15th May 2007 07:04
Enova Systems, Inc.15 May 2007 For Immediate release 15th of May 2007 Enova Systems INC., (OTCBB: ENOV and AIM: ENV and ENVS), a leading developer andmanufacturer of electric, hybrid and fuel cell digital power management systems,announces quarterly results for the quarterly period ended March 31, 2007 HIGHLIGHT For the three months ended March For the three months ended March 31, 31, 2007 2006 Net revenues $1,543,000 $309,000 Net production sales $1,543,000 $264,000 This represents a 390% increase in revenue when comparing quarter on quarter. RESULTS OF OPERATIONS In the first quarter of 2006, our revenues derived mostly from production typecontracts with Hyundai Motor Corporation and the State of Hawaii. Additionally,we recognized additional revenues from our project with Wrightbus and Tomoe. Inthe first quarter of 2007, the company shifted our focus towards productioncontracts, including arrangements with Verizon, International Truck, andTanfield. Cost of revenues consists of component and material costs, direct labor costs,integration costs and overhead related to manufacturing our products. Productdevelopment costs incurred in the performance of engineering developmentcontracts for the U.S. Government and private companies are charged to cost ofsales for this contract revenue. Cost of revenues for the quarter ended March31, 2007 increased to $1,383,000, or 200%, from $460,000 for the same period in2006. This increase is primarily attributable to the increase in sales for thequarter, although we are also experiencing an increase in integration supportcosts. We anticipate there may be an increase in cost of sales for products dueto foreign exchange rate fluctuations of the U.S. dollar versus those currenciesof our primary manufacturers. Our research and development revenues decreased by $45,000, in the first quarterof 2007. The company did not have any research and development revenues in thefirst quarter of 2007 however, we may realize research and development revenuesin the future. Internal research, development and engineering expenses decreased in the threemonths ended March 31, 2007 to $95,000 as compared with $325,000 in the sameperiod in 2006. While we continue to develop several new products such as ourpost transmission parallel hybrid drive system and enhancements to our dieselgenerator set, our focus has shifted towards production type arrangements, whichaccounts for the decrease in our internal research and development costs. Wecontinue to allocate necessary resources to the development of our parallelhybrid drive systems, upgraded proprietary control software, enhanced DC-DCconverters and advanced digital inverters and other power management firmware. Selling, general and administrative expenses increased by $404,000 to $1,328,000for the three months ended March 31, 2007 from the previous year's comparableperiod. The increase is attributable to additional engineering and technicalstaff employed in the first quarter of 2007 as well as increased expense due tostricter regulatory oversight. Further, we have experienced increased costsrelated to our implementation of a new firm-wide software solution.Additionally, we have increased our sales and marketing expenditures and haveincurred additional costs associated with improving our internal processes tosupport our goal of becoming a production company. While management continuesto explore cost reduction strategies in 2007, it is likely that our selling,general, and administrative expenses will continue to increase in the nearfuture. We put a priority on achieving profitability, although managementcannot assure that profitability will be achieved. Interest income decreased by $68,000 in the first quarter of 2007, when comparedto the same period in 2006. This decrease is a result of the Company having asmaller average cash balance for the comparable periods in 2007 and 2006.Consequently, we have earned less interest income. We realized a net loss of $1,193,000 in the first quarter of 2007 compared tonet income of $145,000 in the first quarter of 2006. The decrease is primarilyattributable to the settlement of a portion of the debt outstanding to CMAC,resulting in a gain on settlement in the first quarter of 2006 of $1,392,000. Inquires:Enova SystemsEd Riddle, Chief Executive Officer +1(310) 527-2800 x105Jarett Fenton, Chief Financial Officer +1(310) 527-3847 Investec +44 (0) 207 597 5066Michael Ansell Global Equity IR +44 (0) 79 5620 6270Amira Bardichev MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Enova believes it is a leader in the development and production of proprietary,commercial digital power management systems for transportation vehicles andstationary power generation systems. Power management systems control andmonitor electric power in an automotive or commercial application such as anautomobile or a stand-alone power generator. Drive systems are comprised of anelectric motor, an electronics control unit and a gear unit which power anelectric vehicle. Hybrid systems, which are similar to pure electric drivesystems, contain an internal combustion engine in addition to the electricmotor, eliminating external recharging of the battery system. A hydrogen fuelcell based system is similar to a hybrid system, except that instead of aninternal combustion engine, a fuel cell is utilized as the power source. A fuelcell is a system which combines hydrogen and oxygen in a chemical process toproduce electricity. Stationary power systems utilize similar components tothose which are in a mobile drive system in addition to other elements. Thesestationary systems are effective as power-assist or back-up systems, alternativepower, for residential, commercial and industrial applications. A fundamental element of Enova's strategy is to develop and produce advancedproprietary software, firmware and hardware for applications in thesealternative power markets. Our focus is digital power conversion, powermanagement, and system integration, for two broad market applications - vehiclepower generation and stationary power generation. Specifically, we develop, design and produce drive systems and relatedcomponents for electric, hybrid-electric, fuel cell and microturbine-poweredvehicles. We also develop, design and produce power management and powerconversion components for stationary distributed power generation systems. Thesestationary applications can employ hydrogen fuel cells, microturbines, oradvanced batteries for power storage and generation. Additionally, we performresearch and development to augment and support others' and our own relatedproduct development efforts. Our product development strategy is to design and introduce to marketsuccessively advanced products, each based on our core technical competencies.In each of our product/market segments, we provide products and services toleverage our core competencies in digital power management, power conversion andsystem integration. We believe that the underlying technical requirements sharedamong the market segments will allow us to more quickly transition from oneemerging market to the next, with the goal of capturing early market share. Enova's primary market focus centers on both series and parallel heavy-dutydrive systems for multiple vehicle and marine applications. A series hybridsystem is one where only the electric motor connects to the drive shaft; aparallel hybrid system is one where both the internal combustion engine and theelectric motor are connected to the drive shaft. We believe series-hybrid andparallel hybrid medium and heavy-duty drive system sales offer Enova thegreatest return on investment in both the short and long term. We believe themedium and heavy-duty hybrid market's best chances of significant growth lie inidentifying and pooling the largest possible numbers of early adopters inhigh-volume applications. We will attempt to utilize our competitive advantages,including customer alliances, to gain greater market share. By aligningourselves with key customers in our target market(s), we believe that thealliance will result in the latest technology being implemented and customerrequirements being met, with a minimal level of additional time or expense.Additionally, our management believes that this area will see significant growthover the next several years. As we penetrate more market areas, we arecontinually refining and optimizing both our market strategy and our productline to maintain our leading edge in power management and conversion systems formobile applications. Our website, www.enovasystems.com, contains up-to-date information on ourcompany, our products, programs and current events. We are implementing anaggressive strategy to utilize our website and the internet as a prime focalpoint for current and prospective customers, investors and other affiliatedparties seeking data on our business. In December, 2006, we announced a production contract with the Tanfield GroupPlc., which we expect will lead to production of up to 200 units in 2007. Weexpect that this agreement will help to consolidate our position as a marketleader in Europe. In August, 2006, we entered into a contract with Verizon to design, integrate,and deliver 13 service vans. In 2007, we continue to work actively withVerizon. We believe that working with the 2nd largest fleet operator in NorthAmerica will generate further exposure in the domestic market, and bringadditional focus on our unique fleet solutions. As part of our continuing strategic relationship with International Truck andEngine Corp (IC Corp), we executed an agreement to produce the nations first 19hybrid school buses. IC Corp is the nation's largest school bus manufacturer,claiming over 60% of the Domestic Build. In addition to school buses, IC Corp isteaming with Enova to supply hybrid buses to the Commercial Bus Market. Throughout the first quarter of 2007, we hosted and visited numerous potentialcustomers from the Pick Up and Delivery, Medium Duty and Heavy Duty markets.Every effort is made to continue to mature these relationships, as we believethat they will eventually lead to viable business relationships. Enova believes that our business outlook is improving. Greater recognition andstrong engineering have allowed us to make several key strides towardssustainable revenue as the Company has continued to shift its focus fromresearch and development work towards production contracts. In conjunction withthis expected outlook, we have recently made several key management changes inthe past months: • On November 17, 2006, The Company promoted Mike Staran to the position ofExecutive Vice President. In that role, Mr. Staran is responsible foroperations, engineering, sales and marketing, and investor relations. • In January 2007, Corinne Bertrand resigned as Chief Financial Officer. In herplace, Jarett Fenton was appointed as Chief Financial Officer. • In February of 2007, John Dexter retired from his position as Director ofOperations. We continue to receive greater recognition from both governmental and privateindustry with regards to both commercial and military application of its hybriddrive systems and fuel cell power management technologies. Enova continues to work with customers and potential customers with a view todeveloping these relationships and securing orders of increasing size. Althoughwe believe that current negotiations with several parties may result indevelopment and production contracts and revenues during 2007 and beyond, thereare no assurances that such additional agreements will be realized or when theywill be realized. During the first quarter of 2007, we continued to advance our technologies andproducts for greater market penetration. We continue to develop independentlyand in conjunction with the Hyundai-Enova Innovative Technology Center (ITC)progress on several fronts to produce commercially available heavy-duty, seriesand parallel hybrid drive systems. During the first quarter of 2007, we continued to develop and produce electricand hybrid electric drive systems and components for First Auto Works of China,International Truck and Engine (IC Corp), Ford Motor Company (Ford), HyundaiMotor Car, US Military, Wright Bus of the United Kingdom, and Tomoe of Japan aswell as several other domestic and international vehicle and bus manufacturers.We also were successful in introducing our technology to companies such asConcurrent Technology Corporation (CTC), PUES (Tokyo Research and Development),Verizon, Volvo/Mack, Tanfield/Smith Electric Vehicles and Navistar(International Truck and Engine, IC Corporation). The continued relationships,in addition to our newest customers helped Enova easily surpass, since ourinception, the manufacturing of its 900th system. Our various electric andhybrid-electric drive systems, power management and power conversion systems arebeing used in applications including several light, medium and heavy dutytrucks, train locomotives, transit buses and industrial vehicles. REVENUE RECOGNITION The Company manufactures proprietary products and other products based on designspecifications provided by its customers. The Company recognizes revenue only when all of the following criteria have beenmet: • 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 anarrangement in a written contract signed by the customer prior to recognizingrevenue. Delivery Has Occurred or Services Have Been Performed - The Company performs allservices or delivers all products prior to recognizing revenue. Professionalconsulting and engineering services are considered to be performed when theservices are complete. Equipment is considered delivered upon delivery to acustomer's designated location. The Fee for the Arrangement is Fixed or Determinable - Prior to recognizingrevenue, a customer's fee is either fixed or determinable under the terms of thewritten contract. Fees professional consulting services, engineering servicesand equipment sales are fixed under the terms of the written contract. Thecustomer's fee is negotiated at the outset of the arrangement and is not subjectto refund or adjustment during the initial term of the arrangement. Collectibility is Reasonably Assured - The Company determines thatcollectibility is reasonably assured prior to recognizing revenue.Collectibility is assessed on a customer-by-customer basis based on criteriaoutlined by management. New customers are subject to a credit review process,which evaluates the customer's financial position and ultimately its ability topay. The Company does not enter into arrangements unless collectibility isreasonably assured at the outset. Existing customers are subject to ongoingcredit evaluations based on payment history and other factors. If it isdetermined during the arrangement that collectibility is not reasonably assured,revenue is recognized on a cash basis. Additionally, in accordance with theSecurities and Exchange Commission's Staff Accounting Bulletin No. 104 ("SAB 104"), amounts received upfront for engineering or development fees undermultiple-element arrangements are deferred and recognized over the period ofcommitted services or performance, if such arrangements require the Company toprovide on-going services or performance. All amounts received undercollaborative research agreements or research and development contracts arenonrefundable, regardless of the success of the underlying research. Revenues from milestone payments are recognized when earned, as evidenced bywritten acknowledgment from the customer, provided that (i) the milestone eventis substantive and its achievement was not reasonably assured at the inceptionof the agreement, and (ii) our performance obligations after the milestoneachievement will continue to be funded by our collaborator at a comparable levelto that before the milestone achievement. If both of these criteria are not met,the milestone payment is recognized over the remaining minimum period of ourperformance obligations under the agreement. Pursuant to Emerging Issues Task Force ("EITF") of the Financial AccountingStandards Board Issue 00-21. EITF Issue 00-21 addressed the accounting forarrangements that may involve the delivery or performance of multiple products,services and/or rights to use assets. Specifically, Issue 00-21 requires therecognition of revenue from milestone payments over the remaining minimum periodof performance obligations. As required, we apply the principles of Issue 00-21to multiple element agreements. The Company recognizes engineering and construction contract revenues using thepercentage-of-completion method, based primarily on contract costs incurred todate compared with total estimated contract costs. Customer-furnished materials,labor, and equipment, and in certain cases subcontractor materials, labor, andequipment, are included in revenues and cost of revenues when managementbelieves that the company is responsible for the ultimate acceptability of theproject. Contracts are segmented between types of services, such as engineeringand construction, and accordingly, gross margin related to each activity isrecognized as those separate services are rendered. Changes to total estimated contract costs or losses, if any, are recognized inthe period in which they are determined. Claims against customers are recognizedas revenue upon settlement. Revenues recognized in excess of amounts billed areclassified as current assets under contract work-in-progress. Amounts billed toclients in excess of revenues recognized to date are classified as currentliabilities under advance billings on contracts. Changes in project performance and conditions, estimated profitability, andfinal contract settlements may result in future revisions to engineering anddevelopment contract costs and revenue. ENOVA SYSTEMS, INC.BALANCE SHEETSAs of March 31, 2007 and December 31, 2006 As of March 31, 2007 As of December 31, 2006 ASSETSCurrent assetsCash and cash equivalents $8,649,000 $5,612,000Short term investment 0 5,000,000Accounts receivable, net 1,102,000 358,000Inventories and supplies, net 2,773,000 1,704,000Prepaid expenses and other current assets 184,000 708,000Total current assets 12,708,000 13,382,000Property and equipment, net 665,000 627,000Ownership interest in joint venture company 1,606,000 1,647,000Intangible assets 73,000 74,000Total assets $15,052,000 $15,730,000 LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable $321,000 $382,000Deferred revenues 408,000 399,000Accrued payroll and related expense 307,000 220,000Other accrued expenses 1,036,000 664,000Current portion of notes payable 83,000 71,000Total current liabilities 2,155,000 1,736,000Accrued interest payable 768,000 735,000Notes payable, net of current portion 1,275,000 1,295,000Total liabilities $4,198,000 $3,766,000 Stockholders' equitySeries A convertible preferred stock - no 1,679,000 1,679,000par value 30,000,000 shares authorized2,652,000 issued and outstandingLiquidating preference at $0.60 per share,aggregating $1,591,000Series B convertible preferred stock - no 2,432,000 2,432,000par value 5,000,000 shares authorized1,185,000 shares issued and outstandingLiquidating preference at $2 per share,aggregating $2,370,000Common Stock, no par value 750,000,000 109,496,000 109,460,000shares authorized 14,828,000 and 14,816,000shares issued and outstandingCommon stock issuable 36,000 36,000Stock notes receivable (1,149,000) (1,176,000)Additional paid-in capital 6,975,000 6,955,000Accumulated deficit (108,615,000) (107,422,000) Total stockholders' equity 10,854,000 11,964,000Total liabilities and stockholders' equity $15,052,000 $15,730,000 ENOVA SYSTEMS, INC.STATEMENTS OF OPERATIONSFor the Quarters Ended March 31, 2007 and 2006 31/03/2007 31/03/2006Net revenuesResearch and development contracts $ - $45,000Production 1,543,000 264,000 Total net revenues 1,543,000 309,000 Cost of revenuesResearch and development contracts 0 170,000Production 1,383,000 290,000 Total cost of revenues 1,308,000 460,000 Gross profit (loss) 160,000 -151,000 Operating expensesResearch and development 95,000 325,000Selling, general & administrative 1,328,000 924,000 Total operating expenses 1,423,000 1,249,000 Other income and (expense)Interest and financing fees, net 111,000 179,000Equity loss - share of joint venture company losses -41,000 -26,000Debt extinguishment 0 920,000Interest extinguishment 0 472,000 Total other income and (expense) 70,000 1,545,000 Income (loss) from operations -1,193,000 145,000 Net Income (loss) $ -1,193,000 $145,000Basic and diluted loss per share -0.08 0.01Weighted-average number of shares 14,821,982 14,783,000outstanding- Basic and Diluted ENOVA SYSTEMS, INC. STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended March 31, 2007 and 2006 2007 2006Cash flows from operating activities Net income / (loss) -1,193,000 145,000 Adjustments to reconcile net income/(loss) to net cash used in operating activities Debt extinguishment 0 -920,000 Interest extinguishment 0 -472,000 Depreciation and amortization 74,000 90,000 Equity in losses of equity method investee 41,000 26,000 Issuance of subscribed common stock for services 36,000 30,000 Stock based compensation expense 20,000 14,000 (Increase) decrease in Accounts receivable -744,000 1,399,000 Inventory and supplies -1,069,000 2,000 Prepaid expenses and other current assets 524,000 -92,000 Increase (decrease) in Accounts payable -61,000 -1,236,000 Accrued expenses 459,000 -91,000 Deferred revenues 9,000 0 Accrued interest payable 33,000 -7,000Net cash used in operating activities -1,871,000 -1,112,000 Cash flows from investing activities Purchase of short term investments -10,000,000 Purchases of property and equipment -111,000 -84,000 Sales of Short Term Investments 5,000,000 0 Net cash used in investing activities 4,889,000 -10,084,000Cash flows from financing activities Proceeds from stock notes receivable 27,000 0 Payment on notes payable and capital lease obligations -8,000 0 Payment to extinguish debt 0 -165,000Net cash provided by (used in) financing activities 19,000 -165,000 Net increase (decrease) in cash and cash equivalents 3,037,000 -11,361,000 Cash and cash equivalents, beginning of period 5,612,000 16,187,000 Cash and cash equivalents, end of period 8,649,000 4,826,000 Supplemental disclosure of cashflow information Interest paid 1,4000 0 Income taxes paid 0 0 Supplemental schedule of non- cashinvesting and financing activities Conversion of preferred stock to common stock 0 0 Stock Option Program Description For the year ended December 31, 2006, the Company had two equity compensationplans, the 1996 Stock Option Plan (the "1996 Plan") and the 2006 equitycompensation plan (the 2006 "Plan"). The 1996 Plan has expired for the purposesof issuing new grants. However, the 1996 Plan will continue to govern awardspreviously granted under that plan. The 2006 Plan has been approved by theCompany's Shareholders. Equity compensation grants are designed to reward employees and executives fortheir long term contributions to the Company and to provide incentives for themto remain with the Company. The number and frequency of equity compensationgrants are based on competitive practices, operating results of the company, andgovernment regulations. The maximum number of shares issuable over the term of the 1996 Plan waslimited to 65 million shares. Options granted under the 1996 Plan typically havehad an exercise price of 100% of the fair market value of the underlying stockon the grant date and expired no later than ten years from the grant date. The2006 Plan has a total of 3,000,000 shares reserved for issuance, none of whichhave been granted. Stock options for the 1996 Stock Option Plan, and the 2006 Stock Option Planwere approved by the stockholders. All stock options have terms of 10 years,except for options issued to employees which have a term of 5 years, andgenerally vest and become fully exercisable four years from the date of grant.The vesting schedule for stock option grants are generally as follows: 25% ofthe grant vests upon one year from date of grant with the remainder of the grantvesting in 36 equal monthly installments thereafter. Quarter ended March 31, 2007 In conjunction with the adoption of SFAS 123(R), the Company elected toattribute the value of share-based compensation to expense using thestraight-line method, which was previously used for its pro forma informationrequired under SFAS 123. Share-based compensation expense related to stockoptions and employee stock purchases was $20,000 for the three months endedMarch 31, 2007, and was recorded in the financial statements as a component ofselling, general and administrative expense. Share-based compensation expense reduced the Company's results of operations asfollows: March 31,2007 March 31, 2006 Income from continuing operations before income taxes $20,000 $14,000 Income from continuing operations after income taxes $20,000 $14,000 Cash flows from operations $20,000 $14,000 Cash flows from financing activities $ - $ - Basic and Diluted EPS $ - $ - During the quarters ended March 31, 2007, and 2006 the Company did not grant anystock options As of March 31, 2007, the total compensation cost related to non-vested awardsnot yet recognized is $100,000. The weighted average period over which thefuture compensation cost is expected to be recognized is 30 months. Theaggregate intrinsic value of total awards outstanding, is $645,520. General Option Information A summary of option activity is as follows: 1996 Plan Shares Weighted Weighted Average Average Exercise Price Contractual Term Outstanding December 31, 162,000 $4.43 7.752006 Granted - -Exercised - -Forfeited - - Outstanding, March 31, 162,000 $4.43 7.752007 Vested Expected to Vest 162,000 $4.43 7.75 Exercisable, March 31, 128,000 $4.35 7.632006 The weighted-average remaining contractual life of the options outstanding atMarch 31 2007 was 7.75 years. The exercise prices of the options outstanding atMarch 31, 2007 ranged from $4.35 to $4.95. The weighted-average remainingcontractual life of the options outstanding at December 31, 2006 was 7.96 years.The exercise prices of the options outstanding at December 31, 2006 ranged from$4.35 to $4.95. Options exercisable were 128,000 and 119,000 at March 31, 2007and December 31, 2006, respectively. Recently Issued Pronouncement In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option forFinancial Assets and Financial Liabilities - Including an amendment of FASBStatement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair valueaccounting but does not affect existing standards which require assets orliabilities to be carried at fair value. Under SFAS 159, a company may elect touse fair value to measure accounts and loans receivable, available-for-sale andheld-to-maturity securities, equity method investments, accounts payable,guarantees and issued debt. Other eligible items include firm commitments forfinancial instruments that otherwise would not be recognized at inception andnon-cash warranty obligations where a warrantor is permitted to pay a thirdparty to provide the warranty goods or services. If the use of fair value iselected, any upfront costs and fees related to the item must be recognized inearnings and cannot be deferred, e.g., debt issue costs. The fair value electionis irrevocable and generally made on an instrument-by-instrument basis, even ifa company has similar instruments that it elects not to measure based on fairvalue. At the adoption date, unrealized gains and losses on existing items forwhich fair value has been elected are reported as a cumulative adjustment tobeginning retained earnings. Subsequent to the adoption of SFAS 159, changes infair value are recognized in earnings. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007 and is required to be adopted by the Companyin the first quarter of fiscal 2009. Enova is currently is determining whetherfair value accounting is appropriate for any of its eligible items and cannotestimate the impact, if any, which SFAS 159 will have on its consolidatedresults of operations and financial condition. In June 2006, the Financial Accounting Standards Board ("FASB") issued FASBInterpretation 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes. FIN 48clarifies the accounting for uncertainty in income taxes recognized inaccordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes acomprehensive model for how a company should recognize, measure, present anddisclose in its financial statements uncertain tax positions that the companyhas taken or expects to take on a tax return. This interpretation is effectivefor fiscal years beginning after December 15, 2006. The Company files federal income tax returns in the U.S. The Company is nolonger subject to U.S. state, or non-U.S. income tax examinations by taxauthorities for years before 2003. Certain U.S. Federal returns for years 2006and following are not closed by relevant statutes of limitation due to unusednet operating losses reported on those returns. The Company adopted the provisions of FIN 48 on January 1, 2007. As a result ofthe implementation of FIN 48, the Company had no changes in the carrying valueof its tax assets or liabilities for any unrecognized tax benefits. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would beexchanged to sell an asset or transfer a liability in an orderly transactionbetween market participants. Further, the standard establishes a framework formeasuring fair value in generally accepted accounting principles and expandscertain disclosures about fair value measurements. SFAS 157 is effective forfiscal years beginning after November 15, 2007. The Company does not expect theadoption of SFAS 157 to have a material impact on its financial statements. Notes Payable, Long-Term Debt and Other Financing Notes payable and long-term debt is comprised of the following: March 31, 2007 December 31, 2006 (unaudited) Secured note payable to Credit Managers Association ofCalifornia, bearing interest at prime plus 3% per annum in2005 and through maturity. Principal and unpaid interestdue in April 2016. A sinking fund escrow is required to befunded with 10% of future equity financing, as defined inthe agreement. 1,238,000 1,238,000 Secured note payable to a financial institution in theoriginal amount of $95,000, bearing interest at 6.21%,payable in monthly installments 80,000 88,000 Secured note payable to Coca Cola Enterprises in theoriginal amount of $40,000, bearing interest at 10% perannum. Principal and unpaid interest due now. 40,000 40,000 Less current maturities (83,000) (71,000) Long-term portion 1,275,000 1,295,000 During the quarter ended March, 31, 2006, the Company settled $1,083,000 ofprincipal and $472,000 accrued interest under the secured note payable to theCredit Managers Association of California (CMAC). In consideration for thesettlement, the Company paid the beneficiaries $165,000. The Company evaluatedthis transaction under the guidance set forth in SFAS 140 "Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities"and noted that the extinguishment of these liabilities was consistent with theguidance. Shareholders' Equity During the three months ended March 31, 2007, the Company recorded 9,000 sharesof restricted common stock as common stock subscribed, valued at $36,000, to theBoard of Directors at an average price of $4.00 per share for board meetings andcommittee meetings during the first quarter of 2007. During the three months ended March 31, 2007, the Company issued 12,000 sharesof restricted common stock to the Board of Directors from common stocksubscribed. Directors receive quarterly compensation at a flat rate of $4,000 in cash and$6,000 in stock valued on the date of the meeting at the average of the closingask and bid prices. The flat rate is not dependent on the amount or type ofservices performed by the Directors. All Directors are also reimbursed for out-of-pocket expenses incurred inconnection with attending Board and committee meetings. Related Party Transactions During the three months ended March 31, 2007, the Company purchasedapproximately $396,000 in components, materials, and services from Hyundai HeavyIndustries (HHI), a related party. The outstanding payable balance owed to HHIon March 31, 2007 was approximately $107,000. A relative of the Company's CEO, is a majority owner of a website consultingfirm, which provides services (branding) to the Company. During the threemonths ended March 31, 2007, The Company paid consulting fees and expenses tothis firm in the amount of approximately $59,000 SIGNIFICANT ACCOUNTING POLICIES In the ordinary course of business, the Company has made a number of estimatesand assumptions relating to the reporting of results of operations and financialcondition in the preparation of its financial statements in conformity withaccounting principles generally accepted in the United States of America. Actualresults could differ significantly from those estimates under differentassumptions and conditions. The Company believes that the following discussionaddresses the Company's most critical accounting policies, which are those thatare most important to the portrayal of the Company's financial condition andresults of operations The Company constantly re-evaluates these significantfactors and makes adjustments where facts and circumstances dictate.Historically, actual results have not significantly deviated from thosedetermined using the necessary estimates inherent in the preparation offinancial statements. Estimates and assumptions include, but are not limited to,customer receivables, inventories, equity investments, fixed asset lives,contingencies and litigation. The Company has also chosen certain accountingpolicies when options were available, including: Cash consists of currency held at reputable financial institutions. Inventories are priced at the lower of cost or market utilizing first-in,first-out (FIFO) cost flow assumption. We maintain a perpetual inventory systemand continuously record the quantity on-hand and standard cost for each product,including purchased components, subassemblies and finished goods. We maintainthe integrity of perpetual inventory records through periodic physical counts ofquantities on hand. Finished goods are reported as inventories until the pointof transfer to the customer. Generally, title transfer is documented in theterms of sale. We maintain an allowance against inventory for the potential future obsolescenceor excess inventory that is based on our estimate of future sales. A substantialdecrease in expected demand for our products, or decreases in our selling pricescould lead to excess or overvalued inventories and could require us tosubstantially increase our allowance for excess inventory. If future customerdemand or market conditions are less favorable than our projections, additionalinventory write-downs may be required, and would be reflected in cost ofrevenues in the period the revision is made. Stock Based Compensation- Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards ("SFAS") No. 123(R), Share-BasedPayment ("SFAS 123(R)"), which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors, including stock options and employee stock purchases related to theCompany's Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")based on their fair values. SFAS 123(R) supersedes Accounting Principles BoardOpinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), which theCompany previously followed in accounting for stock-based awards. In March 2005,the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") to provideguidance on SFAS 123(R). The Company has applied SAB 107 in its adoption of SFAS123(R). The Company adopted SFAS 123(R) using the modified prospective transition methodas of and for the three months ended March 31, 2006. In accordance with themodified prospective transition method, the Company's financial statements forprior periods have not been restated to reflect, and do not include, the impactof SFAS 123(R). Share-based compensation expense recognized is based on thevalue of the portion of share-based payment awards that is ultimately expectedto vest. Share-based compensation expense recognized in the Company's Statementof Operations during the three months ended March 31, 2007 includes compensationexpense for share-based payment awards granted prior to, but not yet vested asof, December 31, 2005 based on the grant date fair value estimated in accordancewith the pro forma provisions of SFAS 123. Allowance for Doubtful Accounts. We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments. The assessment of the ultimate realization of accountsreceivable including the current credit-worthiness of each customer is subjectto a considerable degree to the judgment of our management. If the financialcondition of the Company's customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. Contract Services Revenue and Cost Recognition. The Company is required to makejudgments based on historical experience and future expectations, as to thereliability of shipments made to its customers. These judgments are required toassess the propriety of the recognition of revenue based on Staff AccountingBulletin ("SAB") No. 101 and 104, "Revenue Recognition," and related guidance.The Company makes these assessments based on the following factors: i)customer-specific information, ii) return policies, and iii) historicalexperience for issues not yet identified. Under FAS Concepts No. 5, revenuesare not recognized until earned. The Company manufactures proprietary products and other products based on designspecifications provided by its customers. Revenue from sales of products aregenerally recognized at the time title to the goods and the benefits and risksof ownership passes to the customer which is typically when products are shippedbased on the terms of the customer purchase agreement. Revenue relating tolong-term fixed price contracts is recognized using the percentage of completionmethod. Under the percentage of completion method, contract revenues and relatedcosts are recognized based on the percentage that costs incurred to date bear tototal estimated costs. Changes in job performance, estimated profitability andfinal contract settlements may result in revisions to cost and revenue, and arerecognized in the period in which the revisions are determined. Contract costsinclude all direct materials, subcontract and labor costs and other indirectcosts. General and administrative costs are charged to expense as incurred. Atthe time a loss on a contract becomes known, the entire amount of the estimatedloss is accrued. The aggregate of costs incurred and estimated earningsrecognized on uncompleted contracts in excess of related billings is shown as acurrent asset, and billings on uncompleted contracts in excess of costs incurredand estimated earnings is shown as a current liability. 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 thefootnotes to our financial statements. RECENTLY ISSUED ACCOUNTING STANDARDS In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option forFinancial Assets and Financial Liabilities - Including an amendment of FASBStatement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair valueaccounting but does not affect existing standards which require assets orliabilities to be carried at fair value. Under SFAS 159, a company may elect touse fair value to measure accounts and loans receivable, available-for-sale andheld-to-maturity securities, equity method investments, accounts payable,guarantees and issued debt. Other eligible items include firm commitments forfinancial instruments that otherwise would not be recognized at inception andnon-cash warranty obligations where a warrantor is permitted to pay a thirdparty to provide the warranty goods or services. If the use of fair value iselected, any upfront costs and fees related to the item must be recognized inearnings and cannot be deferred, e.g., debt issue costs. The fair value electionis irrevocable and generally made on an instrument-by-instrument basis, even ifa company has similar instruments that it elects not to measure based on fairvalue. At the adoption date, unrealized gains and losses on existing items forwhich fair value has been elected are reported as a cumulative adjustment tobeginning retained earnings. Subsequent to the adoption of SFAS 159, changes infair value are recognized in earnings. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007 and is required to be adopted by the Companyin the first quarter of fiscal 2009. Enova is currently is determining whetherfair value accounting is appropriate for any of its eligible items and cannotestimate the impact, if any, which SFAS 159 will have on its consolidatedresults of operations and financial condition. In June 2006, the Financial Accounting Standards Board ("FASB") issued FASBInterpretation 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes. FIN 48clarifies the accounting for uncertainty in income taxes recognized inaccordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes acomprehensive model for how a company should recognize, measure, present anddisclose in its financial statements uncertain tax positions that the companyhas taken or expects to take on a tax return. This interpretation is effectivefor fiscal years beginning after December 15, 2006. The Company files federal income tax returns in the U.S. The Company is nolonger subject to U.S. state, or non-U.S. income tax examinations by taxauthorities for years before 2003. Certain U.S. Federal returns for years 2006and following are not closed by relevant statutes of limitation due to unusednet operating losses reported on those returns. The Company adopted the provisions of FIN 48 on January 1, 2007. As a result ofthe implementation of FIN 48, the Company had no changes in the carrying valueof its tax assets or liabilities for any unrecognized tax benefits. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would beexchanged to sell an asset or transfer a liability in an orderly transactionbetween market participants. Further, the standard establishes a framework formeasuring fair value in generally accepted accounting principles and expandscertain disclosures about fair value measurements. SFAS 157 is effective forfiscal years beginning after November 15, 2007. The Company does not expect theadoption of SFAS 157 to have a material impact on its financial statements. LIQUIDITY AND CAPITAL RESOURCES We have experienced cash flow shortages due to operating losses primarilyattributable to research, development, marketing and other costs associated withour strategic plan as an international developer and supplier of electricpropulsion and power management systems and components. Cash flows fromoperations have not been sufficient to meet our obligations. Therefore, we havehad to raise funds through several financing transactions. At least until wereach breakeven volume in sales and develop and/or acquire the capability tomanufacture and sell our products profitably, we will need to continue to relyon cash from external financing sources. Our operations during the year ended December 31, 2006 were financed bydevelopment contracts and product sales, as well as from working capitalreserves. During the quarter ended March 31, 2007, our operations required $1,871,000 morein cash than was generated. We continue to increase marketing and developmentspending as well as administrative expenses necessary for expansion to meetcustomer demand. Accounts receivable increased to $1,102,000, more than triplethe balance at December 31, 2006 (net of write-offs). The increase is due to ourincreased sales volume in the first quarter of 2007. Inventory balances increased by $1,069,000 when comparing the balances at March31, 2007 and December 31, 2006. This represents a 63% increase in the inventorybalance between the two periods. We have increased our materials purchasingvolume during in the first quarter of 2007 to support our current sales ordervolume, as well as anticipated increases in future sales volume. Prepaid expenses and other current assets decreased by net $524,000 at March 31,2007 from the December 31, 2006 balance of $708,000, or 74%. The Company electedto transfer all Certificate of Deposit balances to a money market account,resulting in a decline in the accrued interest receivable. In addition, vendorprepayments of $143,000 for the Verizon van project were realized with productdelivery. Fixed assets increased by $38,000, net of depreciation and writeoffs, at March31, 2007, when compared to the December balance of $627,000. In the firstquarter of 2007, the Company purchased $111,000 in new property and equipment.The Company recognized $74,000 worth of depreciation expense for the quarter. Equity method investments decreased by $41,000 in the first quarter of 2007from a balance of $1,647,000 at December 31, 2006, reflecting a pro-rata shareof losses attributable to our forty percent investment interest in theHyundai-Enova Innovative Technology Center (ITC). For the quarter ended March31, 2007, the ITC generated a net loss of approximately $102,500 resulting in acharge to us of $41,000 utilizing the equity method of accounting for ourinterest in the ITC. Accounts payable decreased in the first quarter of 2007 by $61,000 to $321,000from $382,000 at December 31, 2006.This decrease is attributable to increasedmaterials purchasing at year end 2006 to support our delivery to TomoeManufacturing. In the current quarter, we have increased purchasing to supportcurrent sales orders as well as anticipated future orders however, these ordershave either already been paid, or not yet been received. Deferred revenues increased at March 31, 2007 by $9,000, when comparing to theDecember 31, 2006 balance of $399,000. This difference represents the neteffect of the Company realizing revenue that had been deferred in December,combined with additional revenue, which, having been billed or collected, couldnot yet be recognized as revenue as per the relevant accounting guidance. Accrued payroll and related expense increased by $87,000 or 40% at March 31,2007, when compared to the balance reported at December 31, 2006. This increaseis attributable to an increased headcount, as well as an accrual for salaries onMarch 31, 2007, which straddles our pay period. Other accrued expenses increased by $372,000 for the three months ended March31, 2007 from the balance of $664,000 at December 31, 2006, primarily due to theaccrual of professional services, software implementation, and other such fees,as well as accruals for certain un-invoiced inventory purchases. Accrued interest increased by $33,000 for the quarter ended March 31, 2007, anincrease of 4% from the balance of $735,000 at December 31, 2006. The increaseis due to interest related to borrowings under our software lease, as well asadditional interest accrued related on other debt instruments. DISCLOSURE CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participationof our principal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934. Based on this evaluation, our principalexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures were not effective. As of March 30, 2007, we did not maintain effective controls over the inventorypricing, tracking, and the reserve analysis process. This control could resultin a misstatement to cost of sales that would result in a material misstatementto the annual and interim financial statements that would not be prevented ordetected. Our independent registered public accounting firm, PMB Helin Donovan,concluded that these significant deficiencies constituted a "material weakness"in our internal controls. Our management also determined that these deficienciesconstitute a material weakness that impacted our disclosure controls andprocedures. Changes in Internal Controls over Financial Reporting There were no changes in internal control over financial reporting periodcovered by this Form 10-Q that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Enova Systems Inc