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A123 Systems 8K filing says substantial doubt about its ability to continue as a going concern; status of grants and incentives

31 May 2012

In its most recent 8K filing with the Securities and Exchange Commission (SEC), Li-ion battery maker A123 Systems said a number of circumstances have raised “substantial doubt on [its] ability to continue as a going concern.”

On 26 March, A123 launched a field campaign estimated to cost US$51.6 million to replace battery modules and packs that may contain defective prismatic cells produced at A123’s Livonia, Michigan manufacturing facility. The defect could have resulted in premature failure of the battery module or pack, including a decrease in performance and reduced battery life. (Earlier post.)

In addition, the company recorded an inventory charge of approximately US$15.2 million related to inventory produced at its Michigan facilities that may be defective.

As a result of this field campaign and the charge for existing prismatic cell inventory, A123 must begin to rebuild its inventory and manage its backlog for existing customer orders while simultaneously replacing the defective customer modules and packs, it noted in the filing. As a result, it expects to continue to incur significant net losses and negative operating cash flows over the next several quarters.

On 11 May, A123 amended its revolving credit facility with its lead bank, eliminating the borrowing facility and providing for up to $15.0 million as security for letters of credit. All outstanding letters of credit are required to be cash collateralized at 105% of their face amount.

The above circumstances, along with the Company’s history and near term forecast of incurring significant net losses and negative operating cash flows, raise substantial doubt on the Company’s ability to continue as a going concern. Management is taking actions to raise additional capital to fund cash requirements and evaluating other strategic alternatives. The Company is actively engaged in discussions with strategic partners for substantial investments in the Company. In addition, the Company is evaluating various options to raise cash in the capital markets.

Management also continues to seek to reduce cash used in operating and investing activities, including by improving the Company’s gross margins, reducing operating expenses, and reducing working capital. Although the Company’s intent is to improve its operating efficiencies and to obtain additional financing, there is no assurance that the Company will be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow the Company to operate its business.

—A123 Systems Form 8K 30 May 2012

A123 Systems has been the recipient of a number of state and federal grants and tax incentives. Their status, as outlined in the filings, is:

  • US Department of Energy Battery Initiative. In December 2009, A123 entered into an agreement establishing the terms and conditions of a $249.1-million grant awarded under the US Department of Energy (DOE) Battery Initiative to support manufacturing expansion of new lithium-ion battery manufacturing facilities in Michigan. Under the agreement, the DOE will provide cost reimbursement for 50% of qualified expenditures incurred from 1 December 2009 to 30 November 2012. The agreement also provides for reimbursement of pre-award costs incurred from 1 June 2009 to 30 November 2009.

    There are no substantive conditions attached to this award that would require repayment of amounts received if such conditions were not met.

    Through 31 December 2011, A123 incurred $216.9 million in capital expenditures and $38.6 million in operating expenses, for a total of $255.5 million in qualified expenses, of which 50%, or $127.8 million, are allowable costs for reimbursement. Nearly all of the allowable costs have been reimbursed. As of 31 December 2010 and 2011, the Company recorded $2.1 million and $0.8 million, respectively, as receivables in prepaid expenses and other current assets in the consolidated balance sheets.

  • State of Michigan Center of Energy and Excellence Grant. In February 2009, the State of Michigan awarded the Company a $10.0-million Center of Energy and Excellence grant. Under the agreement, the State of Michigan is to provide cost reimbursement for 100% of qualified expenditures based on the achievement of certain milestones by March 2012. There are no substantive conditions attached to this award that would require repayment of amounts received if such conditions were not met.

    A123 received $3.0 million of this grant in March 2009 and $6.0 million of this grant in July 2010, with additional payments to be made based on the achievement of certain milestones in the facility development. Through 31 December 2011, the company used $8.3 million of these funds, of which $7.9 million and $0.4 million was recorded as an offset to property, plant and equipment and operating expenses, respectively.

    For the years ended December 31, 2009, 2010 and 2011, $0.1 million, $0.3 million and $0.1 million was recorded as an offset to operating expenses in the consolidated statements of operations, respectively. As of December 31, 2010 and 2011, $0.8 million and $0.7 million of these funds are recorded in short-term restricted cash and other current liabilities on the consolidated balance sheets, respectively.

  • Michigan Economic Growth Authority. In April 2009, the Michigan Economic Growth Authority (MEGA) offered A123 certain tax incentives, which can be used to offset the Michigan Business Tax owed in a tax year, carried forward for the number of years specified by the agreement, or be paid to the Company in cash at the time claimed to the extent the Company does not owe a tax. The terms and conditions of the High-Tech Credit were established in October 2009 and the Cell Manufacturing Credit in November 2009.

    The High-Tech Credit agreement provides the Company with a 15-year tax credit, based on qualified wages and benefits multiplied by the Michigan personal income tax rate beginning with payments made for the 2011 fiscal year. The proceeds to be received by A123 are based on the number of jobs created, qualified wages paid and tax rates in effect over the 15-year period. The tax credit is subject to a repayment provision in the event the Company relocates a substantial portion of the jobs outside the state of Michigan on or before 31 December 2026.

    As of 31 December 2011, $1.0 million was recorded as an undiscounted receivable in long-term grant receivable with an offsetting balance in other long-term liabilities in the consolidated balance sheet. No receivable was recorded as of 31 December 2010. The balance will be recognized in the statements of operations over the term that the Company is required to maintain the required number of jobs in Michigan.

    The Cell Manufacturing Credit agreement authorizes a tax credit or cash for the Company equal to 50% of capital investment expenses related to the construction of the Company’s integrated battery cell manufacturing facilities in Michigan, commencing with costs incurred from 1 January 2009, up to a maximum of $100.0 million over a four-year period. The tax credit is not to exceed $25.0 million per year and can be submitted for reimbursement beginning in tax year 2012. A123 is required to create 300 jobs no later than 31 December 2016 for the tax credit to be non-refundable. The tax credit is subject to a repayment provision in the event the company relocates 51% or more of the 300 jobs outside of the state of Michigan within three years after the last year the tax credit is received.

    Through 31 December 2011, A123 incurred $200.0 million in qualified expenses related to the construction of the Livonia and Romulus facilities. When the company meets the filing requirements for the tax year ending 31 December 2012, it expects to begin receiving $100.0 million in proceeds related to these expenses.

  • Michigan Economic Growth Authority Loan. The State of Michigan also granted A123 a low-interest forgivable loan of up to $4.0 million effective August 2009 with the objective of conducting advance vehicle technology operations to promote and enhance job creation within the State of Michigan. To receive advances under the loan, A123 was required to achieve certain key milestones related to the development of the manufacturing facility.

  • Michigan Department of Energy, Labor and Economic Growth. In December 2009, the State of Michigan awarded A123 $2.0 million to assist in funding its smart grid stabilization project, the purpose of which is to develop and improve the quality of application of energy efficient technologies and to create or expand the market for such technologies. A123 received an advance of $0.9 million in December 2009 and another $0.9 million in February 2011. Through 31 December 2011, the Company incurred $1.6 million in allowable costs, which was recorded as an offset to operating expenses. During the year ended, 31 December 2011, the remaining $0.4 million in funding was cancelled.

  • Massachusetts Clean Energy Technology Center. In October 2010, the Company entered into a forgivable loan agreement with Massachusetts Clean Energy Technology Center for $5.0 million for the purpose of funding working capital, capital expenses, and leasehold improvements for its new corporate headquarters and primary research and development center in Waltham, Massachusetts and Energy Solution Group engineering and manufacturing facilities in Westborough, Massachusetts.

    Amounts borrowed under this agreement accrue interest of 6% from the date of the advance and mature in October 2017. The loan is collateralized by certain designated equipment and a subordinated lien on certain other assets of the Company. Under the agreement, if A123 creates 263 new jobs in Massachusetts between 1 January 2010 and 31 December 2014 and maintains at least 513 jobs in Massachusetts from January 1, 2015 to the maturity date, $2.5 million of the outstanding principal and accrued interest on the loan will be forgiven.

    In addition, if A123 spends, or commits to spend, at least $12.5 million in capital expenses or leasehold improvements within one year from closing the loan, $2.5 million of the outstanding principal and accrued interest on the loan will be forgiven.

    As A123 is not reasonably assured that it will comply with the conditions of the grant for the forgiveness related to the creation of new jobs in Massachusetts, the remaining $2.5 million is recorded in long-term debt.

May 31, 2012 in Batteries | Permalink | Comments (30) | TrackBack (0)

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Comments

Yet another fine bit of investment advice from Petersen, the troll who knocks lithium batteries in order to pump and pimp Axion, which has been an investment disaster.

He picked up some stock in A123 at rock bottom prices, and without blushing moved staight on to pump that.

Others like myself pointed out that their balance sheet is horrendous, and they were up against huge companies such as AESC, Panasonic and Toshiba.

Where is A123's competitive advantage?

A123’s competitive edge is that they have the type of batteries that will enable a small affordable (10k USD) 24kWh battery pack to charge at 100kW. Toshiba’s batteries can also do that but their energy density is at 50Wh/kg or about half of A123's battery packs.

A123 obviously needs capital or they will bankrupt soon. They will probably be acquired by a bigger player. It could be a large auto maker but probably more likely it will be a large auto supplier. The two errors that have caused this situation for A123 is that they invested money in Fisker (not that this is a bad idea but they needed their equity for themselves and to stay focused on what they do) and then the fatal production lapse with a wrongly calibrated cell assembling machine at one of their main production facilities.

'Toshiba’s batteries can also do that but their energy density is at 50Wh/kg or about half of A123's battery packs.

Not the ones they use in cars, which is the 20Ah version not the 4.2Ah version used in other applications:
http://www.toshiba.co.jp/about/press/2011_11/pr1701.htm

It hits about 100Wh/kg, similar to those in the Leaf and Volt.
They are working on a 150Wh/kg version.

Your link only confirms my statement that Toshiba's battery can do 100kW in a 24kWh pack (equivalent to 80% charge in 15 minutes). There is, as I can see, no word about 100Wh/kg at the pack level. I remember 50Wh/kg at the pack level from elsewhere. Please find a link confirming your claim of 100Wh/kg at the pack level.

Henrik:
Unfortunately the link I posted when we had this discussion before is now dead, but hopefully you checked it out when I previously posted it.

I wrote:
''As for EVs, we will begin to ship samples with the nominal capacity of 20Ah and the energy density of 100Wh/kg this fall. The energy density is sufficient for a small EV, but in order to drive a larger EV, the energy density needs to be raised to around 150Wh/kg. We are already working on this, and we are putting further efforts into research for EV batteries (Fig.6).'
http://e2af.com/interview/091009.shtml'

Our discussion:
http://www.greencarcongress.com/2011/06/scib-20110617.html

Toshiba don't give out information very frequently!

Another write-up here:

'But the new SCiB cells have double the density of their predecessors. That means 100wh/kg,'

http://www.leftlanenews.com/toshibas-new-rapid-charge-battery-holds-promise-for-electric-cars.html

Davemart I will believe it when I see a link from a trustworthy source. Until then it is my conception that A123 has a battery that can mach Toshiba’s in terms of power density and that is superior in terms of energy density but that is only good for 3000 full charge cycles versus Toshibas 10000 charge cycles. However, 3000 cycles is plenty for a battery pack that can do 90 miles per charge. 270k miles.

@Henrik:
So, what has changed your mind?
You previously said:

'Very informative source Davemart.'

It's a shame that Toshiba don't meet your standards in press releases.

I don’t know what you talk about. I would trust a press release from Toshiba.

Which is what I posted last time you queried it.
Why don't you try following the links I have given?

We have been around this issue before, and although the link is no longer live, you were perfectly satisfied with it at the time.

Davemart I do remember that webpage and that I credited you for finding it. However, I also remember it was not a press release from Toshiba but some sort of block from “the darker corners of the internet”. Sometimes such sources are true why I still read them sometimes. However, most of the time it is just baseless gossip, misunderstandings or pure ignorance. Now, that the link has been removed I certainly no longer consider it reliable information. Before it was a maybe. I recall the 50wh/kg info from a reliable source but I also think it was not for the prismatic 20Ah cell but for a smaller cylindrical cell. The 20Ah Toshiba cell could be better than 50Wh/kg at the pack level but I doubt it can best the cells that A123 has.

It was an interview with one of the head guys at Toshiba.

Has anybody compared the quality of the USA's built versus the China's build A123 batteries?

Is this a case of bad local workmanship?

Are we building lemon batteries as we built so many lemon gas guzzlers?

Should A123 move their local manufacturing facilities to China or Korea?

Does anyone know when and how much the respective governments of AESC, Panasonic and Toshiba helped them invest in battery manufacturing? I see all this negative talk about our government spending money on battery manufacturing, but I know it is as always, we are behind and only responding to the external threat. We're not out front on this, we never are, nor are our car companies. Which begs the question how much of the negative media coverage is from shills working with these foreign battery companies. And don't even get me started on the Saudi Arabian owned Fox NEWS. Shouldn't real journalists be able to do a story on this. I mean, wouldn't it be a full story if our news people, if they even exist any more, would discuss how much Japan, Korea, and China have invested as grants or loans in their battery manufacturers?

Harvey,

The US quality has always been better. That won't last long. As with japanese cars, they started out at lower quality, but soon became comparable or better in quality to the US built cars.

What killed 123 was the 250 million dollar loan that made them try to expand far sooner then they should have. They simply cant pay the bills now.

Could A123 manage a technology jump and produce nano-wire electrodes batteries with 10X the energy density and up to 1000x the power handling capability?

If they don't, others will and it may spell the end of A123.

@ W-2000:

The real reason may be closer to home, i.e. bad workmanship at their local manufacturing facilities and $55,000,000 + recalls?

"I would trust a press release from Toshiba."

Toshiba is the company that was caught selling machine tool technology to the Soviet Union that allowed the Soviets to built quieter submarine propellers. They knew it was on the banned list of technology and were stupid enough to tape their discussion on the pros and cons to doing this (just like Nixon and Watergate). Anyway they made about $15 million in profits and cost the US government an est $10 billion to try and recover the advantages we had.

For this, buying Toshiba equipment on US government contracts was banned for about 10 years. I thought that they should have been denied all US sales for at least 10 years. Personally I really would have preferred a 100 Mega-ton airburst although some would probably think this that was harsh. It would definitely be politically incorrect.

sd....please have a closer look at the many shabby deals done by many US firms to increase their profits. There are 10000 + Toshibas at home? USA financed and supplied Al-Quida with arms for 10+ years. USA's firms trained the Al-Quida pilots who destroyed World Trade Center and killed 3000 Americans. The list is very long but it is not political correct to mention them.

That is a very slippery road to use.

A123 has relied on technological advantage in their chemistry. This manufacturing error early in the development of a domestic battery business - should not bring about their demise - since electrification is expanding globally and pack demand will only increase.

Should they need a partner to shore them up - GM has followed their development from the earliest VOLT days. Tesla is another white knight that could make immediate use of A123 technology in both US and China.

And Ford with their push on Focus and Energi now using Panasonic 35kWh LiIon packs rated at 0.84kW/kg specific power - could acquire a local second source in A123 with better chemistry and positive political profile.

But quality improvement is a must.

Not too many electrified vehicle manufactures would take the risk.

Toyota had great success with their 4,000,000 + HEVs by using their own very high quality batteries.

Excellent technology, MIT research, even US government favor..

Its sad when US innovators can't profit, or haven't the staying power, in a critical new market.

Meanwhile, at least the only nation to walk the moon can finally get itself to the space station. Bless Obama and SpaceX.

I still remember the shrub declaring "Let's go to Mars"("mission accomplished", "hydrogen initiative", "Bin L -dead or alive", ..) when - like a occupation exit - he hadn't budgeted a Shuttle replacement for US human orbit or, in general, ever had a clue.

I still hear people praise the A123 Dewalt cordless tool batteries.

Hopefully, A123 can one day thrive - even if as someone's subsidiary.

Last I heard A123 had achieved 140wh/kg energy density in their automotive grade pouch cells.

This is not all bad.

If A123 goes under, it should be relatively easy to build a case for a conspiracy to prevent the large 140wh/kg phosphate-format lithium-ion battery from coming to market.

As an example, after the first Volt battery caught fire in October of 2011, GM changed to A123 batteries so people would associate the fire with A123.

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