10-Q 1 v221683_10q.htm Unassociated Document
  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

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

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 No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 ¨ No¨

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 ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).             Yes ¨ No R
 
APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding as of April 29, 2011
Common Stock, par value $0.01 per share
169,092,179

 
 

 
 
ENER1, INC.
 
Form 10-Q for the Quarter Ended March 31, 2011

INDEX
 
   
Page
     
PART I - FINANCIAL INFORMATION
 
     
Item 1.
Consolidated Financial Statements (Unaudited)
 
     
 
Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
2
     
 
Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010
3
     
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three months ended March 31, 2011 and 2010
4
     
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010
5
     
 
Notes to Unaudited Consolidated Financial Statements
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
32
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
     
Item 4.
Controls and Procedures
42
     
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
43
     
Item 1A.
Risk Factors
43
     
Item 6.
Exhibits
44
     
Signatures
 
45
 
 
 

 

PART I - FINANCIAL INFORMATION
 
Item 1.  Consolidated Financial Statements.
ENER1, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 19,403     $ 60,310  
Restricted cash
    11,678       10,961  
Accounts receivable, net of allowance of $477 and $444
    29,423       23,882  
Grant proceeds receivable
    936       2,038  
Loans receivable
    18,179       14,048  
Inventories, net of provision for obsolescence of $1,105 and $932
    27,344       23,612  
Contracts in process
    19,705       11,250  
Prepaid expenses and other current assets
    10,719       1,328  
Total current assets
    137,387       147,429  
                 
Deferred financing costs, net of amortization of $570 and $3,212
    2,297       2,867  
Property and equipment, net of accumulated depreciation of $18,292 and $15,589
    125,626       123,503  
Intangible assets, net of accumulated amortization of $5,333 and $4,868
    10,751       11,153  
Investment in unconsolidated entity
    -       58,625  
Goodwill
    52,807       51,845  
Other
    1,199       1,122  
Total assets
  $ 330,067     $ 396,544  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities
               
Accounts payable and accrued expenses
  $ 34,360     $ 41,925  
Deferred grant proceeds, current portion
    690       552  
Income taxes payable
    179       337  
Current portion of capital leases and other debt obligations
    47,061       41,775  
Total current liabilities
    82,290       84,589  
                 
Deferred grant proceeds, less current portion
    32,157       31,169  
Derivative and financial instruments
    25,054       15,453  
Long-term debt
    48,928       55,992  
Other long-term liabilities
    2,611       2,049  
Deferred income tax liabilities
    207       216  
Total liabilities
    191,247       189,468  
                 
Commitments and contingencies
               
                 
Stockholders' equity
               
Common stock, $0.01 par value, 300,000,000 shares authorized, 168,397,444 and 163,769,700 issued and outstanding
    1,685       1,639  
Paid in capital
    622,365       607,745  
Accumulated other comprehensive income
    7,967       6,231  
Accumulated deficit
    (495,024 )     (410,306 )
Total Ener1, Inc. stockholders' equity
    136,993       205,309  
Noncontrolling interests
    1,827       1,767  
Total stockholders' equity
    138,820       207,076  
Total liabilities and stockholders' equity
  $ 330,067     $ 396,544  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Net sales
  $ 23,084     $ 10,975  
Cost of sales
    17,619       9,828  
Gross profit
    5,465       1,147  
                 
Operating expenses:
               
General and administrative
    8,014       5,229  
Research and development, net
    8,536       9,866  
Grant proceeds recognized
    (173 )     (28 )
Depreciation and amortization
    1,565       1,349  
Impairment loss
    59,433       -  
Total operating expenses
    77,375       16,416  
                 
Loss from operations
    (71,910 )     (15,269 )
                 
Other income (expense)
    (12,716 )     (178 )
                 
Loss before income taxes
    (84,626 )     (15,447 )
Income tax expense
    82       16  
                 
Net loss
    (84,708 )     (15,463 )
Net income (loss) attributable to noncontrolling interests
    10       (126 )
                 
Net loss attributable to Ener1, Inc.
  $ (84,718 )   $ (15,337 )
                 
Net loss per share attributable to Ener1, Inc.:
               
Basic
  $ (0.51 )   $ (0.12 )
                 
Diluted
  $ (0.51 )   $ (0.13 )
                 
Weighted average shares outstanding
               
Basic
    165,203       124,904  
                 
Diluted
    165,203       124,968  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 
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ENER1, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands)
 
   
Common
Stock
   
Paid in
Capital
   
Accumulated
Other
Comprehensive
Income
   
Accumulated
Deficit
   
Noncontrolling
Interests
   
Total
Stockholders'
Equity
 
Balance at December 31, 2009
  $ 1,245     $ 451,592     $ 4,860     $ (341,505 )   $ 1,807     $ 117,999  
                                                 
Comprehensive loss:
                                               
Net loss
    -       -       -       (15,337 )     ( 126 )     (15,463 )
Translation adjustment
    -       -       1,549       -       20       1,569  
Total comprehensive loss
                                    ( 106 )     (13,894 )
Shares sold for cash, net of costs
    10       4,382       -       -       -       4,392  
Stock option and warrant exercises
    1       38       -       -       -       39  
Reduction in derivative liability
    -       297       -       -       -       297  
Warrants issued to related party as borrowing fees under a line of credit agreement
    -       275       -       -       -       275  
Stock-based compensation expense
    -       1,013       -       -       -       1,013  
Balance at March 31, 2010
  $ 1,256     $ 457,597     $ 6,409     $ (356,842 )   $ 1,701     $ 110,121  
 
                
Accumulated
                   
               
Other
               
Total
 
   
Common
   
Paid in
   
Comprehensive
   
Accumulated
   
Noncontrolling
   
Stockholders'
 
   
Stock
   
Capital
   
Income
   
Deficit
   
Interests
   
Equity
 
                                     
Balance at December 31, 2010
  $ 1,639     $ 607,745     $ 6,231     $ (410,306 )   $ 1,767     $ 207,076  
                                                 
Comprehensive loss:
                                               
Net loss
    -       -       -       (84,718 )     10       (84,708 )
Translation adjustment
    -       -       1,736       -       50       1,786  
Total comprehensive loss
                                    60       (82,922 )
Shares sold for cash, net of costs
    26       6,779       -       -       -       6,805  
Shares issued in advance for debt repayment
    19       6,882       -       -       -       6,901  
Restricted stock, option and warrant exercises
    1       184       -       -       -       185  
Stock-based compensation expense
    -       775       -       -       -       775  
Balance at March 31, 2011
  $ 1,685     $ 622,365     $ 7,967     $ (495,024 )   $ 1,827     $ 138,820  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 
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ENER1, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Operating activities:
           
Net loss
  $ (84,708 )   $ (15,463 )
Adjustments to reconcile net loss to cash used in operating activities:
               
Loss (gain) on derivative and financial instruments
    8,793       (1,525 )
Accretion of discounts on debt
    2,379       850  
Interest expense related to financing costs
    2,277       536  
Depreciation and amortization
    2,847       2,167  
Grant proceeds recognized
    (173 )     (28 )
Impairment loss
    59,433       -  
Stock-based compensation expense
    775       1,013  
Other non-cash changes
    329       863  
Changes in certain operating assets and liabilities:
               
Accounts receivable
    (3,918 )     (2,004 )
Grant receivable related to operating expenses
    1,101       (306 )
Inventory
    (3,412 )     (5,401 )
Contracts in process
    (9,502 )     -  
Accounts payable and accrued expenses
    (8,136 )     11,608  
Changes in current assets, liabilities and other, net
    (2,376 )     (1,203 )
Net cash used in operating activities
    (34,291 )     (8,893 )
                 
Investing activities:
               
Capital expenditures and equipment deposits
    (3,593 )     (16,155 )
Grant proceeds received related to capital expenditures
    1,298       6,469  
Investment in unconsolidated entity
    -       (5,752 )
Loans and advances to unconsolidated entity
    (3,800 )     -  
Restricted cash
    (579 )     (747 )
Other
    7       36  
Net cash used in investing activities
    (6,667 )     (16,149 )
                 
Financing activities:
               
Proceeds from sale of stock, net
    6,805       4,392  
Proceeds from credit facility and bank loans
    1,590       10,573  
Proceeds from related party borrowings
    -       5,000  
Repayment of senior unsecured notes
    (6,967 )     -  
Repayment of credit facility, bank loans and capital leases
    (1,206 )     (1,621 )
Other
    185       39  
Net cash provided by financing activities
    407       18,383  
                 
Effect of exchange rates on cash and cash equivalents
    (356 )     (9 )
Net decrease in cash and cash equivalents
    (40,907 )     (6,668 )
Cash and cash equivalents - beginning balance
    60,310       14,314  
Cash and cash equivalents - ending balance
  $ 19,403     $ 7,646  
                 
Supplemental Disclosure of Non-cash Investing and Financing Activities:
               
                 
Non-cash investing and financing activities:
               
Shares issued for advance payment on senior unsecured notes
  $ 6,901       -  
Put option issued in connection with investment in unconsolidated entity
    809       -  
Warrants issued in connection with short term borrowings
    -       2,166  
Warrants issued in connection with related party debt
    -       275  
Reduction in derivative and financial instruments
    -       297  
Borrowings pursuant to capital leases and equipment purchases
    -       422  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 
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ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 – Business Overview

Nature of the Business
Ener1, Inc. (Ener1, the Company, the Registrant, we, our or us) is a Florida corporation, founded in 1985 and headquartered in New York, New York.  We design, develop and manufacture high-performance, prismatic, rechargeable, lithium-ion batteries and battery pack systems for energy storage for use in the transportation, grid energy storage and small pack, or consumer cell product markets.  We produce and manufacture battery cells in the United States through our subsidiary EnerDel, Inc. (EnerDel) and in South Korea through oursubsidiary, Ener1 Korea, Inc. (Ener1 Korea). 

Ener1 Group, Inc. (Ener1 Group) and Bzinfin, S.A. (Bzinfin), the sole owner of Ener1 Group, collectively owned approximately 47.9% of our outstanding common stock and, with warrants, beneficially owned approximately 55.6% of our common shares on a fully diluted basis as of March 31, 2011.  See Note 12, Related Party Transactions.

Our primary products for the transportation markets 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 the grid energy storage markets, we are developing energy storage applications for utility grid and commercial applications.  Ener1 Korea manufactures lithium-ion batteries for the small format products markets which encompass 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.

In 2009 and 2010 we made separate strategic investments in Think Holdings, AS (Think Holdings), a Norwegian limited liability company and the majority owner of Think Global, AS (Think Global), an EV manufacturer.  As of March 31, 2011, we controlled approximately 48% of the outstanding voting power in Think Holdings and two individuals who serve on the Board of Directors of Ener1 also serve on the board of directors of Think Holdings.  On April 26, 2011, one of these two individuals resigned from the board of directors of Think Holdings.  On May 9, 2011, we surrendered to Think Holdings, for no consideration, all shares of Think Holdings’ voting equity held by Ener1, including, without limitation, all shares of Series B Convertible Preferred Stock (Series B Stock).  See Note 12, Related Party Transactions.

During 2010, we commenced commercial production and shipment of lithium-ion battery packs to Think Global.  In January 2011, we stopped shipping battery packs to Think Global at their direction.  We do not know when or if we will recommence shipping battery packs to Think Global, the timing of which would depend on Think Holdings’ ability to raise sufficient capital to continue operations.

At March 31, 2011, the current portion of our short-term borrowings totaled approximately $47.1 million, of which $24.8 million is related to our senior unsecured notes.  We anticipate paying the amounts due under the senior unsecured notes in shares of Ener1 common stock as long as certain conditions regarding the trading price and volume of our common stock are met.  If these conditions are not met and we are unable to obtain a waiver of these conditions from the holders of the senior unsecured notes, we will need to pay the amounts due under the senior unsecured notes in cash. 

In addition to anticipated cash flows from certain operating segments, we intend to fund our operations and provide additional working capital to the Company through the sale of our common stock or other public or private financings available to us to.  The pricing, dilution, terms and conditions and 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.  We believe we have access to sufficient capital to continue our planned operations for the 12 months following the balance sheet date of March 31, 2011.
 
 
- 6 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The year-end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Principles of Consolidation
Ener1 is the parent company to its wholly-owned subsidiaries: (i) EnerDel, a Delaware corporation, (ii) EnerFuel, Inc. (EnerFuel), a Delaware corporation, (iii) NanoEner, Inc. (NanoEner), a Florida corporation, (iv) EnerDel Japan, Inc. (EnerDel Japan), a Japanese corporation, (v) Ener1 Battery Company (Battery Company), a Florida corporation, and (vi) Ener1 Europe, S.A.S. (Ener1 Europe), a French corporation.  Ener1 currently holds a 94% interest in Ener1 Korea.  Ener1 Korea has a wholly-owned subsidiary, Emerging Power, Inc. (Emerging Power) a New Jersey corporation.

Our consolidated financial statements reflect our financial statements and those of our wholly-owned and majority-owned domestic and foreign subsidiaries.  For consolidated entities in which we own less than a 100% interest, we record net income (loss) attributable to noncontrolling interests in our consolidated statements of operations equal to the percentage of the interests retained by the noncontrolling parties.  Intercompany transactions and balances are eliminated in consolidation.

We account for our investment in Think Holdings, an entity over which we exercise significant influence but do not exercise control, using the cost method because the form of our investment is not deemed to be equivalent to common stock for accounting purposes.  We review this investment for potential impairment at each reporting period using a three-step process.  First, we determine if impairment indicators are present.  If an impairment indicator is present then the second step of the test is to determine if the impairment is temporary or other than temporary.  If the impairment is other than temporary, then the last step is to determine the fair value of the investment and record an impairment loss for the difference between the fair value and the cost of the investment.  See Note 12, Related Party Transactions.

Certain amounts for 2010 have been reclassified to conform to the 2011 presentation.

Foreign Currencies
Subsidiaries located outside the United States of America use the local currency as the functional currency. We translate assets and liabilities denominated in foreign currencies using exchange rates in effect at the balance sheet date and equity accounts at historical exchange rates.  We translate revenues and expenses using average exchange rates during the period.  Translation adjustments resulting from this process are shown as a separate component of accumulated other comprehensive income within stockholders’ equity.  Foreign currency transaction gains and losses are reported in other income (expense) in the statements of operations.

Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) requires our management to make estimates and judgments that may affect the reported amounts presented and disclosed in our consolidated financial statements.  On an ongoing basis, we evaluate our estimates and judgments, including those related to: revenue recognition and related allowances; derivative 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.
 
 
- 7 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

We base these estimates on historical experience and various other factors that we believe 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 the these estimates under different assumptions or conditions.

Note 2 – New Accounting Pronouncements

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued accounting pronouncements that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Note 3 – Supplemental Financial Information

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 sales 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.  Battery related sales by Ener1 Korea are recognized at the delivery point or the receipt point of the bill of lading, depending on whether the sale is domestic or an 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.
 
 
- 8 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Grant Proceeds Receivable and Deferred Grant Proceeds
In August 2009, we were awarded a grant of $118.5 million under the Automotive Battery Manufacturing Initiative (ABMI), which is administered by the Department of Energy (DOE).  The proceeds from the grant are primarily being used to purchase production equipment for capacity at our existing facilities.  Under the ABMI grant, we receive one incentive dollar for each dollar we spend of our own funds.

ABMI grant proceeds related to the purchase of assets are recorded as deferred grant proceeds and recognized as a reduction of operating expenses over the periods during which depreciation on the assets is charged and in proportion to the amount of the depreciation charge.  We begin depreciating a purchased asset on the date the asset is placed in service.  ABMI grant proceeds used to pay operating expenses are recorded as a reduction of research and development expenses and totaled approximately $2.9 million and $468,000 during the three months ended March 31, 2011 and 2010, respectively.

Inventories
The following table presents the components of inventories (in thousands):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Raw materials and supplies
  $ 13,050     $ 12,108  
Work in process
    8,294       7,085  
Finished goods
    7,105       5,351  
      28,449       24,544  
less: provision for obsolescence
    (1,105 )     (932 )
    $ 27,344     $ 23,612  

We establish reserves for obsolete or slow-moving inventory based on management’s analysis of inventory levels and future sales forecasts at the end of each accounting period.

Prepaid Expense and Other Current Assets
On March 3, 2011, we issued approximately 1.9 million registered shares of Ener1 common stock pursuant to a registration statement on Form S-3 filed with the Securities and Exchange Commission as an advance payment for the quarterly installment of principal and interest due on April 1, 2011 under a senior unsecured note.  The fair value of these shares of approximately $6.9 million, is recorded in prepaid expenses and other current assets.  See Note 6, Short-Term and Long-Term Borrowings.

Property and Equipment
The components of property and equipment were as follows (in thousands):
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Land
  $ 2,185     $ 2,134  
Building and building improvements
    5,951       5,818  
Machinery and equipment
    53,386       49,815  
Office equipment, furniture and other
    5,184       4,463  
Leasehold improvements
    14,977       14,934  
Equipment deposits
    6,875       7,238  
Construction in progress
    55,360       54,690  
      143,918       139,092  
less: accumulated depreciation
    (18,292 )     (15,589 )
    $ 125,626     $ 123,503  
 
 
- 9 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Construction in progress includes payments for equipment being constructed by third parties specifically for our use and equipment not yet placed in service.  Depreciation on these assets will commence when we place the assets in service.  During the period ended March 31, 2011, we recorded capitalized interest expense of approximately $782,000, which is included in construction in progress as of March 31, 2011.  Assets recorded under capital leases were approximately $8.4 million at March 31, 2011 and December 31, 2010.

Depreciation expense for the periods ended March 31, 2011 and March 31, 2010 was approximately $2.4 million and $1.6 million, respectively.

Intangible Assets and Goodwill
The components of intangible assets, all of which are finite-lived, were as follows (in thousands, except useful life data):

    
Useful
   
As of March 31, 2011
   
As of December 31, 2010
 
   
life
   
Carrying
   
Accumulated
         
Carrying
   
Accumulated
       
   
(in yrs)
   
Amount
   
Amortization
   
Net
   
Amount
   
Amortization
   
Net
 
                                           
Patented and unpatented technology
  10     $ 13,910     $ (3,662 )   $ 10,248     $ 13,908     $ (3,315 )   $ 10,593  
Electric vehicle battery technology
  4.2       1,199       (696 )     503       1,166       (606 )     560  
Customer relationships
  2.2       975       (975 )     -       947       (947 )     -  
          $ 16,084     $ (5,333 )   $ 10,751     $ 16,021     $ (4,868 )   $ 11,153  
                                                       
Goodwill
 
Indefinite
    $ 52,807     $ -     $ 52,807     $ 51,845     $ -     $ 51,845  

Certain intangible assets and goodwill are subject to foreign currency translation and the translation adjustment is recorded as a component of accumulated other comprehensive income within stockholders’ equity in the consolidated balance sheets. 

Intangible asset amortization expense was approximately $421,000 and $526,000 for the periods ended March 31, 2011 and 2010, respectively.  The following table reflects the estimated future amortization expense related to intangible assets as of March 31, 2011 (in thousands):

Year Ended December 31,      
       
2011
  $ 1,639  
2012
    1,588  
2013
    1,362  
2014
    1,362  
2015
    1,362  
Thereafter
    3,438  
         
    $ 10,751  

As disclosed in Note 13, Operating Segment and Geographic Information, the Company revised its reportable operating segments as of January 1, 2011.  We have not completed the reallocation of goodwill to our new reportable operating segments as of March 31, 2011.
 
 
- 10 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses were as follows (in thousands):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Accounts payable
  $ 19,496     $ 27,616  
Accrued other
    4,229       6,027  
Accrued financing fee
    5,920       4,504  
Accrued compensation and benefits
    3,436       2,921  
Customer advances
    916       617  
Product warranty reserves
    363       240  
    $ 34,360     $ 41,925  

The accounts payable balance at March 31, 2011 and December 31, 2010 includes approximately $473,000 and $5.0 million, respectively, related to equipment purchases made under the ABMI grant.  The accrued financing fees represent minimum fees for premiums payable under senior unsecured notes and advisory services payable by Ener1.  See Note 6, Short-Term and Long-Term Borrowings.

Warranty Reserves
We record the estimated cost of warranties, which we began offering in May 2010 when commercial production and sales of battery packs commenced, in cost of sales in the period the revenue is recognized.  We use internal durability testing data, comparative industry information and industry sources to develop the warranty reserve.  If actual warranty claims differ from these estimates, adjustments to the product warranty reserve could have a material effect on our consolidated financial statements.  The components of the product warranty liability, as of March 31, 2011 and December 31, 2010, were as follows (in thousands):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Balance, beginning of period
  $ 894     $ -  
Provision for new warranties
    306       894  
Balance, end of period
    1,200       894  
less: current portion
    (363 )     (240 )
Long term portion
  $ 837     $ 654  

Note 4 – Earnings per Share

Net loss per share-basic is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Net loss per share-diluted is calculated by including in the number of common shares outstanding, the number of common shares potentially issuable if in-the-money options or warrants are exercised or in-the-money convertible debt is converted into common stock and the effect of the exercise of options and warrants or conversion of convertible debt on the net loss per share.  In addition, in calculating net loss per share-diluted we assume in-the-money warrants containing dilution protection features are exercised, which may cause the gain or loss on derivative instruments to increase or decrease, which will, in turn cause the net loss per share-diluted, if dilutive, to increase.  Also, in calculating net loss per share-diluted we assume financial instruments are exercised, which may cause the gain or loss on financial instruments to increase or decrease, which will in turn, cause the net loss per share-diluted, if dilutive, to increase.  Lastly, in calculating net loss per share-diluted we assume that amounts due under our senior unsecured notes are settled with shares of our common stock, which may cause the interest expense under such notes to decrease, which may in turn cause the net loss per share diluted, if dilutive, to increase.
 
 
- 11 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Following is a reconciliation of net loss attributable to Ener1 and weighted average common shares outstanding for purposes of calculating basic and diluted loss per share (in thousands, except per share data):

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Net loss for basic loss per share
  $ (84,718 )   $ (15,337 )
Adjustment for gain on certain derivative instruments
    -       (1,521 )
Net loss for diluted loss per share
  $ (84,718 )   $ (16,858 )
                 
Weighted average number of common shares outstanding:
               
Basic
    165,203       124,904  
Effect of dilutive securities:
               
Certain warrants
    -       64  
Diluted
    165,203       124,968  
                 
Net loss per share attributable to Ener1, Inc.:
               
Basic
  $ (0.51 )   $ (0.12 )
Diluted
  $ (0.51 )   $ (0.13 )

Note 5 – Other Income (Expenses)

The components of other income (expense) were as follows (in thousands):

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Other income (expense):
           
Interest expense
  $ (3,972 )   $ (2,002 )
Interest income
    376       35  
Gain on derivative instruments
    5,148       1,525  
Loss on financial instruments
    (13,941 )     -  
Foreign currency loss
    (367 )     (50 )
Other
    40       314  
Total other income (expense)
  $ (12,716 )   $ (178 )
 
 
- 12 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 6 – Short-Term and Long-Term Borrowings

The components of short-term and long-term borrowings were as follows (in thousands):

   
March 31, 2011
   
December 31, 2010
 
   
Current
   
Long-Term
   
Current
   
Long-Term
 
                         
8.25% Senior Unsecured Notes due March 2013
  $ 17,069     $ 24,980     $ 17,001     $ 29,391  
8.25% Senior Unsecured Notes due July 2013
    7,689       13,394       4,469       15,342  
6.00% Senior Convertible Notes due August 2015
    55       10,000       192       10,000  
8.50% Convertible Bonds due January 2013
    -       444       -       430  
Bank loans and other financing
    19,946       -       17,635       -  
Capital lease obligations
    2,302       110       2,478       829  
    $ 47,061     $ 48,928     $ 41,775     $ 55,992  

Senior Unsecured Notes
In September 2010, Ener1 sold $55 million of 8.25% senior unsecured notes (the Notes), 960,926 shares of Ener1 common stock and warrants to purchase up to 2,882,776 shares of Ener1 common stock (the Purchase Agreement Warrants) at an initial exercise price of $3.82 per share for aggregate consideration of $55 million (Purchase Agreement I).

In December 2010, Ener1 sold an additional $25 million of Notes, 339,783 shares of Ener1 common stock and Purchase Agreement Warrants to purchase up to 1,019,353 shares of Ener1 common stock 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 premium payments 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 the Notes sold under Purchase Agreement I was paid, in cash, on January 3, 2011, resulting in a premium payment of approximately $523,000, and the second installment payment was paid in shares of Ener1 common stock on April 1, 2011, resulting in a premium payment of approximately $617,000.  The first installment payment for the Notes sold under Purchase Agreement II was paid, in cash, on April 1, 2011, resulting in a premium payment of approximately $226,000.

We are required to register for resale under the Securities Act the maximum number of shares of Ener1 common stock we may elect to issue in payment of amounts due under the Notes issued under Purchase Agreement I and Purchase Agreement II. The registration statement registering the resale of common stock issuable to repay obligations under Notes issued under Purchase Agreement I was declared effective on December 31, 2010.    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 $6.4 million held in restricted cash accounts, representing the first two installment payments due on the Notes issued under Purchase Agreement II, will be released when this registration statement is declared effective.  The April 1, 2011 installment payment for the Notes issued under Purchase Agreement II was made using $3.2 million of funds that were released from the restricted cash accounts.  The registration statement registering the resale of common stock issuable to repay obligations under Notes issued under Purchase Agreement II was declared effective on May 9, 2011.
 
 
- 13 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The estimated fair value of the shares of Ener1 common stock, the Purchase Agreement Warrants and the premium payments in connection with the Notes have been recorded as a debt discount and are being amortized to interest expense, using the effective interest method, over the term of the Notes.  The Purchase Agreement Warrants are immediately exercisable and expire five years from the date of grant.  The Purchase Agreement Warrants contain certain anti-dilution protection features and the fair value of these features has been recognized in the accompanying consolidated balance sheet as a derivative instrument.  See Note 7, Fair Value of Derivative and Financial Instruments.

The components of the Notes as of March 31, 2011 are as follows (in thousands):

   
Purchase
Agreement I
   
Purchase
Agreement II
   
Totals
 
                   
Remaining face value of the Notes
  $ 49,500     $ 25,000     $ 74,500  
Debt discount, net
    (8,424 )     (4,426 )     (12,850 )
Accrued interest
    973       509       1,482  
Balance, end of period
    42,049       21,083       63,132  
less: current portion
    (17,069 )     (7,689 )     (24,758 )
Long-term portion
  $ 24,980     $ 13,394     $ 38,374  

The amortization of debt discount, using the effective interest method, and the future amortization over the remaining life of the Notes are as follows (in thousands):

   
Purchase
Agreement I
   
Purchase
Agreement II
   
Totals
 
                   
Original issue discount
  $ 12,871     $ 5,280     $ 18,151  
Amortized to expense
    (4,447 )     (855 )     (5,302 )
Balance, end of period
  $ 8,424     $ 4,425     $ 12,849  
                         
Future Amortization:
                       
Year ended December 31, 2011
  $ 4,713     $ 2,226     $ 6,939  
Year ended December 31, 2012
    3,523       1,857       5,380  
Year ended December 31, 2013
    188       342       530  
    $ 8,424     $ 4,425     $ 12,849  
 
 
- 14 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Financing costs associated with the sale of the Notes have been recorded as deferred financing costs and are being amortized to interest expense over the term of the Notes.  The amortization of deferred financing costs, using the effective interest method, and the future amortization over the remaining life of the Notes are as follows (in thousands):

   
Purchase
Agreement I
   
Purchase
Agreement II
   
Totals
 
                   
Financing costs incurred
  $ 2,324     $ 1,048     $ 3,372  
Amortized to expense
    (864 )     (212 )     (1,076 )
Balance, end of year
  $ 1,460     $ 836     $ 2,296  
                         
Future Amortization:
                       
Year ended December 31, 2011
  $ 856     $ 497     $ 1,353  
Year ended December 31, 2012
    577       321       898  
Year ended December 31, 2013
    28       18       46  
    $ 1,461     $ 836     $ 2,297  
 
Senior Convertible Notes
In August and September 2010, Ener1 sold an aggregate of $10 million in Senior Convertible Notes (the Convertible Notes) to Itochu Corporation, a Japanese corporation (Itochu).  The Convertible Notes bear interest at 6.0% per annum and the interest is payable in arrears on February 26th and August 26th of each year.  The first interest payment was made on February 25, 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 in August 2015.

In December 2010, Mr. Kasagawa, the chief financial officer of the Aerospace and Industrial Systems Division of Itochu, was elected to serve as a director of the Company.

Convertible Bonds
On January 25, 2008, Ener1 Korea issued convertible bonds with an aggregate principal amount of $9.2 million maturing on January 25, 2013 (Ener1 Korea Convertible Bonds).  Interest accrues on the Ener1 Korea Convertible Bonds at 8.5% per annum and is payable at maturity.  Prior to December 2012, principal due under the bonds may be converted by the holder into shares of Ener1 Korea common stock at a fixed conversion price of 750 Korean Won per share.  Upon conversion, the principal amount to be converted is translated from United States Dollars to Korean Won, using the exchange rate in effect on the date of conversion.

Ener1 acquired 96% of the principal amount of the Ener1 Korea Convertible Bonds in October 2008 in connection with Ener1’s acquisition of Ener1 Korea.  In December 2009, Ener1 converted $6.9 million of the outstanding principal of the Ener1 Korea Convertible Bonds into shares of Ener1 Korea common stock.  At March 31, 2011, approximately $2.7 million in principal and accrued interest of the Ener1 Korea Convertible Bonds was outstanding and is convertible into up to 2,804,635 shares of Ener1 Korea common stock.  We owned approximately 84% of the outstanding principal balance of the Ener1 Korea Convertible Bonds at March 31, 2011 and have eliminated the principal and related accrued interest in consolidation.
 
 
- 15 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Bank loans
Ener1 Korea maintains bank loans denominated in Korean Won, consisting of trade financing agreements and letters of credit.  The total amount available at March 31, 2011 under these loans was approximately $15.7 million, of which $13.3 million was outstanding, based on the period-end exchange rate of 1,107.2 Korean Won per United States Dollar.  The amounts are scheduled for repayment at various times throughout 2011 and the first quarter of 2012.

Ener1 Korea has an equipment loan that is also denominated in Korean Won.  The total amount available and outstanding at March 31, 2011 was approximately $4.5 million.  The loan bears interest at 7.85% and is scheduled to mature in October 2011.

Ener1 Korea’s wholly-owned subsidiary Emerging Power has a $2 million line of credit with a commercial bank that is denominated in United States Dollars.  At March 31, 2011, $1.8 million was outstanding under this line of credit which was then scheduled to mature in June 2011.  In April 2011, Emerging Power amended the line of credit to increase the amount available up to $4 million and extend the maturity date to April 2012.

Certain bank deposits, land, buildings and equipment owned by Ener1 Korea and Emerging Power are pledged as collateral for their respective bank loans.

Capital lease obligations
We are obligated under capital lease agreements for payments relating to certain machinery and production equipment totaling $8.4 million, including the bargain purchase option which management intends to exercise.  Assets under these capital leases are recorded as part of property and equipment in the accompanying balance sheets.  The following table summarizes the activity in our capital leases (in thousands):
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Balance, beginning of period
  $ 3,307     $ 5,073  
Borrowings
    -       754  
Repayments
    (919 )     (2,614 )
Amortization of debt issuance costs
    24       94  
Balance, end of period
    2,412       3,307  
less: current portion
    (2,302 )     (2,478 )
Long term capital lease obligation
  $ 110     $ 829  
 
Note 7 – Fair Value of Derivative and Financial Instruments

We record the fair value of derivative instruments and financial instruments in our consolidated balance sheet and reflect the changes in fair value as gain or loss on derivative instruments and financial instruments.  Our derivative instruments are not designated as hedging instruments.

Derivative Instruments
We issued freestanding warrants in connection with capital raising activities during 2004 that contained dilution protection features requiring exercise price adjustments if we issued securities deemed to be dilutive to the warrants (2004 Warrants).

In connection with our credit agreement with Credit Suisse AG, Cayman Islands Branch (Credit Suisse), we issued warrants to Credit Suisse (Credit Suisse Warrants) in 2010.  In connection with the sale of the Notes we issued the Purchase Agreement Warrants in 2010 to the purchasers of the Notes.  The Credit Suisse Warrants and the Purchase Agreement Warrants contain dilution protection features requiring exercise price adjustments if we issue securities that are deemed to be dilutive to the warrants.
 
 
- 16 -

 


ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In accordance with applicable accounting guidance, the conversion feature of the Ener1 Korea Convertible Bonds was bifurcated and recorded as a derivative instrument.  As foreign currency rates fluctuate, the number of shares of Ener1 Korea stock to be issued upon conversion fluctuates.

Financial Instruments
In May 2010, 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).  See Note 12, Related Party Transactions.

When an investor exercises its Ener1 Put Option, each share of Series B Stock will have a stated value of $1.67 per share.  The Ener1 common stock issued in exchange for Series B Stock will be valued at the greater of (i) the preceding 15-day volume weighted average price of Ener1 common stock or (ii) $4.00 per share.  The total amount of Ener1 common stock issuable upon exercise of the Ener1 Put Option is capped at $27.5 million and at March 31, 2011, Ener1 may be required to issue up to approximately $15.1 million in shares in connection with the Ener1 Put Option.  Investors originally had until May 5, 2011 to exercise the Ener1 Put Option and, upon exercise, would receive unregistered shares of Ener1 common stock.  We are currently negotiating put right extension agreements with investors who have rights pursuant to the Ener1 Put Option (Put Right Extension Agreement) to, among other things, postpone the date on which the Ener1 Put Option may be exercised from May 5, 2011 to September 15, 2011 and provide that on such date, all shares of Series B Stock held by investors that exercise the Ener1 Put Option will be exchanged for shares of Ener1 common stock issued under a registration statement.

In January 2011, we entered into an expanded put right agreement (the Investinor Expanded Put Right) with Investinor AS (Investinor), an existing shareholder of Think Holdings.  Pursuant to the Investinor 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 provided 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.

Upon exercise of the Investinor Expanded Put Right, the exchange price for each share of Series B Stock will be equal to the then current United States dollar equivalent of 10 Norwegian Kroner per share.  The Ener1 common stock issued in exchange for Series B Stock will be valued at the greater of (i) the preceding 15-day volume weighted average price of Ener1 common stock or (ii) $4.00 per share.  Under the initial terms of the Investinor Expanded Put Right, Investinor had until May 5, 2011 to exercise the Investinor Expanded Put Right.  Ener1 agreed to register the resale of the unregistered shares of Ener1 common stock Investinor received upon exercise of the put right.

We also extended to Investinor, under the Investinor 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 Investinor Expanded Put Right.  Investinor also had the right to transfer to Ener1 2,000,000 shares of Series B Stock under the Ener1 Put Option, which is now encompassed under the Investinor Expanded Put Right and the exchange price for each share of Series B Stock will be equal to the then current United States dollar equivalent of 10 Norwegian Kroner per share.

In accordance with applicable accounting standards, in January 2011, we initially recognized the fair value of the Investinor Expanded Put Right by increasing our investment in unconsolidated entity by approximately $731,000.
 
 
- 17 -

 


ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

As of April 4, 2011, Ener1 amended the Investinor Expanded Put Right (the Amended Investinor Expanded Put Right) to, among other things, suspend Investinor’s right to put their shares of Series B Stock to Ener1 until the earlier to occur of: (i) June 15, 2011 or (ii) the date on which Ener1’s ownership of the outstanding voting equity of Think Holdings falls below 20%.  Investinor has until July 15, 2011 to exercise the Amended Investinor Expanded Right.  In addition, at such date, Investinor may exchange its rights under the $2.5 million in bridge financing for shares of Ener1 common stock and no longer has to first convert the bridge financing it provided to Think Holdings into shares of Series B Stock.  Ener1 also agreed to issue shares of Ener1 common stock to Investinor upon exercise of the Amended Investinor Expanded Put Right under a registration statement.  Investinor agreed not to sell more than one-third of the Ener1 shares it receives in the exchange during each thirty day period following the exchange.

In January 2011, Ener1 entered into an expanded put right agreement (the Scatec Expanded Put Right) with Scatec AS (Scatec), an existing shareholder of Think Holdings in connection with Scatec’s agreement to provide bridge financing of 2.4 million Norwegian Kroner to Think Holdings in January 2011.  The Scatec Expanded Put Right provided Scatec with the right to put up to 259,740 shares of Series B Stock as well as the 240,000 shares of Series B Stock into which the bridge financing may be converted, to Ener1 in exchange for shares of Ener1 common stock.  Scatec originally had until May 5, 2011 to exercise the Scatec Expanded Put Right and, upon exercise, would receive unregistered shares of Ener1 common stock.  We are currently negotiating a Put Right Extension with Scatec.

In accordance with applicable accounting standards, in January 2011, we initially recognized the fair value of the Scatec Expanded Put Right by increasing our investment in unconsolidated entity by approximately $77,000.

Lattice Valuation Model

Freestanding Warrants
We valued the 2004 Warrants using a lattice valuation model, for which management understands the methodologies, with the assistance of a valuation consultant. This model incorporates factors such as the price of Ener1’s common stock, contractual terms of the warrants, expiration date of the warrants, and risk-free interest rates, as well as assumptions about future financings by Ener1, volatility of Ener1 common stock, and warrant holder behavior on key dates, including warrant exercise dates and period end reporting dates.  These assumptions are reviewed quarterly and are subject to change.  Changes to these assumptions could materially affect management’s estimate of the fair value of the 2004 Warrants.

Our management estimates that the fair value of the derivative liability associated with the 2004 Warrants that remain outstanding as of March 31, 2011 is approximately $1.6 million.  Some of the key assumptions on which this estimate is based include, but are not limited to, projected annual volatility of Ener1 common stock of 63% and assumptions that holders of the 2004 Warrants will exercise the warrants when Ener1’s common stock price is equal to 200% of the exercise price.

Financial Instruments
With the assistance of a valuation consultant, we valued the Ener1 Put Option, the Investinor Expanded Put Right, the Amended Investinor Expanded Put Right and the Scatec Expanded Put Right (collectively the Put Options), using a lattice valuation model, for which management understands the methodologies, in which the value of Ener1 common stock and the value of Series B Stock is projected and correlated to determine if the holders of the Put Options would exercise the put rights.  This model also incorporates factors such as the volatility of Ener1’s common stock, contractual terms of the Put Options, and the expiration date of the Put Options, as well as the restriction, where applicable, on the resale of the Ener1 shares received when the put right is exercised.  Because the shares of Series B Stock are not publicly traded, the values of the Series B Stock and warrants were determined using recent investments in Think Holdings and the average stock prices of 14 comparable companies that operate in the same industry as, and are similar in size to, Think Holdings.  Volatility of the Series B Stock was estimated using the average volatility of the common stock of the same 14 comparable companies.
 
 
- 18 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Our management estimates that the aggregate fair value of the Put Options that remain outstanding as of March 31, 2011 is approximately $16.1 million.  The key assumptions on which this estimate is based include, but are not limited to, projected annual volatility of Ener1 common stock of 63% and a zero value for a share of Series B Stock, which relate to the determination that all holders of the Put Options would exercise their respective put rights.  Each share of Series B Stock was valued at zero based on the write down of our investment in Think Holdings to zero at March 31, 2011.  See Note 12, Related Party Transactions.

Black-Scholes Valuation Model

Freestanding Warrants
We use a Black-Scholes pricing model to determine the fair value of the Credit Suisse Warrants and the Purchase Agreement Warrants.  This model uses market sourced inputs such as interest rates, stock price and volatility, the selection of which requires management’s judgment.

The fair value of the Credit Suisse Warrants on key dates was estimated using the following inputs:

   
Volatility
   
Interest Rate
   
Stock Price
   
Term in
Years
 
                         
December 31, 2010
    63.9 %     0.3 %   $ 3.79       1.2  
March 31, 2011
    60.3 %     0.3 %   $ 2.96       1.0  

Based on these inputs, the derivative liability associated with the Credit Suisse Warrants as of March 31, 2011 was $398,000 and the gain on derivative liability for the period ended March 31, 2011 was approximately $596,000.

The fair value of the Purchase Agreement Warrants on key dates was estimated using the following inputs:

   
Volatility
   
Interest Rate
   
Stock Price
   
Term in
Years
 
                         
December 31, 2010
    84.7% - 93.4 %     2.0 %   $ 3.79       4.7 - 5.0  
March 31, 2011
    84.5% - 85.9 %     2.2 %   $ 2.96       4.4 - 4.8  

Based on these inputs, the derivative liability associated with the Purchase Agreement Warrants as of March 31, 2011 was $6.9 million and the gain on derivative liability for the period ended March 31, 2011 was approximately $2.9 million.

Ener1 Korea Convertible Bonds
We use a Black-Scholes pricing model to determine the fair value of the Ener1 Korea Convertible Bonds.  This model uses market sourced inputs such as interest rates, stock price and volatility, the selection of which requires management’s judgment.  Because the bonds are convertible into shares of Ener1 Korea common stock, stock prices were estimated using the average stock price of four comparable Korean companies which operate in the same industry as, and are similar in size to, Ener1 Korea, with a 30% liquidity discount.  Volatility of the Ener1 Korea common stock was estimated using the average volatility of the common stock of the same four comparable Korean companies.  Interest rates represent the Korean government bond rate for securities with a maturity that approximates the estimated expected life of the Ener1 Korea Convertible Bonds.

The fair value of the Ener1 Korea Convertible Bonds on key dates was estimated using the following inputs:

   
Volatility
   
Interest Rate
   
Stock Price
   
Term in
Years
 
                         
December 31, 2010
    60.1 %     4.1 %   $ 0.52       2.1  
March 31, 2011
    59.0 %     4.1 %   $ 0.58       1.8  
 
 
- 19 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  A fair value hierarchy is used which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  We have certain liabilities recorded at fair value which have been classified as Level 3 within the fair value hierarchy based on the three levels of inputs that may be used to measure fair value as follows:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

Our Level 3 liabilities as of March 31, 2011 consist of the 2004 Warrants, the Credit Suisse Warrants, the Purchase Agreement Warrants, the Put Options and the Ener1 Korea Convertible Bonds.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes our financial assets and liabilities measured at fair value during the period ended March 31, 2011 (in thousands):

   
Carrying
   
Fair Value Measurements Using
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                               
Warrants
  $ 8,931     $ -     $ -     $ 8,931     $ 8,931  
Put Options
    16,089       -       -       16,089       16,089  
Convertible bonds
    34       -       -       34       34  
    $ 25,054     $ -     $ -     $ 25,054     $ 25,054  

Level 3 Valuation Techniques
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial instruments measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

               
Convertible
       
   
Warrants
   
Put Options
   
Bonds
   
Totals
 
                         
Balance at December 31, 2010
  $ 14,084     $ 1,340     $ 29     $ 15,453  
Total realized/unrealized (gains) or losses:
                               
Included in other income and expense
    (5,153 )     13,941       5       8,793  
Included in other comprehensive income
    -       -       -       -  
Included in stockholders' equity
    -       -       -       -  
Purchases, issuances and settlements
    -       808       -       808  
Transfers in and/or out of Level 3
    -       -       -       -  
Balance at March 31, 2011
  $ 8,931     $ 16,089     $ 34     $ 25,054  

Ener1 Korea may from time to time hold derivative instruments for managing exposure to foreign currency primarily to hedge against the foreign exchange risk arising from accounts receivable from domestic subsidiaries.  These derivative instruments are measured at fair value as they are not designated as hedges based on the criteria established under US GAAP, and gains or losses from changes in the fair value are recognized in earnings.
 
 
- 20 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 8 – Sales of Common Stock

Open Market Sale Agreement

In January 2010, we entered into an open market sale agreement (the 2010 Open Market Sale Agreement) with Jefferies & Company, Inc. (Jefferies), to sell shares of Ener1 common stock on Ener1’s behalf from time to time, as instructed by Ener1, with an aggregate sales price of up to $60 million.  The compensation to Jefferies is 3.0% of gross proceeds of the sales price per share.  We began selling shares under the 2010 Open Market Sale Agreement in February 2010 and through December 31, 2010 we sold 2,069,250 shares for an aggregate purchase price of $8.2 million, at an average price of $3.94 per share.  After deducting fees and expense of $430,000, we received net proceeds of $7.7 million from the sale of these shares.

From January 1, 2011 to March 31, 2011, under the 2010 Open Market Sale Agreement we sold 2,577,789 shares for an aggregate purchase price of $7 million.  After deducting fees and expenses of $210,000, we received net proceeds of $6.8 million from the sale of these shares.

Note 9 – Stock-Based Compensation

At March 31, 2011, we had seven active stock-based compensation plans which provide for the grant of incentive and non-qualified stock options, restricted stock and bonuses to officers, directors, employees and consultants.  The Compensation Committee of the Board of Directors administers the plans and has the authority to determine the recipients to whom awards will be made, the respective vesting and forfeiture terms, the amounts of the awards and other terms.  Under the terms of the plans, the option exercise price approved by the Compensation Committee shall not be less than the fair market value of Ener1 common stock at the date of grant.

Performance options are earned based on achievement of specifically identified performance criteria and are subject to forfeiture if such performance criteria are not met.  These options usually vest ratably over a three year period, but cannot be exercised unless the options are both earned and vested.  We also award incentive options from time to time which generally vest over a three or five year period.  Compensation expense is recorded on a straight-line basis over the vesting periods and is based on the amount of awards expected to be earned and vested. Beginning in February 2009, we also granted restricted stock to certain employees.  The restrictions may lapse based on the passage of time, the achievement of specifically identified performance criteria or other terms.  Compensation expense is determined at the grant date, based on the closing price of our common stock, and is recorded on a straight-line basis over the restriction period.

Compensation expense (net of estimated forfeitures) related to awards under our stock-based compensation plans for the periods ended March 31, 2011 and 2010 was approximately $762,000 and $1 million, respectively.  The total unrecognized compensation expense (net of estimated forfeitures) related to non-vested awards, as of March 31, 2011 is approximately $7.9 million and is expected to be expensed in future years as follows (in thousands):

Unrecognized compensation expense:
     
       
2011
  $ 2,740  
2012
    2,704  
2013
    1,577  
2014
    625  
2015
    263  
    $ 7,909  

If there are any modifications or cancellations of the underlying non-vested awards, we may be required to accelerate, increase or cancel any remaining unearned compensation expense. Future compensation expense and unrecognized compensation expense may increase to the extent that additional equity awards are granted.
 
 
- 21 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A summary of the activity in our stock option plans is as follows:

   
Options
   
Weighted
average
exercise
price
   
Weighted
average
remaining
contractual
life
   
Aggregate
intrinsic
value
 
                         
Balance at January 1, 2011
    5,365,157     $ 3.71       3.8     $ 3,897,606  
                                 
Granted
    645,000     $ 3.15                  
Exercised
    (99,006 )   $ 1.86                  
Forfeited or expired
    (227,144 )   $ 4.24                  
Balance at March 31, 2011
    5,684,007     $ 3.66       3.7     $ 3,659,630  
                                 
Exercisable at March 31, 2011
    3,663,413     $ 3.70       2.7     $ 3,338,130  

The intrinsic value of options exercised during the periods ended March 31, 2011 and 2010, was approximately $252,000 and $138,000, respectively.

The weighted average fair value of non-vested options and restricted stock during the period ended March 31, 2011 is as follows:

         
Weighted
 
   
Non-vested
   
average
 
   
Options
   
fair value
 
             
Non-vested at January 1, 2011
    1,552,916     $ 3.18  
                 
Granted
    645,000       2.81  
Vested
    49,822       1.00  
Forfeited
    (227,144 )     4.24  
Non-vested at March 31, 2011
    2,020,594     $ 2.70  

         
Weighted
 
   
Restricted
   
average
 
   
Stock
   
fair value
 
             
Non-vested at January 1, 2011
    1,456,000     $ 3.57  
                 
Granted
    225,000       3.32  
Vested
    (10,000 )     3.93  
Forfeited
    (60,000 )     3.59  
Non-vested at March 31, 2011
    1,611,000     $ 3.53  
 
 
- 22 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following key assumptions:

 
2011
 
Expected term
4 - 6 yrs
 
Risk free interest rate
1.9% - 2.4%
 
Expected volatility
83.4% - 102.4%
 
Expected dividend yield
0%
 

Expected term
The expected term represents the period over which the stock options are expected to be outstanding. It has been determined using the “simplified method” which is based on a calculation that determines the midpoint between the vesting date and the end of the contractual term.

Risk free interest rate
The risk free interest rate assumption is based on the implied yield currently available on United States Treasury issues with a remaining term equivalent to the expected term of the stock options.

Expected volatility
The expected volatility assumptions are based upon the weekly closing stock price of Ener1’s common stock since January 2002, when Ener1 underwent a change in control.  We determined that share prices prior to January 2002 do not reflect the ongoing business valuation of our operations.

Dividend yield
We do not intend to pay dividends on our common stock in the foreseeable future. Accordingly, we use a dividend yield of zero in our assumptions.
 
The following table summarizes stock option information for options outstanding at March 31, 2011:

   
Options Outstanding
 
Exercise price
range
 
Number of
options
   
Weighted
average
remaining
contractual life
   
Weighted
average
exercise price
   
Aggregate
instrinsic value
 
                         
$0.49 - $1.61
    656,821       0.7     $ 1.61     $ 1,467,433  
$2.10 - $4.25
    3,629,997       4.6       3.07       2,192,197  
$4.83 - $4.90
    422,427       1.7       4.90       -  
$5.18 - $6.79
    812,975       3.6       6.54       -  
$7.15 - $7.63
    161,787       2.4       7.33       -  
Totals
    5,684,007       3.7     $ 3.66     $ 3,659,630  
 
 
- 23 -

 

ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table summarizes stock option information for options exercisable at March 31, 2011:

   
Options Exercisable
 
Exercise price
range
 
Number of
options
   
Weighted
average
remaining
contractual life
   
Weighted
average
exercise price
   
Aggregate
instrinsic value
 
                         
$0.49 - $1.61
    656,821       0.7     $ 1.61     $ 1,467,433  
$2.10 - $4.25
    1,745,831       3.3       2.77       1,870,697  
$4.83 - $4.90
    422,427       1.7       4.90       -  
$5.18 - $6.79
    709,047       3.6       6.53       -  
$7.15 - $7.63
    129,287       2.4       7.36       -  
Totals
    3,663,413       2.7     $ 3.70     $ 3,338,130  

Note 10 - Warrants

A summary of the activity for warrants is as follows:

   
Warrants
   
Weighted
average
exercise price
   
Weighted
average
remaining
contractual life
   
Aggregate
intrinsic value
 
                         
Balance at January 1, 2011
    42,659,126     $ 3.87       2.8     $ 28,470,084  
                                 
Granted
    -       -                  
Exercised
    -       -                  
Expired
    (1,562,500 )     8.25                  
Balance at March 31, 2011
    41,096,626     $ 3.70       2.6     $ 11,887,831  
                                 
Exercisable at March 31, 2011
    40,632,462     $ 3.69       2.6     $ 11,887,831  

The weighted average fair value of non-vested warrants during the period ended March 31, 2011 is as follows:

         
Weighted
 
   
Non-vested
   
average
 
   
Warrants
   
fair value
 
             
Non-vested at January 1, 2011
    2,890,834     $ 4.16  
                 
Granted
    -       -  
Vested
    (2,426,670 )     4.11  
Forfeited
    -       -  
Non-vested at March 31, 2011
    464,164     $ 4.41  

The fair value of warrants granted, if any, is estimated on the date of the grant using the Black-Scholes option pricing model with the following key assumptions:
 
 
- 24 -

 
ENER1, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Expected term
The expected term represents the period over which the warrants are expected to be outstanding.

Risk-free interest rate
The risk free interest rate assumption is based on the implied yield currently available on United States Treasury issues with a remaining term equivalent to the expected term of the warrants.

Expected volatility
The expected volatility assumptions are based upon the weekly closing stock price of Ener1’s common stock since January 2002, when Ener1 underwent a change in control.  We determined that share prices prior to January 2002 do not reflect the ongoing business valuation of our operations.

Dividend yield
We do not intend to pay dividends on our common stock in the foreseeable future. Accordingly, we use a dividend yield of zero in our assumptions.

The following table summarizes warrant information for warrants outstanding at March 31, 2011:

   
Warrants Outstanding
 
Exercise price range
 
Number of
warrants
   
Weighted
average
remaining
contractual life
   
Weighted
average
exercise price
   
Aggregate
instrinsic value
 
                         
$2.10 - $2.80
    18,166,712       1.0     $ 2.31     $ 11,887,831  
$4.83 - $5.95
    19,378,809       4.2       4.12       -  
$7.50 - $8.88
    2,935,717       2.3       7.27       -  
$10.50 - $17.57
    615,388       3.1       14.62       -  
      41,096,626       2.6     $ 3.70     $ 11,887,831  
 
The following table summarizes warrant information for warrants exercisable at March 31, 2011:

   
Warrants Exercisable
 
Exercise price range
 
Number of
warrants
   
Weighted
average
remaining
contractual life
   
Weighted
average
exercise price
   
Aggregate
instrinsic value
 
                         
$2.10 - $2.80
    18,166,712       1.0     $ 2.31     $ 11,887,831  
$4.83 - $5.95
    18,914,645       4.2       4.11       -  
$7.50 - $8.88
    2,935,717       2.3       7.27       -  
$10.50 - $17.57
    615,388       3.1       14.62       -  
      40,632,462       2.6     $ 3.69