Citron Reports on Ener1 (AMEX:HEV)

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You don’t need a PhD in chemistry – just a high school diploma in common sense.

So here is the story in a nutshell (or the trunk of a Prius). It is Citron’s opinion that Ener1 is just a corporate shell company with a long history of failed businesses based on exaggerated promises. Management has tried everything from video games to visualization software to set top boxes for television. All of these businesses have failed — miniscule revenues and never a penny of profit delivered to investors. They purchased Delphi’s years-old attempt to get a lithium battery business going, and got a sublease on a manufacturing plant in Indianapolis. Since then we haven’t seen a single sign of a viable business.

Nosebleed Market Cap
Key Statistics Current After EnerDel JV acquisition from Delphi
Recent Stock Price $6.20  
Outstanding shares : 104 million fully diluted 107 million appx
Market capitalization: $645 million $663 million
Implied capitalization of Enerdel JV (80% owned) $840 million $663 million
Revenues for last 5 years: Less than $1.2 million Ditto
Net Income Continuing Operations for last 5 years: Net Loss of $187 million Ditto
Cash (3/31/08 10-Q) $13.6 million (plus $29.7m in subsequent warrant exercise) $32 million appx
Loss for quarter (3/31/08 10-Q) $13.7 million Ditto

HEV has arrived at its current corporate structure through the most notorious means reserved for the worst type of investment: A failed business goes non-reporting, gets kicked to the pink sheets, dilutes is shareholders with hundreds of millions of new shares, regains a listing on the Over-the-Counter, and then performs a reverse split so it can sell more shares to bring in new money. The small amount of new cash is all it takes to get an AMEX listing – with a gimmicky new ticker symbol to boot. Citron has never been wrong on any company that we have written about that has followed this route.

If you have a better mousetrap then where are the mice?

This is a simple mousetrap story. Ener1 would like us to believe that they have a better mousetrap in their lithium battery. Maybe the “we have a better battery” story would have been worthy of some credibility four years ago, but right now every major automobile manufacturer seems to have their commitments lined up. Much like a game of musical chairs, Ener1 was left without at seat.

Manufacturer Battery Supplier  
Ford Sanyo Click here »
Honda Sanyo Click here »
Volkswagen AG Sanyo Click here »
or Click here »
Robert Bosch Samsung SDI Click here »
Project Better Place (Nissan-Renault) NEC Click here »
Nissan – Renault NEC Corp, / TOKIN Click here »
GM Compact Power and A123 Systems Click here »
Click here »
Mitsubishi GS Yuasa Click here »

EnerDel (Ener1’s battery subsidiary) has only one announced deal, with Th!nk Vehicles of Norway, which claims to be planning to distribute its tiny electric cars in the North American market starting next year. The deal is for “up to” $70 million in battery sales. Even though management keeps touting a $70 million deal, they should be more judicious with their promotion. There appears to be no guaranteed commitment from Th!nk at all.

In addition to meeting performance criteria, testing for which is still pending, Th!nk “hopes” to sell 50,000 cars in the US – but these cars seem to be getting offered in a most unconventional sales proposition: Th!nk has “chosen” three competing battery suppliers. http://www.think.no/think/content/view/full/264

Then there’s Th!nk’s new model (the Ox) for the following year – but EnerDel appears to be out of the running for that one. Th!nk has chose A123, and is partnered with GE in the effort. http://www.think.no/think/Press-Pictures/Press-releases/Strategic-partnership-with-GE

So EnerDel’s slice of Th!nk’s pie is just one of three suppliers for just one of two Th!nk models…..and that is your company.

Even stranger, Th!nk communications describe their expectation that US consumers will lease the battery in a transaction completely separate from the auto purchase. You have to wonder if this assumed business model will have any appeal whatsoever for US consumers – or only serve to highlight the lack of an economic case for current lithium battery technology for all-electric vehicles.

Meanwhile, the Japanese heavyweight manufacturers include Sanyo, Samsung, Toshiba and NEC Corp., have all been investing tens of millions in researching, gearing up battery technologies, and establishing deals with major auto manufacturers.

The Delphi Deal — Validation of the Citron premise

The one wildcard for the stock was that Ener1 never owned 100% of the Enerdel subsidiary. Rather 19.5% was owned by now bankrupt Delphi Corporation. As the Delphi trustees tried to get as much money as they possible can for this subsidiary, here is the deal that is being presented to the Bankruptcy court.

http://media.delphidocket.com/documents/0544481/0544481080711000000000002.pdf

Ener1 will transfer to Delphi 2,857,143 million shares of Ener1 Common Stock and $8 million in cash, and will revise the exercise price for certain warrants held by Delphi exercisable into 750,000 shares of Ener1 Common Stock to $5.25. This entire transaction is valued at around $27 million.

It is the opinion of Citron that this is terrible news for Ener1 for 2 reasons.

  1. It pegs the valuation of Ener1 at around $1 a share post dilution. Now this is a generous number because Ener1 could have overpaid as they were using stock and had a vested interest in making the deal look richer than it should have been.
  2. It shows that even at a comparatively significant discount to Ener1’s market cap, no other strategic buyers or potential partners were willing to buy 20% of Enerdel. What this company needs is validation of its technology and its value proposition — this most recent transaction shows no commercial validation by potential partners and proves that the real value of HEV stock now at its best should be $1.

The Hard Truth

EnerDel’s battery technology, one of many available variations on the Li-ion theme, is frequently compared to Altair’s, whose $150m market cap is less than 25% of HEV’s. (http://thefraserdomain.typepad.com/energy/2007/09/enerdel-lithium.html ) The competition in this space is intense and none of them enjoy a lofty market cap even close to Ener1.

Citron could make a credible argument that until we see a 5 or 10-fold breakthrough in electricity storage density/weight /cost paradigm, which lithium batteries have shown no sign of providing, pure electric cars are only a gimmick, not a credible part of our mainstream transportation future. But this is not even an electric car story. This is the story of a company peddling a dream, which has yet to execute in an unproven industry.

Conclusion

This post simply serves as an introduction to the full Ener1 story. Future articles will explore in depth the history of failed promises of management, and the numerous “holy grail” stories they have attempted to promote out of this corporate shell. We will also discuss the recent analyst reports that have come out on HEV and how they lack the most fundamental business discipline – for a one-product company that has zero track record they don’t even bother with revenue models, gross margin projections, a desperate need for corporate discipline.

Comment to management: Don’t waste your efforts complaining about shortsellers “attacking the price of your stock”. Execute just one firm production contract with a credible counterparty that has real purchase commitments, real revenues and real profits and let the market react properly.

Meanwhile, Ener1 has no path to profitability, and no evidence of widespread commercial acceptance of their product. Until then its just another “battery story stock” and we’ve seen plenty of them over the years.

Cautious investing to all.