10-K 1 v214062_10k.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 001-34050

Ener1, Inc.
(Exact name of registrant as specified in its charter)
FLORIDA
59-2479377
State or other jurisdiction  of
incorporation or organization
(I.R.S. Employer
Identification No.)
1540 Broadway, Suite 25C
New York, New York 10036
 (Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code            (212) 920-3500

Securities registered pursuant to section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No R
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No R

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes R Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes o NoR

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  
Large accelerated filer
¨
Accelerated filer
R
Non-accelerated filer
¨
Smaller reporting company
¨
       
(Do not check if a smaller reporting
company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes o No R

 
The aggregate market value of the voting stock held by non-affiliates was approximately $266.0 million at June 30, 2010.
As of February 28, 2011, there were 164,866,227 shares outstanding of $0.01 par value common stock.

 
 

 

Ener1, Inc.

FORM 10-K

For the year ended December 31, 2010

INDEX

   
Page
PART I
   
     
Item 1.
Business
2
Item 1A.
Risk Factors
16
Item 1B.
Unresolved Staff Comments
35
Item 2.
Properties
35
Item 3.
Legal Proceedings
35
Item 4.
Reserved
35
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
36
Item 6.
Selected Financial Data
38
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
56
Item 8.
Financial Statements and Supplementary Data
57
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
105
Item 9A.
Controls and Procedures
105
Item 9B.
Other Information
105
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
106
Item 11.
Executive Compensation
113
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
129
Item 13.
Certain Relationships and Related Transactions, and Director Independence
132
Item 14.
Principal Accounting Fees and Services
137
     
PART IV
   
     
Item 15.
Exhibits, Financial Statement Schedules
138
 
Signatures
143
 
 

 
 
Ener1, Inc. and its consolidated subsidiaries are sometimes referred to in this Annual Report as Ener1, the Company, the Registrant, we, our or us.

Cautionary Statements Concerning Forward Looking Information

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that involve substantial risks and uncertainties. All statements, other than statements of historical fact, including statements regarding our strategy, future operations, prospects, future financial position, future revenues, cash flow from operations, available cash, operating costs, capital and other expenditures, financing plans, capital structure, contractual obligations, legal proceedings and claims, future economic performance, management’s plans, goals and objectives for future operations and growth and markets for our planned products and stock, are forward-looking statements. The words anticipate, believe, estimate, expect, intend, may, plan, predict, project, will and would and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
 
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have described important factors in the information included in this Annual Report that we believe could cause actual results or events to differ materially from the forward-looking statements that we make in the section entitled Risk Factors (refer to Part I, Item 1A), as well as in other sections of this Annual Report, such as Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
You should consider the risk factors and other cautionary statements made in this Annual Report as being applicable to all related forward-looking statements wherever they appear. Unless specifically indicated, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements. 
  
PART I
Item 1.        Business

Business Overview

Ener1, Inc. (Ener1) designs, develops and manufactures high-performance, prismatic, rechargeable, lithium-ion batteries and battery pack systems for energy storage.  We also conduct research and development activities on fuel cells and nano-coating processes.  Our fuel cell business develops and markets fuel cells and fuel cell systems.  Our nanotechnology business develops and markets nanotechnology related manufacturing processes and materials.

A convergence of market forces and government policy initiatives may encourage a transition from oil-fueled vehicles and energy inefficient electricity production to electric vehicles and more efficient grid storage and energy management technology.   We expect that more stringent fuel economy standards in the United States combined with rigorous carbon dioxide emissions standards in Europe will likely cause many automobile manufacturers to produce new forms of electric cars, trucks and buses.
 
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Our Battery Business

Our battery business develops and markets advanced lithium-ion batteries and battery packs for use in the transportation, grid energy storage and small pack, or industrial cell product markets.

Transportation
Various manufacturers in the transportation industry plan to introduce additional hybrid electric vehicle (HEV), electric vehicle (EV) and plug-in hybrid electric vehicle (PHEV) models, the introduction of which is expected to increase the total number of hybrid and electric vehicle models in the automotive sector to approximately 119 by the end of 2012, based upon the analyst report, “Electric Cars: Plugged in 2,” produced by Deutsche Bank in November 2009.

Our primary products for the transportation market consist of battery solutions for HEVs, PHEVs, EVs and other vehicles such as trucks and buses.  In 2007, pursuant to a supply agreement (the Think Supply Agreement) with Think Global, we began developing a lithium-ion battery pack designed specifically for the Think City EV.  Think Global refinanced its operations in August 2009 after reorganization under Norwegian law. In September 2009, we amended the existing Think Supply Agreement which provided us with, among other rights, an exclusive right to supply battery packs for a certain period and a right of first refusal if Think Global seeks to obtain battery supplies from other battery suppliers.  In May 2010, we commenced commercial production and shipment of lithium-ion battery packs for Think Global’s Think City electric vehicle utilizing our EV cell and pack.  During 2010, we shipped over 1,000 battery packs to Think Global.  However, 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 the United States.

In addition, in 2009 and 2010, we made separate strategic investments in Think Holdings, AS, a Norwegian limited liability company (Think Holdings), which is the majority owner of Think Global. As of December 31, 2010, we controlled approximately 48% of the outstanding voting power in Think Holdings.  We have contractual arrangements with certain other shareholders of Think Holdings which allow them to exchange their shares of Think Holdings’ Series B Convertible Preferred Stock (Series B Stock) for our shares of common stock. In addition, two of our Directors are directors of Think Holdings, including Charles Gassenheimer who serves as Chairman of the Board of Think Holdings.  As described in the Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of this Annual Report, we may become the majority owner of Think Holdings upon the occurrence of certain events.

We are also developing battery packs for the Volvo C30, the first all electric car offered by the Swedish vehicle manufacturer.

In October 2008, we acquired approximately 83% of Ener1 Korea, Inc., formerly known as Enertech International, Inc., (Ener1 Korea), a Korean based manufacturer of lithium-ion batteries and subsequently increased our ownership to 89% in January 2009 with the purchase of additional shares of Ener1 Korea common stock.  During 2010 we invested approximately $12 million in Ener1 Korea which increased our ownership interest to 94% at December 31, 2010.  The acquisition expanded our production capabilities by adding Ener1 Korea’s 145,000 square foot lithium-ion battery manufacturing plant and production equipment located in South Korea.  Ener1 Korea has expertise in manufacturing flat or prismatic batteries, which are used in our battery packs and has been supplying cells, based on EnerDel’s design, for the Think Global battery packs.  

In 2005, we began developing lithium titanate (LTO) chemistry for HEV batteries under the United States Advanced Battery Consortium (USABC) program, a consortium of Ford, General Motors and Chrysler with funding provided by the DOE.  We are currently working on a Phase II grant for LTO cell development.  We are also developing an LTO battery for PHEVs, but with a different cathode material from our LTO HEV chemistry, under an award from the DOE which is being managed by the USABC.  
  
 
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Grid Energy Storage
In the grid energy storage markets, we are developing energy storage applications for utility grid and commercial applications. We believe grid reliability problems in Russia and other emerging economies around the world represent an opportunity for our grid energy storage business.

In October 2010, we entered into a supply agreement (the Supply Agreement) with Mobile Gas Turbine Electric Powerplants, a Russian corporation (MGTES), to provide lithium-ion battery units to power grid energy storage systems in Russia.  The total purchase price for the units is $40.0 million, the payment of which will be made in installments over a period of approximately two years, and each installment payment will be subject to the satisfaction of specified production, inspection and performance conditions.  In 2010, we recognized approximately $11.3 million in revenue associated with the Supply Agreement using the percentage of completion methodology.  Although we anticipate that we will complete performance of our obligations under the contract by the end of 2012, we cannot assure you that we will meet all the requirements to receive all installment payments in full or on a timely basis.

Small Cell Product Markets
Our South Korean subsidiary, Ener1 Korea, manufactures lithium-ion batteries for the small format products market which encompasses consumer, industrial and military products.  Our primary small format product line consists of commercial prismatic lithium-ion batteries for products such as Motorola’s hand-held scanners.

Joint Venture with Wanxiang EV
In January 2011, we entered into a joint venture agreement (the JV Agreement) with Wanxiang EV Co. Ltd (Wanxiang), which operates the electric vehicle division of Wanxiang Group, to form a joint venture company (the Joint Venture) to design, manufacture, sell and service lithium-ion battery cells and lithium-ion battery packs, primarily in China, Hong Kong, Taiwan and Macau.  The Joint Venture will be a limited liability company established under the laws of the People’s Republic of China.

The Joint Venture will be established upon receipt of certain Chinese governmental approvals, which we anticipate will be received within 90 days from the date of the JV Agreement.  The Joint Venture will be based in Hangzhou, China.  Wanxiang will appoint the chief executive officer and chief operating officer of the Joint Venture and we will appoint the chief financial officer and chief technology officer.

The Joint Venture parties have agreed to initially invest approximately $120 million in the Joint Venture.  Wanxiang will contribute $72 million and own 60% of the equity of the Joint Venture and Ener1 will contribute $48 million and own 40% of the equity of the Joint Venture.  The initial ownership percentages may change based on future equity contributions made by the parties or by any new investor in the Joint Venture.  However, as noted in the JV Agreement, Wanxiang will always maintain a minimum 51% equity stake in the Joint Venture pursuant to the terms of the JV Agreement.  The parties further agreed that the Joint Venture may obtain up to $175 million in bank financing in order to fund additional capital needs.

Wanxiang’s initial contribution of $72 million will be made in the form of property, plant and equipment totaling approximately $36 million within 60 days of the establishment of the Joint Venture and the remaining $36 million in cash over a two-year period thereafter ($12 million of property, plant and equipment will be contributed for use in connection with the Joint Venture’s battery pack manufacturing operations and the remaining $24 million will be contributed for the purchase of additional property, plant and equipment in connection with the Joint Venture’s cell manufacturing operations). Of our total cash contribution of $48 million, $8 million will be used in connection with the Joint Venture’s battery pack manufacturing operations (payable in two equal installments of $4 million) and the remaining $40 million will be used in connection with the Joint Venture’s battery cell manufacturing operations.  We expect to raise the capital to fund our initial $8 million contribution, the first half of which is due within sixty (60) days of the signing of the JV Agreement and the second half within two (2) years, through sale of our common stock.  We expect to finance our remaining $40 million contribution, which is due within two (2) years of the signing of the JV Agreement, through non-recourse debt secured by our equity stake in the Joint Venture as collateral.
 
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Our Fuel Cell Business

Our fuel cell business develops and markets fuel cells and fuel cell systems.  This business is working on developing a hydrogen fuel cell range extender for PHEVs and has created a high temperature fuel cell stack which was incorporated into an EV based on the Scion xB platform.  Other planned products are in the early stages of development and completion of prototypes will require additional funding.

Our Nanotechnology Business

Our nanotechnology business develops and markets nanotechnology related manufacturing processes and materials that utilize a proprietary vapor deposition and solidification process for depositing materials onto battery electrodes as part of the battery cell manufacturing process.  Other planned products, such as developing electrodes produced using this process are still in the research and development phase and will require additional funding to continue testing and research.

Operating Segments

Through December 31, 2010 we managed our operations through three reportable segments: battery, fuel cell and nanotechnology.  Financial information for the years ended December 31, 2010, 2009 and 2008 regarding our operating segments, including geographic information, is incorporated by reference from Note 17, Operating Segment and Geographic Information to our Consolidated Financial Statements.

We have revised our reportable segments as of January 1, 2011 in conjunction with the implementation of a new organizational structure, which reflects how the chief operating decision maker evaluates the performance of our business.

Our new reportable segments as of January 1, 2011 are transportation, grid energy storage, and small pack.

 
·
Transportation: the transportation segment reflects potential revenues and costs associated with the design, development and manufacture of batteries for light duty vehicles such as passenger cars, heavy-duty vehicles such as trucks and buses and vehicle-related military applications.  Principal customers in this segment currently include Think Global and Volvo Specialty Vehicles division.

 
·
Grid energy storage: the grid energy storage segment reflects potential revenues and costs from the design, development and manufacture of batteries for bulk energy storage, frequency regulation, community electric storage, and intermittency applications.  Principal customers include MGTES, a subsidiary of the Federal Grid Company of Russia, and Portland General Electric.

 
·
Small pack: the small pack segment reflects potential revenues and costs from batteries sold to small format customers in the handheld scanner, personal digital assistant and medical device markets.  Our principal customer in the small format market is Motorola Corporation.

Segment disclosures will be reclassified in our Form 10-Q for the three months ending March 31, 2011 to conform to the new reportable segments.

Our fuel cell and nanotechnology businesses have been subsumed within research and development activities to support our reportable segments as of January 1, 2011.
 
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Development of our Business

Developing better technology and reducing cost continue to be driving forces in the advanced battery industry. We believe that delivering safe battery solutions with high energy density and long life will be critical to our long-term success.  We use multiple chemistries to achieve these objectives based upon our customers’ requirements for power and energy.

The United States Advanced Battery Consortium (the USABC) has identified the following five factors as key in determining battery performance: power, energy, safety, life, and cost. Ener1 is aggressively focusing on all of these factors and believes it has a competitive advantage in all five areas:

 
·
Power – Power is defined as the rate at which energy transfer takes place in a circuit and is measured in kilowatts.  Our EV cell (comprised of a mixed oxide cathode and hard carbon anode) achieves 2,500W/kg in 10-second pulse power while maintaining an energy density of 160Wh/kg.  Our EV cell also achieves very low impedance (or resistance) at the cell and pack level.

 
·
Energy – Energy determines the storage capacity of a battery and how long a battery can expend energy. Energy is measured in kilowatt-hours.  At 160Wh/kg, we believe our EV cell is one of the top achieving energy density (energy density is defined as the amount of energy that can be stored in a given system or region of space per unit volume) cells in the large format category.

 
·
Safety – Safety is an important factor, as batteries contain several chemicals that can be volatile and dangerous. Ener1 batteries undergo rigorous testing including underwater submersion, drop tests from 10 meters, 3-axis nail penetration tests, and may be crash-tested by customers, such as Volvo and the new Volvo C-30 EV.

 
·
Life – A battery’s life determines a battery’s ability to withstand degradation.  Our EV battery module achieves approximately 93% capacity retention after 2,000 cycles. If the battery is charged once per day, 2,000 cycles is equivalent to a time period of just under 5.5 years.  The automotive industry currently views end of life for the battery at capacity retention of 80%.

 
·
Cost – Cost remains a key factor in EV adoption. Presently, the average cost of a lithium-ion battery pack to automotive manufacturers is approximately $600 per kilowatt-hour, and Ener1 is executing a plan of cost reduction over time.  We believe using hard carbon in the anode will be competitive and ultimately lower cost compared to man-made graphite anodes due to a manufacturing process that requires a lower temperature and is shorter in duration.

Industry Trends by Segment

Transportation
In the transportation sector, we expect that due to (1) volatility in oil prices; (2) government initiatives to increase fuel efficiency; (3) worldwide efforts to reduce dependence upon oil, and (4) government initiatives to reduce CO2 emissions, demand will grow significantly for EVs, PHEVs, and HEVs over the next 10 years.  We believe that strategic and national security considerations will also play a role in this anticipated trend.  We anticipate that electrification of the automobile will be a critical component to automotive manufacturers achieving higher Corporate Average Fuel Economy or CAFE standards as established by the National Highway Traffic Safety Administration.
 
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Automotive manufacturers have particular specifications for different vehicles related to performance, size, form factor and weight of battery packs.  To meet the customization requirements of the transportation segment, our subsidiary EnerDel, Inc. (EnerDel) has developed into what we consider to be an end-to-end solutions provider developing basic components such as lithium-ion cells to completed battery packs.

 
The following is a description of the typical characteristics of HEVs, PHEVs, and EVs:

 
·
HEVs are cars powered by a combination of a battery-powered electric motor and an internal combustion engine.  HEVs use the gasoline engine as the primary source of propulsion, and battery power during acceleration, start-stop functions, regenerative braking and, in some models for limited electric drive-only mode. Well known HEVs include the Toyota Prius and the Honda Civic.

 
·
The PHEV generally is a hybrid car that runs primarily on battery power and uses the internal combustion engine where the battery is depleted and to recharge the battery. The battery can be recharged at an electric outlet. Generally, the most well known PHEV in the United States is the Chevrolet Volt, which is expected to be available in 2011.  According to the Bureau of Transportation Statistics, as many as 85% of American drivers commute 25 miles or less per day, one-way, and an affordable PHEV with a pure electric range of 40 miles would result in a reduction of oil consumption.

 
·
EVs are cars that use battery power as the sole source of energy.  Like PHEVs, the battery is recharged at an electric outlet.  Well known EVs currently being designed or produced include the Think City, the Nissan Leaf, and the Tesla Roadster.  There are efforts by various organizations, including utility companies, governments and independent companies such as Better Place, to develop charging stations and battery swap programs for PHEVs and EVs.

The heavy-duty market (in which we include trucks and buses) and fleet transportation markets may drive a significant amount of growth and demand for Ener1’s products in the coming years. There were over 16 million public and private fleet vehicles on the road in the United States in 2009 according to the Electrification Coalition.  Fleet operators may realize the economic value from lower fuel costs and lower maintenance costs associated with EVs more rapidly than individual consumers. In addition, fleet operators may more easily overcome barriers to widespread consumer adoption utilizing their own charging infrastructure and defined routes.

Grid Energy Storage
The grid energy storage segment provides an opportunity for growth for Ener1. The market for grid storage, including bulk energy storage, frequency regulation, and other applications, is expected to exceed $500 billion globally by 2015, based on a report published by Greentech Media Research. According to Sandia National Laboratories, the key drivers of grid storage demand include a number of factors such as: a growing market for EVs and portable electronic devices, increased implementation of demand response applications and the need to manage peak demand, development of distributed generation, increased renewable portfolio standards for electric utilities across many states, increasing grid storage as an alternative to new transmission capacity construction, and the need for increased demand-based pricing for energy consumption.

Ener1 is exploring grid storage opportunities with customers including the Federal Grid Company of Russia, Portland General Electric and Itochu.  Our contracts with MGTES, a subsidiary of the Federal Grid Company and Portland General Electric are oriented toward bulk energy storage.  Our work with Itochu is centered on grid storage demonstration projects in Japan, in particular using lithium-ion batteries as a storage device for rooftop solar panels and additionally providing power to quick-charge stations for EVs.

Industrial Cell Product Markets
Ener1 Korea’s subsidiary, Emerging Power, Inc. (Emerging Power), manufactures battery cells and packs for the military, medical, and industrial markets for small pack batteries. Emerging Power has established a battery pack manufacturing facility in New Jersey to build polymer cell battery packs used in the unmanned aircraft vehicle (UAV) or drone market. In the industrial market, Ener1 believes there may be growth in several applications including cleaning equipment, lawn equipment, and light-duty special purpose vehicles.  For example, Ener1 has a supply agreement in place with The Toro Company to produce lithium-ion batteries for a walking greens mower, a machine used in golf course maintenance.
 
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Company History

 
Ener1, Inc. is a Florida corporation, founded in 1985 and headquartered in New York, New York.  Ener1 Group, Inc. (Ener1 Group), a privately held company, acquired an 80% stake in our company in early 2002 and changed the name from Boca Research to Ener1. Ener1 Group and Bzinfin, S.A. (Bzinfin), the sole owner of Ener1 Group, collectively owned approximately 49.3% of our outstanding common stock and, with warrants, beneficially owned approximately 57.3% of our shares on a fully diluted basis as of December 31, 2010.  

Since 2002, we have engaged in research, development and production of lithium-ion batteries.  In October 2004, we acquired an 80.5% interest in the lithium-ion battery operations of Delphi Corporation (Delphi) located in Indianapolis, Indiana, and formed EnerDel to conduct our battery development business.  In August 2008, EnerDel became our wholly-owned subsidiary when we acquired the 19.5% interest held by Delphi for 2,857,143 shares of Ener1 common stock.  We also lowered the exercise price of certain warrants held by Delphi exercisable into 750,000 shares of Ener1 common stock from $7.00 per share to $5.25 per share.  These warrants remain outstanding and expire in October, 2011.

Principal Products

Transportation Products
Our primary transportation products consist of lithium-ion batteries and battery packs for HEVs, PHEVs, EVs and other vehicles such as trucks and buses.  Automotive battery packs consist of battery cells that are combined in a module.  Modules are linked together and controlled by a battery management system that manages the battery pack’s operations and monitors its performance and safety metrics.  Our battery cells have a prismatic design and are flat, as opposed to cylindrical, offering what we believe to be a more compact design and a large surface area that aids with the dissipation of heat.

PHEV, EV and HEV Batteries
Batteries for PHEVs and EVs are high-energy density batteries which are designed to provide energy for longer periods, but generally do not have the power capability or as high of a rate of discharge as batteries used in HEV applications.  PHEV and EV batteries generally use the same chemistry, but EVs require more cells due to higher capacity and energy requirements.

We have developed a high-energy density battery using a hard carbon anode and a mixed oxide cathode to produce a 23.7 kWh (kilowatt hour) battery pack for the Think City electric vehicle and the Volvo C30 electric vehicle.  Our EV cell is also being tested by other potential customers in a variety of battery pack configurations.

Our HEV cells do not generate significant heat during periods of high charge and discharge, unlike some consumer electronic lithium-ion batteries that use graphite anodes and cobalt based cathodes.  We continue to modify and test our chemistries to improve the longevity of our EV, PHEV and HEV batteries.  Our high-energy density cell technology and EV pack design have undergone and continue to undergo, various performance and safety tests conducted by outside testing services and by ourselves.

In addition to our hard carbon lithium-ion chemistry, we are continuing research and development of LTO chemistry for batteries for HEVs and PHEVs.  We believe the LTO chemistry may provide safe, high-power (fast charge and discharge rate) performance and a battery that runs efficiently in a wide range of cold and warm temperatures.

Battery Packs
Our automotive battery pack engineering design team provides a total systems solution, including the design, engineering, manufacturing and integration of our battery pack systems.  Our design is modular, which may make any servicing less complicated, and incorporates safety and cooling features as well.  We currently design our own software for the battery management system.
 
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Other Potential Markets
The following chart indicates some of the potential markets that we believe may be available for technologies that we are developing for the automotive battery sector:

Battery Categories
 
Transportation Applications
 
Other
Applications
High-power battery
 
HEV, including light vehicles, buses, trucks and military applications.
 
Power tools, marine motors, load leveling and frequency regulation, back-up power, uninterrupted power supply, and auxiliary power and mobility devices.
High-capacity battery
 
PHEV and EV
 
Military applications such as unmanned aerial vehicles (UAV), aerospace, medical applications, and intermittency applications associated with renewable and bulk energy storage.

Grid energy storage
We believe that grid energy storage represents a developing market opportunity for EnerDel.

In November 2009, we announced that we would be supplying batteries for a smart grid program announced by the United States Department of Energy (DOE). We will supply batteries for five, one-megawatt power systems that will be used by Portland General Electric to help manage peak demand and smooth the variations in power from renewable sources like wind and solar.

In October 2010, we announced that we would be supplying two 1.5-megawatt / 2.5 megawatt hour power systems to MGTES to be used to power grid energy storage systems in Russia.

We believe the lithium-ion battery technologies we are developing will have future applications in backup power sources for homes and storing energy generated by renewable power sources such as wind, solar and geothermal.  Electrical utilities may be able to utilize battery applications to balance demands from the electric grid, effectively charging batteries during low periods of demand and utilizing them during peak periods.  Effective deployment of this technology could reduce the demand for additional electric generating capacity not only in the United States but around the world.

Military Applications
EnerDel is currently working to complete three Defense Logistics Agency (DLA) funded research programs.  The DLA is the Department of Defense’s (DOD) largest logistics combat support agency, providing worldwide logistics support.  The programs include two UAV battery material programs and a Phase II award for further development of an asset tracking battery system.  The programs are in their final stages with product delivery and final reporting scheduled to occur by the end of the first quarter in 2011.

In 2008, we completed work under the first phase of the asset tracking battery system program described above.

In September 2009, EnerDel was awarded $1.3 million in funding from the Tank Automotive Research Development Engineering Center (TARDEC) for development and delivery of battery systems designed for a research platform version of the High Mobility Multi-purpose Wheeled Vehicle (HUMVEE), the XM-1124. 

In 2009, EnerDel also began work on a $6.6 million, three-year cooperative development agreement with the DOE and Argonne National Laboratory for a redox shuttle electrolyte additive.  Additional work has been included in this project with a completion date set for the end of the first quarter in 2013.  Redox shuttle electrolyte additives are used to prevent battery overcharging and could simplify cell overcharge protection circuitry.
 
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Small Pack
Ener1 Korea specializes in “small cell” technology, and manufactures electrodes for other battery manufacturers, commercial battery packs, prismatic cells, and lithium polymer batteries that are used in security systems and global positioning systems.  Ener1 Korea also manufactures battery packs for hand-held scanning devices and two-way radios sold in the United States.  Ener1 Korea’s manufacturing plant has achieved Korean ISO-9002 and TL9000 quality certifications.  Ener1 Korea also manufactures large-format cells for automotive and grid storage applications specified by EnerDel.

The mixed oxide and hard carbon cell we developed for the electric vehicle market is designed to maximize energy storage and we believe it is well suited for the EV, PHEV and bulk energy storage markets.  We anticipate that the LTO formulation under development will be most appropriate for HEV and frequency regulation applications.  We manufacture and assemble our batteries in our United States and Korea plants.  As the energy storage market continues to develop, we envision a hub-and-spoke model for manufacturing and distribution, centralizing cell manufacturing in our Indianapolis and Korean facilities and locating pack assembly closer to our customers, reducing transportation costs and increasing customer response times.

Fuel Cell and Nanotechnology
We also conduct research and development activities on fuel cells and nano coating processes through our subsidiaries EnerFuel, Inc. (EnerFuel) and NanoEner, Inc. (NanoEner).

Government Initiatives

Federal Initiatives
We believe that the volatility in energy prices is traceable directly to worldwide economic activity.  In early 2011, oil prices once again topped $100 per bbl.  The current administration of the United States government has identified energy independence and reduction of greenhouse gases as important initiatives, and has approved funding for a number of grant and loan programs that will specifically benefit the transportation and grid energy storage markets.  These programs are in a large part specifically targeted at domestic manufacturers of batteries and related material suppliers.

In February 2009, the United States government approved a stimulus plan, to be administered by the United States Department of Energy (DOE), which included $2 billion of grants for the development of advanced battery manufacturing capability under the Automotive Battery Manufacturing Initiative (ABMI).  The program provides grants to support the construction of United States-based battery manufacturing infrastructure for lithium-ion and other advanced batteries used in EVs. The program’s goal is to create a domestic battery manufacturing capability to support broad implementation of new HEVs and EVs.

In August 2009, we were awarded a grant of $118.5 million from the DOE, under the ABMI to help finance our United States battery plant capacity expansion. We are reimbursed under the grant as we make equipment purchases, and we are required to match grant proceeds with an equal amount of our own funds. Using funds provided under the ABMI, we are expanding our production capacity in the United States.  We expect our worldwide production capacity will increase during 2011 to the equivalent of 900 EV packs per month as a result of our expansion.  Through December 31, 2010, we have been reimbursed from the DOE for $44.7 million, which includes manufacturing engineering, building improvement, manufacturing equipment and application engineering expenditures.  We anticipate that proceeds from the ABMI grant with our matching contributions, will be sufficient to fund our United States manufacturing expansion plans through 2012.

At December 31, 2010, we had commitments to purchase approximately $12.4 million of equipment during 2011.  In 2011, we plan to purchase buildings and equipment totaling $52.5 million, including $8.1 million for further expansion of production capacity at our Korean facility.  Of the $52.5 million, we expect $20.4 million to be reimbursed under the ABMI grant award issued by DOE.
 
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We have also applied to the DOE for a long-term low interest loan of approximately $290 million under the Advanced Technology Vehicle Manufacturing Incentives Program (ATVM).  We originally submitted our application on December 30, 2008, and our application was determined to be “substantially complete” on January 22, 2009.  We are currently negotiating a term sheet in connection with this loan.  If we receive the ATVM loan, we would anticipate using the proceeds to further expand our battery production capacity in 2013 and 2014.  In addition, if we receive the ATVM loan, the loan program will require us to match every eighty cents of loan proceeds with twenty cents of our own investment.  However, we expect to receive credit for capital invested in expanding our battery production capacity prior to January 22, 2009, which would be considered eligible for financing under the ATVM loan.  We estimate this amount to be $27.8 million.

The United States government is also moving on a number of initiatives to increase adoption of energy efficient vehicles.  Combined, the three initiatives recently highlighted by the current administration would expand funding for vehicle technologies by almost 90% to nearly $590 million and would support the current administration’s goal of putting 1 million EVs on the road by 2015. A brief summary of the initiatives are as follows:

 
·
Transformation of the existing $7,500 tax credit into a rebate at the time of purchase of a qualifying vehicle, giving consumers the ability to receive this benefit at the point of sale.

 
·
Advancing innovative vehicle and battery technologies through increased research and development spending.

 
·
Rewarding communities for developing comprehensive EV friendly infrastructure.

In 2005, we began working on the development of LTO chemistry for HEV batteries under the USABC program, a consortium of Ford, General Motors and Chrysler with funding provided by the DOE. We are currently working on a Phase II grant for LTO cell development.  We are also developing an LTO battery for PHEVs, but with a different cathode material from our LTO HEV chemistry, under an award from the DOE which is being administered by the USABC.  

State Initiatives
Indiana state and local government authorities have also provided us with approximately $80 million of grants and tax offsets to assist in our expansion plans over the next five (5) years. With proceeds under the ATVM loan, if approved and received, and combined with the funds available under the ABMI program and the Indiana state and local incentives, we plan to increase our domestic production capacity to an estimated manufacturing capacity of 3.12GWh, or 120,000 equivalent EV battery packs per year, in the 2015 timeframe.

Battery Manufacturing Capacity

We manufacture and assemble lithium-ion batteries and battery systems in the United States through our subsidiary EnerDel and in South Korea through Ener1 Korea.  We are currently expanding production capacity at our facilities in the United States.  Upon completion of this capacity expansion in the United States, which we expect to occur at the end of June 2011, we will have the capability to produce 253MWh of batteries, or 900 23.7kWh packs per month between our United States and Korean facilities.  Once our Joint Venture with Wanxiang is operational, we expect to have lithium-ion cell and pack manufacturing established in China in addition to our existing operations in the United States and Korea.

We can currently produce 140,000 17.5Ah cells per month in Korea and expect the ability to produce 205,000 17.5Ah cells per month in our Indianapolis facility once final equipment is installed and validated in connection with our current expansion plans.  The combined production should create enough cells for a 900 EV pack per month run rate.

We produce and manufacture battery cells in our Indianapolis and Mount Comfort, Indiana and our South Korea facilities.  We lease approximately 92,000 square feet in Indianapolis, Indiana, where we conduct cell development, engineering and manufacturing.  The facility includes 68,000 square feet of manufacturing space and 24,000 square feet of office space.
 
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We also lease 211,500 square feet in Mount Comfort, Indiana.  We possess the right of first refusal to lease an additional 211,500 square feet in the same building.  In addition, we have an option to purchase the entire building through December 31, 2011 (Purchase Option). If the Purchase Option had been exercised before December 31, 2010, the purchase price would have been $15.5 million. The purchase price increases by $40,000 per month thereafter until the Purchase Option is either exercised or expires, up to a maximum purchase price of $16.0 million. If EnerDel fails to exercise the Purchase Option by December 31, 2011, the landlord has the right to require EnerDel to enter into a fifteen year lease for the entire building, totaling 423,000 square feet.  It is our intention to purchase the Mt. Comfort facility by the end of 2011, accounting for $16 million of our 2011 plan for total purchases of buildings and equipment of $52.5 million.

We lease 31,600 square feet of manufacturing assembly space in Noblesville, Indiana.  We use this facility for battery pack engineering and testing activities.

We own a 145,000 square foot lithium-ion manufacturing facility in Chungcheongbuk-do, Korea.  In 2011, we anticipate Ener1 Korea will produce 100% of our cell requirements until we bring our cell manufacturing capacity in Indiana on stream.  We estimate that cell production in Indiana will commence in mid 2011 after the installation and testing of additional end-of-line assembly and formation equipment.

We lease 11,500 square feet of small cell pack assembly and sales and administrative space in Hackensack, New Jersey.

Sales and Marketing

We expect a significant portion of our initial automotive customers to be based in Europe and Asia, where EVs and PHEVs are expected to gain early consumer acceptance as compared to acceptance in other potential markets due to higher energy prices, carbon emission legislation and driving patterns.  During 2009, we established a sales and engineering support office in Europe and in March 2010 we formed Ener1 Europe.  The European sales team is supported by the United States-based engineering group in addition to locally-based engineers.  We presently have sales people in the Netherlands, Germany and France.  

Our sales and engineering team supports existing customers such as Think Global, as well as engineering development activities for other potential production customers.  

In the United States, we market our products through a combination of our sales force, executive level meetings with potential customers, and participation at trade shows.  Due to the emerging nature of the large-format lithium-ion battery market, our public, media and government relations efforts are also important to provide exposure to potential customers and to increase awareness for our products and our Company.  

Our sales team includes salespeople with automotive experience and sales engineers who assist with product customization within our engineering group.  In addition, our engineering and management team participated in sales presentations and business development during 2010.  We also have dedicated salespeople for the grid energy storage markets.  Sales in the transportation sector are generally conducted through direct interaction with the engineering platform teams at the automotive companies and tier one suppliers.  Technical specifications for products are established by the automotive companies and tier one suppliers, and competitive bidding is often used as a mechanism for awarding contracts.  Traditionally, automotive companies often source the same product from more than one supplier.  However, the EV, PHEV and HEV battery industry is in the early development phase, and product standardization has not been introduced.  Initially, we expect many contracts to be sole sourced until standardization develops.

The Ener1 Korea small pack sales and marketing team includes a direct sales force and support staff of fifteen persons in Korea, a sales manager in Europe and a sales manager and sales engineer in the United States.
 
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Customers

 
Our prospective and current customers for large-format cell battery packs are original equipment manufacturers, or OEMs, in the light and heavy-duty industries, as well as tier one suppliers to automotive, truck and bus OEMs.  Our current customers in this market include Think Global and Volvo.   Our prospective customers in the grid energy storage markets are utilities, renewable energy suppliers such as wind, solar and geothermal installers, and homeowners.  Our current customers in this market include Portland General Electric in the United States and MGTES in Russia.  

Our relationships with the government are with the DOE, the DOD and other departments of the United States government, from which we may seek research grants and development contracts.  Our customers in the small cell market include large consumer product companies in the telephone and the hand-held scanner markets.  We consider Symbol Technologies, a division of Motorola Solutions, to be a significant customer in our small cell business as they represent 20% of total revenue.

In the large-format prismatic cell market, we are currently engaged in discussions with potential customers relating to approximately 30 development or production programs to develop or produce batteries for use in transportation (automotive, bus and truck), grid energy storage, military, government, and other industrial energy storage markets.  These projects involve potential customers in North America, Asia, and Europe.  

We expect to begin shipping EV battery packs in the second half of 2011 for Volvo’s production intent C-30 EV. 

We believe the heavy-duty market will become an important piece of our transportation segment.  Heavy-duty companies appear interested in hybrid solutions which appears complementary to our existing light duty pack designs and energy density cells.      

In the military market, we ship battery packs for a project with TARDEC for an HEV application.  Within the government sector, we have programs with the DLA as well as multiple research and development contracts with the DOE.  In addition we have R&D programs with USABC, Nissan, Itochu, and Kyushu Electric Power Company, Inc. (KEPCO) for the demonstration of fast-charge technology.

In the transportation and utility markets, the selling cycle is generally quite long. There is ordinarily an iterative, interactive process in which the customer tests and evaluates prototypes or samples of cells and/or battery packs, and the supplier then modifies the product characteristics to achieve the customer’s requirements. Due to the long battery life required by automotive manufacturers, this testing and evaluation could take at least several months and could include the delivery of samples, prototypes and final products.  In addition, the procurement cycle for automotive makers is quite long due to the requirements for design and retooling associated with new automobile models.  

Automotive companies often purchase system solutions from tier one suppliers, such as Continental Systems, Bosch, Delphi and Johnson Controls.  Our sales and marketing efforts are directed to the automotive companies and the tier one suppliers.  

The sales cycle for any military markets may also be lengthy depending on the longevity requirement for the specific application.  We expect product development under these programs to undergo thorough testing and evaluation of samples and prototypes, which may extend over long periods of time.  

We cannot predict the extent to which our sales, if any, will be dependent on a single customer or small group of customers.  Think Global is a start-up EV manufacturer with limited operating history.  Volvo has undergone extensive development with its electric C30 model but has yet to commercialize the vehicle. We cannot assure you that either customer will achieve volume production for their vehicle.   Our initial grid storage opportunities are oriented towards the emerging markets adding an element of additional risk.  However, we believe our efforts to segment our business into the transportation, grid energy storage and small pack units will help diversify our customer base over time.  Separate business development and engineering teams assist in the customization of our products to meet the requirements of their respective end markets.
  
 
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Competition

 
Competition in the battery industry is, and is expected to remain, intense. This competition ranges from development stage companies to major Fortune 500 domestic and international companies, many of which have financial, technical, marketing, sales, manufacturing, distribution and other resources that are significantly greater than ours. We compete against companies producing lithium-ion batteries for portable electronics in high volume, as well as other non-rechargeable and rechargeable battery technologies. We compete on the basis of performance, cost and reliability.  Toyota, the industry leader in the production of HEVs, and other battery manufacturers, such as NEC Corporation, Johnson Controls, A123 Systems, Hitachi and Compact Power have significant development programs for lithium-ion batteries for automotive manufacturers.

Like EnerDel, Johnson Controls, A123 Systems and Compact Power are all participants in the USABC HEV and PHEV battery development programs.  Toyota/Panasonic and Nissan/NEC Corporation have lithium-ion development programs to supply batteries for their own HEV production.  Toyota owns a controlling interest in Panasonic, and in December 2009, Panasonic acquired controlling ownership of Sanyo, the largest producer of commercial battery cells.  Other collaborations include: Bosch-Samsung, Daimler-Evonik-Litec, Continental-ENAX, GS Yuasa-Mitsubishi and Nissan-NEC under the name AESC.  In China, BYD has stated its intention to introduce an EV using its own battery.

There are a number of smaller development companies such as Valence and Electro Energy in the United States and Electrovaya in Canada that compete in this market.  Additional potential competitors in lithium-ion commercial and military markets based in the United States are Saft, Eagle Picher Technologies, UltraLife and Yardney. There are also battery developers in China and Korea, which generally have a lower cost manufacturing base than other manufacturers due to low labor costs, lower cost raw materials and increased use of semi-automatic manufacturing processes.  There are numerous other companies who are developing batteries, some of which recently stated they intend to supply batteries for HEVs and others which may be unknown to us at this time.

Research and Development

During 2010, 2009 and 2008, we spent $30.8 million, $30.8 million and $22.9 million, respectively, on research and development net of proceeds from research and development grants of $3.0 million, $3.7 million and $3.8 million, respectively.  We continually evaluate prospective suppliers’ material, and require high quality material with small particle sizes measured in nanometers.  As we are actively pursuing development of new types of materials for use in our batteries, our sources of supply for such materials may change over time.  We work with Argonne National Laboratory and commercial material developers to develop and evaluate the best lithium compounds for use with our battery technologies.

Our EnerFuel Business

Our EnerFuel subsidiary, located in West Palm Beach, Florida, is working on developing a hydrogen fuel cell range extender for PHEVs and has created a high temperature fuel cell stack which was incorporated into an EV based on the Scion xB platform.  Other planned products are in early stages of development and completion of prototypes will require additional time and funding.  EnerFuel’s net loss after corporate allocations was $3.6 million, $3.7 million and $6.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.  

Our NanoEner Business

Our NanoEner subsidiary, located in Fort Lauderdale, Florida, has built prototype equipment that utilizes a proprietary vapor deposition and solidification process for depositing materials onto battery electrodes as part of the battery cell manufacturing process.  NanoEner is developing electrodes produced using this process for testing and is still in the research and development phases.  Our planned products are still under development and will require additional capital to continue testing and research.  NanoEner’s net loss after corporate allocations was $1.0 million, $1.2 million and $1.8 million for the years ended December 31, 2010, 2009 and 2008, respectively.
  
 
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Intellectual Property

 
As of December 31, 2010, Ener1 had 45 issued United States patents, 34 foreign patents and had 144 pending and published United States, Patent Cooperation Treaty and other international patent applications relating to lithium-ion batteries, fuel cells, nanotechnology and other related technologies. Many of these patents were obtained from Delphi when EnerDel was formed, and were issued during a period of several years preceding the formation of EnerDel. The majority of the issued patents will expire 20 years from the date of filing or the earliest priority date, as applicable. Our earliest patent expiration date is November 27, 2015.  Ener1 continues to file patent applications, as appropriate, to protect its interests in new inventions.  We have a policy requiring our employees to sign confidentiality and invention assignments agreements, as well as a policy of entering into confidentiality agreements with third parties before disclosing any proprietary information to them.

Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop technology or products that are similar to ours or that compete with ours. Patent, trademark, and trade secret laws afford only limited protection for our technology platform and products. The laws of many countries may not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorized parties have in the past attempted, and may in the future attempt to, operate under aspects of our intellectual property or products or to obtain and use information that we regard as proprietary. Third parties may also design around our proprietary rights, which may render our protected technology and products less valuable, if the design around is favorably received in the marketplace. In addition, if use of any of our products or technology infringes on third-party patents or other intellectual property rights, we could be subject to various legal actions. We cannot guarantee that our technology and products do not infringe patents or other rights held by others or that they will not in the future.

Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement, invalidity, misappropriation, or other claims. Any such litigation could result in substantial costs and diversion of our resources. Moreover, any settlement of or adverse judgment resulting from such litigation could require us to obtain a license to continue to make, use or sell the products or technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology.

Employees

At December 31, 2010, we had 769 full time employees.  We have no employees under collective bargaining agreements.

Government Regulation and Approvals

Certain aspects of production and transportation of batteries and fuel cells and their components or raw materials are regulated on the international, federal, state, and local levels, as well as by private commercial organizations. Transportation of battery products is regulated by the United States Department of Transportation and other governmental departments and international agencies. We are required to comply with applicable regulations when we ship our products on a commercial basis.  We may need to obtain approvals for the storage or transportation of our batteries and of flammable or hazardous fuels before we are able to deliver some of our systems. Future legislation and/or other regulation concerning the transportation and storage of batteries and hydrogen fuel and other fuels associated with fuel cells is expected in the future.

We may be required to obtain certifications on our products and systems from product-safety testing and certification organizations such as the Qualified Parts Laboratory and the Underwriters Laboratory (UL), before we can sell them generally or to specific markets.
 
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Our manufacturing operations are subject to environmental laws and regulations which, over time, may become more stringent, increasing the cost of compliance and the risk of failure to comply. In particular, there are environmental laws that provide for strict, unlimited liability in connection with releases of “hazardous substances.” In the manufacturing of batteries and components and materials for batteries (and to a lesser extent in our fuel cell and nanotechnology operations), we may use hazardous substances that are regulated under these environmental laws. Our battery operations are currently classified as a “small quantity generator of hazardous waste” and must operate in accordance with the applicable regulations. Air emissions from our battery operation are regulated under an operating permit issued at the state and local level. Compliance requirements are identified in the permit. At this time, our costs for maintaining environmental, health and safety compliance are not significant.

Available Information

Our company Internet address is www.ener1.com. We make available free of charge a variety of information about us including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).

The information found on our Internet site is not a part of this or any other report we file with or furnish to the SEC and is not incorporated by reference into this Annual Report.

You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, N.E., Washington, DC 20549.  Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information that issuers (including Ener1) file electronically with the SEC.  The address of the SEC’s Internet site is http://www.sec.gov.
 
Item 1A.      Risk Factors

Set forth below and elsewhere in this Annual Report on Form 10-K are some of the principal risks and uncertainties, known and unknown, that could cause our actual business results to differ materially from any forward-looking statements contained in this Report and could individually or in combination have a material adverse effect on our business, financial condition, results of operations, cash flows, and the trading price of our common stock.   In addition, future results could be materially affected by general industry and market conditions, changes in laws or accounting rules, domestic and international economic and political conditions, including a global economic slow-down, fluctuation of interest rates or currency exchange rates, terrorism, political unrest or international conflicts, political instability, major health concerns, natural disasters, commodity prices or other disruptions of expected economic and business conditions.   The risks described below are not the only ones we will face.

We have an unproven business plan.
 
We have an unproven business plan and do not expect to be profitable for the next several years. We are developing technologies, products and services primarily related to lithium-ion batteries, and to a lesser extent, related to fuel cells and nanotechnology. Before investing in our securities, you should consider the challenges, expenses and difficulties that we will face as a company seeking to develop and manufacture new products.
 
We have a history of operating losses.
 
We have experienced net operating losses since 1997, and negative cash flows from operations since 1999.  Total net cash used in operations for the years ended December 31, 2010, 2009 and 2008 was $61.7 million, $40.7 million and $24.1 million, respectively. We expect that we will continue to incur net losses and negative operating cash flows for the foreseeable future and will require additional cash to fund our operations and implement our business plan during such time.
 
 
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Our planned capital expenditures depend on the availability of funds under DOE grant and loan programs. We also will need to raise capital or borrow funds to fund our share of capital expenditures under both the grant and loan programs.
 
We have been formally awarded $118.5 million in funds under the DOE ABMI grant program. We also have a pending application under the DOE ATVM loan program for a loan of approximately $290 million. There is no assurance that the final DOE ATVM loan will be approved in full or in part, or that the terms and conditions for borrowing under the facility will be acceptable to us.  If the loan is not approved or is approved in a substantially reduced dollar amount, our future expansion plans would have to be significantly curtailed and our near term prospects would be materially adversely affected.

The DOE ABMI grant requires that we match the grant award by spending one dollar on qualifying capital expenditures and other costs for every dollar reimbursed under the grant, and the loan program requires that recipients of any loans match the loan by spending $0.20 (twenty cents) on qualifying capital expenditures and other costs for every $0.80 (eighty cents) of loan proceeds received. We will need to raise debt or equity capital to fund our share of the capital expenditures under both the grant and, if we are included, under the loan program and raising equity capital may result in dilution to our shareholders. There is also no assurance that we will be able to choose the order of funds that we may receive under the grant or the loan. To the extent that funds must be drawn entirely under the grant first, we will be subject to a higher matching requirement and will need to raise debt or equity capital more quickly in the near future than if we are able to draw funds under the loan first. Access to both grant and loan funds will also be conditioned on our continued compliance with the terms and conditions of the grant and loan programs.  If we fail to comply with the terms and conditions of, and as a result lose access to, the grant and loan funds, this would affect our capacity expansion plans, which would, in turn, have a material adverse effect on our ability to develop our manufacturing capacity and expertise, sell our battery packs to new customers and grow our business.
 
We are beginning production in a new industry with new processes, and our future profitability is dependent upon achieving reductions in manufacturing costs and projected economies of scale from increasing manufacturing quantities. Failing to achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our financial performance.

Since 2002, we have focused primarily on research and development. However, we are currently developing new battery products that will require high-volume battery manufacturing processes and equipment. While we acquired a lithium-ion battery cell manufacturer in South Korea in 2008, we have limited experience manufacturing any of our planned products on a commercial basis. We do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture our products in commercial quantities while meeting the quality, price, engineering, design and production standards required to successfully market our products. Our failure to develop such manufacturing processes and capabilities would have a material adverse effect on our business, financial condition, results of operations and prospects.
 
We are beginning volume production in South Korea and the United States of new products in a new industry in which there is not a significant production history. Historically, we have produced only the component parts for our battery packs in limited production quantities in our South Korean plant and for prototype and production packs in limited quantities in our United States plant. Our future profitability is, in part, dependent upon achieving increased savings from volume purchases of raw materials, achieving acceptable manufacturing yield and capitalizing on machinery efficiencies.
 
We expect the suppliers within our supply chain will experience a sharp increase in demand for their products. As a result, we may not have reliable access to supplies that we require.  There is no assurance that we will ever be in a position to realize any material, labor and machinery cost reductions associated with higher purchasing power and higher production levels.  Failure to achieve these cost reductions could adversely impact our competitiveness and our financial results.
  
 
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Viable markets for our products may never develop, may take longer to develop than we anticipate or may not be sustainable.
 
Our energy products and technologies target new and developing markets, and we do not know the extent to which these markets, including the market for EVs and HEVs, will develop. We currently have limited commercially developed products. If viable markets fail to develop or develop more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our products and may be unable to achieve profitability. In addition, the development of a viable market for our products may be impacted by many factors which are partly or totally out of our control, including:

 
·
the cost competitiveness of our products;
 
·
consumer reluctance to try a new product;
 
·
consumer perceptions of our products’ safety;
 
·
regulatory requirements;
 
·
barriers to entry created by existing energy providers;
 
·
government funding of EV technologies; and
 
·
emergence of newer, more competitive technologies and products.

We will need additional capital to fund development and production activities, which may not be accessible on attractive terms or at all.
 
For the last several years, we have financed our operations and capital expenditures through the sale of our securities and by borrowing money. Our ability to obtain additional financing will be subject to a number of factors, including the development of the market for HEVs and EVs, commercial acceptance of our products, our operating performance, the terms of our existing indebtedness and the credit and capital markets. We cannot assure you that we will be able to raise additional funds on terms favorable to us or at all. If we raise additional funds through the sale of equity or convertible debt securities, the ownership percentage of our then existing shareholders will be reduced and the percentage of our outstanding common stock to which our convertible securities are convertible will be reduced. In addition, any such transaction may dilute the value of our common stock and other debt or equity securities. We may have to issue securities that have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand or limit our flexibility in paying our indebtedness.

Both the credit and capital markets have experienced extreme volatility in recent periods. Credit markets have remained generally illiquid despite injections of capital by the United States and foreign governments. Banks and other lenders, such as true equipment leasing companies, have significantly increased credit requirements and reduced financing available to borrowers. In the capital markets, institutional investors have experienced large losses resulting in reductions of and restrictions on funds available for investment. As a result, the market for offerings of our debt and equity securities may be limited.
 
Our ability to obtain financing from the ATVM loan program and government grants is subject to the availability of funds under the applicable government programs as well as the approval of our applications to participate in such programs. We cannot assure you that our efforts to obtain such funds from these government sources will be successful.
 
If we do not obtain adequate short-term working capital and permanent financing, whether through credit or capital markets or through government programs, we would have to curtail our development and production activities and adopt an alternative operating model to continue as a going concern. Our failure to obtain any required future financing would materially and adversely affect our business, our financial condition and our prospects.
   
 
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Our future growth is dependent upon consumers’ willingness to adopt electric vehicles.
 
Our growth is highly dependent upon the adoption by consumers of EVs. If the market for EVs does not develop as we anticipate or develops more slowly than we expect, our business, operating results, financial condition and prospects will be harmed. The market for EVs is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors. Factors that influence the rate at which consumers adopt EVs include:
 
 
·
perceptions about EV quality, safety (in particular with respect to lithium-ion battery packs), design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of EVs and/or lithium-ion battery packs;
 
·
the limited range over which EVs may be driven on a single battery charge;
 
·
the decline of an EV’s range resulting from deterioration over time in the battery’s ability to hold a charge;
 
·
concerns about electric grid capacity and reliability, including access to charging stations;
 
·
improvements in the fuel economy of the internal combustion engine;
 
·
the environmental consciousness of consumers;
 
·
volatility in the cost of oil and gasoline; and
 
·
government regulations and economic incentives promoting fuel efficiency and alternate forms of energy.
  
The influence of any of the factors described above may cause current or potential consumers not to purchase EVs, which would materially adversely affect our business, operating results, financial condition and prospects.

 
We depend on a limited number of customers, including Think Global, Motorola,  and MGTES, for a significant portion of our revenue, and the loss of our most significant or several of our smaller customers would materially adversely affect our business and results of operation, and we may not be able to obtain contractual commitments for minimum volume orders with respect to the sale of our products.
 
A significant portion of our revenue is currently, and we expect will continue to be, generated from a limited number of customers.  Sales to Motorola have represented a significant portion of our small pack revenue in the past.  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.  Additionally, sales to MGTES represent a significant portion of our total revenue for the foreseeable future. In October 2010, we entered into a supply agreement with MGTES to provide lithium-ion battery units to power grid energy storage systems in Russia.  A delay in providing products to MGTES would adversely affect our 2011 and 2012 revenues and profitability and would have a material adverse affect on our business, and would further potentially subject us to liquidated damages under the supply agreement for failure to deliver product in a timely manner.  Although the composition of our customer base will vary from period to period, we expect that most of our revenue will continue, for the foreseeable future, to come from a relatively small number of customers.

In addition, our contracts with our customers do not include long-term commitments or minimum volumes that ensure future sales of our products. Consequently, our financial results may fluctuate significantly from period-to-period based on the actions of one or more of our significant customers. A customer may take actions that affect us for reasons that we cannot anticipate or control, such as reasons related to the customer’s financial condition, changes in the customer’s business strategy or operations, the introduction of alternative or competing products or as the result of the perceived quality or cost-effectiveness of our products. Our agreements with our customers may be cancelled if we fail to meet certain product specifications or materially breach the agreement or for reasons outside of our control. In addition, our customers may seek to renegotiate the terms of current agreements or renewals. The loss of or a reduction in sales or anticipated sales to our most significant or several of our smaller customers could have a material adverse effect on our business, operating results, financial condition and prospects.
 
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Our investment in Think Holdings and our dependence on Think Global as an automotive customer could materially adversely affect our profitability and business.

We entered into an amended Supply Agreement with Think Global to supply lithium-ion battery packs for the Think City EV commencing in 2010. We are also a significant investor in Think Holdings, which is the majority owner of Think Global.  In January 2011, we temporarily stopped shipping battery packs to Think Global at their direction until the company rebalances its overall inventory levels for the Think City in Europe and the United States.  We cannot assure you when we will recommence shipments to Think Global.  We will not recognize further revenue from sales to Think Global until they recommence production of Think City.   This temporary cessation of shipments, any other delay in the delivery of battery packs to Think Global or delays in Think Global’s start-up plans and financing activities, would adversely affect our expected 2011 and 2012 revenues and profitability, based on the percentage of automotive sales anticipated to be from Think Global, and could have a material adverse effect on our business and our investment in Think Holdings. Think Global, in its corporate history, has been through insolvency proceedings on three separate occasions, including most recently in 2009. Think Global is increasing production and entering new markets and faces the risks associated with the launch of a new vehicle, including achieving production levels, managing production costs, managing their supply chain, financing the costs associated with increased production levels and higher working capital requirements, gaining consumer acceptance, delivering vehicles on time, servicing new customers, satisfying warranty claims and other issues related to manufacturing, selling and servicing automobiles. As a result of the above operational and profitability challenges Think Global and Think Holdings have been facing, and we expect may continue to face, we are exposed to these risks indirectly through our current ownership in Think Holdings. If we were required to consolidate the results of Think Holdings into our own financial results and financial statements, we would face these risks and the negative financial results of Think Holdings directly. In addition, any revenue we derive from sales to Think Global would be eliminated in the process of consolidating their financial results with ours. Think Holdings and Think Global also face many of the same (or similar) risks as we do, including, among others, transportation industry-related risks, manufacturing-related risks and risks associated with the need for additional financing, and which are contained in these risk factors.

The consolidation of Think Holdings’ financial statements with our own could materially adversely affect our ability to raise capital.

We having voting interest in Think Holdings of approximately 48% and own approximately 43% of their outstanding equity securities.  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.  Accepting equity for payment of these receivables, based on our current ownership of Think Holdings and without our ownership being diluted by possible future investments in Think Holdings, could cause us to become the majority shareholder of Think Holdings and require us, under generally accepted accounting principles in the United States (US GAAP), to consolidate Think Holdings’ operating results with our own.  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.  Upon becoming the majority shareholder of Think Holdings, we may be required to file with our SEC reports audited historical financial statements for Think Holdings, and we will be required to consolidate Think Holdings’ operating results with our own in our financial statements as of and for periods following the date we become the majority stockholder of Think Holdings.  Think Holdings does not currently report its financial results in accordance with US GAAP and we cannot assure you that we will be able to disclose on a timely basis as required under the securities laws any historical financial statements of Think Holdings or our consolidated results of operations for future periods.  If we are unable to report Think Holdings’ historical financial statements or our consolidated financial statements for future periods in a timely manner as required under the securities laws, we would be unable to raise additional capital through registered public securities offerings and we may be unable to raise capital through private or unregistered sales of our securities.  The inability to raise capital through the public and private markets would have a material adverse effect on our financial condition and our ability to implement our business plans.  In addition, if we are not able to make filings required under the Exchange Act on a timely basis, we may not be able to pay the principal and interest due on our senior unsecured notes with shares of Ener1 common stock, and may be required to make such payments in cash instead, which could materially adversely affect our liquidity and financial condition.

If we become the majority shareholder of Think Holdings, we may have to devote a significant amount of time, management and financial resources to successfully integrate Think Holdings’ financial and accounting systems with our existing systems, and we may be unable to do so in a timely and non-disruptive manner.
  
 
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If Think Holdings becomes our subsidiary and we or our independent registered public accounting firm are not able to provide an unqualified attestation report on the effectiveness of our internal control over financial reporting, the stock price for our common stock and our ability to raise capital through sales of our securities could be materially adversely affected.
 
If Think Holdings becomes a subsidiary of Ener1, we will be required to certify to and report on, and our independent registered public accounting firm will be required to attest to, the effectiveness of its internal control over financial reporting in our SEC filings for periods after Think Holdings becomes our subsidiary.  Think Holdings and its subsidiaries have not previously been subject to the requirements of Section 404 or 302 of the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated thereunder by the SEC.  We may have to devote considerable resources, including management’s time and other internal resources, to seek to ensure that Think Holdings’ internal control over financial reporting complies with regulatory requirements relating to internal control and the preparation of financial statements.  If we cannot favorably assess the effectiveness of our internal control over financial reporting, or our independent registered public accounting firm is unable to provide an unqualified attestation report on the effectiveness of our internal control over financial reporting, investor confidence and, in turn, the market price of the our common stock could be materially adversely affected.  If Think Holdings becomes our subsidiary, any failure to implement and maintain the effectiveness of its internal control over financial reporting could cause the reliability of our financial statements to be impaired and could also cause us to fail to meet our reporting obligations under applicable law.  Either or both of these events could cause investor confidence and, in turn, the market price of our common stock, to be materially adversely affected and have a material adverse effect on our ability to raise additional capital through sales of our equity or debt securities.

We are expanding our equipment production capacity worldwide and are subject to all of the risks associated with purchasing, installing and efficiently operating new equipment as well as achieving production economies from projected increased efficiencies.
 
We have begun purchasing new equipment, which purchases are partially funded by grants from the DOE to increase our production capacity in the United States. Risk of noncompliance with DOE protocols would delay or eliminate reimbursement of certain costs. If we fail to comply with DOE protocols, we may have to repay the DOE for funds that were granted to us or return assets acquired by us with DOE funds. During the next several years we expect to purchase a substantial amount of equipment and to increase our production capacity correspondingly. Both the equipment procurement process and the installation and integration of the equipment into our facilities are potentially subject to delays. Achieving rated capacity levels with such equipment is subject to additional risks, and the equipment may never reach its projected capacity. Some of the assembly equipment that is scheduled for installation was designed by our engineers and manufactured by independent equipment manufacturers, and achieving projected machine efficiencies is dependent upon the equipment operating as designed. In addition, our competitors may purchase equipment similar or identical to the equipment we plan to purchase, and to the extent there is increased demand for such equipment, there may be shortages of or delays in receiving equipment which in turn could result in delays in our production schedules. Delays in the start-up of production could adversely impact our reputation and financial results. Delays in production deliveries also could adversely impact the financial results of our customers because of delays in the delivery of vehicles to their customers. Failure to reach projected machine efficiencies could result in higher production costs than planned and consequently could have a material adverse impact on our financial results.
 
 
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Our financial results may vary significantly from period-to-period due to long and unpredictable sales cycles for some of our products and the cyclical nature of certain end-markets into which we sell our products, which may in turn lead to volatility in our stock price.
 
The amount and timing of our revenue recognition from sales to our customers is difficult to predict and is market dependent. We are often required to invest significant time to educate our customers about the use and benefits of our products, including their technical and performance characteristics. Customers typically undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle for us, typically many months. In some markets, such as the transportation market, there is usually a significant lag time between the design phase and commercial production. We spend substantial amounts of time and money on our sales efforts and there is no assurance that these investments will produce any sales within expected time frames or at all. Given the potentially large size of battery development and supply contracts, the loss of or delay in the signing of a contract or a customer order could significantly reduce our revenue in any given period. Since most of our operating and capital expenses are incurred based on the estimated number of design wins and their timing, they are difficult to adjust in the short term. As a result, if our revenue falls below our expectations or is delayed in any given period, we may not be able to reduce proportionately our operating expenses or manufacturing costs for that period and any reduction of manufacturing capacity could have long-term implications on our ability to accommodate future demand.

In addition, since our batteries and battery systems are incorporated into our customers’ products for sale into their respective end-markets, our business is exposed to the cyclical demand that may characterize some of our customers’ own product sales. Because many of our expenses are based on anticipated levels of annual revenue, our business and operating results could also suffer if we do not achieve revenue consistent with our expectations in relation to this seasonal demand.

As a result of these factors, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Moreover, our operating results may not meet expectations of equity research analysts or investors. If this occurs, the trading price of our common stock could fall substantially either suddenly or over time.
 
Oil prices are extremely volatile and trends to convert to electric and hybrid electric vehicles may be adversely affected by any perceived or actual significant reduction in gasoline prices.
 
Oil and gasoline prices have been extremely volatile and the possibility of continuing volatility is expected to persist. Decreases in gasoline prices lower the perception in government and the private sector that cheaper, more readily available energy alternatives should be developed and produced. Lower oil prices also result in a decrease to the cost of existing energy technologies, making them more competitive with alternative products such as lithium-ion batteries. If oil prices decline, or are expected to decline, the demand for HEVs and EVs may decrease, which would have a material adverse effect on our business.
 
Problems in our manufacturing and assembly processes could limit our ability to produce sufficient batteries to meet the demands of our customers.
 
Regardless of the process technology used, the manufacturing and assembly of safe, high-power batteries and battery systems is a highly complex process that requires extreme precision and quality control throughout a number of production stages. Any defects in battery packaging, impurities in the electrode materials used, contamination of the manufacturing environment, incorrect welding, excess moisture, equipment failure or other difficulties in the manufacturing process could cause batteries to fail to meet specifications and be rejected by our customers or fail in performance, thereby reducing yields, increasing the chance of product liability claims, and affecting our ability to meet customer expectations.  As we scale up our production capacity, we may experience production problems that may limit our ability to produce a sufficient number of batteries to meet the demands of our customers. If these or other production problems occur and we are unable to resolve them in a timely fashion, our business could suffer and our reputation may be harmed.
 
 
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We may provide warranty coverage and product recall coverage for some of our products, and we do not have significant experience in projecting possible warranty or recall claims and costs. If warranty or recall claims are significantly higher than our initial projections, our financial results would be adversely affected.
 
We are seeking to sell new products in a new industry that does not have significant history of product use.  We have not tested large numbers of batteries and packs for extended periods of time.  We provide warranty coverage in connection with certain automotive battery pack sales and we expect to provide warranty coverage in connection with grid storage battery pack sales, which warranty coverage typically ranges from three to five years and includes warranties that our product complies with the agreed upon specifications developed with the end-user, warranties that there are no defects in our products and workmanship, and warranties that our product will maintain a specified power capacity during the life of the product. We may also be required to provide product recall coverage.  These and other customer protection provisions, such as return rights, could delay our recognition of revenue. We have and will continue to establish warranty reserves in our accounts based upon our expected warranty claims, but there is no assurance that these reserves will be sufficient. Our financial results could consequently vary based upon actual experience relative to how we account for any expected warranty claims. Furthermore, a significant warranty claim or product recall would likely materially adversely affect our financial results and diminish our goodwill with customers.

 
We face high levels of competition and may be unable to compete successfully.
 
The markets in which we intend to market and sell our products are highly competitive. A number of competitors located in Asia, the United States and elsewhere, including Sanyo Electric Co., Ltd., NEC Corporation, Johnson Controls, Inc., Compact Power, Inc., Dow Kokam and A123 Systems, Inc., are developing and planning to manufacture battery cell technologies and other energy products that compete with our technologies and planned products. We also face competition from companies that are focused on traditional energy sources, such as oil and natural gas, as well as those that develop alternative energy technologies such as solar power, wind power, ethanol and biofuels. We will need to develop commercially viable products for our business to be successful.
 
The developers of traditional and alternative energy technologies include, among others, major electric, oil, chemical, natural gas, battery, generator and specialized electronics firms, as well as universities, research institutions and foreign government-sponsored companies. Many of these entities have substantially greater financial, research and development, manufacturing and marketing resources than we do. A significant amount of public and private funding is directed toward the development of traditional and alternative energy generation, distribution and storage. The resulting technologies may render some of our planned products less attractive or obsolete, or our competitors may be able to offer comparable products at better prices.

 
We may never complete the research and development of commercially viable products that are in our product pipeline. The current market for lithium-ion batteries may undergo significant change.
 
We are developing a number of products that involve new technologies. While we have completed the development of a lithium-ion battery pack for an EV and a prototype of our lithium-ion battery pack for HEVs, we continue to work on other projects which are in various stages of development, including testing new lithium-ion chemistries for automotive, truck, bus, stationary power, military and other applications. We do not know when or whether we will successfully complete research and development of these products. If we are unable to develop commercially viable products, we will not be able to generate sufficient revenue to become profitable or sustain our business model. In addition, while we are conducting tests to predict the overall life of our products, we may not have tested our products over their projected useful lives prior to the commencement of large-scale commercialization. As a result, we cannot be sure that our products will last as long as predicted, and, if they do not, we may incur liability under warranty claims and diminished goodwill with customers.
 
 
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The market for advanced rechargeable batteries is at a relatively early stage of development, and the extent to which our lithium-ion batteries will be able to meet our customers’ requirements and achieve significant market acceptance is uncertain. Rapid and ongoing changes in technology and product standards could quickly render our products less competitive or even obsolete if we fail to continue to improve the performance of our battery chemistries and systems. Other companies that are seeking to enhance traditional battery technologies have recently introduced or are currently developing batteries based on other emerging technologies. These competitors are engaged in significant development work on these various battery systems. One or more new, higher energy rechargeable battery technologies could be introduced which could be directly competitive with, or superior to, our technology. The capabilities of many of these competing technologies have improved over the past several years. Competing technologies that outperform our batteries could be developed and successfully introduced, and as a result, there is a risk that our products may not be able to compete effectively in our target markets. If our battery technology is not adopted by our customers, or if our battery technology does not meet industry requirements for power and energy storage capacity in an efficient and safe design, our batteries may not gain market acceptance.
 
We intend to offer lithium-ion batteries to the automotive industry, which is a very competitive and cost focused industry. We have limited automotive industry experience.
 
Supplying lithium-ion batteries to the automotive industry carries significant risks. We compete against much larger suppliers that have greater financial, marketing and other resources; more experience in low cost, high-volume manufacturing operations; existing relationships with automotive purchasing and engineering development departments; and increased ability to take advantage of economies of scale in purchasing raw materials. The automotive industry is extremely competitive and competition to supply vehicle components to manufacturers focuses on the power, energy, cost, weight and size of such components. The ability of domestic automobile manufacturers to adopt new battery technologies will depend on many factors outside our control, including their ability to develop related vehicle platforms. If the industry does not accept lithium-ion battery technology, or if our lithium-ion batteries do not meet industry requirements for battery power, energy, cost, weight, size and other characteristics, our batteries will not gain market acceptance and/or our primary business strategy will not be successful.

We may not be able to protect the intellectual property upon which we depend and we could incur substantial costs defending against claims that our products infringe on the proprietary rights of others.
 
As of December 31, 2010, we had 45 United States issued patents and 34 foreign issued patents. Our ability to compete effectively will depend, in part, on our ability to protect our proprietary technologies, systems designs and manufacturing processes. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so. We rely on patents, trademarks, and policies and procedures related to confidentiality to protect our intellectual property. However, some of our intellectual property is not covered by any patents or patent applications. Moreover, we do not know whether any of our pending patent applications will issue or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficient to protect our technology or processes. Even if all of our patent applications are issued, our patents may be challenged or invalidated. Patent applications filed in foreign countries may be subject to laws, rules and procedures that are substantially different from those of the United States, and any resulting foreign patents may be difficult and expensive to enforce. In addition, we do not know whether the United States Patent & Trademark Office will grant federal registrations based on our pending trademark applications. Even if federal registrations are granted to us, our trademark rights may be challenged. It is possible that our competitors or others will adopt trademarks similar to ours, thereby impeding our ability to maintain our brand identity and possibly leading to customer confusion.
  
 
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Asserting, defending and maintaining our intellectual property rights could be difficult and costly and a failure to do so may diminish our ability to compete effectively and may harm our operating results. We may need to pursue legal action to enforce our intellectual property rights, to protect our trade secrets and domain names and to determine the validity and scope of the proprietary rights of others. If third parties prepare and file applications for trademarks used or registered by us, we may oppose those applications and be required to participate in proceedings to determine priority of rights to the trademark. Similarly, competitors may have filed applications for patents, may have received patents and may obtain additional patents and proprietary rights relating to products or technology that block or compete with ours. We may have to participate in interference proceedings to determine the priority of invention and the right to a patent for the technology. Litigation and interference proceedings, even if they are successful, are expensive to pursue and time consuming and could require the expenditure of a substantial amount of our financial resources. If we are found to infringe third-party proprietary rights, we could be required to pay substantial royalties and/or damages, or be enjoined from selling our products. We do not know whether we will be able to obtain licenses to use the intellectual property at issue on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our products and could require the expenditure of significant resources to develop or acquire non-infringing intellectual property.

We rely, in part, on contractual provisions to protect our trade secrets and proprietary knowledge.
 
Confidentiality agreements to which we are party may be breached, in which case we may not have adequate remedies. Our trade secrets and proprietary information may become publicly available without breach of such agreements or may be independently developed by competitors. Our inability to maintain the proprietary nature of our technology and processes could allow our competitors to limit or eliminate any competitive advantages we may have.
 
Our principal shareholders have substantial control over our affairs.
 
Ener1 Group and Bzinfin are affiliated entities that as of December 31, 2010, own 49.3% of our outstanding common stock (and 57.3% if these entities exercised all of the warrants they own). A principal of the two entities is also a member of our Board of Directors. Our Chief Executive Officer, also a member of our Board of Directors, is a board member and chief executive officer of Ener1 Group.  He also has options to acquire up to 10% ownership of Ener1 Group.  Ener1 Group and Bzinfin have the ability to effectively control all matters submitted to a vote of the shareholders of Ener1, including increases of authorized shares of the Company, the election and removal of directors and any decision regarding any potential merger, consolidation or sale of all or substantially all of our assets. In addition, Ener1 Group and Bzinfin, through their combined ability to elect a majority of the members of our Board of Directors, may dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing an increase in the Company’s authorized shares or a change in control or impeding a merger, consolidation, takeover or other business combination which other shareholders may view favorably.
 
Lithium-ion battery cells have been observed to catch fire or vent smoke and flames, and these occurrences may subject us to litigation, disrupt our operations or harm our reputation.
 
Batteries contain chemicals including acid-based electrolytes that, if improperly packaged, used, charged or discharged, could result in serious injuries and damage to property from fire or otherwise. On occasion, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials. If this occurs with our batteries, we may incur significant liability.  For example, a claim was brought against Ener1 Korea resulting from a battery that was allegedly packaged improperly and subsequently caught fire. Although we did not package the battery in question, the court concluded that we were liable for damages, and it is possible that we may become subject to future claims for damages caused by our batteries, whether or not the cause of such damages were our responsibility or the responsibility of third-party manufacturers and packagers. Regardless of the merits of any claims, we cannot predict when such claims may be brought against us and whether such claims will lead to costly litigation. In addition, highly publicized incidents of laptop computer and cell phone batteries bursting into flames have focused consumer attention on the safety of these lithium-ion battery cells. These events have also raised questions about the suitability of lithium-ion cells for automotive applications. To address these questions and concerns, a number of cell manufacturers are pursuing alternative lithium-ion battery cell chemistries and formulations to improve safety; we cannot assure you that these measures will be effective to address any public safety concerns regarding the use of lithium-ion cells.
 
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While we have tested our batteries and subjected them to damage-inducing treatments such as high temperatures, vibrations, overcharging, crushing or puncturing, in order to assess our battery pack’s response to deliberate and sometimes destructive abuse, there is no assurance that a failure of our battery packs will not occur.  Any such failure could lead to property damage, personal injury or death and may subject us to lawsuits or other regulatory precedings.
 
In addition, we expect to store a significant number of lithium-ion cells at our manufacturing facilities. Any mishandling of battery cells in the production process may cause disruption to the operation of our facilities. While we have implemented safety procedures related to the handling of the cells, there is no assurance that a safety issue or fire related to battery cells would not disrupt our operations. Such damage or injury would likely lead to adverse publicity and potentially a safety recall. The manufacture and use of batteries could also result in product liability claims. Our product liability insurance may not necessarily cover each claim and may not be adequate to protect us from potential liability claims. We also may have exposure to possible third-party claims that our batteries have caused damages to other products or caused serious injuries.
 
The industry could be harmed from negative publicity if serious accidents are attributable to battery products regardless of whose battery product was involved. Such damage or adverse publicity would negatively affect our brand and harm our business, operating results, financial condition and prospects.
 
We are subject to financial and reputational risks due to product recalls resulting from product quality and liability issues.
 
The risk of product recalls, and associated adverse publicity, is inherent in the development, manufacture, marketing and sale of batteries and battery systems as it is a new and unproven technology. Our products and the products of third parties in which our products are a component are becoming increasingly sophisticated and complicated as rapid advancements in technologies occur and as demand increases for lighter and more powerful rechargeable batteries. At the same time, product quality and liability issues present significant risks. Product quality and liability issues may affect not only our own products but also the third-party products in which our batteries and battery systems are a component. Our efforts and the efforts of our development partners to maintain product quality may not be successful, and if they are not, we may incur expenses in connection with, for example, product recalls and lawsuits, and our brand image and reputation may suffer. Any product recall or lawsuit seeking significant monetary damages could have a material adverse effect on our business and financial condition. A product recall could generate substantial negative publicity about our products and business, could interfere with our manufacturing plans and product delivery obligations as we seek to replace or repair affected products or could inhibit or prevent commercialization of other future product candidates. Although we may have limited product liability insurance with respect to certain of our products, not all of our products are covered under product recall insurance policies and we do not have insurance sufficient to cover the costs associated with a product recall and the expenses we would incur in connection with a product recall could have a material adverse affect on our operating results.

We rely on third parties to develop and provide key materials and components for our products.
 
We rely on third-party suppliers to develop and supply key materials and components for our products. If those suppliers fail to develop and supply these materials and components in a timely manner or at all, fail to develop or supply materials and components that meet our quality, quantity or cost requirements, or the supply of materials and components is interrupted for any reason, and we are unable to obtain substitute sources of these materials and components on a timely basis or on terms acceptable to us, we may not be able to manufacture our products. In addition, we may be unable to obtain substitute sources of these materials and components to the extent our suppliers use technology or manufacturing processes that are proprietary, and in some instances, we rely on a single supplier for materials. We do not know when or whether we will secure long-term supply relationships with any suppliers or whether such relationships will be on costs and terms that will allow us to achieve our objectives. Our business, prospects, results of operations and financial condition could be harmed if we fail to secure long-term relationships with entities that will supply the required components for our battery and energy related products. If we experience a rapid increase in demand for our battery products, we could face short term supply issues on key materials and components of our battery systems.
  
 
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Demand for raw materials may affect future prices and availability of raw materials that we use.
 
The demand for raw materials that we use, including without limitation lithium, may increase as the projected demand for HEVs and EVs increases which in turn could lead to higher prices for our raw materials. Global supply disruptions caused by political or other dislocations could also lead to shortages and higher prices. In many cases we rely on a single supplier for materials and we may not have agreements in place guaranteeing the supply of materials to us or guaranteeing that we may obtain such materials on commercially reasonable terms.  The inability to acquire raw materials on commercially reasonable terms, or at all, would prevent, delay and/or increase the cost of manufacturing our products and result in a significant adverse effect on our profitability and our operations.
 
Declines in product prices may adversely affect our financial results.
 
Our business is subject to intense price competition worldwide, which makes it difficult for us to maintain product prices and achieve profits. Such intense price competition may adversely affect our ability to achieve profitability, especially during periods of decreased demand. In addition, because of their purchasing size, our larger automotive customers can influence market participants to compete on price terms. If we are not able to offset pricing reductions resulting from these pressures by improved operating efficiencies and reduced expenditures, those pricing reductions may have an adverse impact on our business.
 
Failure of our planned products to pass testing would negatively impact demand for our planned products.
 
We may encounter difficulties and delays during testing of our planned products for a number of reasons, including the failure of our technology or the technology of third parties. Testing of our products occurs at various stages, including tests at the prototype stage and tests for production products, such as crash-tests by automobile companies.  The requirements of these tests and many of these potential problems and delays are beyond our control. Any problem or perceived problem with test results for our planned products would materially harm our reputation and impair market acceptance of, and demand for, any of our products.
 
We face risks associated with our plans to market, distribute and service our products internationally.
 
We have limited experience developing, manufacturing and distributing products for sale either domestically or internationally. Our success in international markets will depend, in part, on our ability to secure relationships with foreign sub-distributors and to manufacture products that meet foreign regulatory and commercial standards. International operations are subject to other inherent risks, including potential difficulties in enforcing contractual obligations and intellectual property rights in foreign countries (such as China and Russia) and fluctuations in currency exchange rates.
 
Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor and tax conditions.
 
We have significant manufacturing facilities and operations in South Korea, we are expanding our presence in China through our joint venture with Wanxiang and we are in the process of expanding our business in Russia and Europe through growth in our customer relationships. These activities are subject to the legal, political, regulatory and social requirements and economic conditions in these jurisdictions. In addition, we expect to sell a significant portion of our products to customers located outside the United States. Risks inherent to international operations and sales, include, but are not limited to, the following:

 
·
exposure to violations of the Foreign Corrupt Practices Act of 1977, as amended;
 
·
difficulty in enforcing agreements, judgments and arbitration awards in foreign legal systems;
 
·
fluctuations in exchange rates may affect product demand and may adversely affect our profitability in United States dollars to the extent the cost of raw materials and labor is denominated in a foreign currency;
 
·
impediments to the flow of foreign exchange capital payments and receipts due to exchange controls instituted by certain foreign governments and the fact that the local currencies of these countries are not freely convertible;
 
·
inability to obtain, maintain or enforce intellectual property rights;
 
·
changes in general economic and political conditions in foreign countries;
  
 
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·
changes in foreign government regulations and technical standards, including additional regulation of rechargeable batteries, power technology, or the transport of lithium or phosphate, which may reduce or eliminate our ability to sell or license in certain markets;
 
·
requirements or preferences of foreign nations for domestic products, which could reduce demand for our products;
 
·
trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive; and
 
·
longer payment cycles typically associated with international sales and potential difficulties in collecting accounts receivable, which may reduce the future profitability of foreign sales.
 
Our business in foreign jurisdictions requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends on our ability to succeed in different legal, regulatory, economic, social and political situations and conditions. We may not be able to develop and implement effective policies and strategies in each foreign jurisdiction where we do business. Also, each of the foregoing risks will likely take on increased significance as we implement plans to expand foreign manufacturing operations.
 
The United States and global automobile industries have undergone a significant decline in worldwide sales, with many participants experiencing large losses and liquidity issues, all of which may affect our future sales and the development of the electric vehicle industry generally.
 
Our business depends on and is directly affected by the general condition of the United States and global automobile industries. The effect of the continued economic difficulties of the major auto manufacturers on our business is unclear. Several automotive companies were sold or closed in recent years, and two large United States automotive companies reorganized under the bankruptcy laws. Several large automotive companies have sold or discontinued brands of automobiles. It is possible that the ownership of our prospective customers could change and affect our supply agreements and development activities, as any new owners of these customers could choose a different battery supplier or have an existing relationship with another battery supplier. Volvo, an existing customer, has been acquired by Geely Automotive based in China. We do not have a contractual arrangement preventing Volvo from using a different battery supplier, and it is possible that Geely Automotive may chose to use an alternative battery supplier, such as one based in China, and decide not to purchase any batteries from us.  The impact of any restructuring of automotive companies on the automobile industry and its suppliers is also unclear and difficult to predict. Possible effects could include reduced spending on alternative energy systems for automobiles, a delay in the introduction of new HEVs and EVs and a delay in the conversion of automobile car battery technology from nickel metal hybride to lithium-ion chemistry, each of which would have a material adverse effect on our business.
 
We may be unable to manage rapid growth effectively.
 
We expect to expand our manufacturing capabilities, accelerate the commercialization of our products and enter a period of growth, all of which will place a significant strain on our senior management team and our financial and other resources. Our proposed expansion will expose us to increased competition, greater overhead, marketing and support costs and other risks associated with the commercialization of new products. Our ability to manage our growth effectively will require us to continue to improve our operations and our financial and management information systems and to train, motivate and manage our employees. Difficulties in effectively managing the budgeting, forecasting and other process control issues presented by such a rapid expansion could harm our business, prospects, results of operations and financial condition.
  
 
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Future acquisitions may disrupt our business, distract our management and reduce the percentage ownership of our shareholders.
 
As part of our business strategy, we may seek to acquire complementary technologies, products, expertise and/or other valuable assets. We may be unable, however, to identify suitable acquisition candidates or, if we do identify suitable candidates, we may not be able to complete acquisitions on commercially acceptable terms or at all. If we issue equity securities as part of an acquisition transaction, the percentage ownership of our then current shareholders may be reduced. By virtue of our ownership interest in Think Holdings, and the contractual relationship with certain shareholders of Think Holdings which allow them to exchange their shares of Think Holdings’ Series B Stock for our shares of common stock, we may obtain a majority interest in Think Holdings.  See Risk Factors, “The consolidation of Think Holdings’ financial statements with our own could materially adversely affect our ability to raise capital,” for a discussion of the risks associated with the potential consolidation of Think Holdings’ operating results with our operating results.  Once we have acquired a business, such as Think Holdings, we may have to devote a significant amount of time, management and financial resources to successfully integrate the business into our existing operations in a timely and non-disruptive manner, and we may be unable to do so.

Moreover, we may have to consolidate the financials of an acquired business, and there is no assurance that the books and records of the acquired business can be relied upon.  An acquisition may not produce the desired revenues, earnings or business synergies that were anticipated prior to concluding the transaction, which in turn could cause our business and financial condition to be materially and adversely affected. As a result of an acquisition, we may incur nonrecurring charges and be required to amortize significant amounts of intangible assets, which in turn could adversely affect our results of operations and profitability.
 
We may not meet our development and commercialization milestones.
 
We have established product development and commercialization milestones that we use to assess our progress toward developing additional commercially viable products, such as those contained in the MGTES contract. These milestones relate to power, energy capacity, technology and product design as well as to dates for achieving development goals. To gauge our progress, we plan to operate, test and evaluate our products. If our systems or products exhibit performance or technical defects or are unable to meet cost or performance goals, including power output, useful life and reliability, our commercialization schedule could be delayed and potential purchasers of our commercial battery and energy products may decline to purchase them. We cannot assure you that we will successfully achieve our milestones in the future or that any failure to achieve these milestones will not result in potential competitors gaining advantages in our target market. Failure to meet our development and commercialization milestones might have a material adverse effect on our operations and our stock price.

Regulatory and other changes related to the energy industry or to the electric vehicle industry may adversely affect our ability to produce, and may reduce demand for, our planned products.
 
Federal, state, local and foreign government laws, regulations and policies concerning the energy, battery and/or the electric vehicle industry may heavily influence the market for our technologies and products. A change in the current regulatory environment, including amendments to or a rescission or delay in implementation of federal Corporate Average Fuel Economy standards mandate increases in fuel economy in the United States or reduction in tax incentives to purchase EVs, could make it more difficult or costly for us to develop, manufacture or market our products. Any such changes could also deter further investment in the research and development of alternative energy sources, which could significantly reduce demand for our technologies and products. We cannot predict how changes in regulation or other industry changes will affect the market for our products or impact our ability to distribute, install and service our products.
 
- 29 -

 
 
Business practices in Asia may entail greater risk and dependence upon the personal relationships of senior management than is common in North America, and therefore some of our agreements with other parties in China and South Korea could be difficult or impossible to enforce.

We are increasing our business activities in Asia.  The business culture in parts of Asia is, in some respects, different from the business cultures in Western countries. Personal relationships among business principals of companies and business entities in Asia are very significant in their business cultures. In some cases, because so much reliance is based upon personal relationships, written contracts among businesses in Asia may be less detailed and specific than is commonly accepted for similar written agreements in Western countries. In some cases, material terms of an understanding are not contained in the written agreement but exist only as oral agreements. In other cases, the terms of transactions which may involve material amounts of money are not documented at all. In addition, in contrast to the Western business environment where a written agreement specifically defines the terms, rights and obligations of the parties in a legally-binding and enforceable manner, the parties to a written agreement in Asia may view that agreement more as a starting point for an ongoing business relationship which will evolve and undergo ongoing modification over time. As a result, any contractual arrangements we enter into with a counterparty in Asia may be more difficult to review, understand and/or enforce.

Our joint venture investment with Wanxiang EV Co. Ltd. could be adversely affected by the laws and regulations of the Chinese government, our lack of decision-making authority and disputes between us and Wanxiang

On January 17, 2011, we entered into the JV Agreement with Wanxiang EV Co. Ltd., which operates the EV division of Wanxiang Group.  Under the JV Agreement, we agreed to form a joint venture company with Wanxiang to design, manufacture, sell and service lithium-ion battery cells and lithium-ion battery packs, primarily in China, Hong Kong, Taiwan and Macau (the Joint Venture).  Wanxiang will have a majority equity interest in the Joint Venture and, with certain material exceptions, be able to exercise majority control over the Joint Venture.

The Joint Venture will be based in Hangzhou, China.  The national, provincial and local governments in China are highly bureaucratized.  The effort to obtain the registrations, licenses and permits necessary to establish and carry out the business objectives of the Joint Venture can be difficult and time consuming.  Significant delays in obtaining requisite governmental approval for the Joint Venture’s business could have an adverse effect on the prospects and profitability of the Joint Venture.

We have granted an exclusive, royalty free license of our intellectual property to the Joint Venture.  Although Wanxiang is contractually restricted from using our intellectual property outside of the Joint Venture, there is always a general risk associated with sharing intellectual property with third parties and the possibility that such information may be used and shared without our consent.   Moreover, Chinese laws that protect intellectual property rights are not as developed and favorable to the owner of such rights as they are in the United States.  If any of our intellectual property rights are used or shared without our approval in China, we may have difficulty in prosecuting our claim in an expeditious and effective manner.  Delays in enforcing our intellectual property rights could have a material adverse effect on our business and prospects.

As a general matter, there are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, including, but not limited to, the laws and regulations governing the anticipated business of the Joint Venture and the protection of intellectual property rights.  These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty.  The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.  The unpredictability of the interpretation and application of existing and new Chinese laws and regulations will pose additional challenges for us as we seek to develop and grow the Joint Venture’s business in China.  Our failure to understand Chinese laws or an unforeseen change in a law or the application thereof could have an adverse effect on the Joint Venture.
 
 
- 30 -

 
 
Although the Chinese economy has grown significantly in recent years, there is no guarantee that such growth will continue.  If the growth of the Chinese economy slows, the market for the Joint Venture’s products may decline significantly and adversely affect the Joint Venture’s business prospects.

We agreed to invest up to $48 million in the Joint Venture over a two year period from the date on which the establishment of the Joint Venture is approved by the relevant Chinese authority.  If we are unable to timely and fully fund our investment requirement, our equity interests in the Joint Venture may be diluted.

Our investment in the Joint Venture may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that Wanxiang might become bankrupt or fail to fund its share of required capital contributions, which may leave us liable for its share of the Joint Venture’s liabilities. Wanxiang may have economic, tax or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.  Our investment in the Joint Venture may also lead to impasses, for example, as to whether to acquire or dispose of a material asset or enter into a material agreement, because such actions may not be taken by Wanxiang without our consent. Disputes between us and Wanxiang may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our day to day business. Consequently, actions by or disputes with Wanxiang may subject assets owned by the Joint Venture to additional risk. In addition, we may, in certain circumstances, be liable for the actions of Wanxiang.

The Joint Venture is a new business in China.  As with any new business, there will be many challenges facing the Joint Venture, including developing a market for the Joint Venture’s products, obtaining requisite governmental approvals and permits, implementation of an untested business plan, and securing adequate funding for working capital and growth.  Failure to overcome any of these or any other challenges facing the Joint Venture could result in significant losses to our investment in the Joint Venture.
 
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, similar worldwide anti-bribery laws and political instability.

We conduct important operations outside the United States, including in Russia and Korea and through our Wanxiang joint venture. The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws of non-U.S. Countries generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our training and compliance program, we cannot assure you that our internal control policies and procedures always will protect  us from reckless or negligent acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our business and operations. In addition, the parts of the world in which operate may experience social unrest, political and economic instability and resulting governmental corruption. It is difficult to predict whether these countries, and our operations there, will suffer from any such events, but, if they did, it could have a material negative impact on our business and results.
 
We could incur substantial costs, including environmental damages and sanctions, cleanup costs and capital expenditures, resulting from our research, development or manufacturing operations.

We are subject to numerous federal, state, local, foreign and international laws, regulations and other requirements relating to environmental protection and human health and safety, including those governing the management, manufacturing, transport, sale, importation and disposal of hazardous materials, the cleanup of contaminated sites and the discharge of pollutants to air and water. Our business involves the use of hazardous materials and exposes us to the risk that harmful substances may escape into the environment, resulting in personal injury or loss of life, damage to or destruction of property and natural resources, cleanup obligations or other liabilities or claims. Our insurance policies may not adequately reimburse us for costs incurred in defending, settling and paying environmental liabilities and claims, and in some instances, we may not be reimbursed at all. These laws and regulations have changed frequently in the past, and it is reasonable to expect there will be additional changes in the future. If our operations do not comply with current or future environmental laws and regulations, we may be required to make significant unanticipated capital and operating expenditures to bring our operations or products into compliance. If we fail to comply with applicable environmental laws and regulations, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits and private parties may seek damages from us. Under those circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims. Our facilities or operations also could be damaged or adversely affected as a result of natural disasters or unpredictable events.
 
 
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Laws regulating the manufacture, use, transportation or exportation of batteries may be enacted which could result in a delay in the production of our batteries or the imposition of additional costs that could harm our ability to be profitable.

Laws and regulations exist today, and additional laws and regulations may be enacted in the future, which impose environmental, health and safety controls on the transportation, exportation, storage, use and disposal of certain chemicals and metals used in the manufacture of lithium-ion batteries. Complying with any laws or regulations could require significant time and resources from our technical staff and possible redesign of our products or otherwise result in substantial expenditures or delays in the production of one or more of our products, all of which could harm our business and reduce our future profitability. The transportation of lithium and lithium-ion batteries is regulated both domestically and internationally. Compliance with these regulations, when applicable, increases the cost of producing and delivering our products.

Our business depends on retaining and attracting highly capable management and operating personnel.

Our success depends in large part on our ability to retain and attract qualified management and operating personnel. We require a highly-skilled, specialized workforce, including scientists, engineers, researchers and manufacturing and marketing professionals, individuals who are in high demand and are often subject to competing offers. To retain and attract key personnel, we may use various measures, including employment agreements, a stock incentive plan and incentive bonuses for key employees. These measures may not be enough to retain and attract the personnel we need or to offset the impact on our business of the loss of the services of key officers or employees. We could face difficulty hiring and retaining qualified management and operating personnel. Because of the highly technical nature of our batteries and battery systems, the loss of any significant number of our existing engineering and project management personnel could have a material adverse effect on our business and operating results.

Future issuances of our common stock may adversely affect our stock price.

The sale of a substantial number of shares of our common stock, the exercise of existing warrants or stock options, the exchange of shares of Think Holdings for shares of our common stock or the perception by the market that such sales, exercises or exchanges could occur may cause the market price of our common stock to decline or may make it more difficult for us to raise funds through the sale of equity or equity-linked securities in the future. Similarly, if we issue a large number of shares in connection with future acquisitions or financings, particularly if we issue shares at a discount to the then current market price, the price of our common stock could decline significantly.

We will need to raise additional capital in the future, and there is no assurance that we will be able to raise additional funds on terms favorable to us or at all. Our failure to obtain required financing would materially and adversely affect our financial condition and our prospects.  We have outstanding warrants exercisable for approximately 42,659,126 shares of our common stock as of December 31, 2010. The exercise price and expiration date for these warrants are summarized in the table below:
 
 
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Number of Warrant Shares
            
Ener1 Group
   
Other
   
Exercise
      
and Bzinfin
   
Holders
   
Price
   
Expiration Date
  1,962,500       -     $ 8.25    
Various 2011
  4,969,893       -     $ 2.10    
June 30, 2011
  -       250,000     $ 4.90    
October 20, 2011
  -       750,000     $ 5.25    
October 20, 2011
  -       71,429     $ 2.10    
January 5, 2012
  250,000       -     $ 8.25    
February 10, 2012
  2,457,144       -     $ 2.10    
February 13, 2012
  -       1,046,511     $ 4.09 *  
March 23, 2012
  5,331,758       -     $ 2.10    
Various 2012
  2,274,569       3,061,919     $ 2.80    
August 14, 2012
  142,858       -     $ 5.95    
March 26, 2013
  -       170,551     $ 10.50    
November 14, 2013
  -       170,551     $ 14.00    
November 14, 2013
  -       2,285,717     $ 7.05 *  
January 21, 2014
  -       274,286     $ 17.57    
December 9, 2014
  863,806       -     $ 3.40    
August 3, 2015
  1,457,672       -     $ 4.25    
August 3, 2015
  -       2,882,775     $ 3.81 *  
September 7, 2015
  -       75,000     $ 3.82    
September 7, 2015
  3,000,000       -     $ 3.48    
December 8, 2015
  5,000,000       -     $ 4.40    
December 8, 2015
  -       1,019,353     $ 4.68 *  
December 31, 2015
  910,000       -     $ 3.53    
March 21, 2016
  1,516,670       -     $ 4.46    
March 21, 2016
  174,062       -     $ 3.79    
April 1, 2016
  290,102       -     $ 4.79    
April 1, 2016
  30,601,034       12,058,092              

 
*
Exercise price subject to adjustment for issuance of common stock subsequent to December 31, 2010.

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. Since the per share price at which Think Holdings’ investors may exchange their shares of Series B Stock to us is fixed at $1.67, a decline in the value of Think Holdings in conjunction with the issuance of our common stock at fair value may have an adverse effect on our stock price.
 
 
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In January 2011, we entered into an expanded put right agreement (the Expanded Put Right) with Investinor AS (Investinor), an existing shareholder of Think Holdings.  Pursuant to the Expanded Put Right, Investinor provided $2.5 million in bridge financing to Think Holdings.  In connection with the bridge financing by Investinor, we agreed that Investinor could require us to issue shares of Ener1 common in exchange for shares of Series B Stock into which such bridge financing would be converted.  In connection with the Expanded Put Right, the agreed upon exchange price for one share of Series B Stock is the United States dollar equivalent of 10 Norwegian Kroner per share, and the price at which our common stock is valued will be the then 15 day volume weighted average of our common stock trading price, but in no event less than $4.00 per share.  Investinor has until May 2011 to exercise the Expanded Put Right.  We also extended to Investinor, under the Expanded Put Right, the right to transfer to Ener1 an additional 3,007,400 shares of Series B Stock under the same terms and conditions of the Expanded Put Right. Under the Expanded Put Right, Investinor is limited in the amount of shares of Series B Stock that may be exchanged in any 30 day period to $3.0 million in aggregate value of Ener1 shares.  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.  See Risk Factors – “The consolidation of Think Holdings’ financial statements with our own could materially adversely affect our ability to raise capital,” for a discussion of the risks associated with consolidation of Think Holdings’ operating results with our operating results, which may occur if Ener1 acquired Think Holdings shares from Investinor under the Expanded Put Right.

Since the per share price at which Think Holdings investors may exchange their shares of Series B Stock to us is fixed at the United States dollar equivalent of 10 Norwegian Kroner, a decline in the value of Think Holdings in conjunction with the issuance of our common stock at fair value may have an adverse effect on our stock price.

Our equity financing obtained from Ener1 Group during 2010, specifically purchases of our equity securities under stock purchase agreements, was funded by Ener1 Group through a loan it obtained from JSC VTB Bank. In connection with such loan, Ener1 Group and its principals pledged more than a majority of their shares of our common stock to JSC VTB Bank as collateral. The pledged shares represent approximately 40% of our outstanding shares of common stock. As part of that loan, we granted JSC VTB Bank registration rights with respect to the pledged shares on a “commercially reasonable” basis. If JSC VTB Bank forecloses on the pledged shares and decides to sell such shares in large blocks, any such sales would likely have a material adverse affect on our stock price.

In addition to the foregoing, one of our unaffiliated shareholders owns a substantial block of our common stock, consisting of 12.0 million shares or 7.3% of the outstanding shares of common stock at December 31, 2010.  These shares are unrestricted and subject to potential resale in the market.

Our stock price has been, and could remain, volatile.

The market price of our common stock has historically experienced, and may continue to experience, significant volatility. Our progress in developing and commercializing our products, our quarterly operating results, announcements of new products by us or our competitors, our perceived prospects, changes in securities analysts’ recommendations or earnings estimates, changes in general conditions in the economy or the financial markets, mergers or acquisitions, adverse events related to our strategic relationships and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, the stock market, and in particular the market for technology-related stocks, has experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our common stock. In addition, we may be subject to class action securities litigation as a result of volatility in the price of our common stock, which could result in substantial costs and diversion of management’s attention and resources and could harm our stock price and the value of our other debt or equity securities, and our business, prospects, results of operations and financial condition.
 
 
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Our articles of incorporation and Florida law could adversely affect our common stock price.

Provisions of our articles of incorporation and Florida law could discourage potential acquisition proposals and could delay or prevent a change in control of us. These provisions could diminish the opportunities for a shareholder to participate in tender offers, including tender offers at a price above the then current market value of our common stock. These provisions may also inhibit fluctuations in the market price of our common stock that could result from takeover attempts. In addition, our Board of Directors, without further shareholder approval, may issue additional series of preferred stock that could have the effect of delaying, deterring or preventing a change in control. The issuance of additional series of preferred stock could also adversely affect the voting power of the holders of common stock, including the loss of voting control to others.

Item 1B.
Unresolved Staff Comments.

None

Item 2.
Properties.

Our corporate headquarters have been located in New York, New York since August 2008, where we lease 3,500 square feet of office space pursuant to a lease expiring in May 2013.  In January 2011, we entered into an amended lease with the existing landlord to extend the term of the lease for an additional five years and expand the space we occupy to approximately 6,800 square feet.  Prior to August 2008, our corporate headquarters were located in Fort Lauderdale, Florida.

We lease approximately 354,000 square feet of industrial, warehouse and office space used primarily for the manufacturing and production of battery cells, battery pack assembly, and research and development of battery and fuel cell products.  The leases for these properties, located in Indiana, New Jersey and Florida, expire at varying times from December 2011 through February 2017 and may contain renewal options and/or purchase options.  From time to time, we may enter into short-term leases, on a month-to-month basis, for industrial and/or office space.

We also own land and a building in Fort Lauderdale, Florida containing approximately 19,000 square feet of industrial and office space.  We utilize a portion of this facility for administrative personnel, certain hardware development projects, and nanotechnology research and development projects.  Our Ener1 Korea subsidiary owns land and a building in South Korea containing a 145,000 square foot manufacturing plant and adjacent office space.  This facility is used for manufacturing and production of battery cells.

Item 3.
Legal Proceedings.

We receive communications from time to time alleging various claims. These claims may include, but are not limited to, product liability claims, employment matters, collection of accounts payable, and allegations that certain of our products infringe the patent or other intellectual property rights of other third parties. We cannot predict the outcome of any such claims or the effect of any such claims on our operating results, financial condition, or cash flows. As of December 31, 2010, there are no material pending legal proceedings.

Item 4. 
Reserved.
 
 
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PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information and Holders

Effective January 3, 2011, our common stock began trading on Nasdaq Global Select Market under the symbol “HEV”.  Prior to that, our common stock traded on the Nasdaq Global Market under the same symbol.  The following table shows the high and low sales price for our common stock as reported by the Nasdaq Global Market for each quarter in the years ended December 31, 2010 and 2009:

2009
 
High
   
Low
 
First Quarter
  $ 7.90     $ 2.35  
Second Quarter
  $ 7.10     $ 4.94  
Third Quarter
  $ 7.90     $ 4.90  
Fourth Quarter
  $ 7.33     $ 4.68  
                 
2010
 
High
   
Low
 
First Quarter
  $ 6.77     $ 3.71  
Second Quarter
  $ 4.85     $ 2.75  
Third Quarter
  $ 3.95     $ 2.83  
Fourth Quarter
  $ 4.70     $ 3.57  

On February 28, 2011, the closing price of our common stock on the Nasdaq Global Select Market was $3.69 per share and there were 164,866,227 shares of common stock issued and outstanding held by approximately 241 shareholders of record. This number does not include persons whose shares are held of record by a bank, brokerage house or clearing agency, but does include such banks, brokerage houses and clearing agencies.

Effective December 16, 2010, we amended our Articles of Incorporation to increase the total number of authorized shares of common stock to 300 million.

Dividend Policy

We have not paid any cash dividends on our common stock and we have no current intention to pay any cash dividends on our common stock in the foreseeable future.

The terms of our senior unsecured notes restrict our ability to pay dividends on our common stock until all amounts payable under the senior unsecured notes are paid in full, or unless we receive prior written consent from the holders of the senior unsecured notes.
 
 
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Performance Graph (unaudited)
The following graph shows a comparison of cumulative total shareholder return on our common stock for the last five years with the cumulative total return on the Russell 1000 Index and PowerShares Wilderhill Clean Energy Portfolio Fund (the “Clean Energy Fund”).  The comparison assumes $100 was invested on January 1, 2006 in our common stock and, for the Russell 1000 Index and PowerShares Wilderhill Clean Energy Portfolio Fund, assumes reinvestment of dividends. We have not paid any dividends during this period.  The Clean Energy Fund, which we believe to be the fund closest to our business, commenced sales in March 2005.


The comparisons depicted in the above graph are required by the SEC and are not intended to be indicative of future price performance of our stock. The performance graph shall not be deemed to be "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into any future filing by the Company under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates the graph by reference in such filing.
 
 
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Item 6.
Selected Financial Data.

The selected financial data presented below for the five years in the period ended December 31, 2010, was derived from our audited consolidated financial statements. This information should be read in conjunction with the consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Annul Report.  Certain amounts for 2006 have been adjusted for the calculation of amortization of debt discount and deferred financing costs associated with our debentures and Series A Preferred Stock.

Financial highlights, in thousands, except per share data:

   
(1)
         
(6)
             
   
2010
   
2009
   
2008
   
2007
   
2006
 
For the years ended December 31,
                             
Net sales
  $ 77,406     $ 34,800     $ 6,848     $ 280     $ 100  
Loss from operations
    (51,914 )     (49,436 )     (33,905 )     (21,046 )     (26,410 )
Other income (expense)   (2)
    (16,926 )     (2,050 )     (17,432 )     (41,646 )     (15,114 )
Net loss attributable to Ener1, Inc. (3)
    (68,801 )     (51,004 )     (52,460 )     (63,938 )     (43,133 )
Basic net loss per share (4)
  $ (0.48 )   $ (0.44 )   $ (0.51 )   $ (1.02 )   $ (0.70 )
                                         
At December 31,
                                       
Cash and cash equivalents
    60,310       14,314       11,229       24,826       291  
Total assets
    396,544       174,407       141,731       32,745       8,060  
Long term obligations (5)
    73,710       15,922       7,261       11,158       13,137  
Redeemable preferred stock
    -       -       -       7,822       20,583  
Total Ener1, Inc. stockholders' equity (deficit) (5)
    207,076       117,999       106,413       (493 )     (41,241 )

(1)
In May 2010, we commenced commercial production and shipment of lithium-ion battery packs.

(2)
In August 2010, we converted $18.4 million of principal and accrued interest under the convertible line of credit with Bzinfin at an amended conversion price, resulting in debt conversion expense of $6.8 million.  In addition, as an inducement to convert, we issued to Bzinfin warrants to purchase shares of Ener1 common stock, resulting in additional debt conversion expense of $5.9 million.  We also agreed to make a cash payment equal to the withholding taxes that Bzinfin must pay with respect to total interest paid under the line of credit of approximately $527,000, which was recorded as debt conversion expense.

(3)
On January 1, 2009, we implemented a new accounting standard that changed the accounting for and reporting of minority interest, now referred to as noncontrolling interest.  This standard requires the presentation of net income or loss attributable to the noncontrolling interest separately from the net income or loss attributable to Ener1, Inc. for all periods presented.

(4)
Per share amounts have been adjusted to reflect the one for seven reverse stock split in April 2008.

(5)
On January 1, 2009, we adopted a new accounting standard which changed the manner in which we determine if an instrument is indexed to Ener1’s common stock which resulted in a reduction of total stockholders’ equity of $13.2 million.  Included in long term obligations, at December 31, 2009, are derivative and financial instruments totaling $6.9 million.

(6)
The operating results of Ener1 Korea have been included since November 1, 2008, the effective date of the acquisition for accounting purposes.
 
 
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our Consolidated Financial Statements and the accompanying notes to those financial statements and the Risk Factors, as discussed in Item 1A.

Executive Summary

We design, develop and manufacture high-performance, prismatic, rechargeable, lithium-ion batteries and battery pack systems for energy storage.  We also conduct research and development activities on fuel cells and non-coating processes.  Our fuel cell business develops and markets fuel cells and fuel cell systems.  Our nanotechnology business develops and markets nanotechnology related manufacturing processes and materials.

We produce and manufacture battery cells in the United States through our subsidiary EnerDel, Inc. (EnerDel) and in South Korea through our subsidiary, Ener1 Korea, Inc., formerly known as Enertech International, Inc. (Ener1 Korea).

Ener1 Group, Inc. (Ener1 Group) and Bzinfin, S.A. (Bzinfin), the sole owner of Ener1 Group, collectively owned approximately 49.3% of our outstanding common stock and, with warrants, beneficially owned approximately 57.3% of our shares on a fully diluted basis as of December 31, 2010.

Recent Developments in the Battery Business
Our battery business develops and markets advanced lithium-ion batteries and battery packs for use in the transportation, grid energy storage and small pack, or industrial cell product markets.

Transportation
Our primary products for the transportation market consist of battery solutions for hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs), electric vehicles (EVs) and other vehicles such as trucks and buses.

In May 2010, we commenced commercial production and shipment of lithium-ion battery packs to Think Global, AS (Think Global), an EV manufacturer in Norway.  During 2010, we shipped over 1,000 battery packs to Think Global.  However, 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 EV in Europe and the United States.

We are also developing battery packs for the Volvo C30, the first all electric car offered by the Swedish vehicle manufacturer.

Grid Storage
In the grid energy storage markets, we are developing energy storage applications for utility grid and commercial applications.  We believe grid reliability problems in Russia and other emerging economies around the world represent an opportunity for our grid energy storage business.

In October 2010, we entered into a supply agreement with Mobile Gas Turbine Electric Powerplants, a Russian corporation (MGTES), to provide lithium-ion battery units to power grid energy storage systems in Russia.  The total purchase price for the units is $40 million, the payment of which will be made in installments over a period of approximately two years, and each installment payment will be subject to the satisfaction of specified production, inspection and performance conditions.  In 2010, we recognized approximately $11.3 million in revenue associated with the supply agreement using the percentage of completion methodology.  Although we anticipate that we will complete performance of our obligations under the contract by the end of 2012, no assurances can be made that we will meet all the requirements to receive all installment payments in full or on a timely basis.
 
 
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Small Cell Products Market
Ener1 Korea manufactures lithium-ion batteries for the small format products market which encompasses consumer, industrial and military products.  Our primary small format product line consists of commercial prismatic lithium-ion batteries for products such as Motorola’s hand-held scanners.

Joint Venture with Wanxiang EV
In January 2011, we entered into a joint venture agreement (the JV Agreement) with Wanxiang EV Co. Ltd. (Wanxiang), which operates the electric vehicle division of Wanxiang Group, to form a joint venture company (the Joint Venture) to design, manufacture, sell and service lithium-ion battery cells and lithium-ion battery packs, primarily in China, Hong Kong, Taiwan and Macau.  The Joint Venture will be a limited liability company established under the laws of the People’s Republic of China.

The Joint Venture will be established upon receipt of certain Chinese governmental approvals, which we anticipate will be received within 90 days from the date of the JV Agreement.  The Joint Venture will be based in Hangzhou, China.  Wanxiang will appoint the chief executive officer and chief operating officer of the Joint Venture and we will appoint the chief financial officer and chief technology officer.

The Joint Venture parties have agreed to initially invest approximately $120 million in the Joint Venture.  Wanxiang will contribute $72 million and own 60% of the equity of the Joint Venture and Ener1 will contribute $48 million and own 40% of the equity of the Joint Venture.  The initial ownership percentages may change based on future equity contributions made by the parties or by any new investor in the Joint Venture.  However, as noted in the JV Agreement, Wanxiang will always maintain a minimum 51% equity stake in the Joint Venture pursuant to the terms of the JV Agreement.  The parties further agreed that the Joint Venture may obtain up to $175 million in bank financing in order to fund additional capital needs.

Wanxiang’s initial contribution of $72 million will be made in the form of property, plant and equipment, totaling approximately $36 million within 60 days of the establishment of the Joint Venture and the remaining $36 million in cash over a two-year period thereafter ($12 million of property, plant and equipment will be contributed for use in connection with the Joint Venture’s battery pack manufacturing operations and the remaining $24 million will be contributed for the purchase of additional property, plant and equipment in connection with the Joint Venture’s cell manufacturing operations).  Of our total cash contribution of $48 million, $8 million will be used in connection with the Joint Venture’s battery pack manufacturing operations (payable in two equal installments of $4 million) and the remaining $40 million will be used in connection with the Joint Venture’s battery cell manufacturing operations.  We expect to raise the capital to fund our initial $8 million contribution, the first half of which is due within sixty (60) days of the signing of the JV Agreement and the second half within two (2) years, through the sale of our common stock.  We expect to finance our remaining $40 million contribution, which is due within two (2) years of the signing of the JV Agreement, through non-recourse debt secured by our equity stake in the Joint Venture as collateral.

Financial Highlights

We raised $187.3 million from sales of equity and debt securities during the year ended December 31, 2010.  Proceeds from the sale of shares of Ener1 common stock total approximately $97.3 million, of which $89.1million was from sales to Ener1 Group and $8.2 million was from sales under our open market sale agreements.  Proceeds received from the issuance of debt totals $90 million, which includes $80 million of senior unsecured notes due 2013 and $10 million of convertible debt due 2015.

From January 1, 2011 to February 28, 2011, under an open market sale agreement we sold 992,378 shares for an aggregate purchase price of $3.8 million, at an average price of $3.88 per share.  After deducting fees and expenses of $115,000, we received net proceeds of $3.7 million from the sale of these shares.

On August 3, 2010, we converted all outstanding principal and accrued interest of $18.4 million under our convertible line of credit with Bzinfin into 5,398,785 unregistered shares of Ener1 common stock at an amended conversion price of $3.40 per share.  In addition, as an inducement to convert this debt, Ener1 issued to Bzinfin warrants to purchase up to approximately 2.3 million shares of Ener1 common stock.
 
 
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Transactions with Think Holdings

As of December 31, 2010, we controlled approximately 48% of the outstanding voting power in Think Holdings and Mr. Gassenheimer and Mr. Baker, who serve on the Board of Directors of Ener1, also serve on the board of directors of Think Holdings.

As described in our Risk Factors in this Annual Report, we may become the majority owner of Think Holdings upon the occurrence of certain events.

Exchange Agreements
In May 2010, in connection with our strategic investment in Think Holdings, we agreed that certain investors who made investments in Think Holdings could exchange their shares of Think Holdings Series B Stock and half of their warrants to purchase Series B Stock for shares of Ener1 common stock (the Ener1 Put Option).  Investors have until May 2011 to exercise the Ener1 Put Option and, upon exercise, would receive unregistered shares of Ener1 common stock.  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.  We valued the Ener1 Put Option, in May 2010, at fair value which increased our investment in unconsolidated entity by approximately $4.9 million.

In October 2010, Rockport Capital, an investor in Think Holdings exercised its rights under the Ener1 Put Option and transferred 7,500,000 shares of Series B Stock to Ener1 in exchange for 3,131,250 unregistered shares of Ener1common stock, increasing our investment in unconsolidated entity by approximately $12.4 million.  We also extended to this investor the right to transfer to Ener1 an additional 2,706,660 shares of Series B Stock under the same terms and conditions of the Ener1 Put Option.  The investor accepted this offer and exchanged the additional Series B Stock for 1,130,031 unregistered shares of Ener1 common stock, increasing our investment in unconsolidated entity by an additional $4.5 million.

In January 2011, we entered into an expanded put right agreement (the Expanded Put Right) with Investinor AS (Investinor), an existing shareholder of Think Holdings.  Pursuant to the Expanded Put Right, Investinor provided $2.5 million in bridge financing to Think Holdings and waived certain shareholder rights in Think Holdings.  In connection with the bridge financing by Investinor, Ener1 agreed that Investinor could require Ener1 to issue shares of Ener1 common stock to Investinor in exchange for their shares of Series B Stock into which such bridge financing would be converted. In accordance with applicable accounting standards, in January 2011, we initially recognized the fair value of the Expanded Put Right by increasing the investment in unconsolidated entity by approximately $731,000.

Investinor has until May 2011 to exercise the Expanded Put Right and, upon exercise, would receive unregistered shares of Ener1 common stock. Ener1 has agreed to register for resale all of the shares of Ener1 common stock that may be issued in connection with the Expanded Put Right.  We also extended to Investinor, under the Expanded Put Right, the right to transfer to Ener1 an additional 3,007,400 shares of Series B Stock under the same terms and conditions of the Expanded Put Right.  Investinor has an existing right to transfer to Ener1 2,000,000 shares of Series B Stock under the Ener1 Put Option which is now encompassed under the Expanded Put Right.

Under the Expanded Put Right, Investinor’s right to exchange shares of Series B Stock for Ener1 common stock in any 30 day period is limited to $3.0 million in aggregate value of Ener1 shares of common stock.  If Investinor were to exercise their rights under the Ener1 Put Option and the Expanded Put Right in full, Investinor could require Ener1 to issue approximately 2.8 million shares of Ener1 common stock in exchange for approximately 6.5 million shares of Series B Stock, increasing our control over the outstanding voting power of Think Holding to greater than 50% which would require the consolidation of the accounts of Think Holdings with the accounts of Ener1 on such date of exercise.  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 transferred any shares of Ener1 common stock to Investinor.
 
 
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Financing Arrangements
In October 2010, we made short-term working capital loans to Think Holdings totaling $6.4 million, with an interest rate of 5.0% per annum, originally scheduled to mature on December 31, 2010.  In November 2010, we issued 625,000 shares of Ener1 common stock to an existing creditor of Think Holdings in exchange for that creditor’s $2.5 million receivable from Think Holdings, with an interest rate of 5.0% per annum, originally scheduled to mature on December 31, 2011.  We may, at our option, convert the foregoing loans, which total approximately $9.0 million, including accrued and unpaid interest, into shares of Think Holdings Series B Stock.  On February 28, 2011, we extended the maturity date of the foregoing loans made to Think Holdings that were originally scheduled to mature on December 31, 2010 to mature on May 1, 2011.

In November 2010, we entered into a revolving line of credit agreement (Revolving LOC Agreement) with Think Holdings and established a line of credit for Think Holdings in the aggregate principal amount of $5.0 million, with an original maturity date of February 28, 2011.  On February 28, 2011, we amended the Revolving LOC Agreement (Amended Revolving LOC Agreement) with Think Holdings and increased the principal amount of the Revolving LOC Agreement from $5 million to $15 million and extended the maturity date from February 28, 2011 to March 31, 2011.  All funds advanced under the Revolving LOC Agreement and the Amended Revolving LOC Agreement bear interest at a rate of 12% per annum and are secured by the assets and properties of Think North America, Inc., an indirect subsidiary of Think Holdings, pursuant to a security agreement.  During January 2011, we advanced approximately $2.8 million in working capital loans to Think Holdings and on February 28, 2011, in connection with the amendment to the Revolving LOC Agreement we applied the working capital advances to the outstanding balance pursuant to the Amended Revolving LOC Agreement.  Think Holdings currently has borrowed $7.8 million under the Amended Revolving LOC Agreement.
 
On March 9, 2011, we extended the maturity date of the Amended Revolving LOC Agreement from March 31, 2011 to May 1, 2011.

Results of Operations

General and administrative expenses have increased and research and development expenses have decreased during the year ended December 31, 2010 in comparison to the year ended December 31, 2009 as a result of the fact that certain expenses previously classified as research and development expenses for the year ended December 31, 2009 are now classified as general and administrative expenses for the year ended December 31, 2010 due to the commencement of commercial production in May 2010.

In January 2011, we temporarily stopped shipping battery packs to Think Global at their direction until the company rebalances its overall inventory levels for the Think City in Europe and the United States.  We will not recognize further revenue from sales of battery packs to Think Global until they recommence production of Think City.  Think Global currently anticipates production will restart during the third quarter of 2011.

At December 31, 2010, we have approximately $13.6 million in accounts receivable with Think Global.  Although there remains a possibility that we may receive cash in payment of these past due accounts receivables, we currently expect to accept additional equity in Think Holdings for at least a portion of these receivables.  Accepting equity for payment of these receivables, based on our current ownership of Think Holdings and without our ownership being diluted by possible future investments in Think Holdings, could cause us to become the majority shareholder of Think Holdings and require us, under generally accepted accounting principles in the United States (US GAAP), to consolidate Think Holdings’ operating results with our own.

See Risk Factors for additional information regarding transactions with Think Holdings.
 
 
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Years Ended December 31, 2010 and 2009

The following information has been derived from our audited consolidated financial statements for the years ended December 31, 2010 and 2009.

   
Years Ended
 
(in thousands, except per share amounts)
 
December 31,
   
Change
 
    
2010
   
2009
   
$
   
%
 
Net sales
  $ 77,406     $ 34,800     $ 42,606       122 %
Cost of sales
    63,539       30,732       32,807       107 %
Gross profit
    13,867       4,068       9,799       241 %
                                 
Operating expenses:
                               
General and administrative
    29,230       17,653       11,577       66 %
Research and development, net
    30,754       30,770       (16 )     0 %
Grant proceeds recognized
    (288 )     -       (288 )     n/a  
Depreciation and amortization
    6,085       5,081       1,004       20 %
Total operating expenses
    65,781       53,504       12,277       23 %
Loss from operations
    (51,914 )     (49,436 )     (2,478 )     5 %
                                 
Other income (expense):
                               
Interest expense
    (9,852 )     (5,810 )     (4,042 )     70 %
Debt conversion expense
    (13,245 )     -       (13,245 )     n/a  
Gain (loss) on derivative instruments
    3,762       3,527       235       7 %
Gain (loss) on financial instruments
    1,851       -       1,851       n/a  
Foreign currency gain (loss)
    (356 )     (211 )     (145 )     69 %
Other
    914       444       470       106 %
Total other income (expense)
    (16,926 )     (2,050 )     (14,876 )     726 %
                                 
Loss before income taxes
    (68,840 )     (51,486 )     (17,354 )     34 %
Income tax expense (benefit )
    8       19       (11 )     -58 %
Net loss
    (68,848 )     (51,505 )     (17,343 )     34 %
Net income (loss) attributable to noncontrolling interests
    (47 )     (501 )     454       -91 %
Net loss attributable to Ener1, Inc.
  $ (68,801 )   $ (51,004 )   $ (17,797 )        

Net sales, Cost of sales and Gross profit
Net sales increased primarily due to an increase in EV battery pack commercial sales to Think Global of approximately $18.5 million, as shipments to Think Global commenced in May 2010, and an increase in EV battery pack prototype sales to various customers from $2.1 million during the year ended December 31, 2009 to $5.2 million for the year ended 2010, an increase of approximately $3.1 million.  Our domestic sales of small cell battery packs to commercial customers increased from $20.3 million during the year ended December 31, 2009 to $31.2 million during the year ended 2010, an increase of approximately $10.9 million, or 54%, due to an increase in demand.  In 2010, we also recognized $11.3 million in revenue associated with our contract to provide lithium-ion battery units to power grid energy storage systems.

Cost of sales increased primarily due to the commencement of commercial production and sales in May 2010 of EV battery packs.  Also included in cost of sales is depreciation expense of approximately $3.7 million for the year ended December 31, 2010, an increase of approximately $1.1 million, or 44%, primarily due to battery manufacturing and production equipment placed in service in late 2009.

General and administrative expense
General and administrative expenses increased primarily due to an increase in salary and benefits of $7.7 million, of which $2.0 million is due to an increase in stock-based compensation and incentive bonuses. Legal and professional fees increased $1.4 million primarily due to an increase in fees paid for consulting services with various government agencies and costs associated with filing, maintaining and protecting our patents and technology.  Facilities-related expenses increased $0.6 million primarily due to the commencement of commercial production in May 2010 at our Indiana facilities and travel-related expenses increased $0.4 million.
 
 
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Research and development expense
Research and development expenses decreased primarily due to $14.8 million received in proceeds from the ABMI grant during the year ended December 31, 2010.  These proceeds are used to pay operating expenses related to machine qualification and direct application engineering and are treated as a reduction of research and development expenses.  There were no ABMI grant proceeds received during the same period of the prior year.

This decrease has been partially offset by an increase in salaries and benefits of $7.5 million as a result of the increase in our workforce, which was partially offset by a decrease of $1.5 million in stock-based compensation.  Facilities-related expenses increased approximately $1.5 million primarily due to property taxes, rent and utilities for our Mt. Comfort, Indiana facility, which we commenced leasing in February 2010.  Materials and non-capitalized equipment increased $6.8 million as commercial production continued to ramp up and EV battery pack prototype sales increased.

We also present proceeds from our cost-sharing arrangements with federal government agencies as a reduction of research and development expenses.  Proceeds received under these cost-sharing arrangements were $3.0 million and $3.7 million for the years ended December 31, 2010 and 2009, respectively.

Grant proceeds recognized
Proceeds from government grants related to asset purchases are recorded as deferred grant proceeds and recognized as a reduction of operating expense over the periods during which depreciation on the assets is charged and in proportion to the amount of the depreciation charge.  We begin depreciating purchased assets on the date the assets are placed in service.  During the year ended December 31, 2010 we recognized approximately $288,000 in grant proceeds.

Depreciation and amortization expense
Depreciation expense, included in operating expenses, increased $1.0 million as a direct result of the increase in our property and equipment and is reflected in the consolidated statements of operations as follows (in thousands):

   
December 31,
   
Change
 
   
2010
   
2009
   
$
   
%
 
Depreciation expense:
                       
Cost of sales
  $ 3,745     $ 2,596     $ 1,149       44 %
Operating expenses
    3,983       2,948       1,035       35 %
Total depreciation expense
  $ 7,728     $ 5,544     $ 2,184       39 %
                                 
Amortization expense:
                               
Operating expenses
    2,102       2,133       (31 )     -1 %
                                 
Total depreciation and amortization
  $ 9,830     $ 7,677     $ 2,153       28 %

Interest expense
Interest expense represents a combination of cash and non-cash interest related to our deferred financing costs, borrowings with banks, capital leases and other debt instruments, as well as debt issuances costs.  The cash and non-cash components of interest expense are (in thousands):

   
Years Ended
             
   
December 31,
   
Change
 
   
2010
   
2009
   
$
   
%
 
Cash
  $ 2,807     $ 973     $ 1,834       188 %
Non-cash
    7,045       4,837       2,208       46 %
Total interest expense
  $ 9,852     $ 5,810     $ 4,042       70 %
 
 
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The increase in cash interest expense is due to a $26.9 million increase in short-term debt.  Non-cash interest expense related to the amortization of deferred financing costs and debt issuance costs associated with the fair value of equity securities issued in connection with debt financing arrangements and the beneficial conversion feature associated with our convertible line of credit totaled approximately $8.1 million for the year ended December 31, 2010.  Interest accrued under the convertible line of credit with Bzinfin of approximately $874,000 was converted into unregistered shares of Ener1 common stock during the year ended December 3,1 2010.
We have capitalized approximately $1.7 million in interest expense to construction in progress, a component of property and equipment.

Debt conversion expense
In 2010, we converted $18.4 million of principal and accrued interest under the convertible line of credit with Bzinfin into 5,398,785 unregistered shares of Ener1 common stock at an amended conversion price of $3.40 per share, resulting in debt conversion expense of $6.8 million.  In addition, as an inducement to convert, we issued to Bzinfin warrants to purchase up to approximately 2.3 million shares of Ener1 common stock, resulting in debt conversion expense of $5.9 million.  We also agreed to make a cash payment equal to the withholding taxes that Bzinfin must pay with respect to the total interest paid under the line of credit of approximately $527,000 which was recorded as debt conversion expense.

Gain on derivative instruments
The increase in gain on derivative instruments during the year ended December 31, 2010 is primarily related to the overall decline in the price of Ener1 common stock, which resulted in an increase in gain on derivative instruments of approximately $1.8 million.  This increase has been partially offset by the decrease in gain on derivative instruments of approximately $1.6 million resulting from the expiration of the dilution protection feature contained in certain free standing warrants that expired during the period ended March 31, 2009.

Gain on financial instruments
The increase in gain on financial instruments during year ended December 31, 2010 is due to the decline in the fair value of the Ener1 Put Option, which was granted in May 2010, as a result of the overall decline in the price of Ener1 common stock since the date of grant.
 
 
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Years Ended December 31, 2009 and 2008
The following information has been derived from our audited consolidated financial statements for the years ended December 31, 2009 and 2008.  We completed the acquisition of Ener1 Korea during the fourth quarter of 2008 and have included the results of their operations since November 1, 2008.

   
Years Ended
 
(in thousands, except per share amounts)
 
December 31,
   
Change
 
   
2009
   
2008
   
$
   
%
 
Net sales
  $ 34,800     $ 6,848     $ 27,952       408 %
Cost of sales
    30,732       4,661       26,071       559 %
Gross profit
    4,068       2,187       1,881       86 %
                                 
Operating expenses:
                               
General and administrative
    17,653       11,578       6,075       52 %
Research and development, net
    30,770       22,902       7,868       34 %
Depreciation and amortization
    5,081       1,612       3,469       215 %
Total operating expenses
    53,504       36,092       17,412       48 %
Loss from operations
    (49,436 )     (33,905 )     (15,531 )     46 %
                                 
Other income (expense):
                               
Interest expense
    (5,810 )     (21,778 )     15,968       -73 %
Gain (loss) on derivative instruments
    3,527       3,936       (409 )     -10 %
Foreign currency gain (loss)
    (211 )     (259 )     48       -19 %
Other
    444       669       (225 )     -34 %
Total other income (expense)
    (2,050 )     (17,432 )     15,382       -88 %
                                 
Loss before income taxes
    (51,486 )     (51,337 )     (149 )     0 %
Income tax expense (benefit )
    19       (184 )     203       -110 %
Net loss
    (51,505 )     (51,153 )     (352 )     1 %
Net income (loss) attributable to noncontrolling interests
    (501 )     1,307       (1,808 )     -138 %
Net loss attributable to Ener1, Inc.
  $ (51,004 )   $ (52,460 )   $ 1,456          

Net sales, Cost of sales and Gross Profit
Net sales increased due to the sale of prototype EV battery packs to our European customers and the acquisition of Ener1 Korea.   Ener1 Korea’s sales have decreased approximately 7% during 2009, assuming the acquisition was effective for accounting purposes on January 1, 2008, due to an overall decline in demand for batteries due to poor worldwide economic conditions and the impact of foreign currency fluctuations.  The average foreign currency exchange rate of the Korean Won for the year ended December 31, 2009 declined approximately 16% when compared to the same period in 2008.

Cost of sales increased due to the acquisition of Ener1 Korea and the costs increased at a higher rate than net sales as fixed costs of production, such as depreciation expense, are not reduced ratably with production volume.  Included in cost of sales is depreciation expense of approximately $2.6 million for the year ended December 31, 2009.

General and administrative expenses
General and administrative expense increased primarily due to the increase in salary and benefits of $3.4 million, of which $2.4 million is attributable to the acquisition of Ener1 Korea and $0.8 million is for incentive bonuses and stock based compensation.  Legal and professional fees increased $1.8 million, of which $1.2 million is for investor, government, media and public relations.  Travel and facilities related expenses increased $1.0 million, of which approximately 50% is due to the Ener1 Korea acquisition.

These increases were partially offset by a decrease in bad debt expense of $0.7 million due to the collection of previously reserved doubtful accounts.
 
 
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Research and development expenses
Research and development expenses increased primarily due to an increase in salaries and benefits of $6.2 million directly related to the increase in our workforce and $1.1 million for increases in incentive bonuses and stock based compensation.  Facilities related expenses increased approximately $1.0 million primarily due to rent and utilities for our Noblesville, Indiana facility and professional fees increased $0.7 million related to legal fees incurred for filing, maintaining and protection of our patents and technology.

These increases were partially offset by a decrease in materials and non-capitalized equipment of $2.0 million. Ener1 Korea comprises less than 1.0% of the research and development expenses.

We present proceeds from our cost sharing arrangements with federal government agencies as a reduction of research and development.  Proceeds received under these contracts were $3.7 million and $3.8 million for the years ended December 31, 2009 and 2008, respectively.

Depreciation and amortization expense
Depreciation expense, included in operating expenses, increased $1.9 million as a direct result of the increase in our property and equipment and is reflected in the consolidated statements of operations as follows (in thousands):

   
December 31,
   
Change
 
   
2009
   
2008
   
$
   
%
 
Depreciation expense:
                       
Cost of sales
  $ 2,596     $ 408     $ 2,188       536 %
Operating expenses
    2,948       1,044       1,904       182 %
Total depreciation expense
  $ 5,544     $ 1,452     $ 4,092       282 %
                                 
Amortization expense:
                               
Operating expenses
    2,133       568       1,565       276 %
                                 
Total depreciation and amortization
  $ 7,677     $ 2,020     $ 5,657       280 %

Amortization increased $1.6 million related to intangible assets capitalized in connection with our acquisitions during 2008.

Interest expense
Interest expense represents a combination of cash and non-cash interest related to our deferred financing costs, borrowings with banks, capital leases and other debt instruments as well as debt issuances costs.

The cash and non-cash components of interest expense are (in thousands):

   
Years Ended
             
   
December 31,
   
Change
 
   
2009
   
2008
   
$
   
%
 
Cash
  $ 973     $ 421     $ 552       131 %
Non-cash
    4,837       21,357       (16,520 )     -77 %
Total interest expense
  $ 5,810     $ 21,778     $ (15,968 )     -73 %

Of the total $4.8 million in non-cash interest expense for the year ended December 31, 2009, approximately $4.6 million or 96% represents the amortization of deferred financing costs and debt issuance costs associated with the fair value of warrants and the beneficial conversion feature associated with our borrowings pursuant to our convertible line of credit with Bzinfin.  The remaining estimated future straight-line amortization of these deferred financing costs and debt issuance costs is estimated to be $2.2 million during 2010.

The overall decrease in interest expense is primarily due to reduced principal and interest on convertible notes and debenture instruments that were converted into shares of Ener1 common stock during the first quarter of 2008.
 
 
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Gain on derivative instruments
Upon the adoption of new accounting standards, we concluded certain warrants containing a dilution protection feature and convertible bonds issued by Ener1 Korea should be treated as derivative instruments effective January 1, 2009, which resulted in a gain on derivative instruments of $3.5 million during the year ended December 31, 2009.  See Note 9, Fair Value of Derivative and Financial Instruments to the audited consolidated financial statements for additional detail.

Liquidity and Capital Resources

We raised $187.3 million from sales of equity and debt securities during the year ended December 31, 2010.  The Company had cash and cash equivalents of $60.3 million, restricted cash of $11 million and working capital of $62.8 million at December 31, 2010.

Cash Flow Summary

The following information has been derived from our audited consolidated financial statements for the years ended December 31, 2010, 2009 and 2008 and is presented in thousands.  We completed the acquisition of Ener1 Korea during the fourth quarter of 2008 and have included the results of their operations in our consolidated results since November 1, 2008.

Cash and cash equivalents increased by $46 million during the year ended December 31, 2010. The change in cash and cash equivalents is as follows (in thousands):

   
Years Ended
 
    
December 31,
 
   
2010
   
2009
   
2008
 
                   
Net loss
  $ (68,848 )   $ (51,505 )   $ (51,153 )
Non-cash items
    32,587       13,590       23,492  
Net change in working capital items
    (25,395 )     (2,771 )     3,540  
Operating activities
    (61,656 )     (40,686 )     (24,121 )
Investing activities
    (76,157 )     (28,318 )     (13,775 )
Financing activities
    183,928       72,236       24,112  
Effects of exchange rates
    (119 )     (147 )     187  
Net increase (decrease) in cash and cash equivalents
  $ 45,996     $ 3,085     $ (13,597 )
Cash and cash equivalents - beginning balance
    14,314       11,229       24,826  
Cash and cash equivalents - ending balance
  $ 60,310     $ 14,314     $ 11,229  

Operating Activities

Cash used in operating activities is primarily driven by our net loss, adjusted for non-cash items and changes in working capital.  Non-cash items consist primarily of debt conversion expense, depreciation and amortization, stock-based compensation, interest expense and accretion of debt discounts, which are partially offset by the gain on derivative and financial instruments.

Net cash used in operating activities increased $21 million during the year ended December 31, 2010, as compared to the same period in 2009 due primarily to the increase in our net loss of $17.3 million and the net change in working capital items of approximately $22.6 million, partially offset by the increase in non-cash items of $19 million.  The net change in working capital items is primarily due to an increase in accounts receivable, inventory and accounts payable of approximately $16.5 million, which is directly related to the commencement of commercial production in May 2010 and the increase in contracts in process of $11.3 million.  These increases in working capital items have been partially offset by the net change in current assets and current liabilities of $7 million.  Non-cash items increased primarily due to the debt conversion expense associated with the conversion of our convertible line of credit at an amended conversion price.
 
 
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Net cash used in operating activities increased $16.6 million during the year ended December 31, 2009, as compared to the same period in 2008 primarily due to the net change in working capital items of approximately $6.3 million and the decrease in non-cash items of $9.9 million.  The net change in working capital items is primarily due to the decrease in accounts payable and accrued expenses partially offset by the decrease in inventories and accounts receivable.

Investing activities

Net cash used in investing activities for the year ended December 31, 2010 was $76.2 million, an increase of $47.8 million, compared to $28.3 million for the same period in 2009.  This increase is comprised primarily of a $25.4 million increase in net cash used for purchases of property and equipment as we continued to execute our capital expansion plan.  In addition, we advanced $11.4 million to Think Holdings under various loan agreements and the Revolving LOC Agreement and our investment in Think Holdings increased $4.3 million during the year ended December 31, 2010 due to the purchase of additional equity securities from Think Holdings.  In connection with the issuance of our senior unsecured notes, we deposited approximately $20.9 million, representing the first two installment payments due under the senior unsecured notes, in a restricted cash account to secure payment of which $6.4 million remains restricted at December 31, 2010.

Net cash used in investing activities for the year ended December 31, 2009 was $28.3 million, compared to $13.8 million for the year ended December 31, 2008, an increase of $14.5 million.  The increase is primarily due to the investment in Think Holdings of $13.3 million during 2009.

Financing activities

Net cash provided by financing activities for the year ended December 31, 2010 was $183.9 million, an increase of $111.7 million, compared to $72.2 million for the same period in 2009.  This increase in cash provided by financing activities is comprised of an increase in proceeds from the sales of Ener1 common stock of $36.4 million, the increase in proceeds from the issuance of long term debt of $86.6 million and an increase in proceeds from related party and bank borrowings of $2.7 million during the year ended December 31, 2010.  These proceeds have been partially offset by the increase in repayments of borrowings and capital leases of $14.1 million.

Net cash provided by financing activities for the year ended December 31, 2009 was $72.2 million, compared to $24.1 million for the same period ended 2008.  The increase is due to proceeds from sales of Ener1 common stock of $58.4 million and an increase in proceeds from borrowings of $16.2 million during the year ended December 31, 2009.  These increases have been partially offset by a decrease in proceeds from the exercise of options and warrants of $30.3 million during the same period.

Sale of Stock
In May 2009, we entered into an open market sale agreement (2009 Open Market Sale Agreement) under which Jefferies & Company, Inc. (Jefferies) sold on our behalf, from time to time through September 2009, as we instructed a total of $40 million in shares of Ener1 common stock.  We raised net proceeds of $38.4 million from such sales.

In December 2009, we sold $20.0 million in shares of Ener1 common stock to Itochu Corporation, a Japanese corporation (Itochu).

In January 2010, we entered into another open market sale agreement (2010 Open Market Sale Agreement) under which Jefferies agreed to sell, on our behalf, from time to time as we instruct, up to $60.0 million in shares of Ener1 common stock.  Sales under this agreement began on February 3, 2010 and through February 28, 2011 we raised net proceeds totaling $11.4 million.

During 2010, Ener1 Group purchased 25,427,598 shares of Ener1 common stock and warrants to purchase shares of Ener1 common stock for an aggregate purchase price $89.1 million, of which we received $87.2 million after deducting legal fees and expenses of approximately $1.9 million.
 
 
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Senior Unsecured Notes
In September 2010, we sold $55 million of senior unsecured notes (the Notes), 960,926 shares of Ener1 common stock (the Common Stock) and warrants to purchase up to 2,882,776 shares of Ener1 common stock (the Warrants) at an initial exercise price of $3.82 per share for aggregate consideration of $55.0 million (Purchase Agreement I).

In December 2010, we sold an additional $25 million of Notes, 339,783 shares of Common Stock and 1,019,353 Warrants at an initial exercise price of $4.68 for aggregate consideration of $25 million (Purchase Agreement II).

We may pay amounts due on the Notes in cash, or, if certain conditions are met, in shares of Ener1 common stock or a combination of cash and shares of Ener1 common stock all of which will result in a premium payment above the face value plus stated interest.  The stated interest rate on the Notes is 8.25%, but the payments for principal and interest due on any payment date will be computed to give effect to recent share prices, valuing the shares of our common stock at 91.75% of a weighted average share price over a pricing period ending shortly before the payment date.

The principal of the Notes is payable in ten equal quarterly installments.  The first installment payment for Purchase Agreement I was made, in cash, on January 3, 2011.  The second installment for Purchase Agreement I, which will be paid in shares of our common stock, and the first installment payment for Purchase Agreement II, which will be in cash, are scheduled for April 1, 2011.

We are required to register the resale under the Securities Act of the maximum number of shares of Ener1 common stock we may elect to issue in payment of amounts due under the Notes.  We deposited approximately $20.9 million, representing the first two installment payments due on the Notes, in restricted cash accounts to secure payment until the registration statements covering the resale of the shares of Ener1 common stock are declared effective.  On December 31, 2010, approximately $14.5 million of restricted cash was released in connection with the effectiveness of the registration statement registering the resale of common stock we may elect to issue to repay obligations under the Notes issued under Purchase Agreement I.

On February 11, 2011, we filed a registration statement to register the resale of shares we may elect to issue to repay obligations under Notes issued under Purchase Agreement II.  The remaining $6.4 million held in restricted accounts will be released when this registration statement is declared effective.

Financing costs associated with the sale of the Notes totaling approximately $3.4 million have been recorded as deferred financing costs and are amortized to interest expense over the term of the Notes.  Financing costs of approximately $505,000 were expensed during the year ended December 31, 2010 and the remaining $2.9 million will be expensed as follows: $1.9 million in 2011, $0.9 million in 2012 and $0.1 million in 2013.

6.0 % Senior Convertible Notes
During the year ended December 31, 2010, we sold $10 million in senior convertible notes (the Convertible Notes) to Itochu.  The Convertible Notes bear interest at 6% per annum and the interest is payable in arrears on February 26th and August 26th of each year, which commenced on February 26, 2011.  Itochu has the right to convert all or any part of the outstanding principal and unpaid interest into shares of Ener1 common stock at a conversion price of $3.612 per share.  The Convertible Notes mature on August 27, 2015.

Credit Facility
In March 2010, we entered into a Credit Agreement with Credit Suisse AG, Cayman Islands Branch, as lender and borrowed $15 million for general corporate purposes (the Credit Facility), which was repaid on June 23, 2010.  Interest was payable monthly at the London Interbank Offering Rate (LIBOR) plus 5% per annum.  Commitment fees and legal fees associated with closing the Credit Facility totaled approximately $273,000.
 
 
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Convertible Line of Credit
In December 2008, we entered into a $30 million line of credit agreement (the LOC Agreement) with Ener1 Group for a period of 18 months or until we complete a public equity offering, whichever occurs earlier. All amounts borrowed under the LOC Agreement bear interest at 8% per annum.  We were obligated to issue to Ener1 Group warrants to purchase shares of Ener1 common stock each time an advance is made under the LOC Agreement equal to the amount of the advance divided by $20, with an exercise price equal to $8.25 per share.  All warrants are immediately exercisable and expire two years after issuance.

In August 2009, Ener1 Group entered into a novation and assignment agreement with Bzinfin, under which Ener1 Group assigned to Bzinfin all of its rights and obligations under the LOC Agreement.  Simultaneously, Ener1 entered into an amended and restated line of credit agreement (the A&R LOC Agreement) providing Bzinfin, among other rights, the right to convert the first $8 million of principal and related unpaid interest into shares of Ener1 common stock at an exercise price of $5.00 per share and any remaining principal and related unpaid interest into shares of Ener1 common stock at an exercise price of $6.00 per share.

In August 2009, we classified a $1.5 million working capital advance, received from Bzinfin in May 2009, under the A&R LOC Agreement and in February 2010, we borrowed an additional $5 million under the A&R LOC Agreement.

We did not repay the amount outstanding under the A&R LOC Agreement when it matured on July 1, 2010, as we were in negotiations at such time to amend the conversion terms.  On August 3, 2010, we agreed with Bzinfin that all the outstanding principal and accrued interest of approximately $18.4 million under the A&R LOC Agreement would be converted into 5,398,785 unregistered shares of Ener1 common stock at an amended conversion price of $3.40 per share, resulting in $6.8 million in debt conversion expense.

In addition, as an inducement to agree to the amended conversion terms, Ener1 issued to Bzinfin warrants to purchase approximately 2.3 million shares of Ener1 common stock, resulting in $5.9 million in additional debt conversion.  Ener1 agreed to make a cash payment on behalf of Bzinfin equal to the withholding taxes that Bzinfin must pay with respect to the total interest paid under the A&R LOC Agreement from the date of inception to the date of conversion, of approximately $527,000, which was recorded as debt conversion expense.

Management’s Assessment of Liquidity

We believe we have access to sufficient capital to continue our planned operations for the 12 months following the balance sheet date of December 31, 2010.

We have historically financed, and expect to continue to finance, our operations through public and private offerings of debt and equity securities.  We raised $187.3 million through sales of equity and debt securities during 2010.  Our ability to access the public debt and equity markets and the related cost of these activities may be affected by market conditions.  Since 2008, the global financial markets have experienced significant price and volume fluctuations.  Volatility in debt and equity markets may adversely affect our ability to procure future financing.  As described in our Risk Factors in Item 1A of this Annual Report, we may become the majority owner of Think Holdings upon the occurrence of certain events which could materially adversely affect our ability to raise capital.

Under our capital expenditure plan to increase our cell and battery pack production capacity, we intend to spend a total of $75.9 million at our Indiana facilities, of which $60.1 million has been spent through December 31, 2010. These capital expenditure plans are aimed at increasing our cell and battery pack production capacity to reach capacity levels in 2011 that would enable us to produce the equivalent of 900 EV packs per month.  During the year ended December 31, 2010, we invested approximately $12 million in our Ener1 Korea facility.  In January 2010, we began utilizing the funds available to us under the Automotive Battery Manufacturing Initiative grant awarded to us by the United Stated Department of Energy (DOE) in August 2009 to execute our capital expansion strategy for our Indiana facility.  Through February 28, 2011, we have invested $63 million in manufacturing equipment and capacity expansion for our production facilities in Indiana and $31.9 million of these costs have been funded under the DOE grant.
 
 
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We expect to receive a total of $5.3 million from our active cost-sharing arrangements with the DOE and the USABC through September 2012, which will reduce our future research and development expenses.

We have also applied to the DOE for a long-term low interest loan of approximately $290 million under the Advanced Technology Vehicle Manufacturing Incentives Program (ATVM).  We originally submitted our application on December 30, 2008, and our application was determined to be “substantially complete” on January 22, 2009.  We are currently negotiating a term sheet in connection with this loan.  If we receive an ATVM loan, we would anticipate using the proceeds to further expand our battery production capacity in 2013 and 2014.  In addition, if we receive the ATVM loan, the loan program will require us to match every eighty cents of loan proceeds with twenty cents of our own investment. Indiana state and local government authorities have also provided us approximately $80 million of grants and tax offsets to assist in our expansion plans. With proceeds under the ATVM loan, if approved and received, and combined with the funds available under the ABMI program and the Indiana state  and local incentives, we plan to increase our domestic production capacity to an estimated manufacturing capacity of 3.12GWh, or 120,000 equivalent EV battery packs per year, in the 2015 timeframe.

Contractual Obligations

A summary of payments due for our contractual obligations and commitments, as of December 31, 2010, is presented below (in thousands):

                                 
After
       
Contractual cash obligations
 
2011
   
2012
   
2013
   
2014
   
2015
   
2015
   
Total
 
                                           
Senior unsecured notes
  $ 21,470     $ 26,751     $ 17,982     $ -     $ -     $ -     $ 66,203  
Senior convertible notes
    192       -       -       -       10,000       -       10,192  
Convertible bonds (1)
    -       -       430       -       -       -       430  
Capital lease obligations
    3,103       393       34       8       3       -       3,541  
Bank loans (2)
    17,635       -       -       -       -       -       17,635  
Operating lease obligations
    2,113       1,251       739       568       582       695       5,948  
Capital expenditures (3)
    7,586       -       -       -       -       -       7,586  
Inventory purchase commitments
    8,393       -       -       -       -       -       8,393  
Other purchase commitments (4)
    8,861       -       -       -       -       -       8,861  
Totals
  $ 69,353     $ 28,395     $ 19,185     $ 576     $ 10,585     $ 695     $ 128,789  
 

(1)
Includes principal payments and expected interest payments based on the terms of the obligations.
(2)
Certain bank deposits, land, buildings and equipment are pledged as collateral to guarantee payment.
(3)
Approximately $3.6 million will qualify for reimbursement under the ABMI program and proceeds under the ATVM loan, if awarded and received.
(4)
Includes approximately $6.8 million of purchase commitments associated with our contract to provide lithium-ion battery units to power grid energry storage systems.

Off-Balance Sheet Financing

We do not have any significant relationships with entities often referred to as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
 
 
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Application of Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).  Preparing financial statements requires our management to make estimates and judgments regarding uncertainties that may affect the reported amounts presented and disclosed in our consolidated financial statements.  These estimates and judgments are affected by management’s application of accounting policies.  On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition and related allowances, derivatives and financial instruments, inventories, impairments of long-lived assets including intangible assets and goodwill, income taxes, including the valuation allowance for deferred tax assets, product warranty reserves, contingencies and litigation, as well as stock-based payments, warrants, valuation of beneficial conversion feature, if any, on convertible securities, and other financing matters.

We base these estimates on historical experience and various other factors that are believed to be reasonable, the results of which form the basis for making judgments under the circumstances.  Due to the inherent uncertainty involved in making these estimates, actual results reported may differ from these estimates under different situations or conditions.

Our critical accounting policies are described in the notes to our consolidated financial statements.  This summary of critical accounting policies is presented to assist in understanding our consolidated financial statements and the major estimates and judgments used.  Management believes the following are its most critical accounting policies because they require more significant judgments and estimates in preparation of our consolidated financial statements.

Impairment of Long-Lived Assets
Our long-lived assets, including property and equipment as well as intangible assets are reviewed for possible impairment whenever events or circumstances indicate the carrying value of the asset may not be recoverable.  We evaluate the recoverability of the carrying value of our long-lived assets based on estimated undiscounted cash flows to be generated from such assets.  If the undiscounted cash flow indicates impairment occurred, then the carrying value of the assets evaluated is written down to the estimated fair value of those assets.

All of our long-lived assets are subject to depreciation or amortization.  No impairment of long-lived assets has been identified during any of the periods presented since indicators of impairment were not present.

Impairment of Goodwill
Goodwill represents the difference between the purchase price paid for an acquisition and the fair value of the net assets acquired in a business combination.  Goodwill is not amortized, but is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) annually, unless an event occurs that would cause us to believe the value is impaired at an interim date.

We perform a two-step process impairment test. In the first step, we compare the fair value of the reporting unit to its carrying value, including goodwill. We generally determine the fair value of our reporting units using the income approach methodology of valuation that includes the discounted cash flow method.  This valuation method requires a projection of revenue, operating expenses, and capital expenditures over a five to ten year period.  In addition, management estimates the weighted average cost of capital to determine an appropriate discount rate.  If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of the reporting unit’s goodwill.  If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the company records an impairment loss equal to the difference.

Our annual impairment test as of October 1, 2010, indicated the fair value of each operating segment exceeded the carrying value, including goodwill.  As such, the Company’s goodwill is not subject to impairment as of October 1, 2010.  We continue to evaluate whether events and circumstances have occurred that indicate the balance of goodwill may not be recoverable.  Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses as well as other factors.  A significant change in these estimates could result in an impairment of goodwill.
 
 
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Revenue Recognition
Revenue is recognized when persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title and risk of loss are transferred, collectability is reasonably assured, product returns are reasonably estimable and there are no remaining significant obligations or customer acceptance requirements.  When a sale arrangement contains multiple elements, we evaluate the agreement to determine if separate units of accounting exist within the arrangement.  If separate units of accounting exist within the arrangement, we allocate revenue to each element based on the relative fair value of each of the elements.

Product Revenues
Revenue from product sales is recognized when title and risk of loss have passed to the customer, which is typically upon shipment, with the exception of revenue from long-term construction contracts which is recognized using the percentage of completion method.  However, battery related sales by Ener1 Korea are recognized at the delivery point or the receipt point of bill of lading, depending the whether the sale is domestic or export.
 
We began offering limited warranties on battery packs when commercial production and sales of battery packs commenced during 2010.  The estimated cost of the limited warranty is reflected as a component of cost of sales in the period the revenue is recognized.  The warranty period ends on the earlier of the passage of a specified period of time or the occurrence of a specified number of charge and discharge cycles of the battery packs.  The warranty provides that the battery packs will conform to specifications and be free from defects in design, materials and workmanship.

Ener1 Korea offers customers a right of return and reserves for such returns are estimated using historical information.  Ener1 Korea does not provide discounts, rebates, product guarantees or warranties.

Research and Development Services
Proceeds from cost-sharing arrangements with federal government agencies and grants from foreign government agencies are generally recognized as a reduction of research and development expenses.  Proceeds from cost-sharing arrangements with commercial entities are generally recognized using the percentage of completion method.  To date, these cost-sharing arrangements with commercial entities have been for the development and sale of a customer specified prototype and the costs incurred are classified as research and development expenses.

Stock Based Compensation
Awards under our stock based compensation programs include stock options, time-vested restricted stock units and performance-vested restricted stock units.  We charge the estimated fair value of the awards to expense over the requisite service period, which is generally the vesting period.

We make certain assumptions in order to value and expense our stock based compensation.  The fair value of stock options is estimated as of the date of grant using a Black-Scholes option pricing model.  The estimated fair values of the stock options, including the effect of estimated forfeitures are expensed over the vesting period of the option, usually ranging from three to five years.  The fair value of time-vested restricted stock units and, performance-vested restricted stock units is based on the market value of our stock on the date of grant.  Compensation expense for restricted stock units and restricted stock awards is recognized over the applicable service period, adjusted for the effect of estimated forfeitures.

Income Taxes
The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax basis.  We also recognize future tax benefits associated with tax loss and credit carryforwards as deferred tax assets.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled.

We evaluate the realizability of our deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.  Realization of the future tax benefit related to the deferred tax asset is dependent on many factors, including our ability to generate taxable income within the period during which the temporary differences reverse, the outlook for the economic environment in which we operate and the overall future industry outlook.
 
 
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Derivative and Financial Instruments
We record the fair value of derivative and financial instruments in our consolidated balance sheets and reflect the changes in fair value as gain or loss on derivative and financial instruments.  Our derivative instruments are not designated as hedging instruments.

We issued freestanding warrants in connection with capital raising activities during 2004 and 2005 that contained dilution protection features requiring exercise price adjustments if we issued securities deemed to be dilutive to the warrants (2004 Warrants and 2005 Warrants, respectively). Prior to January 1, 2009, these warrants were classified in equity.  After evaluating the application of changes in US GAAP, the 2004 Warrants and 2005 Warrants were no longer deemed to be indexed to Ener1’s common stock and on January 1, 2009 were reclassified as a derivative instrument.  During 2010, in connection with capital raising activities we issued freestanding warrants containing dilution protection features requiring exercise price adjustments if we issue securities deemed to be dilutive to the warrants.  Any time we issue securities that are deemed to be dilutive to the warrants containing dilution protection features, the number of shares of Ener1 stock required to be issued upon the exercise of these warrants will increase.

In connection with our investment in Think Holdings, Ener1 agreed that certain investors that purchased Think Holdings’ Series B Stock could require Ener1 to issue shares of Ener1 common stock to the investors in exchange for their shares of Series B Stock and half of their warrants to purchase Series B Stock (the Ener1 Put Option).  As the price of Ener1 common stock fluctuates, the number of shares issuable upon exercise of the Ener1 Put Option fluctuates.

In accordance with applicable accounting guidance, the conversion feature of the convertible bonds issued by Ener1 Korea was bifurcated and recorded as a derivative instrument on January 1, 2009.   As foreign currency rates fluctuate, the number of shares of Ener1 Korea stock to be issued upon conversion fluctuates.

Recently Adopted Accounting Standards

Effective January 1, 2009, we adopted new accounting guidance for determining whether an instrument or an embedded feature is indexed to our own stock.  The new guidance has affected the accounting for (i) certain freestanding warrants that contain dilution protection features and (ii) the convertible bonds issued by Ener1 Korea with a strike price denominated in a foreign currency.

We adopted new accounting guidance on disclosures about derivative instruments and hedging activities on January 1, 2009.  The new guidance impacts disclosures only and requires additional qualitative and quantitative information on the use of derivatives and their impact on an entity’s financial statements.

On January 1, 2009, we adopted new accounting guidance on business combinations.  The new guidance requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development and either amortize it over the life of the product, or write it off if the project is abandoned or impaired.  The adoption of this guidance did not have a material impact on our financial statements.

On January 1, 2009, we adopted new accounting guidance on fair value measurements.  This new guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

On January 1, 2009, we adopted new accounting guidance that requires the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the debt and equity components in a manner that reflects the issuer’s non-convertible debt borrowing rate.  The adoption of this standard did not have a material impact on the financial statements. We continue to examine our convertible debt instruments for applicability under this guidance.

In June 2009, we adopted new guidance which requires disclosures about fair value of financial instruments in interim as well as in annual financial statements.
 
 
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In September 2009, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (the Codification), as the single source of authoritative nongovernmental Generally Accepted Accounting Principles, in the United States of America.  The adoption of this standard did not have a material impact on our financial statements.

In January 2010, we adopted new guidance which amends previously issued guidance for the consolidation of variable interest entities to require an enterprise to determine whether its variable interest gives it a controlling financial interest in a variable interest entity.  The adoption of this standard did not have a material impact on our financial statements.

In January 2010, we adopted new guidance which amends previously issued guidance for multiple element revenue arrangements. The guidance allows us to account for revenue for different deliverables separately as opposed to part of a combined unit when those deliverables are provided at different times. Specifically, this guidance addresses how to separate deliverables and simplifies the process of allocating revenue to the different deliverables when more than one deliverable exists. The adoption of this standard did not have a material impact on our financial statements.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

We have international operations that expose us to foreign currency exchange risks.

We conduct a portion of our business in foreign countries and are subject to transactional currency exposures that arise when our foreign subsidiaries enter into transactions denominated in currencies other than their own local currency. We do not have any long term supply agreements with suppliers that are denominated in a foreign currency as of December 31, 2010, but we are exposed to currency exchange risk when purchases are denominated in a foreign currency.  Currently, the majority of our principal suppliers are based in China, Japan and Korea and we may not be able to negotiate payment terms that are denominated in United States Dollars.  As a result, any future decline in the United States Dollar against the Chinese Yuan, the Japanese Yen or the Korean Won will increase the amount we may have to pay to our suppliers and could have a material impact on our financial condition, results of operations and cash flows.

For the year ended December 31, 2010, revenue denominated in foreign currencies was approximately 13.1% of total revenue and this revenue would have increased or decreased by approximately $1.0 million if the United States dollar exchange rate used strengthened or weakened, respectively, by 10%.  In addition, we have assets and liabilities denominated in foreign currencies.  A 10% strengthening or weakening of the United States dollar exchange rate against all currencies with which we have exposure at December 31, 2010 would have resulted in an increase or decrease, respectively, of approximately $6.3 million in the carrying amount of net assets.

In addition, we are exposed to fluctuations in foreign exchange rates from translating the results of our Korean and Japanese operations to United States Dollars.  At December 31, 2010 and 2009, the translation adjustment recognized in accumulated comprehensive income was $6.2 million and $4.9 million, respectively.

To date, we have not entered into any derivative financial instruments for purposes of reducing our exposure to adverse fluctuations in foreign currency exchange rates that are designated as hedges.  We are not exposed to market risk from changes in interest rates due to the fixed nature of interest rates associated with our debt instruments and the short-term nature of our debt instruments that have variable interest rates.

We have approximately $51.8 million in goodwill as of December 31, 2010.  As of December 31, 2010, we believe our goodwill is not impaired, however, changes in the economy, the industries in which we operate and our own relative performance could change the assumptions used to evaluate goodwill.  In the event that we determine that goodwill has been impaired, we would recognize an impairment charge equal to the amount by which the carrying amount of the goodwill exceeds the implied fair value.
 
 
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Item 8.
Financial Statements and Supplementary Data

Financial Statements
 
Page
Report of Independent Registered Public Accounting Firm
58
Report of Independent Registered Public Accounting Firm
59
Consolidated Balance Sheets as of December 31, 2010 and 2009
60
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
61
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income for the years ended December 31, 2008, 2009 and 2010
62
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
63
Notes to Consolidated Financial Statements
64
Selected Quarterly Financial Data (Unaudited) for the years ended December 31, 2010 and 2009
104

 
 
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Report of Independent Registered Public Accounting Firm

To Board of Directors and Stockholders of Ener1, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Ener1, Inc. and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in "Management's Report on Internal Control Over Financial Reporting" appearing under Item 9A.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audit.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it determines whether an instrument is indexed to the Company's own stock in 2009.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 10, 2011
 
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Ener1, Inc.
New York, New York

We have audited the accompanying consolidated statements of operations, stockholders' equity (deficit) and cash flows of Ener1, Inc. (the "Company") for the year ended December 31, 2008.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of its operations and its cash flow for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas

March 12, 2009, except for Notes 10, 14, 16 and 17 which are as of January 19, 2010
 
 
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ENER1, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 60,310     $ 14,314  
Restricted cash
    10,961       3,668  
Accounts receivable, net of allowance of $444 and $865
    23,882       6,350  
Grant receivable
    2,038       -  
Loan receivable
    14,048       -  
Inventories, net of provision for obsolescence of $932 and $1,296
    23,612       10,415  
Contracts in process
    11,250       -  
Prepaid expenses and other current assets
    1,328       2,020  
Total current assets
    147,429       36,767  
                 
Deferred financing costs, net of amortization of $3,212 and $2,393
    2,867       268  
Property and equipment, net of accumulated depreciation of $15,589 and $8,340
    123,503       52,903  
Intangible assets, net of accumulated amortization of $4,868 and $2,736
    11,153       13,230  
Investment in unconsolidated entity
    58,625       19,177  
Goodwill
    51,845       51,019  
Other
    1,122       1,043  
Total assets
  $ 396,544     $ 174,407  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities
               
Accounts payable and accrued expenses
  $ 41,925     $ 14,268  
Deferred grant proceeds, current portion
    552       -  
Income taxes payable
    337       329  
Convertible line of credit and accrued interest due to related party, net
    -       10,516  
Current portion of capital leases and other debt obligations
    41,775       15,373  
Total current liabilities
    84,589       40,486  
                 
Deferred grant proceeds, less current portion
    31,169       -  
Derivative and financial instruments
    15,453       6,871  
Long-term debt
    55,992       7,368  
Other long-term liabilities
    2,049       1,281  
Deferred income tax liabilities
    216       402  
Total liabilities
    189,468       56,408  
                 
Commitments and contingencies
               
                 
Stockholders' equity
               
Common stock, $0.01 par value, 300,000,000 shares authorized, 163,769,700 and 124,375,196 issued and outstanding
    1,639       1,245  
Paid in capital
    607,745       451,592  
Accumulated other comprehensive income
    6,231       4,860  
Accumulated deficit
    (410,306 )     (341,505 )
Total Ener1, Inc. stockholders' equity
    205,309       116,192  
Noncontrolling interests
    1,767       1,807  
Total stockholders' equity
    207,076       117,999  
Total liabilities and stockholders' equity
  $ 396,544     $ 174,407  

The accompanying notes are an integral part of the Consolidated Financial Statements.

 
 
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ENER1, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

   
December 31,
 
   
2010
   
2009
   
2008
 
Net sales
  $ 77,406     $ 34,800     $ 6,848  
Cost of sales
    63,539       30,732       4,661  
Gross profit
    13,867       4,068       2,187