The chief executive of American Superconductor Corp. (NASDAQ: AMSC) nailed it when he told a reporter that China wanted “to kill the company.”
In fact, shares collapsed under China’s pressure, plunging the market valuation by 87 percent virtually overnight in 2011. And despite misunderstood hype that has breathed a quiver of life back into AMSC in the past few weeks, the stock appears poised for another hammering.
In a 60 Minutes segment broadcast Sunday night, CEO Daniel McGahn said AMSC lost over $1 billion in valuation when China looted its wind turbine technology in a high-stakes game of industrial espionage.
Back in 2007, AMSC agreed to supply the computer brains for wind turbines made by small, China-based Sinovel. Two years later, AMSC announced a $100 million follow-on contract with Sinovel. In 2010, the year it hyped a partnership expansion, AMSC broke its string of losses and knocked down $16 million in net income, thanks to the Chinese company.
*Business Disappears Overnight
But in March 2011, those celebrated contracts fell apart. Sinovel, a 70 percent contributor to AMSC’s revenue, suddenly refused contracted deliveries of the company’s turbine controls.
Oddly, it seemed Sinovel turbines were spinning when they should have been shut down during testing. That’s when the company began investigating. It seemed an employee had secretly copied AMSC's intellectual property, including source code. Six months later, Superconductor filed suit claiming it had been left in a lurch and its IP stolen.
Lured by promise of a $1.7 million contract and other perks, a Superconductor insider agreed to steal the technology for Sinovel, according to a criminal indictment.
Incredibly, the FBI discovered stolen technology right under AMSC’s nose.
FBI agents found a Sinovel wind turbine - complete with AMSC’s heisted technology - just 40 miles away from company headquarters in Devens, Massachusetts.
The Massachusetts Water Resources Authority had purchased the turbine from Sinovel for $4.7 million - in federal stimulus money.
Undaunted, Sinovel punched back with a $190 million counterclaim in China over issues including failure to meet contract standards.
So the civil proceedings between AMSC and Sinovel rest in the court in Beijing, another complicating factor for the American company.
“It’s a very complicating factor, I think evidenced by the fact it’s been four years and we’ve haven’t seen much movement at all,” Brion Tanous, AMSC investor relations, said in a phone interview with TheStreetSweeper.
Of course, AMSC's four civil lawsuits remain unresolved - one initial trial date has been set for December - and the ultimate expenses remain unknown.
One thing is certain, though. In one fell swoop, AMSC lost its biggest customer … and control of its technology.
TheStreetSweeper believes there’s a nagging danger that other companies may be willing to take a turn at kicking AMSC in the chops, too …
*Inox Agreement: Hype, Numbers, Security Questions
AMSC’s recent hype over $210 million “strategic agreements” with India-based Inox Wind Limited hopped up the stock price.
The agreement revolves around an integrated power electronics system that includes a wind turbine power converter cabinet, internal power supply and controls.
But there are three red flag-waving issues here.
**First, long-time customer Inox is now responsible for about 60 percent of AMSC’s revenue – or about $52.2 million this year.
The December Inox deal specifies the arrangement will be worth $210 million over the “next three to four years.” That means about $52.5 million per year.
But Inox is already contributing that amount right now, anyway.
Indeed, AMSC’s Mr. Tanous confirmed that.
“Yes, the actual revenue from Inox for the first two quarters are certainly in public documents in the 10-Q. We haven’t said anything about the composition of revenues for Q3,” he said.
He added that AMSC’s growth opportunity links to Inox’s intentions to double its megawatt capability over time.
“Whether there is growth in this strategic agreement would depend on the demand that Inox sees,” said Mr. Tanous.
**Second, the agreement details surrounding Inox’s wind turbines in India contain an exclusivity clause, as disclosed in the 8-K.
Technology License Agreement
On December 16, 2015, the Company and Inox entered into a Technology License Agreement (the “License Agreement”). Under the License Agreement, the Company has agreed to grant to Inox (i) an exclusive license to use the Company’s technology (not including the source code) to internally manufacture and supply ECS only for use in its Wind Turbines in India, and (ii) a non-exclusive license to use the Company’s technology to manufacture, distribute and supply ECS only for use in its Wind Turbines in the rest of the world (together, the “License”). The grant of the License will become effective after Inox makes an advance payment under the Supply Contract and the upfront payment under the License Agreement discussed below. The License granted to Inox is subject to the limits on the number of ECS permitted to be manufactured by Inox as set forth in the Supply Contract.
Under the License Agreement, Inox is required to make payments to the Company in the aggregate amount of $12 million to be paid as follows: (i) an upfront payment to the Company of $6 million within thirty (30) days after execution of such agreement, and (ii) an additional $6 million as milestones are satisfied over the fifteen-month period from the License Agreement effective date.
That licensing agreement prevents AMSC from selling its product to any other wind turbine makers in India. So that limits growth prospects there.
AMSC would be precluded from selling that design to another Indian company, though a different design could be sold, said Mr. Tanous.
Third, we wondered about the security of that contract.
Can Inox jump up and develop their own solution much like what happened with Sinovel? If so, with Inox already accounting for over 60 percent of revenue, AMSC could find itself facing the sort of revenue-killing, stock-killing action it endured when 70 percent revenue-generator Sinovel turned on AMSC.
Mr. Tanous assured us that the contract is secure.
“Sinovel did not develop anything. Sinovel stole the technology. AMSC has years and years of experience and it’s extremely difficult to copy what they’ve done…(Due to safeguards) it would be extremely difficult to steal the technology again,” Mr. Tanous added.
* Terrible Earnings, Margins And Returns, Yet Execs Live High
As the company continues to spiral, the top three executives are pulling down more than $4 million in combined compensation.
Here’s their compensation:
(Source: SEC filings)
For the trouble of attending a few meetings, the directors rake in between $50,260 to $85,260 – well above the average American’s wage of about $42,000 per year.
Yet AMSC is suffering from $151 million in operating losses and declining revenue over the past three years:
(Source: SEC filings)
Despite restructuring and reorganization efforts in 2011, AMSC's operating income (yellow) and net income (green) have consistently disappointed investors.
Likewise for recent key metrics:
(Sources: SEC filings, CapitalCube)
While solid institutional ownership traditionally provides comfort that a company may have some potential, big bank ownership is alarmingly low:
The company still doesn't want to talk about any timeline to profitability.
"It's certainly something on our minds," said Mr. Tanous.
But Mr. Tanous asserts that a combination of three areas hold the key to AMSC someday making a buck: wind technology (the company thinks it may be headed toward profitability); quality systems for the electric grid (AMSC hopes to double revenue to reach the 2012 level prior to the Australian market weakness) and high-temperature superconducting grid cables (currently no revenue but AMSC hopes a Navy contract could grow).
Still, analyst estimates reflect a sense of "When, if ever, will we see a profit?" They anticipate negative earnings exceeding -$2 per share through 2017:
(Source: Yahoo Finance)
After losing its technology and primary customer, AMSC is locked in a desperate struggle to remain relevant and viable. The recent baseless so-called strategic announcement points to the desperation, while failing to help the string of operating losses now approaching $1 billion ($921.9 million).
Unrelenting storms have broken the wings of AMSC's wind turbine business model and we don’t believe it can pull off a turn-around. But we do believe the next gust may well drop the company’s share price to about $2.70 – a very fair valuation.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in AMSC and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].