Start-ups are inherently risky and while many bright-eyed visionaries initially display great potential, up to fifty percent of new enterprises run out of money. Unfortunately, Waltham-based A123 Systems Inc. are at risk of becoming a statistic.
Earlier this month, Consumer Reports reported that a brand-new Fisker Karma plug-in hybrid electric vehicle with less than 200 miles on the odometer abruptly shut down. News of the defect spread quickly, causing Fisker engineers scrambling to identify and solve the problem as soon as possible in an attempt to curb any damage to consumer confidence. Investigators determined the cause of the issue as a flaw in the Fisker’s battery module, which is supplied by A123.
Other than the incident at Consumer Reports, A123 CEO David Vieau told reporters that five Fisker customers are potentially affected by the flawed battery packs. As of March 26, A123 has started building replacement modules for Fisker and will begin to ship these battery packs out to customers this week. Despite moving forward, David Vieau admits that the cost of replacing the batteries will “require us to adjust our fundraising strategy.” Vieau did not elaborate.
Caused by faulty calibration in one of four welding machines, a misalignment of the components in some cells could lead to an electrical short, resulting in the permanent failure of the A123 battery or a decrease in performance and battery life. In order to replace all the defective battery packs, expense figure estimates are close to $55 million, which “represents a severe impact” on cash reserves, stated Dan Galves, New York-based Deutsche Bank analyst.
Galves wrote in a report, “We no longer have enough confidence that AONE can raise sufficient capital (without massive equity dilution) and/or continue to augment their book to future business. Recent quality issues may lead to concerns over AONE’s ability to manufacture with quality at high volumes, potentially leading to customer defections or at least difficulty in procuring new contracts.” AONE refers to A123′s stock symbol.
According to financial reports, A123 held $187 million in cash at the end of 2011 but Galves pointed out A123 suffered a cash burn of at least $155 million this year. The company will have to raise at least $50 million of additional short-term capital but, unfortunately, loan requests will be extremely difficult due to a general lack of confidence due to weak first-half results, long-term profitability concerns, pressure on battery pricing, and uncertainty on EV demand.
Dan Galves changed his rating on A123 from “buy” to “hold.” AONE share price have fallen 6 percent to $1.40 yesterday.