The Waltham, Mass., designer, developer, manufacturer and seller of rechargeable lithium-ion batteries and energy storage systems filed for Chapter 11 protection in the U.S. Bankruptcy Court for the District of Delaware in Wilmington with affiliates A123 Securities Corp. and Grid Storage Holdings LLC.

The debtor, which has received numerous grants and awards from state and federal governments, wants the cases jointly administered.

The company's petition comes after A123 Systems missed an almost $2.7 million interest payment on its 3.75% convertible subordinated notes due Monday. The missed interest payment caused it to default on its debt, filings with the Securities and Exchange Commission said.

The debtor has been posting net losses since 2007, when it lost $31 million. Its net loss continued to increase each year, to $257.76 million in 2011 and $269 million through August 2012.

A123 Systems also has suffered from contract and warranty issues in the past several years, along with increased competition in the battery industry, that affected its liquidity, court papers show.

The company had technical issues in the manufacturing scale-up of its prismatic batteries, which led to lower yield, temporary halts in production and personnel distractions.

A123 Systems also found that batteries it produced for its leading customer, Fisker Automotive Inc., had potential safety issues, which required significant management time and expense, as well as the rapid redeployment of technical personnel to the field. Fisker reduced its orders from the debtor in October 2011.

Finally, in March the debtor launched a $51.6 million field campaign to replace battery modules and packs that might contain defective prismatic cells produced at its Livonia, Mich., facility.

A123 Systems and advisers Lazard and Alvarez & Marsal North America LLC therefore began looking for ways to save costs and for potential buyers in March. The debtor received an offer from Wanxiang America Corp. to invest in the company as a going concern, but because of certain closing conditions, only a portion of the agreement was funded, and the debtor could not find additional funding before its liquidity fell below the amount needed for operations outside of bankruptcy.

Wanxiang America would have provided the company with $200 million in 8% senior convertible notes, warrants and a $75 million senior secured bridge loan. Instead, it provided the company with a $12.5 million initial cash advance and a $10 million letter of credit.

During its bankruptcy case, the debtor looks to use the $72.5 million debtor-in-possession loan from Johnson Controls while it continues talks to sell its assets. Johnson Controls has already agreed to purchase the company's automotive assets for $125 million.

The DIP is all new money, according to Johnson Controls counsel Joshua A. Feltman of Wachtell, Lipton, Rosen & Katz.

The debtor has not yet filed a DIP or sale motion with the court. A123 Systems spokesman Michael Freitag of Joele Frank, Wilkinson Brimmer Katcher said a first-day hearing is scheduled for Thursday before Judge Kevin J. Carey, and the debtor has proposed a Nov. 19 auction date.

According to a company statement, Milwaukee-based Johnson Controls, a manufacturer of automotive components and building controls, would purchase the debtor's automotive business assets, including all of its automotive technology, products and customer contracts; its facilities in Livonia and Romulus, Mich.; its cathode powder manufacturing facilities in China; and A123 Systems' equity interest in Shanghai Advanced Traction Battery Systems Co.

The buyer would license back certain technology to A123 Systems for its grid, commercial and government businesses, the company statement said.

According to the statement, the debtor also seeks buyers for its grid, commercial, government and other operations and has received several indications of interest for the businesses.

A123 Systems is the latest government-backed company to seek bankruptcy protection, joining the likes of Abound Solar Inc., fellow battery maker Ener1 Inc., Beacon Power Corp., Open Range Communications Inc. and Solyndra LLC.

According to court filings, the debtor received a $249.1 million grant under a U.S. Department of Energy battery initiative in December 2009. A123 Systems also received a $10 million Center of Energy and Excellence grant from Michigan in February 2009 and a $2 million award from Michigan in December 2009 to assist with its smart grid stabilization project. Michigan has also provided the debtor with various tax credits.

A123 Systems said it had incurred $130.3 million in reimbursable expenses under the DOE program as of June 30, "nearly all" of which had been reimbursed.

"A123's promising technology has a long history of bipartisan support," the DOE said in a blog Tuesday on its website. "In an emerging industry, it's very common to see some firms consolidate with others as the industry grows and matures. ... Today's news [Johnson Controls' offer and DIP] means that A123's manufacturing facilities and technology will continue to be a vital part of America's advanced battery industry."

The agency contended that before its investments in 29 companies, "virtually all advanced vehicle batteries were built overseas, and it looked like the United States might miss out on this enormously important, rapidly expanding market."

According to court documents, A123 Systems primarily focuses on developing new lithium-ion batteries and battery systems for hybrid electric vehicles, plug-in hybrid electric vehicles and electric vehicles, as well as electrical grid services, industrial and commercial products.

Its products include starter batteries and lead acid replacement batteries, as well as packaged modules and multi-megawatt and prismatic battery systems. The batteries are made from a patented nanophosphate material.

A123 Systems was founded on Oct. 19, 2001, "on a belief that lithium-ion batteries will play an increasingly important role in facilitating a shift toward cleaner forms of energy," court filings said.

In 2005, the debtor began commercial production of cathode powder, a cell manufacturing material, and it began shipping its first commercial batteries a year later. The company expanded its operations in 2007 through the construction of two additional plants for powder production and new coating production. A123 Systems also leased a new battery assembly plant in China. The company continued to expand in both China and the U.S. in 2009 and 2010, court documents said.

A123 Systems has 1,763 employees at 10 facilities in the U.S., China and Germany. Its U.S. manufacturing facilities are in Michigan and Massachusetts.

The debtor's transportation business works with automotive manufacturers and Tier 1 suppliers to develop batteries and battery systems for hybrid electric vehicles, plug-in hybrid electric vehicles and electric vehicles. Through its grid energy storage segment, the debtor produces energy storage that improves the reliability and efficiency of the electric power grid and integrates renewable sources of power generation. Its commercial business produces batteries for cordless power tools and other consumer products.

Its customers include AES Energy Storage LLC, BMW AG, Delphi Automotive plc, Fisker, General Motors Co., Gillette Co., Magna Steyr Fahrzeugtechnik AG & Co. KG, Navistar International Corp. and Science Applications International Corp.

A123 Systems' foreign subsidiaries, such as A123 Systems (China) Materials Co. Ltd., A123 Systems (Zhenjiang) Co. Ltd., A123 Systems GmbH, A123 Systems UK Ltd., A123 Systems Korea Co. Ltd., A123 Systems China Co. Ltd., A123 Systems Hong Kong Ltd. and Suzhou Gaolong Trading Co. Ltd., did not file for Chapter 11.

The debtor listed its assets at $459.79 million and its liabilities at $376.04 million in its petition.

A123 Systems owes $4 million in secured prepetition debt to the Michigan Strategic Fund, $2.89 million in secured debt to the Massachusetts Clean Energy Technology Center and $22.5 million to Wanxiang America. The debtor also owes $143.8 million on its 3.75% convertible subordinated notes due 2016 and $2.76 million on 6% senior convertibles notes due July 15, 2013.

U.S. Bank NA is the indenture trustee on the subordinated notes.

Hudson Bay Master Fund Ltd., JPMorgan Omni SPC Ltd., Tenor Special Situation Fund LP, Parsoon Special Situation Ltd., Tenor Opportunity Master Fund Ltd. and Aria Opportunity Fund Ltd. hold the senior convertible notes.

A123 Systems also received various venture capital funding totaling at least $161 million from 2005 through 2009, according to The Deal Pipeline.

Its largest unsecured creditors include Jabil Circuit Inc. of St. Petersburg, Fla. (owed $1.71 million), Hydro-Québec of Montreal ($1.5 million), Boston Plastics (Shanghai) Co. Ltd. of Shanghai ($925,895), Kureha America Inc. of New York ($575,888) and Limbach Co. LLC of Pittsburgh ($570,232).

Debtor counsel D. Jan Baker, Caroline A. Reckler and Adam S. Ravin of Latham & Watkins LLP and Mark D. Collins of Richards, Layton & Finger PA couldn't be reached for comment, while Rosalie W. Gray at Latham & Watkins wouldn't comment.

Lazard is the debtor's financial adviser, and Alvarez & Marsal is its restructuring adviser.

Andrew R. Brownstein and David K. Lam of Wachtell Lipton also represent Johnson Controls.