In the first part of this article, I wrote about four reasons to buy Satcon Technology Corporation (SATC). I was surprised to know the latest news that the company has announced with the presentation of an 8K SEC filing.
On April 22, 2011, Satcon entered into an amended and restated credit agreement with Silicon Valley Bank. The credit agreement amended and restated Satcon's loan agreement and provided for a senior secured revolving credit facility of up to $35 million. In addition, the company may make a one-time request for an additional $15 million to increase the credit facility to an aggregate of $50 million, subject to the approval of the lending group. Now, Silicon Valley, the noteholder, may require the company to redeem all or any portion of the outstanding amounts under the note by delivering a notice to Satcon. The notice requests that the company remit a redemption amount equal to approximately $7.5 million, representing 120% of the outstanding principal and accrued and unpaid interest on the note. The notice also provides that the noteholder has not limited any of its rights under the note by delivery of the notice.
Usually such defaults produce a strong dilution of shares and may cause a "Death Spiral." You can find some examples of "Death Spiral" in A123 Systems (AONE) and in the biofuels company of Pacific Ethanol (PEIX). These companies trusted selling convertible debt to large private investors to fund their operations and growth. This kind of debt, often convertible preferred stock or convertible debentures, can be changed into the common stock of the issuing company often at steep discounts to the market value of the common stock. Under the typical "death spiral" scenario, the convertible debt's holder initially shorts the issuer's common stock, which often causes a decrease in the stock price at the same time that the debt holder turns some of the convertible debt into common shares with which he then covers his short position. The debt holder continues to sell short and cover with converted stock which along with selling by other shareholders alarmed by the falling price continually weakens the share price, making the shares unattractive to new investors and can severely limit the company's ability to obtain new financing if the need arises.
Satcon's shares were beaten up by 46.66% Friday to $0.48. I do not understand why the company has not used the cash to pay this debt. The company reported the second-quarter financial results on August 8, with the following highlights:
The CEO of the company Mr. Charles S. Rhoades or the Treasurer Mr. Aaron M. Gomolak might have sold inventory at low cost in an attempt to cover this debt. They could also have maintained contacts so as to get the $30.38MM receivable in advance. They had chosen to cause more dilution of shares to shareholders and save existing funds so as to make sure they will earn high salaries.
I trust in the potential of this company, but I think that in the next shareholders' meeting some important points should be discussed:
- The output of the CEO of the company
- Provide an external managing that uses existing funds to create value for shareholders.
I change my recommendation from "buy" to "hold."
Disclosure: I am long SATC.