American Superconductor (AMSC)

As management continues to sell stock at a furious pace, American Superconductor announced a $450 million order from Sinovel that is supposed to be used to support more than 10 Gigawatts of power by the end of 2011. This is on top of their current $100+ million “backlog” to the same customer.

To explain how crazy this press release was, Citron refers to the largest wind power purchase order in the world, which was just publicly announced by T. Boone Pickens. Pickens, with General Electric, plans to build a farm for 4,000 megawatts (4 Gw) that is planned in 4 phases for ultimate completion in 2014.

Now we are supposed to believe that American Superconductor just received an order for 10 Gw to be delivered by 2011. That is 2 ½ times the size of the Pickens project in a time span that is half the time. Yet, nowhere in any language do we see an order awarded to Sinovel that would support anything close to this.

This order cannot live in a vacuum. Nowhere can we read of the: funding, the customers, or suppliers of other components that are essential to wind turbines, such as gearboxes, generators, blades, bearings, cast hubs or towers, which comprise 80%-90% of the cost of a wind unit. We are to believe that every other customer involved in this deal has decided not to put out any press.

An order of this size would be the largest order for windpower in the history of the world... but we can read about it only in one place: an AMSC press release.

American Superconductor DOES NOT manufacture wind turbines. They make a power controller and electrical components that are commodities in the wind power business. They are low margin items in a highly competitive industry, and among the only components in wind turbines not facing significant logistics and supply constraints. So any order for electrical components from AMSC should be matched with orders for essential components necessary to complete wind turbine projects.

What happens if AMSC makes all of these power controllers and then Sinovel decides in two years they can buy them cheaper in China? Considering the prices of these systems is not going up and soon they will be manufactured by local Chinese companies, shouldn’t that be a concern for AMSC?

• notice on the bottom of the Sinovel website they admit themselves that they have a maximum capacity of 1000 units…strange considering today’s PR announced orders to “support” 9,0000 units. Better yet, on the bottom left of the website written in Chinese (the blue writing) it says “website under construction”. If you are going to build the biggest wind system in the world how about first making a website.

Yes, the customer shares the same name as the AMSC subsidiary Windtec. As suggested by Citron in the past, this is somehow a related party transaction as these companies are joint ventured. That has not only been mentioned by Citron, but their joint venture has also been commented on in industry press. In an article in Modern Power Systems only two weeks ago referred to the Sinovel Windtec as a joint venture 3x in the same article. Something just isn’t right.

So if they are selling 9,000 systems to Sinovel, who is their next largest customer? This is a tie — there are two customers who have each bought 20 systems each.

This was taken from the 10-k

"We have a history of operating losses, and we expect to incur losses in the future.

We have been focused on research and development activities through the fiscal year ended March 31, 2007. We have incurred net losses in each year since our inception. Our net loss was $23.6 million for the nine months ended December 31, 2007, $34.7 million for the fiscal year ended March 31, 2007, $30.9 million for the fiscal year ended March 31, 2006 and $19.7 million for the fiscal year ended March 31, 2005. Our accumulated deficit as of December 31, 2007 was $408.7 million. We expect to continue to incur operating losses until at least the end of the fiscal year ending March 31, 2009, and we cannot be certain that we will ever achieve profitability ." American Superconductor 10Q filed 02/07/2008 p. 28

A more critical glance at AMSC’s 10-K leaves more questions than answers, as every accounting red flag jumps out.

$15.5 million in “unbilled receivables”

Zero allowance for doubtful accounts

And our favorite is the recording of revenue on a cost of completion basis.

Between the unusual gross margins and issues with the warranty accrual, the 10-K deserves its own report.

American Superconductor, they have been one of those perennial money losing “dream technology” companies who promise everything and deliver nothing. Here are a few snippets from their 10-K’s of years gone by.

• 2000-“We believe that our existing capital resources, including the proceeds of our March offering, will be sufficient to fund our operations until we reach profitability and have positive cash flow”
• 2002 “We believe that our existing capital resources will be sufficient to fund our operations until the end of fiscal 2005, at which time we expect to reach corporate-wide profitability”
• 2005 - “We expect to continue to incur operating losses until at least the end of fiscal 2007”
• 2006- “We expect to continue to incur operating losses until at least the end of fiscal 2009 and there can be no assurance that we will ever achieve profitability.”

In fact, this company has delivered a string of unblemished losses stretching back 14 consecutive years – without ever turning a single profit. Not just marginal losses, either - $400 million in total … and none of this developing wind power, rather Superconductors.