Saturday, May 19, 2012

"A123 Systems Announces First Quarter 2012 Financial Results" ($AONE)

Good summary at Greentech Media:

"First-quarter revenue of $10.9 million was down 40 percent from $40.4 million in the fourth quarter of last year, when the company reported an $85 million loss. A123 also reduced its 2012 revenue estimates to $145 million to $175 million, down from an already-reduced $230 million to $300 million."
From the earnings release, we see cash was down to $113.1 million as of March 31, 2012. However, it looks like they may have paid off their revolving credit line? The 2016 notes are now trading at 27.5, a yield of 45%.

I've taken a crack at updating the cap table for AONE, reflecting the paid off credit line, reduced cash balance as of Mar 31, and issuance of new convertible notes (which are senior to the old sub notes), plus the increased cash from the new notes. I am assuming that they are issued and trading at par, although that may not be precisely correct.

Face Value Market Value
Cash -163,100 -163,100
Convertible Notes 50,000 50,000
Sub Convertible Notes 144,000 39,600
EV through Notes 30,900 -73,500
Common Stock 125,840 125,840
EV through Common 156,740 52,340

There is still a huge disparity between the enterprise value implied by the convertible notes and what is implied by the common stock. If you buy the sub notes, you buy the enterprise for negative $74 million. Buyers of the common are paying $157 million for the enterprise.

If anyone tried to make an argument for owning the equity, they would do it on a theory of "option value". However, at 27.5 cents the sub notes are trading like an option too (since they are the fulcrum security), and with the added advantage that the sub notes have a current yield of 13 percent.

So it seems like you can buy a cheap option and sell an overpriced option by buying the sub notes and selling the equity. The other good part of this trade is there will now be a tailwind of dilution from the new note offering. Those are convertible, plus interest and amortization payments on them may be settled in common stock, plus the notes come with additional warrants.

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