CNBC's Philj LeBeau reports the bankruptcy filing comes after the company was unable to make a $2.8 million interest payment.
A123 Systems, which had received a $249 million grant from the U.S. government, filed for Chapter 11 bankruptcy protection on Tuesday, giving Republicans fresh ammunition to attack the Obama administration's subsidies for green energy.
The filing came after the lithium-ion battery maker's $465 million rescue deal with Chinese auto parts supplier Wanxiang Group collapsed, hobbled by "unanticipated and significant challenges," A123 said on its website.
A123 has agreed to sell its automotive operations, including two factories in Michigan, for $125 million to Johnson Controls Inc, a leading battery supplier and another recipient of federal green subsidies.
The bankruptcy filing comes as President Barack Obama and Republican presidential candidate Mitt Romney prepare for their second debate Tuesday night.
The U.S. Department of Energy allotted about $90 billion for various clean-energy programs through the administration's stimulus package. Of that, at least $813 million went to energy companies that eventually filed for bankruptcy, including A123, Solyndra, Beacon, Abound Solar and EnerDel.
The Solyndra failure has been regularly cited in stump speeches leading up the Nov. 6 presidential election, including those of Romney, who argues that the government should not be in the business of picking corporate winners and losers.
The administration has countered criticism of its green energy initiative by saying such investments are needed to bolster the U.S. position in the market for fast-moving and competitive technology, such as advanced batteries.
"The riskiest strategy of all is not competing aggressively for the technologies of tomorrow and the jobs that come," Dan Leistikow, DOE director of public affairs, said in a blog post. "In an emerging industry, it's very common to see some firms consolidate with others as the industry grows and matures."
A123 had promised to create 38,000 U.S. jobs, including 5,900 at its own plants, in return for the government funding under the 2009 American Recovery and Reinvestment Act's Electric Drive Vehicle Battery and Component Manufacturing Initiative.
A123 has tapped $132 million of its 2009 grant, the DOE said. Johnson Controls, which supplies lithium-ion batteries to a number of vehicle manufacturers, also received a $299 million grant under the same program.
A123 supplies batteries to Fisker Automotive's Karma hybrid, which accounted for 26 percent of A123 revenue last year, and the Chevrolet Spark EV that will be introduced next year by General Motors Co.
"GM is aware of the situation with battery supplier A123," GM spokeswoman Kim Carpenter said. "We are monitoring the situation, but we expect no delays in the Spark EV program."
Johnson Controls supplies batteries to Ford Motor Co, BMW and Daimler, among others.
The bankruptcy filing comes after roughly eight months of attempts by A123 to find a buyer or strategic investor. In March 2012, A123 hired Lazard Freres & Co, which contacted 74 potential partners and investors, according to court documents.
Only 24 discussed the process with Lazard, but only Wanxiang offered to invest in A123 as a going concern. However, it became apparent that A123 would not be able to satisfy some of the conditions laid out in the Wanxiang deal before A123 ran out of money to pay for operations, documents show.
Johnson Controls has provided $72.5 million in debtor-in-possession financing to A123. Johnson Controls said its interest in A123 "is consistent with its long-term commitment to being a market leader in the advanced battery industry."
"This process is in its early stages, so the company cannot provide further details at this time," the company said.
In a research note, Morgan Stanley analyst Ravi Shankar said Johnson Controls would be able to wring out cost inefficiencies in A123 and possible bring the company to break-even quickly. The deal is expected to be dilutive in the first year.
"The transaction is about closing JCI's technology gap in advanced batteries," Shankar said, adding that the deal will help Johnson Controls compete for next-generation hybrid programs and cement its position in the market for start-stop batteries.
In court documents, A123 said it expects it will be able to sell its non-automotive operations and has identified certain bidders. A123 listed total assets of $459.8 million and liabilities of $376 million in its Chapter 11 petition.
In the first presidential debate, Romney attacked Obama's promotion of green technologies, saying the administration, in doling out billions to clean-energy companies, only picked losers.
"I mean, I had a friend who said 'You don't just pick the winners and losers, you pick the losers, all right?'" Romney said. "This is not the kind of policy you want to have if you want to get America energy secure."
The highest-profile recipient of federal funds, Solyndra, will square off in court on Wednesday against the Internal Revenue Service and the Department of Energy as it argues for its bankruptcy plan.
That plan provides $300 million-plus in tax breaks for Solyndra's venture capital backers while potentially leaving the government with zero return on its investment. Every class of creditor supports the plan except the government, which appears to have negotiated the lowest recovery of all the creditors.
The case is In re:A123 Systems Inc, U.S. Bankruptcy Court, District of Delaware, No:12-12859.
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