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Will Apple Watch be delayed with the Fall of GTAT?

10. News
It's Just a Big Mess:
A Forbes report posted by Chuck Jones this afternoon titled "What Does GTAT's Bankruptcy Mean to Apple?" provides us with a look at what might have gone wrong with GTAT. Jones writes: "When you read some of GTAT's 10-Q and 8-K SEC filings along with its bankruptcy documents it is easy to ascertain that GTAT was either not able to produce enough sapphire or at the quality and yield levels to Apple's satisfaction. Apple then had the right to demand immediate repayment of $439 million it had pre-paid to GTAT as part of a $578 million Prepayment Agreement," and this is where the house of cards likely came falling down.

 

GTAT spelled out what seems to have occurred in the Risks section of its 10-Q filing, as follows:

 

'If we are unable to timely ramp up our sapphire materials operations in Arizona, we may not be able meet demand, we may not be eligible to receive future advances under the prepayment agreement, and would be subject to penalties (including payment of cash amounts).'

 

The 10-Q also says 'if the repayment of the prepayment were to be accelerated, it would likely produce a cross-default under our 3.0% convertible notes (correspondingly, an acceleration of the 3.0% senior convertible notes would likely produce a cross-default under the Prepayment Agreement)'.

 

Chuck Jones carefully takes us through some of the fine print of the agreement between GTAT and Apple and concludes that with Rothschild, a premier financial restructuring firm stepping in, it looks as though GTAT will either be sold off in pieces or in total and that it won't be a continuing business. Jones adds, "Maybe Apple would buy it but that doesn't make a lot of sense to me."

 

For now, there's no information as to what new sources Apple may be turning to so as to be able to fuel the production of their new Apple Watch in 2015. Apple Watch uses sapphire glass extensively. Apple proudly pointed out in their marketing literature and keynote in September that Apple Watch uses a new Ion-X glass technology; one that strengthens sapphire glass via a new ion process that Apple has actually patented.

 

Apple's open ended entry point into the market for Apple Watch perhaps makes more sense now that we know that GTAT was likely unable to produce the glass in sufficient quantity or quality that Apple was demanding. Will Apple have to make concessions in order to get Apple Watch out in a timely manner in 2015? While only time will tell, Apple does have other sapphire ingot suppliers that they could work with such as Hansol (KR) and Harbin Aurora Optoelectronics (CN). 

 

For now, the whirlwind of the new sapphire plant opening just months ago and the whole project falling apart at neck breaking speed seems surreal. The plant barely had time to get up and running, never mind perfect sapphire glass using a whole new patented process. Something tells me that there could be another important piece of this puzzle that has yet to surface. Stay tuned because this story is still unfolding. 

 

For more details on this story, read the Full Forbes report here.

 

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