##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ending March 31, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file no. 1-33001
 ENOVA SYSTEMS, INC.
 (Exact name of registrant as specified in its charter)
 California
    
    95-3056150(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 1560 West 190 th Street, Torrance, California 90501  (Address of principal executive offices, including zip code)
 (310) 527-2800  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o   
    Accelerated filer
o
    Non-accelerated filer o
    Smaller reporting company
þ(Do not check if a smaller reporting company)
 o þ




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##### 



ENOVA SYSTEMS, INC.
 INDEX
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)
3Balance Sheets as of March 31, 2008 and December 31, 2007
3Statements of Operations for the Three Months Ended March 31, 2008 and 2007
4Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007
5Notes to Financial Statements
6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
12Item 3. Quantitative and Qualitative Disclosure About Market Risk
20Item 4. Controls and Procedures
20PART II  OTHER INFORMATIONItem 1. Legal Proceedings
21Item 1A. Risk Factors
21Item 2. Unregistered Sales of Equity and Use of Proceeds
21Item 3. Defaults upon Senior Securities
21Item 4. Submission of Matters to a Vote of Security Holders
21Item 5. Other Information
21Item 6. Exhibits
21Signatures
22EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ENOVA SYSTEMS, INC.
 
 BALANCE SHEETS
(Unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,629,000
    
    
    $
    10,485,000Accounts receivable, net
    
    
    2,671,000
    
    
    
    4,256,000Inventories and supplies, net
    
    
    6,811,000
    
    
    
    3,565,000Prepaid expenses and other current assets
    
    
    739,000
    
    
    
    457,000Total current assets
    
    
    16,850,000
    
    
    
    18,763,000Property and equipment, net
    
    
    2,015,000
    
    
    
    870,000Investment in non-consolidated joint venture
    
    
    1,417,000
    
    
    
    1,470,000Intangible assets, net
    
    
    69,000
    
    
    
    70,000Total assets
    
    $
    20,351,000
    
    
    $
    21,173,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,176,000
    
    
    $
    1,877,000Deferred revenues
    
    
    102,000
    
    
    
    101,000Accrued
payroll and related expenses
    
    
    374,000
    
    
    
    680,000Other accrued expenses
    
    
    3,770,000
    
    
    
    2,063,000Current portion of notes payable
    
    
    94,000
    
    
    
    95,000Total current liabilities
    
    
    6,516,000
    
    
    
    4,816,000Accrued interest payable
    
    
    907,000
    
    
    
    874,000Notes payable, net of current portion
    
    
    1,292,000
    
    
    
    1,306,000Total liabilities
    
    
    8,715,000
    
    
    
    6,996,000Stockholders equity:Series A convertible preferred stock  no par value, 30,000,000 shares
authorized; 2,652,000 issued and outstanding; liquidating preference at
$0.60 per share as of March 31, 2008 and December 31, 2007
    
    
    1,679,000
    
    
    
    1,679,000Series B convertible preferred stock  no par value, 5,000,000 shares
authorized; 546,000 shares issued and outstanding; liquidating preference
at $2 per share as of March 31, 2008 and December 31, 2007
    
    
    1,094,000
    
    
    
    1,094,000Common Stock  no par value, 750,000,000 shares authorized; 17,162,000 and
17,156,000 shares issued and outstanding as of March 31, 2008 and December
31, 2007, respectively
    
    
    122,090,000
    
    
    
    121,970,000Common stock subscribed
    
    
    42,000
    
    
    
    30,000Stock notes receivable for the sale of preferred stock
    
    
    (1,149,000
    )
    
    
    (1,149,000
    )Additional paid-in capital
    
    
    7,322,000
    
    
    
    7,322,000Accumulated deficit
    
    
    (119,442,000
    )
    
    
    (116,769,000
    )Total stockholders equity
    
    
    11,636,000
    
    
    
    14,177,000Total liabilities and stockholders equity
    
    $
    20,351,000
    
    
    $
    21,173,000
  3




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ENOVA SYSTEMS, INC.
 
 STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Net revenuesProduction
    
    $
    2,278,000
    
    

    $
    1,543,000Total net revenues
    
    
    2,278,000
    
    
    
    1,543,000Cost of revenuesProduction
    
    
    2,388,000
    
    
    
    1,535,000Total cost of revenues
    
    
    2,388,000
    
    
    
    1,535,000Gross profit (loss)
    
    
    (110,000
    )
    
    
    8,000Operating expensesResearch and development
    
    
    737,000
    
    
    
    253,000Selling, general & administrative
    
    
    1,858,000
    
    
    
    1,018,000Total operating expenses
    
    
    2,595,000
    
    
    
    1,271,000Gross operating loss
    
    
    (2,705,000
    )
    
    
    (1,263,000
    )Other income and (expense)Interest and financing fees, net
    
    
    85,000
    
    
    
    111,000Equity in losses of non-consolidated joint venture
    
    
    (53,000
    )
    
    
    (41,000
    )Total other income, net
    
    
    32,000
    
    
    
    70,000Net loss
    
    $
    (2,673,000
    )
    
    $
    (1,193,000
    )Basic and diluted loss per share
    
    $
    (0.16
    )
    
    $
    (0.08
    )Weighted average number of shares outstanding
    
    
    17,162,000
    
    
    
    14,822,000
  4




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ENOVA SYSTEMS, INC.
 
 STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (2,673,000
    )
    
    $
    (1,193,000
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    104,000
    
    
    
    74,000Loss on asset disposal
    
    
    1,000
    
    
    
    Equity in losses of non-consolidated joint venture
    
    
    53,000
    
    
    
    41,000Issuance of common stock for director services
    
    
    42,000
    
    
    
    36,000Stock option expense
    
    
    89,000
    
    
    
    20,000(Increase) decrease in:Accounts receivable
    
    
    1,585,000
    
    
    
    (744,000
    )Inventory and supplies
    
    
    (3,245,000
    )
    
    
    (1,069,000
    )Prepaid expenses and other current assets
    
    
    (282,000
    )
    
    
    524,000Increase (decrease) in:Accounts payable
    
    
    299,000
    
    
    
    (61,000
    )Deferred revenues
    
    
    1,000
    
    
    
    9,000Accrued payroll and related expense
    
    
    (306,000
    )
    
    
    372,000Accrued expenses
    
    
    1,707,000
    
    
    
    87,000Accrued interest payable
    
    
    33,000
    
    
    
    33,000Net cash used in operating activities
    
    
    (2,592,000
    )
    
    
    (1,871,000
    )Cash flows from investing activities:Maturities of short-term investments
    
    
    
    
    
    
    5,000,000Purchases of property and equipment
    
    
    (1,250,000
    )
    
    
    (111,000
    )Net cash provided by (used) in investing activities
    
    
    (1,250,000
    )
    
    
    4,889,000Cash flows from financing activities:Payment on notes payable and capital lease obligations
    
    
    (14,000
    )
    
    
    (8,000
    )Proceeds from repayment of stock note receivable
    
    
    
    
    
    
    27,000Net cash provided by (used in) financing activities
    
    
    (14,000
    )
    
    
    19,000Net increase (decrease) in cash and cash equivalents
    
    
    (3,856,000
    )
    
    
    3,037,000Cash and cash equivalents, beginning of period
    
    
    10,485,000
    
    
    
    5,612,000Cash and cash equivalents, end of period
    
    $
    6,629,000
    
    
    $
    8,649,000
  5




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ENOVA SYSTEMS, INC.
 
 NOTES TO FINANCIAL STATEMENTS
(Unaudited)
 Three months ended March 31, 2008 and 2007
 1. Description of the Company and its Business
  2. Summary of Significant Accounting Policies
 Interim Financial Information
   Reclassifications
  Fair Value of Financial Instruments
  Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists;
    
    Delivery has occurred or services have been rendered;
    
    The fee for the arrangement is fixed or determinable; and
    
    Collectibility is reasonably assured.
 Persuasive Evidence of an Arrangement
 Delivery Has Occurred or Services Have Been Rendered
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The Fee for the Arrangement is Fixed or Determinable
 Collectibility is Reasonably Assured
       Stock Based Compensation
  Stock Based Compensation Plans
 7




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Use of Estimates
  3. Inventory
  March 31,
    
    
    December 31,2008
    
    
    2007Raw Materials
    
    $
    6,283,000
    
    
    $
    3,037,000Work In Progress
    
    
    628,000
    
    
    
    489,000Finished Goods
    
    
    
    
    
    
    139,000Reserve for Obsolescence
    
    
    (100,000
    )
    
    
    (100,000
    )Total
    
    $
    6,811,000
    
    
    $
    3,565,000
 4.
Other Accrued Expenses
 March 31,
    
    
    December 31,2008
    
    
    2007Accrued Inventory Received
    
    $
    2,239,000
    
    
    $
    429,000Accrued Professional Services
    
    
    752,000
    
    
    
    890,000Accrued Warranty
    
    
    769,000
    
    
    
    734,000Other Accrued Expenses
    
    
    10,000
    
    
    
    10,000Total
    
    $
    3,770,000
    
    
    $
    2,063,000
 5. Notes Payable, Long-Term Debt and Other Financing
  March 31,
    
    
    December 31,2008
    
    
    2007Secured note payable to Credit
Managers Association of California,
bearing interest at prime plus 3%
(8.25% at March 31, 2008) 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
    
    $
    1,238,000
    
    
    $
    1,238,000Secured note payable to a financial
institution in the original amount
of $95,000, bearing interest at
6.21%, payable in 36 equal monthly
installments of principal and
interest through October 1, 2009
    
    
    51,000
    
    
    
    59,000Secured note payable to a financial
institution in the original amount
of $35,000, bearing interest at
10.45%, payable in 30 equal monthly
installments of principal and
interest through November 1, 2009
    
    
    23,000
    
    
    
    27,000Secured note payable to a Coca Cola
Enterprises in the original amount
of $40,000, bearing interest at 10%
per annum. Principal and unpaid
interest due on demand
    
    
    40,000
    
    
    
    40,000Secured note payable to a financial
institution in the original amount
of $39,000, bearing interest at
4.99% per annum, payable in 48 equal
monthly installments of principal
and interest through September 1,
2011
    
    
    34,000
    
    
    
    37,0001,386,000
    
    
    
    1,401,000Less current portion
    
    
    (94,000
    )
    
    
    (95,000
    )Long-term portion
    
    $
    1,292,000
    
    
    $
    1,306,000
 Revolving Credit Agreement
  6. Shareholders Equity
  8




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7. Related Party Transactions
  8. Subsequent Events
    9




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9. Stock Based Compensations Plans
 Stock Option Program Description
   Quarter ended March 31, 2008
   March 31,
    
    March 31,2008
    
    2007Income from continuing operations before income taxes
    
    $
    89,000
    
    
    $
    20,000Income from continuing operations after income taxes
    
    $
    89,000
    
    
    $
    20,000Cash flows from operations
    
    $
    89,000
    
    
    $
    20,000Cash flows from financing activities
    
    $
    
    
    
    $
    Basic and Diluted EPS
    
    $
    
    
    
    $
    
 10




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Weighted AverageRemaining2006 Plan
    
    
    Weighted Average
    
    
    Contractual Term
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    in Years
    
    
    Intrinsic ValueOutstanding at December 31, 2007
    
    
    329,000
    
    
    $
    4.23
    
    
    
    5.85
    
    
    $
    85,000Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Outstanding at March 31, 2008
    
    
    329,000
    
    
    $
    4.23
    
    
    
    5.29
    
    
    $
    85,000Exercisable at March 31, 2008
    
    
    234,000
    
    
    $
    4.26
    
    
    
    5.35
    
    
    $
    55,000
  10. Supplemental Cash Flow Information
  11. Recent Accounting Pronouncements
    11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Quarterly Report on Form 10-Q contains statements indicating expectations about future
performance and other forward-looking statements that involve risks and uncertainties. We usually
use words such as may, will, should, expect, plan, anticipate, believe, estimate,
predict, future, intend, potential, or continue or the negative of these terms or similar
expressions to identify forward-looking statements. These statements appear throughout this
Quarterly Report on Form 10-Q and are statements regarding our current intent, belief or
expectation, primarily with respect to our operations and related industry developments. Examples
of these statements include, but are not limited to, statements regarding the following: our future
operating expenses, our future losses, our future expenditures for research and development and the
sufficiency of our cash resources. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Quarterly Report on Form 10-Q . Our actual
results could differ materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us and described in our Annual Report on Form 10-K for the
year ended December 31, 2007.
 12




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The following discussion and analysis should be read in conjunction with the unaudited interim
financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form
10-Q and with the financial statements and notes thereto and Managements Discussion and Analysis
of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for
the year ended December 31, 2007.
 Overview
       13




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Critical Accounting Policies
   Cash and cash equivalents 
 Inventory 
 14




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Inventory reserve 
 Allowance for doubtful accounts 
 Stock-based Compensation 
 Revenue recognition 
    15




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RESULTS OF OPERATIONS
  First Quarter of Fiscal 2008 vs. First Quarter of Fiscal 2007
 Three Months Ended
    
    
    As a % of RevenuesMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenuesProduction
    
    $
    2,278,000
    
    
    $
    1,543,000
    
    
    
    100
    %
    
    
    100
    %Total net revenues
    
    
    2,278,000
    
    
    
    1,543,000
    
    
    
    100
    %
    
    
    100
    %Cost of revenuesProduction
    
    
    2,388,000
    
    
    
    1,535,000
    
    
    
    105
    %
    
    
    99
    %Total cost of revenues
    
    
    2,388,000
    
    
    
    1,535,000
    
    
    
    105
    %
    
    
    99
    %Gross profit (loss)
    
    
    (110,000
    )
    
    
    8,000
    
    
    
    -5
    %
    
    
    1
    %Operating expensesResearch and development
    
    
    737,000
    
    
    
    253,000
    
    
    
    32
    %
    
    
    16
    %Selling, general & administrative
    
    
    1,858,000
    
    
    
    1,018,000
    
    
    
    82
    %
    
    
    66
    %Total operating expenses
    
    
    2,595,000
    
    
    
    1,271,000
    
    
    
    114
    %
    
    
    82
    %Gross operating loss
    
    
    (2,705,000
    )
    
    
    (1,263,000
    )
    
    
    -119
    %
    
    
    -82
    %Other income and (expense)Interest and financing fees, net
    
    
    85,000
    
    
    
    111,000
    
    
    
    4
    %
    
    
    7
    %Equity in losses of
non-consolidated joint venture
    
    
    (53,000
    )
    
    
    (41,000
    )
    
    
    -2
    %
    
    
    -3
    %Total other income, net
    
    
    32,000
    
    
    
    70,000
    
    
    
    1
    %
    
    
    5
    %Net loss
    
    $
    (2,673,000
    )
    
    $
    (1,193,000
    )
    
    
    -117
    %
    
    
    -77
    %
 The sum of the amounts and percentages may not equal the totals for the period due to the
effects of rounding.
  Revenue.
 Cost of Revenues.
 Gross Margin.
 Research and Development.
 16




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Selling, General, and Administrative Expenses (S, G & A).
 Interest and Financing Fees, Net.
 Net Loss.
 Comparability of Quarterly Results.
 LIQUIDITY AND CAPITAL RESOURCES
     17




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18




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Subsequent Offerings
        Recent Accounting Pronouncements
        19




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Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Remedial Actions and Changes in Internal Control
  
    
    We hired a full-time Inventory Control Manager to summarize and manage the movement or
tracking of inventory throughout the production process. We also hired a full-time
Production Scheduler to manage the production schedule requirements and assist in
monitoring the production process.
    
    We hired a full-time Senior/Cost Accountant to assist in the evaluation of the inventory
accounts and job costing.
    
    We hired a full-time Junior Accountant to assist in the evaluation of the purchasing,
inventory, and job costing concepts.
    
    We hired a full-time Shop Supervisor to handle the daily operations of the production
process.
    
    We hired a full-time Financial Reporting Manager to manage our external financial
reporting processes, including periodic filings with the SEC.
    
    We hired a full-time Director of Supply Chain to develop and manage the materials
planning function.
    
    We began the planning for an independent certification and audit of standards in
accordance with the International Organization for Standardization (ISO).
  20




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Compliance with Sarbanes-Oxley Act of 2002.
   
 Item 2. Unregistered Sales of Equity and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  10.1
    
    Employment Agreement entered into February 11, 2008 between us and Michael Staran, our President and Chief Executive
Officer (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 15, 2008)+10.3
    
    Placing Agreement entered into March 26, 2008 (incorporated by reference to Exhibit 10 of our Current Report on Form
8-K filed April 4, 2008)31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002.*31.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 *
    
    Filed herewith+
    
    Management contract or compensatory plan or arrangement 21




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SIGNATURE
    /s/ Jarett FentonBy: Jarett Fenton, Chief Financial Officer
 22




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Exhibit Index
 EXHIBITS
 10.1
    
    Employment Agreement entered into February 11, 2008 between us and Michael Staran, our President and Chief Executive
Officer (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 15, 2008)+10.3
    
    Placing Agreement entered into March 26, 2008 (incorporated by reference to Exhibit 10 of our Current Report on Form
8-K filed April 4, 2008)31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002.*31.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 *
    
    Filed herewith+
    
    Management contract or compensatory plan or arrangement