Sample Financial Analysis

[ This is an industry and company American analysis. Although the age of the data make this presentation obsolete, Superconductor the company name is obscured out of consideration for the former client. ] Jessica Margolin Margolin Consulting Trends in Technology Investing 1

Breakthrough Issues … Global Warming Effects Fuel Prices Public Policy Socially Responsible Investment Source: The Statistical Review of World Energy 2005, BP Website, June, 2005 2

Breakthrough Issues … Global Warming Effects Fuel Prices Public Policy Socially Responsible Investment …Need Breakthrough Technology Cleaner Energy Sources Lower Use through Greater Efficiency Reliable Distribution 3

But Advances in Materials => Risks Political Risks Incentivization Regulation Market Resistance (NIMBY) Competitive Risks Competing Technologies Competing for Re-Aligned Markets Technology Development Risks Might not work Might be leapfrogged Business Management Risks Research Lab to ROI Production: People & Processes Opportunistic Employees 4

But Advances in Materials => Risks Political Risks Incentivization Regulation Market Resistance (NIMBY) Competitive Risks Competing Technologies Competing for Re-Aligned Markets 5

Risky to Choose Power Generation Oil Renewables Solar Natural Gas Wind, Wave Coal Mini-Hydro Nuclear Energy Hydrogen Geothermal Hydroelectricity Landfill Gas Waste Incineration Biomass Political Risks Incentivization Market Resistance (NIMBY) Competitive Risks Competing Technologies Competing for Re-Aligned Markets 6

… Less Risky Choice: Transmission Transmission & Distribution 7

CapEx for Transmission Market Almost $10 trillion of the total $16 trillion of capital needed in the energy industry will be for the power sector. OECD countries will need to invest $4 trillion in their power sectors, half of it for transmission and distribution grids. Replacement of old power plants will $0.8 Trillion account for much of the investment in US + Canada T&D power generation in those countries, since more than a third of today’s capacity is likely to be retired over the next thirty years. More than 40% of OECD electricity investment will occur in the United States and Canada, which will remain the largest electricity market in the world. Despite the relative maturity of the system, its investment requirements will also be larger than in any region except China. Source (Text): OECD/ IEA; World Energy Investment Outlook, 2003 Insights Source (Image), edited: RBC Capital Markets, Alternative Energy, Myth or Reality – A Public Market Perspective European Energy Venture Fair 2004. 8

Manage Regulatory Risk • Contribute to Policy Regulation • Have Relationships with Agencies • Technology considered Nationally Strategic 9

But Advances in Materials => Risks Technology Development Risks Might not work Might be leapfrogged Business Management Risks Research Lab to ROI Production: People & Processes Opportunistic Employees 10

Manage Development Risks • Monitor Technology • High Barriers to Entry • High Risk / Low Feedback Culture => Methodical • Reputation Transparency => Integrity • Additional Competencies (Service, Software) Technology Development Risks Might not work Might be leapfrogged Business Management Risks Research Lab to ROI Production: People & Processes Opportunistic Employees 11

Investment Strategy Fundamentally Novel Advanced Materials Technology Secure Demand: Energy Issues Leverageable Across Many Product Applications with Big Markets Longterm Buy: Hold for 3-5 years Preferred: Returns sooner rather than later Risks managed as well as possible 12

Investment Strategy Superconductivity High Temperature: Type 2 What is it? • Region where resistence goes to zero. Believed to be because of Cooper pairs. (electrons generating phonons that keep them together) • Type 1 Superconductors are low temperature, and are completely superconducting (Hc1(T)) • Type 2 Superconductors allow some penetration of magnetic field, so resistance isn’t truly zero. Performance depends on how well this penetration is pinned. “High” means Liquid Nitrogen temps, 77K. 13 Source (Image): Mikael Mulot, Helsinki University of Technology, University of Optoelectronics, S-104.3310, Updated Feb 6, 2006

High Temperature Superconducting Wire Power Quality Alternative Energy (Wind) National Security Transportation High Tc Wire Motors Source: Semiconductor.org 14

USA Universe [ still under NDA ] and GE Intermagnetics claims Energy Receive Order for superconductor performance Two D-VAR(R) Systems from milestone City of Detroit Public Lighting In the race to develop commercially viable superconductor wire technology, Department the parent of SuperPower Inc. D-VAR installation expected to save announced on Wednesday that the City of Detroit $10 million annually Latham company had set a new world in operating expenses. 5/10/06 record for performance. 5/23/06 [ still under NDA ] Wins Award for 'Technology in the Intermagnetics looks Service of Science' from IEEE Spectrum and EE Times to sell SuperPower New Breakthrough Product Receives subsidiary Third Major Award in Past Six Intermagnetics General Corp. is now Months seeking a possible sale or spin-off of its SAN JOSE, Calif., 4/05/06 energy technology division as it focuses more on its medical products businesses. 3/01/06 15

Worldwide Europe US Japan * * * * * 16

Worldwide [ news article ] 17

American Superconductor (AMSC) SuperMachines [ ] Wires Power Electric Systems $3.7B growing to $6.9B in Yr10 $10B Cu Market PowerModule converters (PM1000) • Industrial motors $1 billion, • to SuperMachines • D-VAR (Dynamic-VAR) $200-250 Mature, growing 2-4% annually • to PES MM market growing at 4% annually • Utility Generators 1.6 Billion, • to OEM for cable • D-SMES (Superconductor Magnetic Refurb, growing 2-4% annually • to OEM for Machines Energy Storage) • Small Generators 0.4 Billion, - Maglev Train • PQ-IVR (Power Quality - Industrial growing 2-4% annually Voltage Restorer) - Mag Separators • Electric Ship motors $450 million/yr, growing at up to 20% for next 10 years due to transition to electric motors 18

Superconducting Wire Cables HTS vs. Copper: Much higher power throughput Reduces grid congestion Source: AMSC presentation U.S. Department of Energy 2005 Annual Superconductivity Peer Review 19

Superconducting Wire Magnets HTS vs. copper: HTS vs. LTS: Higher field Higher field Lower weight More field stability Smaller Far simpler cryo design => lower design and manufacturing costs => lower operating costs 20

HTS Component Fabrication & Refrigeration HTS-110 (New Zealand) HTS product development and manufacturing; modeling and design of HTS products; HTS coil fabrication and testing; HTS magnet design, fabrication and testing; and cryogenic system integration. Cryomagnetics, Inc. (Oak Ridge, TN) Superconducting magnets; Dewars; Cryogenic Instrumentation and Accessories Scientific Magnetics (England) Superconducting and Cryogenic Systems Ricor (Israel) Designs, manufactures, sells and maintains cryocoolers for various applications 21

Context of HTS Wire Timeline 1987 1987 - Founded 1991 - HTS 1G /// 2003 Jan 2004 Mar Commercial 155,000 m 2005 Mar 389,000 m 2006 Mar 1700 m 2007 Apr Sales target 2008 2009 Dec 2010 Full capacity 1995 - HTS 2G Production 10,000 m 8,000,000m/yr Sep $30MM capex Pre-pilot 2G Dec Capacity target Dec 300,000 m 2G - 1000 m ship 720,000 m 22

Manufacturing Headquarters in Westborough, MA HTS wire manufacturing plant in Devens, MA Source: AMSC Website 23

Cables HTS Manufacturing in Deven, MA Sources: Left - Sumitomo Right - AMSC presentation U.S. Department of Energy 2005 Annual Superconductivity Peer Review 24

Cryogenics of Cable T&D How is it kept cold? Source: AMSC presentation U.S. Department of Energy 2005 Annual Superconductivity Peer Review 25

What is HTS2? Source: AMSC 2005 Annual Report 26

What is HTS2? Source: AMSC 2005 Annual Report 27

Recap Strong forces create volatility => opportunities, but also risks. Manage risks • fundamental and leverageable underlying technology: HTS wire • strong need with few alternatives: power transmission better than generation • proven ability to plan and execute: strong business function track record AMSC has few US competitors and strong international position • First to market in military, grid, and cable applications • Says no competitor in 2G that can ship performance and volume (yet) • Most serious competitor: Sumitomo (partners with SuperPower) 28

Company Financial “We expect fiscal 2007 to be a We are now in FY 2007 momentous year for AMSC as we (Mar 2006-Mar 2007) deliver a series of very important world firsts,” Yurek, May 2006. • PES - Profitable for first time growing revenues 35% to $20MM. • SuperMachines: Deliver the world’s first • SuperMachines - flat to decline (transition 36.5 ship propulsion motor to the US Navy. year. Watch contract for third hull engine for new Navy destroyer.) • PES: Deliver the first commercial HTS power • Cable - flat to decline (transition year). grid product - the SuperVAR • AMSC Wire: Install and operate the world’s first transmission voltage HTS power cable in a commercial gird Transition year to 2G HTS is ahead of schedule • Reduced Price of 1G HTS wire • Wrote down 1G inventory (400,000 meters) $1.6M • Wrote down 1G equip $5.0M • Settled $2.7M with legal challenge 29

Company Financial Revenues $50.9 2006 Revenues by Business 2006 2005 AMSC Wires 14,206,913 11,511,637 SuperMachines 21,663,884 31,107,572 Power Electronic Systems 15,001,651 15,663,629 Operating Loss by Business 2006 2005 AMSC Wires (27,204,629) (15,885,775) SuperMachines (707,593) 412,308 * Power Electronic Systems (3,683,314) 66,067 Sources: Top - AMSC presentation U.S. DOE 2005 Annual Superconductivity Peer Review; Bottom - AMSC 2006 Earnings Conference Call 30

Company Financial Margins by Business 2007 AMSC Wires 30-35% • Limited by Capacity SuperMachines varies • Break-Even at 2,000,000 m Power Electronic Systems 40-50% • Enough cash through 2008 Opportunities Number Comment AMSC Wires - 2G ahead of schedule, saves 20% cost on projections Replacement Cables 2100 Immediate need (EPRI) ($10k-100k/sale?) DOE new contract in Aug ?? Must bid; Timing uncertain. Not included. SuperMachines - FIRST: engine, fault interrupter (I.e. surge protector) De-Gaussing Systems 3 Foreign Navy visitors to AMSC New Destroyers 1 Total of 2 each on 7 DDX ships Non-military ships ?? Creating Alliance SuperVAR ?? Tennessee Valley Authority Fault Protectors ?? Shipped to Asia-Pacific region Power Electronic Systems - Lowered costs through research in 2006 Detroit Situations 100 AMSC analysis, at $2.4 MM per sale Wind Turbines ?? Grid interconnect stds esp UK, AUS, ES 31

Company Culture Low Feedback, High Risk: • Methodical Cultures • Conservatism • Transparency “The full anticipated value of these potential new contracts for power cables [DOE] and rotating machines [Navy] are not included in the company's current budget or revenue estimates for fiscal 2007 because of uncertainty with respect to the structure and timing of government contracts. Overall, AMSC expects that its revenues for fiscal 2007 will be relatively in line with fiscal 2006.” - Yurek, May 2006 32

SuperMachines 33

Mature Business Process & Established Facilities 34

Government Includes AMSC In 60-entity Strategic Summit 35

Technology improvements aren’t invisible Grant funded 36

Fundamental Value Creators IP - Reputation - Relationships Strategic business alliances include • Electricite de France - The world's largest electric utility • GE Energy - A global leader in manufacturing products used to distribute, protect and control electrical power and equipment • Ideal Electric - a designer and manufacturer of electric generators, motors and associated equipment • Long Island Power Authority - Long Island’s primary electric service provider • Nexans - A global expert in cables and cabling systems • Northrop Grumman Marine Systems - a world leader in the design, development, and manufacture of defense and commercial electronics systems. • Siemens - a global power systems company • Suzuki Shokan Co. - distribution partner for 344 Superconductors in the Japanese market • U.S. National Laboratories • Ultera - a joint venture between two of the world's leading wire and cable firms, Southwire Company, and nkt cables and is dedicated to the development and commercialization of HTS power cables. •Tennessee Valley Authority - the largest public power company in the United States • United States Navy 37

Reputation 2004 Superconductor Industry Person of the Year (shared award) “But underpinning all is the fact that the commercialization of a highly complex materials science must go right! It requires deep scientific understanding, great energy, great belief, and a steadfast commitment. Alex … is a vital part of the technical leadership of the whole field.” - David Larbalestier, Director, Applied Superconductivity Center, U of WI “I deeply value his work structuring the development roadmap of 2G HTS wire, and his methodical approach to overcoming all technical obstacles, allowing his team to reach successfully targeted milestones. … His faith in the continuous progress of superconductor performance is based on an outstanding knowledge of material science and applied technology.” - Jacques Jouaire, Vice President, Research and Development, Electricité de France (EDF) “ During his career at AMSC he strongly pushed forward both the basic understanding of HTS materials and the practical application for devices of power engineering. “ - Heinz-Werner Neumueller, Power Components & Superconductivity, Siemens AG 38

Valuation Size of market? Est. via Cu Wire From Cu industry data: 3,700 millions of pounds of copper, of which 47% of market goes to copper wire applications, so roughly: 3billion / 2 = 1.5 billion pounds Cu. Absolutely guessing from price of retail Cu wire, which seems to be about $8/lb., this is about $12 billion market. (Retail Cu premium speaker cable is about $30/lb. Cu) 39

Stock Value Back of the Envelope $10 Billion Market in 2006 (conservative) Doesn’t include new HTS products ! Surge Protector ! Wind Farms Competitive Threats Copper HTS Competitors Dilution Will they really avoid needing more capital to scale operations? !They say they won’t through 2008 !They have zero debt 40

Summary • An Infrastructure solution with Breakthrough Technology • Also social benefits (security, stable power) and facilitates distributed alternative energy (e.g. wind farms) • Typical Technology Risk during Scale-up mitigated by Core Technology, Company Maturity, Government Buy-In and Social Visibility 41

. Appendices Appendix 42

APPENDIX 1: SUPERCONDUCTIVITY What is it • Region where resistence goes to zero. Believed to be because of Cooper pairs. (electrons generating phonons that keep them together) • Type 1 Superconductors are low temperature, and are completely superconducting (Hc1(T)) • Type 2 Superconductors allow some penetration of magnetic field, which creates current vortices, so resistance isn’t truly zero. 43

APPENDIX 1: SUPERCONDUCTIVITY Why does it do that Type I (cooper pairs joined by phonon) Type II (incomplete H penetration leading to vortices) Electronic devices (e.g. SQUIDs, Josephson Junctions) are Type 1 AMSC and others using Type 2 44

APPENDIX 1: SUPERCONDUCTIVITY What is “vortex pinning”? Defects in the lattice pin the vortices, which are areas of non- superconductivity. Source: Mathematical Models and Numerical Simulations of Superconductivity: an Introduction. Qiang Du, Department of Mathematics, Pennsylvania State University. 45

APPENDIX 1: SUPERCONDUCTIVITY • Crystal Structure Source: Mathematical Models and Numerical Simulations of Superconductivity: an Introduction. Qiang Du, Department of Mathematics, Pennsylvania State University. 46

APPENDIX 1: SUPERCONDUCTIVITY 47 Source: Mikael Mulot, Helsinki University of Technology, University of Optoelectronics, S-104.3310, Updated Feb 6, 2006

APPENDIX 1: SUPERCONDUCTIVITY Source: Superconductors.org 52

APPENDIX 2: COPPER Using Copper wire in industrial use (mag, cable) as a proxy, the market is $10B approximately, worldwide. Copper is a commodity, while 2G HSC is premium Price parity with copper by end of decade. Cu $/lb 1/04 1/06 1/08 1/10 $8-14/lb. by 2010 Source: Left - London Metals Exchange http;//www.lme.co.uk Right - Margolin Consulting 53

APPENDIX 3: NANOTECH UNCERTAINTY Groups challenge FDA on nanoparticles May 17, 2006 -- The U.S. Food and Drug Administration has been challenged on the way it regulates skin products with nanoparticle ingredients. Friends of the Earth and the International Center for Technology Assessment filed a petition with the FDA and called for better monitoring and regulation of products like sunscreen and cosmetics, The San Francisco Chronicle reports. The groups have released a report of products they claim contain ingredients small enough to seep into the body and effect brain chemistry. During a telephone news conference from Washington, George Kimbrell, an attorney for the groups, said they will sue if the FDA doesn't make changes within 180 days to how they study and regulate nanoparticle products. FDA spokeswoman Susan Cruzan said the agency will look into the "development and use" of nanoparticles but said there isn't any data showing it is hazardous. Copyright 2006 by United Press International Political Risks This news is brought to you by PhysOrg.com Regulation 54

Sample Financial Analysis

by Jessica Margolin on Oct 22, 2009

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