SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d) of the
Securities and Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File No. 0-25184
ENOVA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 95-3056150
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
19850 South Magellan Drive, Torrance, California 90502
(Address of principal executive offices, including zip code)
(310) 527-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2004 (the last business day of
the registrant's more recently completed second quarter) was $7,958,000. For
purposes of this calculation only, (i) shares of Series A and Series B Preferred
Stock have been included in the calculation, (ii) shares of Common Stock and
Series A Preferred Stock are deemed to have a market value of $0.06 per share,
and the Series B Preferred Stock is deemed to have a market value of $0.12 per
share, based on the average of the bid and ask prices of the Common Stock on
June 30, 2004, and (iii) each of the executive officers, directors and persons
holding 5% or more of the outstanding Common Stock (including Series A and B
Preferred Stock on an as-converted basis) is deemed to be an affiliate.
The number of shares of Common Stock outstanding as of March 30, 2005 was
416,473,000.
EXPLANATORY NOTE
On March 29, 2005, Enova Systems, Inc. (the "Company") filed its Annual Report
on Form 10-K for its fiscal year ended December 31, 2004. The Company hereby
amends its 2004 Form 10-K to include within it the audited financial statements
of the Hyundai-Enova Innovative Technology Center (the "ITC Financial
Statements"), a 40% owned equity method investment of the Company, in compliance
with Rule 3-09 of Regulation S-X. Additionally, we have amended `Note 1 -
Organization and Line of Business'; `Note 2 - Summary of Significant Accounting
Policies'; `Note 4 - Equity Method Investment'; and `Note 11 - Income Taxes' and
`Note 14 - Geographic Area Data' of the Notes to the Company's Financial
Statements for the Years Ended December 31, 2004, 2003 and 2002. The amended
notes reflect the addition of the ITC Financial Statements and correct
computational errors which we believe are immaterial to the fair presentation of
the Company's financial position, results of operations and cash flows for the
year ended December 31, 2004. No other amendments or changes are, or were, made
to the 2004 Form 10-K.
2
Item 8. Financial Statements and Supplementary Data
The response to this Item is submitted as a separate section of this
Form 10-K/A. See Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)1. Financial Statements
The financial statements filed as a part of this report are
identified in the Index to Financial Statements on page F-1.
(a)2. Financial Statement Schedule
No financial statement schedules are filed as a part of this
report.
(a)3. Exhibits
See Item 15 (c) for Index of Exhibits.
(b) Reports on Form 8-K
On September 2, 2005, Registrant filed a Form 8-K, with date
of earliest event reported of September 1, 2005, reporting
under items 8 and 9.
(c) Exhibits
Exhibit Number Description
-------------- -----------
3.1 Amended and Restated Articles of Incorporation of the Registrant (filed
as Exhibit 3.1 to the Registrant's Annual Report on Form 10K for the
year ended December 31, 2000 filed on March 30, 2001 and incorporated
herein by reference).
3.2 Bylaws of Registrant (filed as Exhibit 3.12 to the Registration
Statement on Form 10 filed on November 29, 1994, and incorporated
herein by reference).
4.1 Cashless Exercise Warrants dated October 25, 1996 issued to Fontal
International, Ltd. (filed as Exhibit 4.1 to the Registrant's Annual
Report on Form 10-K/A for the year ended July 31, 1996, as filed on
November 12, 1996, and incorporated herein by reference).
10.1 Form of Stock Option Agreement under 1993 Employee and Consultant Stock
Plan (filed as Exhibit 10.15 to the Registration Statement on Form 10
filed on November 29, 1994, and incorporated herein by reference).
10.2 Form of Solar Electric Engineering, Inc. 1993 Employee and Consultant
Stock Plan (filed as Exhibit 10.16 to the Registration Statement on
Form 10 filed on November 29, 1994, and incorporated herein by
reference).
10.3 Form of Confidential Private Placement Memorandum and Debt
Restructuring Disclosure Statement of U.S. Electricar, Inc., dated
January 2, 1996, delivered by Enova to certain of its unsecured trade
creditors, including exhibits (filed as Exhibit 10.91 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1996, as filed on March 18, 1996, and incorporated herein
by reference).
10.4 Form of Stock Purchase, Note and Debt Exchange Agreement dated January
2, 1996 between Enova and certain unsecured trade creditors (filed as
Exhibit 10.92 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1996, as filed on March 18, 1996, and
incorporated herein by reference).
10.5 Form of Indemnification Agreement (filed as Exhibit 10.63 to the
Registration Statement on Form 10 filed on November 29, 1994, and
incorporated herein by reference).
10.6 Form of Security Agreement made as of May 31, 1995, between Enova and
Credit Managers Association of California, Trustee (filed as Exhibit
10.85 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1996, as filed on June 14, 1996, and incorporated
herein by reference).
3
10.7 Amended 1996 Employee and Consultant Stock Option Plan (filed as
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K/A for
fiscal year ended July 31, 1999, as filed on October 29, 1999, and
incorporated herein by reference).
10.8 Stock Purchase Agreement and Technology License Agreement dated
February 27, 1997, by and between Enova and Hyundai Motor Company and
Hyundai Electronics Industries Co., Ltd. (filed as Exhibit 10.98 to the
Registrant's Quarterly Report on Form 10-Q for fiscal quarter ended
January 31, 1997, as filed on March 14, 1997, and incorporated herein
by reference).
10.9 Letter of Intent between Registrant and a domestic supplier, dated
December 9, 1999, to design, develop and manufacture low voltage
electric drive system components (filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K/A for fiscal year ended
December 31, 2000 and incorporated herein by reference).
10.10 Put/Call Option to sell Itochu shares between Registrant and Carl D.
Perry dated September 1, 1999 (filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K/A for fiscal year ended
December 31, 2000 and incorporated herein by reference).
10.11 Agreement (redacted) between the Registrant and a customer dated June
14, 2001, to develop and produce power management systems. (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for Six
Months ended June 30, 2001 and incorporated herein by reference).
10.12 Agreement (redacted) between the Registrant and Eco Power Technology,
dated June 12, 2001, to produce and sell power drive systems (filed as
Exhibit 10.19 to Amendment No. 6 to the Registrant's Registration
Statement on Form S-1, No. 333-85308, and incorporated herein by
reference).
10.13 Agreement (redacted) between the Registrant and Tomoe
Electro-Mechanical Engineering and Manufacturing, Inc., dated November
19, 2001, to produce and sell power drive systems (filed as Exhibit
10.20 to Amendment No. 6 to the Registrants Registration Statement on
Form S-1, No. 333-85308, and incorporated herein by reference).
10.14 Agreement (redacted) between the Registrant and Moriah Corporation,
dated January 22, 2002, to produce and sell power drive systems (filed
as Exhibit 10.21 to Amendment No. 6 to the Registrant's Registration
Statement on Form S-1, No. 333-85308, and incorporated herein by
reference).
10.15 Form of Stock Purchase Agreement dated June 7, 2002 between Registrant
and each of the selling shareholders listed in a Prospectus dated July
26, 2002 (filed as Exhibit 10.22 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, No. 333-96829, and incorporated
herein by reference).
10.16 Form of Registration Rights Agreement dated June 7, 2002 between
Registrant and each of the selling shareholders listed in a Prospectus
dated July 26, 2002 (filed as Exhibit 10.23 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1, No. 333-96829, and
incorporated herein by reference).
10.17 Joint Venture Agreement (redacted**) to form advanced research and
development corporation, dated as of March 18, 2003, by and between the
Registrant and Hyundai Heavy Industries Co. Ltd. (filed as Exhibit
10.24 to the Registrant's Quarterly Report on Form 10-Q for Three
Months ended March 31, 2003 and incorporated herein by reference).
10.18 Securities Purchase Agreement dated as of March 18, 2003, by and
between the Registrant and Hyundai Heavy Industries Co. Ltd. (filed as
Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q for
Three Months ended March 31, 2003 and incorporated herein by
reference).
10.19 Form of Stock Purchase Agreement dated March 30, 2004 between
Registrant and various investors. (filed as Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-Q for Three Months ended March
31, 2004 and incorporated herein by reference).
10.20 Form of Registration Rights Agreement dated March 30, 2004 between
Registrant and various investors. (filed as Exhibit 10.20 to the
Registrant's Quarterly Report on Form 10-Q for Three Months ended March
31, 2004 and incorporated herein by reference).
10.21 Form of Finder's Fee agreement dated April 1, 2004 between Registrant
and The Global Value Investment Portfolio Management Pte Ltd as
disclosed in our Form 10-Q for the quarter ended March 31, 2004. (filed
as Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for
Six Months ended June 30, 2004 and incorporated herein by reference).
4
23.1* Consent of Singer Lewak Greenbaum & Goldstein LLP, Independent
Registered Public Accounting Firm
23.2* Consent of Moss Adams, LLP, Independent Registered Public Accounting
Firm
24* Power of Attorney (included on signature page)
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act Of 2002
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32* Certification Pursuant to 18 U.S.C. Section 1350
----------------------
* Filed herewith.
5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENOVA SYSTEMS, INC.
By: /s/ Larry B. Lombard
--------------------------------
Larry B. Lombard, Chief Financial Officer
Dated: September 15, 2005
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry B. Lombard, with full power to act
alone, his true and lawful attorney-in-fact and agent, with full power of
substitution for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to the annual report on Form 10-K/A,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated. Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
/s/ Larry B. Lombard Chief Financial Officer September 15, 2005
---------------------------------- and Director
Larry B. Lombard (Principal Financial Officer)
/s/ Edwin O. Riddell Chief Executive Officer September 15, 2005
---------------------------------- and Director
Edwin O. Riddell (Principal Executive Officer)
/s/ Anthony N. Rawlinson Chairman September 15, 2005
----------------------------------
Anthony N. Rawlinson
/s/ Malcolm Currie Director September 15, 2005
----------------------------------
Malcolm Currie
/s/ Bjorn Ahlstrom Director September 15, 2005
----------------------------------
Bjorn Ahlstrom
/s/ Donald H. Dreyer Director September 15, 2005
----------------------------------
Donald H. Dreyer
/s/ John R. Wallace Director September 15, 2005
----------------------------------
John R. Wallace
6
ENOVA SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2004, 2003, AND 2002
ENOVA SYSTEMS, INC.
CONTENTS
December 31, 2004
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 1-2
FINANCIAL STATEMENTS
Balance Sheets 3-5
Statements of Operations 6
Statements of Stockholders' Equity (Deficit) 7-8
Statements of Cash Flows 9-10
Notes to Financial Statements 11-28
SUPPLEMENTAL INFORMATION
Report of Independent Registered Public
Accounting Firm on Financial Statement Schedule 1
Valuation and Qualifying Accounts - Schedule II 2
FINANCIAL STATEMENTS
Hyundai-Enova Innovative Technology Center, Inc. 1-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Enova Systems, Inc.
Torrance, California
We have audited the balance sheets of Enova Systems, Inc. as of December 31,
2004 and 2003, and the related statements of operations, stockholders'
equity/(deficit), and cash flows for each of the two years in the period ended
December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enova Systems, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and negative cash flows from operations. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As described in Note 2 to the financial statements, the Company has made certain
corrections related to the previously filed December 31, 2004 footnotes to the
financial statements.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 10, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Enova Systems, Inc.
We have audited the statements of operations, stockholders' equity, and cash
flows of Enova Systems, Inc., for the year ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Enova Systems, Inc.'s, operations and cash
flows for the year ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ MOSS ADAMS LLP
Santa Rosa, California
February 24, 2003
2
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
2004 2003
--------------- ---------------
Current assets
Cash and cash equivalents $ 1,575,000 $ 530,000
Accounts receivable 522,000 803,000
Inventories and supplies 1,036,000 1,606,000
Note receivable - related party -- 8,000
Prepaid expenses and other current assets 304,000 78,000
--------------- ---------------
Total Current Assets 3,437,000 3,025,000
Property and equipment, net 387,000 481,000
Equity method investment 1,768,000 960,000
Other assets 296,000 404,000
--------------- ---------------
Total assets $ 5,888,000 $ 4,870,000
=============== ===============
The accompanying notes are an integral part of these financial statements
3
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2004 2003
--------------- ---------------
Current liabilities
Accounts payable $ 66,000 $ 768,000
Deferred revenues 392,000 --
Line of credit 229,000 120,000
Accrued payroll and related expense 194,000 120,000
Other accrued expenses 13,000 98,000
Current portion of notes payable 166,000 131,000
Current portion of capital lease obligations 6,000 23,000
--------------- ---------------
Total current liabilities 1,066,000 1,260,000
Accrued interest payable 1,378,000 1,122,000
Capital lease obligations, net of current portion -- 5,000
Notes payable, net of current portion 3,341,000 3,347,000
--------------- ---------------
Total liabilities $ 5,785,000 $ 5,734,000
--------------- ---------------
Commitments and contingencies
The accompanying notes are an integral part of these financial statements
4
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (continued)
2004 2003
--------------- ---------------
Stockholders' equity (deficit)
Series A convertible preferred stock - no par value
30,000,000 shares authorized
2,748,000 and 2,820,000 shares issued and
outstanding
Liquidating preference at $0.60 per share, aggregating
$1,648,507 and $1,692,000 $ 1,774,000 $ 1,837,000
Series B convertible preferred stock - no par value
5,000,000 shares authorized
1,217,000 and 1,217,000 shares issued and outstanding
Liquidating preference at $2 per share aggregating $2,434,000 2,434,000 2,434,000
Common Stock, no par value
500,000,000 shares authorized
415,265,000 and 378,341,000 shares issued and
outstanding 90,465,000 86,054,000
Common stock subscribed 165,000 60,000
Stock notes receivable (1,176,000) (1,203,000)
Additional paid-in capital 6,900,000 7,031,000
Accumulated deficit (100,459,000) (97,077,000)
--------------- ---------------
Total stockholders' equity (deficit) 103,000 (864,000)
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 5,888,000 $ 4,870,000
=============== ===============
The accompanying notes are an integral part of these financial statements
5
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net revenues
Research and development contracts $ 1,070,000 $ 1,889,000 $ 1,843,000
Production 1,484,000 2,421,000 2,612,000
------------- ------------- -------------
Total net revenues 2,554,000 4,310,000 4,455,000
------------- ------------- -------------
Cost of revenues
Research and development contracts 499,000 1,326,000 1,288,000
Production 1,627,000 1,978,000 2,496,000
Writedown Ford Think program inventory 113,000 -- --
------------- ------------- -------------
Total cost of revenues 2,239,000 3,304,000 3,784,000
------------- ------------- -------------
Gross profit 315,000 1,006,000 671,000
------------- ------------- -------------
Other costs and expenses
Research & development 925,000 799,000 1,152,000
Selling, general & administrative 2,325,000 2,919,000 2,837,000
Interest and financing fees, net 255,000 234,000 199,000
Equity in losses of equity method investee 192,000 40,000 --
Asset impairment -- 200,000 --
Legal settlements -- -- 81,000
------------- ------------- -------------
Total other costs and expenses 3,697,000 4,192,000 4,269,000
------------- ------------- -------------
Net loss $ (3,382,000) $ (3,186,000) $ (3,598,000)
============= ============= =============
Basic loss and diluted loss per share $ (0.01) $ (0.01) $ (0.01)
============= ============= =============
Weighted-average number of
shares outstanding 397,435,175 334,839,700 326,390,422
============= ============= =============
The accompanying notes are an integral part of these financial statements
6
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock
---------------------------------------------------------
Series A Series B Common Stock
------------------------- ------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- ---------- ----------- -----------
Balance, December 31,
2000 2,844,00 $1,867,000 1,217,00 $2,434,000 244,249,000 $75,680,000
Issuance of common
stock for
Exercise of warrants -- -- -- -- 50,000,000 3,000,000
Exercise of options -- -- -- -- 1,805,000 181,000
Services -- -- -- -- 448,000 98,000
Legal settlement -- -- -- -- 6,000,000 900,000
Warrants issued for
value participation
agreement -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ---------- -------- ---------- ----------- -----------
Balance, December 31,
2001 2,844,000 1,867,000 1,217,000 2,434,000 302,502,000 79,859,000
Conversion of Series
A preferred stock (20,000) (25,000) -- -- 20,000 25,000
Issuance of common
stock for
Cash, net of offering
costs of $206,000 -- -- -- -- 41,100,000 3,904,000
Exercise of options -- -- -- -- 30,000 3,000
Services -- -- -- -- 1,242,000 190,000
Legal settlement -- -- -- -- 300,000 45,000
Stock notes receivable -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ---------- -------- ---------- ----------- -----------
Common Stock
Subscribed Stock Additional
-------------------------- Notes Paid-In Accumulated
Shares Amount Receivable Capital Deficit Total
--------- --------- ------------ ----------- ------------- ---------
Balance, December 31,
2000 45,000 $13,000 $ (1,149,000) $6,372,000 $ (86,865,000) $ (1,648,000)
Issuance of common
stock for
Exercise of warrants -- -- -- -- -- 3,000,000
Exercise of options -- -- (59,000) -- -- 122,000
Services 955,000 147,000 -- -- -- 245,000
Legal settlement -- -- -- -- -- 900,000
Warrants issued for
value participation
agreement -- -- -- 577,000 -- 577,000
Net loss -- -- -- -- (3,428,000) (3,428,000)
--------- --------- ------------ ----------- ------------- ---------
Balance, December 31,
2001 1,000,000 160,000 (1,208,000) 6,949,000 (90,293,000) (232,000)
Conversion of Series
A preferred stock -- -- -- -- -- --
Issuance of common
stock for
Cash, net of offering
costs of $206,000 1,000,000 100,000 -- -- -- 4,004,000
Exercise of options -- -- -- -- -- 3,000
Services (628,000) (130,000) -- -- -- 60,000
Legal settlement -- -- -- -- -- 45,000
Stock notes receivable -- -- 5,000 -- -- 5,000
Net loss -- -- -- -- (3,598,000) (3,598,000)
--------- --------- ------------ ----------- ------------- ---------
The accompanying notes are an integral part of these financial statements
7
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock
---------------------------------------------------------
Series A Series B Common Stock
------------------------- ------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- ---------- ----------- -----------
Balance, December 31,
2002 2,824,000 $ 1,842,000 1,217,000 $ 2,434,000 345,194,000 $84,026,000
Conversion of Series
A preferred stock (4,000) (5,000) -- -- 4,000 5,000
Issuance of common
stock for
Cash 23,077,000 1,500,000
Issuance of subscribed
common stock -- -- -- -- 1,000,000 100,000
Exercise of options -- -- -- -- 8,694,000 389,000
Stock option -- -- -- -- -- --
Services 372,000 34,000
Net loss -- -- -- -- -- --
-------- ---------- -------- ---------- ----------- -----------
Balance, December 31,
2003 2,820,000 $ 1,837,000 1,217,000 $ 2,434,000 378,341,000 $86,054,000
==== ========= =========== ========= =========== =========== ===========
Conversion of Series
A preferred stock (73,000) (63,000) -- -- 73,000 63,000
Issuance of common
stock for
Cash -- -- -- -- 27,585,000 3,450,000
Issuance of subscribed
common stock -- -- -- -- 367,000 60,000
Exercise of options -- -- -- -- 8,464,000 783,000
Stock option conversions -- -- -- -- 321,000 39,000
Services -- -- -- -- 114,000 16,000
Net loss -- -- -- -- -- --
-------- ---------- -------- ---------- ----------- -----------
Balance, December 31,
2004 2,747,000 $ 1,774,000 1,217,000 $ 2,434,000 415,265,000 $90,465,000
========= =========== ========= =========== =========== ===========
Common Stock
Subscribed Stock Additional
-------------------------- Notes Paid-In Accumulated
Shares Amount Receivable Capital Deficit Total
--------- --------- ------------ ----------- ------------- ---------
Balance, December 31,
2002 1,372,000 $ 130,000 $ (1,203,000) $ 6,949,000 $(93,891,000) $ 287,000
Conversion of Series
A preferred stock -- -- -- -- -- --
Issuance of common
stock for
Cash -- -- -- -- -- 1,500,000
Issuance of subscribed
common stock (1,000,000) (100,000) -- -- -- --
Exercise of options -- -- -- -- -- 389,000
Stock option -- -- -- 82,000 -- 82,000
Services 754,000 30,000 -- -- -- 64,000
Net loss -- -- -- -- (3,186,000) (3,186,000)
--------- --------- ------------ ----------- ------------- ---------
Balance, December 31,
2003 1,126,000 $ 60,000 $ (1,203,000) $ 7,031,000 $(97,077,000) $ (864,000)
Conversion of Series
A preferred stock -- -- -- -- -- --
Issuance of common
stock for
Cash -- -- 27,000 -- -- 3,477,000
Issuance of subscribed
common stock (1,126,000) (60,000) -- -- -- --
Exercise of options -- -- -- -- -- 783,000
Stock option conversions -- -- -- (39,000) -- --
Services 1,196,000 165,000 -- (92,000) -- 89,000
Net loss -- -- -- -- (3,382,000) (3,382,000)
--------- --------- ------------ ----------- ------------- ---------
Balance, December 31,
2004 1,196,000 $ 165,000 $ (1,176,000) $ 6,900,000 $(100,459,000) $ 103,000
========= ========= ============ =========== ============= =========
The accompanying notes are an integral part of these financial statements
8
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Cash flows from operating activities
Net loss $ (3,382,000) $ (3,186,000) $ (3,598,000)
Adjustments to reconcile net loss
to net cash used by operating activities
Depreciation and amortization 376,000 351,000 134,000
Provision for asset impairment -- 200,000 --
Equity in losses 192,000 40,000 --
Issuance of common stock for services 89,000 34,000 60,000
Issuance of common stock for
legal settlement -- -- 45,000
(Increase) decrease in
Accounts receivable 281,000 457,000 (19,000)
Inventory and supplies 570,000 48,000 (727,000)
Note receivable - related party 8,000 24,000 25,000
Prepaid expenses and other current assets (226,000) 29,000 (20,000)
Other assets -- (14,000) 76,000
Increase (decrease) in
Accounts payable (702,000) (424,000) 1,025,000
Accrued expenses (11,000) (112,000) 87,000
Deferred revenues 392,000 -- --
Accrued interest payable 256,000 234,000 212,000
--------------- --------------- ---------------
Net cash used by operating activities (2,157,000) (2,319,000) (2,700,000)
--------------- --------------- ---------------
Cash flows from investing activities
Purchases of property and equipment $ (174,000) $ (113,000) $ (613,000)
--------------- --------------- ---------------
Net cash used in investing activities (174,000) (113,000) (613,000)
--------------- --------------- ---------------
Cash flows from financing activities
Net increase from line of credit $ 109,000 $ 106,000 $ 14,000
Payment on notes payable and
capital lease obligations (33,000) (1,000) (24,000)
Proceeds from notes payable 40,000 -- --
Proceeds from sales of common stock 2,450,000 600,000 4,210,000
Offering costs -- -- (206,000)
Proceeds from exercise of stock options 783,000 389,000 3,000
Payments on stock notes receivable 27,000 -- 5,000
--------------- --------------- ---------------
Net cash provided by financing activities 3,376,000 1,094,000 4,002,000
--------------- --------------- ---------------
Net increase (decrease) in cash and 1,045,000 (1,338,000) 689,000
cash equivalents
Cash and cash equivalents,
beginning of year 530,000 1,868,000 1,179,000
--------------- --------------- ---------------
Cash and cash equivalents,
end of year $ 1,575,000 $ 530,000 $ 1,868,000
=============== =============== ===============
The accompanying notes are an integral part of these financial statements
9
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Supplemental disclosure of cash
flow information
Interest paid $ 10,000 $ 9,000 $ 8,000
=============== =============== ===============
Income taxes paid $ -- $ -- $ --
=============== =============== ===============
Supplemental schedule of non- cash
investing and financing activities
Equipment acquired under capital
lease agreements $ -- $ -- $ 52,000
=============== =============== ===============
Conversion of preferred stock
to common stock $ 63,000 $ (5,000) $ 25,000
=============== =============== ===============
Acquired investment under
common stock purchase $ 1,000,000 $ 1,000,000 $ --
=============== =============== ===============
Offering costs on
common stock purchases $ 92,500 $ -- $ --
=============== =============== ===============
Common stock issued
for purchase of options $ 39,000 $ -- $ --
=============== =============== ===============
The accompanying notes are an integral part of these financial statements
10
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
Enova Systems, Inc. (the "Company") is a California corporation that
develops drive trains 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 develops and sells
components in the United States and Asia, and sells components in
Europe.
Liquidity
---------
At December 31, 2004, the Company had a net working capital of
approximately $2,371,000 as compared to $1,765,000 at December 31,
2003, representing an increase of $606,000. This increase is due
primarily to capital raised during the year offset by losses from
operations. Operating and investing activities used approximately
$2,157,000 and $174,000, respectively, while financing activities
provided $3,376,000. During the year ended December 31, 2004, the
Company increased its headcount minimally to control expenses and still
maintain its competitive edge in power management systems. The
Company's business plan for 2005 provides for raising additional
capital in order to continue with the Company's operations until it
becomes profitable. The Company will also continue to search for areas
in which to further reduce expenses and increase sales.
Stock Purchase Agreement
------------------------
The Company has entered into a joint venture agreement (the Agreement)
with Hyundai Heavy Industries of Korea ("HHI") to create a joint
venture corporation, Hyundai-Enova Innovative Technology Center (the
"ITC") to be domiciled in Torrance, California. In conjunction with
this Agreement, HHI and the Company entered into a stock purchase
agreement in which HHI agreed to make a $3 million investment in the
Company through the purchase of shares of the Company's authorized and
unissued common stock pursuant to Regulation D of the Securities Act of
1933. This investment was made in two installments of $1.5 million
each. The first installment was made in June 2003 upon incorporation of
the ITC and in consideration for the issuance to HHI by the Company of
23,076,923 shares of common stock at $0.065 per share.
The second installment was made in September 2004 in consideration for
the issuance to HHI by the Company of 11,335,315 shares of common stock
at $0.1323 per share.
The Company invested $1 million of each installment into the ITC in
consideration for the issuance to the Company of a 40% equity interest
in the ITC (the balance of the installments, in the amount of $500,000
each, is to be retained by Enova). HHI acquired a 60% equity interest
in ITC by investing $3 million in the ITC in two installments of $1.5
million each, to be made concurrently with the two installment payments
to be paid by HHI for the Company's common stock. HHI and the Company
have invested an aggregate of $5 million in the ITC.
11
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Amendments to Previously Filed Financial Statements
---------------------------------------------------
The Company has amended its 2004 Form 10-K to include as the audited
financial statements of Hyundai-Enova Innovative Technology Center, a
40% owned equity method investment of the Company. Additionally, the
Company has made certain corrections to the previously filed December
31, 2004 footnotes to the financial statements in regards to
disclosures related to segment reporting, deferred taxes, and certain
other footnote disclosures for computational errors. These corrections
did not have any impact on the Company's reported financial position,
results of operations, or cash flows for the year ended December 31,
2004.
Management's Plans Related to Liquidity and Capital Needs
---------------------------------------------------------
The Company has incurred significant losses from operations. During the
year ended December 31, 2004, the Company incurred a net loss of
$3,382,000, and it had negative cash flows from operations of
$2,157,000. At December 31, 2004 the Company had an accumulated deficit
of $100,459,000. Such losses have resulted principally from research
and development costs, sales and marketing costs and general and
administrative costs associated with the development of the Company's
technologies and products and expanding its level of operations.
The Company is subject to all of the many risks inherent in growing a
new enterprise, and the development and commercialization of new
products, including changing technologies, competition from companies
offering the same or similar products, managing growth and lack of
financial resources. As with any growing enterprise, there can be no
assurance that the Company will achieve or sustain profitability or
positive cash flow from operations.
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Over the
next few years the Company expects to incur losses from operations as
it continues to develop future products and market its current
products. The Company will need to raise additional capital through
debt or equity financings or collaborative arrangements with industry
partners to continue its business operations.
The Company's ability to continue as a going concern is dependent on
its success at obtaining additional capital sufficient to meet its
obligations on a timely basis, and to ultimately attain profitability.
Management is actively engaged in seeking to raise capital through
product licensing, co-promotional arrangements, or public or private
equity financing. The Company believes it has demonstrated the ability
to raise the necessary funds for the Company's growth and development
activities. However, there is no assurance that the Company will raise
capital sufficient to enable the Company to continue its operations
through the end of the fiscal year.
In the event the Company is unable to successfully obtain additional
capital, it is unlikely that the Company will have sufficient cash
flows and liquidity to finance its business operations as currently
contemplated. Accordingly, in the event additional capital is not
obtained, the Company will likely further downsize the organization,
12
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management's Plans Related to Liquidity and Capital Needs (continued)
---------------------------------------------------------------------
defer marketing programs, reduce general and administrative expenses
and delay or reduce the scope of research and development projects
until it is able to obtain sufficient financing to do so. These factors
could significantly limit the Company's ability to continue as a going
concern. The balance sheets do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the
amounts of classification of liabilities that might be necessary should
the Company be unable to continue in existence.
Contract Services Revenue and Cost Recognition
----------------------------------------------
The Company manufactures proprietary products and other products based
on design specifications provided by its customers. Revenue from sales
of products are generally recognized at the time title to the goods and
the benefits and risks of ownership passes to the customer which is
typically when products are shipped based on the terms of the customer
purchase agreement.
Revenue relating to long-term fixed price contracts is recognized using
the percentage of completion method. Under the percentage of completion
method, contract revenues and related costs are recognized based on the
percentage that costs incurred to date bear to total estimated costs.
Changes in job performance, estimated profitability and final contract
settlements may result in revisions to cost and revenue, and are
recognized in the period in which the revisions are determined.
Contract costs include all direct materials, subcontract and labor
costs and other indirect costs. General and administrative costs are
charged to expense as incurred. At the time a loss on a contract
becomes known, the entire amount of the estimated loss is accrued.
The aggregate of costs incurred and estimated earnings recognized on
uncompleted contracts in excess of related billings is shown as a
current asset, and billings on uncompleted contracts in excess of costs
incurred and estimated earnings is shown as a current liability.
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's financial
statements since the Company did not have any changes in equity from
non-owner sources.
13
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
-------------------------
Highly liquid investments with an original maturity of three months or
less are considered cash equivalents.
Accounts Receivable
-------------------
Receivables are reported at net realizable value and are considered
past due when payments have not been received for 90 days. In general,
receivables are charged off as uncollectible upon exhausting all
avenues of collection. Receivables older than 90 days totaled $165,000
(without reserve) and $678,000 (of which $595,000 had been reserved
for) at December 31, 2004 and 2003, respectively. The Company believes
the $165,000 will be collected in its entirety in 2005 pending
resolution of various customer requests.
Allowance for Doubtful Accounts
-------------------------------
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. A considerable amount of judgment is required in assessing
the ultimate realization of accounts receivable including the current
credit-worthiness of each customer. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
As of December 31, 2004, the Company did not maintain any allowances
for doubtful accounts as all prior uncollectible balances have been
charged to bad debt expense.
Inventories and Supplies
------------------------
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, and is stated at the
lower of cost (first-in, first-out) or market. During 2004, the Company
charged off $113,000 of inventory related to a prior project with Ford
Th!nk program which was terminated in 2003. Additionally, the Company
charged-off approximately $162,000 for obsolete or slow-moving
inventory for a total of $275,000 during the year ended December 31,
2004.
Property and Equipment
----------------------
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets, which range from three to seven years. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate the sum of expected cash flows from use of the asset is less
than its carrying value. 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 joint venture (see Note 1) is accounted for by the equity
method. The audited financial statements for the Hyundai-Enova
Innovative Technology Center, Inc. are attached following these Notes
to the Financial Statements.
14
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses, approximate fair value due to the short maturity of these
instruments. The carrying value of all other financial instruments is
representative of their fair values. The Company's short and long term
debt may be substantially less than the carrying value since there is
no readily ascertainable market for the debt given the financial
position of the Company.
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. Summary of Statement
SFAS No. 148 "Accounting for Stock-Based Compensation--Transition and
Disclosure" amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company has elected to use the intrinsic value based method and has
disclosed the pro forma effect of using the fair value based method to
account for its stock-based compensation. The Company has adopted only
the disclosure provisions of SFAS No. 123. It applies APB Opinion No.
25 and related interpretations in accounting for its plans and does not
recognize compensation expense for its stock-based compensation plans
other than for restricted stock and options issued to outside third
parties.
For purposes of adjusted pro forma disclosures, the estimated fair
value of the options is amortized to expense over the vesting period.
15
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (continued)
------------------------------------
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under this plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net loss
and loss per share would be reduced to the pro forma amounts indicated
below for the years ended December 31, 2004, 2003, and 2002:
2004 2003 2002
----------- ----------- -----------
Loss applicable to common stockholders $(3,382,000) $(3,186,000) $(3,598,000)
Stock-based employee compensation
expense determined under fair value
presentation for all options (76,000) (315,000) (197,000)
Pro forma net loss $(3,458,000) $(3,501,000) $(3,795,000)
Basic and diluted loss per
common share
As reported $ (0.01) $ (0.01) $ (0.01)
Pro forma $ (0.01) $ (0.01) $ (0.01)
For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and
directors is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the years ended
December 31, 2004, 2003, and 2002: dividend yields of 0%, 0%, and 0%,
respectively; expected volatility of 73%, 88%, and 83%, respectively;
risk-free interest rates of 4%, 4%, and 4%, respectively; and expected
lives of one, three, and five years, respectively. The weighted-average
fair value of options granted during the year ended December 31, 2004
for which the exercise price equals the market price on the grant date
was $0, and the weighted-average exercise price was $0.115.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
Advertising Expense
-------------------
The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the years
ended December 31, 2004, 2003, and 2002 was $12,000, $21,000, and
$20,000, respectively.
16
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
------------------------
Costs of researching and developing new technology or significantly
altering existing technology is expensed as incurred.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for 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 SFAS No. 128, "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.
Estimates
---------
The preparation of financial statements 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.
Concentrations 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. At times, such cash
and cash equivalents may be in excess of the Federal Deposit Insurance
Corporation insurance limit of $100,000. 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.
17
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Major Customers
---------------
During the year ended December 31, 2004, the Company conducted business
with five customers whose sales comprised 16%, 13%, 10%, 9% and 8% of
total revenues. As of December 31, 2004, these customers accounted for
0%, 9%, 33%, 0% and 13%, respectively, of total accounts receivable.
In addition, one of the Company's stockholders accounted for 10%, 1%,
and 16% of total revenues during the years ended December 31, 2004,
2003, and 2002, respectively. This stockholder holds less than 5% of
the total issued and outstanding common stock. Demand deposits are
placed with known, creditable financial institutions.
Recently Issued Pronouncements
------------------------------
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) under
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5
of ARB No. 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires
that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this
statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not
expect adoption of SFAS No. 151 to have a material impact, if any, on
the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
Estate Time-Sharing Transactions". The FASB issued this statement as a
result of the guidance provided in AICPA Statement of Position (SOP)
04-2, "Accounting for Real Estate Time-Sharing Transactions". SOP 04-2
applies to all real estate time-sharing transactions. Among other
items, the SOP provides guidance on the recording of credit losses and
the treatment of selling costs, but does not change the revenue
recognition guidance in SFAS No. 66, "Accounting for Sales of Real
Estate", for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS
No. 152 also amends SFAS No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects", to state that SOP 04-2
provides the relevant guidance on accounting for incidental operations
and costs related to the sale of real estate time-sharing transactions.
SFAS No. 152 is effective for years beginning after June 15, 2005, with
restatements of previously issued financial statements prohibited.
Management does not expect adoption of SFAS No. 152 to have a material
impact, if any, on the Company's financial position or results of
operations.
18
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Pronouncements (continued)
------------------------------------------
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29, "Accounting for
Nonmonetary Transactions". SFAS No. 153 eliminates certain differences
in the guidance in Opinion No. 29 as compared to the guidance contained
in standards issued by the International Accounting Standards Board.
The amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of nonmonetary assets that do not
have commercial substance. Such an exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective
for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in periods beginning after December 16, 2004.
Management does not expect adoption of SFAS No. 153 to have a material
impact, if any, on the Company's financial position or results of
operations. In December 2004, the FASB issued SFAS No. 123(R),
"Share-Based Payment". SFAS 123(R) amends SFAS No. 123, "Accounting for
Stock-Based Compensation", and APB Opinion No. 25, "Accounting for
Stock Issued to Employees". SFAS No.123(R) requires that the cost of
share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS No.
123(R) applies to all share-based payment transactions in which an
entity acquires goods or services by issuing (or offering to issue) its
shares, share options, or other equity instruments (except for those
held by an ESOP) or by incurring liabilities (1) in amounts based (even
in part) on the price of the company's shares or other equity
instruments, or (2) that require (or may require) settlement by the
issuance of a company's shares or other equity instruments. This
statement is effective (1) for public companies qualifying as SEC small
business issuers, as of the first interim period or fiscal year
beginning after December 15, 2005, or (2) for all other public
companies, as of the first interim period or fiscal year beginning
after June 15, 2005, or (3) for all nonpublic entities, as of the first
fiscal year beginning after December 15, 2005. Management is currently
assessing the impact of this statement on its financial position and
results of operations.
Fourth Quarter Adjustments
--------------------------
During the fourth quarter of fiscal 2004, the Company:
o wrote-down inventory by a net of $275,000 for obsolete and
slow-moving inventory. The Company charged off approximately
$113,000 of this reduction for inventory relating to raw
materials for the Ballard/Ford Th!nk city program which was
terminated in 2003. This was inventory specific to that program
which the Company believed may be useable in other components, or
would be purchased by third parties, but was not due to the
Company's increased focus on the heavy-duty hybrid markets. The
Company also charged off an additional $162,000 in obsolete or
19
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fourth Quarter Adjustments (continued)
--------------------------------------
slow moving inventory during 2004. This resulted in an increase
of cost of sales by $275,000 for the year.
o allocated certain expenses to cost of sales, which had been
charged to general and administrative expense, based on the
Company's improved method of apportioning such costs. This
resulted in an increase in cost of sales of approximately
$147,000 in the fourth quarter, a portion of which may have been
attributable to prior quarters in 2004 but none that the Company
believes would have a material impact on the presentation of
those quarters.
The above two adjustments (i) increased cost of sales by $422,000
in the fourth quarter, (ii) reduced gross profit by $422,000, (iii)
increased loss from operations by $275,000 and (iv) reduced net loss by
$275,000.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consisted of the
following:
2004 2003
---------- ----------
Computers $ 229,000 $ 213,000
Machinery and equipment 709,000 715,000
Furniture and office equipment 192,000 192,000
Demonstration vehicles and buses 461,000 297,000
Equipment under capital lease obligations 94,000 94,000
Leasehold improvements 68,000 68,000
---------- ----------
1,753,000 1,579,000
Less accumulated depreciation and amortization 1,366,000 1,098,000
---------- ----------
Total $ 387,000 $ 481,000
========== ==========
Depreciation and amortization expense was $376,000, $351,000, and
$134,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.
20
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 4 - EQUITY METHOD INVESTMENT
During the year ended December 31, 2004, the Company invested
$1,000,000 of the proceeds received from sale of common stock to HHI
into a joint venture formed with HHI in 2003 (see Note 1). The
Company's share of income and losses is 40% as stated in the agreement.
During the year ended December 31, 2004, the Company recorded $192,000
as its proportionate share of losses in the joint venture.
The financial statements of the ITC were audited for the year ended
December 31, 2004, the period from June 11, 2003 (Inception) to
December 31, 2003, and the period from June 11, 2003 (Inception) to
December 31, 2004 and have been included in the Company's Form 10-K/A
for the year ended December 31, 2004. The following is the condensed
financial position and results of operations of ITC (audited), as of
and for the year ended December 31, 2004 and the period from June 11,
2003 (Inception) to December 31, 2003:
Period from June 11,
Year ended 2003 (Inception) to
December 31, 2004 December 31, 2003
----------------- -----------------
Financial position
Current assets $ 4,406,000 $ 2,413,000
Property and equipment, net 13,000 12,000
Liabilities (3,000) (27,000)
----------- -----------
Equity $ 4,419,000 $ 2,425,000
=========== ===========
Operations
Expenses (481,000) (106,000)
----------- -----------
Net loss $ (481,000) $ (106,000)
=========== ===========
Company's proportionate
share of net loss $ (192,000) $ (42,000)
=========== ===========
NOTE 5 - OTHER ASSETS
During the year ended December 31, 2002, the Company incurred legal
costs of $78,000 associated with two patents. These patents have been
capitalized and are being amortized over their estimated useful lives.
In June 2001, a strategic relationship with Ford Motor Company was
entered into to develop and manufacture a high power, high voltage
conversion module for Ford's fuel cell vehicle. Warrants were issued to
Ford Motor Company in exchange for Ford's commitment to enter into a
five-year agreement. The issuance of the warrants was recorded as a
non-current asset (Value Participation Agreement) at its fair market
21
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 5 - OTHER ASSETS (continued)
value of $577,000, which was determined using the Black-Scholes option
pricing model, and is being amortized on a straight-line basis over the
life of the contract.
2004 2003
-------- --------
Patents $ 92,000 $ 92,000
Valuation Participation Agreement 577,000 577,000
-------- --------
669,000 669,000
Less accumulated amortization 373,000 265,000
-------- --------
Total $296,000 $404,000
======== ========
NOTE 6 - LINE OF CREDIT
The Company has available $250,000 revolving line of credit from a bank
with interest payable monthly at 3.25%. The line of credit is secured
by $250,000 Certificate of Deposit and its maturity has been extended
until April 2005.
NOTE 7- DEFERRED REVENUES - Tomoe LTA Long-Term Contract
The Company has entered into a development and production contract with
Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. for eight
battery-electric locomotives for the Singapore Land Transport Authority
for service vehicles for the Singapore Mass Rapid Transit Circle Line
system for maintenance, repair, shunting and recovery of passenger
trains. The contract commenced in August 2004 and completion of the
contract will take approximately 15-18 months and is valued at
approximately $3,100,000. The Company is recording revenues for this
long-term, fixed price contract on the basis of the
percentage-of-completion method. The contract contains several
deliverables over its life and therefore the Company will divide these
deliverables into separate units of accounting based on relative fair
values. Revenue recognition criteria will be assessed separately for each
separate unit of accounting. As of December 31, 2004, the Company
recorded revenues of $68,000 related to the development portion of this
contract.
22
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 8- NOTES PAYABLE
Notes payable at December 31, consisted of the following:
2004 2003
--------------- ----------------
Secured note payable to Credit Managers Association
of California, bearing interest at 6% per annum during
2003 and at prime plus 3% per annum in 2004 and through
maturity. Principal and unpaid interest due in April
2016. A sinking fund escrow is required to be funded
with 10% of future equity financing,
as defined in the agreement. $ 3,332,000 $ 3,332,000
Unsecured note payable, bearing interest at 10%
per annum. This note payable is in default. 120,000 120,000
Secured note payable to a Coca Cola Enterprises
in the original amount of $40,000, bearing
interest at 5% per annum. Principal and
unpaid interest due in July 2005. 40,000 --
Secured note payable to a financial institution in the
original amount of $33,000, bearing interest at 8% per
annum, payable in 36 equal monthly installments. 15,000 26,000
--------------- ----------------
3,507,000 3,478,000
Less current portion 166,000 131,000
--------------- ----------------
Long-term portion $ 3,341,000 $ 3,347,000
=============== ================
Future minimum principal payments of notes payable at December 31, 2004
consisted of the following:
Year Ending
December 31,
------------
2005 $ 166,000
2006 9,000
2007 --
2008 --
2009 --
Thereafter 3,332,000
---------------
Total $ 3,507,000
===============
23
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 9- COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases its facilities under an operating lease agreement,
which requires monthly payments of $13,250 and expires in February
2008. At March 2005, the monthly payments will increase to $13,700 per
the terms of the lease agreement. In addition, the Company rents
manufacturing and office equipment under various capital lease
agreements.
Future minimum lease payments under these non-cancelable operating and
capital lease obligations at December 31, 2004 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ -------- --------
2005 $164,000 $ 6,000
2006 155,000 --
2007 166,000 --
2008 28,000 --
-------- --------
$513,000 6,000
========
Less amount representing interest --
--------
Less current portion 6,000
--------
Long-term portion $ --
========
Rent expense was $140,000, $150,000, and $206,000 for the years ended
December 31, 2004, 2003, and 2002, respectively.
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
------------
During the year ended December 31, 2004, the Company issued 27,585,000
shares of common stock for cash totaling $3,450,000. In addition, the
Company issued 481,000 shares of common stock to directors as
compensation totaling $47,000.
Common Stock Subscribed
-----------------------
At December 31, 2004, the Company was committed to issue 1,196,000
shares of common stock totaling $165,000 as compensation and as
finder's fees to its directors.
In the prior year, the Company incorrectly reported the number of
subscribed common stock. The actual shares subscribed as of December
31, 2003 totaling 367,000 shares differed from the previously reported
number of shares by 760,000 shares, totaling $29,000. The effect of
this error was not material to the reported results. This difference
has been corrected in the current year's financial statements.
24
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Series A Preferred Stock
------------------------
Series A preferred stock is currently unregistered and convertible into
common stock on a one-to-one basis 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.
Substantially all of the stock notes receivable stem from a Board of
Directors plan for the sale of shares of Series A preferred stock in
1993 to certain officers and directors (Participants). In general, the
Participants could purchase the preferred stock for a combination of
cash, promissory notes payable to the Company, and conversion of debt
and deferred compensation due to the Participants. All shares issued
under this plan were pledged to the Company as security for the notes.
The notes provided for interest at 8% per annum payable annually, with
the full principal amount and any unpaid interest due on January 31,
1997. The notes remain outstanding. The likelihood of collecting the
interest on these notes is remote; therefore, accrued interest has not
been recorded since the fiscal year ended July 31, 1997.
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 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.
25
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Stock Options and Warrants
--------------------------
During the year ended December 31, 2004, the Company issued 8,464,000
shares of common stock from the exercise of options by certain
employees in exchange for cash totaling $783,000.
During 2004, the stockholders of the Company approved an increase of
20,000,000 shares for the 1996 Stock Option Plan for incentive and
non-statutory stock options during the period of the Plan, which
expires in 2006. The Plan now reserves 65,000,000 shares under the
plan. Options under the 1996 Plan expire over a period not to exceed
ten years. The following summarizes common stock option activity:
1996 Plan 1993 Plan Other
---------------------------- ----------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------- -------------- ------------- ------------- --------------
Outstanding,
December
31, 2001 20,866,000 $ 0.10 9,654,000 $ 0.52 1,495,000 $ 1.70
Granted 900,000 $ 0.10 -- $ -- -- $ --
Exercised -- $ -- (35,000) $ 0.10 -- $ --
Forfeited (439,000) $ 0.10 (2,565,000) $ 0.52 -- $ --
------------- -------------- -------------
Outstanding,
December
31, 2002 21,327,000 $ 0.11 7,054,000 $ 0.52 1,495,000 $ 1.70
Granted 9,998,000 $ 0.05 -- $ -- -- $ --
Exercised (8,638,000) $ 0.05 -- $ -- -- $ --
Forfeited (1,556,000) $ 0.11 (7,054,000) $ 0.52 (1,495,000) $ 1.70
------------- -------------- -------------
Outstanding,
December
31, 2003 21,131,000 $ 0.12 -- $ -- -- $ --
Granted 2,000,000 $ 0.12 -- $ -- -- $ --
Exercised (10,981,000) $ 0.10 -- $ -- -- $ --
Forfeited (4,795,000) $ 0.12 -- $ -- -- $ --
------------- -------------- -------------
Outstanding,
December
31, 2004 7,355,000 $ 0.12 -- $ -- -- $ --
============= ============== =============
Exercisable,
December
31, 2004 6,418,000 $ 0.12 -- $ -- -- $ --
============= ============== =============
The weighted-average remaining contractual life of the options
outstanding at December 31 2004 was 1.2 years. The exercise prices of
the options outstanding at December 31, 2004 ranged from $0.11 to
$0.30. Options exercisable were 6,418,000, 20,898,000, 28,304,228 at
December 31, 2004, 2003 and 2002.
26
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Stock Options and Warrants (Continued)
--------------------------------------
The agreement with Ford Motor Company (see Note 5) included issuing
warrants to Ford to purchase 4.6% of the fully diluted common stock of
the Company over a 66 month period. The number of shares to be acquired
will be adjusted from time to time for increases in the Company's fully
diluted common stock. The vesting of these warrants is dependent upon
Ford meeting specific purchase requirements.
The fair value of warrants granted were estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 102%,
risk-free interest rate of 4.76% and an expected life of the warrants
of 66 months. Warrants issued and vested under this agreement totaled
2,500,000 at an exercise price of $0.29 per share during the year ended
December 31, 2001. No warrants were vested under this program during
2004 and 2003. As of June 30, 2004, Ford is no longer eligible for
further vesting of its warrants per the terms of the Value
Participation Agreement.
NOTE 11 - INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31, 2004
and 2003 consisted of the following:
2004 2003
--------------- ----------------
Deferred tax assets
Federal tax loss carry-forward $ 31,542,000 $ 31,286,000
State tax loss carry-forward 893,000 712,000
Basis difference 1,610,000 1,610,000
Other, net (96,000) 555,000
---------------- ----------------
33,949,000 34,163,000
Less valuation allowance (33,949,000) (34,163,000)
---------------- -----------------
Net deferred tax assets $ -- $ --
=============== ================
As of December 31, 2004, the Company had net operating loss carry
forwards for federal and state income tax purposes of approximately
$95,571,000 and $9,393,000, respectively. The net operating loss carry
forwards began expiring in 2003.
NOTE 12 - RELATED PARTY TRANSACTIONS
During 2004, the Company purchased approximately $246,000 in
components, materials and services from HHI. The outstanding balance
owed to HHI at December 31, 2004 was approximately $2,000.
27
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------
NOTE 12 - RELATED PARTY TRANSACTIONS (continued)
During 2004, the Company paid a total of $101,000 to two of its
directors in consulting fees.
During 2004, pursuant to a written agreement approved by the Board of
Directors and its Audit Committee, a finder's fee of $92,500 was
accrued to be paid, through the issuance of restricted shares of common
stock in Enova, totaling 608,553 shares at a price of $0.15 per share,
in conjunction with a private placement funding in the first quarter of
2004 to The Global Value Investment Portfolio Management Pte Ltd, a
Singapore Company which is substantially owned by two affiliated
parties: Anthony Rawlinson, Chairman of the Board of our Company and
Borl partnership, owned by Boris Liberman Family Trusts, which is also
affiliated with Jagen Pty Ltd., a large affiliate shareholder in Enova.
Said shares were subsequently issued in the first quarter of 2005.
NOTE 13 - 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, 2004, 2003, and 2002 the Company did not make any
contributions to the plan.
NOTE 14 - 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:
2004 2003 2002
---------------- --------------- ----------------
United States $ 1,465,000 $ 2,672,000 $ 2,478,000
Italy 30,000 213,000 1,040,000
Korea 258,000 297,000 726,000
Japan 176,000 146,000 87,000
China 256,000 - -
Malaysia - 184,000 65,000
Ireland 166,000 - 59,000
Canada - 738,000 -
England 203,000 60,000 -
---------------- --------------- ----------------
Total $ 2,554,000 $ 4,310,000 $ 4,455,000
================ =============== ================
28
SUPPLEMENTAL INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Enova Systems, Inc.
Torrance, California
Our audits were conducted in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 10, 2005
1
ENOVA SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
------------------------------------------------------------------------------------------------------------------------------------
Balance, Additions Deductions
Beginning of Charged to from Balance, End
Year Operations Reserve of Year
------------ ------------ ------------ ------------
Allowance for doubtful accounts
December 31, 2004 $ 595,000 $ -- $ 595,000 $ --
============ ============ ============ ============
December 31, 2003 $ -- $ 595,000 $ -- $ 595,000
============ ============ ============ ============
December 31, 2002 $ -- $ -- $ -- $ --
============ ============ ============ ============
Reserve for obsolete inventories
December 31, 2004 $ 80,000 $ -- $ -- $ 80,000
============ ============ ============ ============
December 31, 2003 $ 80,000 $ -- $ -- $ 80,000
============ ============ ============ ============
December 31, 2002 $ 80,000 $ -- $ -- $ 80,000
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
2
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004 AND
FOR THE PERIOD FROM JUNE 11, 2003 (INCEPTION) TO DECEMBER 31, 2003 AND
FOR THE PERIOD FROM JUNE 11, 2003 (INCEPTION) TO DECEMBER 31, 2004
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
December 31, 2004
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Hyundai-Enova Innovative Technology Center, Inc.
Torrance, California
We have audited the balance sheets of Hyundai-Enova Innovative Technology
Center, Inc. (a development stage company) as of December 31, 2004 and 2003, and
the related statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 2004, the period from June 11, 2003 (inception) to
December 31, 2003, and the period from June 11, 2003 (inception) to December 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hyundai-Enova Innovative
Technology Center, Inc. as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for the year ended December 31, 2004, the period
from June 11, 2003 (inception) to December 31, 2003, and the period from June
11, 2003 (inception) to December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 1, 2005
1
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31,
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
2004 2003
--------------- ---------------
Current assets
Cash and cash equivalents $ 4,405,623 $ 2,412,977
--------------- ---------------
Total current assets 4,405,623 2,412,977
Property and equipment, net 13,718 12,178
--------------- ---------------
Total assets $ 4,419,341 $ 2,425,155
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 162 $ 26,074
Credit cards payable 1,280 670
Accrued payroll and related expenses 1,342 --
--------------- ---------------
Total current liabilities 2,784 26,744
--------------- ---------------
Commitments and contingencies
Stockholders' equity
Common Stock, no par value
5,000,000 shares authorized
5,000,000 and 2,500,000 shares issued and
outstanding, respectively 5,000,000 2,500,000
Deficit accumulated during the development stage (583,443) (101,589)
--------------- ---------------
Total stockholders' equity 4,416,557 2,398,411
--------------- ---------------
Total liabilities and stockholders' equity $ 4,419,341 $ 2,425,155
=============== ===============
The accompanying notes are an integral part of these financial statements.
2
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2004 and
For the Period from June 11, 2003 (Inception) to December 31, 2003 and
For the Period from June 11, 2003 (Inception) to December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Period From Period From
For the Year June 11, 2003 June 11, 2003
Ended (Inception) to (Inception) to
December 31, December 31, December 31,
2004 2003 2004
----------------------------------------------------------------------
Operating expenses
Research & development $ 32,796 $ 8,598 $ 41,394
Selling, general & administrative 501,676 97,154 598,830
------------------- --------------------- ---------------------
Total operating expenses 534,472 105,752 640,224
------------------- --------------------- ---------------------
Loss from operations 534,472 105,752 640,224
------------------- --------------------- ---------------------
Other income
Interest income (52,618) (4,163) (56,781)
------------------- --------------------- ---------------------
Total other income (52,618) (4,163) (56,781)
------------------- --------------------- ---------------------
Net loss $ (481,854) $ (101,589) $ (583,443)
=================== ===================== =====================
Basic and diluted loss per share $ (0.17) $ (0.07) $ (0.25)
=================== ===================== =====================
Basic and diluted weighted-average
number of shares outstanding 2,916,667 1,428,571 2,368,421
=================== ===================== =====================
The accompanying notes are an integral part of these financial statements.
3
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 2004 and
For the Period from June 11, 2003 (Inception) to December 31, 2003 and
For the Period from June 11, 2003 (Inception) to December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Common Stock During the
---------------------------------------- Development
Shares Amount Stage Total
---------------- ---------------- ------------------ ----------------
Balance, June 11, 2003
(Inception) -- $ -- $ -- $ --
---------------- ---------------- ------------------ ----------------
Issuance of common
stock for cash 2,500,000 2,500,000 -- 2,500,000
Net loss -- -- (101,589) (101,589)
---------------- ---------------- ------------------ ----------------
Balance, December 31,
2003 2,500,000 $ 2,500,000 $ (101,589) $ 2,398,411
================ ================ ================== ================
Issuance of common
stock for cash 2,500,000 2,500,000 -- 2,500,000
Net loss -- -- (481,854) (481,854)
---------------- ---------------- ------------------ ----------------
Balance, December 31,
2004 5,000,000 $ 5,000,000 $ (583,443) $ 4,416,557
================ ================ ================== ================
The accompanying notes are an integral part of these financial statements.
4
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2004 and
For the Period from June 11, 2003 (Inception) to December 31, 2003 and
For the Period from June 11, 2003 (Inception) to December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
For the Period For the Period
from June 11, from June 11,
For the Year 2003 2003
Ended (Inception) to (Inception) to
December 31, December 31, December 31,
2004 2003 2004
--------------- --------------- ---------------
Cash flows from operating activities
Net loss $ (481,854) $ (101,589) $ (583,443)
Adjustments to reconcile net loss
to net cash used by operating activities
Depreciation and amortization 4,111 -- 4,111
Increase (decrease) in
Accounts payable (25,912) 26,074 162
Accrued expenses 1,952 670 2,622
--------------- --------------- ---------------
Net cash used by operating activities (501,703) (74,845) (576,548)
--------------- --------------- ---------------
Cash flows from investing activities
Purchases of property and equipment (5,651) (12,178) (17,829)
--------------- --------------- ---------------
Net cash used in investing activities (5,651) (12,178) (17,829)
--------------- --------------- ---------------
Cash flows from financing activities
Proceeds from sales of common stock 2,500,000 2,500,000 5,000,000
--------------- --------------- ---------------
Net cash provided by financing activities 2,500,000 2,500,000 5,000,000
--------------- --------------- ---------------
Net increase (decrease) in cash and 1,992,646 2,412,977 4,405,623
cash equivalents
Cash and cash equivalents,
beginning of year 2,412,977 -- --
--------------- --------------- ---------------
Cash and cash equivalents,
end of year $ 4,405,623 $ 2,412,977 $ 4,405,623
=============== =============== ===============
Supplemental disclosure of cash
flow information
Interest paid $ -- $ -- $ --
=============== =============== ===============
Income taxes paid $ -- $ -- $ --
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
5
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
Hyundai-Enova Innovative Technology Center, Inc. (the "Company") is a
development stage, California corporation that develops technologies
and 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. The Company
develops technologies primarily for its two shareholders, Hyundai Heavy
Industries Co., Ltd. and Enova Systems, Inc. For the years ended
December 31, 2004 and 2003, the Company did not have any revenues.
Liquidity
---------
At December 31, 2004, the Company had a net working capital of
$4,402,839 as compared to $2,386,233 at December 31, 2003, representing
an increase of $2,016,606. This increase is due primarily to capital
raised during the year ended December 31, 2004 offset by losses from
operations. Operating and investing activities used $501,703 and
$5,651, respectively, while financing activities provided $2,500,000
for the year ended December 31, 2004.
During the year ended December 31, 2004, the Company increased its
headcount to five employees as it commenced development on new programs
in power management systems.
Management's Plans Related to Liquidity and Capital Needs
---------------------------------------------------------
The Company has incurred losses from operations since inception. During
the year ended December 31, 2004, the Company incurred a net loss of
$481,854, and it had negative cash flows from operations of $501,703.
At December 31, 2004 the Company had an accumulated deficit of
$583,443. Such losses have resulted principally from research and
development costs, sales and marketing costs, and general and
administrative costs associated with the development of the Company's
technologies and products and expanding its level of operations.
The Company is subject to all of the many risks inherent in growing a
new enterprise, and the development and commercialization of new
products, including changing technologies, competition from companies
offering the same or similar products, managing growth and lack of
financial resources. As with any growing enterprise, there can be no
assurance that the Company will achieve or sustain profitability or
positive cash flow from operations.
6
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Enterprise
----------------------------
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
all of its present efforts to its formation and to fundraising, and its
planned principal operations have not yet commenced. All losses
accumulated since inception have been considered as part of the
Company's development stage activities.
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's financial
statements since the Company did not have any items of comprehensive
income in any period presented.
Cash and Cash Equivalents
-------------------------
Highly liquid investments with an original maturity of three months or
less are considered cash equivalents.
Property and Equipment
----------------------
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets, which range from three to seven years. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate the sum of expected cash flows from use of the asset is less
than its carrying value. 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.
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of financial instruments, including cash and cash
equivalents, accounts payable and accrued expenses, approximate fair
value due to the short maturity of these instruments. The carrying
value of all other financial instruments is representative of their
fair values.
Research and Development
------------------------
Costs of researching and developing new technology or significantly
altering existing technology are expensed as incurred.
7
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for 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 SFAS No. 128, "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 does not have common share
equivalents.
Estimates
---------
The preparation of financial statements 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.
Concentrations of Credit Risk
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents. The
Company places its cash and cash equivalents with high credit, quality
financial institutions. At times, such cash and cash equivalents may be
in excess of the Federal Deposit Insurance Corporation insurance limit
of $100,000. 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.
8
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Pronouncements
------------------------------
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) under
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5
of ARB No. 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires
that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this
statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not
expect adoption of SFAS No. 151 to have a material impact, if any, on
the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
Estate Time-Sharing Transactions". The FASB issued this statement as a
result of the guidance provided in AICPA Statement of Position (SOP)
04-2, "Accounting for Real Estate Time-Sharing Transactions". SOP 04-2
applies to all real estate time-sharing transactions. Among other
items, the SOP provides guidance on the recording of credit losses and
the treatment of selling costs, but does not change the revenue
recognition guidance in SFAS No. 66, "Accounting for Sales of Real
Estate", for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS
No. 152 also amends SFAS No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects", to state that SOP 04-2
provides the relevant guidance on accounting for incidental operations
and costs related to the sale of real estate time-sharing transactions.
SFAS No. 152 is effective for years beginning after June 15, 2005, with
restatements of previously issued financial statements prohibited.
Management does not expect adoption of SFAS No. 152 to have a material
impact, if any, on the Company's financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29, "Accounting for
Nonmonetary Transactions". SFAS No. 153 eliminates certain differences
in the guidance in Opinion No. 29 as compared to the guidance contained
in standards issued by the International Accounting Standards Board.
The amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of nonmonetary assets that do not
have commercial substance. Such an exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective
for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in periods beginning after December 16, 2004.
Management does not expect adoption of SFAS No. 153 to have a material
impact, if any, on the Company's financial position or results of
operations.
9
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Pronouncements (continued)
------------------------------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No.123(R) requires that the cost of share-based
payment transactions (including those with employees and non-employees)
be recognized in the financial statements. SFAS No. 123(R) applies to
all share-based payment transactions in which an entity acquires goods
or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP)
or by incurring liabilities (1) in amounts based (even in part) on the
price of the company's shares or other equity instruments, or (2) that
require (or may require) settlement by the issuance of a company's
shares or other equity instruments. This statement is effective (1) for
public companies qualifying as SEC small business issuers, as of the
first interim period or fiscal year beginning after December 15, 2005,
or (2) for all other public companies, as of the first interim period
or fiscal year beginning after June 15, 2005, or (3) for all nonpublic
entities, as of the first fiscal year beginning after December 15,
2005. Management is currently assessing the impact of this statement on
its financial position and results of operations.
In May 2005, the FASB issued Statement of Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections" an amendment to
Accounting Principles Bulletin (APB) Opinion No. 20, "Accounting
Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements" though SFAS No. 154 carries forward the guidance
in APB No. 20 and SFAS No. 3 with respect to accounting for changes in
estimates, changes in reporting entity, and the correction of errors.
SFAS No. 154 establishes new standards on accounting for changes in
accounting principles, whereby all such changes must be accounted for
by retrospective application to the financial statements of prior
periods unless it is impracticable to do so. SFAS No. 154 is effective
for accounting changes and error corrections made in fiscal years
beginning after December 15, 2005, with early adoption permitted for
changes and corrections made in years beginning after May 2005. The
adoption of this interpretation did not have any impact on our
financial statements
10
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consisted of the
following:
2004 2003
--------------- ----------------
Computers $ 15,087 $ 11,190
Tooling 1,405 517
Furniture and office equipment 1,337 471
--------------- ----------------
17,829 12,178
Less accumulated depreciation and amortization 4,111 --
--------------- ----------------
Total $ 13,718 $ 12,178
=============== ================
Depreciation and amortization expense was $4,111, $0 and $4,111 for the
year ended December 31, 2004, the period from June 11, 2003 (inception)
to December 31, 2003, and the period from June 11, 2003 (inception) to
December 31, 2004, respectively.
NOTE 4 - STOCKHOLDERS' EQUITY
Common Stock
------------
During the year ended December 31, 2004, the Company issued 2,500,000
shares of common stock for cash totaling $2,500,000. During the period
from June 18, 2003 (inception) to December 31, 2003, the Company also
issued 2,500,000 shares of common stock for cash totaling $2,500,000.
11
HYUNDAI-ENOVA INNOVATIVE TECHNOLOGY CENTER, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 5 - INCOME TAXES
Significant components of the Company's deferred tax assets for federal
and state income taxes as of December 31, 2004 and 2003 consisted of
the following:
2004 2003
--------------- ----------------
Deferred tax assets
Federal tax loss carry-forward $ 482,000 $ 102,000
State tax loss carry-forward 482,000 51,000
--------------- ----------------
964,000 153,000
Less valuation allowance 964,000 153,000
--------------- ----------------
Net deferred tax assets $ -- $ --
=============== ================
As of December 31, 2004, the Company had net operating loss carry
forwards for federal and state income tax purposes of approximately
$584,000 and $533,000, respectively. During the period from June 11,
2003 (inception) to December 31, 2003, the Company had net operating
loss carry forwards for federal and state income tax purposes of
approximately $102,000 and $51,000, respectively. The net operating
loss carry forwards begin expiring in 2024.
NOTE 6 - RELATED PARTY TRANSACTIONS
During 2004, the Company purchased $85,420 in services from and paid
rent expense of $6,577 to Enova Systems, Inc. During the period from
June 11, 2003 (inception) to December 31, 2003, the Company purchased
$36,945 in services from and paid rent expense of $1,210 to Enova
Systems, Inc. During the period from June 11, 2003 (inception) to
December 31, 2004, the Company purchased $122,365 in services from and
paid rent expense of $7,787 to Enova Systems, Inc. The outstanding
balances owed to Enova Systems, Inc. at December 31, 2004 and December
31, 2003 were $0.
12