##### 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, 2010
 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(State or other jurisdiction of 
incorporation or organization)
    
    95-3056150(I.R.S. Employer
Identification Number)
 1560 West 190th Street, Torrance, California 90501  (Address of principal executive offices, including zip code)
 (310) 527-2800  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ
 o þ




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##### 



ENOVA SYSTEMS, INC.
 INDEX
 PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (Unaudited)
    
    
    3Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    3Statements of Operations for the Three Months Ended March 31, 2010 and 2009
    
    
    4Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009
    
    
    5Notes to Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    19Item 4T. Controls and Procedures
    
    
    20PART II  OTHER INFORMATION
    
    
    20Item 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity and Use of Proceeds
    
    
    20Item 3. Defaults upon Senior Securities
    
    
    20Item 4. Removed and Reserved
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    21Signatures
    
    
    22EX-31.1EX-31.2EX-32
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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ENOVA SYSTEMS, INC.
 
 BALANCE SHEETS
 March 31,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,889,000
    
    
    $
    13,078,000Short term investments
    
    
    200,000
    
    
    
    200,000Accounts receivable, net of allowance for
doubtful accounts of $31,000 as of March 31,
2010 and December 31, 2009
    
    
    952,000
    
    
    
    1,442,000Inventories and supplies, net
    
    
    5,507,000
    
    
    
    5,605,000Prepaid expenses and other current assets
    
    
    453,000
    
    
    
    263,000Total current assets
    
    
    19,001,000
    
    
    
    20,588,000Property and equipment, net
    
    
    1,283,000
    
    
    
    1,363,000Intangible assets, net
    
    
    59,000
    
    
    
    60,000Total assets
    
    $
    20,343,000
    
    
    $
    22,011,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    383,000
    
    
    $
    415,000Deferred revenues
    
    
    210,000
    
    
    
    357,000Accrued payroll and related expenses
    
    
    469,000
    
    
    
    277,000Other accrued liabilities
    
    
    1,143,000
    
    
    
    1,287,000Current portion of notes payable
    
    
    66,000
    
    
    
    68,000Total current liabilities
    
    
    2,271,000
    
    
    
    2,404,000Accrued interest payable
    
    
    1,094,000
    
    
    
    1,074,000Notes payable, net of current portion
    
    
    1,281,000
    
    
    
    1,286,000Total liabilities
    
    
    4,646,000
    
    
    
    4,764,000Stockholders equity:Series A convertible preferred stock  no par
value, 30,000,000 shares authorized; 2,652,000
shares issued and outstanding; liquidating
preference at $0.60 per share as of March 31,
2010 and December 31, 2009
    
    
    530,000
    
    
    
    530,000Series 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, 2010
and December 31, 2009
    
    
    1,094,000
    
    
    
    1,094,000Common Stock  no par value, 750,000,000 shares
authorized; 31,404,000 shares issued and
outstanding as of March 31, 2010 and December
31, 2009
    
    
    144,018,000
    
    
    
    143,995,000Additional paid-in capital
    
    
    8,482,000
    
    
    
    8,336,000Accumulated deficit
    
    
    (138,427,000
    )
    
    
    (136,708,000
    )Total stockholders equity
    
    
    15,697,000
    
    
    
    17,247,000Total liabilities and stockholders equity
    
    $
    20,343,000
    
    
    $
    22,011,000
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ENOVA SYSTEMS, INC.
 
 STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,2010
    
    
    2009Revenues
    
    $
    929,000
    
    
    $
    688,000Cost of revenues
    
    
    846,000
    
    
    
    579,000Gross income
    
    
    83,000
    
    
    
    109,000Operating expensesResearch and development
    
    
    322,000
    
    
    
    254,000Selling, general & administrative
    
    
    1,477,000
    
    
    
    1,495,000Total operating expenses
    
    
    1,799,000
    
    
    
    1,749,000Operating loss
    
    
    (1,716,000
    )
    
    
    (1,640,000
    )Other income and (expense)Interest and other income (expense), net
    
    
    (3,000
    )
    
    
    (6,000
    )Equity in losses of non-consolidated joint venture, net
    
    
    
    
    
    
    (10,000
    )Total other income (expense), net
    
    
    (3,000
    )
    
    
    (16,000
    )Net loss
    
    $
    (1,719,000
    )
    
    $
    (1,656,000
    )Basic and diluted loss per share
    
    $
    (0.05
    )
    
    $
    (0.08
    )Weighted average number of common shares outstanding
    
    
    31,404,000
    
    
    
    20,845,000
  4




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ENOVA SYSTEMS, INC.
 
 STATEMENTS OF CASH FLOWS
(Unaudited)
 For the Three Months EndedMarch 31,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (1,719,000
    )
    
    $
    (1,656,000
    )Adjustments to reconcile net loss to net cash used in operating activities:Inventory reserve
    
    
    9,000
    
    
    
    61,000Depreciation and amortization
    
    
    138,000
    
    
    
    158,000Loss on asset disposal
    
    
    
    
    
    
    2,000Equity in losses of non-consolidated joint venture
    
    
    
    
    
    
    10,000Issuance of common stock for director services
    
    
    
    
    
    
    45,000Issuance of common stock for employee services
    
    
    23,000
    
    
    
    100,000Stock option expense
    
    
    146,000
    
    
    
    104,000(Increase) decrease in:Accounts receivable
    
    
    490,000
    
    
    
    89,000Inventory and supplies
    
    
    89,000
    
    
    
    238,000Prepaid expenses and other current assets
    
    
    (190,000
    )
    
    
    42,000Increase (decrease) in:Accounts payable
    
    
    (32,000
    )
    
    
    (30,000
    )Deferred revenues
    
    
    (147,000
    )
    
    
    51,000Accrued payroll and related expenses
    
    
    192,000
    
    
    
    (22,000
    )Other accrued liabilities
    
    
    (144,000
    )
    
    
    (425,000
    )Accrued interest payable
    
    
    20,000
    
    
    
    21,000Net cash used in operating activities
    
    
    (1,125,000
    )
    
    
    (1,212,000
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (57,000
    )
    
    
    (6,000
    )Net cash used in investing activities
    
    
    (57,000
    )
    
    
    (6,000
    )Cash flows from financing activities:Payments on notes payable
    
    
    (7,000
    )
    
    
    (16,000
    )Net cash used in financing activities
    
    
    (7,000
    )
    
    
    (16,000
    )Net decrease in cash and cash equivalents
    
    
    (1,189,000
    )
    
    
    (1,234,000
    )Cash and cash equivalents, beginning of period
    
    
    13,078,000
    
    
    
    5,324,000Cash and cash equivalents, end of period
    
    $
    11,889,000
    
    
    $
    4,090,000Supplemental disclosure of cash flow information:Interest paid
    
    $
    2,000
    
    
    $
    1,000Assets acquired through financing arrangements
    
    $
    
    
    
    $
    38,000
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ENOVA SYSTEMS, INC.
 
 NOTES TO FINANCIAL STATEMENTS
(Unaudited)
 Three months ended March 31, 2010 and 2009
 1. Description of the Company and its Business
  2. Summary of Significant Accounting Policies
 Basis of Presentation  Interim Financial Statements
    Fair Value of Financial Instruments
  Revenue Recognition
  
    
    Persuasive Evidence of an Arrangement The Company documents all terms of an
arrangement in a written contract signed by the customer prior to recognizing revenue.
    
    Delivery Has Occurred or Services Have Been Rendered The Company performs all services
or delivers all products prior to recognizing revenue. Professional consulting and
engineering services are considered to be performed when the services are complete.
Equipment is considered delivered upon delivery to a customers designated location. In
certain instances, the customer elects to take title upon shipment.
    
    The Fee for the Arrangement is Fixed or Determinable Prior to recognizing revenue, a
customers fee is either fixed or determinable under the terms of the written contract. Fees
for professional consulting services, engineering services and
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equipment sales are fixed under the terms of the written contract. The customers fee is
negotiated at the outset of the arrangement and is not subject to refund or adjustment during
the initial term of the arrangement.
    
    Collectibility is Reasonably Assured The Company determines that collectibility is
reasonably assured prior to recognizing revenue. Collectibility is assessed on a
customer-by-customer basis based on criteria outlined by management. New customers are
subject to a credit review process which evaluates the customers financial position and
ultimately its ability to pay. The Company does not enter into arrangements unless
collectibility is reasonably assured at the outset. Existing customers are subject to
ongoing credit evaluations based on payment history and other factors. If it is determined
during the arrangement that collectibility is not reasonably assured, revenue is recognized
on a cash basis. Amounts received upfront for engineering or development fees under
multiple-element arrangements are deferred and recognized over the period of committed
services or performance, if such arrangements require the Company to provide on-going
services or performance. All amounts received under collaborative research agreements or
research and development contracts are nonrefundable, regardless of the success of the
underlying research.
       Inventory
  Inventory reserve
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Allowance for doubtful accounts
  Deferred Revenues
  Warranty Costs
  Stock Based Compensation
  tock Options
 3. Inventory
  March 31,
    
    
    December 31,2010
    
    
    2009Raw Materials
    
    $
    6,160,000
    
    
    $
    6,341,000Work In Progress
    
    
    240,000
    
    
    
    132,000Finished Goods
    
    
    95,000
    
    
    
    111,000Reserve for Obsolescence
    
    
    (988,000
    )
    
    
    (979,000
    )Total
    
    $
    5,507,000
    
    
    $
    5,605,000
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4. Property and Equipment
  March 31,
    
    
    December 31,2010
    
    
    2009Computers and software
    
    $
    556,000
    
    
    $
    556,000Machinery and equipment
    
    
    847,000
    
    
    
    795,000Furniture and office equipment
    
    
    98,000
    
    
    
    98,000Demonstration vehicles and buses
    
    
    507,000
    
    
    
    507,000Leasehold improvements
    
    
    1,348,000
    
    
    
    1,348,000Construction in process
    
    
    13,000
    
    
    
    8,0003,369,000
    
    
    
    3,312,000Less accumulated depreciation and amortization
    
    
    (2,086,000
    )
    
    
    (1,949,000
    )Total
    
    $
    1,283,000
    
    
    $
    1,363,000
  5. Other Accrued Liabilities
  March 31,
    
    
    December 31,2010
    
    
    2009Accrued Inventory Received
    
    $
    319,000
    
    
    $
    334,000Accrued Professional Services
    
    
    332,000
    
    
    
    395,000Accrued Warranty
    
    
    492,000
    
    
    
    558,000Total
    
    $
    1,143,000
    
    
    $
    1,287,000
  2010
    
    
    2009Balance at beginning of quarter
    
    $
    558,000
    
    
    $
    545,000Accruals for warranties issued during the period
    
    
    38,000
    
    
    
    42,000Warranty claims
    
    
    (104,000
    )
    
    
    (49,000
    )Balance at end of quarter
    
    $
    492,000
    
    
    $
    538,000
 6. Intangible Assets
   March 31,
    
    
    December 31,2010
    
    
    2009Patents
    
    $
    $93,000
    
    
    $
    93,000Less accumulated amortization
    
    
    (34,000
    )
    
    
    (33,000
    )Total
    
    $
    $59,000
    
    
    $
    60,000
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7. Notes Payable, Long-Term Debt and Other Financing
  March 31,
    
    
    December 31,2009
    
    
    2009Secured note payable to Credit
Managers Association of California,
bearing interest at prime plus 3%
(6.25% as of March 31, 2010), and is
adjusted annually in April through
maturity. Principal and unpaid
interest due in April 2016. A
sinking fund escrow may be funded
with 10% of future equity financing,
as defined in the Agreement
    
    $
    1,238,000
    
    
    $
    1,238,000Secured note payable to a financial
institution in the original amount
of $23,000, bearing interest at
11.70%, payable in 36 equal monthly
installments of principal and
interest through October 1, 2010
    
    
    6,000
    
    
    
    8,000Secured note payable to 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
    
    
    16,000
    
    
    
    18,000Secured note payable to a financial
institution in the original amount
of $38,000, bearing interest at
8.25% per annum, payable in 60 equal
monthly installments of principal
and interest through February 19,
2014
    
    
    30,000
    
    
    
    32,000Secured note payable to a financial
institution in the original amount
of $19,000 bearing interest at
10.50% per annum, payable in 60
equal monthly installments of
principal and interest through
August 25, 2014
    
    
    17,000
    
    
    
    18,0001,347,000
    
    
    
    1,354,000Less current portion
    
    
    (66,000
    )
    
    
    (68,000
    )Long-term portion
    
    $
    1,281,000
    
    
    $
    1,286,000
  8. Revolving Credit Agreement
  9. Stockholders Equity
  10. Subsequent Events
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11. Stock Options
 Stock Option Program Description
    For the three months endedMarch 31,
    
    March 31,2010
    
    2009Income from continuing operations before income taxes
    
    $
    146,000
    
    
    $
    104,000Income from continuing operations after income taxes
    
    $
    146,000
    
    
    $
    104,000Cash flows from operations
    
    $
    146,000
    
    
    $
    104,000Cash flows from financing activities
    
    $
    
    
    
    $
    
   Weighted AverageNumber of
    
    
    
    
    
    
    RemainingShare
    
    
    Weighted Average
    
    
    Contractual Term
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    in Years
    
    
    Intrinsic ValueOutstanding at December 31, 2009
    
    
    1,410,000
    
    
    $
    2.10
    
    
    
    7.65Granted
    
    
    
    
    
    $
    
    
    
    
    Exercised
    
    
    
    
    
    $
    
    
    
    
    Forfeited or Cancelled
    
    
    (39,000
    )
    
    $
    3.42
    
    
    
    Outstanding at March 31, 2010
    
    
    1,371,000
    
    
    $
    2.06
    
    
    
    7.52
    
    
    $
    565,000Exercisable at March 31, 2010
    
    
    620,000
    
    
    $
    2.94
    
    
    
    6.87
    
    
    $
    166,000
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For the three months endedMarch 31,2010
    
    2009Expected life (in years)
    
    
    
    
    
    
    3Average risk-free interest rate
    
    
    
    
    
    
    2
    %Expected volatility
    
    
    
    
    
    
    194
    %Expected dividend yield
    
    
    
    
    
    
    0
    %Forfeiture rate
    
    
    
    
    
    
    3
    %
  12. Concentrations
   13. Recent Accounting Pronouncements
  Amendments to Certain Recognition and
Disclosure Requirement
 Improving Disclosures about Fair Value
Measurements Fair Value Measurements and Disclosures
 Revenue Recognition Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force. Revenue Recognition-Multiple
Element Arrangements
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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, 2009.
 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, 2009.
 Overview
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Recent Developments
        14




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Critical Accounting Policies
   Cash and cash equivalents
 Inventory
 Inventory reserve
 Allowance for doubtful accounts
 Stock-based Compensation
 Revenue recognition
  15




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RESULTS OF OPERATIONS
  First Quarter of Fiscal 2010 vs. First Quarter of Fiscal 2009
 Three Months Ended
    
    
    As a % of RevenuesMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009Revenues
    
    $
    929,000
    
    
    $
    688,000
    
    
    
    35
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    846,000
    
    
    
    579,000
    
    
    
    46
    %
    
    
    91
    %
    
    
    84
    %Gross profit (loss)
    
    
    83,000
    
    
    
    109,000
    
    
    
    -24
    %
    
    
    9
    %
    
    
    16
    %Operating expensesResearch and development
    
    
    322,000
    
    
    
    254,000
    
    
    
    27
    %
    
    
    35
    %
    
    
    37
    %Selling, general & administrative
    
    
    1,477,000
    
    
    
    1,495,000
    
    
    
    -1
    %
    
    
    159
    %
    
    
    217
    %Total operating expenses
    
    
    1,799,000
    
    
    
    1,749,000
    
    
    
    3
    %
    
    
    194
    %
    
    
    254
    %Operating loss
    
    
    (1,716,000
    )
    
    
    (1,640,000
    )
    
    
    -5
    %
    
    
    -185
    %
    
    
    -238
    %Other income and (expense)Interest and other income (expense)
    
    
    (3,000
    )
    
    
    (6,000
    )
    
    
    50
    %
    
    
    0
    %
    
    
    -1
    %Equity in losses of
non-consolidated joint venture
    
    
    
    
    
    
    (10,000
    )
    
    
    100
    %
    
    
    0
    %
    
    
    -1
    %Total other income (expense)
    
    
    (3,000
    )
    
    
    (16,000
    )
    
    
    81
    %
    
    
    0
    %
    
    
    -2
    %Net loss
    
    $
    (1,719,000
    )
    
    $
    (1,656,000
    )
    
    
    -4
    %
    
    
    -185
    %
    
    
    -241
    %
 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 (R&D).
 Selling, General, and Administrative Expenses (S, G & A).
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Interest and Other Income (Expense)
 Equity in Losses of Non-consolidated Joint Venture
 Net Loss.
 Comparability of Quarterly Results
 LIQUIDITY AND CAPITAL RESOURCES
      18




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Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  19




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ITEM 4T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
   
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity and Use of Proceeds
  
 ITEM 3. Defaults upon Senior Securities
  
 ITEM 4. Removed and Reserved
 
 ITEM 5. Other Information
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ITEM 6. Exhibits
  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 21




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SIGNATURE
   ENOVA SYSTEMS, INC. (Registrant)/s/ Jarett FentonBy: Jarett Fenton, Chief Financial Officer 22




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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.
 23