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Enova Reports FY09 Annual Financial Results

29th Mar 2010 07:00

RNS Number : 3041J

Enova Systems, Inc.

29 March 2010

For Immediate Release 26th of March 2009

Enova Systems INC., (AMEX: ENA and AIM: ENV and ENVS), a leading developer and manufacturer of electric, hybrid and fuel cell digital power management systems, announces annual results for the period ended December 31st 2009

Results of Operations

Highlights
	For The Years Ended
	December 31,
	2009	2008	$ Change	% Change
Net revenues	$5,622,000	$6,443,000	($821,000)	-13%
Cost of revenues	5,016,000	8,224,000	(3,208,000)	-39%
Gross income(loss)	606,000	(1,781,000)	2,387,000	+134%

Net Revenues. Net revenues were $5,622,000 for the twelve months ended December 31, 2009, representing a decrease of $821,000 or 13% from net revenues of $6,443,000 during the same period in 2008. The decline in revenue in 2009 compared to 2008 is mainly due to a decrease in sales to Tanfield, due to a change in their growth strategy in the third quarter of 2008, as well as the completion of several low volume contracts for non-core customers in 2008. However, sales to FAW increased by over 11 times in 2009 due to Chinese government policies promoting the purchase of electric and hybrid vehicles in their auto market. FAW, Navistar and HCATT comprised 56%, 15% and 13%, respectively, of our 2009 revenues. In the prior year, Tanfield, Navistar and HCATT comprised 28%, 13% and 22%, respectively of our 2008 revenues, while FAW comprised only 4% of revenues in the period. The Company continued its strategy to concentrate support to core customers in 2009 in our migration to a first tier production company, recording sales with several OEMs, including FAW in China and Navistar, Freightliner and Smith Electric Vehicles in the United States. Although we have seen indications for future production growth, there can be no assurance there will be continuing demand for our products and services.

Cost of Revenues. Cost of revenues were $5,016,000 for the year ended December 31, 2009, compared to $8,224,000 for the year ended December 31, 2008, representing a decrease of $3,208,000, or 39%. The improvement in cost of revenues as a percentage of revenue is primarily attributable to our strategy to concentrate on higher volume production orders and our continuing focus on manufacturing and inventory processes that resulted in tighter control over production costs. Cost of revenues consists of component and material costs, direct labor costs, integration costs and overhead related to manufacturing our products as well as inventory valuation reserve amounts. Product development costs incurred in the performance of engineering development contracts for the U.S. Government and private companies are charged to cost of sales. Our customers continue to require additional integration and support services to customize, integrate and evaluate our products. We believe that a portion of these costs are initial, one-time costs for these customers and anticipate similar costs to be incurred with respect to new customers as we pursue a greater market share. Typically we do not incur these same types of costs for customers who have been using our products over one year.

Inquires:
Enova Systems Mike Staran, Chief Executive Officer	+1(310) 527-2800 x137
Jarett Fenton, Chief Financial Officer	+1(310) 527-3847
Investec James Grace	+44 (0) 20 7597 5970

Gross Margin. The gross margin for the year ended December 31, 2009 was positive 11% compared to a negative 28% in the prior year. The improvement in gross margin is primarily attributable to our focus on key customer production contracts, maturity of our supply chain, and efficiencies gained through focus on manufacturing and inventory processes that resulted in tighter controls over production costs. As we continue to make deliveries on production contracts in 2010, we expect to achieve continued benefit from these initiatives, although we may continue to experience variability in our gross margin.

Research and Development Expenses. Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our research and development activities. Non-funded development costs are reported as research and development expense. Research and development expenses during the year ended December 31, 2009 were $1,228,000 compared to $2,505,000 for the same period in 2008, a decrease of $1,277,000 or 51%. R&D costs were higher in 2008 due to expenditures to complete the development of our wireless tracking module, a one-time cost incurred for a dynamometer testing of our hybrid system and a higher level of resources expended for development projects. In 2009, R&D efforts were focused on development of our new "Ze" all electric vehicle, a next generation motor control unit, testing of new battery technologies as well as engine off capability for our post transmission parallel hybrid drive system. Development resources utilized in support of non-core development projects were reduced consistent with our focus on higher volume customers. We also continued to allocate necessary resources to the development and testing of upgraded proprietary control software, enhanced DC-DC converters and digital inverters and other power management firmware. We will continue to research and develop new technologies and products, both internally and in conjunction with our alliance partners and other manufacturers as we deem beneficial to our global growth strategy.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of sales and marketing costs, including consulting fees and expenses for travel, trade shows and promotional activities and personnel and related costs for the quality and field service functions and general corporate functions, including finance, strategic and business development, human resources, IT and MRP implementation, accounting reserves and legal costs. Selling, general and administrative expenses decreased by $2,469,000, or 28%, during the year ended December 31, 2009 to $6,223,000 from $8,692,000 in the prior year. The Company implemented a series of cost savings measures in response to the severe sales environment, including reducing employee headcount by over 50% from the 2008 peak, eliminating outside IT and marketing consultants, reducing legal and investor relations costs, and placing restrictions on travel and purchasing. In addition, a charge of $575,000 in 2008 was recorded as a bad debt expense for outstanding receivable balances that were deemed unlikely to be collected, as compared to a bad debt expense of zero recorded in 2009.

Interest and Other Income (Expense). For the year ended December 31, 2009, interest and other income (expense) was a negative $196,000, representing a decrease of $398,000, or negative 197%, from $202,000 in 2008. Interest income decreased as a result of the Company having a smaller average cash balance and lower interest rates on cash balances between the respective periods in 2009 and 2008. In 2009, the Company recorded a loss in settlement of a vendor dispute and a loss on disposal of metal molds of a discontinued model of an electric motor in 2009.

Equity in losses of non-consolidated joint venture. For the year ended December 31, 2009, ITC's operations generated an equity loss of $10,000 utilizing the equity method of accounting for our interest in the pro-rata share of losses attributable to this investment, which represents a decrease of $108,000, or 92%, from the $118,000 equity loss in the year ended December 31, 2008. In addition, a gain of $6,000 was recorded upon the dissolution of the joint venture in April 2009.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our 2009 Financial Statements and accompanying Notes. The matters addressed in this Management's Discussion and Analysis of Financial Condition and Results of Operations, may contain certain forward-looking statements involving risks and uncertainties.

Overview

Enova Systems believes it is a leading innovator of proprietary hybrid and electric drive systems propelling the alternative energy industry. Our core competencies are focused on the development and commercialization of power management and conversion systems for mobile and stationary applications. Enova applies unique 'enabling technologies' in the areas of alternative energy propulsion systems for medium and heavy-duty vehicles as well as power conditioning and management systems for distributed generation systems. Our products can be found in a variety of OEM vehicles including those from Navistar Corporation, First Auto Works, Freightliner Customer Chassis Corporation, Hyundai Motor Company and Ford Motor Company, trucks and buses for Tanfield and its U.S. subsidiary, Smith Electric Vehicles, Wright Bus, Optare Plc and the U.S. Military, as well as digital power systems for EDO and other major manufacturers.

We continue to support Navistar in their efforts to maximize exposure in the hybrid school bus market. We have been involved in large shows in St. Louis, MO, Washington, DC and the Principality of Monaco as well as smaller venues throughout the Midwest. The exposure via shows and direct interface will be aggressively pursued throughout the remainder of 2010 in an effort to promote our drive systems production intent for medium and heavy duty applications.

Some notable highlights of Enova's accomplishments in 2009 are:

• Enova achieved its certification for ISO 9001:2000 for Quality and ISO 14001 for Environmental Management over its operational and manufacturing processes. In order to receive ISO certifications for quality and environmental management systems, an organization must demonstrate operating systems and procedures for managing its processes to consistently turn out products and services that meet customer and regulatory requirements, as well as identify and control the environmental impact of its activities, products or services.

• Our customer, Navistar, with Enova Systems as a co-applicant, was selected to receive a cost-shared award of up to $10 million under the Department of Energy Plug-in Hybrid Electric Vehicle ("PHEV") Technology Acceleration and Deployment Activity program to develop and deploy 60 plug-in electric hybrid school buses, including engine-off all-electric drive capability.

• Enova was awarded an exclusive supplier contract with the U.S. General Services Administration ("GSA"), which provides vehicles for government agencies and armed forces. Under this contract, Enova will supply Enova Ze all-electric walk-in step vans to GSA under the Cargo Vans category.

• Freightliner Custom Chassis Corporation ("FCCC"), a division of Daimler Trucks North America, executed a letter of intent with Enova to enter into an all-electric commercial chassis development program. The development program includes close collaboration and will involve the engineering and integration of Enova's 120kW all-electric drive system technology into target FCCC chassis platforms, including the MT-45 walk-in van chassis. FCCC's highest volume MT-45 chassis is used by a range of customers including UPS and Federal Express. The strategic agreement consists of four phases that include the development of vehicles and placement into national fleets. Design, engineering, integration and testing activities will be conducted at the FCCC plant in Gaffney, SC and the Enova facility in Torrance, CA.

• Enova delivered 280 pre-transmission hybrid drive systems to First Auto Works ("FAW") of China. FAW's Jiefang 12-meter hybrid bus can carry 103 passengers. These hybrid power buses are part of China's initiative to produce 500,000 electric and hybrid power vehicles. The initiative will account for 5% of the Chinese automobile market, which is in accordance with China's three-year development plan for its auto industry, released in February 2009.

• Enova saw further federal fleet penetration potential via GSA with the Smith Electric Vehicles' ("Smith") Newton product offering in the Medium and Heavy Duty vehicle category. The Smith Newton is another exclusive, all-electric medium and heavy duty truck offering on the GSA product menu. Moreover, Navistar continued to demonstrate its leadership in the American school bus market with its exclusive GSA contract to supply hybrid school buses. Enova is the exclusive supplier of hybrid electric drive systems to IC Bus, an affiliated division of Navistar.

• The state of Kentucky won a $13 million Department of Energy Clean Cities Grant for hybrid school buses. Our customer, Navistar Corporation, claims 90% of the market for school buses in Kentucky. Enova has already installed our post-transmission hybrid drive system with a new, lighter weight lithium ion battery in a demonstration bus. Other Clean Cities grants may be available for an additional $5 million. We continue to work closely with Navistar and anticipate we may benefit from these programs starting in 2010.

Enova's product focus is digital power management and power conversion systems. Its software, firmware, and hardware manage and control the power that drives either a vehicle or stationary device(s). They convert the power into the appropriate forms required by the vehicle or device and manage the flow of this energy to optimize efficiency and provide protection for both the system and its users. Our products and systems are the enabling technologies for power systems.

The latest state-of-the-art technologies in hybrid and electric vehicles, fuel cell systems and stationary power generation, all require some type of power management and conversion mechanism. Enova Systems supplies these essential components. Enova drive systems are 'fuel-neutral,' meaning that they have the ability to utilize any type of fuel, including diesel, liquid natural gas or bio-diesel fuels. We also develop, design and produce power management and power conversion components for stationary power generation - both on-site distributed power and on-site telecommunications back-up power applications. Additionally, Enova performs significant research and development to augment and support others' and our internal related product development efforts.

Our products are "production-engineered." This means they are designed so they can be commercially produced (i.e., all formats and files are designed with manufacturability in mind, from the start). For the automotive market, Enova designs its products to ISO 9001 manufacturing and quality standards. We believe Enova's redundancy of systems and rigorous quality standards result in high performance and reduced risk. For every component and piece of hardware, there are detailed performance specifications. Each piece is tested and evaluated against these specifications, which enhances and confirms the value of the systems to OEM customers. Our engineering services focus on system integration support for product sales and custom product design.

In light of our efforts to grow market share in our target markets and penetrate emerging ones, the Company continues to acknowledge the principal barrier to commercialization of our drive systems is cost. The cost of engineering proprietary software and hardware for our drive systems is high because economies of production in specialized hybrid drive system component parts, batteries, and vehicle integration have not been achieved. Therefore, the cost of our products and engineering services are currently higher than our gasoline and diesel competitor counterparts. We also believe maturation into commercialization of our drive systems will result in decreases to our long run average costs of materials and services as volume increases over time.

Financial Results

	For and as of the Years Ended December 31,
	2009	2008	2007	2006	2005
	(In thousands, except per share data)
Statement of Operations Data
Net revenues	$5,622	$6,443	$9,175	$1,666	$6,084
Cost of revenues	5,016	8,224	10,313	2,900	6,001
Gross profit (loss)	606	(1,781)	(1,138)	(1,234)	83
Operating expenses
Research and development	1,228	2,505	1,947	1,363	804
Selling, general and administrative	6,223	8,692	6,428	4,178	2,870
Total operating expense	7,451	11,197	8,375	5,541	3,674
Other income and expense
Interest and financing fees, net	(196)	202	343	550	13
Equity in losses of non-consolidated joint venture	(4)	(118)	(177)	(3)	(118)
Gain on debt restructuring	-	-	-	1,392	1,569
Total other income, net	(200)	84	166	1,939	1,464
Net loss	$ (7,045)	$(12,894)	$(9,347)	$(4,836)	$(2,127)
Per common share:
Basic and diluted loss per share	$(0.33)	$(0.66)	$(0.59)	$(0.33)	$(0.18)
Weighted average number of common shares outstanding	21,385	19,660	15,796	14,802	11,644
Balance Sheet Data
Total assets	$22,011	$19,242	$21,173	$15,730	$21,973
Long-term debt	$1,286	$1,263	$1,306	$1,295	$2,321
Shareholders' equity	$17,247	$14,143	$ 14,177	$11,964	$16,604

Critical Accounting Policies

The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues which require management's most difficult, subjective or complex judgments.

Cash and cash equivalents - Cash consists of currency held at reputable financial institutions. Short-term, highly liquid investments with an original maturity of three months or less are considered cash equivalents.

Allowance for doubtful accounts - The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectibility. If the financial condition of the Company's customers were to deteriorate resulting in an impairment of their ability to make payment, additional allowances may be required. In addition, the Company maintains a general reserve for all invoices by applying a percentage based on the age category. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.

Inventory - Inventories are priced at the lower of cost or market utilizing the first-in, first-out (FIFO) cost flow assumption. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of transfer to the customer. Generally, title transfer is documented in the terms of sale.

Inventory reserve - We maintain an allowance against inventory for the potential future obsolescence or excess inventory. A substantial decrease in expected demand for our products, or decreases in our selling prices could lead to excess or overvalued inventories and could require us to substantially increase our allowance for excess inventory. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of revenues in the period the revision is made.

Property and Equipment - Property and equipment are stated at cost and depreciated over the estimated useful lives of the related assets, which range from three to seven years using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Repairs and maintenance are expensed as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. When property and equipment are retired, sold, or otherwise disposed of, the asset's cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

Impairment of Long-Lived Assets - The Company assesses the impairment of its long-lived assets periodically in accordance with the provisions of FASB ASC 360-10-35-15, "Impairment or Disposal of Long-Lived Assets". The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors. Long-lived assets that management commits to sell or abandon are reported at the lower of carrying amount or fair value less cost to sell.

Equity Method Investment - Investment in ITC, a joint venture is accounted for by the equity method. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's balance sheets or statements of operations; however, the Company's share of the earnings or losses of the investee company is reflected in the caption "Equity in losses of non-consolidated joint venture" in the statements of operations. The Company's carrying value in an equity method joint venture company is reflected in the caption "Investment in non-consolidated joint venture" in the Company's balance sheets.

Stock-Based Compensation - The Company calculates stock-based compensation expense in accordance with FASB ASC Topic 718, "Compensation-Stock Compensation" ("ASC 718"). This pronouncement requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, to be based on estimated fair values.

The Company's determination of estimated fair value of share-based awards utilizes the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company's stock price as well as assumptions regarding certain highly complex and subjective variables. These variables include, but are not limited to; the Company's expected stock price volatility over the term of the awards as well as actual and projected employee stock option exercise behaviors.

Revenue recognition - The Company manufactures proprietary products and other products based on design specifications provided by its customers. The Company recognizes revenue only when all of the following criteria have been met:

• Persuasive evidence of an arrangement exists;

• Delivery has occurred or services have been rendered;

• The fee for the arrangement is fixed or determinable; and

• Collectibility is reasonably assured.

Persuasive Evidence of an Arrangement - The Company documents all terms of an arrangement in a written contract signed by the customer prior to recognizing revenue.

Delivery Has Occurred or Services Have Been Rendered - The Company performs all services or delivers all products prior to recognizing revenue. Professional consulting and engineering services are considered to be performed when the services are complete. Equipment is considered delivered upon delivery to a customer's designated location. In certain instances, the customer elects to take title upon shipment.

The Fee for the Arrangement is Fixed or Determinable - Prior to recognizing revenue, a customer's fee is either fixed or determinable under the terms of the written contract. Fees for professional consulting services, engineering services and equipment sales are fixed under the terms of the written contract. The customer's fee is negotiated at the outset of the arrangement and is not subject to refund or adjustment during the initial term of the arrangement.

Collectibility is Reasonably Assured - The Company determines that collectibility is reasonably assured prior to recognizing revenue. Collectibility is assessed on a customer-by-customer basis based on criteria outlined by management. New customers are subject to a credit review process, which evaluates the customer's financial position and ultimately its ability to pay. The Company does not enter into arrangements unless collectibility is reasonably assured at the outset. Existing customers are subject to ongoing credit evaluations based on payment history and other factors. If it is determined during the arrangement that collectibility is not reasonably assured, revenue is recognized on a cash basis. Amounts received upfront for engineering or development fees under multiple-element arrangements are deferred and recognized over the period of committed services or performance, if such arrangements require the Company to provide on-going services or performance. All amounts received under collaborative research agreements or research and development contracts are nonrefundable, regardless of the success of the underlying research.

FASB ASC 605-25 - "Revenue Recognition-Multiple-Element Arrangements" ("ASC 605-25") addresses the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Specifically, ASC 605-25 requires the recognition of revenue from milestone payments over the remaining minimum period of performance obligations. As required, the Company applies the principles of ASC 605-25 to multiple element agreements.

The Company also recognizes engineering and construction contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Customer-furnished materials, labor, and equipment, and in certain cases subcontractor materials, labor, and equipment, are included in revenues and cost of revenues when management believes that the company is responsible for the ultimate acceptability of the project. Contracts are segmented between types of services, such as engineering and construction, and accordingly, gross margin related to each activity is recognized as those separate services are rendered.

Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Claims against customers are recognized as revenue upon settlement. Revenues recognized in excess of amounts billed are classified as current assets under contract work-in-progress. Amounts billed to clients in excess of revenues recognized to date are classified as current liabilities on contracts.

Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to engineering and development contract costs and revenue.

These accounting policies were applied consistently for all periods presented. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results is included in the footnotes to our financial statements.

Several other factors related to the Company may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition related to product contracts are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as acceptance of services provided, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of our products often cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred.

Research and Development - In accordance with FASB ASC 730 "Research and Development", research, development, and engineering costs are expensed in the year incurred. Costs of significantly altering existing technology are expensed as incurred.

Recent Accounting Pronouncements

In April 2008, the FASB issued guidance regarding the determination of the useful life of intangible assets. The guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. We adopted the guidance as of January 1, 2009, as required. The adoption of the guidance did not have a material impact on our financial statements.

In April of 2009, the FASB issued guidance in the Fair Value Measurements and Disclosures Topic of the Codification on determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The guidance provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The guidance is effective for interim or annual reporting periods ending after June 15, 2009. The adoption of the new requirements did not have a material impact on our financial statements.

In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments. The guidance amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. We adopted the guidance as of June 30, 2009, as required. The adoption of the guidance did not have a material impact on our financial statements.

In April 2009, the FASB issued guidance regarding the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. The guidance addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The guidance is effective for all assets acquired or liabilities assumed arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted the guidance as of January 1, 2009, as required. The adoption of the guidance did not have a material impact on our financial statements.

In May 2009, the FASB issued guidance now codified as ASC Topic 855, "Subsequent Events" (("ASC Topic 855") The guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, under the guidance, an entity is required to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The guidance does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. The guidance is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. We adopted the guidance as of June 30, 2009, as required. The adoption of the guidance did not have a material impact on our financial statements. In February 2010, the FASB issued amended guidance on subsequent events. The amended guidance removes the requirement for United States Securities and Exchange Commission filers to disclose the date through which subsequent events have been evaluated. The amended guidance is effective upon issuance, except for the use of the issued date for conduit debt obligors. We adopted the amended guidance upon issuance, as required. The adoption of the amended guidance did not have a material impact on our financial statements. See Note 18 to the accompanying financial statements for the related disclosure.

In June of 2009, the FASB issued guidance now codified as FASB ASC Topic 105, "Generally Accepted Accounting Principles," as the single source of authoritative nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions of FASB ASC Topic 105 are effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for the Company for the current fiscal reporting period. The adoption of this pronouncement did not have an impact on our financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards. On its effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. We adopted the ASC as of September 30, 2009, as required. The adoption of the ASC did not have an impact on our financial statements.

In August 2009, the FASB issued guidance on the measurement of liabilities at fair value. The guidance provides clarification in measuring the fair value of liabilities. The guidance is effective for the first reporting period (including interim periods) beginning after issuance. We adopted the guidance as of October 1, 2009, as required. The Company does not expect the adoption of this guidance to have a material impact on our financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605)-Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by allowing the use of the "best estimate of selling price" for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when vendor specific objective evidence or third-party evidence of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This guidance is effective for the Company in 2011. The Company does not expect the adoption of ASU No. 2009-13 to have a significant impact on its financial statements.

In January 2010, the FASB issued guidance to address implementation issues related to the changes in ownership provisions in ASC 810, "Consolidation," ("ASC 810"). The guidance clarifies the scope of the decrease in ownership provisions in ASC 810 and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets within the scope of ASC 810. The guidance is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009, and should be applied retrospectively to the first period that ASC 810 was adopted. The adoption of this guidance did not have a material impact on our financial statements.

Liquidity and Capital Resources

We have experienced losses primarily attributable to research, development, marketing and other costs associated with our strategic plan as an international developer and supplier of electric drive and power management systems and components. Cash flows from operations have not been sufficient to meet our obligations. Therefore, we have had to raise funds through several financing transactions. At least until we reach breakeven volume in sales and develop and/or acquire the capability to manufacture and sell our products profitably, we will need to continue to rely on cash from external financing sources. Our operations during the year ended December 31, 2009 were financed by product sales, working capital reserves and equity capital raises. At fiscal year end, the Company had $13,278,000 of cash and cash equivalents and short term investments.

The Company had a secured revolving credit facility from Union Bank (the "Credit Agreement") for $2,000,000 which expired on June 30, 2009. The Credit Agreement was secured by a $2,000,000 certificate of deposit ("CD"). In June 2009, the Company renewed the Credit Agreement at a reduced principal amount of $200,000, secured by a CD in the same amount, for a period of one year expiring on June 30, 2010. As a result, the amount of $1,800,000 in the CD was rolled over at maturity into cash. The interest rate is the certificate of deposit rate plus 1.25% with interest payable monthly and the principal due at maturity. As of December 31, 2009, Union Bank has issued a $200,000 irrevocable letter of credit in favor of Sunshine Distribution LP ("Landlord"), with respect to the lease of the Company's new corporate headquarters at 1560 West 190th Street, Torrance, California. We anticipate that the credit facility will be renewed with similar terms as the existing facility.

Net cash used in operating activities was $3,409,000 for the year ended December 31, 2009 compared to $13,582,000 for the prior year ended December 31, 2008. Cash used in operating activities was affected mostly by the cost of revenue, R&D, personnel and general operating costs, which was partially mitigated by our utilization of existing inventory balances to fulfill customer orders in 2009. Non-cash items included expenses for stock-based compensation, depreciation and amortization, inventory reserve, reserve for doubtful accounts, equity losses in our non-consolidated joint venture, and issuance of common stock for services.

Net cash from investing activities was $1,802,000 for the year ended December 31, 2009 compared to net cash used of $3,524,000 in the prior year. In conjunction with the reduction of our credit facility, as explained above, we redeemed a certificate of deposit for $1,800,000 for use in operating activities. In addition, we received proceeds of $137,000 from the dissolution of the Enova-ITC joint venture. Cash used in investing activities in 2008 was attributed to leasehold improvements and fixed asset purchases associated with our move into a new facility and the purchase of a certificate of deposit of $2,000,000 used as security for the revolving credit facility.

Net cash provided by financing activities totaled $9,361,000 for the year ended December 31, 2009, compared to net cash provided of $11,945,000 for the year ended December 31, 2008. On December 15, 2009, we raised capital through the placement of common stock. We sold 9,024,960 shares of common stock at $1.00 per share to certain accredited investors, resulting in gross proceeds of $9,024,960. In addition, we sold 1,323,200 shares of common stock at 62.5 pence per share (approximately US$1.00 per share) to certain eligible offshore investors resulting in gross proceeds of approximately $1,323,000. Costs related to our December 2009 equity raise were approximately $928,000. During the first and second quarters of 2008, we raised capital through two placements of common stock. On April 3, 2008, we sold 2,131,274 shares of common stock at 195 pence sterling per share (approximately US$3.91 per share) to certain eligible offshore investors. We received approximately 3,990,000 pounds sterling or approximately $7,784,000 in proceeds before related expenses. On May 1, 2008, we sold 1,273,700 shares of common stock for $3.91 per share to certain accredited investors, resulting in proceeds of approximately $4,704,000 before related expenses.

Short term investments decreased by $1,800,000 in 2009 compared to 2008. The company reduced its certificate of deposit with Union Bank to a balance of $200,000, which is being used to secure a credit facility.

Accounts receivable increased by $634,000, or 78%, from $808,000 at December 31, 2008 to $1,442,000 at December 31, 2009 due to increased shipments to FAW in the third and fourth quarters of 2009.

Inventory decreased by $2,044,000 from $7,649,000 as of December 31, 2008 to $5,605,000 as of December 31, 2009, representing a 27% decrease in the balance. The decrease resulted from utilization of existing inventory balances to fulfill increases in customer orders during the second half of 2009.

Prepaid expenses and other current assets increased by $48,000, or 22%, to $263,000 as of December 31, 2009 from a balance of $215,000 as of December 31, 2008. The increase is primarily attributable to deposits made to vendors for certain purchase orders.

Property and equipment decreased by $466,000 or 25%, net of accumulated depreciation, to $1,363,000 as of December 31, 2009 from the prior year balance of $1,829,000. The decrease was primarily due to recording of depreciation expense during the year. We moved into our new manufacturing facility in the first quarter of 2008, which resulted in reduced capital expenditure requirements in 2009.

Intangible assets decreased by $5,000 during 2009 from $65,000 at December 31, 2008 to $60,000 at December 31, 2009. Enova did not recognize any additional intellectual property assets, including patents and trademarks, during 2009. The change in the balance was a result of the amortization of the patents.

Accounts payable decreased by $177,000, or 30%, from $592,000 at December 31, 2008 to $415,000 at December 31, 2009. The accounts payable balance was decreased as we reduced purchases in-line with our short-term sales forecast at the end of 2009.

Enova reported $357,000 of deferred revenue at December 31, 2009 consisting of customer deposits for purchase orders, compared to a deferred revenue balance at December 31, 2008 of $0. The Company anticipates recognition of the current year end balance into revenue in the first quarter of 2010.

Accrued payroll and related expenses decreased by $18,000, or 6%, from $295,000 at December 31, 2008 to $277,000 at December 31, 2009. The change between periods is considered immaterial.

Other accrued liabilities decreased by $572,000, or 31%, to $1,287,000 at December 31, 2009 from $1,859,000 at December 31, 2008. The decrease is primarily attributable to a decline in accruals for inventory receipts due to our utilization of existing inventory to fulfill customer sales orders through 2009.

Accrued interest increased by $82,000 from $992,000 at December 31, 2008 to $1,074,000 at December 31, 2009. The majority of the increase is associated with the interest accrued on the $1.2 million note due the Credit Managers Association of California (CMAC).

Contractual Obligations

As of December 31, 2009, our contractual obligations for the next five years, and thereafter, were as follows (in thousands):

	Payments Due by Period
	Total	Less than 1 Year	1-3 Years	3-5 Years	More than 5 Years
Long-Term Debt Obligations	$ 1,354	$ 68	$ 44	$ 4	$ 1,238
Operating Lease Obligations	1,317	439	878	-	-
Purchase Obligations	-	-	-	-	-
Accrued Interest	1,074	20	-	-	1,054
Total	$ 3,745	$ 527	$922	$ 4	$ 2,292

ENOVA SYSTEMS, INC.

BALANCE SHEETS

	December 31,
	2009		2008
ASSETS
Current assets:
Cash and cash equivalents	$ 13,078,000		$ 5,324,000
Short term investments	200,000		2,000,000
Accounts receivable, net	1,442,000		808,000
Inventories and supplies, net	5,605,000		7,649,000
Prepaid expenses and other current assets	263,000		215,000
Total current assets	20,588,000		15,996,000
Property and equipment, net	1,363,000		1,829,000
Investment in non-consolidated joint venture	1,352,000		1,352,000
Intangible assets, net	60,000		65,000
Total assets	$ 22,011,000		$ 19,242,000

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 415,000		$ 592,000
Deferred revenues	357,000		-
Accrued payroll and related expenses	277,000		295,000
Other accrued liabilities	1,287,000		1,859,000
Current portion of notes payable	68,000		98,000
Total current liabilities	2,404,000		2,844,000
Accrued interest payable	1,074,000		992,000
Notes payable, net of current portion	1,286,000		1,263,000
Total liabilities	4,764,000		5,099,000
Commitments and contingencies (Note 11)
Stockholders' equity:
Series A convertible preferred stock - no par value, 30,000,000 shares authorized; 2,652,000 shares issued and outstanding; liquidating preference at $0.60 per share as of December 31, 2008 and 2007	530,000		530,000
Series B convertible preferred stock - no par value, 5,000,000 shares authorized; 546,000 shares issued and outstanding; liquidating preference at $2 per share as of December 31, 2008 and 2007	1,094,000		1,094,000
Common stock - no par value, 750,000,000 shares authorized; 20,817,000 and 17,182,000 shares issued and outstanding as of December 31, 2008 and 2007, respectively	143,995,000		134,233,000
Additional paid-in capital	8,336,000		7,949,000
Accumulated deficit	(136,708,000)		(129,663,000)
Total stockholders' equity	17,247,000		14,143,000
Total liabilities and stockholders' equity	$ 22,011,000	$ 19,242,000

The accompanying notes are an integral part of these financial statements.

ENOVA SYSTEMS, INC.

STATEMENTS OF OPERATIONS

	For the Years Ended December 31,
	2009	2008
Revenues	$ 5,622,000	$ 6,443,000
Cost of revenues	5,016,000	8,224,000
Gross loss	606,000	(1,781,000)
Operating expenses
Research and development	1,228,000	2,505,000
Selling, general & administrative	6,223,000	8,692,000
Total operating expenses	7,451,000	11,197,000
Operating loss	(6,845,000)	(12,978,000)
Other income and (expense)
Interest and financing fees, net	(196,000)	202,000
Equity in losses of non-consolidated joint venture	(4,000)	(118,000)
Total other income, net	(200,000)	84,000
Net loss	$ (7,045,000)	$ (12,894,000)
Basic and diluted loss per share	$ (0.33)	$ (0.66)
Weighted average number of common shares outstanding	21,385,000	19,660,000

The accompanying notes are an integral part of these financial statements.

ENOVA SYSTEMS, INC.

	Convertible Preferred Stock
	Series A			Series B							Common Stock
	Shares	Amount			Shares			Amount	Shares			Amount
Balance, December 31, 2007	2,652,000	$530,000			546,000			$ 1,094,000		17,182,000			$122,000,000
Issuance of common stock for cash										3,430,000			12,008,000
Issuance of common stock for director services										153,000			174,000
Issuance of common stock for employee services										52,000			51,000
Stock option expense
Net loss
Balance, December 31, 2008	2,652,000	$530,000			546,000			$1,094,000		20,817,000			$134,233,000
Issuance of common stock for upon exercise of stock options										23,000			5,000
Issuance of common stock for cash										10,348,000			9,420,000
Issuance of common stock for director services										158,000			165,000
Issuance of common stock for employee services										58,000			172,000
Stock option expense
Net loss													-
Balance, December 31, 2009	2,652,000	$530,000				546,000		$1,094,000		31,404,000			$143,995,000



	Additional Paid-in Capital		Accumulated Deficit				Total
Balance, December 31, 2007	$ 7,322,000		$(116,769,000)				$14,177,000
Issuance of common stock for cash							12,008,000
Issuance of common stock for director services							174,000
Issuance of common stock for employee services							51,000
Stock option expense	627,000						627,000
Net loss			(12,894,000)				(12,894,000)
Balance, December 31, 2008	$ 7,949,000		$(129,663,000)				$14,143,000
Issuance of common stock for upon exercise of stock options							5,000
Issuance of common stock for cash							9,420,000
Issuance of common stock for director services							165,000
Issuance of common stock for employee services							172,000
Stock option expense	387,000						387,000
Net loss			(7,045,000)				(7,045,000)
Balance, December 31, 2009	8,336,000		$ (136,708,000)				$ 17,247,000

The accompanying notes are an integral part of these financial statements.

ENOVA SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

	For the Years Ended December 31,
	2009	2008
Cash flows from operating activities
Net loss	$ (7,045,000)	$ (12,894,000)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization	605,000	593,000
Loss on asset disposal	58,000	-
Inventory reserve	714,000	803,000
Reserve for doubtful accounts	-	575,000
Equity in losses of non-consolidated joint venture	(6,000)	118,000
Issuance of common stock for director services	165,000	174,000
Issuance of common stock for employee services	172,000	51,000
Stock option expense	387,000	627,000
(Increase) decrease in:
Accounts receivable	(644,000)	2,873,000
Inventories and supplies	2,509,000	(4,887,000)
Prepaid expenses and other current assets	(48,000)	242,000
Increase (decrease) in:
Accounts payable	(100,000)	(1,285,000)
Accrued payroll and related expenses	(385,000)	(385,000)
Other accrued liabilities	(607,000)	(204,000)
Deferred revenues	357,000	(101,000)
Accrued interest payable	82,000	118,000
Net cash used in operating activities	(3,409,000)	(13,582,000)
Cash flows from investing activities
Purchases of short-term investments	(200,000)	(2,000,000)
Maturities of short-term investments	(2,000,000)	-
Proceeds from the dissolution of non consolidated joint venture	137,000	-
Purchases of property and equipment	(135,000)	(1,524,000)
Net cash provided by (used in) investing activities	1,802,000	(3,524,000)
Cash flows from financing activities
Payments on notes payable	(64,000)	(63,000)
Net proceeds from sales of common stock	9,420,000	12,008,000
Proceeds from the exercise of stock options	5,000	-
Net cash provided by financing activities	9,361,000	11,945,000
Net increase (decrease) in cash and cash equivalents	7,754,000	(5,161,000)
Cash and cash equivalents, beginning of period	5,324,000	10,485,000
Cash and cash equivalents, end of period	$ 13,078,000	$ 5,324,000
Supplemental disclosure of cash flow information
Interest paid	$ 7,000	$ 9,000
Assets acquired through financing arrangements	$ 57,000	$ 23,000
Net assets acquired in exchange for Enova's interest in joint venture:
Inventory	$ 1,179,000	$ 0
Reduction in related party payable, net of receivable	$ 32,000	$ 0

The accompanying notes are an integral part of these financial statements.

ENOVA SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

1. Description of Business

General

Enova Systems, Inc., (the "Company"), is a California corporation that develops, designs and produces drive systems and related components for electric, hybrid electric, and fuel cell systems for mobile and stationary applications. The Company retains development and manufacturing rights to many of the technologies created, whether such research and development is internally or externally funded. The Company sells drive systems and related components in the United States, Asia and Europe.

Liquidity

The Company has sustained recurring losses and negative cash flows from operations. Over the past year, the Company's growth has been funded through a combination of product sales, working capital reserves and the issuance of new equity capital.. As of December 31, 2009, the Company had approximately $13.3 million of cash, cash equivalents and short term investments. At December 31, 2009, the Company had net working capital of approximately $18.2 million as compared to $13.1 million at December 31, 2008, representing an increase of $5.1 million. Management has implemented measures to conserve cash, including reductions in employee headcount and restrictions on inventory purchases, general and administrative costs, production overhead costs and capital expenditures. The Company will continue to conserve available cash by closely scrutinizing expenditures and extensively utilizing current inventory for sales during 2010. Therefore, the Company believes that it currently has sufficient cash and financial resources to meet its funding requirements over the next year. However, the Company has experienced and continues to experience recurring operating losses and negative cash flows from operations as well as an ongoing requirement for additional capital investment. The Company expects that it will need to raise additional capital to accomplish its business plan over the next several years. The Company is striving to expand its presence in the marketplace and achieve operating efficiencies.

2. Summary of Significant Accounting Policies

Basis of Presentation

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Revenue Recognition

The Company manufactures proprietary products and other products based on design specifications provided by its customers.

The Company recognizes revenue only when all of the following criteria have been met:

• Persuasive evidence of an arrangement exists;

• Delivery has occurred or services have been rendered;

• The fee for the arrangement is fixed or determinable; and

• Collectibility is reasonably assured.

Persuasive Evidence of an Arrangement - The Company documents all terms of an arrangement in a written contract signed by the customer prior to recognizing revenue.

The Fee for the Arrangement is Fixed or Determinable - Prior to recognizing revenue, a customer's fee is either fixed or determinable under the terms of the written contract. Fees professional consulting services, engineering services and equipment sales are fixed under the terms of the written contract. The customer's fee is negotiated at the outset of the arrangement and is not subject to refund or adjustment during the initial term of the arrangement.

FASB ASC 605-25 "Revenue Recognition-Multiple-Element Arrangements" ("ASC 605-25") addresses the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Specifically, ASC 605-25 requires the recognition of revenue from milestone payments over the remaining minimum period of performance obligations. As required, the Company applies the principles of ASC 605-25 to multiple element agreements.

The Company recognizes engineering and construction contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Customer-furnished materials, labor, and equipment, and in certain cases subcontractor materials, labor, and equipment, are included in revenues and cost of revenues when management believes that the company is responsible for the ultimate acceptability of the project. Contracts are segmented between types of services, such as engineering and construction, and accordingly, gross margin related to each activity is recognized as those separate services are rendered. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Claims against customers are recognized as revenue upon settlement. Revenues recognized in excess of amounts billed are classified as current assets under contract work-in-progress. Amounts billed to clients in excess of revenues recognized to date are classified as current liabilities under advance billings on contracts. Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to engineering and development contract costs and revenue.

Deferred Revenues

The Company recognizes revenues as earned. Amounts billed in advance of the period in which service is rendered are recorded as a liability under Deferred Revenues. The Company has entered into several production and development contracts with customers. The Company has evaluated these contracts, ascertained the specific revenue generating activities of each contract, and established the units of accounting for each activity. Revenue on these units of accounting is not recognized until a) there is persuasive evidence of the existence of a contract, b) the service has been rendered and delivery has occurred, c) there is a fixed and determinable price, and d) collectability is reasonable assured.

Warranty Costs

The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which revenue is recognized. Our products are generally warranted to be free of defects in materials and workmanship for a period of one year from the date of delivery, subject to standard limitations for equipment that has been altered by other than Enova Systems personnel and equipment which has been subject to negligent use. Warranty provisions are based on past experience of product returns, number of units repaired and our historical warranty incidence over the past twelve month period. The warranty liability is evaluated on an ongoing basis for adequacy and may be adjusted as additional information regarding expected warranty costs become known.

Cash and Cash Equivalents

Short-term, highly liquid investments with an original maturity of three months or less are considered cash equivalents.

Short-Term Investments

Short-term investments consist of certificates of deposit with maturities of less than a year.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. If the financial condition of the Company's customers were to deteriorate resulting in an impairment of their ability to make payment, additional allowances may be required. In addition, the Company maintains a general reserve for all invoices by applying a percentage based on the age category. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote. As of December 31, 2009 and 2008, the Company maintained a reserve of $31,000 and $640,000 for doubtful accounts receivable. Bad debt expense of $0 and $575,000 was recorded in 2009 and 2008, respectively.

Inventory

Inventories and supplies are comprised of materials used in the design and development of electric, hybrid electric, and fuel cell drive systems, and other power and ongoing management and control components for production and ongoing development contracts, finished goods and work-in-progress, and is stated at the lower of cost or market utilizing the first-in, first-out (FIFO) cost flow assumption. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of transfer to the customer. Generally, title transfer is documented in the terms of sale.

Inventory reserve

We maintain an allowance against inventory for the potential future obsolescence or excess inventory. A substantial decrease in expected demand for our products, or decreases in our selling prices could lead to excess or overvalued inventories and could require us to substantially increase our allowance for excess inventory. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of revenues in the period the revision is made.

Property and Equipment

Property and equipment are stated at cost and depreciated over the estimated useful lives of the related assets, which range from three to seven years using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Impairment of Long-Lived Assets

The Company assesses the impairment of its long-lived assets periodically in accordance with the provisions of FASB ASC 360-10-35-15, "Impairment or Disposal of Long-Lived Assets".

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors. Long-lived assets that management commits to sell or abandon are reported at the lower of carrying amount or fair value less cost to sell.

Equity Method Investment

Investment in ITC, a joint venture (see Note 6) is accounted for by the equity method. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's balance sheets or statements of operations; however, the Company's share of the earnings or losses of the investee company is reflected in the caption "Equity in losses of non-consolidated joint venture" in the statements of operations. The Company's carrying value in an equity method joint venture company is reflected in the caption "Investment in non-consolidated joint venture" in the Company's balance sheets.

Patents

Patents are measured based on their fair values. Patents are being amortized on a straight-line basis over a period of 20 years and are stated net of accumulated amortization.

Impairment of Intangible Assets

The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset's carrying amount may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2009 and 2008, the Company did not have any impairment loss related to intangible assets (see Note 6).

Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted FASB ASC 825-10-25, "Financial Value Option", which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in the results of operations. FASB ASC 825 also establishes additional disclosure requirements. The Company did not elect the fair value option under FASB ASC 825 for any of its financial assets or liabilities upon adoption.

The carrying amount of financial instruments, including cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable and other accrued liabilities, approximate fair value due to the short maturity of these instruments. The recorded values of notes payable and long-term debt approximate their fair values, as interest approximates market rates. Effective January 1, 2008, the Company adopted FASB ASC 820 "Fair Value Measurement", which relates to the measurement and disclosure of financial assets and liabilities. This guidance established a framework for measuring fair value in GAAP and clarified the definition of fair value within that framework. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of this guidance did not have an effect on the Company's financial condition or results of operations.

Stock-Based Compensation

The Company calculates stock-based compensation expense in accordance with FASB ASC 718, "Compensation-Stock Compensation" ("FASB ASC 718"). This pronouncement requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options to be based on estimated fair values.

Advertising Expense

The Company expenses all advertising costs as they are incurred. Advertising expense for the years ended December 31, 2009 and 2008 was $0 and $1,000, respectively.

Research and Development

In accordance with FASB ASC 730, "Research and Development", research, development, and engineering costs are expensed in the period incurred. Costs of significantly altering existing technology are expensed as incurred.

Income Taxes

The Company utilizes FASB ASC 740, "Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Loss Per Share

The Company utilizes FASB ASC 260 "Earnings per Share." Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. The Company's common share equivalents consist of stock options.

The potential shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows:

	Fiscal Years Ended
	December 31,
	2009	2008
Options to purchase common stock	1,410,000	623,000
Series A and B preferred shares conversion	84,000	84,000
Potential equivalent shares excluded	1,494,000	707,000

Commitments and Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company's management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high credit, quality financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. With respect to accounts receivable, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.

Major Customers

During the year ended December 31, 2009, the Company conducted business with three customers whose gross sales comprised 56%, 15% and 13% of total revenues and accounted for 77%, 4% and 11% of gross accounts receivable, respectively. During the year ended December 31, 2008, the Company conducted business with three customers whose gross sales comprised 28%, 22% and 13% of total revenues and accounted for 3%, 34% and 4% of gross accounts receivable, respectively.

Recent Accounting Pronouncements

In April 2008, the FASB issued ASC 350 "Intangible -Goodwill and Others " regarding the determination of the useful life of intangible assets. The guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. We adopted the guidance as of January 1, 2009, as required. The adoption of the guidance did not have a material impact on our financial statements.

In April 2009, the FASB amended ASC 820, effective for reporting periods ending after June 15, 2009, to provide guidance on (i) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly decreased and (ii) identifying whether a transaction is distressed or forced. The adoption of the amendment did not have a material impact on the Company's financial statements.

In April 2009, the FASB amended ASC 320, effective for reporting periods ending after June 15, 2009, to provide guidance on measuring other-than-temporary impairments for debt securities and improving the presentation and disclosure of other-than-temporary impairments on debt and equity securities in financial statements. The adoption of the amendment did not have a material impact on the Company's financial statements.

In January 2010, the FASB issued guidance to improve disclosures about fair value measurements. The guidance provides amendments to require new disclosures regarding transfers in and out of Levels 1 and 2 of the fair value measurement hierarchy, and activity in Level 3, and to clarify existing disclosures regarding the level of disaggregation, inputs and valuation techniques. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We do not expect that the adoption of the guidance will have a material impact on our financial statements.

3. Inventory

Inventories, consisting of materials, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and consist of the following at December 31:

	2009	2008
Raw materials	$ 6,341,000	$ 7,114,000
Work-in-process	132,000	391,000
Finished Goods	111,000	1,047,000
Reserve for obsolescence	(979,000)	(903,000)
	$ 5,605,000	$ 7,649,000

As of December, 31 2009, the reserve for obsolescence totaled $979,000 and was increased during the year by approximately $714,000. For the year ended December 31, 2008 the reserve for obsolescence was increased by approximately $803,000. Inventory valuation adjustments and other inventory write-offs in 2009 and 2008 amounted to $638,000 and $0, respectively.

4. Property and Equipment

Property and equipment at December 31, 2009 and 2008 consisted of the following:

	2009	2008
Computers and software	$ 556,000	$ 598,000
Machinery and equipment	795,000	1,470,000
Furniture and office equipment	98,000	107,000
Demonstration vehicles and buses	507,000	346,000
Leasehold improvements	1,348,000	1,348,000
Construction in progress	8,000	-
	3,312,000	3,869,000
Less accumulated depreciation and amortization	(1,949,000)	(2,040,000)
Total	$ 1,363,000	$ 1,829,000

Fixed assets totaling $748,000 and $549,000, respectively, were retired or disposed of in the years ended December 31, 2009 and 2008. Depreciation and amortization expense was $600,000 and $588,000 for the years ended December 31, 2009 and 2008, respectively, and within those total expenses, the amortization expense of leasehold improvements was $269,000 and $222,000 for the years ended December 31, 2009 and 2008, respectively.

5. Other Accrued Liabilities

Other accrued liabilities consisted of the following at:

	December 31, 2009	December 31, 2008
Accrued Inventory Received	$ 334,000	$ 743,000
Accrued Professional Services	395,000	571,000
Accrued Warranty	558,000	545,000
Total	$1,287,000	$ 1,859,000

Accrued warranty consisted of the following activities for the years ended December 31:

	2009	2008
Balance at beginning of year.........................................................................	$545,000	$734,000
Accruals for warranties issued during the period...........................................	383,000	377,000
Warranty claims.............................................................................................	(370,000)	(566,000)
Balance at end of year...................................................................................	$558,000	$545,000

6. Investment in Non-Consolidated Joint Venture - ITC

On April 6, 2009, Enova Systems Inc. and Hyundai Heavy Industries of Korea ("HHI") agreed to dissolve their 60/40 joint venture, Hyundai-Enova Innovative Technology Center, Inc. ("ITC"), by mutual agreement based on their evaluation of the joint venture and its business relationship to each of Enova and HHI. ITC was originally established in 2003 as a technical center for specified products with Enova as the commercial manager, ITC as the engineering and development venture and HHI as the primary components supplier.

In connection with the dissolution of ITC, Enova, HHI and ITC entered into a Joint Venture Dissolution and Termination Agreement, effective as of April 6, 2009 (the "Dissolution Agreement"), pursuant to which, among other things, the parties terminated each of: (a) the Joint Venture Agreement between Enova and HHI, (b) the License and Technology Transfer Agreement between HHI and ITC (and all amendments and modifications thereto), (c) the License Transfer Agreement between Enova and ITC (and all amendments and modifications thereto), (d) the Manufacturing and Sales Agreement between Enova, HHI and ITC (and all amendments and modifications thereto), (e) the Manufacturing and Sales Agreement between HHI and ITC (and all amendments and modifications thereto) and (f) the License Agreement among U.S. Electricar, Inc., Hyundai Motor Company, and Hyundai Electronics Co., Ltd. (and all amendments and modifications thereto).

The Dissolution Agreement required Enova and ITC to enter into a Stock Purchase Agreement, dated as of April 6, 2009. Pursuant to the Stock Purchase Agreement, ITC re-purchased the 2,000,000 shares of common stock of ITC owned by Enova, which represented 40% of the issued shares of ITC, for a purchase price of $1,334,097 with HHI becoming the sole shareholder of ITC immediately subsequent to this transaction. Enova received from ITC a cash payment of $137,218 and, as was agreed under the Dissolution Agreement, the amount of $1,196,879 was paid to HHI to settle open purchase orders that Enova had placed with HHI for electrical component inventory which are expected to become part of salable systems; and to settle other payables and receivables between Enova and HHI and ITC. As of December 31, 2009, Enova received approximately $1,179,000 in inventory from HHI as full settlement for ITC.

The summary of the ITC dissolution is as follows:

	Amount
Cash received at settlement	$ 137,000
Inventory received in settlement of purchase orders with HHI for Enova's share in joint venture	1,179,000
Related party receivables and payables settled for Enova's share in joint venture	32,000
Settlement amount	1,348,000
Less: Joint venture investment balance as of April 6, 2009	(1,342,000)
Net gain resulting from dissolution of the joint venture	$ 6,000

The summary of the ITC dissolution is as follows:

HHI continues to be a key strategic supplier of components for Enova, including electric drive motors and control electronic units that are manufactured using Enova specifications.

7. Intangible Assets

Intangible assets consist of legal fees directly associated with patent licensing. The Company has been granted three patents. These patents have been capitalized and are being amortized on a straight-line basis over a period of 20 years.

Intangible assets consisted of the following as of December 31:

	2009	2008
Patents	$ 93,000	$ 93,000
Less accumulated amortization	(33,000)	(23,000)
Total	$ 60,000	$ 70,000

Amortization expense charged to operations was $5,000 for each of the years ended December 31, 2009 and 2008, respectively.

8. Notes Payable

Notes payable at December 31, consisted of the following:

	2009	2008
Secured note payable to Credit Managers Association of California, bearing interest at prime plus 3% (6.25% as of December 31, 2009), and is adjusted annually in April through maturity. Principal and unpaid interest due in April 2016. A sinking fund escrow may be funded with 10% of future equity financing, as defined in the Agreement. ....................................................	$1,238,000	$1,238,000
Secured note payable to a financial institution in the original amount of $95,000, bearing interest at 6.21%, payable in 36 equal monthly installments of principal and interest through October 1, 2009…. ……………………………………… …………………………………….	-	27,000
Secured note payable to a financial institution in the original amount of $35,000, bearing interest at 10.45%, payable in 30 equal monthly installments of principal and interest through November 1, 2009 ………………………………………………………………………………	-	14,000
Secured note payable to a financial institution in the original amount of $23,000, bearing interest at 11.70%, payable in 36 equal monthly installments of principal and interest through October 1, 2010………………………………………………………………………………….	8,000	15,000
Secured note payable to a Coca Cola Enterprises in the original amount of $40,000, bearing interest at 10% per annum. Principal and unpaid interest due on demand ……… …………..	40,000	40,000
Secured note payable to a financial institution in the original amount of $39,000, bearing interest at 4.99% per annum, payable in 48 equal monthly installments of principal and interest through September 1, 2011 …………………………………………………………………..	18,000	27,000
Secured note payable to a financial institution in the original amount of $38,000, bearing interest at 8.25% per annum, payable in 60 equal installments of principal and interest through February 19,2014 ………	32,000	-
Secured note payable to a financial institution in the original amount of $19,000, bearing interest at 10.50% per annum, payable in 60 equal installments of principal and interest through August 25,2014 ………	18,000	-
	1,354,000	1,361,000
Less current portion …………………………………………………………………………....	(68,000)	(98,000)
Long-term portion ……………………………………………………………………… …...	$1,286,000	$1,263,000

As of December 31, 2009 and 2008, the balance of long term interest payable with respect to the Credit Managers Association of California note amounted to $1,054,000 and $976,000, respectively. Interest expense on notes payable amounted to approximately $91,000 and $133,000 during the years ended December 31, 2009 and 2008, respectively.

Future minimum principal payments of notes payable consisted of the following:

	December 31, 2009
2010	$ 68,000
2011	19,000
2012	12,000
2013	13,000
2014	4,000
Thereafter	1,238,000
Total	$ 1,354,000

9. Revolving Credit Agreement

In October 2007, the Company entered into a secured revolving credit facility with a financial institution (the "Credit Agreement") for $2,000,000, which was secured by a $2,000,000 certificate of deposit. The facility expired on June 30, 2009.

In June 2009, the Company renewed the Credit Agreement at a reduced principal amount of $200,000 for a one-year term maturing on June 30, 2010. The agreement is secured by a $200,000 certificate of deposit. The interest rate on a drawdown from the facility is the certificate of deposit rate plus 1.25% with interest payable monthly and the principal due at maturity. The financial institution also renewed the $200,000 irrevocable letter of credit for the full amount of the credit facility in favor of Sunshine Distribution LP ("Landlord"), with respect to the lease of the Company's corporate headquarters at 1560 West 190th Street, Torrance, California.

10. Deferred Revenues

The Company had deferred $357,000 and $0 in revenue related to production and development contracts at December 31, 2009 and 2008, respectively. We anticipate that this revenue will be recognized in the first quarter of 2010.

11. Commitments and Contingencies

Leases

In October 2007, Enova entered into a lease agreement with Sunshine Distribution LP ("Landlord"), with respect to the lease of an approximately 43,000 square foot facility located at 1560 West 190th Street, Torrance, California (the "Lease"). The lease term commenced on November 1, 2007, and expires January 1, 2013. The total base monthly rent is approximately $37,000, and will be increased effective May 1, 2011 based on the increase in the consumer price index. Under the Lease, Enova will pay the Landlord certain commercially reasonable and customary common area maintenance costs of approximately $5,000 per month, increasing ratably as these costs are increased to the Landlord. The Lease is secured by an irrevocable standby letter of credit in the amount of $200,000 and naming the Landlord as the beneficiary. Enova also has an office in Hawaii which is rented on a month-to-month basis at $3,400 per month, and a sales office in Michigan that it rents on a month-to-month basis at $500 per month. Rent expense was $561,000 and $616,000 for the years ended December 31, 2009, and 2008, respectively.

Future minimum lease payments under non-cancelable operating lease obligations at December 31, 2009 were as follows:

Year Ending December 31	Operating Leases
2010	$ 439,000
2011	439,000
2012	439,000
2013	-
2014	-
Total	$ 1,317,000

Employment Contracts

Prior to his appointment as Chief Executive Officer, Mr. Staran's compensation was governed by a letter agreement executed on March 27, 2007 retroactive to January 22, 2007 when he served as Executive Vice President. Pursuant to the letter agreement, Mr. Staran received an annual salary of $190,000, was eligible to participate in the executive bonus program, received health and life insurance benefits, and received living and transportation reimbursements. We also agreed to issue Mr. Staran 5,000 shares of common stock.

Upon his appointment as Chief Executive Officer on August 28, 2007, the Board of Directors increased Mr. Staran's annual salary from $190,000 to $235,000 retroactive to July 1, 2007 and he was granted 6,000 shares of Enova's common stock.

Effective February 11, 2008, we entered into an employment agreement with Mr. Staran to provide him an annual salary of $250,000 beginning as of January 1, 2008. On October 29, 2008, Mr. Staran was granted 12,000 shares of Enova's common stock. Pursuant to the February 11, 2008 employment agreement, we leased a car for Mr. Staran's use and pay for related expenses. Mr. Staran also is entitled to reimbursement for an apartment at the rate of $2,822 per month. The employment agreement further provides for life, medical and disability benefits and 15 days of annual accrued vacation.

The terms of the February 11, 2008 employment agreement, as modified on February 17, 2009, with our current Chief Executive Officer provides that in the event Mr. Staran's employment is terminated by us without cause, he is entitled to receive as severance (i) three months of health benefits, (ii) his contingent bonus, (iii) 18 months payment of his current base salary on a monthly basis and (iv) a relocation allowance of $20,000. If his duties or responsibilities are materially diminished or if he is assigned duties that are demeaning or otherwise materially inconsistent with the duties then currently performed by him, Mr. Staran will have the right to receive the same severance payment as if his employment had been terminated without cause.

On February 17, 2009, the Board of Directors entered into a severance agreement with Jarett Fenton, the Chief Financial Officer of Enova. Mr. Fenton's agreement provides for a 12 month severance provision. In the event that Mr. Fenton's employment is terminated by Enova without cause, he is entitled to receive as severance three months of health benefits and 12 months payment of his current base salary, to be paid on a monthly basis. If Mr. Fenton's duties or responsibilities are materially diminished or he is assigned duties that are demeaning or otherwise materially inconsistent with the duties then currently performed, he will have the right to terminate his agreement and receive the same severance payment as if his employment had been terminated without cause.

12. Stockholders' Equity

Common Stock

On October 29, 2009, Enova entered into a Purchase Agreement ("Purchase Agreement") with certain accredited investors (as such term is defined under Regulation D promulgated by the Securities and Exchange Commission ("SEC")) pursuant to which the Investors agreed to purchase 9,024,960 shares of Common Stock ("Investor Shares") and the Company received $9,024,960 in gross proceeds from the offering.

On October 29, 2009, the Company entered into a Placing Agreement (the "Placing Agreement") to which Investec Bank (UK) Limited ("Investec") acted as Enova's agent to place 1,323,200 shares of the Common Stock (the "Placing Shares") at 62.5 Pence (the "Placing Price"), or approximately the equivalent of $1.00 (U.S. Dollars) per share as of such date based on the exchange rate on October 29, 2009 as reported by Fidessa.

On December 15, 2009, Enova Systems, Inc. completed the sale of the above 10,348,160 shares of the Company's common stock, no par value ("Common Stock"), at $1.00 (U.S.) per share for gross proceeds of approximately $10,348,160 (based on current exchange rates as described above) pursuant in part to a Purchase Agreement and in part to a Placing Agreement as more particularly described above. The transactions contemplated by the Purchase Agreement and the Placing Agreement were approved by shareholders at the company's annual meeting held on December 8, 2009. Costs related to the December 2009 equity raise were approximately $928,000.

During the years ended December 31, 2009 and 2008, the Company issued 158,000 and 153,000 shares of common stock, respectively, to directors as compensation. The common stock issued to directors in 2009 and 2008 was valued at $165,000 and $174,000, respectively, based upon the trading value of the common stock on the date of issuance.

During the years ended December 31, 2009 and 2008, the Company issued 58,000 and 52,000 shares of common stock, respectively, to employees as compensation. The common stock issued to employees in 2009 and 2008 was valued at $172,000 and $51,000, respectively, based upon the trading value of the common stock on the date of issuance.

Series A Preferred Stock

Series A preferred stock is currently unregistered and convertible into common stock on a one-to-one basis, including adjustments to reflect the Company's 1-45 reverse stock split on July 20, 2005, at the election of the holder or automatically upon the occurrence of certain events including: sale of stock in an underwritten public offering; registration of the underlying conversion stock; or the merger, consolidation, or sale of more than 50% of the Company. Holders of Series A preferred stock have the same voting rights as common stockholders. The stock has a liquidation preference of $0.60 per share plus any accrued and unpaid dividends in the event of voluntary or involuntary liquidation of the Company. Dividends are non-cumulative and payable at the annual rate of $0.036 per share if, when, and as declared by, the Board of Directors. No dividends have been declared on the Series A preferred stock.

Series B Preferred Stock

Series B preferred stock is currently unregistered and each share is convertible into shares of common stock on a two-for-one basis, including adjustments to reflect the Company's 1-45 reverse stock split on July 20, 2005, at the election of the holder or automatically upon the occurrence of certain events including: sale of stock in an underwritten public offering, if the offering results in net proceeds of $10,000,000, and the per share price of common stock is at least $2.00; and the merger, consolidation, or sale of common stock or sale of substantially all of the Company's assets in which gross proceeds received are at least $10,000,000. The Series B preferred stock has certain liquidation and dividend rights prior and in preference to the rights of the common stock and Series A preferred stock. The stock has a liquidation preference of $2.00 per share together with an amount equal to, generally, $0.14 per share compounded annually at 7% per year from the filing date, less any dividends paid. Dividends on the Series B preferred stock are non-cumulative and payable at the annual rate of $0.14 per share if, when, and as declared by, the Board of Directors. No dividends have been declared on the Series B preferred stock.

13. Stock Options

Stock Option Program Description

For the year ended December 31, 2009 the Company had two equity compensation plans, the 1996 Stock Option Plan (the "1996 Plan") and the 2006 equity compensation plan (the 2006 "Plan"). The 1996 Plan has expired for the purposes of issuing new grants. However, the 1996 Plan will continue to govern awards previously granted under that plan. The 2006 Plan has been approved by the Company's Shareholders. Equity compensation grants are designed to reward employees and executives for their long term contributions to the Company and to provide incentives for them to remain with the Company. The number and frequency of equity compensation grants are based on competitive practices, operating results of the company, and government regulations.

The maximum number of shares issuable over the term of the 1996 Plan was limited to 65 million shares. Options granted under the 1996 Plan typically have an exercise price of 100% of the fair market value of the underlying stock on the grant date and expire no later than ten years from the grant date. The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which 903,000 were granted in 2009.

The Company attributes the value of share-based compensation to expense using the straight-line method over the vesting period for the options granted. Stock-based compensation expense related to stock options was $387,000 and $627,000 for the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, the total compensation cost related to non-vested awards not yet recognized is $924,000. The remaining period over which the future compensation cost is expected to be recognized is 22 months. The aggregate intrinsic value of total awards outstanding is $822,000.

Stock-based compensation expense recognized in the Statement of Operations for the year ended December 31, 2009 has been based on awards ultimately expected to vest and it has been reduced for estimated forfeitures. FASB ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the year ended December 31, 2009, the Company applied estimated average forfeiture rates of approximately 3% for non-officer grants, based on historical forfeiture experience. The expected life of options granted in 2009 is 3 years.

FASB ASC 718 requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to the Company's loss position, there were no such tax benefits for the years ended December 31, 2009 and 2008.

The fair value of stock-based awards to officers and employees is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the bond equivalent yields that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company's stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

The following is a summary of changes to outstanding stock options during the fiscal year ended December 31, 2009:

		Number of Share Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2007		329,000	$ 4.23	5.85	$ -
	Granted	420,000	$ 3.82	9.74	$ -
	Exercised	-	-	-	$ -
	Forfeited or Cancelled	(126,000)	$ 3.91	-	$ -
Outstanding at December 31, 2008		623,000	$ 4.02	7.09	$ -
	Granted	903,000	$ 0.89	8.60	$ -
	Exercised	(23,000)	$ 0.23	-	$ -
	Forfeited or Cancelled	(93,000)	$ 3.67	-	$ -
Outstanding at December 31, 2009		1,410,000	$ 2.10	7.65	$ 822,000
Exercisable at December 31, 2009		531,000	$ 3.40	6.28	$ 134,000

At December 31, 2009, there were 1,663,000 shares available for grant under the 2006 plan. The weighted-average remaining contractual life of the options outstanding at December 31, 2009 was 7.65 years. The exercise prices of the options outstanding at December 31, 2009 ranged from $0.21 to $4.95. The weighted-average remaining contractual life of the options exercisable at December 31, 2008 was 6.28 years. Options exercisable were 531,000 and 387,000 at December 31, 2009 and 2008, respectively. The weighted-average grant date fair value of the options granted during the years ended December 31, 2009 and 2008 was $0.69 and $2.88, respectively.

Unvested share activity for the year ended December 31, 2009 is summarized below:

	Unvested number of options	Weighted-average grant date fair value
Unvested balance at December 31, 2008	236,000	$ 2.88
Granted	903,000	$ 0.69
Vested	(223,000)	$ 1.68
Forfeited	(37,000)	$ 2.28
Unvested balance at December 31, 2009	879,000	$ 0.98

The company settles employee stock option exercises with newly issued common shares. The table below presents information related to stock option activity for the fiscal years ended December 31, 2009 and 2008:

	Fiscal Year Ended
	December 31,
	2009	2008
Total intrinsic value of stock options exercised	$13,000	$ -
Cash received from stock option exercises	$5,000	$ -
Gross income tax benefit from the exercise of stock options	$ -	$ -

Valuation and Expense Information under SFAS 123(R)

The fair values of all stock options granted during the fiscal years ended December 31, 2009 and 2008 were estimated on the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:

	Fiscal Year Ended
	December 31,
	2009	2008
Expected life (in years)	2 - 3	4
Average risk-free interest rate	2%	3%
Expected volatility	120 - 194%	111 -113%
Expected dividend yield	0%	0%
Forfeiture rate	3%	3%

The estimated fair value of grants of stock options and warrants to nonemployees of the Company is charged to expense, if applicable, in the financial statements. These options vest in the same manner as the employee options granted under each of the option plans as described above.

14. Income Taxes

Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes as of December 31, 2009 and 2008 consisted of the following:

	2008	2007
Deferred tax assets
Net operating loss carry-forwards	$25,440,000	$34,163,000
Stock based compensation	248,000	357,000
Other, net	(421,000)	(6,000)
	25,267,000	34,514,000
Less valuation allowance	(25,267,000)	(34,514,000)
Net deferred tax assets	$ -	$ -

The Tax Reform Act of 1986 limits the use of net operating loss carryforwards in certain situations where changed occur in the stock ownership of a company. In the event the Company has had a change in ownership, utilization of the carryforwards could be restricted.

Deferred taxes arise from temporary differences in the recognition of certain expenses for tax and financial reporting purposes. The deferred tax assets have been offset by a valuation allowance since management does not believe the recoverability of these in future years is more likely than not to occur. The valuation allowance decreased by $9,247,000 and $3,156,000 during the years ended December 31, 2009 and 2008, respectively. As of December 31 2009, the Company had net operating loss carry forwards for federal and state income tax purposes of approximately $64,133,000 and $40,185,000, respectively. Net operating loss carry forwards of $34,460,000 expired in 2009 and remaining operating loss carry forwards will expire in 2010 to 2024.

The provision for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2009 and 2008) to income taxes as follows:

	December 31, 2009	December 31, 2008
Tax benefit computed at 34%	$(4,384,000)	$(4,384,000)
Change in valuation allowance	(3,156,000)	(3,156,000)
State tax (net of Federal benefit)	(748,000)	(748,000)
Change in carryovers and tax attribute	8,288,000	8,288,000
Net tax benefit	$ -	$ -

15. Related Party Transactions

During 2009 and 2008, the Company purchased approximately $1,179,000 and $1,478,000, respectively, in components, materials and services from HHI. Sales to HHI amounted to approximately $111,000 and $88,000 for the years ended December 31, 2009 and 2008, respectively. The Company had an outstanding payable balance owed to HHI of approximately $0 at December 31, 2009 and $30,000, net of a receivable of approximately $10,000 at December 31, 2008.

A relative of one of the Company's directors is a majority owner of a website consulting firm which provided services (branding) to the Company. The Company paid consulting fees and expenses to this firm in the amount of approximately $0 in 2009 and $111,000 in 2008.

16. Employee Benefit Plan

The Company has a 401(k) profit sharing plan covering substantially all employees. Eligible employees may elect to contribute a percentage of their annual compensation, as defined, to the plan. The Company may also elect to make discretionary contributions. For the years ended December 31, 2009 and 2008, the Company did not make any contributions to the plan.

17. Geographic Area Data

The Company operates as a single reportable segment and attributes revenues to countries based upon the location of the entity originating the sale. Revenues by geographic area are as follows:

	2009	2008

United States	$1,660,000	$2,726,000
China	3,142,000	249,000
United Kingdom	534,000	2,033,000
Italy	161,000	274,000
Korea	111,000	256,000
Canada	14,000	-
Japan	-	259,000
Norway	-	646,000
Total	$5,622,000	$6,443,000

18. Subsequent Events

The Company has evaluated subsequent events through the filing date of this Form 10-K and has determined that there were no additional subsequent events to recognize or disclose in these financial statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURES

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by SEC Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2009. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2009.

Management's Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. We maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included an assessment of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this evaluation, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2009.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.

Changes in Internal Control over Financial Reporting

There have not been any other changes in our internal control over financial reporting as of the year ended December 31, 2009 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Shareholders Meeting convened on December 8, 2009

The annual meeting of the Shareholders of Enova Systems, Inc. was convened on Tuesday, December 8, 2009 at the Company's headquarters. A total of 14,748,097 shares were voted out of a total 21,095,776 shares outstanding, inclusive of Common Shares and Series A and Series B Preferred Shares. The following three proposals were presented to the shareholders:

Proposal 1 was for the election of six Directors to hold office until the next Annual Meeting of Shareholders and until their respective successors are elected and qualified or until each Director's earlier resignation or removal. The six Directors up for re-election were Mssrs. Michael Staran, Edwin Riddell, John Wallace, John Micek, Richard Davies and Roy Roberts. The shares voted in person or by proxy were voted in favor of the six nominees as detailed in the following table:

Directors	For	Withheld
Richard Davies	14,654,886	93,211
John Micek	14,654,996	93,101
Edwin Riddell	14,596,111	151,986
Roy Roberts	14,598,137	149,960
Michael Staran	14,589,195	158,902
John Wallace	14,586,418	149,150

Proposal 2 was for the ratification of the Board's appointment of PMB Helin Donovan, LLP as the Corporation's independent auditors for the fiscal year ending December 31, 2009. Of the shares voted in person or by proxy on the proposal, 14,684,581 shares voted in favor, 37,581 shares voted against and 25,665 shares voted to abstain.

Proposal 3 was for the authorization to issue up to 10,348,160 shares of the Company's common stock in accordance with the Purchase Agreement and Placing Agreement, each dated October 29, 2009. Of the shares voted in person or by proxy on the proposal, 8,439,091 shares voted in favor, 171,671 shares voted against, 19,124 shares voted to abstain and there were 3,832,711 broker non-votes.

RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

For the fiscal year ended December 31, 2009, we had two equity compensation plans: the 1996 Option Plan and the 2006 Equity Compensation Plan. Each plan was adopted with the approval of our shareholders. The 1996 Stock Option Plan has expired for purposes of issuing new grants. The 1996 Stock Option Plan, however, will continue to govern awards previously granted under that plan. The 2006 plan, adopted at our annual meeting in November 2006, has a total of 3,000,000 shares reserved for issuance. The following table provides information regarding our equity compensation plans as of December 31, 2009:

Plan category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)	Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
Equity compensation plans approved by security holders	1,410,000	$ 2.10	1,663,000
Equity compensation plans not approved by security holders	-	-	-
Total	1,410,000	$ 2.10	1,663,000

This information is provided by RNS

The company news service from the London Stock Exchange

END

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