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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number 0-21138
June 30, 2003
ENER1, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2479377
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
550 West Cypress Creek Road-Suite 120 33309
Ft. Lauderdale, Florida (Zip Code)
(Address of principal
executive offices)
(954) 202-4442
(Registrant's telephone number, including area code)
(Former name, former address, and former fiscal year if
changed since last report)
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 X No___
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
Common stock, par value AUGUST 19, 2003
$.01 per share 323,890,520
ENER1, INC. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
(unaudited) as of June 30, 2003.................. 3
Condensed Consolidated Statements of
Operations (unaudited) for the three and six
months ended June 30, 2003 and 2002 ............. 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the six
months ended June 30, 2003 and 2002.............. 5-6
Notes to Condensed Consolidated
Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 19
Item 3. Controls and Procedures .................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 25
Item 3. Defaults Upon Senior Securities ............................ 26
Item 6. Exhibits and Reports on Form 8-K ........................... 26
Signatures ........................................................... 27
2
ENER1, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
June 30,
2003
--------
ASSETS
Current assets
Cash and equivalents ............................................ 52
Trade receivables, net .......................................... --
Inventories ..................................................... 966
Prepaid expenses and other current assets ....................... 117
-------
Total current assets ...................................... 1,135
Property and Equipment, net ......................................... 22,238
Other assets ........................................................ 1,232
-------
Total ..................................................... 24,605
=======
assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................ 1,836
Customer deposits ............................................... 847
Notes payable to stockholder .................................... 6,862
Due to stockholder .............................................. 2,088
Current maturities of related party debt ........................ 1,672
Accrued expenses and other current liabilities .................. 1,934
Current maturities of mortgage payable .......................... 29
-------
Total current liabilities ....................................... 15,268
-------
Long-term liabilities
Mortgage note payable on building ........................... 689
Notes payable to bank ........................................ 1,600
-------
2,289
Minority interest ................................................... 251
-------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share, 5,000,000
shares authorized, none issued and outstanding .............. --
Common stock, par value $.01 per share, 500,000,000
shares authorized, 309,856,520 issued and outstanding ....... 3,099
Additional paid-in capital ..................................... 55,853
Accumulated deficit ............................................ (52,155)
-------
Total stockholders' equity ............................... 6,797
-------
Total liabilities and stockholders' equity ................ 24,605
=======
See notes to condensed consolidated financial statements.
3
ENER1, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales
Product sales ........................... $ 102 $ 72 $ 835 $ 716
Engineering services .................... -- 577 151 1,117
--------- --------- --------- ---------
Total ......................... 102 649 986 1,833
Cost of goods sold .......................... 83 1,010 925 2,573
--------- --------- --------- ---------
Gross profit (loss) ..................... 19 (361) 61 (740)
--------- --------- --------- ---------
Operating expenses:
Research and development ................ 449 426 768 628
Selling, general and administrative ..... 1,073 1,787 2,050 3,255
--------- --------- --------- ---------
Total operating expenses ................ 1,522 2.213 2,818 3,883
--------- --------- --------- ---------
Loss from operations ........................ (1,503) (2,574) (2,757) (4,623)
Other income (expense), net ................. (249) (34) (521) (42)
--------- --------- --------- ---------
Loss before income taxes .................... (1,752) (2,608) (3,278) (4,665)
Income taxes ................................ -- -- -- 1
--------- --------- --------- ---------
Loss before minority interest ............... (1,752) (2,608) (3,278) (4,666)
Minority interest in net loss ............... 109 159 189 167
--------- --------- --------- ---------
Net Loss .................................... $ (1,643) $ (2,449) $ (3,089) $ (4,499)
========= ========= ========= =========
Loss per share (basic and diluted) .......... $ (0.01) $ (0.01) $ (0.01) $ (0.02)
========= ========= ========= =========
Weighted average
shares outstanding ..................... 309,748 305,410 309,704 292,072
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
ENER1, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months
Ended June 30,
-------------------
2003 2002
------- -------
Cash provided by (used in):
Operating activities:
Net loss .......................................... $(3,089) $(4,499)
Depreciation and amortization ..................... 124 410
Foreign currency transaction gain ................. -- 14
Common stock issued for services .................. 20 138
Minority interest in loss of subsidiary ........... (189) (167)
Changes in assets and liabilities ................. 877 3,304
------- -------
Net cash used in operating activities ........... (2,257) (800)
------- -------
Investing activities:
Capital expenditures .............................. (431) (1,982)
Purchase of technology licenses ................... -- (1,170)
------- -------
Net cash used in investing activities ........... (431) (3,152)
------- -------
Financing activities:
Repayment of related party debt ................... -- (1,156)
Repayment of short-term note payable .............. (595) --
Net proceeds from issuance of common stock ........ 5 945
Proceeds from advances from stockholder ........... 2,806 2,440
Repayment of mortgage payable ..................... (14) (12)
Proceeds from note payable ........................ -- 208
Proceeds from minority investment in subsidiary ... 250 1,600
------- -------
Net cash provided by financing activities ..... 2,452 4,025
------- -------
Net increase (decrease) in cash and equivalents .......... (236) 73
Cash and equivalents, beginning of period ................ 288 1,495
------- -------
Cash and equivalents, end of period ...................... $ 52 $ 1,568
======= =======
See notes to condensed consolidated financial statements
5
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
[Download Table]
Cash paid during the six months for
Income taxes ............................................. $ 1
=======
Interest paid ............................................ $ 100 $ 34
======= =======
Non-cash investing and financing activities:
Equipment sold to stockholder at net book value for
a reduction in the amount due to stockholder ...... $ 103
=======
Advances from stockholder converted to additional paid
in capital ....................................... $ 909 $ 5,958
======= =======
Equipment purchase from Parent at net book value for
the assumption of various promissory notes to
related parties and an increase in the amount due
to Parent ......................................... $12,363
=======
See notes to condensed consolidated financial statements
ENER1, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT PLANS
6
The Company has, in the past year, changed the focus of its business and now
concentrates most of its effort on developing and marketing new energy
technologies (lithium batteries, fuel cells and solar cells) through its Ener1
Battery Company subsidiary, which it acquired from its parent company, Ener1
Group, Inc. in September of 2002.
On September 6, 2002, the Company entered into a merger agreement, pursuant to
which it acquired 100% of the outstanding capital stock of Ener1 Battery Company
("Ener1 Battery" or "Battery Company") from the Company's parent, Ener1 Group,
Inc. In accordance with SFAS 141 Business Combinations, because the Company and
Ener1 Battery were entities under common control, operations of the two entities
were combined from the beginning of each period presented similar to the pooling
of interests method. The Company previously reported the details of operations
of the formerly separate Battery Company before the combination in the Company's
Form 8-K/A dated October 18, 2002.
Ener1 Battery develops and markets lithium technology batteries for military,
industrial and consumer applications, as well as fuel cells and solar cells.
Ener1 Battery has five patent applications on file with the U.S. Patent and
Trademark Office relating to its technologies for advanced lithium battery
materials and designs and is developing additional technologies for lithium
metal batteries, fuel cells and solar cells that are expected to be the subject
of further patent applications.
The Company has been phasing out those portions of its set top box and
consulting business (the "Digital Media Technologies Division") that have not
been transferred to EnerLook Solutions, Inc., f/k/a EnerLook Health Care
Solutions, Inc. (of which the Company owns approximately 49% as of the date of
this Form 10-QSB). EnerLook Solutions delivers interactive information and
entertainment systems and services to customers in the hospitality and
healthcare businesses.
On June 13, 2002 the Company formed Ener1 Technologies, Inc. to develop and
market products and services for neutralizing the harmful effects of
electromagnetic fields in electric power transmission lines and related
equipment, under an exclusive technology license.
ENER1, INC. CORPORATE STRUCTURE:
ENER1 BATTERY - 100% OWNED SUBSIDIARY
Ener1 Battery develops new energy technologies and products and services for
lithium batteries, fuel cells and solar, using patented and patent pending
technologies. The Company believes these battery technologies will be
particularly useful in military applications, specialty and industrial
applications, such as medicine and, ultimately, in high-end consumer electronics
applications, such as 3G telecommunications products.
Ener1 Battery is considered a development stage company, but is now producing
prototypes and samples of its products for internal and third party testing.
7
OTHER OPERATING UNITS:
The Company also owns 49.35% of EnerLook Solutions, Inc. f/k/a EnerLook
Health Care Solutions, Inc., which develops and markets turn-key video-on-demand
and interactive TV to customers in the health care and hospitality industry.
EnerLook integrates its interactive systems and services with a patient,
administrative, and clinical services for its hospital customers and customer
and administrative functions for its hospitality customers. The former Digital
Media division, which developed the proprietary set top box used by EnerLook in
its systems, has been substantially combined into EnerLook Solutions, Inc.
On June 13, 2002, the Company formed Ener1 Technologies, Inc. to
develop and market products for the electric power transmission industry, using
the licensed, patent-pending EnerWatchTM technology for detecting, monitoring
and mitigating energy losses and other harmful effects of transients in
electronic circuits and systems.
BASIS OF PRESENTATION The accompanying, unaudited, condensed, consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-QSB for quarterly reports under
section 13 or 15 (d) of the Securities Exchange Act of 1934. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and such adjustments are of
a normal recurring nature. Operating results for the three and six months ended
June 30, 2003 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2003. The audited financial statements at
December 31, 2002, which are included in the Company's Annual Report on Form
10-KSB, should be read in conjunction with these condensed consolidated
financial statements.
GOING CONCERN. The accompanying condensed consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has experienced net operating losses since 1997, negative cash flows
from operations since 1999 and as of June 30, 2003, had an accumulated deficit
of $52.2 million. Cash used in operations for the years ended December 31, 1999,
2000, 2001 and 2002 was $6.1 million, $8.2 million, $6.2 million and $6.5
million respectively. The Company continued to have negative cash flows of $2.3
million from operations for the six months ended June 30, 2003. It is likely
that the Company's operations will continue to incur negative cash flows in the
third quarter of 2003, and additional cash will be required. Such conditions,
among others, give rise to substantial doubt about the Company's ability to
continue as a going concern for a reasonable period of time. The condensed
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
MANAGEMENT PLANS. Through the acquisition of the Battery Company from Ener1
Group, Inc., the Company has re-directed its focus almost exclusively on
development and marketing of new
8
energy sources in the areas of lithium batteries, fuel cells and solar cells.
Therefore, an important contribution to the Company's future success will have
to come from its bringing the Battery Company from a development stage company
to production of batteries and/or other new energy products.
Both EnerLook Solutions, Inc. and Ener1 Technologies, Inc. are also development
stage companies.
The Company will require additional capital to pursue and complete its business
plans, and there can be no assurance that the capital will be available. The
Battery Company has been funded in the past by its parent company Ener1 Group,
Inc.. Ener1, Group, Inc. (Parent Company) has provided additional debt and
equity funding of approximately $2.8 million during the six month period ended
June 30, 2003. The Company believes Ener1 Group, Inc. will continue to provide
additional working capital; however, the Company is also pursuing other sources
of financing as well. In this connection, on July 25, 2003, the Company secured
additional funding of $3.5 million from ITOCHU Corporation's purchase of its
common stock (See Investment Transaction). All of the $3.5 million has been
received by the Company.
RECENT DEVELOPMENTS
FILING WITH SEC TO SPIN-OFF ENER1 TECHNOLOGIES, INC. SUBSIDIARY:
Ener1 Technologies, Inc., a development stage company and subsidiary of
the Company, filed on November 6, 2002 an SB-2 registration statement with the
Securities and Exchange Commission to register the spin-off by the Company of
100% of Ener1 Technologies' common stock to the record holders of Ener1, Inc.
common stock once a record date for the spin-off is set. The spin-off
distribution would occur once SEC review of the proposed transaction is
completed and the registration statement goes effective. The Company believes
that the distribution will be treated as a dividend to Ener1, Inc. stockholders.
INVESTMENTS AND OTHER TRANSACTIONS WITH ITOCHU CORPORATION
On July 25, 2003, the Company entered into a Subscription and
Investment Agreement with ITOCHU Corporation ("ITOCHU"), whereby among other
things, in return for an investment by ITOCHU of $3.5 million in cash, the
Company issued 14 million shares of its restricted common stock to ITOCHU at a
price of $0.25 per share. ITOCHU also has options to increase its ownership in
the Company at escalating prices and in specific amounts during set periods. For
the six month period beginning on the date of the Subscription and Investment
Agreement (July 25, 2003), ITOCHU has the option to purchase additional shares
equivalent to up to 4% of the Company's total outstanding Common Stock (computed
as of July 24, 2003) for US$0.70 per share. During the immediately subsequent
six month period, ITOCHU has the option to purchase additional shares equivalent
to up to 3% of the Company's outstanding Common Stock (also computed as of July
24, 2003) for US.2.50 per share. The Company has completed a transaction with
ITOCHU on August 14, 2003 to form a new Japanese company called EnerStruct, Inc.
("EnerStruct"), of which ITOCHU own 51% and the Company owns 49%. The Company
has invested $2 million in cash into EnerStruct for the Company's 49% interest.
9
The Company made this investment on August 14, 2003, using proceeds from the
ITOCH investment. The Company has also entered into a license agreement with
ITOCHU, Ener1 Battery Company and EnerStruct to provide EnerStruct with an
exclusive license (for Japan only) to the technologies covered by two of Ener1
Battery Company's pending patent applications at the U.S. Patent and Trademark
Office: (i) U.S. Patent Application No.10/038,556 Solid Polymer Electrolyte
Lithium Battery, and (ii) U. S. Patent Application No. 10/108,140 Methods and
Apparatus for Deposition of Thin Films. Concurrently, ITOCHU has also licensed
to EnerStruct patents relating to ITOCHU's high-rate battery technology).
SEGMENT REPORTING
On September 6, 2002, the Company acquired 100% of the outstanding
stock of Ener1 Battery from the Company's parent, Ener1 Group, Inc. On June 13,
2002, the Company formed Ener1 Technologies, Inc., and in February 2002, it
formed a (then) 51% owned subsidiary, EnerLook Solutions, Inc. (f/k/a EnerLook
Health Care Solutions, Inc.). EnerLook Solutions has raised additional capital
during the second quarter of 2003, which has reduced the Company's ownership to
49.35%. These businesses are reportable segments since they reflect different
types of businesses from the Company's original business of developing and
marketing advanced interactive digital information and entertainment software
and hardware systems that provide video and movies on demand, Web access, e-mail
and interactive TV services delivered through television for customers in
industries such as hospitality, healthcare, and other vertical markets. The
Company has mostly completed combining the activities of the Digital Media
division and EnerLook Solutions, Inc. Former Digital Media net assets of
approximately $1.0 million were transferred to EnerLook as of May 31, 2003. The
sales, losses and other financial information reported below by segment are for
the three and six months ended June 30, 2003 and 2002.
Ener1 Battery was incorporated on March 1, 2001 in the State of Florida
under the name of Ener1 USA Incorporated. On March 27, 2002, Ener1 USA
Incorporated changed its name to Ener1 Battery Company. In accordance with SFAS
141 Business Combinations, because Ener1, Inc. and Ener1 Battery were under
common control, operations of the entities were combined from the beginning of
each period presented similar to the pooling of interests method as if the
acquisition occurred at the beginning of the first period presented. Therefore
the Battery Company operating performance is included in the financial
statements and in the information below for both the three-month and six-month
periods ended June 30, 2003 and 2002.
EnerLook Solutions, Inc. was successful during the first quarter of
2003 in implementing its first hospital system contract, which generated
approximately $146,000 in revenue, the majority of which was attributable to
system equipment sales.
The Company operated Ener1 Technologies, Inc. during the three and six
month ended June 30, 2003 and 2002 as a cost center. As a development stage
company, Ener1 Technologies did not have significant financial statement
activity.
10
Transactions between segments, consisting principally of product sales
and purchases, are recorded at the consummated sales price. The Company
evaluates the performance of its segments and allocates resources to them based
on anticipated future contribution. Segment Reporting
[Enlarge/Download Table]
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------ ------ ------ ------
Amounts in thousands
Sales:
Digital Media Division 102 649 840 1,833
EnerLook Solutions, Inc. -- -- 146 --
Ener1 Technologies, Inc. -- -- -- --
Ener1 Battery Company -- -- -- --
------ ------ ------ ------
Net Sales 102 649 986 1,833
====== ====== ====== ======
Loss before minority interest
Digital Media Division 523 1,529 1,124 3,198
EnerLook Solutions, Inc. 214 325 378 351
Ener1, Technologies, Inc. 94 60 102 71
Ener1 Battery Company 921 694 1,674 1,046
------ ------ ------ ------
Loss before minority interest 1,752 2,608 3,278 4,666
====== ====== ====== ======
Assets
Digital Media Division 967 1,716
EnerLook Solutions, Inc. 1,452 1,365
Ener1 Technologies, Inc. 11 --
Ener1 Battery Company 22,175 21,234
------ ------
Total Assets 24,605 24,315
11
REVENUE RECOGNITION
Revenue from engineering services contracts is recognized as the work
is performed. Contracts are either time-and-material or fixed-price in nature.
With time-and-material type contracts, revenue is calculated by multiplying the
number of hours worked by the contractually agreed upon rate per hour. With
fixed-price type contracts, revenue is calculated by applying the percentage of
completion method, which is based on the ratio of total hours incurred to date
to the total estimated hours. Revenue recognition must satisfy several factors
depending on the nature of the contract. These factors include the completion of
certain contractual milestones, which are verified by the customer before
revenue is recognized, and a calculation of the costs incurred and an estimated
cost to complete to determine if costs are in excess of potential revenue.
Contracts generally allow for modification of the number of hours or the stated
deliverables via change orders based upon the actual work required to complete a
project and upon agreement between the Company and its customer(s). The Company
records a loss in the current period during which a loss on a project appears
probable. The amount of such loss is the reasonably estimated loss on the
project and is recorded immediately upon determination that the loss is
probable. The Company is doing business with a number of start up companies.
Generally accepted accounting principles require that collectability must be
reasonably assured before revenue is recognized. The Company evaluates each of
its customers who are in a start up mode and assesses its ability to pay and the
customer's recent history of payments before the Company recognizes revenue for
services performed. Revenue from product licensing is recognized as earned
pursuant to the terms of the related contract, which generally occurs when the
Company ships equipment in conjunction with such license. Amounts received but
unearned as of June 30, 2003 are recorded as deferred revenue.
CONSOLIDATION OF 49.35% SUBSIDIARY (ENERLOOK SOLUTIONS, INC.)
EnerLook Solutions, Inc. ("Solutions") was a 51% subsidiary of the
Company at its inception. 42.58% of Solutions is owned by Ener1 Group, Inc.
Solutions recently raised $250,000 by sale of its restricted shares, in a
private transaction, reducing the Company's ownership to 49.35%. The transaction
was exempt under Section 4(2) of the Securities Act of 1933. Since the inception
of Solutions, the Company has consolidated its operating results and its balance
sheet as part of the Company's consolidated financial statements. Ownership
below 51% is most often recorded under the equity method of accounting, as it is
presumed that control does not exist and therefore consolidation is prohibited.
The Company has elected to continue consolidating this subsidiary as part of its
financial statements because the Company and Ener1 Group, Inc. are related
parties and exercise substantial control over the activities of the subsidiary
and in total own 91.93%. Management believes that the reduction in its ownership
percentage of Solutions by 1.65% (from 51% to 49.35%) does not materially reduce
the control over Solutions operations exercisable by the Company.
If the Company were to report the investment in Solutions under to the
equity method of accounting, the Company's share of the losses of Solutions
would be included in its financial results as a one line item instead of
reflecting sales and expenses in the statement of operations. In the equity
method of accounting, the assets and liabilities of the subsidiary would be
shown as
12
a net investment in the subsidiary instead of consolidating the assets and
liabilities with those of the Company. Solutions at June 30, 2003, had total
assets of $1.5 million, liabilities of $0.6 million, and net equity of $0.9
million.
The Company in the second quarter transferred certain assets of its
Digital Media division to Ener1 Solutions, Inc. in order to consolidate the set
top box business, which delivers interactive information and entertainment
systems and services to vertical markets such as hospitality and healthcare,
into one entity - EnerLook Solutions Inc.. Since Digital Media was no longer
pursuing contract-engineering business, the activities of the two units became
quite similar. As part of this restructuring of the activities of Digital Media
and Solutions, the Company transferred net assets in the amount of approximately
$1.0 million to Solutions, resulting in an intercompany receivable from
Solutions in the amount of $0.5 million and a contribution of capital of $0.5
million to Solutions. Preparatory to this restructuring, Solutions sold $250,000
of its restricted shares to outside private investors, which also increased the
equity base of Solutions.
TECHNOLOGY LICENSES
During the six months ended June 30, 2002, the Company capitalized
approximately $1.0 million for licenses related to the set-top box technology.
Management believes that this technology and the related set-top boxes will not
be fully developed and marketable with this technology until mid 2004 and the
Company will not generate significant revenues from the sale of set-top boxes
with this technology until that time. Based on this, the Company is currently
not amortizing the licenses. These licenses will continue to be reviewed for
impairment in accordance with SFAS No. 144. As indicated above, Digital Media
transferred its portion of the licenses in the approximate amount of $0.8
million to Solutions to consolidate the activities of the set top box into one
entity.
GUARANTEE OF CERTAIN LOANS
At June 30, 2003, Ener1 s.r.l., a related Italian company, had a loan
outstanding to Meliorbanca, an Italian bank, in the amount of EURO approximately
2,367,685. This was approximately $2,700,000 in US dollars at June 30, 2003. The
loan to Meliorbanca is payable in monthly installments of EURO 100,000, starting
March 31, 2003, with a balloon payment for the remainder on March 31, 2004. All
required payments under the loan have been made. The collateral coverage on
specified Ener1 Battery production equipment is EURO 5,000,000 (approximately
US$5,540,000 as of the date of this filing). Ener1, Inc., Ener1 Group, and Ener1
Battery are guarantors on the loan, along with other related parties.
Ener1 Group, Inc. (the Parent Company) has loans outstanding with a
principal investor, BZINFIN, S.A., totaling approximately $24.3 million. The
Battery Company equipment and two of the five pending patents owned by the
Battery Company comprise a portion of the collateral for these loans. (BZINFIN
released its security interest in a third pending patent in connection with the
ITOCHU Investment Transactions.) Repayment of these loans has been postponed
until December 31, 2003 by agreement of the parties involved.
13
NET LOSS PER SHARE
The Company computes net loss per share under Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which requires a
dual presentation of basic and diluted earnings per share on the face of the
statement of operations. Basic earnings per share excludes dilution and is
computed by dividing income or loss attributable to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were converted into common
stock, but such securities or contracts are excluded if their effects would be
anti-dilutive. The Company excluded stock equivalents from the weighted-average
shares outstanding calculation for the three and six months ended June 30, 2003
and 2002, respectively, as their effect was anti-dilutive.
COMMITMENTS AND CONTINGENCIES
The Company's litigation with Eduard Will, the Company's former
President and Chief Executive Officer, regarding amounts allegedly owed by the
Company to Will under an employment agreement, has been settled. Mr. Will, as
plaintiff in the litigation was seeking monetary damages for alleged breach of
his employment agreement with the Company, including severance and other
compensation. The law suit was settled on June 28, 2003 for $100,000 in cash
payments, spread equally over a twelve month period, and 240,000 shares of
restricted common stock at a stipulated price of $0.25 per share. The issuance
of the shares is exempt under Section 4(2) of the Securities Act of 1933.
The Company's litigation with GMC Properties, Inc., the landlord for
the Company's former leased facility in Boca Raton, Florida, regarding amounts
allegedly owed by the Company to GMC for rent and certain repairs to the
property, has been settled for $150,000, which includes $30,000 down (already
paid by the Company) and monthly payments of $10,000 for twelve months.
The Company was named a co-defendant in an action brought in the United
States District Court for the District of Massachusetts, by NEC Technologies,
Inc. ("NEC"). The suit alleges that the Company supplied modem hardware to NEC,
which was combined by NEC with software supplied by another co-defendant, Ring
Zero Systems, Inc. NEC was subsequently sued for patent infringement by PhoneTel
Communications, Inc. ("PhoneTel"), allegedly as a result of NEC's combination of
modem hardware and software supplied by the vendors in its personal computer
products. NEC alleges that the Company and Ring Zero are obligated to indemnify
NEC for NEC's costs of defense and settlement of the PhoneTel suit, in the
amount of $327,000. This action was dismissed without prejudice on April 25,
2000; however, the reason for the dismissal was entirely procedural. While it is
possible that NEC might attempt to refile this action in an appropriate
jurisdiction in the near future, no such action has been taken against the
Company. The Company cannot predict at this time whether any such future claim
would have a material adverse effect on the Company's operating results,
financial condition, or cash flows.
14
The Company and its Boca Global, Inc. subsidiary were named
co-defendants in an action brought in the District Court of South Dakota, by
Gateway, Inc. ("Gateway"). Global Village, Inc. had contracted to supply its
FaxWorks software to be bundled with Gateway PCs. Gateway's complaint against
the Company and Boca Global, Inc. alleges that either or both of these entities
assumed the liabilities of Global Village, Inc. with respect to the FaxWorks
product. Gateway reportedly will pay between $5 million and $6 million to settle
litigation brought by PhoneTel, for which Gateway has sought indemnification
from the Company, Boca Global, Inc., and an unrelated co-defendant. On January
19, 2001, a motion to dismiss was granted with respect to the Company. Boca
Global, Inc. remains as a defendant. While the Company believes that Boca
Global, Inc. will be able to assert numerous defenses to the liability, the
Company is unable to estimate what impact, if any, this claim will have upon the
Company's financial statements, given the preliminary nature of the claim.
The Company is the obligor on a Term Note in the principal amount of
$200,000, payable to Ener1 Holdings, Inc. (now known as Ener1 Group, Inc.), the
majority stockholder of the Company. This note matured on February 22, 2003, and
none of the principal or accrued interest has been paid.
STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2003, related to the terms of a
consulting agreement, the Company issued to the consultant 300,000 shares of
common stock. Under the agreement, the Company is also obligated to issue to the
consultant a warrant to acquire 200,000 shares of common stock. The warrant is
required to have an exercise price of $.10 per share and expire in December
2004. As of the date of this filing, the warrant has not yet been issued;
however, the Company is still obligated to issue the warrant. During the six
months ended June 30, 2003, 2,460,000 options were issued, 179,000 options were
terminated and 108,500 options were exercised.
RELATED PARTY TRANSACTIONS
During the three and six months ended June 30, 2003 and 2002, Ener1
Group, Inc. incurred expenses on behalf of the Company, including payroll,
advisory services and other administrative expenses for the three and six months
ended June 30, 2003 totaling approximately $193,516 and $405,096, and for the
three and six months ended June 30, 2002 totaling approximately $410,207 and
$630,511 respectively. These advances are non-interest bearing and due on demand
and are included in Due to Stockholder on the balance sheet.
During the quarter ended March 31, 2003, a total of approximately
$1,420,000 was allocated and advanced (including the allocation of the incurred
expenses above) to the Company of which approximately $909,000 was converted to
capital. During the quarter ended June 30, 2003, approximately $1,388,000 was
allocated and advanced (including the allocation of incurred expenses above) to
the Company. None of the additional $1,388,000 was converted to capital and is
reflected in Due to Stockholder.
15
RECLASSIFICATION
Certain amounts reflected in the financial statements for the three and
six month period ended June 30, 2002 have been reclassified to conform to the
presentation for the three and six month period ended June 30, 2003.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND INTERPRETATIONS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method over its useful life. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. Adoption of
this statement did not have a material effect on the Company's financial
condition, results of operations and cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3. This statement is effective for exit or disposal
costs initiated after December 31, 2002, with early adoption encouraged.
Adoption of this statement did not have a material effect on the condensed
consolidated financial statements of the Company.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company has not yet
determined what the effects of this Statement will be on its financial position
and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. Adoption of this
Statement did not have a material impact on the condensed consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based
16
employee compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002. Adoption of this Statement did not have a material
impact on the condensed consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company has not yet
determined what the effects of this Statement will be on its financial position
and results of operations.
In April 2003, the FASB issued SFAS No. 149, which amends SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". The primary
focus of this Statement is to amend and clarify financial accounting and
reporting for derivative instruments. This Statement is effective for contracts
entered into or modified after June 30, 2003. The Company has not yet determined
what the effects of this Statement will be on its financial position and results
of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting guidance
contained in SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet. SFAS No. 150 affects the issuer's accounting
for three types of freestanding financial instruments. One type is mandatory
redeemable shares, which the issuing company is obligated to buy back in
exchange for cash or other assets. A second type includes put options and
forward purchase contracts, which involves instruments that do or may require
the issuer to buy back some of its shares in exchange for cash or other assets.
The third type of instruments that are liabilities under this Statement is
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. Most of the provisions of SFAS No. 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement No. 6, "Elements
of Financial Statements". The remaining provisions of this Statement are
consistent with the FASB's proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing its
own shares. This Statement shall be
17
effective for financial instruments entered into or modified after May 31, 2003
and otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of a non-public entity, as to which the effective date is for fiscal
periods beginning after December 15, 2003. The Company is currently assessing
the impact of SFAS No. 150, which is not expected to have a material impact on
the Company's financial statements.
18
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 23E of the Securities Act of 1934, as amended. These statements relate
to the Company's expectations regarding future events or future financial
performance. Any statements contained in this report that are not statements of
historical fact may be deemed forward-looking statements. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "intend", "believe,"
"estimate," "predict," "potential" or "continue," or the negative of such terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company, nor any other entity, assumes responsibility for the accuracy and
completeness of the forward-looking statements. The Company is under no
obligation to update any of the forward-looking statements after the filing of
this Form 10-QSB to conform such statements to actual results or to changes in
the Company's expectations.
The following discussion should be read in conjunction with the
Company's condensed consolidated financial statements, related notes and the
other financial information appearing elsewhere in this Form 10-QSB. Readers are
also urged to carefully review and consider the various disclosures made by the
Company, which attempt to advise interested parties of the factors which affect
the Company's business, including without limitation, the disclosures made under
the caption "Certain Factors That May Affect Future Performance."
19
RESULTS OF OPERATIONS
NET SALES. The Company's net sales decreased 84.3% to $0.1 million for
the three months ended June 30, 2003 from $0.6 million for the three months
ended June 30, 2002. For the six months ended June 30, 2003 net sales decreased
by 46.1% to $1.0 million from $1.8 million for the six month ended June 30,
2002. Sales for the three months ended June 30, 2003 consisted of $0.1 million
in product sales. No revenue was recorded for contract engineering. Sales for
the three months ended June 30, 2002 consisted of $0.1 million in product sales
and $0.5 million in contract engineering. Sales for the six months ended June
30, 2003 consisted of $0.8 million in product sales and $0.2 million in contract
engineering. Sales for the six months ended June 30, 2002 consisted of $0.7
million in product sales and $1.1 million in contract engineering. The decrease
in contract engineering sales for the three months and six months ended June 30,
2003 compared to the previous year is the result of the Company's decision to
focus its activities on completing product development for several new lithium
batteries concurrently phase out the contract engineering business. Furthermore,
the Company is now pursuing sales of its interactive system iTV devices to the
hospital and lodging markets only through its EnerLook Solutions subsidiary.
During the six months ended June 30, 2003 this 49.35% owned subsidiary completed
the installation of its first hospital system at the Hackensack Medical Center.
This generated $146,000 in revenue in the first quarter, the majority of which
was attributable to system equipment sales. In the second quarter ended June 30,
2003, EnerLook secured a contract from CentraState Hospital, which may result in
revenue during the third quarter. The Battery Company did not have any sales
during the six months ended June 30, 2003, and it is unlikely that it will have
any significant sales until 2004.
GROSS PROFIT (LOSS). The Company recorded a gross profit of $19,000 for
the three months ended June 30, 2003, as compared to a gross loss of $361,000
for the three months ended June 30, 2002. For the six month period ended June
30, 2003 the Company reported a gross profit of $61,000 compared to a gross loss
of 740,000 for the six month period ended June 30, 2002. Over the last several
years, the Company has been unable to consistently achieve positive gross
margins on the contract engineering services business. In the three and six
months ended June 30, 2003, the Company significantly reduced its engineering
services staff as it scaled back its engineering services operations to focus on
primarily on research, development and marketing of lithium batteries, fuel
cells and solar cells and secondarily on EnerLook's sales of systems to
hospitals and hotels.
RESEARCH AND DEVELOPMENT EXPENSES. The Company has determined that a
significant portion of Battery operating expenses should be classified as
research and development expenses, which has not been done previously. Therefore
these financial statements reflect the reclassification of certain expenses
previously classified as selling, general, and administrative in the battery
operations to research and development expenses for the three and six months
ended June 30, 2003 and June 30, 2002. The Company's research and development
expenses for the three month periods ended June 30, 2003 and 2002 were $0.4
million and $0.4 million, respectively and for the six month periods ended June
30, 2003 and 2002 were $0.8 million and
20
$0.6 million, respectively. As a result of the phasing out of the former Digital
Media division, the Company did not record any research and development expenses
for the three and six months ended June 30, 2003 for this division as compared
to $171,000 and $295,000 for the three and six months ended June 30, 2002. The
Company expects that R & D expenses for Digital Media and EnerLook will continue
to be insignificant. However, it expects to increase in the future R&D expenses
for the Battery Company now that the Company has shifted its focus to new energy
technologies and the development of products and services using those
technologies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). As noted in the
discussion concerning Research and Development expenses ("R&D"), certain
Selling, General and Administrative expenses in the Battery Company have been
reclassified to R & D expense. The Company's SG&A expenses for the three and six
months ended June 30, 2003 decreased from $1.8 million to $1.1 million and $3.3
million to $2.1 million respectively. The decrease was primarily due to a
decrease in the Company's Digital Media and EnerLook division and to a lesser
extent from a lesser decrease in the Battery Company. The chart below reflects
the actual dollar expenditures in these categories after the reclassification.
Three Months Ended Six Month Ended
June 30 June 30
----------------------------------------------
In millions 2003 2002 2003 2002
------- ------- ------- -------
Digital Media Division $ 0.5 $ 1.0 $ 1.1 $ 2.2
Ener1 Technologies, Inc. 0.1 0.1 0.1 0.1
Ener1 Battery Company 0.3 0.4 0.5 0.7
EnerLook Solutions, Inc. 0.2 0.3 0.4 0.3
------- ------- ------- -------
Total $ 1.1 $ 1.8 $ 2.1 $ 3.3
======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had a working capital deficit of
$11.9 million. As of June 20, 2003, the Company's working capital deficit was
$14.1 million, of which $6.9 million consisted of notes payable to its majority
stockholder, and $1.7 million consisted of current maturities of related party
debt. During the period from December 31, 2002 through June 30, 2003, the
Company's working capital decreased by $2.2 million. This decrease in working
capital was primarily the result of a decrease in cash of $0.3 million, a
decrease in accounts receivable by $0.3 million, a decrease in prepaid expenses
and inventory of $0.6 million, and increase in due to stockholders of $1.9
million, offset by a decrease in accounts payable of $0.2 million, a decrease in
notes payable of $0.6 million and a decrease in deferred revenue of $0.1
million.
The Company will require additional capital to support the development
stage activities of its Ener1 Battery Company subsidiary and the expanding
activities of EnerLook. The Company will also require additional capital to pay
existing balance sheet liabilities. There can be no assurance that any required
capital will be available on terms acceptable to the Company, if
21
at all, at such time or times as required by the Company. The Company has been
funded primarily for the last twelve months by equity, loans, and advances from
its parent company, Ener1, Group, Inc. During the quarter ended March 31, 2003,
a total of approximately $1,420,000 was allocated and advanced to the Company of
which approximately $909,000 was converted to capital. During the quarter ended
June 30, 2003, approximately $1.388,000 was allocated and advanced to the
Company. EnerLook Solutions raised $1.6 million of equity in 2002 and also sold
shares of its restricted common stock for $250,000 during the second quarter of
2003 to raise additional working capital. The stock was sold to accredited
investors in a transaction exempt under Section 4(2) of the Securities Act of
1933. This additional investment reduced the Company's ownership to 49.35%.
The Company at the end of July finalized a $3.5 million investment
transaction with ITOCHU Corporation. The Company issued 14 million restricted
shares at a price of $0.25 per share. The transaction was exempt under Section
4(2) of the Securities Act of 1933. ITOCHU Corporation has options to increase
ownership in the Company at specific prices and in specific amounts as described
in a Subscription and Investment Agreement. For the six month period beginning
on the date of the Subscription and Investment Agreement (July 25, 2003), ITOCHU
has the option to purchase additional shares equivalent to up to 4% of the
Company's total outstanding Common Stock (computed as of July 24, 2003) for
US$0.70 per share. During the immediately subsequent six month period, ITOCHU
has the option to purchase additional shares equivalent to up to 3% of the
Company's outstanding Common Stock (also computed as of July 24, 2003) for
US.2.50 per share. As a result of the $3.5 million transaction, ITOCHU now owns
approximately 4.3% of the Company's outstanding common stock. The Company also
agreed with ITOCHU to form a new Japanese company called EnerStruct, Inc.
("EnerStruct"), of which ITOCHU would own 51% and the Company would own 49%, and
the Company would invest $2 million into EnerStruct for such 49% interest in
EnerStruct. This investment was made on August 14, 2003, using proceeds from the
ITOCH investment. The Company has also entered into a license agreement with
ITOCHU, Ener1 Battery Company and EnerStruct to provide EnerStruct with an
exclusive license (for Japan only) to the technologies covered by two of Ener1
Battery Company's pending patent applications at the U.S. Patent and Trademark
Office: (i) U.S. Patent Application No.10/038,556 Solid Polymer Electrolyte
Lithium Battery, and (ii) U. S. Patent Application No. 10/108,140 Methods and
Apparatus for Deposition of Thin Films. ITOCHU also licensed to EnerStruct its
high-rate battery technology as part of the above transactions.
The Company is the obligor on a Term Note in the principal amount of
$200,000, payable to Ener1 Holdings, Inc. (now known as Ener1 Group, Inc.), the
majority stockholder of the Company. This note matured on February 22, 2003, and
none of the principal or accrued interest has been paid. Interest is payable at
12%. The Company expects to resolve this matter in the near future.
As of June 30, 2003, the Company's total indebtedness was $17.5
million, of which $15.2 consisted of current liabilities. $10.6 million of the
latter consisted of current portions of notes payable or intercompany advances
due to either stockholders or related parties.
22
CRITICAL ACCOUNTING POLICIES
The accounting principles applied by the Company for which acceptable
alternative principles are available is the use of APB 25 compared to SFAS 123,
related to recording employee stock compensation. The Company continues to apply
the intrinsic method of measuring employee stock compensation under APB 25 and
disclose the effects of measuring the compensation using the fair value method
prescribed in SFAS 123 which is consistent with the treatment employed by most
public companies.
Revenue from engineering services contracts is recognized as the work
is performed. Contracts are generally either time-and-materials or fixed-price
in nature. With time-and-materials type contracts, revenue is calculated by
multiplying the number of hours worked times the contractually agreed upon rate
per hour. With fixed-price type contracts, revenue is calculated by applying the
percentage of completion method. The Company did not have a significant amount
of work under a fixed price contract as of June 30, 2003. The nature of
consulting work for software and hardware development projects can cause
difficulties in estimating the cost of completion on fixed cost contracts.
Contracts generally allow for modification of the number of hours or the stated
deliverables via change-orders based upon the actual work required to complete a
project and upon agreement between the Company and its customer(s). The Company
records a loss in the current period during which a loss on a project appears
probable. The amount of such loss is the reasonably estimated loss on the entire
project and is recorded immediately upon determination that the loss is
probable. Revenue from product licensing or software royalties is recognized as
earned pursuant to the terms of the related contracts, which generally occurs
when the Company ships equipment in conjunction with such license or software.
Amounts received but unearned as of June 30, 2003, are recorded as deferred
revenue.
EnerLook Solutions, Inc. ("Solutions") was a 51% subsidiary of the
Company at its inception. 42.58% of Solutions is owned by Ener1 Group, Inc.
Solutions, Inc. recently raised $250,000 by sale of its restricted shares. Thus
reducing the Company's ownership to 49.35%. Since the inception of Solutions
Company the Company has consolidated its operating results and its balance sheet
as part of the Company's consolidated financial statements. Ownership below 51%
is most often recorded under the equity method of accounting. It is presumed
that control does not exist and therefore consolidation is prohibited. The
Company has elected to continue consolidating this subsidiary as part of its
financial statements because the Company's parent company Ener1, Group, Inc.
also owns 42.58% of EnerLook Solutions, Inc. The Company and Ener1 Group, Inc
are related parties and exercise substantial control over the activities of the
subsidiary and in total own 91.93%. Management believes that the reduction in
its ownership percentage of Solutions by 1.65% (from 51% to 49.35%) does not
materially reduce the control over Solutions operations exercisable by the
Company.
If the Company would report the investment in Solutions under to the
equity method of accounting, the Company's share of the losses of Solutions
would be included in its financial results as a one line item instead of
reflecting sales and expenses in the statement of operations.
23
In the equity method of accounting, the assets and liabilities of the subsidiary
would be shown as a net investment in the subsidiary instead of consolidating
the assets and liabilities with those of the Company. Solutions at June 30, 2003
had total assets of $1.5 million, liabilities of $0.6 million, and net equity of
$0.9 million.
The Company in the second quarter transferred certain assets of its
Digital Media division to Ener1 Solutions, Inc. in order to consolidate the set
top box business, which delivers interactive information and entertainment
systems and services to vertical markets such as hospitality and healthcare,
into one entity - EnerLook Solutions Inc. Since Digital Media was no longer
pursuing contract-engineering business, the activities of the two units became
quite similar. As part of this restructuring of the activities of Digital Media
and Solutions, the Company transferred assets in the amount of approximately
$1.0 million to Solutions, resulting in an intercompany receivable from
Solutions in the amount of $0.5 million and a contribution of capital of $0.5
million to Solutions. Preparatory to this restructuring, Solutions sold $250,000
of its restricted shares to outside private investors, which also increased the
equity base of Solutions.
ITEM 3. CONTROLS AND PROCEDURES
We have carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer (the
"CEO") and our Chief Financial Officer (the "CFO"), of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Act")) as of the end of the fiscal quarter covered by this report.
Based upon that evaluation, our CEO and CFO concluded that our disclosure
controls and procedures are effective in providing reasonable assurance that (a)
the information required to be disclosed by us in the reports that we file or
submit under the Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and (b) such information is accumulated and communicated to our
management, including our CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.
There has been no change in our internal control over financial
reporting during the fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
24
PART II.
ENER1, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 1. Legal Proceedings
The Company's litigation with Eduard Will, the Company's former
President and Chief Executive Officer, regarding amounts allegedly owed by the
Company to Will under an employment agreement, has been settled. Mr. Will, as
plaintiff in the litigation was seeking monetary damages for alleged breach of
his employment agreement with the Company, including severance and other
compensation. The law suit was settled on June 28, 2003 for $100,000 in cash
payments, spread equally over a twelve month period, and 240,000 shares of
restricted common stock at a stipulated price of $0.25 per share. The issuance
of the shares is exempt under Section 4(2) of the Securities Act of 1933.
The Company's litigation with GMC Properties, Inc., the landlord for
the Company's former leased facility in Boca Raton, Florida, regarding amounts
allegedly owed by the Company to GMC for rent and certain repairs to the
property, has been settled for $150,000, which includes $30,000 down (already
paid by the Company) and monthly payments of $10,000 for twelve months.
The Company has been named a co-defendant in an action brought in the
United States District Court for the District of Massachusetts, by NEC
Technologies, Inc. ("NEC"). The suit alleges that the Company supplied modem
hardware to NEC, which was combined by NEC with software supplied by another
co-defendant, Ring Zero Systems, Inc. NEC was subsequently sued for patent
infringement by PhoneTel Communications, Inc. ("PhoneTel"), allegedly as a
result of NEC's combination of modem hardware and software supplied by the
vendors in its personal computer products. NEC alleges that the Company and Ring
Zero are obligated to indemnify NEC for NEC's costs of defense and settlement of
the PhoneTel suit, in the amount of $327,000. This action was dismissed without
prejudice on April 25, 2000; however, the reason for the dismissal was entirely
procedural. While it is possible that NEC might attempt to refile this action in
an appropriate jurisdiction in the near future, no such action has been taken
against the Company. The Company cannot predict at this time whether any such
future claim would have a material adverse effect on the Company's operating
results, financial condition, or cash flows.
The Company and its Boca Global, Inc. subsidiary were named
co-defendants in an action brought in the District Court of South Dakota, by
Gateway, Inc. ("Gateway"). Global Village, Inc. had contracted to supply its
FaxWorks software to be bundled with Gateway PCs. Gateway's complaint against
the Company and Boca Global, Inc. alleges that either or both of these entities
assumed the liabilities of Global Village, Inc. with respect to the FaxWorks
product. Gateway reportedly will pay between $5 million and $6 million to settle
litigation
25
brought by PhoneTel, for which Gateway has sought indemnification from the
Company, Boca Global, Inc., and an unrelated co-defendant. On January 19, 2001,
a motion to dismiss was granted with respect to the Company. Boca Global, Inc.
remains as a defendant. While the Company believes that Boca Global, Inc. will
be able to assert numerous defenses to the liability, the Company is unable to
estimate what impact, if any, this claim will have upon the Company's financial
statements, given the preliminary nature of the claim.
Item 3. Defaults Upon Senior Securities
The Company is the obligor on a Term Note in the principal amount of
$200,000, payable to Ener1 Holdings, Inc. (now known as Ener1 Group, Inc.), the
majority stockholder of the Company. This note matured on February 22, 2003, and
none of the principal or accrued interest has been paid. Interest is payable at
12%. The Company expects to resolve this matter in the near future.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of CEO, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of CEO, Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of CFO, Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
None filed for the quarter ended June 30, 2003.
26
ENER1, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
ENER1, INC.
Dated: August 19, 2003 By: /s/ Ronald Stewart
---------------------------
Ronald Stewart
Chief Executive Officer
(Principal Executive Officer)
Dated: August 19, 2003 By: /s/ Ronald Stewart
----------------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer)
27
Dates Referenced Herein and Documents Incorporated by Reference
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