With so many ditches already dug, it’s difficult to predict whether the $12.5 million bailout engineered by execs at Distributed Energy Systems will prove to be a last ditch effort, or just the final one.
That effort was to secure a $12.5 million injection of cash from Washington, D.C.-based private equity firm, Perseus LLC. The loan, which matures in March, carries a 12.5 percent interest rate — about what some credit cards are charging — and is secured by all of the Wallingford-based firm’s assets. As part of the deal, Perseus gets the rights to purchase up to 8 million shares of Distributed Energy, or about 17 percent of the company’s stock.
That would make Perseus by far the largest shareholder in the company. Of course, that’s if Perseus decides it wants it. The exercise price of warrants is 80 cents a share — a few pennies more than the stock currently trades on the open market.
Little more than 14 months ago, Distributed’s stock traded around $10 a share.
And then there’s a bigger problem: whether the cash Perseus has already invested in Distributed will be enough. The deal for the loan contemplates a future investment of $15 million — presumably before March, when the loan matures — which would be used to pay back the original $12.5 million and in a roundabout way extend the loan for another few months.
“It is a vital first step that, we believe, will facilitate the action required to reach operating profitability,” said Ambrose Schwallie, CEO of Distributed Energy.
It might not be the only step.
If done, that deal would also give Perseus warrants to buy 35 million additional shares of stock. Since Distributed’s current float is around 40 million shares, the deal would make it more or less a private firm. The deal is subject to shareholder approval, and may not materialize, the company said in a recent Securities and Exchange Commission filing.
Cash For Sale
Distributed needs the money to sell its Proton Energy Systems subsidiary, Distributed said in a recent filing. Proton, which makes hydrogen generators and fuel cell products, is the smaller of Distributed’s two pieces. The larger is Barre, Vt.-based Northern Power Systems, which makes equipment for distributed power generation.
The infusion of cash is much needed. Between January and March, Distributed’s cash and marketable securities shrunk by nearly half to $9.3 million, down from $18.1 million.
The most recent disclosures over Distributed Energy’s deteriorating financial condition cap off a year of increasingly bad news for the company, which has struggled with turnover in its executive ranks, arguments with the SEC over its accounting practices, the closure of a key supplier and an unsettled, seven-year-old class action lawsuit brought by angry shareholders.
People Problems
Last month, Robert Shaw, the company’s chairman was forced to step down from the board abruptly, citing health reasons. He was replaced by Bernard Cherry, a longtime energy executive who joined Distributed’s board in January.
New CEO Ambrose Schwallie has only occupied the corner office since January, when he replaced Walter Schroder, who is still the president and a director of the company.
CFO Peter Tallian has only been a key executive since October, when he was hired three months after the departure of then-CFO John Glidden, who left to become a finance V.P. at the Connecticut Center for Advanced Technology.
Then in December, Darren Jamison, president of Northern Power Systems, abruptly resigned to head a turbine manufacturing company.
The departures came as the company had been haggling with the SEC over how it accounted revenue for uncompleted projects it was still building. Eventually, in March, Distributed agreed to lower its 2006 sales figures by $600,000.
That was less than a month after Distributed Energy learned one of its key suppliers, STM Power Inc., which made engines used in two uncompleted projects, ceased operations. If it can’t find adequate substitutes, Distributed said, it could end up having to take a charge of $1.7 million for the deals.
And as of yet, the company had still not settled a lawsuit dating back to the original IPO for Proton Energy Systems, when four separate class action suits alleged misrepresentation about how the underwriter in the IPO was paid. Those suits were combined in 2002, but a settlement has yet to be sanctioned by the court.
Tenuous Position
John Fox, senior managing director of Perseus, said his firm “made an investment in Distributed Energy Systems because we believe the company is well positioned to capitalize on the increasing global demand for distributed power generation.”
If it is well positioned, Distributed Energy hasn’t yet figured out how to turn that position into value for its shareholders. The company has never turned a profit in any year. It lost $15 million last quarter, and $54 million last year.
Perhaps Perseus can change all that, perhaps not. Whether it gets the chance to do so will have to wait until the company’s annual meeting, expected sometime in July or August.
Whether Distributed Energy lasts that long is another question.
