, there can be no assurance that we can successfully raise additional funds through the capital markets.
As of June 30, 2013, the Company had approximately $8,000 in cash and cash equivalents and does not anticipate that its existing cash and anticipated receivables collections will be sufficient to meet its projected operating requirements through December 2013 to continue operations and market trading.
Significant Accounting Policies
The accounting and reporting policies of the Company conform to US GAAP. There have been no significant changes in the Company's significant accounting policies during the three months ended June 30, 2013 compared to what was previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.
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 - The Company documents all terms of an arrangement in a written contract signed by the customer prior to recognizing revenue.
-- 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 for 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.
-- Collectability is Reasonably Assured - The Company determines that collectability is reasonably assured prior to recognizing revenue. Collectability 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 collectability 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 collectability 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.
The Company recognizes revenue from milestone payments over the remaining minimum period of performance obligations.
The Company also recognizes engineering and construction contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Customer-furnished materials, labor, and equipment, and in certain cases subcontractor materials, labor, and equipment, are included in revenues and cost of revenues when management believes that the company is responsible for the ultimate acceptability of the project. Contracts are segmented between types of services, such as engineering and construction, and accordingly, revenue and gross margin related to each activity is recognized as those separate services are rendered.
Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Claims against customers are recognized as revenue upon settlement. Revenues recognized in excess of amounts received are classified as current assets. Amounts billed to clients in excess of revenues recognized to date are classified as current liabilities on contracts.
Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to engineering and development contract costs and revenue.
These accounting policies were applied consistently for all periods presented. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results is included in the footnotes to our financial statements.
Several other factors related to the Company may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition related to product contracts are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as acceptance of services provided, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of our products often cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred.
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.
Stock Based Compensation
We measure the compensation cost for stock-based awards classified as equity at their fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest, net of estimated forfeitures.
Accounting Changes and Recent Accounting Pronouncements
Certain accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations and cash flows.
3. Inventory
Inventory, consisting of materials, labor and manufacturing overhead, is stated at the lower of cost (first-in, first-out) or market and consisted of the following at:
December
June 30, 31,
2013 2012
----------- -----------
Raw Materials $ 3,224,000 $ 3,988,000
Work In Progress 267,000 2,000
Finished Goods 511,000 587,000
Reserve for Obsolescence (1,969,000) (2,374,000)
---------- ----------
Total $ 2,033,000 $ 2,203,000
========== ==========
In the three months ended June 30, 2013, the Company exchanged excess inventory with an original book value totaling $670,000 as settlement for vendor payables. Inventory reserve charged to operations amounted to $200,000 and $893,000 for the six months ended June 30, 2013 and 2012, respectively. Inventory valuation adjustments and other inventory write-offs amounted to $606,000 and $76,000 for the six months ended June 30, 2013 and 2012, respectively.
4. Property and Equipment
Property and equipment consisted of the following at:
December
June 30, 31,
2013 2012
--------- -----------
Computers and software $ 231,000 $ 580,000
Machinery and equipment 251,000 535,000
Furniture and office equipment 86,000 87,000
Demonstration vehicles and buses 423,000 675,000
Leasehold improvements - 1,327,000
-------- ----------
991,000 3,204,000
Less accumulated depreciation and amortization (808,000) (2,897,000)
-------- ----------
Total $ 183,000 $ 307,000
======== ==========
Depreciation and amortization expense was $91,000 and $238,000 for the six months ended June 30, 2013 and 2012, respectively, and within those total expenses, the amortization of leasehold improvements was $22,000 and $131,000 for the six months ended June 30, 2013 and 2012, respectively. Depreciation and amortization expense was $33,000 and $119,000 for the three months ended June 30, 2013 and 2012, respectively, and within those total expenses, the amortization of leasehold improvements was $0 and $65,000 for the three months ended June 30, 2013 and 2012, respectively.
For the three months ended June 30, 2013, fixed assets with an original book value of $272,000 were exchanged in settlement of vendor payables, two vehicles were sold and one vehicle was repossessed. The Company recorded proceeds from the sale of fixed assets of $29,000 and a loss on the disposal of fixed assets of $4,000 for the three and six months ended June 30, 2013, and an impairment loss of $68,000 for the three and six months ended June 30, 2012. In addition, the Company's headquarters lease expired on January 31, 2013, which resulted in a decrease in gross leasehold improvements in the amount of $1,327,000 and a net book value of zero.
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following at:
December
June 30, 31,
2013 2012
-------- --------
Accrued inventory received $ 10,000 $ 14,000
Accrued professional services 97,000 45,000
Accrued warranty 111,000 117,000
Other 33,000 79,000
------- -------
Total $251,000 $255,000
======= =======
Accrued warranty consisted of the following activities during the six months ended June 30:
2013 2012
-------- ---------
Balance at beginning of quarter $117,000 $ 227,000
Accruals for warranties issued during the period 57,000 80,000
Warranty claims (63,000) (167,000)
------- --------
Balance at end of quarter $111,000 $ 140,000
======= ========
Accrued warranty consisted of the following activities during the three months ended June 30:
2013 2012
-------- ---------
Balance at beginning of quarter $ 93,000 $ 186,000
Accruals for warranties issued during the period 46,000 55,000
Warranty claims (28,000) (101,000)
------- --------
Balance at end of quarter $111,000 $ 140,000
======= ========
6. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
December
June 30, 31,
2013 2012
---------- ----------
Secured note payable to Credit Managers Association
of California, bearing interest at prime plus 3%
(6.25% as of June 30, 2013), and is adjusted annually
in April through maturity. Principal and unpaid
interest due in April 2016. A sinking fund escrow
may be funded with 10% of future equity financing,
as defined in the Agreement $1,238,000 $1,238,000
Secured note payable to a Coca Cola Enterprises
in the original amount of $40,000, bearing interest
at 10% per annum. Principal and unpaid interest
due on demand 40,000 40,000
Secured note payable to a financial institution
in the original amount of $38,000, bearing interest
at 8.25% per annum, payable in 60 equal monthly
installments of principal and interest through February
19, 2014 6,000 11,000
Secured note payable to a financial institution
in the original amount of $19,000, bearing interest
at 10.50% per annum, payable in 60 equal monthly
installments of principal and interest through August
25, 2014 5,000 8,000
Secured note payable to a financial institution
in the original amount of $26,000, bearing interest
at 7.91% per annum, payable in 60 equal monthly
installments of principal and interest through April
9, 2015 11,000 14,000
Secured note payable to a financial institution
in the original amount of $25,000, bearing interest
at 7.24% per annum, payable in 60 equal monthly
installments of principal and interest through March
10, 2016 - 17,000
--------- ---------
1,300,000 1,328,000
Less current portion of notes payable (56,000 ) (66,000)
--------- ---------
Notes payable, net of current portion $1,244,000 $1,262,000
========= =========
As of June 30, 2013 and December 31, 2012, the balance of long term interest payable amounted to $1,360,000 and $1,318,000, respectively, of which the Credit Managers Association of California note amounted to $1,325,000 and $1,286,000, respectively. Interest expense on notes payable amounted to $43,000 and $42,000 during the six months ended June 30, 2013 and 2012, respectively. Interest expense on notes payable amounted to $22,000 and $21,000 during the three months ended June 30, 2013 and 20112, respectively. In June 2013, the vehicle that secured the note payable due March 10, 2016 was repossessed by the secured lender. The Company has recorded an accrued liability of $18,000 as an estimated settlement with the lender.
7. Deferred Revenues
The Company had deferred $274,000 and $118,000 in revenue related to production and development contracts at June 30, 2013 and December 31, 2012, respectively. The Company anticipates that the June 30, 2013 deferred revenue balance will be recognized in the third quarter of 2013.
8. Stockholders' Equity
On April 23, 2012, the Company entered into a $6,600,000 purchase agreement with Lincoln Park Capital Fund pursuant to which the Company has the right to sell to Lincoln Park up to $6,600,000 in shares of the Company's common stock, and on April 24, 2012, the Company entered into another purchase agreement with Lincoln Park Capital Fund pursuant to which the Company has the right to sell to Lincoln Park up to $3,400,000 in shares of the Company's common stock, subject to certain limitations. We received proceeds of $132,000, net of financing costs of $152,000, under the $3,400,000 Purchase Agreement and issued a total of 1,754,974 shares of common stock in the second quarter of 2012. As consideration for its commitment to purchase common stock under the $3,400,000 Purchase Agreement, the Company issued to Lincoln Park 281,030 shares of common stock. Access to funding under the facility is dependent upon our shares being listed on a national exchange, and as our shares were delisted from the NYSE Amex exchange on October 31, 2012, the Company can no longer raise funds from the facility.
9. Stock Options
Stock Option Program Description
As of June 30, 2013, the Company had two equity compensation plans, the 1996 Stock Option Plan (the "1996 Plan") and the 2006 equity compensation plan (the "2006 Plan"). The 1996 Plan has expired for the purposes of issuing new grants. However, the 1996 Plan will continue to govern awards previously granted under that plan. The 2006 Plan has been approved by the Company's shareholders. Equity compensation grants are designed to reward employees and executives for their long term contributions to the Company and to provide incentives for them to remain with the Company. The number and frequency of equity compensation grants are based on competitive practices, operating results of the company, and government regulations.
The maximum number of shares issuable over the term of the 1996 Plan was limited to 65 million shares (without giving effect to subsequent stock splits). Options granted under the 1996 Plan typically have an exercise price of 100% of the fair market value of the underlying stock on the grant date and expire no later than ten years from the grant date. The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which zero and 20,000 were granted in the six months ended June 30, 2013 and 2012, respectively, and 2,111,000 shares were available for grant as of June 30, 2013. Options granted under the 2006 Plan have terms of between three and ten years and generally vest and become fully exercisable from one to three years from the date of grant or vest according to the price performance of our shares.
Stock-based compensation expense related to stock options was $6,000 and $166,000 for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, the total compensation cost related to non-vested awards not yet recognized is $12,000. The remaining period over which the future compensation cost is expected to be recognized is 20 months.
The following table summarizes information about stock options outstanding and exercisable at June 30, 2013:
Weighted
Average
Weighted Remaining
Number of Average Contractual Aggregate
Share Exercise Term in Intrinsic
Options Price Years Value(1)
---------- ----------- ------------ -------------
Outstanding at December 31,
2012 810,000 $ 0.64 4.06 $ -
Granted - $ - - $ -
Exercised - $ - - $ -
Forfeited or Cancelled - $ - - $ -
--------- ------- ------------ ------------
Outstanding at June 30, 2013 810,000 $ 0.64 3.57 $ -
========= ======= ============ ============
Exercisable at June 30, 2013 599,000 $ 0.83 3.81 $ -
========= ======= ============ ============
Vested and expected to vest
(2) 810,000 $ 0.64 3.57 $ -
========= ======= ============ ============
(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.
The exercise prices of the options outstanding at June 30, 2013 ranged from $0.07 to $4.35. The weighted average grant-date fair value of options granted during the six months ended June 30, 2012 was $0.15. The Company's policy is to issue shares from its authorized shares upon the exercise of stock options.
Unvested share activity for the three months ended June 30, 2013 is summarized below:
Weighted
Average
Unvested Grant Date
Number of Fair
Options Value
----------- -------------
Unvested balance at December 31, 2012 236,000 $ 0.04
Granted - $ -
Vested (50,000) $ 0.11
Forfeited - $ -
---------- --- --------
Unvested balance at June 30, 2013 186,000 $ 0.07
========== === ========
The fair values of all stock options granted during the six months ended June 30, 2013 and 2012 were estimated on the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:
For the six months
ended
---------------------
June 30, June 30,
2013 2012
----------- --------
Expected life (in years) - 6.5
Average risk-free interest rate - 1.66 %
Expected volatility - 108 %
Expected dividend yield - 0 %
Forfeiture rate - 3 %
The estimated fair value of grants of stock options to nonemployees of the Company is charged to expense 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.
10. Warrants
In December 2011, the Company completed a private equity placement of 11,250,000 shares of common stock for $1,245,000 together with warrants to purchase up to 11,250,000 shares of common stock to a group of 17 shareholders (the "Low-Beer Managed Accounts"). The warrants are exercisable for a period of five years and exercisable at a price of $0.22 per share. The warrants further provide that if, for a twenty consecutive trading day period, the average of the closing price quoted on the OTCQB market is greater than or equal to $0.44 per share, with at least an average of 10,000 shares traded per day, then, on the 10th calendar day following written notice from the Company, any outstanding warrants will be deemed automatically exercised pursuant to the cashless/net exercise provisions under the warrants.
The following is a summary of changes to outstanding warrants for the six months ended June 30, 2013:
Weighted
Number Weighted Average
of Average Remaining
Share Exercise Contractual
Options Price Life
----------- ------------ ---------------
Outstanding at December 31, 2012 11,250,000 $ 0.22 4.00
Granted - $ - -
Exercised - $ - -
Forfeited or Cancelled - $ - -
---------- -------- ---------------
Outstanding at March 31, 2013 11,250,000 $ 0.22 3.50
========== ======== ===============
Exercisable at March 31, 2013 - $ - -
========== ======== ===============
11. Concentrations
The Company's trade receivables are concentrated with a few customers. The Company performs credit evaluations on its customers' financial condition and generally requires no collateral from its customers. Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Two customers represented 71% and 28%, respectively, of gross accounts receivable at June 30, 2013, and two customers represented 61% and 39%, respectively, of gross accounts receivable at December 31, 2012.
The Company's revenues are concentrated with few customers. For the three and six months ended June 30, 2013, two customers represented 88% and 11% of gross revenues and two customers represented 83% and 13% of gross revenues, respectively. For the three and six months ended June 30, 2012, two customers represented 52% and 40% of gross revenues and two customers represented 66% and 24% of gross revenues, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains statements indicating expectations about future performance and other forward-looking statements that involve risks and uncertainties. We usually use words such as "may," "will, " "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "future," "intend," "potential," or "continue" or the negative of these terms or similar expressions to identify forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our current intent, belief or expectation, primarily with respect to our operations and related industry developments. Examples of these statements include, but are not limited to, statements regarding the following: our future operating expenses, our future losses, our future expenditures for research and development and the sufficiency of our cash resources. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the disclosure contained in Item 1A of Part II of this Form 10-Q.
The following discussion and analysis should be read in conjunction with the unaudited interim financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2012.
Overview
Enova believes it has been a leader in the development, design and production of proprietary, power train systems and related components for electric and hybrid electric buses and medium and heavy duty commercial vehicles. Electric drive systems are comprised of an electric motor, electronics control unit and a gear unit which power a vehicle. Hybrid electric systems, which are similar to pure electric drive systems, contain an internal combustion engine in addition to the electric motor, and may eliminate external recharging of the battery system. A hydrogen fuel cell based system is similar to a hybrid system, except that instead of an internal combustion engine, a fuel cell is utilized as the power source. A fuel cell is a system which combines hydrogen and oxygen in a chemical process to produce electricity.
A fundamental element of Enova's strategy has been to develop and produce advanced proprietary software and hardware for applications in these alternative power markets. Our focus has been on powertrain systems including digital power conversion, power management and system integration, focusing chiefly on vehicle power generation. Specifically, we have developed, designed and produce drive systems and related components for electric, hybrid electric and fuel cell powered vehicles in both the new and retrofit markets. We also perform internal research and development ("R&D") and funded third party R&D to augment our product development and support our customers.
Our product development strategy 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 has been centered on aligning ourselves with key customers and integrating with original equipment manufacturers ("OEMs") in our target markets. We believe that alliances will result in the latest technology being implemented and customer requirements being met, with an optimized level of additional time and expense. Provided we generate necessary resources, we will continue to work refining both our market strategy and our product line to maintain our edge in power management and conversion systems for vehicle applications.
Our website, www.enovasystems.com, contains up-to-date information on our company, our products, 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.
Enova has incurred significant operating losses in the past. As of June 30, 2013, we had an accumulated deficit of approximately $160.1 million, working capital of approximately negative $964,000 and shareholders' deficit of approximately $3.4 million. As reported in our Form 8-K filing on June 21, 2012, due to continued delays in industry adoption of EV technology, the Company's revenues continue to significantly decrease. As part of cost cutting measures, we implemented a reduction in our workforce whereby in excess of 80% of our employees have left the Company. We continue to evaluate strategic opportunities to leverage resources and assist with continuing operations. We expect to incur additional operating losses until we re-position the company in order to achieve a level of product sales sufficient to cover our operating and other expenses. As of June 30, 2013, the Company had approximately $8,000 in cash and cash equivalents and we do not anticipate that our existing cash and anticipated receivables collections will be sufficient to meet projected operating requirements through the end of 2013 to continue operations and market trading.
Customer Highlights
FIRST AUTO WORKS (FAW) - Enova continues to supply FAW drive systems for their hybrid buses. Since the 2008 Olympics in Beijing, Enova Systems and First Auto Works have deployed over 500 vehicles, 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.
SMITH ELECTRIC VEHICLES (SEV) - Enova continues to be SEV's supplier of drive systems. SEV is a leader in the all EV market in North America and Europe.
Technology Highlights
OMNI INVERTER. Power-source and motor design agnostic, Enova's new Omni-series inverter/vehicle controller offers increased flexibility and ease-of-integration. With plug-and-play connectivity, it is compatible with a wide range of vehicle drive systems and motors, and can be configured for HEV, PHEV and EV applications. The inverter is fully production validated.
OMNI CHARGER. Our Omni-series 10kW on-board battery charger for plug-in hybrid-electric and all-electric vehicles is a CAN control based unit that offers increased flexibility, ease-of-integration and compatibility with a wide range of vehicle platforms.
Enova has delayed further introduction of the Omni Inverter and Charger with customers due to the reduction in our workforce and current financial resource constraints. Provided additional resources are obtained, we anticipate continuing development and marketing of these two products, which we believe can gain broad market acceptance.
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Estimates and assumptions include, but are not limited to, customer receivables, inventories, equity investments, fixed asset lives, contingencies and litigation. There have been no material changes in estimates or assumptions compared to our most recent Annual Report for the fiscal year ended December 31, 2012.
The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues which require management's most difficult, subjective or complex judgments.
Cash and cash equivalents - Cash consists of currency held at reputable financial institutions.
Inventory - Inventories are priced at the lower of cost or market utilizing first-in, first-out ("FIFO") cost flow assumption. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of transfer to the customer. Generally, title transfer is documented in the terms of sale.
Inventory reserve - We maintain an allowance against inventory for the potential future obsolescence or excess inventory. A substantial decrease in expected demand for our products, or decreases in our selling prices could lead to excess or overvalued inventories and could require us to substantially increase our allowance for excess inventory. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required, and would be reflected in cost of revenues in the period the revision is made.
Allowance for doubtful accounts - We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The assessment of the ultimate realization of accounts receivable including the current credit-worthiness of each customer is subject to a considerable degree to the judgment of our management. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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.
Revenue recognition - Effective January 1, 2011, we adopted the provisions of Accounting Standards Update, or ASU, 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13, which is included within the Codification as Revenue Recognition-Multiple Element Arrangements, on a prospective basis. Under the provisions of ASU 2009-13, we no longer rely on objective and reliable evidence of the fair value of the elements in a revenue arrangement in order to separate a deliverable into a separate unit of accounting, and the use of the residual method has been eliminated. We instead use a selling price hierarchy for determining the selling price of a deliverable, which is used to determine the allocation of consideration to each unit of accounting under an arrangement. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. As of September 30, 2012, we had not applied the provisions of ASU 2009-13 to any of our revenue arrangements as we had not entered into any new, or materially modified any of our existing, revenue arrangements since our adoption of ASU 2009-13. Therefore, there
was no material impact on our financial position or results of operations from adopting ASU 2009-13. However, the provisions of ASU 2009-13 could have a material impact on the revenue recognized from any collaboration agreements that we enter into in future periods.
We generally recognize revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, performance of our obligation is complete, our price to the buyer is fixed or determinable, and we are reasonably assured of collection. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Determination of these criteria, in some cases, requires management's judgment. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue for any reporting period could be adversely affected.
The Company also recognizes engineering and construction contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Customer-furnished materials, labor, and equipment, and in certain cases subcontractor materials, labor, and equipment, are included in revenues and cost of revenues when management believes that the company is responsible for the ultimate acceptability of the project. Contracts are segmented between types of services, such as engineering and construction, and accordingly, gross margin related to each activity is recognized as those separate services are rendered.
These accounting policies were applied consistently for all periods presented. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results is included in the footnotes to our financial statements.
Several other factors related to the Company may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition related to product contracts are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as acceptance of services provided, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of our products often cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2013 compared to Three and Six Months Ended June 30, 2012
Second Quarter of Fiscal 2013 vs. Second Quarter of Fiscal 2012
Three Months Ended As a % of Revenues
June 30, March 31,
-------------------------------------- -------------------------
2013 2012 % Change 2013 2012
---------- ----------- ----------- ------------ -------
Revenues $ 232,000 $ 543,000 -57% 100% 100%
Cost of revenues 425,000 746,000 -43% 183% 137%
--------- ---------- ------- ------------ -------
Gross loss (193,000) (203,000) -5% -83% -37%
Operating expenses
Research and development - 338,000 -100% 0% 62%
Selling, general &
administrative 155,000 1,145,000 -86% 67% 211%
--------- ---------- ------- ------------ -------
Total operating expenses 155,000 1,483,000 -90% 67% 273%
--------- ---------- ------- ------------ -------
Operating loss (348,000) (1,686,000) -79% -150% -310%
--------- ---------- ------- ------------ -------
Other income (expense)
Interest and other
income (expense) 8,000 (101,000) -108% 3% -19%
--------- ---------- ------- ------------ -------
Total other income
(expense) 8,000 (101,000) -108% 3% -19%
--------- ---------- ------- ------------ -------
Net loss $ (340,000) $(1,787,000) -81% -147% -329%
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First Six Months of Fiscal 2013 vs. First Six Months of Fiscal 2012
Six Months Ended As a % of Revenues
June 30, June 30,
------------------------------------- ----------------------
2013 2012 % Change 2013 2012
---------- ----------- ---------- ------------ ----
Revenues $ 285,000 $ 903,000 -68% 100% 100%
Cost of revenues 481,000 1,582,000 -70% 106% 232%
--------- ---------- ------ ------------ ----
Gross loss (196,000) (679,000) -71% -6% -132%
Operating expenses
Research and development - 804,000 -100% 0% 129%
Selling, general &
administrative 538,000 2,398,000 -78% 723% 348%
--------- ---------- ------ ------------ ----
Total operating expenses 538,000 3,202,000 -83% 723% 478%
--------- ---------- ------ ------------ ----
Operating loss (734,000) (3,881,000) -81% -728% -610%
--------- ---------- ------ ------------ ----
Other income (expense)
Interest and other
income (expense) (12,000) (121,000) -90% -38% -6%
--------- ---------- ------ ------------ ----
Total other income
(expense) (12,000) (121,000) -90% -38% -6%
--------- ---------- ------ ------------ ----
Net loss $ (746,000) $(4,002,000) -81% -766% -615%
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The sum of the amounts and percentages may not equal the totals for the period due to the effects of rounding.
Computations of percentage change period over period are based upon our results, as rounded and presented herein.
Revenues. Revenues in the current year were negatively affected by capacity constraints to pursue new business due to our restructuring in June 2012. We believe the industry is affected by continued uncertainty over battery performance and non-recoverable engineering costs associated with battery development. As a result, OEM and other customers have delayed major all-electric vehicle marketing initiatives, resulting in decreased demand for our systems. The decrease in revenue for the three and six months ended June 30, 2013 compared to the same period in 2012 was mainly due to a decrease in deliveries to our core customer base in Asia. Revenues in the first three and six months of 2013 were mainly attributed to continued shipments to First Auto Works in China and the Smith Electric Vehicles in the U.S. We will have fluctuations in revenue from quarter to quarter. Although we have seen some indications from customers to support future revenue, there can be no assurance there will be continuing demand for our products and services.
Cost of Revenues. Cost of revenues consists of component and material costs, direct labor costs, integration costs and overhead related to manufacturing our products as well as inventory valuation reserve amounts. Cost of revenues for the three and six months ended June 30, 2013 decreased primarily due to the decrease in revenue compared to the same period in the prior year and, in addition, we recorded a charge of approximately $893,000 during the first six months of 2012 to increase our inventory obsolescence reserve after management updated its estimate of the realizable value of inventory.
Gross Loss. The decrease in gross loss for the three and six months ended June 30, 2013 compared to the same period in the prior year is primarily attributable to the recording of an increase in the inventory obsolescence reserve in the first six months of 2012.
Research and Development ("R&D"). R&D costs decreased for the three and six months ended June 30, 2013 compared to the same periods in the prior year as our engineering staff was reduced in June 2012 due to the Company's lack of financial resources. As a result, the Company's development of its next generation Omni-series motor control unit and 10kW charger was put on hold at the end of the second quarter of 2012.
Selling, General, and Administrative Expenses ("S, G & A"). S, G & A is comprised of activities in the executive, finance, marketing, field service and quality departments' compensation as well as related payroll benefits, and non-cash charges for depreciation and options expense. The decrease in S, G & A for the three and six months ended June 30, 2013 compared to the same period in the prior year is attributable to the resignation of approximately 80% of the Company's workforce from June 2012 and other cost savings measures. We continually monitor S, G & A in light of our business outlook and are taking proactive steps to control these costs.
Interest and Other Income (Expense). The interest and other income (expense) for the three and six months ended June 30, 2013 compared to the same period decreased primarily due to fixed asset impairment charges recorded in the prior year period.
Net Loss. The decrease in the net loss for the three and six months ended June 30, 2013 compared to the same period in the prior year was mainly due to the reduction in our workforce in the second quarter of 2012 which resulted in lower operating costs and a decrease in the inventory obsolescence reserve compared to 2012.
Comparability of Quarterly Results. Our quarterly results have fluctuated in the past and we believe they will continue to do so in the future. Certain factors that could affect our quarterly operating results are described in Part I, Item 1A-Risk Factors contained in our Form 10-K for 2012, as updated by the disclosure contained in Item 1A of Part II of this Form 10-Q. Due to these and other factors, we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance.
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 three months ended June 30, 2013 were financed by product sales and from working capital reserves.
On June 30, 2010, the Company entered into a secured a revolving credit facility with a financial institution for $200,000 which was secured by a $200,000 certificate of deposit. The interest rate on a drawdown from the facility is the certificate of deposit rate plus 1.25% with interest payable monthly and the principal due at maturity. The financial institution also renewed the $200,000 irrevocable letter of credit for the full amount of the credit facility in favor of Sunshine Distribution LP, with respect to the lease of the Company's corporate headquarters at 1560 West 190th Street, Torrance, California. During the fourth quarter of 2012, the irrevocable letter of credit was fully drawn down by Sunshine Distribution L.P. in order to pay rent on our corporate headquarters, and the certificate of deposit was fully utilized to fund draws on the secured facility. Therefore, the facility was fully drawn and expired on December 31, 2012.
Net cash used in operating activities was $50,000 for the six months ended June 30, 2013, a decrease of $2,918,000 compared to $2,968,000 for the six months ended June 30, 2012. Operating cash used in the first six months of 2013 decreased compared to the prior year period primarily due to over 80% of our workforce leaving the Company in June 2012 that decreased our ongoing operational costs in the current year. Non-cash items include expense for stock-based compensation, depreciation and amortization and other losses. These non-cash items decreased by $1,319,000 for the six months ended June 30, 2013 as compared to the same period in the prior year primarily a decrease in the inventory reserve charges and in the current year period and lower depreciation expense in 2013 due to the end of the lease at our former headquarters in January 2013. The decrease in net loss was primarily due to a decrease in administrative and R&D expenses related to over 80% of our workforce leaving the Company in June 2012 and our restricting other administrative expenditures to conserve cash resources. As of June 30, 2013, the Company had $8,000 of cash and cash equivalents compared to $57,000 as of December 31, 2012.
Net cash provided by investing activities was $29,000 for the six months ended June 30, 2013 compared to net cash used of $16,000 for the six months ended June 30, 2012. The Company recorded net proceeds of $29,000 from the sale of vehicles in 2013 and, subsequent to the reduction in our work force in the second quarter of 2012, halted further capital expenditures.
Net cash used in financing activities was $28,000 for the six months ended June 30, 2013, a decrease of $149,000 compared to net cash from financing activities of $121,000 for the six months ended June 30, 2012. The decrease was primarily attributable to proceeds of $132,000 from the issuance of Common Stock during second quarter of 2012 from the Lincoln Park facility, as explained in Note 8 - Stockholders' Equity to the financial statements included in Item 1 of this Form 10-Q.
Net accounts receivable decreased by $30,000, or 14%, to $178,000 at June 30, 2013 compared to a balance of $208,000 at December 31, 2012. The decrease in the receivable balance was primarily due to collections of receivables due. As of June 30, 2013 and December 31, 2012, the Company maintained a reserve for doubtful accounts receivable of $254,000 and 313,000, respectively, related to financial instability at a major customer.
Net inventory and supplies decreased by $170,000, or 8%, to $2,033,000 at June 30, 2013 compared to a balance of $2,203,000 at December 31, 2012. The decrease resulted from net inventory activity including receipts totaling $298,000, consumption of $268,000 and an inventory reserve charge of $200,000.
Prepaid expenses and other current assets decreased by $123,000, or 51%, to $119,000 at June 30, 2013 compared to a balance of $242,000 at December 31, 2012. The decrease was primarily due to a decrease in deposits to vendors in support of a customer purchase orders and decreases in prepaid rent and insurance in the first half of 2013.
Long term accounts receivable decreased by $27,000, or 71%, to $11,000 at June 30, 2013 compared to a balance of $38,000 at December 31, 2012. The decrease is primarily due to reclassification of amounts that will be due within one year to current accounts receivable. The Company agreed to defer collection of certain accounts receivable as requested by a customer for the term of the Company's warranty guarantee. The Company continues to remedy all warranty claims and therefore anticipates collection of this receivable.
Property and equipment, net of depreciation, decreased by $124,000, or 40%, to $183,000 at June 30, 2013 compared to a balance of $307,000 at December 31, 2012. The decrease is primarily due to depreciation expense of $91,000 and a loss on disposed assets of $33,000.
Accounts payable increased by $30,000, or 5%, to $588,000 at June 30, 2013 compared to a balance of $558,000 at December 31, 2012. The increase was primarily due to inventory purchases made in the second quarter of 2013 in support of a customer order and payment deferrals due to the financial condition of the Company.
Deferred revenues increased by $156,000, or 132%, to $274,000 at June 30, 2013 compared to a balance of $118,000 at December 31, 2012. The Company received prepayments on purchase orders from certain customers, which are expected to be recognized as revenue in the third quarter of 2013.
Accrued payroll and related expenses increased by $21,000, or 21%, to $119,000 at June 30, 2013 compared to a balance of $98,000 at December 31, 2012. The increase was primarily due to an increase in unpaid compensation in the second quarter of 2013 resulting from the financial condition of the Company.
Accrued loss for litigation settlement was unchanged at June 30, 2013 compared to the balance at December 31, 2012. As disclosed in Item 1. Legal Proceedings, on December 12, 2012, a judgment was entered in favor of Arens Controls Company, L.L.C. by the United States District Court Northern District of Illinois in the amount of $2,014,169 in the case of Arens Controls Company, L.L.C. v. Enova Systems, Inc. See Item 1 of Part II of this report on Form 10-Q.
Other accrued liabilities decreased by $4,000, or 2%, to $251,000 at June 30, 2013 compared to a balance of $255,000 at December 31, 2012. The decrease was primarily due to a decrease in the accrual for professional services incurred in the first half of 2013.
Accrued interest payable increased by $42,000, or 3%, to $1,360,000 at June 30, 2013 compared to a balance of $1,318,000 at December 31, 2012. The increase was due to interest related to our debt instruments, primarily the interest on the secured note payable in the amount of $1,325,000 to the Credit Managers Association of California.
Going concern
To date, the Company has incurred recurring net losses and negative cash flows from operations. At June 30, 2013, the Company had an accumulated deficit of approximately $160.1 million, working capital of approximately negative $964,000 and shareholders' deficit of approximately $3.4 million. Until the Company can generate significant cash from its operations, the Company expects to continue to fund its operations with existing cash resources, proceeds from one or more private placement agreements, as well as potentially through debt financing or the sale of equity securities. However, the Company may not be successful in obtaining additional funding. In addition, the Company cannot be sure that its existing cash and investment resources will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or its shareholders.
Our operations will require us to make necessary investments in human and production resources, regulatory compliance, as well as sales and marketing efforts. We do not currently have adequate internal liquidity to meet these objectives in the long term. On June 21, 2012, we reported in a Form 8-K filing that, as part of cost cutting measures in response to our decrease in revenue amid continued delays in industry adoption of EV technology resulting from ongoing battery cost and reliability concerns, in excess of 80% of our workforce left our Company, including the resignation of members of our senior management. We continue to evaluate strategic partnering opportunities and other external sources of liquidity, including the public and private financial markets and strategic partners. Having insufficient funds may require the Company to eliminate its product development, relinquish some or even all rights to product candidates at an earlier stage of development or negotiate less favorable terms than it would otherwise choose. Failure to obtain adequate financing also may adversely affect the Company's ability to continue in business. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations, as well as covenants and specific financial ratios that may restrict its ability to operate its business.
As of June 30, 2013, the Company had approximately $8,000 in cash and cash equivalents and we do not anticipate that our existing cash and anticipated receivables collections will be sufficient to meet projected operating requirements through the end of 2013 to continue operations and market trading.
Judgment entered in Arens Controls Litigation
On December 12, 2012, a judgment was entered by the United States District Court Northern District of Illinois in favor of Arens Controls Company, L.L.C. in the amount of $2,014,169 regarding claims for two counts. In 2008, Arens Controls Company, L.L.C. ("Arens") filed claims against Enova with the United States District Court Northern District of Illinois. A Partial Settlement Agreement, as amended on January 14, 2011, resolved certain claims made by Arens. However, the claims were preserved under two remaining counts concerning i) anticipatory breach of contract by Enova for certain purchase orders that resulted in lost profit to Arens and ii) reimbursement for engineering and capital equipment costs incurred by Arens exclusively for the fulfillment of certain purchase orders received from Enova.
The Company filed a notice of appeal on January 15, 2013. The Company believes the court committed errors leading to the verdict and judgment, and the Company is evaluating its options on appeal. However, there can be no assurance that the appeal will be successful or a negotiated settlement can be attained or that Arens will assert its claim in the state of California, and thereby cause the Company to go into bankruptcy.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 SEC Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2013. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of June 30, 2013, our disclosure controls and procedures were not effective to ensure the information required to be disclosed by an issuer in the reports it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms relating to us, and was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
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 has concluded that the Company's internal control over disclosure controls and procedures was not effective as of June 30, 2013.
Changes in Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. We maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
In June 2012, all but two of the Company's employees resigned, and such staff reduction resulted in our inability to complete documentation of proper accounting procedures and management review. Not all fully implemented fundamental elements of an effective control were present as of June 30, 2013, including formalized monitoring procedures. Based on this evaluation, management has concluded that the aforementioned factors constituted a material weakness in the Company's internal control over financial reporting as of June 30, 2013.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As reported in our Form 10-K for the fiscal year 2012, 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 remained outstanding. The two remaining counts concerned i) anticipatory breach of contract by Enova for certain purchase orders that resulted in lost profit to Arens and ii) reimbursement for engineering and capital equipment costs incurred by Arens exclusively for the fulfillment of certain purchase orders received from Enova.
On December 12, 2012, a judgment was entered under the two remaining counts by the United States District Court Northern District of Illinois in favor of Arens Controls Company, L.L.C. in the amount of $2,014,169. The Company filed an appeal of the judgment in the 7th Circuit Court of Appeals on January 15, 2013. The Company believes the court committed errors leading to the verdict and judgment. However, there can be no assurance that the appeal will be successful, a negotiated settlement can be attained, or that Arens will enforce its claim in the state of California and thereby cause the Company to go into bankruptcy.
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
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 lists risk factors for the Company. There have been no material changes from the risk factors as previously disclosed in such Annual Report on Form 10-K.
This information is provided by RNS
The company news service from the London Stock Exchange
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