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