Not many of the people talking about this morning's AONE announcement have read the actual "non-binding Memorandum of Understanding" between A123 Systems and Wanxiang. The deal has two major components, first is the Bridge Loan Facility and Bridge Warrants.
A senior secured bridge loan facility in an amount of up to $75 million, to be provided by one or more of affiliates of Wanxiang, providing for an initial cash advance of $15 million and a letter of credit facility that will result in an additional $10 million of liquidity for the Company. The Bridge Loan Facility also provides for up to $50 million of subsequent cash advances, subject to the satisfaction of certain conditions, including the receipt of necessary governmental and other approvals, including (i) receipt of a favorable determination from the Committee on Foreign Investment in the United States (“CFIUS”), (ii) receipt of Chinese government approvals on terms satisfactory to the Lender in its sole discretion, (iii) the accuracy of representations and warranties, (iv) the absence of any default, , (v) the absence of a material diminishment of the Company’s research and development and engineering teams by reason of resignations or departures and (vi) certain other conditions. Borrowings under the Bridge Loan Facility would bear interest at an annual rate of 10 percent and mature in August 2014.Wow! Strike price of $0.425 on those warrants that come with the 10% interest, 2-year senior secured loan. Somehow, none of that made it into the company's morning press release, did it? Maybe the price tanked once people read the 8-K? And how about the "subject to reduction to $0.17" feature, if the certain government grants go away. Is there a chance that the DOE grant will go away now that the company is in the clutches of a Chinese company? Another exciting alternative energy story for the Obama DOE.
Upon each advance or other extension of credit made under the Bridge Loan Facility, the Company will issue warrants to the Lender exercisable (subject to the restrictions on exercisability described below) for a number of shares of the Company’s common stock resulting in warrant coverage equal to 100% of the outstanding amount of such advance or extension of credit. For purposes of calculating warrant coverage,the exercise price of the Bridge Warrants will initially be set at $0.425, subject to reduction to $0.17 in the event that certain government grants or tax credits cease to be available to the Company. The Bridge Warrants will expire on the fifth anniversary of their issue date. The exercise price of the Bridge Warrants will be appropriately adjusted for stock splits, stock dividends and similar events and will be subject to full-ratchet anti-dilution protection (which would increase the number of shares issuable under the warrant). Because the anti-dilution provisions are intended to protect the Lender from dilutive issuances occurring from and after the date of the Bridge Loan Facility, the effective initial exercise price of Bridge Warrants may be less than the Initial Exercise Price and the number of shares into which the Bridge Warrants are initially exerciseable may increase. Bridge Warrants may be exercised for cash or in exchange for outstanding Bridge Warrants on a cashless basis or by offset of amounts payable under the Bridge Loan Facility. None of the Bridge Warrants will be exercisable until the earlier of (i) the time the Company’s shareholders vote on the proposed issuances of Common Stock pursuant to exercise of the Bridge Warrants and the Convertible Note Warrants and the conversion of the 8.00% Convertible Notes and (ii) the termination of the Company’s obligation to seek the approval of its shareholder. After such vote has occurred, the exercise of the Bridge Warrants will be subject to the limitations set forth below. The exercise of the Bridge Warrants in an amount greater than 9.99% of the issued and outstanding Common Stock after giving effect to such issue will be conditioned on receipt of CFIUS approval. Additionally, before the shareholder approval has been obtained, the Bridge Warrants may only be exercised to the extent such issuance would not require shareholder approval. The failure to obtain shareholder approval within 120 days after the will be an event of default under the Bridge Loan Facility.
The second part of the deal is the Senior Secured Convertible Notes and Warrants.
Subject to the satisfaction of certain conditions within 180 days after the date of first advance under the Bridge Loan Facility, an affiliate of Wanxiang would agree to purchase $200,000,000 in aggregate principal amount of the Company’s 8.00% Senior Secured Convertible Notes from the Company. The 8.00% Convertible Notes would mature on the fifth anniversary of their issue date. [...]So the new convertible notes wouldn't mature until 2017 and the old sub notes are due in 2016. That's why they have to retire the old notes. The 90% requirement and all the anti-dilution provisions regarding the warrants are dead giveaways that this is going to be an exchange offer. I wonder if they have the S-4 draft done already?
Holders of the 8.00% Convertible Notes will have the option, at any time and from time to time, to convert principal of and interest accrued on the 8.00% Convertible Notes into shares of Common Stock at a conversion price equal to $0.60 per share, subject to reduction to $0.24 per share in the event that certain government grants or tax credits cease to be available to the Company. The conversion price will be appropriately adjusted for stock splits, stock dividends and similar events and will be subject to full-ratchet anti-dilution protection. Because the anti-dilution provisions are intended to protect the Holders from dilutive issuances occurring from and after the date of the Bridge Loan Facility, the effective initial conversion price upon issuance of the 8.00% Convertible Notes may be less than $0.60 or $0.24 per share, as applicable. [...]
Concurrently with the issuance of the 8.00% Convertible Notes, the Company would issue warrants to the Purchaser to purchase shares of Common Stock equal to 50% of the shares of Common Stock underlying the 8.00% Convertible Notes issued, assuming conversion at the initial conversion price. The Convertible Note Warrants would expire on the fifth anniversary of their issue date. Each Convertible Note Warrant would have an exercise price equal to the conversion price of the 8.00% Convertible Notes. [...]
The issuance of the 8.00% Convertible Notes and the Convertible Note Warrants will be subject to certain closing conditions, including obtaining the shareholder approval, CFIUS approval and Chinese regulatory approval; the expiration or termination of any waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any other antitrust or competition laws; the continued listing of the Common Stock on Nasdaq; the increase of the number of members on the Company’s board of directors from seven to nine and the concurrent election or appointment of 4 individuals designated by the Purchaser to the Company’s board of directors; the Purchaser’s receipt of reasonable assurances that certain government grants and tax credits will remain available for specified periods; the conversion or redemption of all of the outstanding 6.00% Convertible Notes and the related warrants; and the conversion or repurchase of at least 90% of the Company’s outstanding 3.75% Convertible Notes on terms satisfactory to the Lender in its sole discretion.