Last Friday (December 21, 2012), American Superconductor's (AMSC) shareholders received another round of bad news as the company exchanged a $25 million promissory note for a convertible note. The new convertible note's conversion price is $3.19, a mere 10% premium over Friday's closing price. In addition, Superconductor upped the percentage the owner of the note, Capital Ventures, can own from 4.99% to 9.99%. For a company that has successfully avoided diluting its shareholders, the low conversion price and the increase in ownership limits further signals that the company is in a serious cash crunch.
American Superconductor's problems began early last year when its largest customer, Chinese wind turbine manufacturer Sinovel, refused to pay for already delivered product and cancelled more than a billion dollars worth of orders without notice. Further investigation by Superconductor revealed that one of its Austrian employees had sold proprietary code to Sinovel in violation of Superconductor's contractual arrangement with Sinovel. The employee is currently serving time in an Austrian prison, but that is little comfort to Superconductor or its shareholders as the company went from profitability to massive losses in a single quarter. The company is currently suing Sinovel in Chinese courts for $1.2 billion in damages and the company continues to hemorrhage cash as it hasn't been able to replace Sinovel's business.
The jury is still out with regards to whether or not Superconductor will recover anything from its Sinovel suit. Some have argued that China's court system will do next to nothing about the suit and essentially allow Sinovel to escape with little more than a slap on the wrist. Others have argued the Chinese must prove to the world that they value intellectual property protections and thus provide a modicum of relief to American Superconductor. This line of reasoning, though, suffered a serious setback on December 19, 2012 as investigative reporter Bill Gertz broke a story concerning General Electric (GE) that at first glance appears completely unrelated to American Superconductor.
GE, through its North Carolina based subsidiary GE-Hitachi Nuclear Energy, is currently hoping to build a nuclear power plant in India. One component of GE's plans for the proposed reactor includes outsourcing the production of reactor vessels to China. GE has sought assurances from China through the US State Department that its intellectual property will not be stolen. If a giant conglomerate such as GE is still even considering outsourcing production to China after the $1.2 billion theft of American Superconductor's IP, then the Chinese court system is under much less pressure to deliver a verdict favorable to Superconductor. GE's outsourcing is a clear signal to Beijing that American companies still view the benefits of outsourcing to China as outweighing the risks of IP theft. Until Beijing feels the pinch of companies either leaving China or refusing to outsource production, then IP theft will be low on the list of enforcement issues which is very bad news for American Superconductor.
The final nail in American Superconductor's coffin is the expiration of the wind power production tax credit. Unless Congress acts to extend the tax credit in the coming weeks, then numerous wind power projects that are already on hold will be cancelled as the economics of wind power are simply unsustainable without the tax credit. Siemens Wind Power (SI) is laying off 900 workers, Vestas Wind Systems (VWS.CO) (VWSYF.PK) has laid off 200+ employees and Katana Summit, another wind turbine manufacturer, plans to shut down factories in Nebraska and Washington. American Superconductor is attempting to add new customers in a contracting marketplace and without an extension of the tax credit; the company will face significant headwinds in rebuilding its wind power business.
While American Superconductor has several promising projects in its pipeline including the Tres Amigas switching station and its superconducting cables, the company is not a good investment considering its perilous cash position and the potential for significant dilution, if not outright bankruptcy. Until the Sinovel suit is resolved, though, the stock doesn't present short sellers with much opportunity for profit and the (slight) potential for a $1.2 billion settlement creates serious risks in shorting the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.