Ener1's Reality Is Worse Than My Nightmares

| About: Ener1 Inc (HEV)
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On Thursday morning, I wrote an Instablog titled “My Ener1 Nightmares” that gave voice to my fears that Ener1 (NASDAQ:HEV) might be required to report one or more of the following fundamental changes in its Annual Report on Form 10-K for last year:
  • The impairment of $11.68 million of intangible assets reflected on its September 30, 2010 balance sheet;
  • The impairment of $51.75 million of goodwill reflected on its September 30, 2010 balance sheet; and
  • The consolidation Think as a subsidiary, which could slash the $41.75 carrying value reflected on its September 30, 2010 balance sheet.
I felt pretty silly when Ener1’s Form 10-K was filed on Thursday afternoon without any of these changes and was embarrassed when my Instablog was upgraded to the Seeking Alpha main pages on Friday. After all, no professional likes to make dire predictions that don’t materialize.
After spending a couple days studying Ener1’s Form 10-K, I’ve concluded that my concerns over the consolidation of Think were justified, the problem is far more pervasive than I thought, and while Ener1 was able to fade the heat in its Annual Report, a consolidation of Think in the first half of 2011 is approaching the point of virtual certainty.
Think is a Norwegian electric vehicle manufacturer that is attempting to commercialize the Th!nk City, a plastic body city car that was originally developed by Ford (NYSE:F). Over the years, Think has run into financial problems and gone into public administration, the Norwegian equivalent of Chapter 11 reorganization, on three separate occasions, most recently, in December 2008. Since Think had previously decided to use batteries from Ener1, keeping Think afloat was a high priority item for Ener1’s management and principal stockholders.
Shortly after Think went into public administration, a group of investors led by the Ener1 Group, Ener1’s biggest stockholder, stepped into the breach with $5.7 million in bridge funding. Over the next two years, Ener1 took the lead in arranging additional financing for Think and as part of the deal structure gave new Think investors the right to exchange their Think shares for Ener1 shares.
At September 30, 2010, Ener1 held approximately 33% of Think's voting power and carried its investment at $41.75 million, which represented $36.8 million of cash invested in Think and $4.95 million in value attributable to the put options Ener1 had given other Think investors. In the fourth quarter of 2010, Rockport Partners exercised its put option and transferred 10.2 million Think shares to Ener1 in exchange for 4.26 million Ener1 shares. At December 30, 2010, Ener1 controlled 48% of Think's voting power and carried its investment at $58.6 million. In addition, its December 31, 2010 balance sheet includes $13.6 million in accounts receivable and $14 million in loans receivable from Think, bringing Ener1’s total financial commitment to Think to $96.2 million at year-end. Since then, Ener1 has increased Think’s borrowing limits under an intercompany line of credit facility by $10 million.
Some of the more disturbing disclosures in Ener1’s Form 10-K say:

Sales to Think Global have represented nearly all of our automotive revenue in the past, and in January 2011 we temporarily stopped shipping battery packs to Think Global at their direction until the company rebalanced its overall inventory levels for the Think City in Europe and in the United States.(Page 19)
We currently have approximately $14.3 million in outstanding receivables under the Think Supply Agreement. Although there remains a possibility that we may receive cash in payment of these outstanding receivables, we currently expect to accept additional equity in Think Holdings for at least a portion of these receivables. (Page 20)
We have also made several loans to Think Holdings totaling $17.1 million, including accrued interest, which loans begin to mature on March 31, 2011. Similar to our outstanding receivables under the Supply Agreement, there is the possibility that we may accept equity rather than cash as repayment of these loans, which would increase our ownership in Think Holdings and could cause us to become the majority shareholder of Think Holdings and require consolidation. (Page 20)
In connection with our investment in Think Holdings, we agreed that certain other investors that purchased Think Holdings Series B Stock could require us to issue shares of Ener1 common stock to these investors in exchange for their shares of Series B Stock, along with one-half of their warrants to purchase shares of Series B Stock (the Ener1 Put Option). In connection with the Ener1 Put Option, the agreed upon exchange price for one share of Series B Stock is $1.67, and the price at which our common stock is valued will be the then 15 day moving average of our common stock trading price, but in no event less than $4.00 per share. Investors have until May 2011 to exercise the Ener1 Put Option. The total amount of Ener1 common stock issuable upon exercise of the Ener1 Put Option was originally capped at $27.5 million and at December 31, 2010, the remaining cap, after exchanges under the Ener1 Put Option have been made, is $15.1 million. (Page 33)
In January 2011, Investinor attempted to exercise its rights under the Expanded Put Right, but Ener1 is contesting the exercise at this time and has not issued any shares of Ener1 common stock to Investinor in exchange for Series B Stock.” (Page 33)

Additional color can be found in a Google Translation of an Investinor press release dated February 2, 2011 that said Investinor had sold its interest in Think to Ener1.
From where I sit, the handwriting on the wall is in big block letters. Rockport has already bailed on its investment in Think by exercising its Put Option. Investinor wants to bail by exercising its Put Option. Other investors in Think have until May 2011 to make up their minds. Under the circumstances, I believe it's only a matter of time. When Ener1 is required to consolidate Think as a subsidiary, the following amounts (in thousands) shown Ener1’s December 31, 2010 balance sheet will be at risk:

At Risk
Working capital
Investment in Think
Stockholders equity
Including intangible fluff
Without intangible fluff

I can't begin to estimate the impact of a Think consolidation on Ener1’s financial position, but there’s ample reason to believe the outcome will not be pretty. The working capital exposed in a Think consolidation represents a little over half of Ener1’s working capital. If you feel comfortable with $63 million of intangible asset and goodwill fluff that I discussed in my earlier Instablog, the stockholders equity exposed in a Think consolidation represents about 43.5% of Ener1’s stockholders’ equity. If you believe as I do that intangible assets and goodwill are meaningless in a money losing company like Ener1, about 62.5% of its stockholders equity is at risk.
At this point, I don’t know that Ener1’s stockholders can do anything but wait for the smoke to clear. I would certainly not be a buyer of Ener1’s stock without a good deal more clarity than we have today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.