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“And we would have gotten away with it, if it wasn’t for you meddling kids!”

- Famous Scooby Doo line

Citron has observed with keen interest developments at Emcore (NASDAQ:EMKR) since our first report March 18th and follow-up March 25th. There are a few significant events, all of which point to a ménage trios of convenience between Emcore, Green and Gold Energy and the head cheerleader analyst at Jefferies & Co.

The Coalition of the Willing
  • Emcore needs Green and Gold Energy because it is the largest “customer” of record for its terrestrial solar products, representing 80% or more of its “backlog” for solar technology. Emcore desperately needs the appearance of a growing solar business as it needs to raise huge amounts of capital to cover operational losses.
  • Green and Gold Energy needs Emcore because it is a tiny, thinly capitalized Australian business trying to create the appearance that it is a major player in the solar business. Green and Gold uses its purported Emcore purchase order as a credential to establish credibility. Green and Gold’s CEO has a multi-year track record of trying to raise money by selling promises which never come to fruition, including perpetual machine kits and rooftop solar electric devices. There is little or no public information available on any of Green and Gold’s “licensee” customers.
  • Jefferies & Co recently underwrote Emcore’s private placement, and sees a lucrative cash-raise offering coming over the horizon.
Analyze This

Jefferies analyst John Lau needs to issue a big mea culpa to Wall St.

On March 11, he states clearly, “GGE is an important customer to Emcore.” He goes on to mention either Green and Gold or the Suncube over 12 times in a 3 page report to Wall St. There is no financial model included in the March 11 report.

And then on March 27, only two weeks later (after the Citron report of course), Lau publishes a report that is reminiscent of the glossy “scammy” mailers you might receive on an OTC company. The report is full of nice pictures of companies who are not Emcore and do not have business with Emocre…..yet not even one mention of Emcore’s major contract with Green and Gold. But it gets worse. In the same report, Lau’s financial model grossly understates Emcore’s losses, paints a picture of its emerging into profitability when there is not a scintilla of evidence that it is about to do so, and thereby completely misrepresents its financial situation.

There are several shocking deficiencies in Lau’s model, include understating operating income, net loss, and SG&A by all close to 100%... this is either an unheard of oversight or someone is really trying to pull a fast one. Even better, Lau’s projected share count into 2009 is lower than the company’s current share count. Someone has a lot of explaining to do here.

The Rain in Spain

Emcore and Green and Gold were both scheduled speakers at the much-anticipated CPV conference in Madrid. Green and Gold’s presentation is laced with preposterous material misrepresentations, and states a client list of companies who have no public presence. Meanwhile, Emcore claims GGE as its largest terrestrial solar photovoltaic customer. Emcore has done nothing to create accurate disclosure to the US investing public as to the actual condition of its solar business or the reliance that can be placed on GGE’s claims.

By appearing in the same venue with Green and Gold, and by having gone on record with a “To Whom it May Concern” letter expressing “support” for GGE, Emcore is in fact aiding and abetting the fraud perpetrated on the market by Green and Gold Energy.

Danzilio Letter [PDF]

Citron notes that “backlog” is the one financial metric about a company’s current business that is not typically audited. Therefore, it is especially subject to being used in a misleading way.

Therefore, today Citron calls on the SEC to investigate Emcore’s public statements about its solar technology business, and calls on Emcore to go on record to correct its statements with regard to its “backlog” of terrestrial solar orders — and specifically, that percentage of orders which are from customers who can be relied upon to pay for their purchases.

SEC Letter on Emocre [PDF]

Let's Make a Deal

Subsequent to the CPV conference in Spain, Emcore has announced two deals:

  1. Buying additional fiber assets from Intel (NASDAQ:INTC), and
  2. A solar deal in China.

As to the former, Citron notes that this follow-on asset purchase requires zero cash, just some freshly minted stock, which Emcore has in good supply. Citron observes that Intel is not in the habit of giving away attractive, profitable businesses for free. We believe that as these integration and operational numbers begin to flow through Emcore’s financial statements, the gusher of red ink will intensify. No doubt Emcore’s quarter will be heralded by headlines of “Record Revenues”… but without sating its ravenous appetite for the public’s investment money, the losses generated by these “record revenues” are simply not sustainable.

As to the latter, Citron notes that aside from the slippery accountable-to-nobody future promises, the stated deal is for 60kW of solar technology. While no terms are announced, but by extrapolating from previously published numbers about Emcore’s backlog, it's possible to compute a value of 60kW at about (……drum roll…..) $18,000. …nothing more than a college science project.

CITRON CALLS UPON EMCORE AND JEFFERIES TO COME CLEAN

The only way investors can validate a technology as a business is if we see valid orders from customers. Where are the commercial-sized valid orders from Emcore? Green and Gold is the only major customer. Emcore has gone out of its way to perpetrate the fraud by not only writing letters of recommendation for Green and Gold to induce investors, but more importantly by lying to its own investors by stating in a press release, “Green and Gold Energy is a world leading CPV system provider.”

In our next report, we will show how this whole circle of hype is not new for CEO Reuben Richards, but rather he has been promoting fictional backlogs and unfulfilled promises for years.

Disclosure: Author is short EMKR.

Source: Where Are Emcore's Commercial-Sized Orders?