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Enova Systems, Inc. ENV Enova announces 3rd Quarter Results

  Enova Systems, Inc. (ENV) - Enova announces 3rd Quarter Results

RNS Number : 1725R
Enova Systems, Inc.
15 November 2012




15 November 2012

                              ENOVA SYSTEMS, INC

                          ("Enova" or "the Company")

                   Enova Reports 3^rd Quarter 2012 Results

                                      

Enova Systems, Inc., (NYSE Amex: ENA and AIM: ENV and ENVS), a leading
developer and manufacturer of electric, hybrid and fuel cell digital power
management systems, announces results for the three and nine month periods
ended 30 September 2012.



For further information please contact:
Enova Systems, Inc
John Micek, Chief Executive Officer     +1(310) 527-2800 x103
Daniel Stewart & Company Plc
Paul Shackleton/ Jamie Barklem          +44 (0) 20 7776 6550



                                      

                                      

                        PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS

                             ENOVA SYSTEMS, INC.

                                      

                                BALANCE SHEETS

                                         September 30,     December 31,  
                                              2012             2011      
ASSETS                                     (unaudited)                    
Current assets:                                                           
Cash and cash equivalents                 $      108,000   $    3,096,000 
Certificate of deposit, restricted              200,000         200,000 
Accounts receivable, net                        322,000         759,000 
Inventories and supplies, net                 2,860,000       4,036,000 
Prepaid expenses and other current
assets                                          148,000         242,000 
Total current assets                          3,638,000       8,333,000 
Long term accounts receivable                    73,000          79,000 
Property and equipment, net                     525,000         928,000 
Total assets                              $    4,236,000   $    9,340,000 
                                                                     
LIABILITIES AND STOCKHOLDERS' EQUITY                                  
Current liabilities:                                                  
Accounts payable                          $      233,000   $      354,000 
Deferred revenues                                18,000         320,000 
Accrued payroll and related expenses            103,000         266,000 
Other accrued liabilities                       405,000         517,000 
Current portion of notes payable                 63,000          62,000 
Total current liabilities                       822,000       1,519,000 
Accrued interest payable                      1,298,000       1,237,000 
Notes payable, net of current portion         1,268,000       1,286,000 
Total liabilities                             3,388,000       4,042,000 
Stockholders' equity:                                                 
Series A convertible preferred stock -
no par value, 30,000,000 shares
authorized; 2,642,000 shares issued and
outstanding; liquidating preference at
$0.60 per share as of September 30, 2012
and December 31, 2011                           528,000         528,000 
Series B convertible preferred stock -
no par value, 5,000,000 shares
authorized; 546,000 shares issued and
outstanding; liquidating preference at
$2 per share as of September 30, 2012
and December 31, 2011                         1,094,000       1,094,000 
Common Stock - no par value, 750,000,000
shares authorized; 44,520,000 and
42,765,000 shares issued and outstanding
as of September 30, 2012 and December
31, 2011, respectively                      145,512,000     145,380,000 
Additional paid-in capital                    9,577,000       9,408,000 
Accumulated deficit                        (155,863,000 )   (151,112,000 )
Total stockholders' equity                      848,000       5,298,000 
Total liabilities and stockholders'
equity                                    $    4,236,000   $    9,340,000 



            See accompanying notes to these financial statements.





                             ENOVA SYSTEMS, INC.

                                      

                           STATEMENTS OF OPERATIONS

                                 (Unaudited)



               Three Months Ended September     Nine Months Ended September
                           30                               30
                  2012             2011            2012            2011

Revenues        $    152,000    $    508,000    $  1,055,000    $  5,984,000
Cost of
revenues             140,000         434,000       1,722,000       5,108,000
Gross income
(loss)                12,000          74,000        (667,000 )       876,000
Operating
expenses
Research and
development            1,000         528,000         805,000       1,532,000
Selling,
general &
administrative       731,000       1,172,000       3,129,000       4,034,000
Total
operating
expenses             732,000       1,700,000       3,934,000       5,566,000
Operating loss      (720,000 )    (1,626,000 )    (4,601,000 )    (4,690,000 )
Other income
and (expense)
Interest and
other income
(expense)            (29,000 )       (20,000 )      (150,000 )      (113,000 )
Total other
income and
(expense)            (29,000 )       (20,000 )      (150,000 )      (113,000 )
Net loss        $   (749,000 )  $ (1,646,000 )  $ (4,751,000 )  $ (4,803,000 )
Basic and
diluted loss
per share       $      (0.02 )  $      (0.05 )  $      (0.11 )  $       0.15
Weighted
average number
of common
shares
outstanding       44,520,000      31,515,000      43,757,000      31,503,000



            See accompanying notes to these financial statements.

                                      



                             ENOVA SYSTEMS, INC.

                           STATEMENTS OF CASH FLOWS

                                 (Unaudited)

                                                    Nine Months Ended
                                                       September 30
Cash flows from operating activities:               2012            2011
Net loss                                        $ (4,751,000 )  $ (4,803,000 )
Adjustments to reconcile net loss to net cash
used in operating activities:
Reserve for doubtful accounts                        197,000          53,000
Inventory reserve                                    945,000         281,000
Depreciation and amortization                        351,000         373,000
Loss on asset disposal                                     -          49,000
Loss on asset impairment                              68,000               -
Loss on litigation settlement                              -          41,000
Stock option expense                                 169,000         282,000
(Increase) decrease in:
Accounts receivable                                  240,000         173,000
Inventory and supplies                               231,000        (867,000 )
Prepaid expenses and other current assets             94,000         175,000
Long term receivables                                  6,000          19,000
Increase (decrease) in:
Accounts payable                                    (121,000 )    (1,448,000 )
Deferred revenues                                   (302,000 )        29,000
Accrued payroll and related expense                 (163,000 )      (387,000 )
Other accrued liabilities                           (112,000 )    (1,250,000 )
Accrued interest payable                              61,000          61,000
Net cash used in operating activities             (3,087,000 )    (7,219,000 )

Cash flows from investing activities:
Purchases of property and equipment                  (16,000 )      (237,000 )
Net cash used in investing activities                (16,000 )      (237,000 )

Cash flows from financing activities:
Payment on notes payable                             (17,000 )       (20,000 )
Net proceeds from the exercise of stock
options                                                    -          23,000
Net proceeds from the issuance of common stock       132,000               -
Net cash provided by financing activities            115,000           3,000

Net decrease in cash and cash equivalents         (2,988,000 )    (7,453,000 )
Cash and cash equivalents, beginning of period     3,096,000       8,431,000
Cash and cash equivalents, end of period        $    108,000    $    978,000

Supplemental disclosure of cash flow
information:
Interest paid                                   $      4,000    $      5,000
Assets acquired through financing arrangements  $          -    $     25,000
Supplemental disclosure of non-cash investing
and financing:
  Shares issued for services                $    62,000    $         -



            See accompanying notes to these financial statements.

                                      

                                      

                             ENOVA SYSTEMS, INC.

                                      

                        NOTES TO FINANCIAL STATEMENTS

                                 (Unaudited)



1. Description of the Company and its Business



Enova  Systems,  Inc.,  ("Enova",  "We"   or  "the  Company"),  a   California 
corporation, was incorporated in July 1976, and trades on the OTCQB under  the 
trading symbol "ENVS" and on the London Stock Exchange under the symbol  "ENV" 
or "ENVS".The  Company is  a globally  recognized leader  as a  supplier  of 
efficient,  environmentally-friendly  digital  power  components  and  systems 
products, in conjunction with  associated engineering services. The  Company's 
core competencies are focused on the commercialization of power management and
conversion systems for mobile and stationary applications.



2. Summary of Significant Accounting Policies



Basis of Presentation - Interim Financial Statements



The financial  information as  of and  for  the three  and nine  months  ended 
September 30,  2012  and  2011  is  unaudited  but  includes  all  adjustments 
(consisting only of normal recurring  adjustments) that the Company  considers 
necessary for a fair statement of its financial position at such dates and the
operating results and cash flows for those periods. The year-end balance sheet
data was derived  from audited financial  statements, and certain  information 
and note disclosures normally included in annual financial statements prepared
in  accordance  with  generally  accepted  accounting  principles  have   been 
condensed or  omitted  pursuant to  SEC  rules or  regulations;  however,  the 
Company believes the  disclosures made  are adequate to  make the  information 
presented not misleading.



The preparation  of financial  statements in  conformity with  U.S.  generally 
accepted accounting  principles  requires  management to  make  estimates  and 
assumptions that affect  the reported  amounts of assets  and liabilities  and 
disclosure of contingent assets and liabilities  at the date of the  financial 
statements and  the  reported amounts  of  revenues and  expenses  during  the 
reporting period. Although management believes these estimates and assumptions
are adequate, actual results could  differ from the estimates and  assumptions 
used.



The  results  of  operations  for  the  interim  periods  presented  are   not 
necessarily indicative of  the results of  operations to be  expected for  the 
fiscal year. These interim financial statements should be read in  conjunction 
with the audited financial  statements for the year  ended December 31,  2011, 
which are included in the  Company's Annual Report on  Form 10-K for the  year 
then ended.



Delisting from the NYSE MKT

On October 24, 2012, the Company received notification from the NYSE MKT (the
"Exchange") stating that, because the Company was not in compliance with
certain of the Exchange's continued listing standards, the Exchange intended
to strike the common stock of the Company from the Exchange by filing a
delisting application with the Securities and Exchange Commission (the "SEC").
The Company previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24, 2012 the
provisions of the Exchange's continued listing standards with which the
Company was not in compliance. The Company requested a formal appeal of the
Exchange's delisting determination, which hearing before the Committee on
Securities has been scheduled on December 19, 2012.

Effective October 31, 2012, trading of the Company's common shares ceased on
the Exchange and, on the same date, trading of the Company's shares commenced
on the OTCQB Marketplace under the trading symbol "ENVS". The OTCQB is a
market tier operated by the OTC Market Group Inc. for over-the-counter traded
companies. The Company anticipates that the delisting will be completed once
the Exchange files a Form 25-NSE Notification of Delisting with the SEC. The
delisting and transition to the OTCQB does not change the Company's
obligations to file periodic and other reports with the SEC under applicable
federal securities laws.

The admission of the Company's common stock for trading on London Stock
Exchange's AIM market is unaffected by the NYSE MKT's determination.





Liquidity and Going Concern



The accompanying financial  statements have  been prepared  assuming that  the 
Company will continue as  a going concern.  However, historically the  Company 
has experienced  significant  recurring net  losses  and operating  cash  flow 
deficits. The Company's ability to continue as a going concern is dependent on
many factors, including among others, its ability to raise additional funding,
and its ability to successfully restructure operations to lower  manufacturing 
costs and reduce operating expenses.



 To date, the Company has  incurred recurring net losses and  negative 
cash flows  from  operations.  At  September 30,  2012,  the  Company  had  an 
accumulated deficit of approximately $155.9 million, cash and cash equivalents
of  $108,000  and   working  capital   of  approximately   $2.8  million   and 
shareholders' equity  of approximately  $0.8 million.  Until the  Company  can 
generate significant cash from its operations, the Company expects to continue
to fund its operations with existing cash resources, proceeds from one or more
private placement agreements, as well as potentially through debt financing or
the sale of equity securities. However,  the Company may not be successful  in 
obtaining additional funding. In addition, the Company cannot be sure that its
existing cash and  investment resources  will be adequate  or that  additional 
financing will be available when needed or that, if available, financing  will 
be obtained on terms favorable to the Company or its stockholders.



Our ongoing operations will require  us to make necessary  investments 
in human and production resources, regulatory compliance, as well as sales and
marketing efforts. We  do not  currently have adequate  internal liquidity  to 
meet these objectives in the long term. To do so, we will need to continue  to 
look for partnering  opportunities and  other external  sources of  liquidity, 
including the public  and private  financial markets  and strategic  partners. 
Having insufficient  funds may  require the  Company to  delay or  potentially 
eliminate some or all of its development programs, relinquish some or even all
rights to product candidates at an  earlier stage of development or  negotiate 
less favorable  terms  than  it would  otherwise  choose.Failure  to  obtain 
adequate financing  also may  adversely  affect the  launch of  the  Company's 
product candidates or  its ability  to continue  in business.  If the  Company 
raises additional funds by issuing equity securities, substantial dilution  to 
existing stockholders would  likely result. If  the Company raises  additional 
funds by  incurring  debt  financing,  the  terms  of  the  debt  may  involve 
significant cash  payment  obligations,  as well  as  covenants  and  specific 
financial ratios that may restrict its ability to operate its business.



As previously reported, 80% of our workforce terminated their employment  with 
the Company in June 2012. We  continue to evaluate strategic opportunities  to 
leverage our resources and assist with continuing operations.



We have accessed the capital markets to obtain additional operating funds.In
December 2011, we raised approximately  $1,245,000, net of financing costs  of 
$442,500, through an  equity issuance to  certain accredited investors,  which 
was disclosed  in our  Form 10-K  filed on  March 29,  2012.In addition,  as 
summarized  in  Note  8-Stockholders'  Equity,  to  our  financial  statements 
contained in  this Form  10-Q we  entered into  two Purchase  Agreements  (the 
facility) with Lincoln Park Capital Fund in April 2012 to issue up $10,000,000
in shares  of our  common stock  and  received proceeds  of $132,000,  net  of 
financing costs of  $152,000, from the  initial purchase of  shares of  Common 
Stock from Lincoln Park in the second quarter of 2012. Access to funding under
the facility is dependent upon our share price maintaining a floor price of at
least $0.15 per share.Our share price decreased below that threshold in  May 
2012 and, until our share price increases above the threshold level, we cannot
raise additional funds from the facility.



The Company continues to pursue other  options to raise additional capital  to 
fund  its  operations;  however,  there  can  be  no  assurance  that  we  can 
successfully raise additional funds through the capital markets.



 As of September 30, 2012, the Company had approximately $0.1  million 
in cash and cash equivalents currentlyandanticipates that its existing  cash 
and anticipated  receivables  collections  will  be  sufficient  to  meet  its 
projected  operating  requirements  through  mid-December  2012  to   continue 
operations and market trading.



Significant Accounting Policies



The accounting and reporting policies of the Company conform to US GAAP. There
have been  no  significant changes  in  the Company's  significant  accounting 
policies during the three and nine months ended September 30, 2012 compared to
what was previously disclosed in the Company's Annual Report on Form 10-K  for 
the year ended December 31, 2011.







Revenue Recognition



The Company  manufactures proprietary  products and  other products  based  on 
design specifications  provided  by  its  customers.  The  Company  recognizes 
revenue only when all of the following criteria have been met:



• Persuasive Evidence of an Arrangement - The Company documents all
terms of an arrangement in a written contract signed by the customer prior to
recognizing revenue.



• Delivery Has Occurred or Services Have Been Rendered - The Company
performs all services or delivers all products prior to recognizing revenue.
Professional consulting and engineering services are considered to be
performed when the services are complete. Equipment is considered delivered
upon delivery to a customer's designated location. In certain instances, the
customer elects to take title upon shipment.



• The Fee for the Arrangement is Fixed or Determinable - Prior to
recognizing revenue, a customer's fee is either fixed or determinable under
the terms of the written contract. Fees for professional consulting services,
engineering services and equipment sales are fixed under the terms of the
written contract. The customer's fee is negotiated at the outset of the
arrangement and is not subject to refund or adjustment during the initial term
of the arrangement.



• Collectability is Reasonably Assured - The Company determines that
collectability is reasonably assured prior to recognizing revenue.
Collectability is assessed on a customer-by-customer basis based on criteria
outlined by management. New customers are subject to a credit review process
which evaluates the customer's financial position and ultimately its ability
to pay. The Company does not enter into arrangements unless collectability is
reasonably assured at the outset. Existing customers are subject to ongoing
credit evaluations based on payment history and other factors. If it is
determined during the arrangement that collectability is not reasonably
assured, revenue is recognized on a cash basis. Amounts received upfront for
engineering or development fees under multiple-element arrangements are
deferred and recognized over the period of committed services or performance,
if such arrangements require the Company to provide on-going services or
performance. All amounts received under collaborative research agreements or
research and development contracts are nonrefundable, regardless of the
success of the underlying research.



The Company  recognizes revenue  from milestone  payments over  the  remaining 
minimum period of performance obligations.



The Company  also recognizes  engineering and  construction contract  revenues 
using the percentage-of-completion method,  based primarily on contract  costs 
incurred   to   date   compared   with   total   estimated   contract   costs. 
Customer-furnished materials,  labor,  and  equipment, and  in  certain  cases 
subcontractor materials, labor,  and equipment, are  included in revenues  and 
cost of revenues when management believes that the company is responsible  for 
the ultimate acceptability  of the  project. Contracts  are segmented  between 
types of  services, such  as engineering  and construction,  and  accordingly, 
revenue and  gross margin  related to  each activity  is recognized  as  those 
separate services are rendered.



Changes to total estimated contract costs or losses, if any, are recognized in
the period  in  which  they  are  determined.  Claims  against  customers  are 
recognized as  revenue  upon  settlement. Revenues  recognized  in  excess  of 
amounts received are classified as  current assets. Amounts billed to  clients 
in excess of revenues recognized to date are classified as current liabilities
on contracts.



Changes in project  performance and conditions,  estimated profitability,  and 
final contract settlements may result  in future revisions to engineering  and 
development contract costs and revenue.



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.



Several other factors related to the Company may have a significant impact  on 
our operating results  from year to  year. For example,  the accounting  rules 
governing the timing of revenue  recognition related to product contracts  are 
complex and it  can be difficult  to estimate when  we will recognize  revenue 
generated by  a given  transaction.  Factors such  as acceptance  of  services 
provided, payment  terms,  creditworthiness of  the  customer, and  timing  of 
delivery or acceptance of our products  often cause revenues related to  sales 
generated in one period  to be deferred and  recognized in later periods.  For 
arrangements in  which  services  revenue  is  deferred,  related  direct  and 
incremental costs may also be deferred.



Deferred Revenues



The Company recognizes revenues  as earned. Amounts billed  in advance of  the 
period in which service is rendered are recorded as a liability under deferred
revenues. The  Company has  entered into  several production  and  development 
contracts  with  customers.  The   Company  has  evaluated  these   contracts, 
ascertained the specific revenue generating  activities of each contract,  and 
established the units of accounting for each activity. Revenue on these  units 
of accounting is not recognized until  a) there is persuasive evidence of  the 
existence of a  contract, b) the  service has been  rendered and delivery  has 
occurred, c) there is a fixed and determinable price, and d) collectability is
reasonable assured.



Warranty Costs



The Company provides product warranties for specific product lines and accrues
for estimated  future  warranty  costs  in the  period  in  which  revenue  is 
recognized. Our products  are generally  warranted to  be free  of defects  in 
materials and workmanship for  a period of  12 to 24 months  from the date  of 
installation, subject  to standard  limitations for  equipment that  has  been 
altered by other  than Enova Systems  personnel and equipment  which has  been 
subject to negligent use. Warranty provisions are based on past experience  of 
product  returns,  number  of  units  repaired  and  our  historical  warranty 
incidence over the past  twenty-four month period.  The warranty liability  is 
evaluated on an ongoing basis for  adequacy and may be adjusted as  additional 
information regarding expected warranty costs becomes known.



Stock Based Compensation



We measure the compensation cost  for stock-based awards classified as  equity 
at their fair value  on the date of  grant and recognize compensation  expense 
over the  service  period  for  awards expected  to  vest,  net  of  estimated 
forfeitures.



See Note 9 Stock Options  for further information on stock-based  compensation 
expense.



3. Inventory



Inventory, consisting of materials, labor and manufacturing overhead, is
stated at the lower of cost (first-in, first-out) or market and consisted of
the following at:



                           September 30,     December 31,

                             2012            2011     
Raw Materials             $   4,237,000   $  4,431,000 
Work In Progress                 3,000       144,000 
Finished Goods                 587,000       644,000 
Reserve for Obsolescence    (1,967,000 )   (1,183,000 )
Total                     $   2,860,000   $  4,036,000 



 Inventory write-offs were $161,000 and $203,000 for the nine months
ended September 30, 2012 and 2011, respectively.





























4. Property and Equipment



Property and equipment consisted of the following at:



                                              September 30,     December 31,

                                                2012            2011     
Computers and software                       $     618,000   $    618,000 
Machinery and equipment                           947,000       892,000 
Furniture and office equipment                     98,000        98,000 
Demonstration vehicles and buses                  675,000       774,000 
Leasehold improvements                          1,348,000     1,348,000 
Construction in process                                 -        39,000 
                                               3,686,000     3,769,000 
Less accumulated depreciation and
amortization                                   (3,161,000 )   (2,841,000 )
Total                                        $     525,000   $    928,000 



Depreciation and amortization expense was  $351,000 and $373,000 for the  nine 
months ended September 30, 2012 and 2011, respectively, and within those total
expenses, the amortization of leasehold improvements was $196,000 for the nine
months ended  September  30,  2012 and  2011.  Depreciation  and  amortization 
expense was $113,000  and $120,000for  the three months  ended September  30, 
2012 and 2011, respectively, and within those total expenses, the amortization
of leasehold improvements was $65,000 for the three months ended September 30,
2012 and 2011.In addition, the Company recorded an impairment loss of $0 and
$68,000 for the three and nine months  ended September 30, 2102 and a loss  on 
disposal of fixed assets in the amount  of $0 and $49,000 was recorded in  the 
three and nine months ended September 30, 2011.



5. Other Accrued Liabilities



Other accrued liabilities consisted of the following at:



                                September 30,     December 31,

                                  2012            2011     
Accrued inventory received     $      15,000   $      2,000 
Accrued professional services       194,000       150,000 
Accrued warranty                    105,000       227,000 
Other                                91,000       138,000 
Total                          $     405,000   $    517,000 



Accrued warranty consisted of the following activities during the nine months
ended September 30:



                                                    2012         2011    
Balance at beginning of quarter                   $  227,000   $  510,000 
Accruals for warranties issued during the period     94,000     392,000 
Warranty claims                                    (216,000 )   (610,000 )
Balance at end of quarter                         $  105,000   $  292,000 



Accrued warranty consisted of the following activities during the three months
ended September 30:



                                                   2012         2011    
Balance at beginning of quarter                   $ 140,000   $  408,000 
Accruals for warranties issued during the period    14,000     107,000 
Warranty claims                                    (49,000 )   (223,000 )
Balance at end of quarter                         $ 105,000   $  292,000 





6. Notes Payable, Long-Term Debt and Other Financing



Notes payable consisted of the following at:

                                              September 30,     December 31,

                                                2012            2011     
Secured note  payable  to  Credit  Managers 
Association of California, bearing interest
at prime plus 3% (6.25% as of September 30,
2012), and  is adjusted  annually in  April 
through  maturity.  Principal  and   unpaid 
interest due in April 2016. A sinking  fund 
escrow may  be funded  with 10%  of  future 
equity  financing,   as  defined   in   the 
Agreement                                    $   1,238,000   $  1,238,000 
Secured  note  payable   to  a  Coca   Cola 
Enterprises  in  the  original  amount   of 
$40,000, bearing interest at 10% per annum.
Principal and unpaid interest due on demand        40,000        40,000 
Secured  note   payable  to   a   financial 
institution  in  the  original  amount   of 
$38,000,  bearing  interest  at  8.25%  per 
annum,  payable   in   60   equal   monthly 
installments  of  principal  and   interest 
through February19, 2014                          12,000        18,000 
Secured  note   payable  to   a   financial 
institution  in  the  original  amount   of 
$19,000, bearing  interest  at  10.50%  per 
annum,  payable   in   60   equal   monthly 
installments  of  principal  and   interest 
through August25, 2014                             9,000        12,000 
Secured  note   payable  to   a   financial 
institution  in  the  original  amount   of 
$26,000,  bearing  interest  at  7.91%  per 
annum,  payable   in   60   equal   monthly 
installments  of  principal  and   interest 
through April9, 2015                              14,000        18,000 
Secured  note   payable  to   a   financial 
institution  in  the  original  amount   of 
$25,000,  bearing  interest  at  7.24%  per 
annum,  payable   in   60   equal   monthly 
installments  of  principal  and   interest 
through March 10, 2016                             18,000        22,000 
                                               1,331,000     1,348,000 
Less current portion of notes payable             (63,000 )      (62,000 )
Notes payable, net of current portion        $   1,268,000   $  1,286,000 



As of September  30, 2012  and December  31, 2011,  the balance  of long  term 
interest payable with respect to the Credit Managers Association of California
note amounted to $1,267,000 and $1,209,000, respectively.Interest expense on
notes payable amounted  to $65,000 and  $66,000 during the  nine months  ended 
September 30, 2012 and 2011, respectively.Interest expense on notes  payable 
amounted to $22,000 and  $22,000 during the three  months ended September  30, 
2012 and 2011, respectively.



7. Revolving Credit Agreement



On June30,  2010, the  Company  entered into  a  secured a  revolving  credit 
facility with a  financial institution  for $200,000  which was  secured by  a 
$200,000 certificate of deposit. The facility is for a period of 3 year and  6 
months from  July 1,  2010  to December  31, 2013.  The  interest rate  on  a 
drawdown from the facility is the certificate of deposit rate plus 1.25%  with 
interest payable  monthly and  the principal  due at  maturity. The  financial 
institution also renewed  the $200,000  irrevocable letter of  credit for  the 
full amount of the credit facility in favor of Sunshine Distribution LP,  with 
respect to  the lease  of the  Company's corporate  headquarters at  1560West 
190thStreet, Torrance, California.



On November 7, 2012,  Sunshine Distribution LP initiated  a drawdown from  the 
irrevocable standby letter of credit in  order to pay October rent and  unpaid 
retro-active rent adjustments for the Company's corporate headquarters in  the 
amount of $72,735. The financial institution redeemed part of the certificate
of deposit in the same amount to fund the drawdown on the irrevocable  standby 
letter of credit.



8. Stockholders' Equity



On April 23, 2012,  the Company entered into  a $6,600,000 purchase  agreement 
with Lincoln Park Capital Fund pursuant to which the Company has the right  to 
sell to Lincoln Park up to $6,600,000 in shares of the Company's common stock,
and on April  24, 2012, the  Company entered into  another purchase  agreement 
with Lincoln Park Capital Fund pursuant to which the Company has the right  to 
sell to Lincoln Park up to $3,400,000 in shares of the Company's common stock,
subject to  certain limitations.  We  received proceeds  of $132,000,  net  of 
financing costs  of  $152,000, under  the  $3,400,000 Purchase  Agreement  and 
issued a total of 1,754,974  shares of common stock  in the second quarter  of 
2012. As consideration for its commitment  to purchase common stock under  the 
$3,400,000 Purchase  Agreement, the  Company issued  to Lincoln  Park  281,030 
shares of common stock. At September 30, 2012, the Company is not able to sell
shares to Lincoln Park under this agreement due to the Company's quoted market
share price.



During the  three and  nine months  ended  September 30,  2012 and  2011,  the 
Company did not issue any shares of common stock to directors or employees  as 
compensation. During the nine months  ended September 30, 2011, 10,000  shares 
of the Company's Series  A Preferred Stock were  converted into 222 shares  of 
its common  stock.  There  were  no conversions  of  the  Company's  Series  A 
Preferred Stock for the comparable period in 2012.



9. Stock Options



Stock Option Program Description



As of September 30, 2012, the  Company had two equity compensation plans,  the 
1996 Stock Option Plan (the "1996 Plan") and the 2006 equity compensation plan
(the "2006 Plan"). The 1996 Plan has  expired for the purposes of issuing  new 
grants. However,  the 1996  Plan  will continue  to govern  awards  previously 
granted under that  plan. The  2006 Plan has  been approved  by the  Company's 
shareholders. Equity compensation grants are designed to reward employees  and 
executives for their  long term contributions  to the Company  and to  provide 
incentives for them to  remain with the Company.  The number and frequency  of 
equity compensation  grants  are  based on  competitive  practices,  operating 
results of the company, and government regulations.



The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which
2,091,000 shares were available for grant as of September 30, 2012. All  stock 
options have  terms of  between three  and ten  years and  generally vest  and 
become fully exercisable from  one to three  years from the  date of grant  or 
vest according to the price performance of our shares.



As of September 30,  2012, the total compensation  cost related to  non-vested 
awards not yet recognized is $21,000.  The weighted average period over  which 
the future compensation cost is expected to be recognized is 12 months.



The following table summarizes information about stock options outstanding and
exercisable at September 30, 2012:



                                                    Weighted
                                                     Average

                                      Weighted      Remaining
                     Number of        Average                      Aggregate
                       Share                       Contractual
                                      Exercise       Term in       Intrinsic
                    Options        Price        Years      Value(1)  
Outstanding at
December 31,
2011                  2,529,000   $   1.07         6.09   $       - 
Granted                 270,000   $   0.08            -   $       - 
Exercised                     -   $      -            -   $       - 
Forfeited or
Cancelled            (1,969,000 )  $   1.08            -   $       - 
Outstanding at
September 30,
2012                    830,000   $   0.73         4.22   $  10,000 
Exercisable at
September 30,
2012                    568,000   $   1.01         4.49   $   1,000 
Vested and
expected to
vest (2)                830,000   $   0.73         5.80   $       - 
(1)        Aggregate intrinsic  value represents  the  value of  the  closing 
            price per share of our common stock on the last trading day of the
            fiscal period in excess  of the exercise  price multiplied by  the 
            number of  options  outstanding  or exercisable,  except  for  the 
            "Exercised" line,  which  uses  the  closing  price  on  the  date 
            exercised.
(2)        Number of shares includes options vested and those expected to
            vest net of estimated forfeitures.



The exercise  prices of  the options  outstanding at  September 30,  2012 
ranged from $0.07  to $4.35.  The weighted  average grant-date  fair value  of 
options granted during the nine months ended September 30, 2012 and 2011  were 
$0.05 and $0.79, respectively.  The Company's policy is  to issue shares  from 
its authorized shares upon the exercise of stock options.

















Unvested share activity for the nine months ended September 30, 2012 is
summarized below:



                                                            Weighted

                                          Unvested           Average

                                          Number of      Grant Date Fair

                                         Options          Value      
Unvested balance at December31, 2011    1,403,000   $          0.26 
Granted                                    270,000   $          0.05 
Vested                                    (892,000 )  $          0.19 
Forfeited                                 (519,000 )  $          0.29 
Unvested balance at September 30, 2012     262,000   $          0.05 



The fair values  of all  stock options granted  during the  nine months  ended 
September 30, 2012  and 2011 were  estimated on  the date of  grant using  the 
Black-Scholes option-pricing model with the following range of assumptions:



                                 For the nine months ended     
                                 September 30, September 30,
                                                                 
                                    2012           2011      
 Expected life (in years)        1.5 - 6.5      2.5 - 6.5    
Average risk-free interest rate          1.66 %            2.00 %
Expected volatility                 108 - 136 %       107 - 132 %
Expected dividend yield                     0 %               0 %
Forfeiture rate                             3 %               3 %



The estimated fair  value of grants  of stock options  to nonemployees of  the 
Company is charged to expense in the financial statements. These options  vest 
in the same manner as  the employee options granted  under each of the  option 
plans as described above.



10. Concentrations



The Company's  trade  receivables are  concentrated  with few  customers.  The 
Company performs  credit evaluations  on its  customers' financial  condition. 
Concentrations of credit risk, with  respect to accounts receivable, exist  to 
the extent of  amounts presented  in the financial  statements. Two  customers 
represented 56%  and  36%,  respectively,  of  gross  accounts  receivable  at 
September 30, 2012, and two  customers represented 62% and 37%,  respectively, 
of gross accounts receivable at December31, 2011.



The Company's revenues are concentrated with few customers.For the three and
nine months ended September 30, 2012, two customers represented 65% and 31% of
gross revenues and two  customers represented 66% and  21% of gross  revenues, 
respectively.For the three  and nine  months ended September  30, 2011,  two 
customers represented  58%  and  39%  of gross  revenues  and  four  customers 
represented 55%, 17%, 10% and 10% of gross revenues, respectively.



11. Recent Accounting Pronouncements



Effective January 1, 2012, the Company adopted revised guidance related to the
presentation of comprehensive income that increases comparability between U.S.
GAAP and International Financial Reporting Standards. This guidance eliminates
the current  option  to  report  other  comprehensive  income  (OCI)  and  its 
components in the statement  of changes in  stockholders' equity. The  Company 
adopted this guidance during the first quarter of 2012, which had no impact on
the Company's  financial position,  operations,  or cash  flows.The  Company 
currently does not have any components of other comprehensive income or loss.



In May  2011, the  Financial Accounting  Standards Board  ("FASB") issued  new 
guidance to achieve common fair value measurement and disclosure  requirements 
between  GAAP  and  International  Financial  Reporting  Standards.  This  new 
guidance amends  current fair  value measurement  and disclosure  guidance  to 
include  increased  disclosures  regarding  valuation  inputs  and  investment 
categorization. The adoption of this new  accounting guidance in 2012 did  not 
have a material impact on the Company's financial position, operations or cash
flows.





12.Subsequent Events

On October 24, 2012, the Company received notification from the NYSE MKT (the
"Exchange") stating that, because the Company was not in compliance with
certain of the Exchange's continued listing standards, the Exchange intended
to strike the common stock of the Company from the Exchange by filing a
delisting application with the Securities and Exchange Commission (the "SEC").
The Company previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24, 2012 the
provisions of the Exchange's continued listing standards with which the
Company was not in compliance. The Company requested an appeal of the
Exchange's delisting determination, which hearing before the Committee on
Securities has been scheduled on December 19, 2012.

Effective October 31, 2012, trading of the Company's common shares ceased on
the Exchange and, on the same date, trading of the Company's shares commenced
on the OTCQB Marketplace under the trading symbol "ENVS". The OTCQB is a
market tier operated by the OTC Market Group Inc. for over-the-counter traded
companies. The Company anticipates that the delisting will be completed once
the Exchange files a Form 25-NSE Notification of Delisting with the SEC. The
delisting and transition to the OTCQB does not change the Company's
obligations to file periodic and other reports with the SEC under applicable
federal securities laws.

The admission of the Company's common stock for trading on London Stock
Exchange's AIM market is unaffected by the NYSE MKT's determination.







ITEM 2.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS  OF  FINANCIAL  CONDITION  AND 
RESULTS OF OPERATIONS



This Quarterly Report on Form 10-Q contains statements indicating expectations
about future  performance and  other forward-looking  statements that  involve 
risks and uncertainties. We usually use words such as "may," "will," "should,"
"expect," "plan,"  "anticipate," "believe,"  "estimate," "predict,"  "future," 
"intend," "potential," or "continue" or the negative of these terms or similar
expressions to identify  forward-looking statements.  These statements  appear 
throughout this Quarterly Report on Form 10-Q and are statements regarding our
current  intent,  belief  or  expectation,  primarily  with  respect  to   our 
operations and  related industry  developments. Examples  of these  statements 
include, but  are not  limited  to, statements  regarding the  following:  our 
future operating  expenses, our  future losses,  our future  expenditures  for 
research and development and the sufficiency of our cash resources. You should
not place undue reliance on these forward-looking statements, which apply only
as of the date of this Quarterly Report on Form 10-Q. Our actual results could
differ materially from those  anticipated in these forward-looking  statements 
for many reasons, including the risks faced by us and described in our  Annual 
Report on Form 10-K for  the year ended December 31,  2011, as updated by  the 
disclosure contained in Item 1A of Part II of this Form 10-Q.



The following discussion and analysis should  be read in conjunction with  the 
unaudited interim financial statements and  notes thereto included in Part  I, 
Item 1 of this Quarterly Report on Form 10-Q and with the financial statements
and notes  thereto  and  Management's Discussion  and  Analysis  of  Financial 
Condition and Results  of Operations contained  in our Annual  Report on  Form 
10-K for the year ended December 31, 2011.



Overview



Enova believes it  is a leader  in the development,  design and production  of 
proprietary, power  train  systems and  related  components for  electric  and 
hybrid electric buses and medium and heavy duty commercial vehicles.  Electric 
drive systems are comprised of an electric motor, electronics control unit and
a gear unit which power a vehicle. Hybrid electric systems, which are  similar 
to pure  electric drive  systems,  contain an  internal combustion  engine  in 
addition to the electric motor, and  may eliminate 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.



A fundamental element of Enova's strategy  is to develop and produce  advanced 
proprietary software and hardware for applications in these alternative  power 
markets. Our focus is powertrain  systems including digital power  conversion, 
power management and  system integration,  focusing chiefly  on vehicle  power 
generation. Specifically, we  develop, design and  produce drive systems  and 
related components  for  electric,  hybrid  electric  and  fuel  cell  powered 
vehicles in both the new and retrofit markets.



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.



Enova's primary market focus centers on aligning ourselves with key  customers 
and integrating with original equipment  manufacturers ("OEMs") in our  target 
markets.We believe that alliances will result in the latest technology being
implemented and customer requirements  being met, with  an optimized level  of 
additional time and expense.



Our website,  www.enovasystems.com,  contains up-to-date  information  on  our 
company, our products,  programs and current  events. Our website  is a  prime 
focal point  for  current  and  prospective  customers,  investors  and  other 
affiliated parties seeking additional information on our business.



Enova has incurred significant operating losses  in the past. As of  September 
30, 2012, we had  an accumulated deficit of  approximately $155.9 million.  As 
reported in our Form 8-K filing on  June 21, 2012, due to continued delays  in 
industry adoption  of  EV  technology,  the  Company's  revenues  continue  to 
significantly decrease. As  part of  cost cutting measures,  we implemented  a 
reduction in our workforce whereby in excess of 80% of our employees have left
the Company.  We  continue to  evaluate  strategic opportunities  to  leverage 
resources and assist with continuing operations. We expect to incur additional
operating losses until we re-position the company in order to achieve a  level 
of product  sales  sufficient  to  cover our  operating  and  other  expenses. 
Following reductions  in the  Company's expense  base, the  Company  currently 
believes it has sufficient working capital in the short term through year  end 
to continue operations and market trading.





Delisting from the NYSE MKT

On October 24, 2012, the Company received notification from the NYSE MKT (the
"Exchange") stating that, because the Company was not in compliance with
certain of the Exchange's continued listing standards, the Exchange intended
to strike the common stock of the Company from the Exchange by filing a
delisting application with the Securities and Exchange Commission (the "SEC").
The Company previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24, 2012 the
provisions of the Exchange's continued listing standards with which the
Company was not in compliance. The Company requested an appeal of the
Exchange's delisting determination, which hearing before the Committee on
Securities has been scheduled on December 19, 2012.

Effective October 31, 2012, trading of the Company's common shares ceased on
the Exchange and, on the same date, trading of the Company's shares commenced
on the OTCQB Marketplace under the trading symbol "ENVS". The OTCQB is a
market tier operated by the OTC Market Group Inc. for over-the-counter traded
companies. The Company anticipates that the delisting will be completed once
the Exchange files a Form 25-NSE Notification of Delisting with the SEC. The
delisting and transition to the OTCQB does not change the Company's
obligations to file periodic and other reports with the SEC under applicable
federal securities laws.

The admission of the Company's common stock for trading on London Stock
Exchange's AIM market is unaffected by the NYSE MKT's determination.



Customer Highlights



FREIGHTLINER  CUSTOM  CHASSIS  CORPORATION  (FCCC)  -  Enova  and  FCCC  began 
deploying new and retrofit all-electric  vehicles to major fleet customers  in 
2011. The  resulting integration  of our  all-electric drive  system into  the 
MT-45 chassis provides FCCC an all-electric product offering: the FCCC  MT-EV. 
The MT-EV (the FCCC model name) chassis boasts a GVWR of 14,000 to 19,500 lbs.
Enova and FCCC also jointly announced, in November 2011, intentions to  deploy 
3000 vehicles via  the Green  for Free™ Program,  which is  designed to  allow 
fleet executives  to  operate full  100%  electric commercial  vehicles  (EVs) 
and/or Hybrid Electric Vehicles (HEVs) for  similar life cycle costs as  those 
of diesel-powered  commercial vehicles.  The anticipated  savings fleets  are 
expected to realize from the reduced maintenance and fuel cost of  electricity 
of the  electric  vehicles  are used  over  a  period of  time  to  cover  the 
incremental expense  for  the  technology.  FCCC had  begun,  in  early  2011, 
showcasing the Enova/FCCC EV step van at numerous events on the West Coast, as
well as  the recent  NTEA Work  Truck show  in Indianapolis.  This program  is 
currently on hold, pendingEnova's  ability to continue operationsand  FCCC's 
decision on battery  sourcing, which  has been  delayed due  to concerns  over 
recent negative reports regarding battery reliability.



FIRST AUTO WORKS (FAW) - Enova continues to supply FAW drive systems for their
hybrid buses. Since the 2008 Olympics in Beijing, Enova Systems and First Auto
Works have deployed over 500 vehicles, all utilizing Enova's  pre-transmission 
hybrid drive system  components. First Auto  Works is one  of China's  largest 
vehicle producers, manufacturing in excess of 1,000,000 vehicles annually.



SMITH ELECTRIC VEHICLES (SEV) - Enova  continues to be SEVs supplier of  drive 
systems. SEV, a leader in the all EV market, is currently in the process of an
IPO. A successful IPO could result in increased opportunity for Enova.



CSR CORPORATION LIMITED (CSR) - Enova completed its initial contract with  CSR 
to  integrate  our  all  electric   drive  system  into  its  commercial   bus 
applications. CSR  is  approved  by the  State-owned  Assets  Supervision  and 
Administration Commission of  the State  Council and was  co-founded by  China 
South Locomotive  and Rolling  Stock Industry  Group Corporation  and  Beijing 
Railway Industry Economic and Trade Company with a total equity capital of  $7 
billion USD. CSR  was established  in December  2007 with  sixteen (16)  fully 
funded holding companies and over 80,000 employees distributed in 10 provinces
and cities around the country.



OPTARE PLC - Enova fulfilled an order in the second quarter of 2012 for  eight 
120kW systems  for  integration into  Optare's  Solo and  Versa  Electric  Bus 
models. Optare has chosen  Enova as the production  drive system supplier  for 
its all electric buses. Optare designs, manufactures and sells single deck and
double deck buses and mini coaches and operates in the UK, Continental Europe,
and North  America. In  January 2012,  Optare shareholders  gave approval  for 
Ashok Leyland  and its  associated  companies to  increase their  holdings  in 
Optare to 75.1%  in order to  re-finance its operations.  Ashok Leyland  has 
annual turnover of approximately  $2.5 billion and is  a market leader in  the 
medium and heavy commercial  vehicle segment in India  with a market share  of 
about 25.7% in 2010/2011. Ashok  is a market leader  in the Indian bus  market 
selling over 23,000 buses annually and including overseas plants, has  current 
global capacity of over 150,000 buses and trucks.



Technology Highlights



OMNI INVERTER. Power-source and motor design agnostic, Enova's new Omni-series
inverter/vehicle    controller     offers    increased     flexibility     and 
ease-of-integration. With plug-and-play connectivity, it is compatible with  a 
wide range of vehicle drive systems and motors, and can be configured for HEV,
PHEV and EV applications. The inverter is fully production validated.



OMNI CHARGER. We continued  development of our  new Omni-series 10kW  on-board 
battery charger  for plug-in  hybrid-electric and  all-electric vehicles.  CAN 
control  based,   the  new   Omni   charger  offers   increased   flexibility, 
ease-of-integration and compatibility with a wide range of vehicle platforms.



Enova has delayed further introduction of  the Omni Inverter and Charger  with 
customers due to the reduction in our workforce and current financial resource
constraints.Provided additional  resources are  obtained, we  will  continue 
development and marketing  of these two  products, which we  believe can  gain 
broad market acceptance.



We continue to receive recognition from both governmental and private industry
with regards to commercial  application of our  all-electric and hybrid  drive 
systems and fuel cell power management technologies. Although we believe  that 
current negotiations  with  above  named  parties  may  result  in  additional 
production contracts during 2012 and beyond, there are no assurances that such
additional agreements will be realized.





Critical Accounting Policies



In the ordinary course of business, the Company has made a number of estimates
and assumptions  relating  to  the  reporting of  results  of  operations  and 
financial  condition  in  the  preparation  of  its  financial  statements  in 
conformity with accounting principles generally accepted in the United  States 
of America. The Company constantly re-evaluates these significant factors  and 
makes  adjustments  where  facts  and  circumstances  dictate.  Estimates  and 
assumptions  include,   but  are   not  limited   to,  customer   receivables, 
inventories,  equity  investments,  fixed   asset  lives,  contingencies   and 
litigation. There have been  no material changes  in estimates or  assumptions 
compared to our most recent Annual  Report for the fiscal year ended  December 
31, 2011.



The following  represents  a  summary of  our  critical  accounting  policies, 
defined as those policies that we believe:  (a) are the most important to  the 
portrayal of our financial condition and results of operations and (b) involve
inherently  uncertain  issues  which  require  management's  most   difficult, 
subjective or complex judgments.



Cash and  cash equivalents  -  Cash consists  of  currency held  at  reputable 
financial institutions.



Inventory - Inventories are  priced at the lower  of cost or market  utilizing 
first-in, first-out ("FIFO")  cost flow  assumption. We  maintain a  perpetual 
inventory system and  continuously record  the quantity  on-hand and  standard 
cost for  each  product,  including purchased  components,  subassemblies  and 
finished goods.  We  maintain the  integrity  of perpetual  inventory  records 
through periodic physical  counts of  quantities on hand.  Finished goods  are 
reported  as  inventories  until  the  point  of  transfer  to  the  customer. 
Generally, title transfer is documented in the terms of sale.



Inventory reserve  -  We  maintain  an allowance  against  inventory  for  the 
potential future obsolescence or excess  inventory. A substantial decrease  in 
expected demand for  our products, or  decreases in our  selling prices  could 
lead to excess or overvalued inventories and could require us to substantially
increase our  allowance for  excess inventory.  If future  customer demand  or 
market  conditions  are  less  favorable  than  our  projections,   additional 
inventory write-downs  may be  required, and  would be  reflected in  cost  of 
revenues in the period the revision is made.



Allowance for doubtful accounts - We maintain allowances for doubtful accounts
for estimated losses  resulting from the  inability of our  customers to  make 
required payments.  The assessment  of the  ultimate realization  of  accounts 
receivable including the current credit-worthiness of each customer is subject
to a considerable degree to the  judgment of our management. If the  financial 
condition of  the Company's  customers were  to deteriorate,  resulting in  an 
impairment of their  ability to  make payments, additional  allowances may  be 
required.



Stock-based Compensation -  The Company measures  and recognizes  compensation 
expense for all share-based  payment awards made  to employees and  directors, 
including employee stock  options based on  the estimated fair  values at  the 
date of  grant. The  compensation  expense is  recognized over  the  requisite 
service period.



Revenue recognition - Effective January 1, 2011, we adopted the provisions  of 
Accounting Standards  Update, or  ASU, 2009-13,  Multiple-Deliverable  Revenue 
Arrangements, or ASU  2009-13, which  is included within  the Codification  as 
Revenue Recognition-Multiple  Element Arrangements,  on a  prospective  basis. 
Under the  provisions of  ASU 2009-13,  we  no longer  rely on  objective  and 
reliable evidence of the fair value  of the elements in a revenue  arrangement 
in order to separate a deliverable into a separate unit of accounting, and the
use of the residual method has been eliminated. We instead use a selling price
hierarchy for determining the selling price of a deliverable, which is used to
determine the allocation of consideration to each unit of accounting under  an 
arrangement. The selling  price used  for each  deliverable will  be based  on 
vendor-specific objective  evidence,  if available,  third-party  evidence  if 
vendor-specific objective evidence is not available or estimated selling price
if neither  vendor-specific objective  evidence  nor third-party  evidence  is 
available. As of September 30, 2012, we had not applied the provisions of  ASU 
2009-13 to any of our revenue arrangements as we had not entered into any new,
or materially modified  any of  our existing, revenue  arrangements since  our 
adoption of  ASU 2009-13.  Therefore,  there was  no  material impact  on  our 
financial position  or  results  of  operations  from  adopting  ASU  2009-13. 
However, the provisions  of ASU 2009-13  could have a  material impact on  the 
revenue recognized from  any collaboration  agreements that we  enter into  in 
future periods.



We generally recognize revenue at the time of shipment when title and risk  of 
loss have  passed  to the  customer,  persuasive evidence  of  an  arrangement 
exists, performance of our obligation is  complete, our price to the buyer  is 
fixed or determinable, and we are reasonably assured of collection. If a  loss 
is anticipated  on any  contract, a  provision  for the  entire loss  is  made 
immediately.  Determination  of  these  criteria,  in  some  cases,   requires 
management's judgment.  Should  changes  in  conditions  cause  management  to 
determine that these  criteria are  not met for  certain future  transactions, 
revenue for any reporting period could be adversely affected.



The Company  also recognizes  engineering and  construction contract  revenues 
using the percentage-of-completion method,  based primarily on contract  costs 
incurred   to   date   compared   with   total   estimated   contract   costs. 
Customer-furnished materials,  labor,  and  equipment, and  in  certain  cases 
subcontractor materials, labor,  and equipment, are  included in revenues  and 
cost of revenues when management believes that the company is responsible  for 
the ultimate acceptability  of the  project. Contracts  are segmented  between 
types of  services, such  as engineering  and construction,  and  accordingly, 
gross margin related to each activity is recognized as those separate services
are rendered.



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.



Several other factors related to the Company may have a significant impact  on 
our operating results  from year to  year. For example,  the accounting  rules 
governing the timing of revenue  recognition related to product contracts  are 
complex and it  can be difficult  to estimate when  we will recognize  revenue 
generated by  a given  transaction.  Factors such  as acceptance  of  services 
provided, payment  terms,  creditworthiness of  the  customer, and  timing  of 
delivery or acceptance of our products  often cause revenues related to  sales 
generated in one period  to be deferred and  recognized in later periods.  For 
arrangements in  which  services  revenue  is  deferred,  related  direct  and 
incremental costs may also be deferred.



















RESULTS OF OPERATIONS



Three and Nine  Months Ended  September 30, 2012  compared to  Three and  Nine 
Months Ended September 30, 2011



Third Quarter of Fiscal 2012 vs. Third Quarter of Fiscal 2011



                           Three Months Ended            As a % of Revenues

                            September 30,                 September 30,    
                                                    %
                  2012          2011       Change      2012      2011 
Revenues        $  152,000   $    508,000    -70 % 100 %  100 %
Cost of
revenues          140,000       434,000    -68 %           92 %   85 %
Gross income
(loss)             12,000         74,000    -84 %            8 %   15 %
Operating
expenses                                                      
Research and
development         1,000       528,000    -99 %            1 %  104 %
Selling, general
& administrative   731,000     1,172,000    -38 %          481 %  231 %
Total
operating
expenses          732,000     1,700,000    -57 %          482 %  335 %
Operating
loss             (720,000 )   (1,626,000 )    56 %         -474 % -320 %
Other income
(expense)                                                     
Interest and other
income (expense)    (29,000 )      (20,000 )   -45 %          -19 %   -4 %
Total other
income
(expense)         (29,000 )      (20,000 )   -45 %          -19 %   -4 %
Net loss        $ (749,000 )  $ (1,646,000 )    55 %         -493 % -324 %



First Nine Months of Fiscal 2012 vs. First Nine Months of Fiscal 2011



                                                                 As a % of
                                Nine Months Ended                Revenues    

                                September 30,                September 30,
                      2012           2011       % Change  2012   2011  
Revenues           $  1,055,000   $  5,984,000      -82 %   100 % 100 %
Cost of revenues     1,722,000     5,108,000      -66 %   163 %  85 %
Gross income
(loss)                (667,000 )      876,000     -176 %   -63 %  15 %
Operating
expenses                                                     
Research and
development            805,000     1,532,000      -47 %    76 %  26 %
Selling, general
& administrative     3,129,000     4,034,000      -22 %   297 %  67 %
Total operating
expenses             3,934,000     5,566,000      -30 %   373 %  93 %
Operating loss      (4,601,000 )   (4,690,000 )      -2 %  -436 % -78 %
Other income and
(expense)                                                    
Interest and other
income (expense)        (150,000 )     (113,000 )      33 %   -14 %  -2 %
Total other
income (expense)      (150,000 )     (113,000 )      33 %   -14 %  -2 %
Net loss           $ (4,751,000 )  $ (4,803,000 )      -1 %  -450 % -80 %



The sum of the amounts and percentages may not equal the totals for the period
due to the effects of rounding.



Computations of  percentage  change period  over  period are  based  upon  our 
results, as rounded and presented herein.



Revenues. Revenues in the current  year were negatively affected by  continued 
uncertainty over  battery performance  and non-recoverable  engineering  costs 
associated with battery  development.As a  result, OEM  and other  customers 
have delayed major  all-electric vehicle marketing  initiatives, resulting  in 
decreased demand for our  systems. The decrease in  revenue for the three  and 
nine months ended September 30, 2012 compared  to the same period in 2011  was 
mainly due to a decrease in deliveries to our core customer base in the United
States.Revenues in the first nine months  of 2012 were mainly attributed  to 
continued shipments to First Auto Works in  China and the Optare Group in  the 
U.K.We will have fluctuations in revenue from quarter to  quarter.Although 
we have  seen indications  from  our customers  to support  future  production 
growth, there can  be no  assurance there will  be continuing  demand for  our 
products and services.



Cost of Revenues. Cost of revenues  consists of component and material  costs, 
direct labor costs,  integration costs and  overhead related to  manufacturing 
our products as well as inventory valuation reserve amounts. Cost of  revenues 
for the three and nine months ended September 30, 2012 decreased primarily due
to the decrease in revenue for the  three and nine months ended September  30, 
2012 compared to the same  period in the prior year.  We recorded a charge  of 
approximately $945,000 during  the first  nine months of  2012 increasing  our 
inventory obsolescence reserve  after management updated  its estimate of  the 
realizable value of inventory.



Gross Profit. The decrease in gross profit for the three and nine months ended
September 30, 2012 compared to the same period in the prior year is  primarily 
attributable to the decrease in revenues  and the recording of an increase  in 
the inventory obsolescence reserve in the first nine months of 2012.



Research and Development ("R&D"). R&D costs  decreased for the three and  nine 
months ended September 30, 2012 compared to the same periods in the prior year
as we reduced  engineering staff in  June 2012  due to the  Company's lack  of 
financial resources.  As a  result,  the Company's  development of  its  next 
generation Omni-series motor control unit and 10kW charger was put on hold  at 
the end of the second quarter.



Selling, General,  and Administrative  Expenses ("S,  G &  A"). S,  G &  A  is 
comprised of activities  in the executive,  finance, marketing, field  service 
and quality departments' compensation as well as related payroll benefits, and
non-cash charges for depreciation and options expense. The decrease in S, G  & 
A for the three and nine months ended September 30, 2012 compared to the  same 
period in the prior year is attributable the Company's implementation of staff
reductions, the termination  of employment with  the Company by  approximately 
80%  of  the  Company's  workforce   and  other  cost  savings   measures.We 
continually monitor S, G & A in  light of our business outlook and are  taking 
proactive steps to control these costs.



Interest and Other Income (Expense).  The interest and other income  (expense) 
increased in the  nine months ended  September 30, 2012  compared to the  same 
period in the prior  year primarily due to  $68,000 of fixed asset  impairment 
charge recorded in the second quarter of 2012.



Net Loss. The decrease  in the net  loss for the three  and nine months  ended 
September 30, 2012 compared to  the same period in  the prior year was  mainly 
due to the  reduction in our  workforce in  the second quarter  of 2012  which 
resulted in lower operating costs in 2012.



Comparability of Quarterly Results. Our  quarterly results have fluctuated  in 
the past and we  believe they will  continue to do so  in the future.  Certain 
factors that could  affect our  quarterly operating results  are described  in 
Part I, Item 1A-Risk Factors contained in  our Form 10-K for 2011, as  updated 
by the disclosure contained in Item 1A  of Part II of this Form 10-Q.Due  to 
these and other factors, we believe that quarter-to-quarter comparisons of our
results of operations are not meaningful indicators of future performance.



LIQUIDITY AND CAPITAL RESOURCES



We have experienced  losses primarily attributable  to research,  development, 
marketing  and  other  costs  associated   with  our  strategic  plan  as   an 
international developer and  supplier of electric  drive and power  management 
systems and components. Historically cash flows from operations have not  been 
sufficient to meet  our obligations  and 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. Our operations during  the nine months ended September  30, 
2012 were financed by product sales,equity financing,as well as from working
capital reserves.



On June30,  2010, the  Company  entered into  a  secured a  revolving  credit 
facility with a  financial institution  for $200,000  which was  secured by  a 
$200,000 certificate of deposit. The facility is for a period of 3years  and 
6months from  July1, 2010  to December31,  2013. The  interest rate  on  a 
drawdown from the facility is the certificate of deposit rate plus 1.25%  with 
interest payable  monthly and  the principal  due at  maturity. The  financial 
institution also renewed  the $200,000  irrevocable letter of  credit for  the 
full amount of the credit facility in favor of Sunshine Distribution LP,  with 
respect to  the lease  of the  Company's corporate  headquarters at  1560West 
190thStreet,  Torrance,   California.   On  November   7,   2012,   Sunshine 
Distribution LP drew down on the letter of credit in the amount of $72,735  in 
order to pay for October rent and  a remaining payable for a retroactive  rent 
increase. The  financial  institution redeemed  part  of the  certificate  of 
deposit in the  same amount to  fund the drawdown  on the irrevocable  standby 
letter of credit.



Net cash used in operating activities was $3,087,000 for the nine months ended
September 30, 2012; a  decrease of $4,132,000 compared  to $7,219,000 for  the 
nine months ended September  30, 2011. Operating cash  used in the first  nine 
months of  2012 decreased  compared to  the prior  year period  due mainly  to 
decreases in  our sales  volume  in 2012  and the  use  of our  existing  cash 
resources to fund our current operations. Non-cash items include expense  for 
stock-based compensation, depreciation  and amortization,  issuance of  common 
stock for employee services and  other losses. These non-cash items  increased 
by $650,000 for the nine  months ended September 30,  2012 as compared to  the 
same period  in  the  prior year  primarily  due  to larger  increase  in  the 
inventory reserve and reserve for doubtful accounts.The decrease in net loss
was primarily due to a decrease in administrative and R&D expenses related  to 
over 80% of our workforce leaving the Company in June 2012 and our restricting
other administrative expenditures to conserve cash resources. As of September
30, 2012, the Company  had $108,000 of cash  and cash equivalents compared  to 
$3,096,000 as of December 31, 2011.



Net cash used in investing activities for capital expenditures was $16,000 for
the nine months  ended September 30,  2012 compared to  $237,000 for the  nine 
months ended September 30, 2011. The decrease was primarily attributable to  a 
decrease in acquisitions  of test  vehicles and  equipment in  the first  nine 
months of 2012.



Net cash provided  by financing activities  was $115,000 for  the nine  months 
ended  September  30,  2012,  compared  to  net  cash  provided  by  financing 
activities of  $3,000  for the  nine  months  ended September  30,  2011.  The 
increase was primarily attributable to proceeds of $132,000 from the  issuance 
of Common Stock during second quarter of 2012 from the Lincoln Park  facility, 
as explained in  Note 8  - Stockholders'  Equity to  the financial  statements 
included in Item 1 of this Form 10-Q.



Net accounts  receivable  decreased  by  $437,000,  or  58%,  to  $322,000  at 
September 30, 2012 compared to a balance of $759,000 at December 31, 2011. The
decrease in  the  receivable  balance  was primarily  due  to  collections  of 
receivables due and an  increase in the Reserve  for Doubtful Accounts due  to 
financial instability at  a major  customer, Smith  Electric Vehicles.As  of 
September 30, 2012 and December 31, 2011, the Company maintained a reserve for
doubtful accounts receivable of $214,000 and $18,000, respectively.



Net inventory and supplies decreased by  $1,176,000, or 29%, to $2,860,000  at 
September 30,  2012  compared to  a  balance  of $4,036,000  at  December  31, 
2011.The decrease resulted  from net inventory  activity including  receipts 
totaling $544,000, consumption of $775,000 and an inventory reserve charge  of 
$945,000.



Prepaid expenses and  other current assets  decreased by $94,000,  or 39%,  to 
$148,000 at September 30, 2012 compared  to a balance of $242,000 at  December 
31, 2011. The decrease  was primarily due  to a decrease  in prepaid rent  and 
other expenses as  the Company reduced  expenditures to conserve  cash in  the 
third quarter of 2012.



Long term  accounts receivable  decreased  by $6,000,  or  8%, to  $73,000  at 
September 30, 2012 compared to a balance of $79,000 at December 31, 2011.  The 
decrease is primarily  due to  reclassification of  amounts that  will be  due 
within one year to current  accounts receivable.The Company agreed to  defer 
collection of certain accounts receivable as  requested by a customer for  the 
term of the Company's warranty guarantee. The Company continues to remedy  all 
warranty claims and therefore anticipates collection of this receivable.



Property and equipment, net of  depreciation, decreased by $403,000, or  43%, 
to $525,000  at  September 30,  2012  compared to  a  balance of  $928,000  at 
December 31, 2011.The decrease is  primarily due to depreciation expense  of 
$351,000 and an asset impairment charge of $68,000, which was partially offset
by additions to  fixed assets  totaling $16,000 in  the first  nine months  of 
2012.



Accounts payable decreased by $121,000, or  34%, to $233,000 at September  30, 
2012 compared to a balance of $354,000 at December 31, 2011. The decrease  was 
primarily due  to decreases  in  inventory purchases  made  in 2012  as  sales 
activity decreased.



Deferred revenues decreased by $302,000, or  94%, to $18,000 at September  30, 
2012 compared to a  balance of $320,000  at December 31,  2011 as revenue  was 
recognized in the second and third quarter of 2012 associated with prepayments
on purchase orders from certain customers.



Accrued payroll  and  related  expenses  decreased by  $163,000,  or  61%,  to 
$103,000 at September 30, 2012 compared  to a balance of $266,000 at  December 
31, 2011. The decrease was primarily due to the reduction in our workforce  by 
over 80% in  June 2012  which resulted  in a pay  out of  accrued vacation  of 
approximately $143,000 in the second quarter.



Other accrued  liabilities  decreased by  $112,000,  or 22%,  to  $405,000  at 
September 30,  2012  compared  to  a  balance  of  $517,000  at  December  31, 
2011.The decrease was primarily  due to a decrease  in the accrued  warranty 
balance as  costs for  warranty  claims were  greater than  warranty  accruals 
during the first nine months of 2012.



Accrued interest  payable  increased  by  $61,000, or  5%,  to  $1,298,000  at 
September 30, 2012 compared to a  balance of $1,237,000 at December 31,  2011. 
The increase was due  to interest related to  our debt instruments,  primarily 
the secured note payable  in the amount of  $1,267,000 to the Credit  Managers 
Association of California.



Going concern



To date, the Company has incurred recurring net losses and negative cash flows
from operations. At September 30, 2012, the Company had an accumulated deficit
of approximately $155.8 million, working capital of approximately $2.8 million
and shareholders' equity of approximately $0.9 million. Until the Company  can 
generate significant cash from its operations, the Company expects to continue
to fund its operations with existing cash resources, proceeds from one or more
private placement agreements, as well as potentially through debt financing or
the sale of equity securities. However,  the Company may not be successful  in 
obtaining additional funding. In addition, the Company cannot be sure that its
existing cash and  investment resources  will be adequate  or that  additional 
financing will be available when needed or that, if available, financing  will 
be obtained on terms favorable to the Company or its shareholders.



Our ongoing operations will require us to make necessary investments in  human 
and  production  resources,  regulatory  compliance,  as  well  as  sales  and 
marketing efforts. We  do not  currently have adequate  internal liquidity  to 
meet these objectives in  the long term.  On June 21, 2102,  we reported in  a 
Form 8-K filing  that, as part  of cost  cutting measures in  response to  our 
decrease  in  revenue  amid  continued  delays  in  industry  adoption  of  EV 
technology resulting from  ongoing battery cost  and reliability concerns,  in 
excess of 80% of our workforce left our Company, including the resignation  of 
members  of  our  senior  management.   We  continue  to  evaluate   strategic 
partneringopportunitiesand other  external sources  of liquidity,  including 
the public  and  private  financial markets  and  strategic  partners.  Having 
insufficient funds may require the  Company to delay or potentially  eliminate 
some or all of its development programs, relinquish some or even all rights to
product candidates  at  an earlier  stage  of development  or  negotiate  less 
favorable terms than  it would otherwise  choose.Failure to obtain  adequate 
financing also may adversely affect the launch of the Company's its ability to
continue in business. If the Company raises additional funds by issuing equity
securities, substantial dilution to existing stockholders would likely result.
If the Company raises additional funds by incurring debt financing, the  terms 
of the  debt may  involve significant  cash payment  obligations, as  well  as 
covenants and  specific financial  ratios  that may  restrict its  ability  to 
operate its business.



As of September 30, 2012, the  Company had approximately $0.1 million in  cash 
and cash equivalentsandwe anticipate that our existing cash and  anticipated 
receivables  collections  will  be  sufficient  to  meet  projected  operating 
requirements  through   year   end   to   continue   operations   and   market 
trading.



We have  also accessed  the  capital markets  to obtain  additional  operating 
funds.In December 2011, we raised approximately $1,245,000, net of financing
costs of $442,500 through an equity issuance to certain accredited  investors, 
which was disclosed in our Form  10-K filed on March 29,  2012.Additionally, 
we entered  into two  Purchase  Agreements (the  facility) with  Lincoln  Park 
Capital Fund in April to  issue up $10,000,000 in  shares of our common  stock 
and received proceeds of  $132,000, net of financing  costs of $152,000,  from 
the initial purchase of shares of Common Stock from Lincoln Park in the second
quarter. Access to  funding under  the facility  is dependent  upon our  share 
price maintaining a floor price of at least $0.15 per share.Our share  price 
decreased below that threshold in May 2012 and until our share price increases
above the threshold level, we cannot raise additional funds from the facility.



The Company continues to pursue other  options to raise additional capital  to 
fund its  operations,  including potential  strategic  partnerships;  however, 
there can be  no assurance  that we  can successfully  raise additional  funds 
through the capital markets.



Off-Balance Sheet Arrangements



The Company has no off-balance sheet arrangements.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Not applicable.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



The Company maintains disclosure controls and procedures which are designed to
provide reasonable assurance that information required to be disclosed in  the 
Company's periodic  Securities  and  Exchange Commission  ("SEC")  reports  is 
recorded, processed, summarized and reported within the time periods specified
in the SEC's  rules and forms,  and that such  information is accumulated  and 
communicated to  its  principal  executive  officer  and  principal  financial 
officer,  as  appropriate,  to  allow  timely  decisions  regarding   required 
disclosure.



As required by Rule 13a-15(b) under  the Securities and Exchange Act of  1934, 
as amended, the Company carried out  an evaluation, under the supervision  and 
with the participation  of the Company's  management, including the  Company's 
Chief Executive Officer and Chief  Financial Officer, of the effectiveness  of 
the design and operation of  the Company's disclosure controls and  procedures 
for the period covered by this report. Based on that evaluation, the Company's
Chief Executive Officer  and Chief  Financial Officer has  concluded that  the 
Company's  internal  control  over  disclosure  controls  and  procedures  was 
effective as of September 30, 2012.



Changes in Internal Control Over Financial Reporting



There were no  changes in our  internal control over  financial reporting  (as 
defined in Rules 13a-15(f)  and 15d-15(f) under the  Exchange Act) during  the 
nine months ended  September 30, 2012  that have materially  affected, or  are 
reasonably likely to  materially affect, our  internal control over  financial 
reporting.





                          PART II. OTHER INFORMATION



ITEM 1. Legal Proceedings



As reported in our Form 10-K for the fiscal year 2011, six of the eight counts
in the  litigation  between Enova  and  Arens Controls  Company,  L.L.C.  were 
settled. The two counts that were not settled remain outstanding. There  have 
been no material developments with  respect thereto during the period  covered 
by this report.We  intend to  continue to contest  the remaining  unresolved 
counts.



From time to  time, we are  subject to  legal proceedings arising  out of  the 
conduct  of   our  business,   including   matters  relating   to   commercial 
transactions. We recognize a liability for any contingency that is probable of
occurrence and reasonably estimable. We  continually assess the likelihood  of 
adverse outcomes in  these matters, as  well as potential  ranges of  probable 
losses (taking  into  consideration  any insurance  recoveries),  based  on  a 
careful analysis of each matter with  the assistance of outside legal  counsel 
and, if applicable, other experts.



Given the uncertainty inherent in litigation, we do not believe it is possible
to develop  estimates of  the  range of  reasonably  possible loss  for  these 
matters. Considering our  past experience,  we do  not expect  the outcome  of 
these matters, either  individually or in  the aggregate, to  have a  material 
adverse  effect  on   our  consolidated  financial   position.  Because   most 
contingencies are resolved  over long periods  of time, potential  liabilities 
are subject to change due to new developments, changes in settlement  strategy 
or the impact of evidentiary requirements, which could cause us to pay  damage 
awards or settlements  (or become  subject to equitable  remedies) that  could 
have a material adverse effect on our results of operations or operating  cash 
flows in the periods recognized or paid.



ITEM 1A. Risk Factors



The additional  risk factors  included below  supplement and  update the  risk 
factors previously discussed in our Annual Report on Form 10-K for the  fiscal 
year ended December 31, 2011.There have been no other material changes  from 
the risk factors as previously disclosed in such Annual Report on Form 10-K.





Our common stock has been delisted from the NYSE MKT

On October 24, 2012, the Company received notification from the NYSE MKT (the
"Exchange") stating that, because the Company was not in compliance with
certain of the Exchange's continued listing standards, the Exchange intended
to strike the common stock of the Company from the Exchange by filing a
delisting application with the Securities and Exchange Commission (the "SEC").
The Company previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24, 2012 the
provisions of the Exchange's continued listing standards with which the
Company was not in compliance. The Company did not request an appeal of the
Exchange's delisting determination.

Effective October 31, 2012, the Company's common shares were delisted from the
Exchange and, on the same date, trading of the Company's shares commenced on
the OTCQB Marketplace under the trading symbol "ENVS". The OTCQB is a market
tier operated by the OTC Market Group Inc. for over-the-counter traded
companies. The Company anticipates that the delisting will be completed once
the Exchange files a Form 25-NSE Notification of Delisting with the SEC. The
delisting and transition to the OTCQB does not change the Company's
obligations to file periodic and other reports with the SEC under applicable
federal securities laws.

As a result of the delisting of  our common stock from the NYSE MKT,  we 
believe that the price and liquidity of  our common stock, and our ability  to 
raise funds  from  the  sale of  equity  in  the future,  will  be  materially 
affected.



The sale or issuance of  our common stock to  Lincoln Park may cause  dilution 
and the sale of the  shares of common stock acquired  by Lincoln Park, or  the 
perception that such  sales may  occur, could cause  the price  of our  common 
stock to fall



On April 24,  2012, we  entered into  the $3,400,000  Purchase Agreement  with 
Lincoln Park pursuant to which we may issue to Lincoln Park from time to  time 
over a 36-month period up to $3,400,000  worth of our common stock subject  to 
certain limitations defined in the  prospectus supplement and 567, 681  shares 
to be  issued to  Lincoln Park  at no  cost as  a fee  for its  commitment  to 
purchase such shares.  In addition,  on April 23,  2012, we  entered into  the 
$6,600,000 Purchase Agreement  with Lincoln  Park, pursuant  to which  Lincoln 
Park committed to purchase an additional $6,600,000 worth of our common stock,
from time to time over a 36-month period commencing after the SEC has declared
effective a registration statement for the resale of such shares that we  must 
file with the SEC within 120 business days after the date of such agreement.



Other than  Lincoln  Park's initial  purchase  under the  $3,400,000  Purchase 
Agreement of 1,250,000  shares of our  common stock  at a price  per share  of 
$0.20 for  an aggregate  amount  of $250,000,  or  the Initial  Purchase,  the 
purchase price for the shares that we may sell to Lincoln Park will  fluctuate 
based on the price of our common stock. It is anticipated that shares will  be 
sold over  a period  of up  to  36 months  after the  date of  the  prospectus 
supplement. Depending on  market liquidity  at the  time, sales  of shares  we 
issue to Lincoln Park may cause the trading price of our common stock to fall.



We generally have the right to control  the timing and amount of any sales  of 
our shares  to  Lincoln  Park, except  that,  pursuant  to the  terms  of  our 
agreements with Lincoln  Park, we would  be unable to  sell shares to  Lincoln 
Park if and  when the  market price  of our common  stock is  below $0.15  per 
share. Sales of our  common stock, if  any, to Lincoln  Park will depend  upon 
market conditions and  other factors to  be determined by  us. As such,  other 
than the Initial Purchase, Lincoln Park  may ultimately purchase all, some  or 
none of the  shares of our  common stock offered  pursuant to this  prospectus 
supplement and, after it has acquired shares, Lincoln Park may sell all,  some 
or none of those shares.  Therefore, sales to Lincoln  Park by us pursuant  to 
either the $3,400,000 Purchase Agreement or the $6,600,000 Purchase  Agreement 
could result in substantial dilution to the interests of other holders of  our 
common stock. Additionally, the sale of a substantial number of shares of  our 
common stock to Lincoln Park, or the anticipation of such sales, could make it
more difficult  for us  to sell  equity or  equity-related securities  in  the 
future at a time and at a price that we might otherwise wish to effect sales.



Raising additional funds by issuing securities, engaging in debt financings or
through licensing  arrangements may  cause  substantial dilution  to  existing 
stockholders, restrict our operations or require us to relinquish  proprietary 
rights.



To the extent that we raise additional capital by issuing equity securities as
we did in 2011, April 2012 and May 2012, our existing stockholders'  ownership 
may be substantially  diluted. Any debt  financing we enter  into may  involve 
covenants that restrict  our operations  or our  ability to  enter into  other 
funding arrangements. These restrictive  covenants may include limitations  on 
additional borrowing and specific  restrictions on the use  of our assets,  as 
well as prohibitions on our ability to create liens, pay dividends, redeem our
stock or make investments. In addition,  if we raise additional funds  through 
licensing arrangements, it may be necessary to relinquish potentially valuable
rights to  our  potential  products  or  proprietary  technologies,  or  grant 
licenses on terms that are not favorable to us.



One group of our shareholders holds  a large percentage of our  outstanding 
common stock, and, should they choose to do so, may have significant influence
over the outcome of corporate actions requiring stockholder approval.



Approximately 25.4% of our outstanding common stock  is held by a group of  17 
shareholders (the "Low-Beer  Managed Accounts") who  invested in our  December 
2011 placement of 11,250,000 shares of common stock together with warrants  to 
purchase up to 11,250,00 shares of common stock. The warrants are  exercisable 
for a period of five years and exercisable at a price of $0.22 per share.  The 
warrants further provide that if, for a twenty consecutive trading day period,
the average of the closing price quoted on the OTCQB market is greater than or
equal to $0.44 per share, with at least an average of 10,000 shares traded per
day, then, on the 10th calendar day following written notice from the Company,
any outstanding warrants  will be deemed  automatically exercised pursuant  to 
the cashless/net  exercise provisions  under  the warrants.  Accordingly,  the 
Low-Beer Managed  Accounts,  should they  choose  to do  so,  may be  able  to 
significantly influence  the outcome  of any  corporate transaction  or  other 
matter submitted to our stockholders  for approval, including the election  of 
directors, any merger, consolidation  or sale of all  or substantially all  of 
our assets or any other significant  corporate transaction, and such group  of 
investors could delay or prevent a change  of control of our company, even  if 
such a change of control would  benefit our other stockholders. The  interests 
of the Low-Beer Managed  Accounts may differ from  the interests of our  other 
stockholders.



Funding from our equity lines of credit  may be limited or be insufficient  to 
fund our operations or to implement our strategy.



Under our purchase agreements with Lincoln Park, we may direct Lincoln Park to
purchase up to $3,400,000 of  shares of common stock  over a 36 month  period, 
and, upon effectiveness of a registration  statement for resale of the  shares 
and subject to other conditions, we  also may direct Lincoln Park to  purchase 
up to $6,600,000 of  our shares of  common stock over a  36 month period.  The 
amounts available for purchase is  limited under each purchase agreement.  The 
extent to which we rely on Lincoln Park as a source of funding will depend  on 
a number  of factors  including, the  amount, if  any, of  additional  working 
capital needed, the prevailing market price of our common stock and the extent
to which we are able to secure  working capital from other sources. If we  are 
unable to  sell  enough  of  our  products  to  finance  our  working  capital 
requirements and  if  sufficient  funding  from Lincoln  Park  were  to  prove 
unavailable or prohibitively dilutive, we would need to secure another  source 
of funding.  Even if  we sell  all $10,000,000  under the  aggregate  purchase 
agreements to Lincoln Park, there can be no assurance this would be sufficient
to support our operations or implement our growth plans in all cases.





We will need to secure adequate funding to complete the development program
for Omni Product Line and Green For Free (GFF).



Our current cash reserves are not sufficient to fully fund GFF development and
commence production of the Omni  product line, and as  a result, we will  need 
additional funding to  complete the development  of these product  initiatives 
and to fund  operations generally. We  may seek to  enter potential  strategic 
partnerships related to both  GFF and Omni production  to provide funding  for 
continued development of the Omni  platform, support of our  commercialization 
operations with  respect to  GFF and  support funding  of general  operations. 
However, there can be no assurance that such a strategic partnership would  be 
completed or on  terms that are  favorable to us.  If we are  unable to  reach 
agreement with a  potential strategic  partner or if  a strategic  partnership 
does not provide adequate funding, we may need to obtain additional funding to
complete the  development of  GFF. Raising  additional equity  capital may  be 
difficult due  to our  share price  trading at  near historical  lows and  the 
delisting of our stock. If we are  unable to raise sufficient capital to  fund 
our development programs and operations generally, we may be unable to proceed
with the development of  GFF and our business  and financial condition may  be 
adversely affected.



                     This information is provided by RNS
           The company news service from the London Stock Exchange

END


QRTLFFLVLELSLIF -0- Nov/15/2012 07:01 GMT
 
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