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With their earnings call scheduled for later today I wanted to create a record of the issues that scare me about Ener1's (HEV) financial statements. I've spent a good deal of time going back and forth on this Instablog because I could be fretting over nothing and certainly don't want to yell fire in a crowded theater. I guess we'll know more after Ener1's earnings release this afternoon.

The source of my nightmares is battles with auditors and the SEC that I've fought in the past and lost. The short list of issues that I see are:

1. When Ener1 bought the last 19.5% of EnerDel from Delphi (OTCPK:DPGYF), it was a stock for assets transaction that was valued at $32 million for accounting purposes. Since the hard assets of EnerDel already showed up on Ener1's balance sheet with a historical value in the $6 million range, the entire $32 million was booked as intangible assets. $13.8 million was attributed to EnerDel's lithium-titanate battery chemistry which has since been put on a back burner and is rarely discussed. The balance of of $18.2 million was booked to "goodwill."

2. When Ener1 bought Enertech it was also a stock for assets transaction that was valued at $47.4 million. Of that total, $15.8 million was allocated to the identified tangible assets of Enertech while $1.9 million was allocated to identified intangible assets and $29.7 million was allocated to "goodwill."

3. When Th!nk went into insolvency administration in Norway, Ener1 put together a financing group to bail Th!nk out. Ener1 started with a modest ownership in the 20% range, but it also gave the financing group members a right to tender their Th!nk shares to Ener1 in exchange for shares of Ener1 stock. That happened late last year when Rockport tendered its entire Th!nk position to Ener1 and boosted Ener1's interest in Th!nk to about 48%.

I've been a direct participant in one goodwill impairment fight with auditors. The fight is almost impossible to win in the case of a money losing company. An extreme example of what can happen was seen last year when C&D Technologies was forced into a debt restructuring after $60 million in goodwill that it had been carrying for years was impaired and written off.

Since Ener1 has already chosen to de-emphasize their lithium-titanate technology and it continues to lose money on Enertech, I don't see how it can continue to carry $11.7 million of intangible assets and $51.7 million of goodwill on the face of its financial statements.

In the wake of the Enron mess, FASB accounting rules were changed radically to require the consolidation of entities where the principal risk of loss is borne by a reporting company. While Ener1's interest may not be technical control, I'd have a hard time arguing that it's not de facto control. If Ener1 is required to consolidate Th!nk's balance sheet and pick up Th!nk's losses I fear a good deal of the $41.8 million of Ener1's investment in Th!nk may disappear.

Collectively, the assets that strike me as worrisome represent the bulk of Ener1's net worth. I'll be fascinated to see how it all turns out.

Source: My Ener1 Nightmares