UPDATE 4-A123's cash burn another black eye for green tech

Fri Jul 6, 2012 6:16pm EDT

* Says has about 5 months cash left to fund operations

* Had received $249 mln grant from Obama administration

* Announces moves to raise $39 mln

* Shares fall nearly 11 pct

By Ben Klayman

DETROIT, July 6 (Reuters) - Once a high-flying green technology company, battery maker A123 Systems Inc on Friday told investors it has about five months of cash left to fund operations, adding to woes for a sector short on results and long on government loans.

The company, which received a $249 million grant from the Obama administration as part of a program to develop advanced lithium-ion batteries, said in documents filed with U.S. regulators that it "expects to have approximately four to five months of cash to support its ongoing operations" based on its recent monthly spending average.

Its shares fell almost 11 percent despite A123's announcement of moves to raise $39 million.

A123 has previously raised concerns about its viability due to expected steep losses over the next several quarters.

While analysts said Friday's warning was not new, seeing it in a type of U.S. Securities and Exchange Commission filing used for an important corporate event may have spooked investors.

"While the stock and warrants proceeds of $9 million the company expects from its July 5th offering could conceivably provide the company with another half month or so of runway, we think it is important to get something done much sooner to allay any potential fears," CRT Capital Group analyst David Epstein said.

A123's issues have been a reminder of the struggles for a U.S. electric-vehicle industry still in its infancy and dealing with lower-than-projected demand.

It is also a sharp reversal of A123's fortune since 2009, when it raised $378 million in an initial public offering and its stock rose 50 percent during its first day of trading on the Nasdaq. In 2010, the White House said A123 planned to employ 3,000 people at its two Michigan plants. A123 currently employs about 780 in southeast Michigan.

President Barack Obama's administration has been a strong proponent of electric vehicles and set a goal of getting 1 million battery-powered vehicles on the road by 2015, a target that is looking increasingly unrealistic.

The development of both General Motors Co's Chevrolet Volt and Fisker Automotive's Karma plug-in electric hybrid cars were supported by low-interest federal loans. Electric carmaker Tesla Motors also got backing from the U.S. Department of Energy.

But numerous alternative energy companies have struggled. Fisker suspended work at its U.S. plant earlier this year as it works to renegotiate a $529 million federal loan. Fisker is a major A123 customer.

And since the bankruptcy of Solyndra last fall, a solar panel maker that received $535 million in U.S. loan guarantees, federal support for advanced vehicle technology programs has ground to a halt. Two weeks ago, another bankruptcy announcement from Abound Solar added another $70 million to the tab.

The White House has said repeatedly that start-ups involve a high level of risk and some of them are bound to fail.

Industry officials and analysts have pointed to tightened Department of Energy requirements in the face of withering criticism from Republicans about the Obama administration's generosity for anything related to green technology.

A123, which developed as a start-up at the Massachusetts Institute of Technology, said on Friday it will raise about $9 million by selling shares to existing institutional investors and get access to another $30 million after satisfying conditions related to its cash on hand. Analysts said another factor in the stock price decline was the dilution caused by the exercise of warrants in the stock sale.

"There's still a lot of work to be done," said Needham analyst Michael Lew, who has a "hold" rating on A123 shares. "Any cash they can raise will help buy them some more time, but what we don't know is where the other projects are, how fast they can accelerate them." He added that investors likely were hoping for A123 to raise a larger amount.

A123 previously said it was looking to raise additional cash and was exploring "other strategic alternatives." The Waltham, Massachusetts-based company said it could tap the capital markets for funds.

Stifel Nicolaus previously said A123 would need to raise an additional $75 million by the fourth quarter of 2012 and another $200 million in 2013 to fund its ongoing operations.

A123 said its cash and cash equivalents were about $68 million at the end of May, according to SEC documents. It said it was using on average $18 million to $25 million per month in "net operating and investing cash flows."

The company also had about $40 million of restricted cash, including the $30 million related to the 6 percent senior convertible notes tied to maintaining a minimum cash balance of $40 million, according to the SEC documents. By meeting that requirement, A123 fulfilled the conditions of the account agreement, the documents said.

A123 has said it expects to achieve positive quarterly gross profit margins next year instead of by the end of 2012. It expects positive adjusted operating earnings on a quarterly basis next year as well.

A123's losses stem from its recall of defective batteries built at its Livonia, Michigan, plant. The flaw came to light earlier this year when a Fisker Karma with an A123 battery failed during a test by Consumer Reports magazine.

The repairs will cost nearly $67 million and force A123 to rebuild its inventory. In addition to Fisker, A123 makes batteries for the BMW hybrid 3- and 5-Series cars, and GM's all-electric Chevy Spark due in 2013. China's SAIC Motor Corp and India's Tata Motors also are customers.

A123 said earlier this month it would hire up to 400 people over the next several months in response to increased business in its commercial transportation and grid operations.

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