Thursday, April 5, 2012

Capital Structure Note: A123 Systems ($AONE)

A123 Systems (AONE) designs, develops, manufactures and sells advanced rechargeable lithium-ion batteries and energy storage systems and provides R&D services to government agencies and commercial customers.

The company has a market cap of $120 million. There is also $140 million face amount of convertible notes outstanding, which are trading at 30 cents for a market value of $42 million.

The notes bear interest at 3.75% and mature on April 15, 2016. The initial conversion rate of 138.8889 shares of common stock per $1,000 aggregate principal amount of notes is equivalent to a conversion price of approximately $7.20 per share.

The company has had a negative gross margin each of the past three years. Also, its operating expenses (not including COGS) are nearly 100 percent of sales.

On January 25, the Company raised $23.5 million from an institutional investor in a registered direct offering. They are also taking actions to improve cash flow by reducing manufacturing costs and operating expenses, as well as by managing inventory levels. The company mentioned in its annual report that if it "is unable to raise enough capital and improve operating performance, the Company's growth potential may be adversely affected and the Company will have to modify its growth plans to conserve available cash. Management believes that the available cash and cash equivalents should be sufficient to fund operations for the next twelve months."

Interestingly, the company had close to $200 million cash at the end of 2011. This looks a lot like another ENER situation with a negative enterprise value through the bonds.

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