May 16, 2012 8:47 pm

Financing problems put A123 in jeopardy

A123 Systems, the Massachusetts-based battery manufacturer that was awarded a $249m US government grant, warned there was “substantial doubt” over its continuing as a going concern.

The problems facing A123, which makes batteries for electric and hybrid vehicles and for electricity grids, are the latest examples of the difficulties facing clean energy companies backed by government money as they attempt to become self-supporting businesses.

The Obama administration’s support for clean energy has been heavily criticised by Republicans following the failure of Solyndra, an innovative solar panel manufacturer that collapsed last year owing $527m to the federal government.

In a filing to the US Securities and Exchange Commission on Tuesday, A123 said its heavy losses since start-up, the $66.8m cost of a production fault that necessitated a battery recall, and the end last week of its revolving bank credit facility, called its survival into question.

It has hired outside advisers to work on the “evaluation of strategic alternatives” and has agreed a deal to raise $50m from convertible loan notes and warrants, which it hopes to close at the end of the week.

However, the statement warned that while A123 was trying to cut costs and raise additional financing, “there is no assurance that the company will be able to obtain such financing on favourable 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 floated on the stock market in September 2009 at $13.50 a share, and jumped on its opening day to close up 50 per cent. The shares closed down 3 per cent at $0.93 on Wednesday.

The company has been selling batteries for use in some big-name car models, including the BMW 3 and 5 series hybrids, and General Motors’ Spark mini-car. It is also developing its sales to power companies for electricity storage, to help manage the variable contribution of renewable generation such as wind and solar.

However, Theodore O’Neill of Wunderlich Securities said the going concern warning “is going to make it very hard to attract customers in the automotive sector, because customers there need to be sure suppliers are around for seven years to honour the warranty.”

The company has drawn down only $129m of the $249m grant it was offered by the US department of energy, and has been given until the end of 2014 to say whether it wants to take the remaining $120m, extending the previous deadline by two years.

A123’s SEC filing also revealed that in February it signed contracts with about 40 employees, giving them severance payments ranging from 6 months to 24 months of salary if they lose their jobs if the company is taken over.

Some employees also have contracts that accelerate the vesting of share option awards in the event of a takeover.

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