13th Nov 2006 07:02
Enova Systems, Inc.13 November 2006 For Immediate Release 13th of November 2006 Enova Systems, Inc. (AMEX: ENA and AIM: ENV and ENVS), an early stage productioncompany in an emerging industry and a leading developer of proprietary electric,hybrid and fuel cell digital power management systems, announces quarterlyresults for the period ended 30th September 2006. HIGHLIGHT In the first quarter and nine months of 2006, our revenues derived mostly fromproduction type contracts with Hyundai Motor Corporation and the State ofHawaii. The decrease in revenues in the first nine months of 2006 for thecorresponding period of 2005 was a result of contracts that were completed ornear completion in 2005. During the first nine months of 2006, we focused on establishing new customerrelationships and submitting proposals. As a result, we have been awardedcontracts with, but have not yet recognized revenues from, IC Corp. for nineteenschool buses, Phoenix Motor Car for ten sport utility trucks and Ford MotorCompany for four High Voltage Energy Converters (HVEC). We have additionalproposals with other potential customers who have not yet made final decisions. RESULTS OF OPERATIONS • Net revenues for the nine months ended September 30, 2006 were$1,185,000 as compared to $2,871,000 for the corresponding period in 2005. Netrevenues were $424,000 for the three months ended September 30, 2006 as comparedto $857,000 for the same period in 2005. • Net production sales for the nine months ended September 30, 2006decreased to $746,000 from $1,711,000 in the same period in 2005. Net productionsales for the three months ended September 30, 2006 increased to $405,000 from$402,000 for the corresponding period in 2005. • Research and development revenues decreased to $439,000 in the firstnine months of 2006, from $1,160,000 during the same period in 2005. For thethree months ending September 30, 2006, research and development revenuesdecreased to $19,000 from $455,000 for the same period in 2005. • Cost of revenues for the three and nine months ended September 30,2006 decreased $88,000 and $306,000, or 12% and 13% respectively from $729,000and $2,322 000 respectively, for the same period in 2005. • Cost of revenues consists of component and material costs, directlabor costs, integration costs and overhead related to manufacturing ourproducts. Product development costs incurred in the performance of engineeringdevelopment contracts for the U.S. Government and private companies are chargedto cost of sales for this contract revenue. • As a percentage, cost of revenues did not decrease in the sameproportion as sales when comparing the three and nine months ended 2006 to theequivalent period in 2005. This is primarily attributable to continued productdevelopment initiatives. We anticipate there may be an increase in cost of salesfor products due to potential weakening of the U.S. dollar. While we do nottransact in foreign currencies, our suppliers are overseas and may raise ourinput prices in response to a weaker value of our functional currency, which isthe U.S. Dollar. • Internal research, development and engineering expenses increased inthe three and nine months ended September 30, 2006 to $297,000 and $929,000 ascompared with $197,000 and $592,000 respectively, for the same period in 2005. • We continue to develop several new products such as our posttransmission parallel hybrid drive system and enhancements to our dieselgenerator set which account for a majority of the increase during the firstquarter and nine months of 2006 when compared to the same period in 2005. Wecontinue to allocate increased 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 $1,276,000to $3,200,000 for the nine months ended September 30, 2006 from the previousyear's comparable reporting period. For the three months ended September 30,2006, selling, general and administrative expenses increased by $476,000 to$1,241,000 when comparing with the three months ended September 30, 2005. • The increase during the first nine months and quarter of 2006 whencompared to the same periods in 2005 is attributable to additional costsassociated with marketing, engineering and technical staff. We also haveexperienced increased expenditures related to stricter regulatory oversight inconjunction with the Sarbanes-Oxley Act of 2002. We have incurred additionalcost in our efforts to remediate certain material weaknesses, as described inItem 4 "Controls and Procedures." Furthermore, we are in the process ofupgrading our accounting and reporting software, thus further contributing tothe general and administrative cost increase. Management believes that as wemove toward sustainable production, our cost structure will become moreefficient. • Interest income/expense increased by $59,000 for the three monthsended September 30, 2006, up from the same period in 2005, and now shown net asinterest income. The increase in the three months ended September 30, 2006 isillustrated as the net effect of interest income earned on cash and certificatesof deposit, and regular interest expense recognized on the remaining debtoutstanding. For the nine months ended September 30, 2006, interest income/expense increased by $530,000, primarily related to the settlement of portionsof our note payable to the Credit Managers Association of California. • We incurred net losses of $1,637,000 and $3,163,000 for the threeand nine months ended September 30, 2006 compared to a loss of $782,000 and$2,123,000 for the three and nine months ended September 30, 2005, respectively.The increase in net loss for the three and nine months ended 2006 is a result ofincreased operational costs associated with our expanding product and marketinginitiatives. Inquires: Enova SystemsEdwin Riddell, Chief Executive Officer +1(310) 527-2800 x105Corinne Bertrand, Chief Financial Officer +1(310) 527-2800 x103 InvestecMichael Ansell/ Andrew Chen +44 (0) 207 597 5066 Global Equity IR +44 (0) 79 5620 6270Amira Bardichev CHAIRMAN'S DISCUSSION We believe we are an early stage production company in an emerging industry anda leading developer of proprietary electric, hybrid and fuel cell digital powermanagement systems. Power management systems control and monitor electric powerin an automotive or commercial application such as an automobile or astand-alone power generator. Drive systems are comprised of an electric motor,an electronics control unit and a gear unit which power an electric vehicle.Hybrid systems, which are similar to pure electric drive systems, contain aninternal combustion engine in addition to the electric motor, eliminatingexternal recharging of the battery system. Our HybridPower hybrid electric drive system provides all the functionality ofan internal combustion engine powered vehicle. The HybridPower system consistsof an enhanced electric motor and the electronic controls that regulate the flowof electricity to and from the batteries at various voltages and power to propelthe vehicle. In addition to the motor and controller, the system may include agear reduction/differential unit which ensures the desired propulsion andperformance. The system is designed to be installed as a "drop in," fullyintegrated turnkey fashion. Regardless of power source (battery, fuel cell,diesel generator or turbine) the HybridPower electric motor is designed to meetthe customer's drive cycle requirements. Our light/medium-duty drive systems include: • 30kW, 60kW, 90kW all-electric drives • 90kW series-hybrid drive • any combination of these systems based on customer requirements. Our heavy-duty electric drive systems include: • 120kW all-electric drive • 120/60kW peak series hybrid system • 240/60kW peak series hybrid system • 90kW peak mild, pre-transmission parallel hybrid system • 100kW peak post-transmission parallel hybrid systems • 100kW peak pre-transmission parallel hybrid system. Our drive systems, in conjunction with, internal combustion engines,microturbines, fuel cells, flywheels, and generator sets provide state of theart hybrid-electric propulsion systems. Hybrid vehicles are those that utilizean electric motor and batteries in conjunction with an internal combustionengine (ICE), whether piston or turbine. With a hybrid system, a small piston orturbine engine - fueled by gasoline or diesel, CNG, methane, etc., in a tank -supplements the electric motor and battery. These systems are self-charging, inthat the operating ICE recharges the battery. During the quarter ended September 30, 2006, we continued to develop and/orproduce electric and hybrid electric drive systems and components for suchcustomers as First Auto Works of China, Ford Motor Company (Ford), Hyundai MotorCar (Hyundai), the U.S. Military, International Truck and Engine (IC Corp.),Wrightbus Ltd. (Wrightbus), Tomoe of Japan and several other domestic andinternational vehicle and bus manufacturers. We also continue to advance itstechnologies and products for greater market penetration for 2006, and beyond.In addition, we continue to develop independently and in conjunction with theHyundai-Enova Innovative Technology Center (ITC) progress on several fronts toproduce commercially available heavy-duty, series and parallel hybrid drivesystems. We continue to support IC Corp. in their efforts to maximize exposure in theHybrid School Bus Market. We have been involved in large shows in Albany, NY andReno, NV, as well as smaller venues throughout the Midwest. The exposure viashows and direct interface will be aggressively pursued throughout the remainderof 2006, in an effort to promote IC Corp.'s production intent for Hybrid SchoolBuses. IC Corp. claims to be the nation's largest integrated school busmanufacturer with 60-65% of the school bus market share. In July, IC Corp. announced it was ready to move to production on Hybrid SchoolBuses. At the same time, IC Corp. announced that Enova would be their Hybriddrive system supplier. Also in July, Enova and IC Corp. were awarded a contractfor nineteen Hybrid School Buses. These buses will be delivered to eleven statesthroughout the next three to six months. The award was based on a projectcoordinated by the Advanced Energy consortium and was the first major HybridSchool Bus award of its kind. In August, Enova announced it had received a major initial contract from PhoenixMotorcars, to integrate ten Sport Utility Trucks (SUT) with their 90kW ElectricDrive System. This award was Enova's first award with a major North AmericanFleet operator. In August, Enova announced that its common stock has been approved to be listedand will be available for trading on the American Stock Exchange (AMEX). Wrightbus, one of the largest low-floor bus manufacturers in the United Kingdom,continues to purchase our diesel genset-powered, series hybrid drive systems fortheir medium and large bus applications. Our systems have been integrated intosix of Wrightbus' Hybrid Buses and were introduced into London's public busfleet in early February 2006. Although the buses were temporarily removed fromservice due to a non-hybrid related issue during this past quarter, weunderstand that these buses are back to operating on a seven day per week,eighteen hour per day schedule. We anticipate the results of this project willbe increased Hybrid volumes in this arena. Enova continues to implement the necessary processes and procedures to becomeISO/QS certified in 2006. The certification will be valuable to optimizeinternal processes and efficiencies, as well as secure Enova's position as aproduction supplier to major Original Equipment Manufacturers. Ford Motor Company continues to evaluate our components in thirty Ford FocusHydrogen Fuel Cell Vehicles being evaluated in three countries. According toFord Motor Company communications, the vehicles have functioned satisfactorily,and they continue to evaluate markets for producing additional vehicles. InAugust, Enova announced that Ford Motor Company has ordered four (4) advanceddesign High Voltage Energy Converters (HVECs). This award confirms Ford'scontinued interest in Enova's technology. During the last quarter we announcedthat Hyundai was using its Hybrid Drive components to power a Fuel Cell Bus andtwo Hyundai Tucsons being featured at the World Cup Soccer tournament inGermany. Hyundai is an official sponsor of the World Cup Soccer tournamentthrough 2014. At this year's event, Hyundai had thirty two buses in use. One ofthe thirty two Hyundai Buses was hybrid powered by our 240kW Induction Motor andHigh Voltage Motor Control Unit. In addition to the bus, the Tucson's containour 80kW Induction Motor and Control Unit. We expect Hyundai to utilize morevehicles of this type in the future and expect to be their supplier in saidvehicles. Our alliance with Hyundai has been critical to the development ofhybrid systems such as the ones being used in the fuel cell bus and Tucson's. Throughout the quarter we hosted and visited numerous potential customers fromthe Pick Up and Delivery, Medium Duty and Heavy Duty markets. During the quarterwe provided a large fleet operator a functional vehicle for evaluation. Weexpect this evaluation period to take several weeks, and expect results to bepositive with a likelihood of future volume. Every effort is made to continue tomature these relationships, as we hope that they will eventually lead to viablebusiness relationships. We also anticipate continuing our work with Tsinghua University of China, andtheir fuel cell bus development program. We believe that China intends to usehybrid-electric buses to shuttle athletes and guests at the 2008 Beijing SummerOlympics and the 2010 World's Expo in Shanghai and that it is seeking up to onethousand full-size hybrid-electric buses to support these global events. MTransof Malaysia has integrated two of our standard HybridPower 120kW drive systeminto a hybrid 10-meter bus with a Capstone microturbine as its power source.This drive system is currently on demonstration in Hong Kong, PRC. Also, Hyundaicontinues to evaluate our converters in their fuel cell hybrid electric vehiclesand we currently expect to deliver an additional sixteen units in 2006. Anthony RawlinsonChairman13 November 2006 RESEARCH AND DEVELOPMENT PROGRAMS We continue to pursue government and commercially sponsored development programsfor both ground and marine heavy-duty drive system applications. In 2006, wecontinued the integration of a fuel cell powered step-van similar to theHydrogenics program for the Hawaii Center for Advanced TransportationTechnologies (HCATT) and the U.S. Air Force. We intend to establish newdevelopment programs with the Hawaii Center for Advanced TransportationTechnologies in mobile and marine applications as well as other state andfederal government agencies as funding becomes available. Our development contract with EDO Corporation of New York for the design andfabrication of a high voltage DC-DC power conversion system utilizing a Capstonemicroturbine as the primary power source for the U.S. Navy unmanned minesweeperproject also continues to progress during 2006. The electronics package willinclude our advanced power components including a new, enhanced 50V, 700A DC-DCpower converter, our Battery Care Unit and Hybrid Control Unit which will powerthe minesweeper's electromagnetic detection system. Our power management andconversion system will be used to provide on-board power to other accessories onthe platform. LIQUIDITY AND CAPITAL RESOURCES We have experienced losses primarily attributable to research, development,marketing and other costs associated with our strategic plan as an internationaldeveloper and supplier of electric propulsion and power management systems andcomponents. Cash flows from operations have not been sufficient to meet ourobligations. Therefore, we have had to raise funds through several financingtransactions. At least until we reach breakeven volume in sales and develop and/or acquire the capability to manufacture and sell our products profitably, wewill need to continue to rely on cash from external financing sources. Our operations during the period ended September 30, 2006 and the year endedDecember 31, 2005 were financed by development contracts and product sales, aswell as from working capital reserves. During the nine months ended September 30, 2006, our operations required$3,439,000 more in cash than was generated. We continue to increase marketingand development spending as well as administrative expenses necessary forexpansion to meet customer demand. Accounts receivable at September 30, 2006decreased by $1,878,000, from $2,173,000, or approximately 86% from the balanceat December 31, 2005 (net of reserves). The decrease was primarily due tocollections made on outstanding receivables from Tomoe Manufacturing in thefirst and third quarter of 2006. Inventory balances increased by $83,000 from $1,016,000 to $1,099,000 whencomparing the period end balances at September 30, 2006 and December 31, 2005.During the fourth quarter of 2005, we completed several large developmentcontracts, including the Tomoe project. Conversely, in the first nine months of2006, we were focused more on internal research and development as well as salesand marketing activities. As such, inventory did not experience significantturnover when comparing quarter on quarter. Prepaid expenses and other current assets increased by $240,000 net ofamortization at September 30, 2006 from the December 31, 2005 balance of$182,000, or 132%. The increase is attributable to interest receivable on onecertificate of deposit and cash held in a short term, cash equivalent,investment account. Fixed assets increased by $104,000, net of depreciation and write-offs atSeptember 30, 2006 from the December 31, 2005 balance of $576,000. In the firstnine months of 2006, we purchased $338,000 in new property and equipment. Werecognized $234,000 of depreciation expense for the nine months ended September30, 2006. Equity method investments decreased by $42,000 in the first nine months of 2006from $1,649,000 at December 31, 2005, which reflects our pro-rata share oflosses attributable to our forty percent investment interest in theHyundai-Enova Innovative Technology Center (ITC). For the first nine months of2006, the ITC generated a net loss of approximately $105,000 resulting in acharge to us of $42,000 utilizing the equity method of accounting for ourinterest in the ITC. Other assets decreased by $88,000 when comparing the September 30, 2006 balanceof $102,000 with the December 31, 2005 balance of $190,000. The decrease isoccurring as a result of amortization of the Ford Value Participation Agreementand our other intellectual property assets. Accounts payable at September 30, 2006 decreased by $1,308,000, to $88,000 from$1,396,000 at December 31, 2005. During the fourth quarter of 2005, the Companycompleted several large development contracts, including the Tomoe project.Conversely, in the first nine months of 2006, we were focused more on internalresearch and development as well as sales and marketing activities. As such, theCompany did not incur significant trade payables resulting from inventorypurchases. Meanwhile, we continued to pay our trade payables in the due course. Accrued payroll at September 30, 2006 increased by $50,000, to $245,000 from$195,000 at December 31, 2005. This is a result of open positions in the fourthquarter of 2005, as well as an increase in the total number of personnel atSeptember 30, 2006. Other accrued expenses increased by $249,000 when comparing the balance atSeptember 30, 2006 from the balance of $302,000 at December 31, 2005. Thisfluctuation is primarily due to un-invoiced out-sourced production services andinternal project services at September 30, 2006. Accrued interest increased by $413,000 for the first nine months of 2006, adecrease of 37% from the balance of $1,113,000 at December 31, 2005. Thedecrease was due to the settlement of certain components of interest payable onthe Note due the Credit Managers Association of California, combined withinterest accrued on the remaining balance of notes payable. ENOVA SYSTEMS, INC. BALANCE SHEETS As of As of September 30, December 31, 2006 2005 (unaudited) (unaudited) ASSETS Current assets Cash and cash equivalents $ 7,340,000 $ 16,187,000Short term investment 5,000,000 -Accounts receivable, net 295,000 2,173,000Inventories and supplies, net 1,099,000 1,016,000Prepaid expenses and other current assets 422,000 182,000Total current assets 14,156,000 19,558,000Property and equipment, net 680,000 576,000Equity method investment 1,607,000 1,649,000Other assets 102,000 190,000Total assets $ 16,545,000 $ 21,973,000 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Accounts payable $ 88,000 $ 1,396,000Accrued payroll and related expense 245,000 195,000Other accrued expenses 551,000 302,000Current portion of notes payable 67,000 42,000Total current liabilities 951,000 1,935,000Accrued interest payable 700,000 1,113,000Notes payable, net of current portion 1,306,000 2,321,000Total liabilities $ 2,957,000 $ 5,369,000Commitments and contingencies Stockholders' equity (deficit) Series A convertible preferred stock - no par value 30,000,000 shares authorized $ 1,679,000 $ 1,679,0002,674,000 and 2,674,000 shares issued and outstanding Liquidating preference at$0.60 per share, aggregating $1,604,000Series B convertible preferred stock - no par value 5,000,000 shares authorized 2,434,000 2,434,0001,217,000 and 1,217,000 shares issued and outstanding Liquidating preference at$2 per share, aggregating $2,434,000Common Stock, no par value 750,000,000 shares authorized, 14,800,000 and 109,422,000 109,323,00014,783,000 shares issued and outstandingCommon stock subscribed 36,000 30,000Stock notes receivable (1,176,000) (1,176,000)Additional paid-in capital 6,942,000 6,900,000Accumulated deficit (105,749,000) (102,586,000)Total stockholders' equity 13,588,000 16,604,000Total liabilities and stockholders' equity $ 16,545,000 $ 21,973,000 The accompanying notes are an integral part of these financial statements. ENOVA SYSTEMS, INC. STATEMENTS OF OPERATIONS (Unaudited) For the Three and Nine Months Ended September 30, Nine Months Three Months 2006 2005 2006 2005Net revenuesResearch and development contracts $ 439,000 $ 1,160,000 $ 19,000 $ 455,000Production 746,000 1,711,000 405,000 402,000Total net revenues 1,185,000 2,871,000 424,000 857,000Cost of revenuesResearch and development contracts 767,000 813,000 211,000 393,000Production 1,249,000 1,509,000 430,000 336,000Total cost of revenues 2,016,000 2,322,000 641,000 729,000Gross profit (loss) (831,000) 549,000 (217,000) 128,000Operating expensesResearch and development 929,000 592,000 297,000 197,000Selling, general and administrative 3,200,000 1,924,000 1,241,000 765,000Loss from operations (4,960,000) (1,967,000) (1,755,000) (834,000)Other income and (expense)Interest and other income/expense, net 447,000 (83,000) 118,000 59,000Equity in losses of equity method investee (42,000) (73,000) - (7,000)Debt extinguishment 920,000 - - -Interest extinguishment 472,000 - - -Total other income (expense) 1,797,000 (156,000) 118,000 52,000Net loss $ (3,163,000) $ (2,123,000) $ (1,637,000) $ (782,000)Basic earnings (loss) per share $ (0.21) $ (0.20) $ (0.11) $ (0.06)Diluted earnings (loss) per share $ (0.21) $ (0.20) $ (0.11) $ (0.06)Weighted-average number of shares outstanding 14,800,000 10,628,000 14,800,000 13,373,000 The accompanying notes are an integral part of these financial statements. ENOVA SYSTEMS, INC. STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 2006 2005Cash flows from operating activities Net loss $ (3,163,000) $ (2,123,000)Adjustments to reconcile net loss to net cash used in operating activitiesDebt extinguishment (920,000) -Interest extinguishment (472,000) -Depreciation and amortization 322,000 79,000Equity in losses of equity method investee 42,000 73,000Issuance of common stock for services 105,000 237,000Equity compensation expense 42,000 - (Increase) decrease in: Accounts receivable 1,878,000 (357,000)Inventory and supplies (83,000) (235,000)Prepaid expenses and other current asset (240,000) (36,000)Increase (decrease) in: Accounts payable (1,308,000) 511,000Accrued payroll and related expenses 50,000 (22,000)Other accrued expenses 249,000 (228,000)Accrued interest payable 59,000 231,000Net cash used in operating activities (3,439,000) (1,870,000)Cash flows from investing activities Purchase of short term investment $ (5,000,000) $ -Purchases of property and equipment (243,000) (155,000)Net cash used in investing activities (5,243,000) (155,000)Cash flows from financing activities Net payments on line of credit $ - $ (229,000)Payment on notes payable and capital lease obligations - (17,000)Net proceeds from sale of common stock - 18,361,000Payment to extinguish debt (165,000) -Net cash provided by (used in) financing activities (165,000) 18,115,000Net increase (decrease) in cash and cash equivalents (8,847,000) 16,090,000Cash and cash equivalents, beginning of period 16,187,000 1,575,000Cash and cash equivalents, end of period $ 7,340,000 $ 17,665,000Supplemental disclosure of cash flow information Interest paid $ - $ 5,000Income taxes paid $ - $ -Supplemental schedule of non-cash investing and financing activities Conversion of preferred stock to common stock $ - $ 40,000Software acquired through financing agreement $ 95,000 $ - The accompanying notes are an integral part of these financial statements. ENOVA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 - Basis of Presentation The accompanying unaudited financial statements have been prepared from therecords of our company without audit and have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-Q and Article10 of Regulation S-X. Accordingly, they do not contain all the information andnotes required by accounting principles generally accepted in the United Statesof America for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary for afair presentation of the financial position at September 30, 2006 and theinterim results of operations for the three and nine months ended September 30,2006 and cash flows for the nine months ended September 30, 2006 have beenincluded. The balance sheet at December 31, 2005, presented herein, has beenprepared from the audited financial statements of our company for the year thenended. The preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to make estimatesand assumptions affecting the reported amounts of assets, liabilities, revenuesand expenses, and the disclosure of contingent assets and liabilities. TheSeptember 30, 2006 and December 31, 2005 inventories are reported at the lowerof cost or market value. Inventories have been valued on the basis that theywould be used, converted and sold in the normal course of business. The amountsestimated for the above, in addition to other estimates not specificallyaddressed, could differ from actual results; and the difference could have asignificant impact on the financial statements. Accounting policies followed by us are described in Note 1 to the auditedfinancial statements for the fiscal year ended December 31, 2005. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted for purposes of theinterim financial statements. The financial statements should be read inconjunction with the audited financial statements, including the notes thereto,for the year ended December 31, 2005, which are included in our Form 10-K AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 asfiled with the Securities and Exchange Commission. Basic earnings (loss) per common share is computed using the weighted averagenumber of common shares outstanding. Diluted earnings (loss) per share iscomputed using the weighted-average number of common shares and dilutivepotential common shares outstanding during the period. Dilutive potential commonshares consist of employee stock options and preferred stock conversions. The results of operations for the three and nine months ended September 30, 2006presented herein are not necessarily indicative of the results to be expectedfor the full year. Short Term Investments Short term investments consist of highly liquid instruments with originalmaturities greater than three months and current maturities less than twelvemonths from the balance sheet date. Stock Based Compensation Effective January 1, 2006, the Company adopted Statement of Financial AccountingStandards ("SFAS") No. 123(R), Share-Based Payment ("SFAS 123(R)"), whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors, including stockoptions related to the Company's Employee Stock Option Plan (the "EmployeeOption Plan") based on their fair values. SFAS 123(R) supersedes AccountingPrinciples Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB25"), which the Company previously followed in accounting for stock-basedawards. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB107") to provide guidance on SFAS 123(R). The Company has applied SAB 107 in itsadoption of SFAS 123(R). The Company adopted SFAS 123(R) using the modified prospective transition methodas of and for the three and nine months ended September 30, 2006. In accordancewith the modified prospective transition method, the Company's financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS 123(R). Share-based compensation expense recognizedis based on the value of the portion of share-based payment awards that isultimately expected to vest. Share-based compensation expense recognized in theCompany's Statement of Operations during the three and nine months endedSeptember 30, 2006 includes compensation expense for share-based payment awardsgranted prior to, but not yet vested as of, December 31, 2005 based on the grantdate fair value estimated in accordance with the pro forma provisions of SFAS123. The Company uses the Black-Scholes option-pricing model for estimating the fairvalue of options granted. The Black-Scholes option-pricing model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable. In addition, option valuation modelsrequire the input of highly subjective assumptions, including the expected stockprice volatility. The Company uses projected volatility rates, which are basedupon historical volatility rates, trended into future years. Because theCompany's employee stock options have characteristics significantly differentfrom those of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in management'sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of the Company's options. For purposes of pro formadisclosures, the estimated fair values of the options are amortized over theoptions' vesting periods. Stock Option Program Description As of September 30, 2006, the Company had one stock option plan: the 1996 StockOption Plan (the "1996 Plan"). Stock option grants are designed to reward employees and executives for theirlong-term contributions to the Company and provide incentives for them to remainwith the Company. The number and frequency of stock option grants are based oncompetitive practices, operating results of the Company, and governmentregulations. The maximum number of shares issuable over the term of the 1996 Plan is limitedto 65 million shares. Options granted under the 1996 Plan typically have anexercise price of 100% of the fair market value of the underlying stock on thegrant date and expire no later than ten years from the grant date. Options issued to executives will vest based on the Company achieving certainrevenue milestones for the years ended December 31, 2005 and 2006. If suchmilestones are not met, the options with respect to those milestones willterminate. Options issued to employees will vest in equal installments over 36months. All of the granted options will remain in effect for a period of 10years or until 90 days after the employment of the optionee terminates. Diluted shares outstanding include the dilutive effect of in-the-money options.As of September 30, 2006, and on December 31, 2005, the Company did not have anyin-the-money options, and therefore, there was no dilutive effect relating tostock options outstanding on the 1996 plan. Current quarter ended September 30, 2006 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 was $14,000 and $41,000 for the three and nine months ended September30, 2006, respectively, and was recorded in the financial statements as acomponent of selling, general and administrative expense. Share-based compensation expense reduced the Company's results of operations forthe three and nine months ended September 30, 2006 as follows: Three Months Ended Nine Months Ended September 30, 2006 September 30, 2006Income from continuing operations before income taxes $ 14,000 $ 23,000Income from continuing operations after income taxes $ 14,000 $ 23,000Cash flows from operations $ 14,000 $ 23,000Cash flows from financing activities $ - $ -Basic and Diluted EPS $ - $ - During the quarter ended September, 2006, the Company did not grant any stockoptions. As of September 30, 2006, the total compensation cost related to non-vestedawards not yet recognized is $110,000. The weighted average period over whichthe future compensation cost is expected to be recognized is 24 months. Theaggregate intrinsic value of total awards outstanding is zero. Stock-based compensation expense recognized during the period is based on thevalue of the portion of share-based payment awards that is ultimately expectedto vest during the period. Stock-based compensation expense recognized in theCompany's Consolidated Statement of Operations for the three and nine monthperiods ended September 30, 2006 included compensation expense for share-basedpayment awards granted prior to, but not yet vested as of December 31, 2005based on the grant date fair value estimated in accordance with the pro formaprovisions of SFAS 123 and compensation expense for the share-based paymentawards granted subsequent to December 31, 2005 based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123(R). As stock-basedcompensation expense recognized in the Consolidated Statement of Operations forthe first nine months of fiscal 2006 has been based on awards ultimatelyexpected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. For the three and nine month periods ended September 30, 2006, theCompany applied estimated average forfeiture rates of approximately 28.8% fornon-officer grants and 61.6% for officer and senior management grants, based onhistorical forfeiture experience. The estimated pricing term of option grantsfor the three and nine month periods ended September 30, 2006 was 5.0 years fornon-officer grants. Officer and senior management grants are vested based onrevenue milestones. Under the current grant, milestones were set for the 2005and 2006 fiscal years. Options granted for the 2006 fiscal year are not expectedto vest and have been included in the forfeiture rate calculation. In theCompany's pro forma information required under SFAS 123 for the periods prior tofiscal 2006, the Company accounted for forfeitures as they occurred. SFAS 123(R) requires the cash flows resulting from the tax benefits resultingfrom tax deductions in excess of the compensation cost recognized for thoseoptions to be classified as financing cash flows. Due to the Company's lossposition, there were no such tax benefits during the three and nine monthperiods ended September 30, 2006 and September 30, 2005. Prior to the adoptionof SFAS 123(R), those benefits would have been reported as operating cash flowshad the Company received any tax benefits related to stock option exercises. The fair value of stock-based awards to officers and employees is calculatedusing the Black-Scholes option pricing model, even though this model wasdeveloped to estimate the fair value of freely tradable, fully transferableoptions without vesting restrictions, which differ significantly from theCompany's stock options. The Black-Scholes model also requires subjectiveassumptions, including future stock price volatility and expected time toexercise, which greatly affect the calculated values. The expected term ofoptions granted is derived from historical data on employee exercises andpost-vesting employment termination behavior. The risk-free rate selected tovalue any particular grant is based on the bond equivalent yields thatcorresponds to the pricing term of the grant effective as of the date of thegrant. The expected volatility is based on the historical volatility of theCompany's stock price. These factors could change in the future, affecting thedetermination of stock-based compensation expense in future periods. Nine Months Ended September 30, 2006,Dividend Yield 0.0%Expected Volatility 57.4%Risk-Free Interest Rate 4.0%Forfeiture Rate, officer and senior management grants 61.6%Forfeiture Rate, non-officer grants 28.8%Estimated Life 7.2 Years General Option Information A summary of option activity follows: 1996 Plan Weighted Average Exercise Shares PriceOutstanding, December 31, 2004 164,000 $ 5.40Granted 310,000 $ 4.35Exercised - -Forfeited (38,000) $ 7.64Outstanding December 31, 2005 436,000 $ 4.46Granted 46,000 $ 4.60Exercised - -Forfeited (152,000) $ 4.60Outstanding September 30, 2006 330,000 $ 4.42Vested and Expected to Vest 236,000 $ 4.35Exercisable, September 30, 2006 168,000 $ 4.99 The weighted-average remaining contractual life of the options outstanding atSeptember 30, 2006 was 7.2 years. The exercise prices of the options outstandingat September 30, 2006 ranged from $4.35 to $8.10. The weighted-average remainingcontractual life of the options outstanding at December 31, 2005 was 7 years.The exercise prices of the options outstanding at December 31, 2005 also rangedfrom $4.35 to $8.10. Options exercisable were 168,000 and 255,000, at September30, 2006 and December 31, 2005, respectively. Valuation and Expense Information under SFAS 123 Prior to the adoption of Statement of Financial Accounting Standards No. 123(R)"Accounting for Stock-Based Compensation-Revised "(SFAS 123(R)), at March 31,2006, the Company would not have recognized compensation expense for employeeshare-based awards, when the price of such awards equaled the market price ofthe underlying stock on the date of the grant. The Company previously hadadopted the provisions of Statement of SFAS 123 as amended by SFAS 148, "Accounting for Stock Based Compensation, Transition and Disclosure" (SFAS 148)through disclosure only. The Company did not have any share based awards for thethree and nine months ended September 30, 2005, and consequently, there is nopro forma effect of share based awards for the first three quarters of 2005. Reclassification Certain amounts in prior-quarter financial statements have been reclassified forcomparative purposes to conform with current quarter presentation. NOTE 2 - Property and Equipment During the third quarter, the Company reduced the estimated useful life of oneof the demonstration vehicles from five years to three years. The change inestimated life was made based on the expected usage of the vehicle. As a resultof this change, depreciation expense increased by $39,000 during the three monthperiod ended September 30, 2006. The effect of this change is immaterial to thefinancial statement in the current period and on a prospective basis. NOTE 3 - Notes Payable, Long-Term Debt and Other Financing Notes payable and long-term debt is comprised of the following: Sep 30 2006 Dec 31 2005 (unaudited) (unaudited)Secured note payable to Credit Managers Association of California, bearing interest 1,238,000 2,321,000at prime plus 3% per annum in 2005 and through maturity. The prime rate resets oncea year at April 30. At September 30, 2006, interest was being accrued at a rate of10.75%. Principal and unpaid interest due in April 2016.Secured note payable to Coca Cola Enterprises in the original amount of $40,000, 40,000 40,000bearing interest at 5% per annum. Principal and unpaid interest due now.Secured note payable to a financial institution in the original amount of $33,000, - 2,000bearing interest at 8% per annum, payable in 36 equal monthly installments.Secured note payable to a financing company in the original amount of $95,000,bearing interest at 6.21% per annum, payable in 39 equal monthly installments. 95,000 - 1,373,000 2,363,000Less current maturities 67,000 42,000Long-term portion $ 1,306,000 $ 2,321,000 NOTE 4 - Stockholders' Equity During the three months ended September 30, 2006, the Company recorded 6,870shares of restricted common stock as common stock subscribed, valued at $36,000,to the Board of Directors at an average price of $5.24 per share for boardmeetings and committee meetings during the third quarter of 2006. In the third quarter of 2006, and in accordance with the Directors CompensationPlan, the Company issued 8,220 shares of restricted common stock, valued at$30,000, to the Board of Directors as the share based portion of theircompensation. In the third quarter of 2006, the company issued 2,532 shares of restrictedcommon stock, valued at $10,000, to an employee as a sign-on bonus. NOTE 5 - Related Party Transactions During the three months ended September 30, 2006, the Company purchasedapproximately $146,000 in components, materials, and services from Hyundai HeavyIndustries (HHI), a joint venture party. The Company had $67,500 of outstandingpayable balances owed to HHI on September 30, 2006. Additional financial discloses are contained in the Form 10-Q filed with theUnited States Securities and Exchange Commission. A complete version of thisfiling may be obtained by contacting the company or by logging on to the SECwebsite at www.sec.gov This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Enova Systems Inc