Red Flags at Emcore

“Business … that’s easily defined: It’s other people’s money" – Peter Drucker

It is difficult to write any financial story this week without referring to the complete debacle at Bear Stearns. While there are many lessons here, the pre-eminent one is the corruption of judgment induced by OPM (Other People’s Money). With the huge fees and cash bonuses generated by indiscriminate Wall Street dealmaking, the most fundamental principle has gone out the window: “When you make a loan, lend it out as if you were risking your own money, and when you recommend a stock to the public, act as if your mother was asking for investment advice.”

Thinking about the sad state of OPM leads us to our newest entry to the Citron blog…Emcore Corp. (NASDAQ:EMKR) which sports a market cap of nearly $700 million, after one of the worst operating histories Citron can recall. Emcore has racked up operational losses for 14 of the last 15 years – $340 million in losses offset by just $1 million in gains — in 1995. With its low margin sales, gigantic SG&A expenses and a history of overpromising and under-delivering, you have to wonder if the company has forgotten all about the principle of making a profit – last year the loss ballooned to $58 million – and the share count bloated to more than 70 million, right in step. OPM baby.

As of last filing the company had approximately $30 mil in cash while they were burning $15 million a quarter. Emcore has 3 units: Fiber optics, space solar, and solar energy. The first two businesses are flat and sell technology commodities that have proven consistently unprofitable, and wouldn’t be worth more than $2 a share. This leaves the company with their golden child: a Solar Energy business that Wall St. deems worthy of a fat market cap.

But Emcore’s solar business is built on a foundation of illusions. Citron will now show that Emcore has deceived the public about the quality of their customers and their customer’s ability to fulfill these alleged orders.

Shining the Light on Emcore’s Solar Business

Emcore has been in the solar technology business for more than a decade. Its gallium arsenide cells have always produced electricity more efficiently than polysilicon, and it works with high concentrations of light. The drawbacks, however, doom it to a narrow niche – irrelevant in the current push for high-volume, mass-scale, low cost power production. The high cost of putting weight into orbit makes Gallium Arsenide technology cost effective in space, but it’s prohibitively expensive on earth – up to 100 times the cost of a polysilicon solar cell.

It’s also really toxic, and doesn’t work at all under hazy conditions.

In contrast to the major polysilicon solar companies, who have earned market value by racking up huge multi-year supply agreements with credible counterparties, Emcore has strung together a group of sham deals to make it appear to be a player in the terrestrial solar business. Citron is incredulous that Wall Street’s analysts have swallowed this story without doing any fact-checking whatsoever. Instead the analysts have been fawning on the prospects of Emcore’s supposed backlog and deal flow.

But what do you expect – it’s the same group of analysts whose consensus earnings estimates underestimated EMKR’s losses in the last two quarters by 1000% — a miss of over $28 million in six months — and yet wouldn’t dream of a downgrade.

1) Green and Gold Energy

As you can see in Jefferies’ analyst John Lau’s notes last week, Emcore is banking heavily on Green and Gold Energy as a critical part of Emcore’s backlog:
Emcore Shares Surge on Upbeat Note
Emcore Jumps on Upbeat Analyst Comments

This order was restated in Emcore’s 10-K in which it states it ended FY 2007 with $142 million solar backlog of which “terrestrial” represents $89 million.

Then in February, the company announced an additional $39m order from Green and Gold, and restated its $86m terrestrial solar backlogged orders.

So that’s $65 million ($78m according to Green and Gold’s PR), or appx 75% (or 86%) of Emcore’s backlog for terrestrial solar products. The question is whether there is any prospect whatsoever of Green and Gold being able to pay for this order.

Citron has done considerable research on Green and Gold and believes the company does not have the money or capacity to fulfill the purchase commitments reflected in these press releases.

Consider the following:

The CEO and founder of Green and Gold Energy is Gregory Watson. Before Green and Gold, Mr. Watson promoted perpetual motion machines.

But that turned out to be a bust

Mr. Watson then moved on to the “SunBall”. He then abandoned those claims in favor of the SunCube – promised for future sale to the public in 2007. But he retreated from those claims, and now claims giant solar farms will be built with SunCube’s, built with Emcore’s solar cells. …only one problem. His company states that it doesn’t have a yet have plant to produce its SunCube, and doesn’t have the financing for the plant, but it does have an “intention” to build it!

Beyond the lack of production capacity, the SunCube itself comes with a fair share of controversy. Observers at the much promoted unveiling of the SunCube prototype at an Adelaide park last month commented that:

1. The SunCube didn’t have any heavy electrical wires running from the unit
2. There was no electrical load attached, nor any meter to measure how much electricity the unit was producing, if any.
3. The unit wobbled noticeably in a light breeze – enough to take it out of solar alignment.

Its “exclusive distributor”, Zolar Distributors (see banner in above photo) has a website but no address or phone number.

Emcore has admitted that it has received only $500,000 from Green and Gold. Citron believes that whatever it has received is the only money it will ever see from this fantasy, and it is the height of corporate malfeasance to use any of the $65m or $78m claimed for future sales to Green and Gold as part of its revenue guidance. They’ve had over six months to do their own due diligence, but they persist in insisting this customer is the anchor of their backlog. Analysts should wake up.

For some fun reading, here is some of the solar tech community’s commentary on Emcore’s future largest customer.

SunPeak Energy

Emcore released PR for a “memorandum of understanding” regarding a multi-year agreement to supply 200 to 700 MW of solar power components to SunPeak Energy for unspecified future projects.

Sounds promising, but SunPeak has no verifiable track record in the solar energy generation business. Here are a few cute tidbits about Emcore’s second largest solar customer.

1. They were just incorporated — April 2007.
2. Their COO was fired from his last job for a $47 million natural gas hedging “mistake”
3. According to Dun and Bradstreet, the company has 4 employees and no verifiable credit history.

Citron believes that this press release was just that – a press release.

Spanish Contracts

In November, Emcore announced $18m component contract with ISFOC, the “Institute of Concentration Photovoltaics Systems”.

This very small (850Kw) is a “turnkey” project meaning most of Emcore’s revenue will not come from solar cells, but rather systems integration work. This low margin systems integration work is not what Wall St. was promised.

Pod Corp. in Sault St. Marie, Canada

It’s a Memorandum of Understanding only, not a firm contract and it contains this strange language:

“EMCORE also has the right to substitute other solar technologies in portions of the projects.”

Why would Emcore not use its own products in the installation? How about because in that location, cloudy more than 50% of the time, gallium arsenide isn’t effective. That would be as if Coke had a contract with McDonalds and said at times we will supply Pepsi.

World Water & Solar Technologies

This customer is our favorite. With less than $25 million in shareholder equity and $36 million dollars of losses over the last 4 years, Emcore certainly seems to be relying heavily on the future success of a flimsy OTC company. Emcore went as far as to invest $18 million in World Water…and guess what happened – World Water committed to a competing solar technology.

WWAT recently completed a purchase of proprietary solar systems developer Entech. This is a direct competitor to Emcore’s concentrating solar cells. There is no explanation of why, if Emcore’s technology is so promising, WWAT would buy a competitor for cash and stock

Citron notes that WWAT’s CFO Larry Crawford was formerly EVP and CFO at Escala, wrecked when it was exposed to be part of a notorious Ponzi scheme fraud broken up by Spanish authorities … first exposed by Citron.

Conclusion

After reading this report we expect the analysts will predictably defend the stock as they always do – hey, no doubt Emcore will need more money soon, and the banking business is too good to pass up. The company might kick and scream and add short sellers to their agenda in presentations. Citron will suggest a novel approach to management: Instead of complaining about critics, make a profit for a change! Sell your product to real customers, record more revenue than expenses and let your numbers do your talking. As for the analysts, show some accountability here. If and when Emcore misses your next quarterly estimates – hold the company and yourselves accountable. But then again, you can just hold to your normal course of business…after all it is only Other People’s Money.

Cautious investing to all.

Disclosure: Author is short EMKR.

Comments

[turbodog:]

Some corrections --

"The high cost of putting weight into orbit makes Gallium Arsenide technology cost effective in space, but it’s prohibitively expensive on earth – up to 100 times the cost of a polysilicon solar cell."

Terrestrial concentrating PV is just that -- concentrating. By focusing the sunlight with a concentration factor of 500 (typical for these systems) onto the cell that's 1 cm x 1 cm in area (1 cm^2), the power generated is roughly equivalent to that generated by a silicon cell with an area of 1000 cm^2. 500x of that improvement comes from the concentration of sunlight, and the other factor of two comes from the efficiency that is ~2x that of a good silicon solar cell.

"It’s also really toxic, and doesn’t work at all under hazy conditions."

Many things are "toxic", and there's more left unsaid here than is said. Toxicity is intrinsic to today's energy sources (fossil fuels -- airborne mercury pollution from coal chief among them), and to a mush lesser extend wind and solar. In fact, for wind and solar the toxicity issues all fall within the manufacturing phase -- the actual electrical power production produces no pollutants. in this way, solar and wind merit the "clean" energy tag. Toxicity during production is an issue, but an issue that falls well within the bounds of many other industries, such as plastics and other petroleum products, agricultural waste, and the numerous chemicals used to manufacture the many specialty materials that go into electronics such as cell phones, computers, and automobiles.

As for performance on hazy days, the fraction of sunlight this is indirect (i.e., scattered light) produces very little power for these CPV solar cells -- this is correct. Their biggest advantages come in sunny climates.

2008 Mar 18 03:35 PM

[dhruv:]

Do you a have reference which prove that cost of emcore solar system is 100 times that of FSLR solar systems ?

To me total cost of ownership for a given power outputis most important factor.

2008 Mar 18 04:22 PM

[dhruv:]

25 million $ for 105 MW power is cheaper than 1 dollar per Watt (according to new release related to GnG) . Why is the author saying that this is 100 times expensive. Given that you are probably short the stock, you may not be representing the facts correctly. I find it extremely hard to believe the cost part.

2008 Mar 18 05:28 PM

[turbodog:]

Emcore manamgement may very well require a wake-up call, but the solar PV technology they're developing merits serious consideration. The CPV technology remains in its early stages, so yes, there are risks. Nontheless, here's an FAQ from a potentially larger competitor of theirs, Spectrolab (owned by Boeing):

www.spectrolab.com/prd...

2008 Mar 18 06:16 PM

[Sherlock Ho...:]

Nice to see Greg Watson get the publicity he deserves.
He is nothing more than a sleazy con man.
I've been on his case for more than a year
(Keef, dogshitontoast, rover etc.)
I can't believe it has taken so long for the world to wake up.
Here is one of Greg's delightful replies
Tell you what Doggie Boy, got the balls to meet me face to face at Elder
Park? I'll do a video and will put it on YouTube. Or do you just make cheap
snipes from behind an alias and your mothers skirt?

Little Doggie Boy want to come and play with the big dogs who can and will
eat him alive? Or maybe play it safe and go back to your kennel and lick
yourself some more as you enjoy your favourite food?

Your call Doggie Boy.

All the best,
Green and Gold Energy Pty., Ltd
Greg Watson, CEO

see tech.groups.yahoo.com/...

for more priceless guff from Mr Whatson

2008 Mar 18 06:51 PM

[undercover:]

Detour Media Group vs. Andrew Left

In February 2002, we commenced an action against Andrew Left, our former
President, which action has been filed in the Superior Court for the State of
California for the County of Los Angeles, Case No. BC269050, for the recovery of
approximately $25,000, plus costs, interest and exemplary and punitive damages.
Our complaint alleges fraud and deceit, negligent misrepresentation, breach of
fiduciary duty and unlawful monetary conversion. As of the date of this Report,
we have filed a motion for default judgment in this matter and are awaiting
entry of a judgment in our favor.

You boys at S.A. should do a better job screening contributors.

2008 Mar 18 07:25 PM

[dhruv:]

Does anyone know the cost per watt of CPV from Emcore ?

2008 Mar 18 07:26 PM

[Warren Buffet:]

How can you write materially inaccurate and misleading words. Aren't you ashamed of being convicted of inestor fraud? Shame on you for trying to profit from lies.

2008 Mar 19 12:26 AM

[Warren Buffet:]

See you in court Mr. Left!

2008 Mar 19 12:28 AM

[Warren Buffet:]

.

2008 Mar 19 12:29 AM

[ej san fran:]

Some important information about Green and Gold has been left out of this article.
Green and Gold has a strategy to sign up licensees to manufacture the Suncube product. A company in India with the name Square Engineering is featured on the Green and Gold website. This company apparently has signed up. A newspaper article about them says the Suncube will cost about US$1500 which is equivalent to about $3/W if compared with conventional solar panels. That's a competitive price.

The Suncube product seems pretty straightforward to me and I think in high volume it should be a lot cheaper. If they get it down to $500 they would hit $1/W, which would be a nice target and position them well.

The Suncube design needs to work, of course, and be durable and reliable. So it's up to Green and Gold and Emcore to prove this.

2008 Mar 19 02:33 AM

[Sherlock Ho...:]

User165567--- you are quoting from one of Greg's own press releases.
The reason that he has got away with this scam for so long is that publications accept his PR without any checks at all.
Greg has successfully created a house of cards because by publishing the BIG LIE often enough it becomes an accepted fact.
I've been trying to expose this scam for more than a year but nobody would believe me because Greg is such a "respectable" businessman.
As soon as Seeking Alpha published the story people finally started to believe it.
What does that tell us?

All lies and jest, still a man hears what he wants to hear
And disregards the rest, hmmmm

Thank you Paul Simon

2008 Mar 19 04:40 AM

[ratherblucky:]

Thanks to all the readers who have added comments. This feedback has really changed the way I look at information provided on SA. I thought it was more reliable than the jibberish on the Yahoo finance boards, but now I wonder.

2008 Mar 19 11:00 AM

[ej san fran:]

Keef,
Have you interviewed that company Square Engineering?
If yes, what did they say?
If not, why call it a scam?

If not defending anybody here. I'm just asking for facts. That's more helpful than heated talk.

2008 Mar 19 01:09 PM

[NYG2008:]

He should have titled his bogus article "Red Candlestix" while he profits on the short side! This guys name says it all! Hey 'Andy Liberal' I think O'Rilley would have fun w/ you!
Most likely he's Long & worn out JDSU supporter!

2008 Mar 19 01:13 PM

[Sherlock Ho...:]

Hi User
Why don't YOU call the company in India.
Ask them when you can buy a suncube.
Ask them about the GGE non-disclosure agreement that they signed.
Ask them about the licence fees

No comment? Refer NDA?

2008 Mar 20 12:34 AM

[E.T. Explorer:]

My understanding of "Shorting is that you have to borrow the stock from the broker who in turn gets it from the marketmaker and then you can sell it. My experience is that If a short seller has the nerve to short anything over a thousand shares the market maker makes darn shure the price will go counter to the seller. especially if the stock is thinly traded but in any event a buyer can't keep on buying every minute of the day any stock so I question all those flashing numbers on all those stocks every minute of every bussiness day. the market maker does not just match trades they buy and sell stocks much like a fruit store sells fruit at a profit of course. any time I hear of a boght deal, like "V" (visa) I see shares jumping up as they are shooting for the moon. so why would any stock cater without any fundamental reason? Well somebody wants to buy it and not at market price so If I had a "MONOPOLY" in that market I can guarantee you that as long as i have shares to sell the price would go up. But If i needed the stock to increase my inventory , it would be a good opportunity for me to cater the stock. Buy all that comes on the market and some time later as new blogs and analysts report on this company, the price is crancked back up again . so this negative blog is a paid advertisement by someone who has to replenish inventory. Just like all the positive blogs are paid advertising by the same agents that have to sell the accumulated merchandise while facilitating the random buy sell orders that prop up now and then. of course the 300 to 400 point gains are another form of advertising to keep the fires of greed roaring.

2008 Mar 20 01:08 AM

[Sherlock Ho...:]

Re: Red Flags at Emcore

Greg M

You may not have been asked for money yourself, but what about those
enterprises from Korea, Spain and India, to mention a few, who did
fork out. Do you you think that their licences came free? Where do
you think Greg got his money from?

Also spare a thought for those who lost their jobs in a car making
factory. Just for a bit of cheap publicity Greg W went on television
and branded them around as if they would be offered a job.

This is the type of slapstick hype that needs to be condemned.

As regards Emcore, they will have to face a SOX audit. Beleive me, if
they have been playing Mickey Mouse with shareholders; you will see
more than pigs flying in Woomera.

regards,

Cello



--- In [e-mail]... "Greg Meggs" <lindyhop@...> wrote:
>
> OK Marcelo, let's have a hands up from the investors who have lost
their money. I did not put any up. I MAY have lost some time and
ideas about using suncubes, but then again maybe not. Time will tell.
>
> And I am not saying Greg is a victim. Certainly his product is not
ready as yet. Maybe it will fail, maybe not, but I am not sure the
whole issue is resolved as yet. If Emcore were to go down, and Greg
had all his eggs in one basket, then he would be a victim. You all
seem to be suggesting that the whole episode was nothing but scam
from go to whoa. It has certainly been a pretty big effort to achieve
very little if that is the case.
>
> Let's face it, plently of people for the last year or so have just
been waiting with great hopes that the Suncube would come to nothing.
I still hope it will be a success, and I am sure Greg W believes the
same. Time will tell, but I would suggest the naysayers go off and
get a life. You might as well start attacking all the other
developing technologies as well as that can be part of your bag of
tricks.
>
> Greg
> ----- Original Message -----
> From: Marcello Vella
> To: [e-mail]...
> Sent: Thursday, March 20, 2008 12:09 AM
> Subject: Re: [SunGrid] Re: Red Flags at Emcore
>
>
>
> Greg M,
>
>
> you don't get it do you? In Europe we arrest people who con
investors out of their money and not compare them to the likes of the
great inventors.
>
>
>
> You seem to have much sympathy for Greg W but none for the
investors who unkowingly ended up by financing this ego trip.
>
> How can you even suggest that Greg W is some kind of victim?
>
>
>
> If you can't even tell the difference between being optimistic
and misleading people then you need to recalibrate your principles.
>
>
>
> regards,
>
>
>
> Cello
>
>
>
>
> ----- Messaggio originale -----
> Da: Greg Meggs <lindyhop@...>
> A: [e-mail]...
> Inviato: Mercoledì 19 marzo 2008, 12:08:34
> Oggetto: Re: [SunGrid] Re: Red Flags at Emcore
>
>
>
> So, now I see it all so clearly. Greg Has been slaving away for
two or three years, knowing this thing would not work, and being
privy the the "fact" that Emcore may go belly up or something. He has
built all these prototypes and preproduction items, hired a factory
and staff, put his reputation on the line, just so he could rip us
all off......... .. God, what a fool I have been. I have gotta ask
why though, surely he could have gone and made lots of money some
other way. Is it maybe possible that he truley believes in the
Suncube concept, and we may yet see it in full production. Why would
anyone put so much time into something which he knew would not work.
Well chances are he wouldn't. I certainly would not waste that many
years on an item I knew would not work. Greg is no idiot and I am
sure he is a pretty competent engineer. So he was to know emcore may
suffer from USA business ethics?
>
> Maybe Greg is overly optomistic. Things like this are not
developed generally in two or three years, maybe ten years is more
viable, though maybe we dont have ten years. Maybe he should just
give up and go and live on a nice island somewhere, and leave the
world to its own devices. Maybe he should not even try because there
is an off chance it wont work. Maybe Henry Ford, the Wright brothers,
Michaelangelo, Marconi, etc should not have tried because at first
they did not succeed with their ideas. If it aint right just give up
should be our motto, right.
>
> Greg

2008 Mar 20 10:56 PM

[Dogbreath077:]

The fact that the author is short-selling says it all. New technology always involves great risks, long term development, high R&D costs, and a host of critiques along along the way. A noted French scientist "proved" that the new bicycle, if it exceeded 25kph, would tear the flesh from a man's face. As far as I'm concerned, technology investment is always high risk. Oh, by the way I own a few K of EMKR, and I'll see them through.

2008 Mar 21 09:50 PM

[ej san fran:]

Emcore has good technology for high-efficiency cells that are used in space projects.
That gives them a nice starting position to deploy solar power on earth as well.
For instance, they can address the large market for utility scale renewable energy in states that have a renewable portfolio standard. They can also target countries like Spain that have a generous feed-in tariff for utility scale solar power.
So, they have plenty of opportunity.

The question that is still open for me is: do they have the business savvy to make this potential come true?
Terrestrial solar power is lot more down to earth (pun intended!) than the high tech they are used to.
Can they come up with ultra low cost optics and tracking systems and produce them in volume with a supply chain in low cost countries?
Are they able to strike deals with utilities and large commercial accounts?

I call upon the board of directors and the shareholders to consider this question carefully: is the management in place to pull off this difficult new business? Or is new management needed?

2008 Mar 24 03:22 PM

[NYG2008:]

Check out this article! Still Bullish on EMKR!

eon.businesswire.com/r...

2008 Mar 27 11:41 AM

[NYG2008:]

(EMKR) Emcore receives $4.6 mln follow-on order for concentrator solar cell receiver assemblies from Concentration Solar la Mancha
(Dow Jones Newswire)

2008 Apr 02 10:30 AM

[Sherlock Ho...:]

Your morals don't improve, Watson. You have added fibbing to your
When a man embarks upon a crime, he is morally guilty of any other crime which may spring from it

I will represent the official police until their arrival.

I am not the law, but I represent justice so far as my feeble powers go.
other vices.

Once or twice in my career, I feel that I have done more real harm by my discovery of the criminal than ever he had done by his crime. I have learned caution, and I had rather play tricks with the law of England than with my own conscience.

It is not for me, my dear Watson, to stand in the way of the official police force. I leave them all the evidence which I found.

I am getting into your involved habit, Watson, of telling a story backward.

2008 Apr 04 04:36 AM

[Sherlock Ho...:]

Correction!
Your morals don't improve, Watson. You have added fibbing to your other vices.

2008 Apr 04 04:40 AM

[Sherlock Ho...:]

Dear me! What a chorus of groans, cries and bleatings! What a rag-bag of singular happenings! . . . Bleat, Watson, unmitigated bleat!

Well, Watson, we seem to have fallen upon evil days.

What one man can invent, another can discover.

I am pleased to think that I shall be able to free society from any further effects of his presence, though I fear that it is at a cost which will give pain to my friends, and especially, my dear Watson to you.

There, Watson, this infernal case had haunted me for ten days. I hereby banish it completely
from my presence.

2008 Apr 04 04:55 AM

[Solar Analyst:]

Emcore's CPV technology is real and some (but not all) of the CPV startups using Emcore chips will eventually execute their business plans. The reality is most are at the prototype or small pilot project stage. Making their products a commercial reality also means they must pass all certification hurdles and successfully setup a manufacturing operation capable of making tens to hundreds of megawatts worth of their systems every year. The most advanced players can at best do about 10 MW of production in 2008 with perhaps 50-100 MW in 2009.

One factor that has been ignored in this analysis is the impact of all of the certification headaches and delays associated with IEC 62108. For Emcore to successfully execute their business plan and meet their quarterly targets, their CPV customers such as Green and Gold Energy have to get their products certified. The problem with IEC 62108 is that there is not a single testing lab in the world accredited to test to this standard and that the first product certified to IEC 62108 by an accredited lab will probably not get their certification until late 2009 or even 2010. None of the various US Rebate programs (e.g. LADWP, CEC in California, Oregon, Massachutsetts, etc) will give a rebate for ANY of the CPV systems. CEC has stated that they are willing to accept a custom UL investigation (testing to the IEC 62108 standard) in place of 62108. Given the anemicly slow time UL take to test standard photovoltaic modules to the 1703 standard, this custom investigation would likely take a year (one test alone takes 110 days in a testing chamber). Given these certification headaches, it is very likely that any 2008 earnings estimates for Emcore associated with CPV chip orders will not materialize and that these orders will be pushed back for multiple quarters, possibly even a year or more.

As for Green and Gold Energy, they have been very inconsistent and often have been their own worst enemy making comments on discussion forums that should never have been made, especially by a company CEO. Much of their credibility problems result from certification and independent testing issues -- with greater emphasis and disclosure of test results and certification status, many of their question marks would disappear.

2008 May 04 09:18 PM