Emcore (NASDAQ:EMKR) – Citron Calls Fraud.

,

The SEC and NASDAQ must investigate Emcore management’s claims about the validity of this purported order from ES Systems.

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.

The Heart of Fraud

Just before earnings, which were a train wreck (losses 150% higher than the main analyst’s expectations), Emcore produced a preposterous PR about a $28 million order from Korean ES Systems for solar receivers.

http://www.emcore.com/news_events/release?y=2008&news=196

In the press release we read of ES being “a leading provider of CPV Systems in Korea” and they are building 70MW of solar farms.  Two days later the company went on a conference call and made a very large deal out of ES Systems, insisting their recently announced huge order was “licensed and fully funded”. 

ES Systems is also on record as the first licensee of Green and Gold Energy from over a year ago.  Revenues from this deal were promised but never delivered as of yet.
http://www.greenandgoldenergy.com.au/Documents/GGEPressReleaseKorea20070321a.pdf.  This announcement, trumpeting a 10 year, 500 MW contract, is predicated on building solar farms costing over $2 billion dollars. 

We cannot say that fabricating claims about customers is beyond Green and Gold — they completely falsified a distributor to the investment world.
http://www.zolardistributors.com/index.html   But then again, as a private Australian company, they are not accountable to the SEC.  Not so with Emcore.

Let us start with the obvious about ES Systems

Here is the website.   http://www.essystem.kr/
Notice, no real information except one press release, that being the Emcore deal.  No announcement of funding, no announcing of project.  Just like a cheap penny stock promotion you get in the mail.  It appears that the only purpose of this website is to promote the deal with Emcore.  Under partners it lists Green and Gold Energy and Emcore.  Where is the funding?  Where are the customers? Who is management?  This is a complete insult to anyone who wonders how this company could ever get funding for a large scale solar project.  It spells SCAM.

The ES System Solar Farms

Then Emcore presents the ES order for a 70 MW project in its official press release.  To put 70 MW in perspective, that would rank as one of the top five solar projects in the world …. yet not a mention of it anywhere online or anywhere in Korean newspapers or journals. 

Here is a list of the biggest solar projects in the world as of March 2008:
http://www.iht.com/articles/2007/05/09/business/solar.php

Note: No ES Systems or anything even approaching 70 MW of projects in South Korea.  THAT IS BECAUSE IT IS A SHAM.  Emcore did it once again.

How much does it cost?

We are told that these projects are “fully funded”.  Using the $4 per watt rule of thumb, as verified during the Emcore conference call, just the $28 million order alone would be for a project that would require a minimum of $280 million in financing for land, installation, and collectors, of which the receivers comprise only 10% of the overall project cost.  Who is giving ES $280 mil??  Let us look at what a real solar company looks like that just raised $115 million from the likes of Google.
http://www.brightsourceenergy.com/

Anyone notice a difference???

You cannot hide a solar project.

In a world where even the smallest investment in solar is publicized extensively, how does one hide a project of this scope?  And why?  So here we have a mystery project from a customer with no verifiable operating history … is this plausible?  NO.  The solar industry is a widely covered in the worldwide press.  Just to show you how preposterous the claims are from Emcore about their 70 MW project, let us look at other solar projects in Korea.

This is a 1 megawat project from an established Japanese Company

http://www.energy-business-review.com/article_news.asp?guid=05A3432A-EA78-4C0A-BEEA-AFF86AAB7F94

Here is news on solar giant Sun Power doing a 2.5 MW plant in Korea

http://www.eetasia.com/register/login.php?type=ART&jumpvalue=8800482347&refilljp=L0FSVF84ODAwNDgyMzQ3Xzc2NTI0NV9OVF8zOTc0NWY5NS5IVE0=&cat_id=765245&article_type=NT

C’mon Guys

During the conference call, management was specifically asked whether this $28 million  order was a “transition” from a previous order placed through Green and Gold or a separate order.  After CEO Hong Hau answers that the order is “more of a transition”, Chairman Richards can’t wait to interrupt to correct him, saying “it is a separate purchase order”.  This lack of knowledge speaks for itself.

So we’re asked to believe that the total booked orders from ES Systems now represents over 75 MW, over $30 million dollars, and comprises the technology core of $300 million of CPV projects!  Yet, no one in the world knows about this project except Emcore, Green and Gold, and ES Systems. 

We Did Our Homework … Did You?

The claims made by management are completely preposterous — so much so that we had to hire a corporate private investigator in Korea to find out more about the mysterious ES Systems.  After finding no available information on any large scale projects, we then contacted Symphony Energy, a leading solar provider in Korea and is located in the same industrial park and city as ES Systems.
http://www.symphonyenergy.com/english/index.html

As the report stated back to Citron:

“Symphony people said they also has factory at the same Pyeongdong Industrial Complex in Gwansan-gu, Gwangju city, but never heard of ES System. They said Symphony is one of the largest solar module businesses in the country and know most competitors, but the name was new to them although they knew Mr. Nak-Jun Chung as being a man in generation business.”

Whenever either Citron or a private investigator called over to ES Systems we were refused any information about funding or the project of ES.  We were told to put information in an email … which we did and received no response.  We did manage to get James Park on the phone and he said he got funding from “Wall Street” but wouldn’t say who.
Does any of this sound like the leading provider of CPV systems in Korea?

An Open Challenge

Management lost a lot of credibility putting faith in Green and Gold Energy.  Citron exposed how they claimed to have a an Australian distributor when it was in fact just self-dealing.  Management of Emcore should now disclose the funding for ES Systems’ projects.   The shareholders should demand that management show funding for a 70MW project, as stated in press releases and conference calls.  It is the opinion of Citron that ES Systems does not have the capability of paying for this order or financing the projects necessary to utilize this volume of solar receivers.  For Emcore, misleading investors in this way is a violation of securities regulations for publicly traded companies.

Conclusion

Backlog is a funny number when it comes to accounting shenanigans – it is one of the few unaudited numbers which management can report, which makes it a prime tool for a management intent on selling dreams.  We have seen claims of huge backlogs used in some of our favorite corporate scams (Home Solutions of America).  In Future reports we will discuss how management of Emcore has played this backlog game in the past (just look at the 10-K from 2000 and 2001; and subsequently delivered nothing to shareholders but empty promises.  Furthermore, we will look into the fiber optic business, which has done nothing but bleed money.  Yet for now we just can’t get our mind off the wonderful solar business and the marquis customer that is ES Systems.

Cautious investing to all