A123 Systems: Cash Burn Trumps Battery Short Circuit

NEW YORK ( TheStreet) -- At under $2, a big move in shares of lithium ion battery maker A123 Systems ( AONE) isn't a big deal, but it is one more sign of a company facing risks rightly defined as existential.

On Monday, A123 Systems' stock slumped to a new 52-week low -- down 12% to as low as $1.45 intraday -- on the news that batteries it supplied to electric car maker Fisker had to be recalled. It's the second recall for A123.

The battery defect isn't the real headline, though. The $55 million in cash that A123 has to pay to replace the batteries highlights the more significant near-term concern for a company already at risk of bankruptcy .

A123 stated that the root cause of the battery pack failures was incorrect calibration of one of its four automate welding machines used in cell manufacturing. Defective cells went undetected by A123's visual and electrical inspection processes, resulting in electrical short circuits that caused the battery pack to prematurely fail, leading to decreased performance and reduced battery life.

Product quality concerns are the last thing A123 Systems needs as it seeks new contracts for OEM hybrid, plug-in hybrid, and all-electric vehicles.

However, the manufacturing line issues can be fixed, while the cash situation continues to deteriorate for the company.

A123's cash position at the end of 2011 was $186.9 million. In 2011, the company averaged a quarterly cash burn rate of $94 million.

A123 Systems expects a sequential decline in revenue in the first half of 2012, and has $54 million in inventory on the books that could lead to more write-downs -- the inventory may include batteries with these defective cells.

Taking these existing balance sheet concerns and adding the $55 million in recalls to it, Stifel analyst Jeff Osborne concludes A123 will need to raise more capital, possibly sooner than expected.

"We expect that A123 will have to raise capital as early as 3Q12, but certainly by 4Q12. While management implied that the company has resources to fund the $55 million product replacement announced today, we are more concerned about its overall liquidity position, and note that AONE will have significant working capital requirements as it launches the Chevy Spark contract in 2013," the analyst wrote.

Osborne added that A123 Systems may need a white knight to save it from a liquidity hole, but that won't necessarily protect current shareholders from further dilution.

"We believe a major investor or partner may be necessary for A123 moving forward and significant continued dilution for current shareholders should be expected."

-- Written by Eric Rosenbaum from New York.

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