-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IGeN8ZdqHmp2lQhQ9OHQ2fYFAsUQ5hotmftgqfkl1Sa0aei2gL+7/WaSE8aU0BRd mus8tm1T3mGLUJfAQ9P9sQ== 0000950005-05-000611.txt : 20050815 0000950005-05-000611.hdr.sgml : 20050815 20050815172009 ACCESSION NUMBER: 0000950005-05-000611 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENOVA SYSTEMS INC CENTRAL INDEX KEY: 0000922237 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 953056150 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25184 FILM NUMBER: 051028030 BUSINESS ADDRESS: STREET 1: 19850 SOUTH MAGELLAN DR STREET 2: SUITE 305 CITY: TORRANCE STATE: CA ZIP: 90502 BUSINESS PHONE: 3105272800 MAIL ADDRESS: STREET 1: 19850 SOUTH MAGELLAN DR STREET 2: SUITE 305 CITY: TORRANCE STATE: CA ZIP: 90502 FORMER COMPANY: FORMER CONFORMED NAME: US ELECTRICAR INC DATE OF NAME CHANGE: 19940425 10-Q 1 p19484_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2005 or (_) 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. 0-25184 -------- ENOVA SYSTEMS, INC. ------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 95-3056150 ---------- ---------- (State or other jurisdiction of (IRS employer identification number) incorporation or organization) 19850 South Magellan Drive Torrance, CA 90502 --------------------------------------------- (Address of Principal Executive Offices and Zip Code) Registrant's telephone number, including area code (310) 527-2800 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 periods 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of August 16, 2005, there were 14,728,422 shares, post-split, of Common Stock, no par value, 2,734,000 shares of Series A Preferred Stock, no par value, and 1,217,000 shares of Series B Preferred Stock, no par value, outstanding. INDEX ENOVA SYSTEMS, INC. Page No. -------- PART 1. FINANCIAL INFORMATION Item 1. Financial Statements...............................................3 Balance Sheets: June 30, 2005 (unaudited) and December 31, 2004....................3 Statements of Operations (unaudited): Three and six months ended June 30, 2005 and 2004..................4 Statements of Cash Flows (unaudited): Six months ended June 30, 2005 and 2004............................5 Notes to Financial Statements (unaudited):.........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................13 Item 3. Quantitative and Qualitative Disclosure about Market Risk.........23 Item 4. Control and Procedures............................................23 PART II. OTHER INFORMATION Item 1. Legal Proceedings ................................................24 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......24 Item 3. Defaults upon Senior Securities...................................24 Item 4. Submission of Matters to a Vote of Security Holders...............24 Item 5. Other Information.................................................24 Item 6. Exhibits..........................................................24 SIGNATURE ..................................................................26 CERTIFICATIONS ...............................................................48 2 ENOVA SYSTEMS, INC. BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------- ASSETS As of As of June 30, 2005 December 31, 2004 ------------- ------------- (unaudited) Current assets Cash and cash equivalents $ 624,000 $ 1,575,000 Accounts receivable, net 726,000 522,000 Inventories and supplies, net 889,000 1,036,000 Prepaid expenses and other current assets 445,000 304,000 ------------- ------------- Total Current Assets 2,684,000 3,437,000 Property and equipment, net 346,000 387,000 Equity method investment 1,702,000 1,768,000 Other assets 242,000 296,000 ------------- ------------- Total assets $ 4,974,000 $ 5,888,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Accounts payable $ 317,000 $ 66,000 Deferred revenues 84,000 392,000 Line of credit -- 229,000 Accrued payroll and related expense 169,000 194,000 Other accrued expenses 49,000 13,000 Current portion of notes payable 169,000 166,000 Current portion of capital lease obligations -- 6,000 ------------- ------------- Total current liabilities 788,000 1,066,000 Accrued interest payable 1,528,000 1,378,000 Notes payable, net of current portion 3,332,000 3,341,000 ------------- ------------- Total liabilities $ 5,648,000 $ 5,785,000 ------------- ------------- Commitments and contingencies Stockholders' equity (deficit) Series A convertible preferred stock - no par value 30,000,000 shares authorized 2,734,000 and 2,748,000 shares issued and outstanding Liquidating preference at $0.60 per share, aggregating $1,640,000 and $1,649,000 $ 1,759,000 $ 1,774,000 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 750,000,000 shares authorized 9,378,000 and 415,265,000 shares issued and outstanding (Note 6) 91,144,000 90,465,000 Common stock subscribed 63,000 165,000 Stock notes receivable (1,176,000) (1,176,000) Additional paid-in capital 6,901,000 6,900,000 Accumulated deficit (101,799,000) (100,459,000) ------------- ------------- Total stockholders' equity (deficit) (674,000) 103,000 ------------- ------------- Total liabilities and stockholders' equity (deficit) $ 4,974,000 $ 5,888,000 ============= ============= The accompanying notes are an integral part of these financial statements
3
ENOVA SYSTEMS, INC. STATEMENTS OF OPERATIONS (Unaudited) For the Three and Six Months Ended June 30, - ------------------------------------------------------------------------------------------------------------------- Three Months Six Months 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net revenues Research and development contracts $ 505,000 $ 262,000 $ 705,000 $ 698,000 Production 817,000 456,000 1,309,000 1,128,000 ----------- ----------- ----------- ----------- Total net revenues 1,322,000 718,000 2,014,000 1,826,000 ----------- ----------- ----------- ----------- Cost of revenues Research and development contracts 300,000 188,000 419,000 493,000 Production 724,000 331,000 1,175,000 684,000 ----------- ----------- ----------- ----------- Total cost of revenues 1,024,000 519,000 1,594,000 1,177,000 ----------- ----------- ----------- ----------- Gross profit 298,000 199,000 420,000 649,000 ----------- ----------- ----------- ----------- Other costs and expenses Research & development 178,000 181,000 395,000 309,000 Selling, general & administrative 550,000 453,000 1,158,000 935,000 Interest and other income/expense, net 72,000 79,000 141,000 124,000 Equity in losses of equity method investee 26,000 88,000 66,000 44,000 ----------- ----------- ----------- ----------- Total other costs and expenses 826,000 801,000 1,760,000 1,412,000 ----------- ----------- ----------- ----------- Net loss $ (528,000) $ (602,000) $(1,340,000) $ (763,000) =========== =========== =========== =========== Basic and diluted loss per common share $ (0.01) $ (0.01) $ (0.01) $ (0.01) =========== =========== =========== =========== Weighted-average number of shares outstanding 9,263,000 8,519,000 9,263,000 8,519,000 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements
4 ENOVA SYSTEMS, INC. STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30,
- ------------------------------------------------------------------------------------- --------------------------------- 2005 2004 ---------------- --------------- Cash flows from operating activities Net loss $(1,340,000) $ (763,000) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 146,000 175,000 Equity in losses of equity method investee 66,000 88,000 Issuance of common stock for services 63,000 37,000 (Increase) decrease in Accounts receivable (204,000) 165,000 Inventory and supplies 147,000 286,000 Prepaid expenses and other current assets (141,000) (8,000) Increase (decrease) in Accounts payable 252,000 (618,000) Accrued expenses 11,000 30,000 Deferred revenues (308,000) -- Accrued interest payable 150,000 124,000 ----------- ----------- Net cash used by operating activities (1,158,000) (484,000) ----------- ----------- Cash flows from investing activities Purchases of property and equipment $ (51,000) $ (129,000) ----------- ----------- Net cash used in investing activities (51,000) (129,000) ----------- ----------- Cash flows from financing activities Borrowings (repayments) on line of credit $ (229,000) $ 113,000 Proceeds (repayment) on notes payable and capital lease obligations (13,000) 24,000 Proceeds from sale of common stock 500,000 2,622,000 ----------- ----------- Net cash provided by (used in) financing activities 258,000 2,759,000 ----------- ----------- Net increase (decrease) in cash and (951,000) 2,146,000 cash equivalents Cash and cash equivalents, beginning of year 1,575,000 530,000 ----------- ----------- Cash and cash equivalents, end of year $ 624,000 $ 2,676,000 =========== =========== Supplemental disclosure of cash flow information Interest paid $ 4,000 $ 4,000 =========== =========== Income taxes paid $ -- $ -- =========== =========== Supplemental schedule of non- cash investing and financing activities Conversion of preferred stock to common stock $ 13,000 $ 64,000 =========== =========== The accompanying notes are an integral part of these financial statements
5 ENOVA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 - Basis of Presentation The accompanying unaudited financial statements have been prepared from the records of our company without audit and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position at June 30, 2005 and the interim results of operations for the three and six months ended June 30, 2005 and cash flows for the six months ended June 30, 2005 have been included. The balance sheet at December 31, 2004, presented herein, has been prepared from the audited financial statements of our company for the year then ended. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The June 30, 2005 and December 31, 2004 inventories are reported at market value. Inventories have been valued on the basis that they would be used, converted and sold in the normal course of business. Certain reclassifications have been made to the prior period's financial statements to conform to the current period's presentation. The amounts estimated for the above, in addition to other estimates not specifically addressed, could differ from actual results; and the difference could have a significant impact on the financial statements. Accounting policies followed by us are described in Note 1 to the audited financial statements for the fiscal year ended December 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of the interim financial statements. The financial statements should be read in conjunction with the audited financial statements, including the notes thereto, for the year ended December 31, 2004, which are included in our Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as filed with the Securities and Exchange Commission. Basic and diluted net loss per common share is computed using the weighted average number of common shares outstanding. Since a loss from operations exists, diluted earnings per share number is not presented because the inclusion of common stock equivalents, consisting of Series A and B preferred stock, unexercised stock options and warrants, would be anti-dilutive. The results of operations for the three and six months ended June 30, 2005 presented herein are not necessarily indicative of the results to be expected for the full year. Revenue Recognition From time to time, the Company enters into arrangements with its customers where there are multiple deliverables. In accordance with Emerging Issues Task Force Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables", when a company enters into these types of arrangements, the contract is divided into separate units of accounting based on relative fair values, and revenue recognition criteria are assessed separately for each separate unit of accounting. These elements will include product sales, service elements, and fixed-price development elements. 6 Revenues from Component Sales Revenues from sales of components are recognized when shipped and title passes to the customer. Service Revenue Services revenues are billed and recognized in the period the services are rendered and earned and the collection of the related receivable is probable. Method of Accounting for Long-Term Contracts In accordance with the American Institute of Certified Public Accountant's Statement of Position 81-1, "Accounting for Performance of Certain Construction-Type and Certain Product Type Contracts," the Company records its revenues on long-term, fixed price contracts on the basis of the percentage-of-completion method applied to individual contracts, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy and collection of the related receivable is probable. That portion of the total contract price is accrued which is allocable, on the basis of the Company's estimates of the percentage-of-completion, to contract expenditures and work performed. Operating expenses, including indirect costs and administrative expenses, are charged to income as incurred and are not allocated to contract costs. As these long-term contracts are performed, revisions in cost and profit estimates during the course of the work are recognized in the accounting period in which the facts which require the revision become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss on both short- and long-term contracts is accrued. Recently Issued Pronouncement In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations - an Interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations." This interpretation addresses the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement of the obligation are conditional on a future event. The interpretation requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. The adoption of this interpretation did not have any impact on our financial statements 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 7 NOTE 2 - Notes Payable Notes payable is comprised of the following:
June 30, 2005 December 31, ------------- ------------ (unaudited) 2004 ----------- ---- 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 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 9,000 15,000 ---------- ---------- 3,501,000 3,507,000 Less current maturities 169,000 166,000 ---------- ---------- Total $3,332,000 $3,341,000 ========== ==========
NOTE 3 - Tomoe LTA Long-Term Contract Enova 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. Completion of the contract will take approximately 15-18 months and is valued at approximately $3,100,000. We are 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 we 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 June 30, 2005, we recorded revenues of $398,000 related to the development portion of this contract. NOTE 4 - Shareholders' Equity/ (Deficit) On June 3, 2005, Enova entered into a stock purchase and warrant agreement to issue 123,456, post-split, shares of our common stock through a private placement offering at $4.05, per share for a total cash purchase of $500,000. The funds were received and the shares were issued in June 2005. The warrant agreement grants the right for the investor to purchase 24,961, post-split, 8 shares of our common stock at a price of $5.40 per share on or before June 2, 2006. These investors represented that they were accredited investors. We relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for the exemption from registration of the sale of such shares. During the three months ended June 30, 2005, we recorded 8,556 shares, post-split, of restricted common stock as common stock subscribed to the Board of Directors at an average price of $4.28 per share for full and telephonic board meetings and committee meetings during the second quarter of 2005. NOTE 5 - Related Party Transactions During the first six months of 2005, we purchased from HHI approximately $74,000 in components, materials and services for manufacture of our drive systems and power management systems. These purchases were made on terms and conditions equal to or better than our standard commercial terms with other vendors. At quarter ended June 30, 2005, our outstanding payables balance due HHI was approximately $76,000. NOTE 6 - Subsequent Events On July 19, 2005, we entered into an agreement with a placement agent relating to the sale of up to 5,350,000 new shares of its common stock. Pursuant to the agreement, the placement agent has sold all such shares of common stock at a price of $3.78 per share to certain eligible investors located outside the United States. The approximate gross proceeds from the sale are $20,000,000, before fees to Investec Investment Bank and other costs associated with the listing and placement of approximately $2,000,000. We received approximately $18,000,000 of net proceeds from the offering. We listed our common stock for trading on the AIM Market of the London Stock Exchange on July 25, 2005. The sale of common stock described above is being conducted pursuant to the requirements of Regulation S under the Securities Act of 1933. Among other things, each investor purchasing shares of the Registrant's common stock in the offering has represented that he or she is not a "U.S. Person" as defined in Rule 902 of Regulation S. In addition, neither the Registrant nor the placement agent has conducted any selling effort directed at the United States in connection with the offering. All shares of common stock to be issued in the offering will be endorsed with a restrictive legend indicating that the shares are being issued pursuant to Regulation S under the Securities Act and will be deemed to be "restricted securities." As a result, the purchasers of such shares will not be able to resell the shares in the United States without registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act. Additionally, on July 20, 2005 (the "Effective Date"), we filed an Amendment to our Amended and Restated Articles of Incorporation, effecting a reverse 1-for-45 split of our common stock. The number of authorized shares were unchanged. At the close of business on the Effective Date, each share of the our Common Stock issued and outstanding immediately prior to the Effective Date was automatically and without any action on the part of the holder thereof reclassified as and changed, pursuant to a reverse stock split (the "Reverse Stock Split"), into a fraction thereof of 1/45th of a share of our outstanding Common Stock, subject to the treatment of fractional share interests as described below. No certificates or scrip representing fractional share interests in the new common stock were issued, and no such fractional share interest will entitle the holder thereof to vote, or to any rights of a shareholder of the Company. In lieu of any fractional shares to which a holder of Common Stock would otherwise be entitled, we paid cash equal to (a) the average of the high-bid and low-asked per share prices of the Common Stock as reported on the NASDAQ electronic "Bulletin Board" on the Effective Date multiplied by (b) the number of shares of Common Stock held by such holder that would otherwise have been exchanged for such fractional share interest. As such, the number of issued and outstanding shares of common stock as of June 30, 2005 has been retroactively adjusted to 9,378,422 from 422,028,840 to reflect the effects of the reverse-split. The number of shares of common stock authorized remains at 750,000,000. These are reflected in the financial statements as of June 30, 2005. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following information should be read in conjunction with the interim financial statements and the notes thereto in Part I, Item I of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual report on Form 10-K for the year ended December 31, 2004. The matters addressed in this Management's Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented contains certain forward-looking statements involving risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks discussed in this Item 2 and specifically discussed in this report under the heading "Certain Factors That May Affect Future Results" following this Management's Discussion and Analysis section, and elsewhere in this report. 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. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, equity investments, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: o Inventories are priced at the lower of cost or market using standard costs, which approximate actual costs on a first-in, first-out (FIFO) basis. 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. Standard costs are generally re-assessed at least annually and reflect achievable acquisition costs, generally the most recent vendor contract prices for purchased parts, currently obtainable assembly and test labor, and overhead for internally manufactured products. Manufacturing labor and overhead costs are attributed to individual product standard costs at a level planned to absorb spending at average utilization volumes. We maintain an allowance against inventory for the potential future obsolescence or excess inventory that is based on our estimate of future sales. 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. o Stock Based Compensation - we periodically issue common stock or stock options to employees and non-employees for services rendered. For 10 common stock issuances, the cost of these services is recorded based upon the fair value of our common stock on the date of issuance. 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. We have 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. For issuances of stock options to employees and directors we measure compensation costs using the intrinsic value method, or APB Opinion No. 25. Stock options granted to non-employees are accounted for under the fair value method. The fair value of stock options granted is calculated using the Black Scholes option pricing model based on the weighted average assumptions. o Allowance for Doubtful Accounts - we maintain 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. o Contract Services Revenue and Cost 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 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. These accounting policies were applied consistently for all periods presented. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results is included in the footnotes to our financial statements. Recently Issued Accounting Standard In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations - an Interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations." This interpretation addresses the timing of 11 liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement of the obligation are conditional on a future event. The interpretation requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. The adoption of this interpretation did not have any impact on our financial statements. 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. GENERAL Enova Systems, Inc., a California Corporation ("Enova" or the "Company"), was incorporated on July 30, 1976. The Company's fiscal year ends December 31. Enova believes it is a leader in the development and production of proprietary, commercial digital power management systems for transportation vehicles and stationary power generation systems. Power management systems control and monitor electric power in an automotive or commercial application such as an automobile or a stand-alone power generator. Drive systems are comprised of an electric motor, an electronics control unit and a gear unit which power an electric vehicle. Hybrid systems, which are similar to pure electric drive systems, contain an internal combustion engine in addition to the electric motor, eliminating external recharging of the battery system. A hydrogen fuel cell based system is similar to a hybrid system, except that instead of an internal combustion engine, a fuel cell is utilized as the power source. A fuel cell is a system which combines hydrogen and oxygen in a chemical process to produce electricity. Stationary power systems utilize similar components to those which are in a mobile drive system in addition to other elements. These stationary systems are effective as power-assist or back-up systems, alternative power, for residential, commercial and industrial applications. A fundamental element of Enova's strategy is to develop and produce advanced proprietary software, firmware and hardware for applications in these alternative power markets. Our focus is digital power conversion, power management, and system integration, for two broad market applications - vehicle power generation and stationary power generation. Specifically, we develop; design and produce drive systems and related components for electric, hybrid-electric, fuel cell and microturbine-powered vehicles. We also develop, design and produce power management and power conversion components for stationary distributed power generation systems. These stationary applications can employ hydrogen fuel cells, microturbines, or advanced batteries for power storage and generation. Additionally, we perform research and development to augment and support others' and our own related product development efforts. Our product development strategy is to design and introduce to market successively advanced products, each based on our core technical competencies. In each of our product / market segments, we provide products and services to leverage our core competencies in digital power management, power conversion and system integration. We believe that the underlying technical requirements shared among the market segments will allow us to more quickly transition from one emerging market to the next, with the goal of capturing early market share. 12 Enova's primary market focus centers on both series and parallel heavy-duty drive systems for multiple vehicle and marine applications. We believe series-hybrid and parallel hybrid heavy-duty drive system sales offer Enova the greatest return on investment in both the short and long term. Additionally, Enova management believes that this area will see significant growth over the next several years. As we penetrate more market areas, 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. Management's strategy is to provide a dual path approach in offering both a series and parallel hybrid drive systems solution. We have developed or are developing a variety of heavy-duty drive system solutions including our series hybrid drive system featuring our diesel generator set; a post-transmission parallel hybrid system and two variations of a pre-transmission parallel hybrid drive system. Many of these systems are currently being utilized in our customer's trucks and buses such as the Mack R-11 refueler vehicle which utilizes our post-transmission parallel hybrid and WrightBus of the United Kingdom's 10m bus which utilizes our series hybrid drive system. Additionally, we continue to pursue privately and governmental funded development programs. These programs allow us to increase our revenue base, form new alliances with major OEMs and participate in the latest trends in alternative fuel technologies. Research and development revenues in the second quarter of 2005 are a result of engineering services for the Hyundai Motor Company for their fuel cell bus, Ford Motor Company for their fuel cell vehicle, Tomoe's hybrid train programs and various Hawaii Center for Advanced Transportation Technologies (HCATT) programs. In the quarter ended June 30, 2005, we continued with our development efforts with both new and existing customers. Enova, teaming with Concurrent Technologies Corporation (CTC), continues to supply product and assist in the integration of a fuel cell hybrid drive system for a MB4 tow tractor for the U.S. Air Force. Additionally, we are nearing completion of a parallel hybrid drive system study for HCATT in conjunction with the U.S. Air Force. We continue to receive greater recognition from both governmental and private industry with regards to both commercial and military application of our hybrid drive systems and fuel cell power management technologies. Although we believe that current negotiations with several parties may result in development and production contracts during 2005 and beyond, there are no assurances that such additional agreements will be realized. During the quarter ended June 30, 2005, we continued to develop and produce electric and hybrid electric drive systems and components for FAW China, Wright Bus and Eneco of the United Kingdom, EcoPower Technology (EPT) of Italy, Tsinghua University of China, MTrans of Malaysia, Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. of Japan and several other domestic and international vehicle and bus manufacturers. Our various electric and hybrid-electric drive systems, power management and power conversion systems are being used in applications, including Class 8 trucks, train locomotives, transit buses and industrial vehicles as well as in non-transportation applications such as fuel-cell management and power management systems, including the EDO minesweeper. We have furthered our development and production of systems for both mobile and stationary fuel cell powered systems with major companies such as Ford and Hydrogenics, a fuel cell developer in Canada. Heavy-Duty Drive Systems - Buses, Trucks, Vans and Other Industrial Vehicle - -------------------------------------------------------------------------------- Applications - ------------ Enova's primary market focus centers on both series and parallel heavy-duty drive systems for multiple vehicle and marine applications. We believe series-hybrid and parallel hybrid heavy-duty drive system sales offer Enova the greatest return on investment in both the short and long term. Although this market sector has developed more slowly than anticipated, management believes that this area will see significant growth over the next several years. As the Company penetrates more market areas, we are continually refining and optimizing both our market strategy and our product line to enhance our power management and conversion systems for mobile applications. 13 In the second quarter of 2005, we continued to market our latest hybrid, the HybridPower Series Hybrid, to customers in Europe and Asia. Enova's new diesel generator set, the power component within the hybrid drive system, delivers 60 kilowatts volts of continuous power, enabling it to integrate seamlessly with Enova's 240kW or 120kW drive motors and other digital power management components. The series hybrid genset consists of a 60kW electric motor, a motor controller and a diesel engine meeting stringent Euro 3 or Euro 4 emission specifications. The genset is distinctively designed to allow end users to choose the engine best suited for their commercial needs, permitting a wide variety of engine choices. During the second quarter of 2005, we delivered two 120kW and 240kW HybridPower drive systems to Tsinghua University in China for its fuel cell hybrid bus development program. Our pre-transmission parallel hybrid drive system program with FAW for their buses continued during the second quarter of 2005. The first vehicle was successfully integrated and tested, and FAW has commenced integration of the second and third buses. We anticipate an order for an additional three systems in the second half of 2005. Management believes that these development and initial production programs will result in additional production contracts during 2005 and beyond; however at this time; there are no assurances that such additional contracts will be consummated. Our eight drive system contract with Tomoe for Singapore Land Transport Authority's eight battery-electric locomotives continues on target. Over the last several years, Enova successfully integrated its HybridPowerTM drive systems into Tomoe's heavy-duty Isuzu dump truck application, three passenger trams and a mine tunnel crawler. It is anticipated that the hybrid drive train components will begin being delivered in late 2005 at Tomoe's Japan-based facilities. Enova anticipates the total contract to exceed US$3 million over the life of the contract which is anticipated to run through the second quarter of 2006. This latest market penetration in Asia enhances not only Enova's alliances with both Tomoe and HHI, but also advances Enova's hybrid-electric technologies in high voltage power management components. As part of this contract, Enova will develop a high voltage charging system to enable the locomotive to receive a direct battery charge from the high voltage rail. Tomoe and Enova continue to develop other commercial and industrial applications for our drive systems, including potential light rail applications. For the quarter ended June 30, 2005 we billed approximately $210,000 for these various systems. Although we anticipate additional orders for these systems in 2005 and beyond, there are no assurances that such additional orders will be forthcoming. WrightBus, one of the largest low-floor bus manufacturers in the United Kingdom, continues to purchase our diesel genset-powered, series hybrid drive systems for their medium and large bus applications. We delivered three 120kW drive systems during the 2nd quarter of 2005 for a total of $132,000 to be delivered. In late 2004, we entered into an exclusive three-year agreement with WrightBus for the sale of certain Enova products for specific vehicles in the United Kingdom. WrightBus has notified us of potential additional orders for 2005 as well as requirements for 2006 through 2007. At this time, however, there are no assurances that such additional orders will be forthcoming. We have begun delivery of the sixteen 120kW electric drive systems to Eneco of the United Kingdom, a vehicle integrator which utilizes Enova's HybridPower 120kW drive systems in its hybrid bus applications. These production system deliveries will continue into the 3rd and 4th quarters of 2005. Eneco has notified us of its plans to order additional 120kw systems in the 3rd and 4th quarter 2005 for its bus programs. At this time, however, there are no assurances that such additional orders will be forthcoming. In Italy, our relationship with EPT continues to build as they order additional hybrid electric HybridPowerTM 120kw drive systems for their bus customers in Turin, Genoa, Brescia, Ferrara and Vicenza. We delivered five drive systems and various other power management components to EPT in the 2nd quarter for a total of $138,000. EPT has notified Enova of its requirements for additional drive systems in 2005; however, there are no assurances that such additional orders will be forthcoming. 14 Additionally, we are in discussions with other bus manufacturers and industrial, commercial and military vehicle manufacturers regarding the purchase of our heavy-duty, high performance, parallel and series hybrid drive systems in 2005. There are no assurances, however, that these discussions will result in any sales of the HybridPower parallel or series hybrid drive systems. Light-Duty Drive Systems - Automobiles and Delivery vehicles - ------------------------------------------------------------ Our 90kW controller, motor and gear unit is utilized in light duty vehicles such as midsize automobiles and delivery vehicles. The topology of this system is being adapted to also be utilized as a parallel hybrid motor and controller system. We are beginning to receive more interest in our light-duty systems from both European and Asian customers. Our 90kW motor controller is utilized in the parallel hybrid drive system designed for FAW. In conjunction with the 90kW motor, FAW and Enova are evaluating this latest usage of our hybrid technologies. As noted earlier, we anticipate additional demand for these systems. At this time, however, there are no assurances that such additional orders will be forthcoming. We continue to cross-sell our systems to new and current customers in the light and medium duty vehicle markets, both domestically and globally. Fuel Cell Technologies - ---------------------- Due to the success of the 20kW High Voltage Energy Converter (HVEC) development program with Ford Motor Company for their fuel cell vehicle, Ford has entered into another development contract with Enova for a 30kW converter. We delivered two of our new 30kW HVEC systems to Ford in early July for use in their fuel cell vehicle development programs. The 20kW HVEC is a key component in Ford's Focus Fuel Cell Vehicle (FCV) which utilizes the Ballard fuel cell system. It converts high voltage power from the fuel cell into a lower voltage for use by the drive system and electronic accessories. There is a potential for additional production orders for HVEC units from Ford in 2005 and beyond; however, at this time, there are no assurances that such additional orders will be forthcoming. Furthermore, we are applying the technology and components derived from this program to other applications. The HVEC is a critical component of our Fuel Cell bus programs and other fuel cell powered systems such as the Hyundai fuel cell vehicle. Both of these projects are further detailed in the research and development programs section set forth below. Our latest projects with both CTC and HCATT for a fuel cell powered MB-4 tow tractor and a step-van, respectively, both utilize our HVEC units to control and adapt power between the fuel cells, the batteries and the power electronics of the drive system. In heavy-duty mobile applications such as these, Enova has developed firmware to run our HVEC units in parallel for greater power capacity. Enova's fuel cell enabling components are part of the proposed fleets of fuel cell vehicles being utilized by both Ford Motor Company - the Ford Focus FCV- and Hyundai Motor Company - the Hyundai Tucson fuel cell hybrid electric vehicle - - in response to the U.S. Department of Energy's solicitation, entitled "Controlled Hydrogen Fleet and Infrastructure Demonstration and Validation Project." This government-funded project, which commenced in late 2004, will last over five years evaluating the economic and performance feasibility of fuel cell vehicles and infrastructure across the U.S. The Company will continue to explore new applications for this versatile technology in both mobile and stationary systems. Research and Development Programs - --------------------------------- We continue to pursue government and commercially sponsored development programs for both ground and marine heavy-duty drive system applications. 15 Our program with Mack Truck, Inc., Powertrain division - a unit of The Volvo Group, Sweden, for the development and manufacture of a motor controller, electric motor and battery management systems for a new parallel hybrid drive system continues on schedule. The new parallel hybrid vehicle program is part of the Air Force's efforts to improve efficiency, reduce fuel and maintenance costs, provide re-generative brake energy and reduce emissions. The refueler fleet consists of approximately 300 vehicles and, upon successful completion and evaluation of the refueler vehicle, there is the potential for additional upgrades to the parallel hybrid drive system. As part of the program, Mack Trucks will also evaluate the applicability of the drive system to commercial vehicles commencing with its Class 8 Refuse Hauler. Mack Truck currently produces approximately 3,000 refuse vehicles per annum for major customers such as Waste Management. This development program is anticipated to be completed in mid 2005, followed by an evaluation period of approximately three to nine months. We received additional orders for our fuel cell power management and conversion components for Hyundai Motor Company's (HMC) latest fuel cell hybrid electric vehicle, the Tucson, which was unveiled at the Geneva Auto Show in March 2004. During the second quarter of 2005, Enova received an order for 5 additional systems for delivery in the 3rd quarter 2005. HMC has notified Enova of its intent to order up to 35 more motors and controllers for additional vehicles for 2005 and 2006. Although we believe there is potential for such production in 2005, there can be no assurances at this time that such orders will be realized. Our HCATT fuel cell powered step-van continues on schedule to be completed in the third quarter of 2005, ending with an evaluation phase. This vehicle is almost identical to the Purolator step-van and utilizes the same fuel cell powered drive systems and components. We are experiencing a notable increase in interest from both government and military organizations for our products and integration services. The first of these being the project with CTC for the fuel cell powered MB-4 tow tractor. For the quarter ended June 30, 2005, we billed approximately $85,000 for all of our HCATT programs. Additionally, during the first quarter of 2005, we commenced a parallel hybrid study project with HCATT which may lead to a contract for the development of a pre-transmission parallel hybrid step-van for the U.S. Air Force in the second half of 2005. . Although we believe there is potential for production of this type of drive system and other development programs in 2005, there can be no assurances at this time that such contracts will be realized. We intend to establish new development programs with the Hawaii Center for Advanced Transportation Technologies in mobile and marine applications as well as other state and federal government agencies as funding becomes available. LIQUIDITY AND CAPITAL RESOURCES We have experienced cash flow shortages due to operating losses primarily attributable to research, development, marketing and other costs associated with our strategic plan as an international developer and supplier of electric propulsion and power management systems and components. Cash flows from operations have not been sufficient to meet our obligations. Therefore, we have had to raise funds through several financing transactions. At least until we reach breakeven volume in sales and develop and/or acquire the capability to manufacture and sell our products profitably, we will need to continue to rely on cash from external financing sources. In the second quarter of 2005, Enova entered into a stock purchase and warrant agreement to issue 123,456 post-split, shares of our common stock through a private placement offering at $4.05, per share for a total cash purchase of $500,000. The funds were received and the shares were issued in June 2005. The warrant agreement grants the right for the investor to purchase 24,961, post-split, shares of our common stock at a price of $5.40 per share on or before June 2, 2006. These investors represented that they were accredited investors. We relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for the exemption from registration of the sale of such shares. 16 On July 19, 2005, we entered into an agreement with a placement agent relating to the sale of up to 5,350,000 new shares of its common stock. Pursuant to the agreement, the placement agent has sold all such shares of common stock at a price of $3.78 per share to certain eligible investors located outside the United States. The approximate gross proceeds from the sale are $20,000,000, before fees to Investec Investment Bank and other costs associated with the listing and placement of approximately $2,000,000. We received approximately $18,000,000 of net proceeds from the offering. The sale of this common stock was conducted pursuant to the requirements of Regulation S under the Securities Act of 1933. Among other things, each investor purchasing shares of the Registrant's common stock in the offering has represented that he or she is not a "U.S. Person" as defined in Rule 902 of Regulation S. In addition, neither the Registrant nor the placement agent has conducted any selling effort directed at the United States in connection with the offering. All shares of common stock to be issued in the offering will be endorsed with a restrictive legend indicating that the shares are being issued pursuant to Regulation S under the Securities Act and will be deemed to be "restricted securities." As a result, the purchasers of such shares will not be able to resell the shares in the United States without registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act. Our operations during the quarter ended June 30, 2005 were financed by development contracts and product sales, as well as from working capital reserves. During the six months ended June 30, 2005, our operations required $1,158,000 more in cash than was generated. Enova continues to increase marketing and development spending as well as administrative expenses necessary for expansion to meet customer demand. Accounts receivable increased by $204,000 from $522,000, or approximately 39% from the balance at December 31, 2004 (net of write-offs). The increase results from additional product sales in the second quarter as well as continued progress on our development contracts with Tomoe and HMC. We are realizing an increase in sales activity for our drive systems, components and development services which commenced in the fourth quarter of 2004 and we anticipate that we will increase receivables during the next several quarters. Inventory decreased by $147,000 from $1,036,000 or 14% from December 31, 2004 balances. The decrease was due to the fulfillment of product orders received in the first quarter of 2005. Prepaid expenses increased by net $141,000 at June 30, 2005 from the December 31, 2004 balance of $304,000 or 37% due to the renewal of our various insurance policies and deposits placed for several inventory purchases. Fixed assets increased by $51,000 or 3%, before depreciation, for the quarter ended June 30, 2005 from the prior year balance of $1,754,000 due to the purchase of both computer and production equipment. Investments decreased by $66,000 for the six months ended June 30, 2005 from $1,768,000 at December 31, 2004, which reflects our pro-rata share of losses attributable to our forty percent investment interest in the Hyundai-Enova Innovative Technology Center (ITC). For the six months ended June 30, 2005, the ITC generated a net loss of approximately $165,000, resulting in a charge to Enova of $66,000 utilizing the equity method of accounting for our interest in the ITC. Other assets decreased by $54,000 over the six months ended June 30, 2005 from $296,000 at December 31, 2004 as we continued to amortize the asset relating to the Ford Value Participation Agreement and our other intellectual property assets. Intellectual property assets, including patents and trademarks remained unchanged at $92,000 at June 30, 2005. Accounts payable increased over the six months ended June 30, 2005 by $252,000 to $317,000 from $66,000 at December 31, 2004. The increase in accounts payable is due to additional purchases of materials and goods for customers. These payables are routinely incurred and paid during the ordinary course of business. 17 Deferred revenue decreased from $392,000 to $84,000 in the six months ended June 30, 2005 as we recognized an additional $308,000 in revenues for the six months ended June 30, 2005 on the Tomoe Singapore project based on the percentage of completion method of revenue recognition. The deferred revenues for the current portion of this contract have been fully recognized and we will commence billing as we progress on the development and production phases of that contract in 2005 and 2006. Other accrued expenses, including accrued payroll, increased by a net of $11,000 for the six months ended June 30, 2005 from the balance of $207,000 at December 31, 2004, from a combination of factors including increases in insurance contracts payable associated with our liability insurance policies and quarter-end payroll accruals. During the quarter ended June 30, 2005, we also paid off our Line of Credit for a total reduction of $229,000 from the December 31, 2004 balance. Accrued interest increased by $150,000 for the quarter ended June 30, 2005, an increase of 11% from the balance of $1,378,000 at December 31, 2004. The increase was due to interest on the Note due the Credit Managers Association of California for $3.2 million per the terms of the Note as well as the Schulz note payable as discussed in Note 2 of the financial statements. The future unavailability or inadequacy of financing to meet future needs could force us to delay, modify, suspend or cease some or all aspects of our planned operations. RESULTS OF OPERATIONS Net revenues for the three and six month periods ending June 30, 2005 were $1,322,000 and $2,014,000, respectively, as compared with $718,000 and $1,826,000 for the corresponding periods in 2004, an increase of 84% and 10% respectively. Net production revenues for the quarter ended June 30, 2005 increased to $817,000 from $456,000 for the same period in 2004. Net R&D revenues for the quarter ended June 30, 2005 increased to $505,000 from $262,000 for the quarter ended June 30, 2004. The increase in production revenues is primarily the result of delivery of drive systems to our customers as forecasted in prior quarters. Our sources of revenue for the second quarter of 2005 came predominantly from product sales rather than development contracts. Product sales as a percentage of total revenues were 62% for the three months ended June 30, 2005, and 65% of total revenues for the six months ended therein, with sales of our HybridPower 120kW drive systems accounting for a majority of our product sales. We believe this trend will continue to accelerate for the foreseeable future as more current and prospective customers purchase additional drive systems for their production vehicles. We will continue to seek out and contract for new development programs with both our current partners such as WrightBus, Eneco, EPT, FAW, Tomoe, Hyundai and our other U.S., Asian and European alliance partners, as well as with new alliances with other vehicle manufacturers and energy companies to enhance our technology and our product offerings. Research and development revenues for the second quarter of 2005 are a result of development programs and engineering services for the Tomoe LTA train, the HMC fuel cell bus and various HCATT programs. Cost of revenues consists of component and material costs, direct labor costs, integration costs and overhead related to manufacturing our products. Product development costs incurred in the performance of engineering development contracts for the U.S. Government and private companies are charged to cost of sales for this contract revenue. Cost of revenues for the quarter ended June 30, 2005 increased $505,000 to $1,024,000 from $519,000 for the same period in 2004. For the six months ending June 30, 2005, there was an increase in cost of revenues from $1,177,000 to $1,594,000 for the same six-month period in 2004. These increases are primarily attributable to the increase in sales for the three and six months, as well as additional support costs for some of our new product lines. We anticipate there may be additional increases in cost of sales for products in 2005 due to foreign exchange rate fluctuations of the U.S. dollar versus those currencies of our primary manufacturer. We anticipate this to be offset by a reduction in costs associated with manufacturing these products due to increasing purchases, thereby improving our gross margins. Internal research, development and engineering expenses remained constant for the three months ended June 30, 2005 at $178,000 as compared with $181,000 in the same period in 2004. For the six months ended June 30, 2005, such expenses 18 increased to $395,000 from $309,000 in 2004. As the market for heavy-duty hybrid vehicles continues to evolve and grow, we have increased allocating engineering resources to the development and enhancement of our new parallel hybrid drive systems, our series hybrid system, upgrading proprietary control software, higher power DC-DC converters and advancing our digital inverters and other power management firmware. Selling, general and administrative expenses increased from $453,000 to $550,000, or 21%, for the three months ended June 30, 2005 from the previous year's comparable period. For the six months ended June 30, 2005, the increase was from $935,000 to $1,158,000 or a 24% increase. The increases are attributable to additional marketing, engineering and technical staff employed in the first half of 2005 as well as increased expense due to stricter regulatory oversight in conjunction with the Sarbanes-Oxley Act of 2002 and our efforts to attract additional capital funding. Management continues to implement cost reduction strategies in 2005 in its efforts to achieve profitability, although management cannot assure that profitability will be achieved. Net interest and other income/expense remained relatively constant at approximately $72,000 for the second quarter of 2005, down slightly from the same period in 2004. For the six months ended June 30, 2005, net interest and other income/expense was $141,000 compared to $124,000 for the same period in 2004. We incurred a loss from continuing operations of $528,000 in the second quarter of 2005 compared to a loss of $602,000 in the second quarter of 2004, which represents a 5% reduction in loss. For the six months ending June 30, 2005, the loss increased from $763,000 to $1,340,000 or a 75% increase. The increase was attributable to several factors including higher comparative costs of revenue due to the type of products sold in the first half of 2005 as compared to 2004, higher support costs in the second quarter of 2005, increased internal development efforts and higher general operating costs due to factors noted above. By increasing sales revenues while maintaining cost management strategies currently in effect, we believe we will be able to reduce our annual loss from operations as compared with prior years' results; however, management cannot assure that these results will be achieved. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This Form 10-Q contains forward-looking statements concerning our existing and future products, markets, expenses, revenues, liquidity, performance and cash needs as well as our plans and strategies. Forward-looking statements may be identified by the use of terminology such as "may," "anticipate," "estimate," "plans," "expects," "believes," "will," "potential" and by other comparable terminology or the negative of any of the foregoing. These forward-looking statements involve risks and uncertainties and are based on current management's expectations and we are not obligated to update this information. Many factors could cause actual results and events to differ significantly from the results anticipated by us and described in these forward looking statements including, but not limited to, the following risk factors. Net Operating Losses. We experienced recurring losses from operations and had an accumulated deficit of $101,798,000 at June 30, 2005. There is no assurance, however, that any net operating losses will be available to us in the future as an offset against future profits for income tax purposes. Continued Losses. For the three months ended June 30, 2005 and 2004, we had net losses of $528,000 and $602,000 respectively on sales of $1,322,000 and $718,000, respectively. For the six months ended June 30, 2005 and 2004, we had net losses of $1,340,000 and $763,000 respectively on sales of $2,014,000 and $1,826,000, respectively. Our independent auditors' opinion on our audited financial statements includes a going concern qualification. Our independent auditors have included an explanatory paragraph in their audit report issued in connection with our financial statements for the year ended December 31, 2004 which states that our recurring operating losses raise substantial doubt about our ability to continue as a going concern. Our 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. 19 In July 2005, we raised approximately $20,000,000 with net proceeds to the Company of approximately $18,000,000 in conjunction with a placement of 5,350,000 shares of common stock on the London Stock Exchanges AIM Market as detailed in Note 6 of our financial statements included in the Form 10-Q. We believe we now have sufficient funds to continue operations for the next thirteen months. Nature of Industry. The mobile and stationary power markets, including electric vehicle and hybrid electric vehicles, continue to be subject to rapid technological change. Most of the major domestic and foreign vehicle manufacturers and vehicle component manufacturers: (1) have already produced electric and hybrid vehicles, and/or (2) have developed improved electric storage, propulsion and control systems, and/or (3) are now entering or have entered into production, while continuing to improve technology or incorporate newer technology. In addition, the stationary power market is still in its infancy. A number of established energy companies are developing new technologies. Cost-effective methods to reduce price per kilowatt have yet to be established and the stationary power market is not yet viable. Our current products are designed for use with, and are dependent upon, existing technology. As technologies change, and subject to our limited available resources, we plan to upgrade or adapt our products in order to continue to provide products with the latest technology. We cannot assure you, however, that we will be able to avoid technological obsolescence, that the market for our products will not ultimately be dominated by technologies other than ours, or that we will be able to adapt to changes in or create "leading-edge" technology. In addition, further proprietary technological development by others could prohibit us from using our own technology. Our industry is affected by political and legislative changes. In recent years there has been significant public pressure to enact legislation in the United States and abroad to reduce or eliminate automobile pollution. Although states such as California have enacted such legislation, we cannot assure you that there will not be further legislation enacted changing current requirements or that current legislation or state mandates will not be repealed or amended, or that a different form of zero emission or low emission vehicle will not be invented, developed and produced, and achieve greater market acceptance than electric or hybrid electric vehicles. Extensions, modifications or reductions of current federal and state legislation, mandates and potential tax incentives could also adversely affect our business prospects if implemented. Changed legislative climate. Because vehicles powered by internal combustion engines cause pollution, there has been significant public pressure in Europe and Asia, and enacted or pending legislation in the United States at the federal level and in certain states, to promote or mandate the use of vehicles with no tailpipe emissions ("zero emission vehicles") or reduced tailpipe emissions ("low emission vehicles"). Legislation requiring or promoting zero or low emission vehicles is necessary to create a significant market for electric vehicles. The California Air Resources Board (CARB) is continuing to modify its regulations regarding its mandatory limits for zero emission and low emission vehicles. Furthermore, several car manufacturers have challenged these mandates in court and have obtained injunctions to delay these mandates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), an evaluation was carried out by the Company's President, Chief Executive Officer and its acting Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures 20 (as defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of the end of the quarter ended June 30, 2005. Based upon that evaluation of these disclosure controls and procedures, the President, Chief Executive Officer and acting Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the quarter ended June 30, 2005 to ensure that material information relating to the Company was made known to him particularly during the period in which this quarterly report on Form 10-Q was being prepared. Changes in internal controls over financial reporting. There was not any change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings We may from time to time become a party to various legal proceedings arising in the ordinary course of business. As of July 12, 2005, the Company was not involved in any legal proceedings. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. California law prohibits the payment of dividends unless the Company has sufficient retained earnings or meets certain asset to liability ratios. On June 3, 2005, Enova entered into a stock purchase and warrant agreement to issue 123,456, post-split, shares of our common stock through a private placement offering at $4.05, per share for a total cash purchase of $500,000. The funds were received and the shares were issued in June 2005. The warrant agreement grants the right for the investor to purchase 24,961, post-split, shares of our common stock at a price of $5.40 per share on or before June 2, 2006. These investors represented that they were accredited investors. We relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for the exemption from registration of the sale of such shares. During the three months ended June 30, 2005, the Company has issued or accrued common stock of Enova to the non-executive board directors in accordance with the September 1999 Board of Directors compensation package for outside directors. During the three months ended June 30, 2005, we recorded 8,556, post-split shares of restricted common stock as common stock subscribed to the Board of Directors at an average price of $4.28 per share for full and telephonic board meetings and committee meetings during the second quarter of 2005. We relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for the exemption from registration of the sale of such shares. As of June 30, 2005, 93,258 shares, post-split, had been issued under the above compensation plan for Directors. Item 3. Defaults upon Senior Securities: None. Item 4. Submission of Matters to a Vote of Securities Holders: None. Item 5. Other Information: On July 14, 2005, the Company entered into indemnification agreements with each of its directors (each an "Indemnitee"). The agreements govern each Indemnitee's right to indemnification in accordance with the Company's Articles of Incorporation and applicable law. Pursuant to the agreements, the Company will maintain Director and Officer Insurance for each Indemnitee. In addition, the Company will indemnify the Indemnitee against expenses incurred in connection with any threatened, pending or completed action, suit or other proceeding to which the Indemnitee is a party by reason of the fact that the Indemnitee is or was an agent of the Company. The Company is obligated to advance all expenses incurred by the Indemnitee in connection with a qualifying proceeding within 20 days following a written request by the Indemnitee. The Indemnitee is obligated to repay such amounts advanced if it is ultimately determined, pursuant to the terms of the agreement, that the Indemnitee is not entitled to indemnification. 22 Item 6. Exhibits: 10.24* Form of Stock Purchase Agreement dated June 3, 2005 between Registrant and Eruca Limited. 10.25* Form of Warrant Agreement dated June 3, 2005 between Registrant and Eruca Limited. 10.26* Form of Director's Indemnification Agreement dated July 14, 2005 between Registrant and each of its directors as of July 14, 2005. 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 23 SIGNATURE Pursuant to the requirements 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. Date: August 16, 2005 ENOVA SYSTEMS, INC. (Registrant) /s/ Larry B. Lombard - ------------------------------- By: Larry B. Lombard, Chief Financial Officer 24 EX-10.24 2 p19484_ex10-24.txt FORM OF STOCK PURCHASE AGREEMENT Exhibit 10.24 EXHIBIT 10.24 WARRANT AND COMMON STOCK PURCHASE AGREEMENT THIS WARRANT AND COMMON STOCK PURCHASE AGREEMENT (the "Agreement") is made effective as of June 3, 2005 (the "Effective Date"), by and among Enova Systems, Inc., a California corporation located at 19850 South Magellan Drive, Torrance, California 90502 (the "Company" or the "Corporation") ), and the investor who is identified on and has executed the signature page to this Agreement ( the "Investor"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Shares and Warrants. 1.1 Sale of Shares and Warrants. (a) Subject to the terms and conditions of this Agreement, the Investor agrees, severally, to purchase and the Company agrees to sell and issue to the Investor, Five Million Five Hundred Fifty-five Thousand Five Hundred and Fifty-five (5,555,555) shares of the Company's Common Stock at the per share purchase price of the Common Stock of $0.09 per share for an aggregate purchase price of $499,999.95 (the "Purchase Price"). (b) In addition, subject to the terms and conditions of this Agreement, the Investor agrees to purchase, and the Company agrees to sell and issue to the Investor, a Warrant for the purchase price of $100 in form and substance attached hereto as Exhibit A to acquire One Million One Hundred Eleven Thousand One Hundred and Eleven (1,111,111) of the Company's Common Stock at an exercise price of $0.12 per share with an exercise period terminating no later than June 2, 2006 (the "Warrant"). (c) The shares of Common Stock sold to the Investor pursuant to this Agreement are hereinafter referred to as the "Shares." The Warrant to purchase Common Stock sold hereunder are hereinafter referred to as the "Warrant." The total amount of Common Stock and other securities issued or issuable upon exercise of the Warrant are hereinafter referred to as the "Conversion Stock." The Shares, the Warrants and the Conversion Stock are hereinafter collectively referred to as the "Securities." 1.2 Closing. The purchase and sale of the Shares and Warrant shall take place at the offices of Reed Smith, LLP Two Embarcadero, 20th Floor, San Francisco, CA 94111 at 10:00 A.M., effective as of the Effective Date, or at such other time and place as the Company and the Investor mutually agree upon (which time and place are designated as the "Closing"). Within thirty (30) days after the Closing, the Company shall deliver to the Investor a certificate representing the Shares and a corresponding Warrant, which such Investor is purchasing against delivery to the Company by the Investor of a check, wire transfer or cancellation of indebtedness (principal and interest)in the aggregate amount of the Purchase Price for the Shares plus $100 for the Warrant therefor payable to the Company's order. 2. Representations and Warranties of the Company. The Company hereby represents and warrants the following as of the Closing to the Investor: 2.1 Corporate Organization and Standing. The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Corporation has the requisite corporate power to carry on its business as presently conducted, and as proposed or contemplated to be conducted in the future, and to enter into and carry out the provisions of this Agreement and the transactions contemplated under this Agreement. 2.2 Authorization. All corporate action on the part of the Corporation, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement by the Corporation and the 25 performance of all of the Corporation's obligations hereunder has been taken. This Agreement, when executed and delivered by the Corporation, shall constitute a valid and binding obligation of the Corporation, enforceable in accordance with its terms, except as may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and non-assessable 2.3 No Breach. The issue and sale of the Shares and Warrant by the Corporation does not and will not conflict with and does not and will not result in a breach of any of the terms of the Corporation's incorporating documents or any agreement or instrument to which the Corporation is a party. The consummation of the transactions or performance of the obligations contemplated by this Agreement will not result in a breach of any term of, or constitute a default under, any statute, indenture, mortgage, or other agreement or instrument to which the Corporation or any of its subsidiaries is or are a party or by which any of them is or are bound. 2.4 Pending or Threatened Claims. Neither the Corporation nor any of its subsidiaries is a party to any action, suit or proceeding which could materially affect its business or financial condition, and no such actions, suits or proceedings are contemplated or have been threatened. 2.5 Brokers and Finders. No agent, broker, investment banker or other firm or person acting on behalf or under the authority of the Company is or shall be entitled to any broker's or finder's fee or any other commission or similar fee from the Company in connection with any of the transactions contemplated by this Agreement. 3.0 Representations and Warranties of the Investor. The Investor hereby represents and warrants that: 3.1 Authorization. When executed and delivered by the Investor, and assuming execution and delivery by the Company, this Agreement and the Warrant constitute its valid and legally binding obligations, enforceable in accordance with their terms. If Investor is a corporation, partnership, trust or estate: (i) the individual executing and delivering this Agreement on behalf of the Investor has been duly authorized and is duly qualified to execute and deliver this Agreement and the Warrant on behalf of Investor in connection with the purchase of the Shares and the Warrant and (ii) the signature of such individual is binding upon Investor. The Investor represents that it has full power and authority to enter into this Agreement and the Warrant. 3.2 Purchase Entirely for Own Account. This Agreement is made with the Investor in reliance upon the Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Securities will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Securities. 3.3 Disclosure of and Access to Information. The Investor has had an opportunity to discuss the Corporation's business, management and financial affairs with its management and to obtain any additional information which the Investor has deemed necessary or appropriate for deciding whether or not to purchase the Securities, and has had an opportunity to receive, review and understand the disclosures and information regarding the Company's financial statements, capitalization and other business information as set forth in the Company's filings with the Securities and Exchange Commission (the "SEC Filings") which are all incorporated herein by reference, together with all exhibits referenced therein. The Investor acknowledges that no representations or warranties, oral or written, have been made by the Company or any agent thereof except as set forth in this Agreement. 26 3.4 Investment Experience. The Investor has such knowledge and experience in financial and business matters, including investments in other start-up companies, that it is capable of evaluating the merits and risks of the investment in the Securities, and it is able to bear the economic risk of such investment. Further, the individual executing this Agreement has such knowledge and experience in financial and business matters that he/it is capable of utilizing the information made available to him/it in connection with the offering of the Securities, of evaluating the merits and risks of an investment in the Securities and of making an informed investment decision with respect to the Securities, including assessment of the Risk Factors set forth in the SEC Filings which are incorporated herein by reference. 3.5 Restricted Securities. The Investor understands that the Shares and Warrants it is purchasing and the Conversion Stock are characterized as "restricted securities" under the United States federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, the Investor represents that it is familiar with Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. The Investor is aware that there is currently a very limited "over-the-counter" public market for the Company's common stock shares which are eligible for such sales. There is no guarantee that a more established public market will develop at any time in the future. The Investor understands that the Securities are all unregistered and may not presently be sold in even this limited public market. The Investor understands that the Securities cannot be readily sold or liquidated in case of an emergency or other financial need. The Investor has sufficient liquid assets available so that the purchase and holding of the Securities will not cause it undue financial difficulties. 3.6 Accredited Investor. The Investor is an "accredited investor" as that term is defined in Regulation D promulgated by the Securities and Exchange Commission. The term "Accredited Investor" under Regulation D refers to: (i) A person or entity who is a director or executive officer of the Corporation; (ii) Any bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Exchange Act; insurance Corporation as defined in Section 2(13) of the Securities Act; investment Corporation registered under the Investment Corporation Act of 1940; or a business development Corporation as defined in Section 2(a)(48) of that Act; Small Business Investment Corporation licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of $5,000,000; employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance Corporation, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decision made solely by persons that are accredited investors; (iii) Any private business development Corporation as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iv) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the Securities offered, with total assets in excess of $5,000,000; 27 (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; (vi) Any natural person who had an individual income in excess of $200,000 during each of the previous two years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; (vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Securities offered, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment; or (viii) Any entity in which all of the equity owners are accredited investors. As used in this Section 3.6, the term "net worth" means the excess of total assets over total liabilities. For the purpose of determining a person's net worth, the principal residence owned by an individual should be valued at fair market value, including the cost of improvements, net of current encumbrances. As used in this Section 3.6, "income" means actual economic income, which may differ from adjusted gross income for income tax purposes. Accordingly, the undersigned should consider whether it should add any or all of the following items to its adjusted gross income for income tax purposes in order to reflect more accurately its actual economic income: Any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to an IRA or Keogh retirement plan, and alimony payments 3.7 Economic Risk. The Investor understands that an investment in the Company involves substantial risks. The Investor understands all of the risks related to the purchase of the Securities. The Investor further understands that the purchase of the Securities will be a highly speculative investment. The Investor is able, without impairing the Investor's financial condition, to hold the Securities for an indefinite period of time and to suffer a complete loss of the Investor's investment. 3.8 Brokers or Finders. The Company has not, and will not, incur, directly or indirectly, as a result of any action taken by such Investor, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. 3.9 Tax Liability. It has reviewed with its own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. It relies solely on such advisors and not on any statements or representations of the Company or any of its agents. It understands that it (and not the Company) shall be responsible for its own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 3.10 Further Limitations on Disposition. Without in any way limiting the representations set forth above, the Investor further agrees not to make any disposition of all or any portion of the Shares, Warrants (or the Conversion Stock) unless and until: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b) (i) The Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if requested by the Company, the Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act, provided that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 of such Act; or 28 3.11 Legends. It is understood that the certificates evidencing the Shares and Warrants (and the Conversion Stock) may bear one or all of the following legends: (a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS, AND MAY BE OFFERED AND SOLD ONLY IF SO REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THE HOLDER OF THESE SHARES MAY BE REQUIRED TO DELIVER TO THE COMPANY, IF THE COMPANY SO REQUESTS, AN OPINION OF COUNSEL (REASONABLY SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY) TO THE EFFECT THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (OR QUALIFICATION UNDER STATE SECURITIES LAWS) IS AVAILABLE WITH RESPECT TO ANY TRANSFER OF THESE SHARES THAT HAS NOT BEEN SO REGISTERED (OR QUALIFIED). THE COMPANY IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK. A COPY OF THE PREFERENCES, POWERS, QUALIFICATIONS AND RIGHTS OF EACH CLASS AND SERIES WILL BE PROVIDED TO EACH SHAREHOLDER WITHOUT CHARGE, UPON WRITTEN REQUEST. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER, INCLUDING A "LOCK-UP" PROVISION RESTRICTING THE TRANSFER OF THE SECURITIES FOR A PERIOD OF TIME NOT TO EXCEED ONE HUNDRED EIGHTY (180) DAYS FROM THE EFFECTIVE DATE OF THE CORPORATION'S PUBLIC OFFERING. (b) Any legend required by the laws of the State of California or any other applicable state, including any legend required by the California Department of Corporations and Sections 417 and 418 of the California Corporations Code. 4. Lock-up/Registration Rights. Except for the piggy-back registration rights granted under the Warrant, the Investor acknowledges and agrees that the Securities may be subject to certain restrictions on transfer following a registered public offering of the Corporation's securities as provided in this Section 4. In connection with any registration of the Corporation's securities, the Investor agrees, upon the request of the underwriters managing such offering of the Company's securities, if applicable, or the Company if there are no underwriters, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Corporation and, if applicable, such underwriters, as the case may be, for such period of time, not to exceed thirty (30) days before and one hundred eighty (180) days, after the effective date of such registration as the Corporation or the underwriters may specify; provided, however, that all executive officers, directors and shareholders holding more than 1% of the fully diluted capital stock of the Corporation are subject to the same restrictions as the Investor. The Corporation and underwriters may request such additional written agreements in furtherance of such standoff in the form reasonably satisfactory to the underwriter and the Investor. The Corporation may also impose stop-transfer instructions with respect to the shares subject to the foregoing restrictions until the end of said one hundred eighty (180) day or shorter period. 5. Conditions of Investor's Obligations at the Closing. The obligations of the Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against the Investor unless consented to in writing thereto: 5.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the date of the Closing 29 5.2 Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 5.3 Satisfaction. All corporate and legal proceedings taken by the Company in connection with the transactions contemplated by this Agreement and all documents relating to such transactions shall be satisfactory to the Investors in the reasonable exercise of their judgment. 5.4 Warrant. The Company and the Investor shall have entered into the Warrant. 5.5 Consents, Permits, and Waivers. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement (except for such as may be properly obtained subsequent to the Closing). 5.6 Legal Investment. Subject in part to the truth and accuracy of the Investor's representations set forth in this Agreement, the sale and issuance of the Shares and Warrants to the Investor, and the proposed delivery of the Conversion Stock into which the Warrant may convert, shall be legally permitted by all securities laws and regulations to which the Investor and the Company are subject. 6. Conditions of the Company's Obligations at the Closing. The obligations of the Company to the Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective unless consented to in writing by the Company: 6.1 Representations and Warranties. The representations and warranties of the Investor contained in Section 3 shall be true on and as of the date of the Closing. 6.2 Payment of Purchase Price. The Investor shall have delivered the purchase price specified in Section 1.1(a) and 1.1(b). 6.3 Warrant. The Company and the Investor shall have entered into the Warrant. 7. Miscellaneous. 7.1 Survival of Warranties. The warranties, representations and covenants of the Company and Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company. In particular, the warranties and representations of the Company in Section 2 shall survive for a period of one year after the Closing. 7.2 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.3 Governing Law/Venue. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California, without reference to the conflict of laws. Venue for all purposes hereunder shall be the County of Los Angeles, California. 7.4 Counterparts/Titles. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which 30 together shall constitute one and the same instrument. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.5 Notices. All notices and other communications required or permitted hereunder shall be in writing and, except as otherwise noted herein, shall be deemed effectively given upon personal delivery, delivery by nationally recognized courier, by facsimile to a telephone number provided by the receiving party or upon deposit with the United States Post Office, (by first class mail, postage prepaid) addressed: (a) if to the Company, at the address set forth on the first page of this Agreement (or at such other address as the Company shall have furnished to the Investors in writing) and (b) if to the Investor, at the latest address of the Investor on the Company's records, which as of the Effective Date shall be deemed to be the address set forth on the signature page hereto 7.6 Finder's Fee/Investor Legal Fees. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. The Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.7 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement (including any exhibit or schedule hereto), the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.8 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), by the Investor and the Company. Any amendment or waiver effected in accordance with this Section 7.9 shall be binding upon the Investor and each transferee of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. All provisions under this Agreement and the Warrant shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Company or the Investor. 7.9 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision will be deemed amended to conform to applicable law so as to be valid, legal and enforceable in such jurisdiction, and the validity, legality and enforceability of such provision will not be affected or impaired thereby in any other jurisdiction; if such provision cannot be amended without altering materially the intention of the parties, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 7.10 Stock Splits. All references to numbers of shares in this Agreement shall be appropriately adjusted to reflect any stock dividend, split, combination or other recapitalization of shares by the Company occurring after the Effective Date. 7.11 Entire Agreement/Acknowledgment of Representation. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the parties hereto are expressly canceled. The Investor acknowledges that the Company's counsel, Reed Smith LLP, is representing only the Company in this transaction and the terms and conditions set forth in this Agreement and the Warrant. The Investor represents 31 and acknowledges that it has had the opportunity and has been advised by the Company to consult with independent counsel of its own selection concerning the transactions set forth in this Agreement and the negotiations and terms set forth in this Agreement and the Warrant. Investor further acknowledges and represents that it has had no communications or discussions with the Company's counsel. 7.12 Confidential Information. The Investor agrees that any information not currently set forth in the Company's SEC Filings may be treated by the Company as confidential with respect to the Company or its activities ("Confidential Information"). The Investor understands and agrees that such Confidential Information may not be disclosed to any third party or used by the Investor for purposes of trading in the Company's publicly traded stock until such Confidential Information is publicly disclosed by the Company or is no longer deemed in writing by the Company to be Confidential Information. [SIGNATURES TO FOLLOW] 32 SIGNATURE PAGE TO ENOVA SYSTEMS, INC. JUNE 2005 WARRANT AND COMMON STOCK PURCHASE AGREEMENT IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "COMPANY" ENOVA SYSTEMS., INC. By: _______________________________________ Edwin Riddell, Chief Executive Officer "INVESTOR" Eruca Limited Signature:__________________________________ By:_________________________________________ Title:______________________________________ Address: 50 Raffles Place #17-01 Singapore Land Tower Singapore 048623 33 EX-10.25 3 p19484_ex10-25.txt FORM OF WARRANT AGREEMENT Exhibit 10.25 EXHIBIT 10.25 ENOVA SYSTEMS, INC. WARRANT AND COMMON STOCK PURCHASE AGREEMENT June 3, 2005 NEITHER THIS WARRANT, NOR THE SHARES REPRESENTED BY THIS WARRANT, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES ACT OF ANY STATE, AND THEREFORE THEY MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR ASSIGNED UNLESS REGISTERED UNDER THE APPLICABLE PROVISIONS OF SUCH ACTS OR UNLESS THE CORPORATION HAS RECEIVED AN OPINION FROM LEGAL COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, ENOVA SYSTEMS, INC., a California corporation (the "Corporation" or the "Company"), hereby grants to Eruca Limited ("Holder"), the right to purchase from the Corporation 1,111,111 shares of the Common Stock of the Corporation as adjusted from time to time under the provisions of this Warrant (the "Warrant Shares"), subject to the following terms and conditions: 1. Term. This Warrant may be exercised in whole, or in part, at any time from the date of issuance of this Warrant through the first to occur of (a) June 2, 2006; or (b) the closing of the Corporation's sale of all or substantially all of its assets or the acquisition of the Corporation by another entity by means of merger or other transaction as a result of which shareholders of the Corporation immediately prior to such acquisition possess less than 50% of the voting power of the acquiring entity immediately following such acquisition, subject to certain stand-off as set forth in Section 9 (below) (collectively, the "Exercise Period"). 2. Purchase Price. The purchase price for each share of the Corporation's Common Stock purchasable hereunder shall be $0.12 per share (the "Warrant Exercise Price"). 3. Exercise of Warrant. The purchase rights represented by this Warrant may be exercised by the Holder, in whole or in part, at any time and from time to time before the end of the Exercise Period by the surrender of this Warrant at the office of the Corporation, at its principal office in Torrance, California (or such other office or agency of the Corporation as it may be designated by notice in writing to the Holder at the address of the Holder appearing on the books of the Corporation), accompanied by payment in full of the amount of the aggregate purchase price of the Warrant Shares in immediately available funds; provided, however, that this Warrant may not be exercised for less than the lesser of 100,000 shares and the remaining Warrant Shares then exercisable under this Warrant; provided, further, that such exercise shall be conditioned upon Holder meeting the investment suitability requirements set forth in Section 6 below upon exercise. Certificates for shares purchased hereunder shall be delivered to the Holder within thirty (30) business days after the date on which this Warrant shall have been exercised as aforesaid. 34 4. Fractional Interest. The Corporation shall not be required to issue any fractional shares on the exercise of this Warrant. 5. Warrant Confers No Rights of Shareholder. Holder shall not have any rights as a shareholder of the Corporation with regard to the Warrant Shares prior to actual exercise resulting in the purchase of the Warrant Shares. 6. Investment Representation. Neither this Warrant nor the Warrant Shares issuable upon the exercise of this Warrant have been registered under the Securities Act, or under the California Corporate Securities Law of 1968. Holder acknowledges by acceptance of the Warrant that (a) it has acquired this Warrant for investment and not with a view toward distribution; and either (b) it has a pre-existing personal or business relationship with the Corporation, or its executive officers, or by reason of its business or financial experience it has the capacity to protect its own interests in connection with the transaction; and (c) it is an accredited investor as that term is defined in Regulation D promulgated under the Securities Act. Holder agrees that any Warrant Shares issuable upon exercise of this Warrant will be acquired for investment and not with a view toward distribution, and such Warrant Shares will not be registered under the Securities Act and applicable state securities laws, and that such Warrant Shares may have to be held indefinitely unless they are subsequently registered or qualified under the Securities Act and applicable state securities laws or, based on an opinion of counsel reasonably satisfactory to the Corporation, an exemption from such registration and qualification is available. Holder, by acceptance hereof, consents to the placement of the following restrictive legends, or similar legends, on each certificate to be issued to Holder by the Corporation in connection with the issuance of such Warrant Shares in addition to any other legends set forth in that certain Warrant and Common Stock Purchase Agreement Purchase entered into by and between the Holder and the Corporation and incorporated herein by reference (the "Purchase Agreement"): "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS COVERING SUCH SECURITIES, OR (B) THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES SATISFACTORY TO THE CORPORATION, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND ANY FURTHER QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE LAW." "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER FOR A PERIOD OF TIME, NOT TO EXCEED ONE HUNDRED EIGHTY (180) DAYS FROM THE EFFECTIVE DATE OF THE CORPORATION'S FIRST UNDERWRITTEN PUBLIC OFFERING." 7. Stock Fully Paid, Reservation of Shares. All Warrant Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. The Corporation agrees at all times during the Exercise Period to have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented hereby. 35 8. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable under the exercise of the Warrant, and the Warrant Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: a. Reclassification or Merger. Subject to earlier termination of this Warrant under Section 1 above, in any case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in the par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is a continuing corporation, and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), the Corporation, or such successor or purchasing corporation, as the case may be, shall execute a new Warrant (in form and substance satisfactory to Holder), providing that Holder shall have the right to exercise such new Warrant and, upon such exercise, to receive, in lieu of each share of Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of one (1) share of Common Stock. Such new Warrant shall provide for adjustment that shall be as nearly equivalent as may be practicable to the adjustment provided for in this Section 8. The provisions of this subsection 8.a. shall similarly apply to successive reclassifications, changes, mergers and transfers. b. Subdivisions or Combinations of Shares. If the Corporation at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the Warrant Exercise Price, and the number of shares issuable upon exercise hereof shall be proportionately adjusted. c. Stock Dividends. If the Corporation at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Common Stock (except as a distribution specifically provided for in the foregoing subsections 8.a. and 8.b.), then the Warrant Exercise Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of Shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of Shares of Common Stock outstanding immediately after such dividend or distribution and the number of Warrant Shares subject to this Warrant shall be proportionately adjusted. d. No Impairment. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 8., and in the taking of all such action as may be necessary or appropriate in order to protect the rights of Holder against impairment. e. Notice of Adjustments. Whenever the Warrant Exercise Price shall be adjusted pursuant to the provisions hereof, the Corporation shall within thirty (30) days after such adjustment deliver a certificate signed by its Chief Financial Officer to Holder setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Exercise Price, after giving effect to such adjustment. 9. Public Offering Lock-Up/Piggy-Back Registration. Except as provided herein, in connection with the next underwritten registration of the Corporation's securities, the Holder agrees, upon the request of the Corporation and the underwriters managing such underwritten offering of the Corporation's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Warrant Shares (other than those included in the registration) without the prior written consent of the 36 Corporation and such underwriters, as the case may be, for such period of time, not to exceed one hundred eighty (180) days, from the effective date of such registration as the underwriters may specify. The Corporation and underwriters may request such additional written agreements in furtherance of such standoff in the form reasonably satisfactory to the Corporation and such underwriter. The Corporation may also impose stop-transfer instructions with respect to the shares subject to the foregoing restrictions until the end of said one hundred eighty (180) day period. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holder) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash during the Exercise Period (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Warrant Shares and the "Shares" (as defined in the Purchase Agreement)), the Company shall, at such time, promptly give Holder written notice of such registration. Upon the written request of Holder given within ten (10) days after mailing of written notice by the Company, the Company shall, subject to the provisions herein, cause to be registered under the Act all of the Warrant Shares that Holder has requested to be registered; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section after the Company has effected a registration pursuant to this Section and such registration has been declared effective. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration whether or not Holder has elected to include securities in such registration. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section with respect to the Warrant Shares and Shares that Holder shall furnish to the Company such information regarding itself, the Warrant Shares and the Shares held by it, and the intended method of disposition of such securities as shall be required or requested by the Company to effect the registration of the Holder's Warrant Shares and Shares. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of the Warrant Shares and Shares with respect to the registrations pursuant hereto for the Holder, including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto, but excluding fees and disbursements of counsel for the Holder, stock transfer taxes, and any underwriting discounts and commissions relating to the Warrant Shares and Shares. Notwithstanding the foregoing, these piggy-back registration rights may NOT be transferred to any other person or entity. 10. Assignment. With respect to any offer, sale or other disposition of this Warrant or any underlying securities, the Holder will give written notice to the Corporation prior thereto, describing briefly the manner thereof, together with a written opinion of such Holder's counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any applicable federal or state law then in effect). Furthermore, no such transfer shall be made unless the transferee meets the same investor suitability standards set forth in Section 6 of this Warrant. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Corporation, as promptly as practicable, shall notify Holder that Holder may sell or otherwise dispose of this Warrant or the underlying securities, as the case may be, all in accordance with the terms of the written notice delivered to the Corporation. If a determination has been made pursuant to this Section 10 that the opinion of counsel for the Holder is not reasonably satisfactory to the Corporation, the Corporation shall so notify the Holder promptly after such determination has been made. Each Warrant thus transferred shall bear the same legends appearing on this Warrant, and underlying securities thus transferred shall bear the legends required by Section 6. The Corporation may issue stop transfer instructions to its transfer agent in connection with such restrictions. 11. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Corporation of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or stock certificate, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to 37 it, and upon reimbursement to the Corporation of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Corporation will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of this Warrant or stock certificate. 12. Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts between California residents entered into and to be performed entirely within the State of California. 13. Descriptive Headings. The headings used herein are descriptive only and for the convenience of identifying provisions, and are not determinative of the meaning or effect of any such provisions. ENOVA SYSTEMS, INC. AGREED AND ACCEPTED: HOLDER: ERUCA LIMITED By:___________________________ ____________________________________ (Signature) (Signature) ______________________________ ____________________________________ (Print Name & Title) (Print Name & Title) 38 EX-10.26 4 p19484_ex10-26.txt FORM OF DIRECTOR'S INDEMNIFICATION AGREEMENT Exhibit 10.26 EXHIBIT 10.26 ENOVA SYSTEMS, INC. DIRECTOR INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (the "AGREEMENT") is made effective as of July _____, 2005, by and between Enova Systems, Inc., a California corporation (the "Company"), and ________________, a Director of the Company (the "INDEMNITEE"). RECITALS: --------- A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors and officers of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors or officers. B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors and officers with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take. C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is beyond the personal resources of directors and officers. D. The Company believes that it is unfair for its directors and officers to assume the risk of huge judgments and other expenses which may occur in cases in which the director or officer received no personal profit and in cases where the director or officer was not culpable. E. The Company recognizes that the issues in controversy in litigation against a director or officer of a corporation such as the Company are often related to the knowledge, motives, and intent of such director or officer, that he or she is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director or officer can reasonably recall such matters and may extend beyond the normal time for retirement for such director or officer with the result that he or she, after retirement or in the event of death, his or her spouse, heirs, executors or administrators, may be faced with limited ability and undue hardship in maintaining an adequate defense, which may discourage such a director or officer from serving in that position. F. Based upon their experience as business managers, the Board of Directors of the Company (the "BOARD") has concluded that, to retain and attract talented and experienced individuals to serve as directors and officers of the Company and to encourage such individuals to take the business risks necessary for the success of the Company, it is necessary for the Company to contractually indemnify its directors and officers, and to assume for itself maximum liability for expenses and damages in connection with claims against such directors and officers in connection with their service to the Company, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and the Company's shareholders. G. Section 317 of the California Corporations Code (the "CODE"), under which the Company is organized ("SECTION 317"), empowers the Company to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 317 is not exclusive. 39 H. The Company is also investigating obtaining increased coverage of director's and officer's liability insurance ("D&O INSURANCE"). The Company believes that the interests of the Company's shareholders would best be served by a combination of such insurance as the Company may obtain in the future pursuant to the Company's obligations hereunder and the indemnification by the Company of the directors and officers of the Company. I. The Company desires and has requested the Indemnitee to serve or continue to serve as a director of the Company free from undue concern for claims for damages arising out of or related to such services to the Company. J. The Indemnitee is willing to serve, or to continue to serve, the Company, provided that he or she is furnished the indemnity provided for herein. THE PARTIES AGREE AS FOLLOWS: 1. DEFINITIONS. As used herein, the following terms shall have the following meanings: Section 1.1 "AGENT" of the Company shall mean any person who is or was a director, officer, employee or other agent of the Company or a Subsidiary (as defined below); or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a Subsidiary as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or a Subsidiary or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. Section 1.2 "EXPENSES" shall mean all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements, other out of pocket costs and reasonable compensation for time spent by the Indemnitee for which he or she is not otherwise compensated by the Company or any third party) actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement, Section 317 or otherwise; provided, however, that expenses shall not include any judgments, fines, ERISA excise taxes or penalties or amounts paid in settlement of a proceeding. Section 1.3 "PROCEEDING" shall mean any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative or any other type whatsoever. Section 1.4 "SUBSIDIARY" shall mean any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries. 2. AGREEMENT TO SERVE. The Indemnitee agrees to serve and/or continue to serve as a director of the Company, at its will, so long as the Indemnitee is duly appointed or elected and qualified in accordance with the applicable provisions of the by laws of the Company or until such time as the Indemnitee tenders his/her resignation in writing. 3. FUTURE LIABILITY INSURANCE. The Company hereby covenants and agrees that the Company shall use its reasonable best efforts consistent with prudent business practice to maintain in full force and effect D&O Insurance in reasonable amounts from established and reputable insurers. The parties acknowledge that such insurance in the future may not be available at an acceptable price or at all. 40 4. MANDATORY INDEMNIFICATION. Section 4.1 Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding (other than an action by or in the right of the Company) by reason of the fact that the Indemnitee is or was an Agent of the Company, or by reason of anything done or not done by the Indemnitee in any such capacity, the Company shall indemnify the Indemnitee against any and all Expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) actually and reasonably incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of such proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Section 4.2 Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee is or was an Agent of the Company, or by reason of anything done or not done by the Indemnitee in any such capacity, the Company shall indemnify the Indemnitee against any amounts paid in settlement of any such proceeding and all Expenses actually and reasonably incurred by the Indemnitee in connection with the investigation, defense, settlement, or appeal of such proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company; except that no indemnification under this subsection shall be made in respect of any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction due to willful misconduct of a culpable nature in the performance of a duty to the Company unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the court shall deem proper. Section 4.3 Actions where Indemnitee is Deceased. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that the Indemnitee is or was an Agent of the Company, or by reason of anything done or not done by the Indemnitee in any such capacity, the Company shall indemnify the Indemnitee against any and all Expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by or for the Indemnitee in connection with the investigation, defense, settlement or appeal of such proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, prior to, during the pendency or after completion of such proceeding Indemnitee is deceased, except that in a proceeding by or in the right of the Company no indemnification shall be due under the provisions of this subsection in respect of any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company, by a court of competent jurisdiction, due to willful misconduct of a culpable nature in the performance of his duty to the Company, unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the court shall deem proper. Section 4.4 Payments from D&O Insurance. Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by D&O Insurance. 41 5. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) incurred by the Indemnitee in the investigation, defense, settlement or appeal of a proceeding but not entitled, however, to indemnification for all of the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for that portion thereof to which the Indemnitee is entitled. 6. MANDATORY ADVANCEMENT OF EXPENSES. Subject to Section 10.1 below, the Company shall advance all Expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an Agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined pursuant to Section 8 hereof that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby, and such undertaking should be deemed to satisfy the requirements of Section 317(f) of the Code. The advances to be made hereunder shall be paid by the Company to the Indemnitee within 20 days following delivery of a written request therefor by the Indemnitee to the Company. 7. NOTICE AND OTHER INDEMNIFICATION PROCEDURES. Section 7.1 Commencement of Proceeding. Promptly after receipt by the Indemnitee of notice of the commencement of, or the threat of commencement of, any Proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. Section 7.2 Notice to Insurers. If, at the time of the receipt of a notice of the commencement of a Proceeding pursuant to Section 7.1 hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. Section 7.3 Assumption of Defense. If the Company shall be obligated to pay the Expenses of any Proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same Proceeding, provided that: (i) the Indemnitee shall have the right to employ his counsel in any such Proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 8. DETERMINATION OF RIGHT TO INDEMNIFICATION. Section 8.1 Appeal of Proceeding. To the extent the Indemnitee has been successful on the merits or otherwise in defense of any Proceeding referred to in Sections 4.1, 4.2, or 4.3 of this Agreement or in the defense of 42 any claim, issue or matter described therein, the Company shall indemnify the Indemnitee against Expenses actually and reasonably incurred by him/her in connection with the investigation, defense, or appeal of such Proceeding. Section 8.2 No Indemnification. In the event that Section 8.1 is inapplicable, the Company shall also indemnify the Indemnitee unless, and only to the extent that, the Company shall prove by clear and convincing evidence to a forum listed in Section 8.3 below that the Indemnitee has not met the applicable standard of conduct required to entitle the Indemnitee to such indemnification. Section 8.3 Selection of Forum. The Indemnitee shall be entitled to select the forum in which the validity of the Company's claim under Section 8.2 hereof that the Indemnitee is not entitled to indemnification will be heard from among the following: (a) A quorum of the Board consisting of directors who are not parties to the proceeding for which indemnification is being sought; (b) The shareholders of the Company; (c) Legal counsel selected by the Indemnitee, and reasonably approved by the Board, which counsel shall make such determination in a written opinion; or (d) A panel of three arbitrators, one of whom is selected by the Company, another of whom is selected by the Indemnitee and the last of whom is selected by the first two arbitrators so selected. Section 8.4 Submission of Claim. As soon as practicable, and in no event later than 30 days after written notice of the Indemnitee's choice of forum pursuant to Section 8.3 above, the Company shall, at its own expense, submit to the selected forum in such manner as the Indemnitee or the Indemnitee's counsel may reasonably request, its claim that the Indemnitee is not entitled to indemnification; and the Company shall act in the utmost good faith to assure the Indemnitee a complete opportunity to defend against such claim. Section 8.5 Binding Judgment. If the forum listed in Section 8.3 hereof selected by Indemnitee determines that Indemnitee is entitled to indemnification with respect to a specific Proceeding, such determination shall be final and binding on the Company. If the forum listed in Section 8.3 hereof selected by Indemnitee determines that Indemnitee is not entitled to indemnification with respect to a specific Proceeding, the Indemnitee shall have the right to apply to the court in which that Proceeding is or was pending or any other court of competent jurisdiction, for the purpose of enforcing the Indemnitee's right to indemnification pursuant to this Agreement. Section 8.6 Interpretation of Agreement. Notwithstanding any other provision in this Agreement to the contrary, the Company shall indemnify the Indemnitee against all Expenses incurred by the Indemnitee in connection with any Proceeding under this Section 8 involving the Indemnitee and against all Expenses incurred by the Indemnitee in connection with any other Proceeding between the Company and the Indemnitee involving the interpretation or enforcement of the rights of the Indemnitee under this Agreement unless a court of competent jurisdiction finds that each of the claims and/or defenses of the Indemnitee in any such Proceeding was frivolous or made in bad faith. 9. LIMITATION OF ACTIONS AND RELEASE OF CLAIMS. No Proceeding shall be brought and no cause of action shall be asserted by or on behalf of the Company or any Subsidiary against the Indemnitee, Indemnitee's spouse, heirs, estate, executors or administrators after the expiration of one year from the act or omission of the Indemnitee upon which such Proceeding is based; however, in a case where the Indemnitee fraudulently conceals the facts underlying such cause of action, no Proceeding shall be brought and no cause of action shall be asserted after the expiration of one year from the earlier of: (i) the date the Company or any Subsidiary of the Company discovers such facts; or (ii) the date the Company or any Subsidiary of the Company could have discovered such facts by the exercise of reasonable diligence. Any claim or cause of action of the Company or any Subsidiary of the Company, including claims predicated upon the negligent act or omission of the Indemnitee, shall be extinguished and deemed released unless asserted by filing of a legal action within such period. This Section 9 shall not apply to any cause of action which has accrued on the date hereof and of which the Indemnitee is aware on the date hereof, but as to which the Company has no actual knowledge apart from the Indemnitee's knowledge. 43 10. EXCEPTIONS. Any other provisions herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: Section 10.1 Claims Initiated by Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 317 but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board finds it to be appropriate; or Section 10.2 Lack of Good Faith. To indemnify the Indemnitee for any Expenses incurred by the Indemnitee with respect to any Proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such Proceeding was made in bad faith or was frivolous; or Section 10.3 Unauthorized Settlements. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a Proceeding effected within seven calendar days after delivery by the Indemnitee to the Company of the notice provided for in Section 7.1 hereof, unless the Company consents to such settlement. 11. NON-EXCLUSIVITY. The provisions for indemnification and advancement of Expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Company's Articles of Incorporation or Bylaws, the vote of the Company's shareholders or disinterested directors, other agreements, or otherwise, both as to action in Indemnitee's official capacity and to action in another capacity while occupying the position as an Agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an Agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. 12. INTERPRETATION OF AGREEMENT. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent now or hereafter permitted by law. 13. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 12 hereof. 14. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 15. SUCCESSORS AND ASSIGNS. The terms of this Agreement shall bind, and shall inure to the benefit of, the successors and assigns of the parties hereto. 16. NOTICE. All notices, requests, demand and other communications under this Agreement shall be in writing and shall be deemed duly given: (i) if delivered by hand and receipted for by the party addressee; or (ii) if mailed by 44 certified or registered mail with postage prepaid, on the third business day after the mailing date. Address for notice to either party are as shown on the signature pages of this Agreement, or as subsequently modified by written notice. 17. GOVERNING LAW. This Agreement shall be governed exclusively by and construed according to the laws of the State of California, as applied to contracts between California residents entered into and to be performed entirely within California. 18. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby irrevocably consent to the jurisdiction of the state and federal courts in the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state or federal courts in the State of California. IN WITNESS WHEREOF, the parties hereto have entered into this Indemnity Agreement effective as of the date first above written. ENOVA SYSTEMS. INC. By: ______________________________ Name: ____________________________ Title: ___________________________ INDEMNITEE __________________________________ [NAME OF DIRECTOR] 45 EX-31.1 5 p19484_ex31-1.txt CERTIFICATION OF CEO Exhibit 31.1 EXHIBIT 31.1 CERTIFICATIONS I, Edwin O. Riddell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Enova Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation: and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 16, 2005 /s/ Edwin O. Riddell - ------------------------------------------ By: Edwin O. Riddell, President and Chief Executive Officer 46 EX-31.2 6 p19484_ex31-2.txt CERTIFICATION OF CFO Exhibit 31.2 EXHIBIT 31.2 CERTIFICATIONS I, Larry B. Lombard, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Enova Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation: and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 16, 2005 /s/ Larry B. Lombard - --------------------------------------- By: Larry B. Lombard, Chief Financial Officer 47 EX-32 7 p19484_ex32.txt CERTIFICATION Exhibit 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly of Enova Systems, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Edwin O. Riddell, Chief Executive Officer, and Larry B. Lombard, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Edwin O. Riddell - -------------------------- Edwin O. Riddell Chief Executive Officer August 16, 2005 /s/ Larry B. Lombard - -------------------------- Larry B. Lombard Chief Financial Officer August 16, 2005 This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 48 -----END PRIVACY-ENHANCED MESSAGE-----