Citron Comments on Pyramid Oil (AMEX:PDO)
Yes we know that crude oil prices are trading 40% this year, and no we do not want to call a top to the oil market, yet speculation in crude oil prices has only been outdone by speculation in small oil stocks, to this we call your attention to Pyramid Oil (PDO). With $1.6 million in Q1 Revs and $27 mil in P1 reserves, PDO trading at $44 a share in our opinion would be as if oil was trading at $400 a barrel.
To see what this company has to offer look at www.pyramidoil.com
Based upon last quarter’s numbers this company with a typical 5x cash flow should trade more with a stock price of $8, still higher than was just a month and a half ago. That would put them in line with their competition. The comany has not shown any significant P2 reserves that would justify this move. By the company’s own admissions in their filings they are not sitting on what they believe to be a potential oil windfall. Note- we are not saying that PDO is a “scam” but they are a garden variety oil producer with nothing sexy to the story. We are just advising readers that if oil happens to sneeze, we believe that PDO will catch the flu.
We have seen these parabolic run-ups too many times to know how they all end. The stock is currently trading at 6x their proven 07 reserves and for anyone who follows oil knows this is unsustainable. We write this as many readers have emailed us asking what our thoughts were on the run up in this micro float oil name. Cautious Investing To All….and if it seems to good to be true, it probably is.
Lawsuit challenging Arthrocare business model and Arthrocare Executive Has Been Referred to Florida’s State Attorney’s Office For Determination of Criminal Charges.
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Could this be the final straw in the “Discocare Model”?
Just last week in the 17th Judicial Court in Broward County Florida a, judge made a determination in a contempt hearing that implicates Arthrocare executive and former Discocare director Michael Denker.
This was a contempt hearing for Mr. Denker amongst others for not answering a deposition in the Islam personal injury case. This case directly challenged the “Discocare model” as shown here:
http://www.citronresearch.com/wp-content/uploads/2008/04/new_problems_at_arthrocare.pdf
On June 12, the court record states:
Attorney statement:
“We were before Your Honor on a status conference, I kind of described the difficulties that we were having in getting discovery including some people that we subpoenaed that did not show. Michael Denker is one of those people.”
Judge’s reply:
“I’m going to refer this to the State Attorney’s Office. I don’t think its really — at this moment I’m going to defer on the indirect criminal contempt. I’m going to send it up to the State Attorney’s Office determine whether criminal charges should be filed against him.”
Why would Mr. Denker go through such lengths to avoid a deposition? Why would Arthrocare allow Denker to even go in front of a judge for contempt? What are they hiding? Maybe the answer can be found in the incriminating nature of the first deposition that showed the “all too comfy” relationship between Arthrocare and Discocare.
http://www.citronresearch.com/wp-content/uploads/2007/12/denkerdepo.pdf
It is unclear if judge intended his referral to extend to the all defendants; Citron will continue to follow this part of the story. Does Arthrocare and its shareholders take comfort in state prosecutor looking at this case? Especially, because the Florida Department of Insurance has recently made an issue of patient brokering and fraudulent billing.
Michael Denker’s employment- Is this the Rosetta Stone?
Citron has previously documented the involvement in Discocare of Michael Denker, the former sales manager of Arthrocare’s spine unit, who was hired to run Discocare. In the recent deposition of former Arthrocare employee Jackie Brown on May 14, 2008, she stated that Denker never left active involvement at Arthrocare. . This is in direct contradiction to his own words from his own his earlier deposition.
Jacqueline Brown Deposition (PDF)
Here are the key lines:
Q-Then was it your understanding when you talked to Mr. Denker that he was an Arthrocare employee?
A-Yes.
Q- Do you know whether or not he was a DiscoCare employee?
A- I don’t know what his role was. I didn’t figure that out while I worked there. I know he participated with Discocare but he was an Arthrocare employee.
If Ms. Brown’s testimony is true, the implications for Arthrocare are devastating. Not only would Denker be guilty of perjury (in addition to contempt), but this information could render every Arthrocare transaction with Discocare as related party – and subject to extra disclosure and restatement. It also calls into question if we can trust Arthrocare and their transactions with their other billing company DRS. Both of these companies present a potential restatement of financials for the past year.
It is precisely this vulnerability that led Williams Capital (which used to rate Arthrocare a “buy”) to downgrade it again last week, this time from “hold” to “sell”.
It all comes back to the numbers.
Even if you believe that Arthrocare and Discocare happened to share the same fax # pre-acquisition by fluke, you cannot deny the potential restatements if either the auditor or the company discloses that Discocare was a related party. The company wants us to believe that the NASDAQ inquiry cleared this up, yet they never disclosed what the nature of that inquiry was; therefore we have no clarity as to what was disclosed. With the medical device industry making a move towards more disclosure, Citron finds it disturbing that Arthrocare is violently moving in the opposite direction. The headline risk surrounding Arthrocare seems to be growing every day.
Weakening Spine
Meanwhile, in another blow to the “Discocare model”, in a case last week Nikhol and Geroge Primm v. Specialty Appliance Mechanics, Inc., Case No. 07-215CA pending in Martin County, Florida the plaintiff sought $1,500,000 and was awarded only $23,000.
The reason these cases are so important is not only for the future viability of the Discocare model and growth in Arthrocare’s spine business, but more importantly every case lost is $7,500 that will not be recovered by Arthrocare/Discocare, as well as a beacon to insurance companies that many of these cases are seriously flawed and can be effectively defended in court.
So even if you believe that Discocare and Arthrocare were separate entities pre acquisition, there has to be concern about the future viability of its “model” to deliver growing profitability.
Conclusion
Citron continues to see ominous signs confirming its original diagnosis – that Arthrocare’s revenue growth was and is alarmingly dependent on a shady reimbursement scheme, replete with deception and disreputable characters. This has led management down a road of sacrificing credibility for short-term financial performance.
American Superconductor - You Have To Read it To Believe It!!!
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In behavior normally reserved for penny stock promotions, the CEO of AMSC sold $11 million in stock — around 250,000 shares — most of which was on the day of AMSC’s questionable press release. Selling into this volume, yet before release of the 8-K with the contract details, is deceptive business practice at its worst.
The questions about this deal have been best pointed out in numerous analyst reports, who raise the obvious doubts about the viability of this contract.
- Sinovel’s (AMSC’s Chinese counterparty) willingness to commit to a multi-year forward-year, fixed price deal — completely inconsistent with how Chinese companies are doing business with foreign suppliers. Citron notes that at least three large-scale industrial Chinese competitors will be mass-producing electrical subsystems for wind turbines by 2009. AMSC has historically won no more than a “right of refusal” to supply components on a competitive basis when it licensed a design. This design is sourced from competitor Furhlander.
- How Sinovel can absorb 7500 units of electrical components (which exceeds by a factor of 3 Sinove’ls projected capacity to produce turbines) when it doesn’t have supply agreements on the other turbine components, such as blades, towers, bearings, and hubs all of which are seriously supply constrained.
- There’s nothing in this agreement that compels Sinovel’s specific performance, or stipulates cancellation penalties, yet explicitly grants Sinovel the right to change which sizes of units they are buying. This appears to transfer all the execution risk to AMSC, leaving us to wonder whether it is in fact a purchase order by FASB rules, or in reality just a MOU.
- Sinovel’s inability to finance the $10 billion project pricetag of this massive number of turbines. (Citron understands that Sinovel’s parent Dalian may have financial issues of its own, and may be preening for an IPO to raise capital.)
- No mention of the fact that 17% of the blockbuster purchase order is a VAT tax – a fact conveniently left out of the PR – and overlooked by analysts — that will surely put their pricing model on a diet.
All of which makes us wonder: How long will AMSC benefit by the street’s misperception that it is even in the “wind turbine” manufacturing business, much less a “pure play”? In fact, AMSC manufactures commodity electrical components for wind systems, which comprise no more than about 5% of completed wind farm projects, are not in short supply. It also licenses turbine designs, which numerous Chinese competitors are moving with remarkable speed to design independently of foreign licensors.
Cautious investing to all.
06/11/2008
“If You Add to The Truth, You Subtract From It”… The Talmud
It is no secret that Citron Research is skeptical of American Superconductor. The company has now crossed the line to ridiculous. They have taken a small customer in Sinovel and added so much nonsense that they have subtracted any corporate credibility that is still left from a company that has done nothing but burn through investors money. It is our opinion that anyone on Wall Street would have to be deaf, dumb and blind not to realize the complete lunacy of American Superconductor’s most recent press release.
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. This project has been publicized all around the world in every language imaginable.
http://www.msnbc.msn.com/id/19231397/
http://www.cnn.com/2008/US/05/19/pickens.qa/
http://www.usatoday.com/tech/science/environment/2008-05-15-pickens-wind-turbines_N.htm
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.
Not to carry on but let’s look at how ridiculous this really is. General Electric is one of the top 5 largest companies in the world. When they received an order for 1,000 MW of wind power they put out a PR.
http://www.genewscenter.com/Content/Detail.asp?ReleaseID=3601&NewsAreaID=2&MenuSearchCategoryID=
Sinovel is a small company that did not even put out a pr when they got an order more than 10x that size…guess they didn’t want anyone to get “wind of it”.
The Pickens project is supposed to cost up to $12 billion for all 4 Gw, therefore using the same math this Sinovel project would cost up to $30 billion in the next 3 years. Where is the financing for $30 billion in wind projects? Is it contingent on anything? What a great job Sinovel has done at keeping this secret.
Let’s Get One Thing Straight.
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.
ANALYZING THE PR
Let us look at the headline of this tremendous pr, “AMSC receives $450 million follow on order from China’s Sinovel Wind.”
http://biz.yahoo.com/bw/080610/20080610005242.html?.v=1
First thing we notice is the company refers to their customer as Sinovel Wind. That is funny because the real name of the customer is Sinovel Windtec. http://www.sinovel.com/
The PR mentions no delivery schedule, no minimums, no cancellation fees. 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.
http://phx.corporate-ir.net/phoenix.zhtml?c=86422&p=irol-newsArticle_Print&ID=1120095&highlight
It’s in the numbers … NOT.
A critical glance at AMSC’s 10-K leaves more questions than answers, as every accounting reg 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.
A Closer look at Sinovel
An examination of Sinovel’s finances and the AMSC’s acquisition of Windtec make it very clear how unlikely it is that a multi-billion dollar wind turbine deal (an arms-length one at that) has grown out of the ground in less than 18 months.
As of Dec 31, 2006, these numbers appear in Sinovel’s D&B:
| Balance Sheet Data | (USD equiv) | (USD equiv) |
| Cash | 6.28 million | |
| Accounts Receivable/Payable | 4.76 million | 2.36 million |
| Other Receivables / Payable | 8.16 million | 7.63 million |
| Fixed Assets | 32.97 million | |
| Construction in Progress | 23.63 million | |
| Other liabilities | 76.58 million | |
| Total Equity | 2.85 million |
| Profit and Loss Data | (USD equiv) |
| Sales | 26.93 million |
| Cost of Sales | 22.83 million |
| Profit | 48.9 thousand |
| Taxes | 0 |
| Profit net of Taxes | 48.9 thousand |
In early 2007, AMSC acquired Windtec, and by September 2007, Sinovel had placed orders worth $90 million with AMSC. Assuming that the electrical subsystem components supplied by AMSC comprise 5% of completed wind turbine installations, this would have represented $1.8 billion in deliverable wind turbine commitments.
Investors are due an explanation as to how this bonanza comes into being.
- Is there an undisclosed financial relationship between Sinovel and Windtec, which requires restating all these transactions?
- Are these fungible orders according to US GAAP – where are the funds necessary to pay for this magnitude of purchase?
- What about announcement of the projects – which would clearly be the world’s largest wind projects, including location and funding disclosures and timeframes?
- Are firm commitments in place for the blades, bearings, gearboxes, castings/hubs, and towers, all supply constrained components, which are necessary to fulfill these contracts?
Insider sales
A relentless drumbeat of insider share sales – over 500,000 shares in just the last 60 days – completes the picture. CEO, Directors, CTO … if things are so great, it sure makes you wonder why all the officers are running to the bank.
Cautious Investing To All
Emcore (NASDAQ:EMKR) To Become Largest Solar Provider in Fantasyland.
As Wall Street Continues to ignore the blatant fraud at Emcore, Citron thought we would address this in a novel way through an open letter to management. Emcore continues to tout a solar backlog but Citron has found no verifiable commercial size orders that could represent more than 5% of stated backlog. We hope that either management can address some of these concerns in this letter or prepare themselves for the consequences. Gentleman, securities fraud is a serious matter like everything else in fantasy world; it is never a problem, until it’s a problem
Open Letter to Emcore Management
Reuben Richards COB
Hong Hou CEO
Emcore Corp
Dear Sirs,
Background
In June 2007, you formally endorsed Green and Gold Energy’s efforts to promote itself on your letterhead,
http://www.citronresearch.com/wp-content/uploads/2008/04/danziliolettergge.pdf .In August 2007, Emcore publicly stated it received a $24 million purchase order from Green and Gold Energy. The PR included a quote from Green and Gold’s CEO, Greg Watson.
http://www.emcore.com/news_events/release?y=2007&news=163
Then in February 2008, Emcore claimed an additional $39 million purchase order from GGE.
http://www.emcore.com/news_events/release?y=2008&news=187
In May, you announced a $28 million purchase order from SunCube International Group (SCIG) member ES System in Korea.
http://www.emcore.com/news_events/release?y=2008&news=196
More recently, Emcore and its analysts have stopped referring to Green and Gold Energy, and claim no backlog from Green and Gold; instead claiming that Green and Gold has encouraged its “SCIG” group customers “deal direct” by placing orders with Emcore.
The SunCube International Group (SCIG)
http://www.greenandgoldenergy.com.au/scig.htm
Green and Gold Energy’s SCIG is composed of 5 companies. What is consistent and disturbing about this list is the utter absence of any financial substance necessary to execute a large-scale solar project. After trying diligently to contact these parties, it is the belief of Citron Research that at least 4 of the 5 group members are frauds.
Here’s what we’ve found so far:
ES System (Korea)
· Has announced projects totaling 70 MW in size, which would place among the top 10 solar projects worldwide
· Has refused to disclose locations or financing
· Did not appear at recent solar power industry conference in South Korea
http://www.energyexpo.co.kr/eng/sub01/sub01_06.asp
· Projects unknown among major Korean solar companies
Energies AC Gava (Spain)
· No independently verifiable confirmation that the company exists
· No independently verifiable information about any projects by this company
· Company cannot be reached at phone number http://www.acgava.net/index.php?option=com_contact&Itemid=3
Square Engineering (India)
· Claims it has a “fully developed manufacturing facility” in Satara Maharashtra
· However, photos show only a shell building under construction
· No verifiable information about any sizable projects or funding
Solar Ace (Israel and middle east)
· No independently verifiable information that this company exists
· No verifiable information about any projects or funding
Zolar Distributors (Australia, New Zealand, South Pacific)
· Not an independent company, but rather an (undisclosed) related party to Green and Gold. The Zolar website is registered to George Zoumis, Business Development Manager of Green and Gold Energy.
(Details at: http://www.citronresearch.com/index.php/2008/03/25/citron-research-updates-emcore-nasdaqemkr/#more-330 )
Greg Watson actively promoting Emcore stock
Now that Greg Watson is publishing in the US financial press as an active promoter of Emcore’s stock, http://seekingalpha.com/article/79261-shining-light-on-emcore?source=yahoo , we call upon the company to clear the public record as to:
- the full and complete status of each of these orders, including dollar amount shipped, and the dollar amount of deposits received on each
- the totality of Emcore’s financial relationships with the SCIG companies and GGE
- the identity of any company comprising at minimum 5% or more of Emcore’s terrestrial solar backlog
Citron Research wishes to advise you that Emcore, and specifically Mr. Watson, as its agent, is in violation of US Securities Laws, which provide for strict disclosure rules regarding the truth of material public statements from and about publicly traded companies.
Further, US Securities laws require that due to Mr. Watson’s material financial relationship with Emcore, he is obliged to disclose, in each and every public writing about Emcore, the full nature of that relationship.
Yours truly,
Citron Research
Arthrocare - The Smoking Gun
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On May 29, Arthrocare announced that it had been awarded the Frost & Sullivan award for product innovation for the Opus Twin Lock system. The company was so proud that they proclaimed:
“We’re very excited about our TwinLock Knotless Fixation System being recognized by Frost & Sullivan for this prestigious award,” said Jack Giroux, president of ArthroCare Sports Medicine. “The device is designed to dramatically simplify the most challenging rotator cuff repairs by providing a dual implant system that can be placed and tensioned by the surgeon in seconds–directly through the rotator cuff. In terms of acceptance and demand from surgeons, the system has already exceeded expectations. This Award is icing on the cake. It’s a great honor.”
What they forgot to mention is - THE AWARD IS A SCAM!
More Explanation of the Fraud at Emcore (Nasdaq:EMKR)
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It has not been a great month for Emcore.
May 5: The company puts out a fraudulent press release announcing an order of $28 million by a customer who has no verifiable projects or funding.
May 7: Emcore publicly disclosed in a form 8-K that the business unit acquired from Intel lost $100 million with -20% gross margins and declining revenues. (Did they pay Intel or did Intel pay them to take these assets?)
Emcore (NASDAQ:EMKR) – Citron Calls Fraud.
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When you stack up management’s claims vs. the facts to make an investment decision, two starkly different versions of reality have to be weighed. One version requires believing Emcore’s management. The other version has you looking squarely in the face of corporate fraud.