A123 Systems (AONE) recently announced that it has developed a new piece of technology that would make electronic vehicles cheaper. The new battery would no longer need a separate cooling system to cool the battery.
The company believes that this new battery would mean heavy adoption from companies such as General Motors (GM), which already has contracts with A123 to make batteries for the Chevy Spark.
The battery is said to start entering production phase in the beginning of 2013. A123 has already been in hot water after a recent explosion at a GM lab has strained the relationship between the two companies. A123 is counting on this battery to help the company get enough contracts to help stave off financial bankruptcy.
However, I still believe that the company will collapse under its obligations. Currently, the cost of revenue well exceeds the revenue. Last quarter, the company lost $125 million. This year, A123 is expected to lose $273 million. In the last three years, the company's cash reserve has fallen from $458 million to $187 million. Within this period, the long-term debt has increased from $7 million to $160 million.
As losses continue to mount, it seems as if the company is in a tight spot. It's very likely that bankruptcy could happen right around production phase of this new battery. If we simply look at expectations, A123 is expected to lose $405 million from this year until the end of next. The company has limited financing options as cost of debt has risen heavily.
The company's bond are trading at 30 cents on the dollar. If A123 wanted to do another bond sale, the new interest rate would be greater than 12%. This is because the bond market currently believes there is a lot of risk for the company. In addition, they only have another $113 million left in cash and that will most likely be burned out with continuing losses.
Even if the company begins production early, it's not as if companies like GM will make large orders, especially after the recent events that took place. The new battery that is coming out will more than likely not generate enough revenue to meet their COGS.
After the news of the new battery was announced, the stock jumped 50% as investor confidence rose heavily. Optimism is still high regarding the new battery, but based on the losses going forward, the company's new product is more than likely not going to generate profit, at least not fast enough.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.