What You Need To Know About The A123 Systems Surge

| About: A123 Systems, (AONEQ)

Shares of lithium-ion battery maker A123 Systems Inc (AONE) surged higher Tuesday following news that the company has broken through with its efforts to create a battery capable of operating in extreme heat and cold.

Click to enlarge.

AONE ChartAONE data by YCharts.

The Breakthrough

CEO David Vieau said:

We believe Nanophosphate EXT is a game-changing breakthrough that overcomes one of the key limitations of lead acid, standard lithium ion and other advanced batteries.

AONE says it expects to start producing battery cells that include the technology in the first half of 2013.

Bankruptcy Warning

In late May, AONE warned of a possible bankruptcy after mounting losses and difficulty raising funds. From the filing:

There is no assurance that the company will be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow the company to operate its business.

Defective Batteries

One of the primary reasons AONE is in financial trouble is the company's defective battery problem from its Livonia, Michigan, plant. AONE was forced to replace the batteries at a cost of $67 million. However, due to the exciting new technology, the defective battery issue looks to be behind AONE.

Short Interest

Prior to Tuesday, short interest in AONE was 23.6 million shares, or 23.5% of the float. It is likely that at least part of Tuesday's surge higher is short-covering. However, it remains likely that the short interest is still high.

My Take

While the technology breakthrough is certainly good for the company, I would not buy AONE on the surge higher. The company still needs to raise more capital and it could come in the form of a secondary. If AONE pulls back on a secondary offering, I would consider buying as a speculative play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.