Well, my position in $GTAT did not fair very well. I have been a long-term holder. I have been in and out of the stock over the years. Recently, my cost basis was around $11 before demand dropped off. I added to my position around $4 when the stock traded close to 1.0 P/B. I felt like a genius because the stock did nothing but climb since then.
I decided to read the June-2014 10-Q a little more closely the evening. Here are some bullets:
- "The Company is currently in compliance [in reference to the Master Development and Supply Agreement ("MDSA") with Apple], and based on the Company's operational plans and financial forecasts, the Company expects to maintain compliance with the operating metrics and financial covenants in the Prepayment Agreement and management believes that the Company will have sufficient cash resources to fund operations for at least the next twelve months."
- "...the Company incurred significant costs in connection with inventory losses and production inefficiencies as a result of the qualification of sapphire growth and fabrication equipment and the establishment of production processes at the facility. Inventory losses include charges to write down ending inventory to net realizable value, losses realized on inventory produced not deemed to be saleable and inventory spoilage losses resulting from plant construction related interruptions. Production inefficiencies resulted from production process refinements necessary to generate saleable material, qualification of consumable materials that are necessary for the operation of the equipment at the site and the qualification of the supply chain for this operation."
- "Due to the aforementioned issues, the Mesa operation is operating at a per unit and total cost structure substantially above the targeted cost structure for the facility."
- "Production start-up expenses were relabeled to Sapphire production ramp up costs and were reclassified from operating expenses to cost of goods sold to correct the presentation in the accompanying consolidated financial statements and footnotes."
- "The Company has granted Apple certain intellectual property rights in connection with its sapphire growth technologies and the right to purchase a license for certain other intellectual property of the Company."
- "While the MDSA specifies GTAT Corp.'s minimum and maximum supply commitments, Apple has no minimum purchase requirements under the terms of the MDSA."
ZT: Sweet deal Apple. Give GTAT a zero-interest loan to equipment the facility you lease to them. If you do not use their material, they still have to pay you back.
- "...The Company is required to repay the Prepayment Amount ratably (on a quarterly basis) over a five year period beginning in January 2015, either as a credit against amounts due from Apple purchases of sapphire goods under the MDSA or as a direct cash payment. The Prepayment Amount is non-interest bearing. The Company's obligation to repay the Prepayment Amount may be accelerated under certain circumstances, including if the Company does not meet certain financial metrics or meet certain technical and performance covenants."
- ZT: I guess the 4th payment was delayed or worst, a trigger happened to accerlate the pre-payment. Quarterly payments should be approx. $28.9-Million.
- "During the three months ended June 28, 2014, the Company sold equipment to Apple for $14,724 [thousand], which had previously been purchased by the Company for the same amount. This equipment has been leased-back to the Company for the term of the MDSA for no explicit lease payment."
- "..The Company's obligations under the Prepayment Agreement and MDSA are secured by (i) the assets held by GT Equipment Holdings LLC (see below) (a wholly-owned subsidiary of the Company and the legal owner of the ASF systems and related equipment used in the Arizona facility that were purchased with the Prepayment Amount) and (ii) a pledge of all of the equity interests of GT Equipment Holdings LLC."
ZT: looks like Apple is getting GT Equipment Holding LLC.
- "On September 28, 2012, the Company issued $220,000 aggregate principal amount of 3.00% Convertible Senior Notes due 2017 (the "2017 Notes"). The net proceeds from the issuance of the 2017 Notes were approximately $212,592, after deducting fees paid to the initial purchasers and other offering costs. The 2017 Notes are senior unsecured obligations of the Company, which pay interest in cash semi-annually (on April 1 and October 1 of each year) at a rate of 3.00% per annum beginning on April 1, 2013. The 2017 Notes are governed by an Indenture dated September 28, 2012 with U.S. Bank National Association, as trustee (the "Indenture"). The Notes are not redeemable by the Company."
ZT: Was this interest payment the straw that broke GT's back? This Oct. 1 payment should of been about $3.3-million
- "There is still additional installation of the necessary growth and related equipment, as well as further process tuning, before the ramp up will be completed. As expected, the capital expenditures in connection with purchasing and installing of growth systems and the commencement of volume operations have resulted in significant operating costs. Such operating costs and capital expenditures have had a material impact on our financial position at June 28, 2014 and our financial results for the three and six months ended June 28, 2014. While we do expect the rate of capital expenditures to decrease in the third and fourth quarters of fiscal 2014 as compared to the quarter ended June 28, 2014, we will continue to incur significant costs to install and qualify the balance of the equipment that are required to be operating in the Mesa facility. The increase in these capital expenses and other costs, and the overall material impact on our financial statements, were a result of the transition from an equipment business with low capital requirements to the rapid development of our material manufacturing operations which requires significant expenses to commence operations on the scale required under the MDSA with Apple.Upon completion of the ramp up we no longer expect to incur the level of capital expenditures and production ramp up costs as described above."
- "As noted above, Apple is not under any contractual obligation to purchase sapphire material from the Mesa facility and the MDSA does not specify whether or when sapphire materials will be incorporated into any product. Our obligation to commence repayment of the Prepayment Amount will begin in January 2015, regardless of the quantities of sapphire material purchased by Apple. Until the production ramp up is completed, we expect that equipment sales in our sapphire segment will continue to account for a majority of our sapphire revenues."
From the Pre-Payment Agreement:
Some "trigger" events that would accelerate pre-payment:
(d) any indebtedness of GTAT or Supplier Affiliate in excess of One Hundred Million United States Dollars (US$100,000,000) ("Material Debt") in the aggregate is accelerated, or the holder (i.e., creditor) or holders of Material Debt or any trustee or agent on its or their behalf, pursuant to their rights under the applicable debt instrument, cause Material Debt to become due or require the prepayment, repurchase, redemption or defeasance thereof, before its scheduled maturity, provided that if any convertible notes or bonds issued by the Consolidated Entities become redeemable prior to their maturity because the stock of GT Advanced Technologies Inc. or the trading price of such notes has reached the conversion price is not a Trigger Event under this provision;
(h) if as of the last day of any fiscal quarter of GTAT, the sum of [***] and [***] was equal to or greater than [***]% of the cumulative Supply Commitment [***] (as described in Section 9.7.1 of the SOW) during the prior [***] period and the Consolidated Cash Balance is below [***];
(i) if as of the last day of any fiscal quarter of GTAT, the sum of [***] and [***] was less than [***]% of the cumulative Supply Commitment [***] during the prior [***] period and the Consolidated Cash Balance is below [***];
(j) if the Projections show a Cash Balance of less than [***] at the end of the six-month period reflected in the applicable Projections;
(k) if the Consolidated DPO is more than [***]; or
Conclusion:
I think the combination of the note payment due on Oct. 1 tripped a trigger and begun pre-payment early. Combined with yield issues (inefficiencies), delayed or prevented the final installment of the zero-interest loan from Apple.