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| ENA > SEC Filings for ENA > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
The Company's primary market focus centers on both series and parallel
heavy-duty drive systems for multiple vehicle and marine applications. A series
hybrid system is one where only the electric motor connects to the drive shaft;
a parallel hybrid system is one where both the internal combustion engine and
the electric motor are connected to the drive shaft. We believe series-hybrid
and parallel hybrid medium and heavy-duty drive system sales offer Enova the
greatest return on investment in both the short and long term. We believe the
medium and heavy-duty hybrid market's best chances of significant growth lie in
identifying and pooling the largest possible numbers of early adopters in
high-volume applications such as fleets. We will attempt to utilize our
competitive advantages, including customer alliances, to gain greater market
share. By aligning ourselves with key customers in our target markets of Europe,
Asia, and North America, we believe alliances will result in the latest
technology being implemented and customer requirements being met, with a minimal
level of additional time or expense. Additionally, our management believes that
this area will see significant growth over the next three years as our target
markets and their governments adopt greenhouse gas cutting initiatives and
increase fuel economy standards. As we penetrate more emerging market areas such
as India and Singapore, we are continually refining and optimizing both our
market strategy and our product line to maintain our leading edge in power
management and conversion systems for mobile applications.
In light of our efforts to grow market share in our target markets and
penetrate emerging ones, the Company acknowledged the principal barrier to
commercialization of our drive systems is cost. The high cost of engineering
proprietary software and hardware for our drive systems is high because
economies of production in specialized hybrid drive system component parts,
batteries, and vehicle integration have not been achieved. Therefore, the cost
of our products and engineering services are currently higher than our gasoline
and diesel competitor counterparts. Our customers monitor leading global
economic indicators and industry forecasts to manage their production schedule
requirements. As a result of our customers' current reviews on the economy and
demand forecasts, the commercialization of our drive systems has yet to be
realized and continues to prevent this maturation. We also believe maturation
into commercialization of our drive systems will result in decreases to our long
run average costs of materials and services as volume increases over time.
In January 2008, we announced a production contract with Smith Electric
Vehicles, a division of The Tanfield Group Plc. At the time, based upon the
contract, the Company expected to supply in excess of 1,000 units in 2008 and as
many as 3,000 in 2009 to Smith Electric Vehicles. In July 2008, however,
Tanfield announced that although demand for electric vehicles has remained, it
now expects lower forecast sales of electric vehicles. To date, Enova has
delivered 450 drive systems to Tanfield, consisting of 306 units in 2007 and 144
units in 2008. Due to Tanfield's realigned growth strategy, Enova now expects
fewer orders of drive systems from Tanfield in 2008 and 2009. There are no
assurances that purchase orders will be realized from Tanfield and therefore
revenues may decline in comparison to the prior fiscal 2007 year.
In February 2008, we announced a contract with Th!nk Global on the production
of 1,000 Power Control Units in 2008. In the second quarter of 2008, Enova and
Th!nk Global management convened in Torrance to discuss future pricing and other
commercial terms. Subsequently, Enova determined this product was unlikely to be
profitable under the negotiated conditions. Enova and Th!nk Global mutually
agreed to support the relocation of this business to an alternative supplier
selected by Th!nk Global. Th!nk Global has agreed to purchase certain production
rights associated with the Power Control Unit. In the third quarter of 2008, we
identified approximately $505,000 of Th!nk Global outstanding receivables and
thus recorded a respective increase to the allowance for doubtful accounts of
the aforementioned amount. We will continue to actively pursue these outstanding
receivables even though considered doubtful for collection.
In March 2008, the Company finalized its move into a 43,000 square foot
facility located at 1560 W 190th Street, Torrance (the "lease"). The Lease term
commenced on November 1, 2007, and expires on January 1, 2013. Our expansion
into a new facility was determined an essential part of our movement into a
production stage. The Company also began planning for a certification and audit
of its standards in accordance with the International Organization for
Standardization ("ISO"). We believe the receipt of an independent ISO
certification will allow the Company to supplement its existing product and
service characteristics of quality, environmental friendliness, safety,
reliability, efficiency and versatility.
In May 2008, we expanded an existing customer relationship by entering into a
long term supply agreement with IC Corporation, a division of Navistar. Pursuant
to the agreement, Navistar has agreed to purchase Post-Transmission Hybrid drive
systems equipment and services exclusively from Enova, and Enova has agreed to
supply drive systems equipment and services to Navistar. In addition, Enova has
agreed to not sell drive systems equipment and services to any other party other
than Navistar into the North American school and commercial bus market, unless
expressly authorized by Navistar. The initial term of the agreement terminates
on February 28, 2011 and may be extended for two additional terms of 12 months
upon agreement by Enova and Navistar. The agreement may be terminated by
Navistar for any reason with 120 days prior notice to Enova by Navistar. If
certain Navistar purchasing goals are not achieved by Navistar, Enova's
obligation to exclusively supply drive systems to Navistar in the North American
school and commercial bus market may be terminated. In addition, if Enova is
unable to supply Navistar's requirements pursuant to the Agreement, then
Navistar's obligation to exclusively purchase from Enova may be terminated.
Although the supply agreement provides forecasted volumes, there is no assurance
these goals will be met. The revenue we receive under the agreement will depend
upon the number of drive systems ordered.
During the second quarter, Enova management visited FAW research and
development center and FAW's affiliate electronics manufacturer in China, to
further develop the basis for a continued cooperation on hybrid transit buses,
and potentially on other FAW vehicles. Enova has developed a customized,
pre-transmission, solution for FAW. This system has been designed in parallel
with FAW's development of a new transmission package, which they hope to
aggressively market across Asia, and possibly export abroad. The "designed in"
feature of our pre-transmission hybrid system indicates that Enova will continue
to be heavily engaged with FAW in their efforts to market their hybrid
solutions.
In July 2008, we delivered a plug-in hybrid bus to Denali National Park for
use in transporting visitors. The IC Corporation bus included our unique
post-transmission parallel hybrid drive technology. We believe the utilization
of our products in environments such as National Parks further demonstrates the
diverse opportunities for our drive system. The delivery of this plug-in hybrid
bus is part of the continued worldwide sales growth of our drive system
technology for commercial and transit buses. According to results from recent
independent third-party dynamometer testing, our IC Corporation plug-in hybrid
bus is cleaner than standard diesel buses as they reduce carbon dioxide
emissions by as much as 40 percent, nitrogen oxide by up to 20 percent and
particulate matter by as much as 30 percent.
In August 2008, we were engaged to develop two different prototype transit
buses for a new UK bus manufacturer, Optare Plc (Optare). These vehicles were
delivered in the third quarter of 2008. The plug-in hybrid diesel-electric and
full-electric vehicles will use the latest lithium ion battery technology to
provide maximum vehicle range and fuel efficiency. Enova's electric and hybrid
drive system solutions include fully integrated on-board or stationary battery
charging systems. The Enova drive systems and chargers will be featured in two
new Optare transit buses which will debut at the Euro Bus Expo taking place in
Birmingham, UK in the fourth quarter of 2008.
In the second quarter of 2008, we completed the commissioning of the drive
systems in 8 maintenance locomotives for the Light Transit Authority of
Singapore, Malaysia. Enova supplied drive motors, chargers, and battery control
units to Tomoe, who, in conjunction with the Hitachi Corporation, completed the
testing and delivery of these locomotives. Enova and Tomoe will bid on
additional orders later this year. There are no assurances purchase orders will
be realized from this bidding.
In September 2008, we announced the completion of twenty (20) successful
trials of our pre-transmission hybrid drive systems in First Auto Works of China
(FAW) Hybrid "City" buses. These trials were completed on passenger routes
within the Olympic sector during the Beijing Olympics. As a result of these
trials, additional orders have been placed for our pre-transmission
hybrid-electric drive from FAW. The FAW hybrid-electric "City Bus" is a vehicle
that is built by the Wuxi division of FAW Bus & Coach. The factory is now set to
begin mass production of the new hybrid municipal transit bus which is designed
for China's increasingly popular Bus Rapid Transit (BRT) systems and traditional
inner city mass transit routes. This new model, with 10 proprietary patents,
delivers a fuel economy increase of 38% and an emissions reduction of 30%,
compared to traditional diesel buses.
In the third quarter of 2008, the Company continued to evaluate prototype
vehicles that were sent to Isuzu Motors Ltd., who had previously delivered them
to two of their largest fleet customers. Enova has provided service training for
these fleet owners, and continues to monitor the vehicles during their
evaluation. We continue to mature this relationship, as we believe it will
develop into viable business relationships.
During the third quarter of 2008, Enova, along with Hyundai Heavy Industries
(HHI), continued to evaluate their relationship to determine its future role for
both companies. Although integral to our development and financial stability in
prior years, Enova is now more established in the market as a fully functional,
self-sufficient entity. To meet the anticipated needs of our core customers, we
have developed resources to supply our products to the medium and heavy duty
truck and bus market segment.
During the third quarter of 2008, we continued to develop and produce
electric and hybrid electric drive systems and components for FAW, International
Truck and Engine (IC Corp), the US Military, Wright Bus Ltd. and Optare Plc of
the United Kingdom, and Tomoe of Japan as well as several other domestic and
international vehicle and bus manufacturers. We also were successful in
introducing our technology to companies such as Concurrent Technology
Corporation (CTC), PUES (Tokyo Research and Development), Verizon, and Navistar
(International Truck and Engine, IC Corporation).
The Company concluded that a material weakness in the Company's internal
controls over financial reporting existed as of December 31, 2007, as reported
in the Company's Annual Report on Form 10-K for the year ended December 31,
2007. The material weakness related to ineffective controls over the inventory
pricing, tracking, and reserve analysis. Throughout the nine months ended
September 30, 2008, the Company increased the number of qualified personnel with
sufficient depth, skills, and experience in the production, engineering, and
accounting departments in order to mitigate the risks of material misstatement
due to ineffective controls over inventory pricing, tracking, and reserve. On
September 30, 2008, the Company's management, including its Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company's disclosure controls and procedures, as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended. As a
result of the strengthening and enhancement of the existing controls at the
Company, the Chief Executive Officer and Chief Financial Officer have concluded
that the material weakness described above no longer exists.
Enova continues to receive recognition from both governmental and private
industry with regards to both commercial and military application of its hybrid
drive systems and fuel cell power management technologies. Although we believe
that current negotiations with various parties may result in production
contracts during 2008 and beyond, there are no assurances that such additional
agreements will be realized. Furthermore, the general economic outlook for the
latter part of our fiscal year 2008 appears to indicate the United States
(US) and the United Kingdom (UK) markets are in the midst of a recession which
is currently defined as two continuous quarters of contraction of Gross Domestic
Product (GDP). Although there is no evidence of GDP contraction in China for the
third quarter of 2008, the Chinese government reported a slowed growth of an
annual rate of 9 percent in China. The Company considers the US, the UK, and
China as key countries in our target markets of North America, Europe, and Asia.
The US Department of Commerce reported the US economy decreased at an annual
rate of 0.3 percent in the third quarter of 2008. The last GDP contraction for
the US was in the third quarter of 2001, when GDP slowed to an annual rate of
1.4 percent. The UK Office for National Statistics reported a third quarter 2008
decrease of 0.5 percent. GDP is considered by the Company to be the broadest
measure of a nation's economic health and gauge for the consumption of goods and
services.
As part of a "New Energy for America" plan, the newly elected administration
for the US government has proposed implementing a wide array of government
initiatives and potential laws which are designed to be
"environmentally-friendly." Proposals such as an increase in fuel economy
standards, placing one million plug-in electric vehicles on the road by 2015,
financing in the form of tax credits and loan guarantees to domestic auto and
parts manufacturers, establishing a national low carbon fuel standard, and
investing in an electrical infrastructure are all considered to be conducive to
an environment where our products and services may thrive. Although the Company
believes these planned initiatives will be pursued in earnest by the newly
elected US administration in contrast with the former US administration, there
are no assurances any revenues will be realized from such proposals or
initiatives.
In the United Kingdom, the Environmental Transformation Fund (ETF) was formed
by the UK government in April 2008 as an initiative to move forward the
commercialization of low carbon energy and energy efficiency technologies in the
UK and developing countries. In particular, a focus on the demonstration and
deployment phases of bringing low carbon technologies to the market. The UK
element of the ETF will total 400 million pounds sterling (approximately
US$644 million) from 2009 though 2011. Although the Company expects our
customers to benefit from the ETF, there are no assurances revenues will be
realized from such benefits.
In China, during the third quarter of 2008, the Ministry of Environmental
Protection reported the Ministry of Industry and Information Technology, the
National Development and Reform Commission and the Ministry of Science and
Technology are in the process of designing policies on alternative-fuel
vehicles, aiming for energy conversation and reduction in greenhouse gases as
announced in the First China Green Energy Automotive Development Summit of 2008.
These policies are set to go into affect by the end of 2009. In addition, the
Ministry of Environmental Protection reported "new energy vehicles" are
currently in low numbers as their costs to produce are high and incentives do
not exist for consumption. Although the Company expects our customer to benefit
from these plans, there are no assurances revenues will be realized from such
plans.
The Company believes government incentives and funding for our customers are
necessary for a more prompt transition into commercialization. Other barriers to
commercialization are high costs due to the absence of benefits from economies
of production. Our customers have also experienced a reduction in the general
availability of credit along with increases in the cost of obtaining credit.
Their use of credit is a critical part of their growth strategies, including a
key component of financing their operations.
Enova has incurred significant operating losses in the past. As of
September 30, 2008, we had an accumulated deficit of approximately
$126.0 million. We expect to incur additional operating losses until we achieve
a level of product sales sufficient to cover our operating and other expenses.
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Estimates and assumptions
include, but are not limited to, customer receivables, inventories, equity
investments, fixed asset lives, contingencies and litigation. There have been no
material changes in estimates or assumptions compared to our most recent Annual
Report for the fiscal year ended December 31, 2007.
The following represents a summary of our critical accounting policies,
defined as those policies that we believe: (a) are the most important to the
portrayal of our financial condition and results of operations and (b) involve
inherently uncertain issues which require management's most difficult,
subjective or complex judgments.
Cash and cash equivalents - Cash consists of currency held at reputable
financial institutions.
Inventory - Inventories are priced at the lower of cost or market utilizing the
first-in, first-out (FIFO) cost flow assumption. We maintain a perpetual
inventory system and continuously record the quantity on-hand and standard cost
for each product, including purchased components, subassemblies and finished
goods. We maintain the integrity of perpetual inventory records through periodic
physical counts of quantities on hand. Finished goods are reported as
inventories until the point of transfer to the customer. Generally, title
transfer is documented in the terms of sale.
Inventory reserve - We maintain an allowance against inventory for the potential
future obsolescence or excess inventory. A substantial decrease in expected
demand for our products, or decreases in our selling prices could lead to excess
or overvalued inventories and could require us to substantially increase our
allowance for excess inventory. If future customer demand or market conditions
are less favorable than our projections, additional inventory write-downs may be
required, and would be reflected in cost of revenues in the period the revision
is made.
Allowance for doubtful accounts - We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. The assessment of the ultimate realization of accounts
receivable including the current credit-worthiness of each customer is subject
to a considerable degree to the judgment of our management. If the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Stock-based Compensation - The Company calculates stock-based compensation
expense in accordance with SFAS No. 123 revised, "Share-Based Payment" ("SFAS
123 (R)"). This pronouncement requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors, including employee stock options to be based on estimated fair
values. The Company adopted SFAS 123 (R) using the modified prospective method,
which requires the application of the accounting standard as of January 1, 2006,
the beginning of the Company's 2006 fiscal year. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 ("SAB 107") related to SFAS 123 (R). The
Company applied the provisions of SAB 107 in adopting SFAS 123 (R).
Revenue recognition - The Company is required to make judgments based on
historical experience and future expectations, as to the reliability of
shipments made to its customers. These judgments are required to assess the
propriety of the recognition of revenue based on Staff Accounting Bulletin
("SAB") No. 101 and 104, "Revenue Recognition," and related guidance. The
Company makes these assessments based on the following factors: i)
customer-specific information, ii) return policies, and iii) historical
experience for issues not yet identified. Under FAS Concepts No. 5, revenues are
not recognized until earned.
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
. . .
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