Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2015

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-35214

 

 

API TECHNOLOGIES CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware		98-0200798
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

4705 S. Apopka Vineland Rd. Suite 210

Orlando, FL 32819

(Address of Principal Executive Offices)

(855) 294-3800

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 and 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined Rule 12b-2 of the Exchange Act).

 

Large Accelerated Filer		¨		Accelerated Filer		x
Non-Accelerated Filer		¨		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

State the number of shares outstanding of each of the issuer’s class of common equity as of the latest practicable date:

55,397,384 shares of common stock with a par value of $0.001 per share at April 2, 2015.

 

 

 

---

Table of Contents

API TECHNOLOGIES CORP. AND SUBSIDIARIES

Report on Form 10-Q

Quarter Ended February 28, 2015

Table of Contents

 

		Page
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at February 28, 2015 and November 30, 2014			3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended February  28, 2015 and 2014			4
Consolidated Statement of Changes in Shareholders’ Equity for the three months ended February 28, 2015			5
Consolidated Statements of Cash Flows for the three months ended February 28, 2015 and 2014			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Forward-Looking Statements			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			28
PART II—OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3. Defaults Upon Senior Securities			28
Item 4. Mine Safety Disclosures			28
Item 5. Other Information			28
Item 6. Exhibits			29
Signatures			30

 

2

---

Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

API TECHNOLOGIES CORP.

Consolidated Balance Sheets

(unaudited) (Dollar Amounts in Thousands)

 

		February 28, 2015				November 30, 2014
Assets
Current
Cash and cash equivalents		$	6,199			$	8,258
Accounts receivable, less allowance for doubtful accounts of $696 and $716 at February 28, 2015 and November 30, 2014, respectively			35,955				38,657
Inventories, net (note 4)			58,231				54,718
Deferred income taxes			539				561
Prepaid expenses and other current assets			1,535				1,592
			102,459				103,786
Fixed assets, net			29,524				30,574
Goodwill			116,770				116,770
Intangible assets, net			28,071				29,848
Other non-current assets			1,911				1,862
Total assets		$	278,735			$	282,840
Liabilities and Shareholders’ Equity
Current
Accounts payable and accrued expenses		$	28,635			$	27,907
Deferred revenue			2,407				2,279
Current portion of long-term debt (note 7)			10,916				10,097
			41,958				40,283
Deferred income taxes			4,651				4,575
Other long-term liabilities			1,386				1,216
Long-term debt, net of current portion (note 7)			114,865				118,214
Deferred gain (note 7c)			7,639				7,788
			170,499				172,076
Commitments and contingencies (note 12)
Shareholders’ Equity
Common shares ($0.001 par value, 250,000,000 authorized shares, 55,397,320 and 55,397,320 shares issued and outstanding at February 28, 2015 and November 30, 2014, respectively)			55				55
Special voting stock ($0.01 par value, 1 share authorized, issued and outstanding at February 28, 2015 and November 30, 2014, respectively)			—				—
Additional paid-in capital			327,925				327,846
Common stock subscribed but not issued			2,373				2,373
Accumulated deficit			(222,284	)			(220,105	)
Accumulated other comprehensive income			167				595
			108,236				110,764
Total Liabilities and Shareholders’ Equity		$	278,735			$	282,840

The accompanying notes are an integral part of these consolidated financial statements.

 

3

---

Table of Contents

API TECHNOLOGIES CORP.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited) (Dollar Amounts in Thousands, Except Per Share Data)

 

		For the Three Months Ended Feb. 28, 2015				For the Three Months Ended Feb. 28, 2014
Revenue, net		$	50,850			$	58,918
Cost of revenues
Cost of revenues			37,859				45,274
Restructuring charges			42				299
Total cost of revenues			37,901				45,573
Gross profit			12,949				13,345
Operating expenses
General and administrative			5,279				5,719
Selling expenses			3,655				3,757
Research and development			2,000				2,074
Business acquisition and related charges			62				110
Restructuring charges			830				118
Total operating expenses			11,826				11,778
Operating income			1,123				1,567
Other expense (income), net
Interest expense, net			3,127				2,410
Amortization of note discounts and deferred financing costs			23				665
Other expense (income), net			(120	)			110
			3,030				3,185
Loss before income taxes			(1,907	)			(1,618	)
Expense for income taxes			272				506
Net loss		$	(2,179	)		$	(2,124	)
Accretion on preferred stock			—				(393	)
Net loss attributable to common shareholders		$	(2,179	)		$	(2,517	)
Net loss per share—Basic and diluted		$	(0.04	)		$	(0.05	)
Weighted average shares outstanding
Basic			55,461,217				55,426,635
Diluted			55,461,217				55,426,635
Comprehensive income (loss)
Unrealized foreign currency translation adjustment			(428	)			141
Other comprehensive income (loss)			(428	)			141
Comprehensive loss		$	(2,607	)		$	(1,983	)

The accompanying notes are an integral part of these consolidated financial statements.

 

4

---

Table of Contents

API TECHNOLOGIES CORP.

Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

(In thousands of dollars, except share data)

 

		Common stock- number of shares				Common stock amount				Additional paid- in capital				Common stock subscribed but not issued				Accumulated deficit				Accumulated other comprehensive income				Total shareholders’ equity
Balance at November 30, 2014			55,397,320			$	55			$	327,846			$	2,373			$	(220,105	)		$	595			$	110,764
Stock-based compensation expense			—				—				79				—				—				—				79
Net loss for the period			—				—				—				—				(2,179	)			—				(2,179	)
Other comprehensive loss			—				—				—				—				—				(428	)			(428	)
Balance at February 28, 2015			55,397,320			$	55			$	327,925			$	2,373			$	(222,284	)		$	167			$	108,236

The accompanying notes are an integral part of these consolidated financial statements.

 

5

---

Table of Contents

API TECHNOLOGIES CORP.

Consolidated Statements of Cash Flows

(Unaudited) (Dollar Amounts in Thousands)

 

		Three Months Ended February 28,
		2015				2014
Cash flows from operating activities
Net loss		$	(2,179	)		$	(2,124	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			3,459				4,130
Amortization of note discounts and deferred financing costs			23				665
Stock based compensation			79				(48	)
Gain on sale of fixed assets			(149	)			(99	)
Deferred income taxes			98				335
Changes in operating asset and liabilities, net of business acquisitions
Accounts receivable			2,410				(2,555	)
Inventories			(3,830	)			5,427
Prepaid expenses and other current assets			39				855
Accounts payable and accrued expenses			560				(4,575	)
Deferred revenue			153				476
Net cash provided by operating activities			663				2,487
Cash flows from investing activities
Purchase of fixed assets			(159	)			(105	)
Purchase of intangible assets			(107	)			(55	)
Net proceeds from disposal of fixed assets (note 7c)			—				15,108
Business acquisitions (note 10)			—				1,414
Net cash provided (used) by investing activities			(266	)			16,362
Cash flows from financing activities
Repayments of long-term debt (note 7)			(2,500	)			(25,480	)
Net proceeds from long-term debt (note 7)			—				9,508
Net cash used by financing activities			(2,500	)			(15,972	)
Effect of exchange rate on cash and cash equivalents			44				54
Net change in cash and cash equivalents			(2,059	)			2,931
Cash and cash equivalents, beginning of period			8,258				6,351
Cash and cash equivalents, end of period		$	6,199			$	9,282

The accompanying notes are an integral part of these consolidated financial statements.

 

6

---

Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements

(Unaudited) (Dollar Amounts in Thousands, Except Per Share Data)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

API Technologies Corp. (“API”, and together with its subsidiaries, the “Company”) designs, develops, and manufactures systems, subsystems, modules, and components for RF microwave, millimeterwave, electromagnetic, power, and security applications, as well as provides electronics manufacturing for technically demanding, high-reliability applications.

On December 31, 2013, the Company completed the sale and leaseback (the “Sale/Leaseback”) of the Company’s facility located in State College, Pennsylvania. The Company sold the facility to an unaffiliated third party for a purchase price of approximately $15,500 and will lease the property from the buyer for approximately $1,279 per year, subject to annual adjustments. The Company used $14,200 of the proceeds of the Sale/Leaseback to prepay a portion of its outstanding term loan indebtedness.

The unaudited consolidated financial statements include the accounts of API and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. There are no other entities controlled by the Company, either directly or indirectly. The financial statements have been prepared in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”).

Accordingly, certain information and footnote disclosures required in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair presentation of the Company’s consolidated financial position as of February 28, 2015 and the results of its operations and cash flows for the three month period ended February 28, 2015. Results for the interim period are not necessarily indicative of results that may be expected for the entire year or for any other interim periods. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto as of and for the year ended November 30, 2014 included in the Company’s Form 10-K filed with the SEC on February 10, 2015.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements, and the disclosures made in the accompanying notes. Examples of estimates include the provisions made for bad debts and obsolete inventory, estimates associated with annual goodwill impairment tests, and estimates of deferred income tax and liabilities. The Company also uses estimates when assessing fair values of assets and liabilities acquired in business acquisitions as well as any fair value and any related impairment charges related to the carrying value of machinery and equipment, other long-lived assets and discontinued operations. The Company also uses estimates in determining the remaining economic lives of long-lived assets. In addition, the Company uses assumptions when employing the Black-Scholes valuation model to estimate the fair value of share options. Despite the Company’s intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.

Inventories

Inventories, which include materials, labor, and manufacturing overhead, are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. On a quarterly basis, the Company evaluates inventories for potential write-down for identifiable obsolescence and slow moving items. The evaluation includes analysis of future demand, product mix and possible alternative uses. The Company records a provision for both excess and obsolete inventory when write-downs or write-offs are identified. Any write-down of inventory at the close of a fiscal period creates a new cost basis that subsequently would not be marked up based on changes in underlying facts and circumstances.

The Company periodically reviews and analyzes its inventory management systems, and conducts inventory impairment testing on a quarterly basis.

 

7

---

Table of Contents

Fixed Assets

Fixed assets are recorded at cost less accumulated depreciation and are depreciated using the straight-line method over the following periods:

 

Straight line basis
Buildings and leasehold improvements			5-40 years
Computer equipment			3-5 years
Furniture and fixtures			5-8 years
Machinery and equipment			5-10 years
Vehicles			3 years

Betterments are capitalized and amortized by the Company, using the same amortization basis as the underlying assets over the remaining useful life of the original asset. Betterments include renovations, major repairs and upgrades that increase the service of a fixed asset and extend the useful life. Gains and losses on depreciable assets retired or sold are recognized in the consolidated statements of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred.

Goodwill and Intangible Assets

Goodwill and intangible assets result primarily from business acquisitions accounted for under the purchase method. Goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment by applying a fair value based test. The Company completes an annual (or more often if impairment indicators arise under the applicable accounting guidance) impairment assessment of its goodwill on a reporting unit level. The Company’s annual impairment test for goodwill is September 1st.

Intangible assets that have a finite life are amortized using the following basis over the following periods:

 

Non-compete agreements		Straight line over 5 years
Computer software		Straight line over 3-5 years
Customer related intangibles		Straight line or the pattern in which the economic benefits are expected to be realized, over an estimated life of 4-15 years
Marketing related intangibles		The pattern in which the economic benefits are expected to be realized, over an estimated life of 3-10 years
Technology related intangibles		The pattern in which the economic benefits are expected to be realized, over an estimated life of 10 years

Long-Lived Assets

The Company periodically evaluates the net realizable values of long-lived assets, principally identifiable intangibles and capital assets, for potential impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, as determined based on the estimated future undiscounted cash flows. If such assets were considered to be impaired, the carrying value of the related assets would be reduced to their estimated fair value.

Income Taxes

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available net operating loss carry forwards. A valuation allowance is established to reduce tax assets if it is more likely than not that all or some portions of such tax assets will not be realized.

The Company’s valuation allowance was recorded on the deferred tax assets to provide for a reasonable provision, which in the Company’s estimation is more likely than not that all or some portions of such tax assets will not be realized. In determining the adequacy of the valuation allowance, the Company applied the authoritative guidance, and considered such factors as (i) which subsidiaries were producing income and which subsidiaries were producing losses and (ii) temporary differences occurring from depreciation and amortization which the Company expects to increase the taxable income over future periods.

The Company follows the guidance concerning accounting for uncertainty in income taxes, which clarifies the accounting and disclosure for uncertainty in tax positions. The guidance requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement.

 

8

---

Table of Contents

Based on the Company’s evaluation, management has concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements or adjustments to deferred tax assets and related valuation allowance. Open tax years include the tax years ended January 21, 2011 through November 30, 2014.

The Company from time to time has been assessed interest or penalties by major tax jurisdictions, however such assessments historically have been minimal and immaterial to our financial results. If the Company receives an assessment for interest and/or penalties, it would be classified in the consolidated financial statements as general and administrative expense.

Revenue Recognition

The Company recognizes non-contract revenue when it is realized and earned. The Company considers non-contract revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until products have been shipped and risk of loss and ownership has transferred to the client. Revenue from production-type contracts, which represents less than one per cent of total revenue, is recognized using the percentage of completion method. The degree of completion is determined based on costs incurred, excluding costs that are not representative of progress to completion, as a percentage of total costs anticipated for each contract. A provision is made for losses on contracts in progress when such losses first become known. Revisions in cost and profit estimates, which can be significant, are reflected in the accounting period in which the relevant facts become known. Revenue from contracts under the percentage of completion method is not significant to the financial statements.

Deferred Revenue

The Company defers revenue when payment is received in advance of the service or product being shipped or delivered. For some of the larger government contracts, the Company will bill upon meeting certain milestones. These milestones are established by the customer and are specific to each contract. Unearned revenue is recorded as deferred revenue. The Company recognizes revenue on these larger government contracts when items are shipped or upon agreed milestones.

Research and Development

Research and development costs are expensed when incurred.

Stock-Based Compensation

The Company follows the authoritative guidance for accounting for stock-based compensation. The guidance requires that new, modified and unvested stock-based payment transactions with employees, such as grants of stock options, restricted stock units (“RSUs”) and restricted stock, be recognized in the financial statements based on their fair value at the grant date and recognized as compensation expense over their vesting periods. Stock-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant. The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying shares and its expected volatility, expected dividends on the shares and the risk-free interest rate for the term of the option.

Foreign Currency Translation and Transactions

The Company’s functional currency is United States dollars and the consolidated financial statements are stated in United States dollars, “the reporting currency.” Integrated operations have been translated from various foreign currencies (Canadian dollars, British Pounds Sterling, Chinese Yuan, Euros, and Mexican Pesos) into United States dollars at the period-end exchange rate for monetary balance sheet items, the historical rate for fixed assets and shareholders’ equity, and the average exchange rate for the year for revenues, expenses, gains and losses. The gains or losses on translation are included as a component of other comprehensive income (loss) for the period.

 

9

---

Table of Contents

Financial Instruments

The fair values of financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings approximate their carrying values due to the short-term nature of these instruments. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest rate, currency or credit risks arising from its financial instruments. The recorded value of long-term debt approximates the fair value of the debt as the terms and rates approximate market rates.

In the ordinary course of business, the Company carries out transactions in various foreign currencies (Canadian Dollars, British Pounds Sterling, Chinese Yuan, Euros, and Mexican Pesos) included in the Company’s cash, accounts receivable, accounts payable, bank indebtedness, as well as a mortgage loan. The translation adjustments related to these accounts have been reflected as a component of comprehensive income. Currently, the Company does not maintain a foreign currency hedging program.

Debt Issuance Costs and Long-term Debt Discounts

Fees paid to obtain debt financing or amendments under such debt financing are treated as debt issuance costs and are capitalized and amortized over the life of the debt using the effective interest method. These payments are shown as a financing activity on the consolidated statement of cash flows and are shown as other non-current assets in the consolidated balance sheets.

The Company may record debt and equity discounts in connection with raising funds through the issuance of convertible notes or equity instruments. These discounts may arise from (i) the receipt of proceeds less than the face value of the convertible notes or equity instruments, (ii) beneficial conversion features and/or (iii) recording derivative liabilities related to embedded features. These costs are amortized over the life of the debt to interest expense utilizing the effective interest method. If a conversion of the underlying debt occurs, a proportionate share of the unamortized discount is immediately expensed.

Concentration of Credit Risk

The Company maintains cash balances, at times, with financial institutions, which are in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC), Canadian Deposit Insurance Corporation (CDIC) and Financial Services Compensation Scheme (FSCS in the United Kingdom). Management monitors the soundness of these institutions and has not experienced any collection losses with these institutions.

The US, Canadian and United Kingdom Governments’ Departments of Defense (directly and through subcontractors) accounts for approximately 41%, 1% and 11% of the Company’s revenues for the three months ended February 28, 2015 (49%, 3% and 10% for the three months ended February 28, 2014), respectively. A loss of a significant customer could adversely impact the future operations of the Company.

Earnings (Loss) per Share of Common Stock

Basic earnings per share of common stock is computed by dividing income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock gives effect to all dilutive potential shares of common stock outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings per share (Note 11).

Comprehensive Income (Loss)

Comprehensive income (loss), which includes foreign currency translation adjustments, is shown in the Consolidated Statement of Operations and Comprehensive Income (Loss).

 

10

---

Table of Contents

3. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

Recently Issued Accounting Pronouncements

In April 2014, the FASB issued guidance which changes the threshold for reporting discontinued operations and adds additional disclosures. The guidance updates the definition of discontinued operations to include the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance is effective prospectively for all disposals of components of an entity that occur with annual periods beginning on or after December 15, 2014, and interim periods therein. The Company is currently assessing the impact of this guidance on our consolidated financial position and results of operations.

In May 2014, the FASB issued guidance which affects any entity using GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The new guidance will supersede the existing revenue recognition requirements, and most industry-specific guidance. For a public entity, the amendments in this guidance are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined the impact of adoption on its condensed consolidated financial statements.

4. INVENTORIES

Inventories consisted of the following:

 

		(in thousands)
		February 28, 2015				November 30, 2014
Raw materials		$	31,228			$	30,509
Work in progress			17,641				16,130
Finished goods			9,362				8,079
Total		$	58,231			$	54,718

At February 28, 2015 and November 30, 2014, inventories are presented net of inventory reserves of $9,159 and $8,990, respectively.

5. SHORT-TERM DEBT

The Company has a credit facility in place for certain of its U.K. subsidiaries for approximately $388 (250 GBP), which renews in July 2015. This line of credit is tied to the prime rate in the United Kingdom and is secured by the subsidiaries’ assets. This facility was undrawn as of February 28, 2015 and November 30, 2014.

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

 

		(in thousands)
		February 28, 2015				November 30, 2014
Trade accounts payable		$	18,884			$	16,843
Accrued expenses			6,505				6,497
Wage and vacation accrual			3,246				4,567
Total		$	28,635			$	27,907

 

11

---

Table of Contents

7. Long-Term Debt

The Company had the following long-term debt obligations:

 

		(in thousands)
		February 28, 2015				November 30, 2014
Term loans, due February 6, 2018, base rate plus 6.50% interest or LIBOR plus 7.50%, (a)		$	119,266			$	121,730
Mortgage loan, due 2027, 1.35% above Barclays fixed bank rate (b)			1,098				1,151
Capital leases payable (c)			5,417				5,430
		$	125,781			$	128,311
Less: Current portion of long-term debt			(10,916	)			(10,097	)
Long-term portion		$	114,865			$	118,214

 

a)

On February 6, 2013, the Company refinanced its credit facilities and entered into (i) a credit agreement (the “Term Loan Agreement”) with various lenders and Guggenheim Corporate Funding, LLC, as agent (the “Agent”) that provides for a $165,000 term loan facility and (ii) a credit agreement with various lenders and Wells Fargo Bank, National Association (the “Revolving Loan Agreement”) that provides for a $50,000 asset-based revolving borrowing base credit facility, with a $10,000 subfacility (or the Sterling equivalent) for certain of our United Kingdom subsidiaries, a $10,000 subfacility for letters of credit and a $5,000 subfacility for swingline loans.

On February 6, 2013, in connection with entering into the Term Loan Agreement and the Revolving Loan Agreement, the Amended and Restated Credit Agreement, dated as of June 27, 2011 and amended on January 6, 2012 and March 22, 2012, by and among the lenders from time to time party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, lead arranger and sole book-runner, which had an outstanding balance of $183,400 was paid off and terminated, which resulted in the write-off of approximately $10,300 of deferred financing costs and note discounts.

On December 31, 2013, the Company repaid $14,200 of its term loans from the proceeds of the Sale/Leaseback, (see (c) below) of the Company’s facility located in State College, Pennsylvania. On July 5, 2013 and April 17, 2013, the Company sold Data Bus and Sensors and repaid approximately $28,780 and $44,919, respectively, of its term loans from the proceeds of these sales, in accordance with the Term Loan Agreement. In addition, the Company repaid a portion of its term loans using the net proceeds of $739 from the March 14, 2013, sale of certain land and a building in Palm Bay, Florida.

On May 22, 2013, the Company entered into a First Amendment to the Revolving Loan Agreement that amends certain cash management and reporting requirements.

On October 10, 2013, the Company entered into an Amendment No. 1 to the Credit Agreement (the “Amendment No. 1”) by and among the Company, as borrower, the lenders party thereto and the Agent. Amendment No. 1, among other things, amends the Term Loan Agreement to reduce the minimum interest coverage ratio, increase the maximum leverage ratio, reduce the interest rate on the term loans and modify the terms of the prepayment premium, which the Company is required to pay upon voluntary prepayments or certain mandatory prepayments of the term loans.

On March 21, 2014, the Company entered into Amendment No. 2 to the Credit Agreement (the “Amendment No. 2”), by and among the Company, as borrower, the lenders party thereto and the Agent.

Amendment No. 2 amends the Term Loan Agreement to provide for an incremental term loan facility in an aggregate principal amount equal to $55,000 (the “Incremental Term Loan Facility”), which Incremental Term Loan Facility is subject to substantially the same terms and conditions, including the applicable interest rate and the maturity date of February 6, 2018, as the $165,000 term loan facility provided upon the initial closing of the Term Loan Agreement. In addition, Amendment No. 2 amends the Term Loan Agreement to reduce the minimum interest coverage ratio and increase the maximum leverage ratio, among other things.

The proceeds of the Incremental Term Loan Facility were used (i) to pay in full and terminate the Company’s Revolving Loan Agreement; (ii) to redeem all 26,000 shares of the Company’s Series A Preferred Stock that were outstanding (as defined and described in Note 10); (iii) to pay fees, costs and expenses associated with the Incremental Term Loan Facility and related transactions; and (iv) for general corporate purposes. This resulted in the write-off of approximately $10,212 of deferred financing costs and note discounts in the quarter ended May 31, 2014.

 

12

---

Table of Contents

Term Loan Agreement

The term loans incurred pursuant to the Term Loan Agreement, as amended, bear interest, at the Company’s option, at the base rate plus 6.50% or an adjusted LIBOR rate (based on one, two or three-month interest periods) plus 7.50% for the first year and at the base rate plus 7.50% or an adjusted LIBOR rate (based on one, two or three-month interest periods) plus 10.75% thereafter, with a LIBOR floor of 1.50%. For purposes of the Term Loan Agreement, the “base rate” means the highest of Wells Fargo Bank, National Association’s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 3-month interest period plus a margin equal to 1.00%.

Interest is due and payable in arrears monthly for term loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of term loans with interest periods greater than three months) in the case of term loans bearing interest at the adjusted LIBOR rate. Principal payments of the term loans are paid at the end of each of the Company’s fiscal quarters, commencing for the fiscal quarter ending May 31, 2013, with the balance of any outstanding term loans due and payable in full on February 6, 2018. The quarterly principal payments will amortize at 1.25% for the fiscal quarters through the end of the Company’s 2014 fiscal year, at 1.875% for the fiscal quarters through the end of the Company’s 2015 fiscal year and at 2.50% for each of the fiscal quarters thereafter.

Under certain circumstances, the Company is required to prepay the term loans upon the receipt of cash proceeds of certain asset sales, cash proceeds of certain extraordinary receipts and cash proceeds of certain debt or equity financings, and based on a calculation of annual excess cash flow. Mandatory prepayments resulting from assets sales or certain debt financings may require the payment of certain prepayment premiums.

The term loans are secured by a first priority security interest in accounts receivable, inventory, machinery, equipment and certain other personal property relating to the foregoing, and any proceeds from any of the foregoing, subject to certain exceptions and liens, and a first priority security position on substantially all other real and personal property, in each case that are owned by the Company and the subsidiary guarantors.

The Term Loan Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, dispose of assets and pay dividends or make distributions to stockholders, in each case subject to customary exceptions for a term loan of this size and type.

Pursuant to the Term Loan Agreement, the Company is required to maintain compliance with an interest coverage ratio and a leverage ratio and to limit its annual capital expenditures to $4,000 per fiscal year (subject to carry-over rights).

Revolving Loan Agreement

On March 21, 2014, approximately $25,136 of the proceeds of the Incremental Term Loan Facility were used to pay in full and terminate the Company’s Revolving Loan Agreement.

The revolving loans incurred pursuant to the Revolving Loan Agreement bore interest, at the Company’s option, at the base rate plus a margin between 1.50% and 2.00% or an adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin between 2.50% and 3.00%, in each case with such margin being determined based on the Company’s average daily excess availability under the revolving credit facility for the preceding fiscal quarter. For purposes of the Revolving Loan Agreement, the “base rate” means the highest of Wells Fargo Bank, National Association’s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 3-month interest period plus a margin equal to 1.00%.

Interest was due and payable in arrears monthly for revolving loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of revolving loans bearing interest at the adjusted LIBOR rate. Principal, together with all accrued and unpaid interest, would have been due and payable on February 6, 2018. The Company was permitted to prepay the revolving loans and terminate the commitments, in whole or in part, at any time without premium or penalty. Under certain circumstances, the Company was required to prepay the revolving loans upon the receipt of cash proceeds of certain asset sales.

All borrowings under the Revolving Loan Agreement were limited by amounts available pursuant to a borrowing base calculation, which was based on percentages of eligible accounts receivable, inventory, machinery and equipment, in each case subject to reductions for applicable reserves.

The Revolving Loan Agreement contained customary affirmative and negative covenants, including covenants that limited or restricted the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, dispose of assets and pay dividends or make distributions to stockholders, in each case subject to customary exceptions for a credit facility of this size and type.

Pursuant to the Revolving Loan Agreement, the Company was also required to maintain compliance with a fixed charge coverage ratio and to limit its annual capital expenditures to $4,000 per fiscal year (subject to carry-over rights) at such times that it failed to maintain excess availability under the revolving credit facility above a specified level.

 

13

---

Table of Contents

b)	A subsidiary of the Company in the United Kingdom entered into a 20 year term mortgage agreement in 2007, under which interest is charged at a margin of 1.35% over Barclays Fixed Base Rate of 0.5% at February 28, 2015. The mortgage is secured by the subsidiary’s assets.

c)

On December 31, 2013, the Company completed the Sale/Leaseback. The Company sold the facility to an unaffiliated third party for a gross purchase price of approximately $15,500 and will lease the property from the buyer for approximately $1,279 per year, subject to annual adjustments. As a result of this transaction the Company initially recorded a capital lease obligation of $5,225. The gain on the sale has been deferred and is being recognized over the 15 year lease term.

8. SHAREHOLDERS’ EQUITY

On January 20, 2010 the Company agreed to issue 800,000 shares of API common stock payable as part of the compensation to Kuchera Defense Systems, Inc. (“KDS”), KII, Inc. (“KII”) and Kuchera Industries, LLC (“KI Industries” and collectively with KDS and KII, the “KGC Companies”) or their designees. 250,000 shares were issued and delivered at closing, 250,000 shares were to be issued and delivered on the first anniversary of the closing and 300,000 shares were to be issued and delivered on the second anniversary of the closing. The Company has issued 126,250 shares in escrow from the remaining 550,000 shares. Three API subsidiaries have claimed a right of set off against the escrowed shares under the asset purchase agreement with respect to claimed amounts due to the Company under the indemnification provisions of the asset purchase agreement. The unissued shares have been accounted for as common shares subscribed but not issued. In addition, on January 20, 2010 and January 22, 2010, we issued warrants to purchase an aggregate of 892,862 shares of common stock with an exercise price of $5.60 per share, which expired on January 20, 2015 and January 22, 2015.

In connection with the Plan of Arrangement that occurred on November 6, 2006, the Company was obligated to issue 2,354,505 shares of either API common stock or exchangeable shares of API Nanotronics Sub, Inc. in exchange for the API Electronics Group Corp. common shares previously outstanding. As of February 28, 2015, API is obligated to issue a remaining approximately 63,886 shares of its common stock under the Plan of Arrangement either directly for API common shares or in exchange for API Nanotronics Sub, Inc. exchangeable shares not held by API or its affiliates. There are 22,617 exchangeable shares outstanding (excluding exchangeable shares held by the Company) as of February 28, 2015. Exchangeable shares are substantially equivalent to our common shares.

On November 6, 2006, API amended its certificate of incorporation to allow it to issue one special voting share. This special voting share was issued to a trustee in connection with a Plan of Arrangement and allows the trustee to have at meetings of stockholders of API the number of votes equal to the number of exchangeable shares not held by API or subsidiaries of API. (The trustee is charged with obtaining the direction of the holders of exchangeable shares on how to vote at meetings of API stockholders.) The API Nanotronics Sub, Inc. exchangeable shares are convertible into shares of API common stock at any time at the option of the holder. API may force the conversion of API Nanotronics Sub., Inc. exchangeable shares into shares of API common stock on the tenth anniversary of the date of the Plan of Arrangement or sooner upon the happening of certain events.

The Company, as of March 21, 2014, redeemed all 26,000 shares of its outstanding Series A Preferred Stock. Following the redemption, all shares of Series A Preferred Stock were cancelled and such shares were returned to authorized but undesignated shares of the Company’s preferred stock.

The Company issued no options or RSUs during three months ended February 28, 2015 and 2014, respectively (Note 9). The Company values its option grants using the Black-Scholes option-pricing model.

9. STOCK-BASED COMPENSATION

Of the 5,875,000 shares authorized under the Equity Incentive Plan, 3,752,072 shares are available for issuance pursuant to options, RSUs, or stock as of February 28, 2015. Under the Company’s Equity Incentive Plan, incentive options and non-statutory options may have a term of up to ten years from the date of grant. The stock option exercise prices are equal to at least 100 percent of the fair market value of the underlying shares on the date the options are granted.

As of February 28, 2015 there was $197 of total unrecognized compensation related to non-vested stock options, which are not contingent upon attainment of certain milestones. The cost is expected to be recognized over the remaining periods of the options, which are expected to vest from 2014 to 2017.

During the three months ended February 28, 2015 and 2014, $79 and ($48), respectively, has been recognized as stock-based compensation expense in general and administrative expense.

 

14

---

Table of Contents

The summary of the common stock options granted, cancelled, exchanged or exercised under the Plan:

 

		Options				Weighted Average Exercise Price
Stock Options outstanding— November 30, 2013			1,848,485			$	4.98
Less forfeited			(765,175	)		$	4.90
Exercised			—			$	—
Issued			245,000			$	2.23
Stock Options outstanding—November 30, 2014			1,328,310			$	4.52
Less forfeited			(12,683	)		$	5.26
Exercised			—			$	—
Issued			—			$	—
Stock Options outstanding—February 28, 2015			1,315,627			$	4.52
Stock Options exercisable— February 28, 2015			1,065,211			$	5.05

Restricted stock unit activity under the 2006 Equity Compensation Plan is presented below:

 

		Units				Weighted Average Grant Date Fair Value
RSUs outstanding— November 30, 2013			81,667			$	3.72
Issued			15,000			$	2.37
Exercised—Stock issued			(48,333	)		$	3.72
RSUs outstanding—November 30, 2014			48,334			$	3.30
Issued			—			$	—
Exercised—Stock issued			—			$	—
RSUs outstanding— February 28, 2015			48,334			$	3.30
RSUs exercisable— February 28, 2015			—			$	—

 

		RSUs and Options Outstanding																RSUs and Options Exercisable
Range of Exercise Price		Number of Outstanding at Feb. 28, 2015				Weighted Average Exercise Price				Weighted Average Remaining Life (Years)				Aggregate Intrinsic Value (in thousands)				Number Exercisable at Feb. 28, 2015				Weighted Average Exercise Price				Aggregate Intrinsic Value (in thousands)
$0.00 – $ 3.55			690,834			$	2.83				7.65			$	94				397,500			$	3.54			$	—
$3.56 – $ 4.99			27,084			$	3.56				5.65			$	—				21,668			$	3.56			$	—
$5.00 – $ 6.99			640,209			$	5.95				5.59			$	—				640,209			$	5.95			$	—
$7.00 – $ 20.00			5,834			$	14.07				2.24			$	—				5,834			$	14.07			$	—
			1,363,961								6.62			$	94				1,065,211							$	—

The intrinsic value is calculated as the excess of the market value as of February 28, 2015 over the exercise price of the shares. The market value as of February 28, 2015 was $1.94 as reported by the NASDAQ Stock Market.

 

15

---

Table of Contents

10. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information:

 

		(in thousands) Three months ended
		February 28, 2015				February 28, 2014
Supplemental Cash Flow Information
Cash paid for income taxes		$	220			$	244
Cash paid for interest		$	2,792			$	1,711
Capital lease obligation		$	—			$	5,225

In February 2014, the Company received $1,414 related to a tax refund from the acquisition of one of its subsidiaries, SenDEC Corporation.

11. EARNINGS PER SHARE OF COMMON STOCK

The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share (EPS):

 

		Three months ended February 28
		2015				2014
Weighted average shares-basic			55,461,217				55,426,635
Effect of dilutive securities			*				*
Weighted average shares—diluted			55,461,217				55,426,635

Basic EPS and diluted EPS for the three months ended February 28, 2015 and 2014 have been computed by dividing the net income (loss) by the weighted average shares outstanding. The weighted average numbers of shares of common stock outstanding includes exchangeable shares and shares to be issued under the Plan of Arrangement.

 

*

Outstanding options and RSUs aggregating 1,363,961 – February 28, 2015 (1,756,937 – February 28, 2014) incremental shares, and 892,862 warrants at February 28, 2014 have been excluded from the February 28, 2015 and 2014 computation of diluted EPS as they are anti-dilutive due to the losses generated in each respective period.

12. COMMITMENTS AND CONTINGENCIES

On September 15, 2011, Currency, Inc., KII Inc., Kuchera Industries, LLC, William Kuchera and Ronald Kuchera (the “Plaintiffs”) filed a lawsuit against API and three API subsidiaries (the “API Pennsylvania Subsidiaries”) in the Court of Chancery of the State of Delaware in relation to the Asset Purchase Agreement by and among API, the API Pennsylvania Subsidiaries, the KGC Companies, William Kuchera, and Ronald Kuchera dated January 20, 2010. Plaintiffs’ complaint alleges claims for breach of contract and unjust enrichment based on their contention that API and the API Pennsylvania Subsidiaries violated the Asset Purchase Agreement by failing to issue certain shares of stock to Plaintiffs and by failing to cooperate with Plaintiffs in the filing of a final general and administrative overhead rate with the Defense Contracting Audit Agency. API and the API Pennsylvania Subsidiaries filed an answer to the complaint denying all liability and a counterclaim for breach of contract against Plaintiffs. The final outcome and impact of this matter is subject to many variables, and cannot be predicted. Of the 550,000 shares that have not been delivered under the Asset Purchase Agreement, 126,250 were placed in escrow and the remaining 423,750 shares have been accounted for as common shares subscribed but not issued with a value of $2,373.

The Company is also a party to lawsuits in the normal course of its business. Litigation can be unforeseeable, expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on the Company’s business, operating results, or financial condition.

 

16

---

Table of Contents

In accordance with required guidance, the Company accrues for litigation matters when losses become probable and reasonably estimable. The Company has no recorded accrual relating to its outstanding legal matters as of February 28, 2015 (November 30, 2014—$0). As of the end of each applicable reporting period, or more frequently, as necessary, the Company reviews each outstanding matter and, where it is probable that a liability has been incurred, it accrues for all probable and reasonably estimable losses. Where the Company is able to reasonably estimate a range of losses with respect to such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it will use the amount that is the low end of such range. Because of the uncertainty, the complexity and the many variables involved in litigation, the actual costs to the Company with respect to its legal matters may differ from our estimates, could result in a significant difference and could have a material adverse effect on the Company’s financial position, liquidity, or results of operations. If we determine that an additional loss in excess of our accrual is probable but not estimable, the Company will provide disclosure to that effect. The Company expenses legal costs as they are incurred.

13. INCOME TAXES

For the three month periods ended February 28, 2015 and 2014, the Company’s effective income tax rates were (14.2)% and (31.3)% for continuing operations, respectively compared to an applicable U.S. federal statutory income tax rate of 34%. The difference between the effective tax rate and U.S. statutory tax as of February 28, 2015 and February 28, 2014 is primarily due to existence of valuation allowance for deferred tax assets including net operating losses and income from foreign subsidiaries taxed at rates lower than the U.S. statutory rate. For the three months ended February 28, 2015, the Company recorded valuation allowances on deferred tax assets relating to current year losses and for the accrual of non-cash tax expense due to additional valuation allowances in connection with the tax amortization of our indefinite-lived intangible assets that was not available to offset existing deferred tax assets.

As of February 28, 2015, the Company had no significant unrecognized tax benefits.

The Company records interest and penalties related to tax matters within general and administrative expenses on the accompanying Consolidated Statement of Operations. These amounts are not material to the consolidated financial statements for the periods presented. The Company’s U.S. tax returns are subject to examination by federal and state taxing authorities. Generally, tax years 2011-2014 remain open to examination by the Internal Revenue Service or other tax jurisdictions to which the Company is subject. The Company’s Canadian tax returns are subject to examination by federal and provincial taxing authorities in Canada. Generally, tax years 2011-2014 remain open to examination by Canada Revenue Agency or other tax jurisdictions to which the Company is subject.

14. RESTRUCTURING CHARGES RELATED TO CONSOLIDATION OF OPERATIONS

In accordance with accounting guidance for costs associated with asset exit or disposal activities, restructuring costs are recorded as incurred. Restructuring charges for employee workforce reductions are recorded upon employee notification.

a) Ottawa restructuring

In November 2013, the Company commenced the restructuring of a portion of its Ottawa, Ontario, Canada business (“Ottawa restructuring”), which included the movement of certain operations to its State College facility, in order to improve its profitability. The actions taken as part of the Ottawa restructuring are intended to realize synergies from our combined SSC operations, contain costs and streamline our operations. Elements of the Ottawa restructuring include management re-alignment, workforce reductions and write-downs and charges related to inventory and relocation costs. The Ottawa restructuring was substantially completed by May 31, 2014. As a result of the Ottawa restructuring, the Company reduced its SSC workforce by approximately 4%, which represents approximately 3% of its global workforce.

The Company has recorded $2,047 of cumulative salary and related charges for the Ottawa restructuring in fiscal 2014 and 2013. As at February 28, 2015, $112 is included in accounts payable and accrued liabilities.

b) EMS restructuring

In June 2012, the Company announced the restructuring of its EMS business (“EMS restructuring”) in order to improve its profitability. The actions taken as part of the EMS restructuring were intended to realize synergies from our combined EMS operations, contain costs, reduce our exposure to low margin and unprofitable revenue streams within the EMS businesses, and streamline our operations. Elements of the EMS restructuring include management re-alignment, workforce reductions and write-downs and charges related to inventory, fixed assets, and long-term leases. The EMS restructuring was substantially completed by the end of fiscal 2012. As of November 30, 2012, the Company reduced its EMS workforce by approximately 10%, which represented approximately 2% of its global workforce.

 

17

---

Table of Contents

During the period ending November 30, 2012, the Company incurred approximately $591 related to cash outlays, primarily due to employee separation expenses. The majority of the non-cash charges are primarily related to the write-down of inventory related to the EMS product offerings, leasehold impairments and fixed asset impairments.

The following tables summarize the charges related to EMS restructuring activities by type of cost:

 

		EMS Restructuring (in thousands)
Salary and related charges		$	591
Inventory write-down			7,401
Fixed asset impairment			865
Lease impairment			3,672
Accumulated restructuring charges at November 30, 2012			12,529
Cash payments			(591	)
Non-cash charges			(10,028	)
Balance – Lease impairment accrual, February 28, 2015		$	1,910

During the three months ended February 28, 2015, the Company has reflected within the consolidated statement of operations restructuring charges of $872, which includes $326 related to specific restructuring events and $546 related to recruiting costs for the Company’s new Chief Executive Officer.

15. SEGMENT INFORMATION

The Company follows the authoritative guidance on the required disclosures for segments, which establish standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial reports. The guidance also establishes standards for related disclosures about products, geographic areas and major customers.

The authoritative accounting guidance uses a management approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. The Company’s operations are conducted in three principal business segments: Systems, Subsystems & Components (SSC), Secure Systems & Information Assurance (SSIA) and Electronic Manufacturing Services (EMS). Inter-segment sales are presented at their market value for disclosure purposes. Corporate includes general and administrative functions and unallocated costs of our shared service operations/management, administrative and other shared corporate services functions such as information technology, legal, finance, human resources, and marketing. These administrative and other shared services costs have been allocated in the adjusted EBITDA measure based on a percent of revenue for each respective operating segment.

During the quarter ended February 28, 2014, the Company changed its reported basis of measurement of segment profit or loss. The Company’s chief operating decision maker evaluates segment performance based primarily on revenues and Adjusted EBITDA. The accounting policies of each of the operating segments are the same as those described in the summary of significant accounting policies in Note 2. Adjusted EBITDA represents income from continuing operations excluding depreciation and amortization, stock-based compensation expense and other items as described below. Management views adjusted EBITDA as an important measure of segment performance because it removes from operating results the impact of items that management believes do not reflect the Company’s core operating performance. Adjusted EBITDA is a measure which is also used in calculating financial ratios in material debt covenants in the Company’s credit facilities.

Management does not evaluate the performance of its operating segments using asset measures. The identifiable assets by segment disclosed in this note are those assets specifically identifiable within each segment and include cash, accounts receivable, inventory, goodwill and intangible assets.

 

18

---

Table of Contents

Three months ended February 28, 2015 (in thousands)		SSC				SSIA				EMS				Corporate				Inter Segment Eliminations				Total
Revenue from external customers		$	38,386			$	4,258			$	8,206			$	—			$	—			$	50,850
Adjusted EBITDA:			5,242				755				50				—				—				6,047
Acquisition related charges																							62
Restructuring																							872
Depreciation and amortization																							3,459
Interest expense, net																							3,127
Amortization of note discounts and deferred financing costs																							23
Other adjustments *																							411
Loss before income taxes																						$	(1,907	)
Segment assets—as at February 28, 2015		$	240,496			$	11,670			$	25,187			$	1,382			$	—			$	278,735
Goodwill included in assets—as at Feb. 28, 2015		$	114,301			$	—			$	2,469			$	—			$	—			$	116,770
Purchase of fixed assets, to February 28, 2015		$	144			$	12			$	3			$	—			$	—			$	159

 

Three months ended February 28, 2014 (in thousands)		SSC				SSIA				EMS				Corporate				Inter Segment Eliminations				Total
Revenue from external customers		$	39,661			$	5,399			$	13,858			$	—			$	—			$	58,918
Adjusted EBITDA:			4,390				1,081				1,023				—				—				6,494
Acquisition related charges																							110
Restructuring																							417
Depreciation and amortization																							4,130
Interest expense, net																							2,410
Amortization of note discounts and deferred financing costs																							665
Other adjustments *																							380
Loss before income taxes																						$	(1,618	)
Segment assets—as at November 30, 2014		$	241,246			$	13,183			$	24,235			$	4,176			$	—			$	282,840
Goodwill included in assets—as at Nov. 30, 2014		$	114,301			$	—			$	2,469			$	—			$	—			$	116,770
Purchase of fixed assets, to February 28, 2014		$	63			$	15			$	27			$	—			$	—			$	105

 

*	Other adjustments primarily include non-cash inventory provisions, stock based compensation, franchise taxes, financing and other adjustments, lease payments for the State College, Pennsylvania facility, foreign exchange losses and a change in benefit liability.

 

19

---

Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This section is provided as a supplement to, and should be read in conjunction with, our unaudited Consolidated Financial Statements and accompanying Notes thereto included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended November 30, 2014 to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

Business Overview of API Technologies Corp.

General

We design, develop and manufacture high-reliability RF, microwave, microelectronic, power, and security solutions for the defense, aerospace, industrial, satellite, and commercial end markets. We own and operate several state-of-the-art manufacturing facilities in the United States, the United Kingdom, Canada, China and Mexico. Our defense customers, which include military prime contractors, and the contract manufacturers who work for them, in the United States, Canada, the United Kingdom and various other U.S. friendly countries in the world, outsource many of their defense electronic components and systems to us as a result of the combination of our design, development and manufacturing expertise. Our commercial customers, who represent the commercial, aerospace, space, industrial, and medical communities, leverage our products, engineering, and manufacturing capabilities to address high-reliability requirements.

Operating through our three segments: Systems, Subsystems & Components (SSC), Electronic Manufacturing Services (EMS) and Secure Systems & Information Assurance (SSIA), we are positioned as a differentiated solution provider to U.S. and U.S. friendly governments, military, defense, aerospace and homeland security contractors, and leading industrial and commercial firms. With a focus on high-reliability products for critical applications, our solutions portfolio spans RF/microwave and microelectronics, electromagnetics, power products, and security products. We also offer a wide range of electronic manufacturing services from prototyping to high volume production and secure communication products, including ruggedized computers and peripherals, network security appliances, and TEMPEST Emanation prevention products.

Effective March 2, 2015, the Company hired Robert Tavares as its new President and Chief Executive Officer.

On March 21, 2014, we entered into Amendment No. 2 to Credit Agreement (the “Amendment No. 2”), by and among the Company, as borrower, the lenders party thereto and Guggenheim Corporate Funding, LLC, as administrative agent (the “Agent”). Amendment No. 2 amends the Credit Agreement, dated as of February 6, 2013, by and among the Company, as borrower, the lenders party thereto and Agent (as amended, supplemented or modified from time to time, the “Term Loan Agreement”) to provide for an incremental term loan facility in an aggregate principal amount equal to $55.0 million (the “Incremental Term Loan Facility”). The Incremental Term Loan Facility is subject to substantially the same terms and conditions, including the applicable interest rate and the maturity date of February 6, 2018, as the $165.0 million term loan facility provided upon the initial closing of the Term Loan Agreement. In addition, Amendment No. 2 amends the Term Loan Agreement to reduce the minimum interest coverage ratio and increase the maximum leverage ratio, among other things.

The proceeds of the Incremental Term Loan Facility were used (i) to pay in full the amounts due under a Credit Agreement (the “Revolving Loan Agreement”), by and among the Company and certain of its U.S. subsidiaries, as borrowers, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and U.K. security trustee, which Revolving Loan Agreement was then terminated; (ii) to redeem all 26,000 shares of the Company’s Series A Mandatorily Redeemable Preferred Stock that were outstanding (as described below); (iii) to pay fees, costs and expenses associated with the Incremental Term Loan Facility and related transactions; and (iv) for general corporate purposes.

As of March 21, 2014, we redeemed all 26,000 shares of our Series A Mandatorily Redeemable Preferred Stock that were outstanding. We paid the holder of the Series A Mandatorily Redeemable Preferred Stock an aggregate of $27.6 million to effect the redemption. Following redemption, all shares of Series A Mandatorily Redeemable Preferred Stock were cancelled and such shares were returned to authorized but undesignated shares of preferred stock.

Commencing in 2010, we began various cost reduction initiatives to rationalize the number of our facilities and personnel, which has resulted in us consolidating certain parts of our manufacturing operations. During the year ended November 30, 2013, we also began the consolidation of certain parts of our Ottawa, Canada operations to State College, Pennsylvania. The collective impact of these changes has resulted in a net reduction of costs of approximately $43.9 million on an annualized basis.

 

20

---

Table of Contents

Operating Revenues

We derive operating revenues from our three principal business segments: Systems, Subsystems & Components (SSC); Electronic Manufacturing Services (EMS); and Secure Systems & Information Assurance (SSIA). We sell our products to customers throughout the world, with a concentration in North America, western Europe, and the Asia-Pacific region.

Systems, Subsystems & Components (SSC) Revenue includes high-performance RF/microwave, microelectronics, millimeter wave, electromagnetic, power, and microelectronics solutions used in high-reliability defense, space, industrial and commercial applications, including missile systems, radar systems, electronic warfare systems (e.g. counter-IED RF jamming devices), unmanned air, ground and robotic systems, satellites, as well as industrial, medical, energy and telecommunications products. The main demand today for our SSC products come from U.S. friendly governments, including militaries, defense organizations, commercial aerospace, space, homeland security, prime defense contractors and manufacturers of industrial products.

Electronic Manufacturing Services (EMS) Revenue includes high speed surface mount circuit card assemblies using both surface mount and thru-hole processes, electromechanical assemblies, system and integrated level solutions used in high-reliability defense, industrial, and commercial applications. The main demand today for our EMS products come from various defense organizations, aerospace, prime defense contractors and manufacturers of industrial, medical and commercial products.

Secure Systems & Information Assurance (SSIA) Revenue includes revenues derived from the manufacturing of TEMPEST and Emanation control products, ruggedized computers and peripherals, secure mobile devices, secure access and information assurance products. The principal market for these products are the defense industries of the United States, Canada and the United Kingdom and other U.S. friendly governments, Fortune 500 companies and telecommunication service providers.

Cost of Revenue

We conduct all of our design and manufacturing efforts in the United States, Canada, United Kingdom, Mexico and China. Cost of goods sold primarily consists of costs that were incurred to manufacture, test and ship the products and some design costs for customer funded research and development (“R&D”). These costs include raw materials, including freight, direct labor, subcontractor services, tooling required to design and build the parts, and the cost of testing (labor and equipment) the products throughout the manufacturing process and final testing before the parts are shipped to the customer. Other costs include provision for obsolete and slow moving inventory, and restructuring charges related to the consolidation of operations.

Operating Expenses

Operating expenses consist of selling, general, administrative expenses, research and development, business acquisition and related charges and other income or expenses.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses include compensation and benefit costs for all employees, including sales and customer service, sales commissions, executive, finance and human resource personnel. Also included in SG&A is compensation related to stock-based awards to employees and directors, professional services for accounting, legal and tax, information technology, rent and general corporate expenditures.

Research and Development Expenses

R&D expenses represent the cost of our development efforts. R&D expenses include salaries of engineers, technicians and related overhead expenses, the cost of materials utilized in research, and additional engineering or consulting services. R&D costs are expensed as incurred.

Business Acquisition and Related Charges

Business acquisition charges primarily represent costs of engaging outside legal, accounting, due diligence, business valuation consultants and accelerated stock option expenses related to business combinations or divestitures. Related charges include costs incurred related to our efforts to consolidate operations of recently acquired and legacy businesses and expenses associated with divestitures.

Other Expenses (Income)

Other expenses (income) consists of interest expense on term loans, notes payable, operating loans and capital leases, interest income on cash and cash equivalents and marketable securities, amortization of note discounts and deferred financing costs, gains or losses on disposal of property and equipment, and gains or losses on foreign currency transactions.

 

21

---

Table of Contents

Backlog

Our sales backlog at February 28, 2015 was approximately $128.0 million compared to approximately $120.7 million at November 30, 2014. Our backlog figures represent confirmed customer purchase orders that we had not shipped at the time the figures were calculated. We anticipate that approximately $91.7 million of our backlog orders will be filled by February 28, 2016. We lack control over the timing of new purchase orders, as such, the backlog can increase or decrease significantly based on timing of customer purchase orders.

 

		(dollar amounts in thousands)
		February 28, 2015				November 30, 2014				% Change
Backlog by segments:
SSC		$	98,624			$	98,111				0.5	%
EMS			26,163				19,077				37.1	%
SSIA			3,262				3,481				(6.3	)%
		$	128,049			$	120,669				6.1	%

The increase at February 28, 2015 compared to November 30, 2014 was primarily related to our SSC and EMS segments as a result of higher SSC and EMS bookings due to program timing in the quarter ended February 28, 2015, partially offset by a reduction in the UK foreign exchange rate. The decrease in the SSIA backlog as at February 28, 2015 was due to the reduction in the UK foreign exchange rate.

Results of Operations for the Three Months Ended February 28, 2015 and 2014

The following discussion of results of operations is a comparison of our three months ended February 28, 2015 and 2014.

Segment Operating Revenue and Adjusted EBITDA

Financial information for each of our segments is set forth in Part I- Item 1, Financial Statements (unaudited), Note 15 “Segment Information” to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. In deciding how to allocate resources and assess performance, our chief operating decision maker regularly evaluates the performance of our reportable segments on the basis of revenue and adjusted EBITDA. Segment adjusted EBITDA assists us in comparing our segment performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance. Our reportable segment measure of adjusted EBITDA is not a recognized measure under GAAP and should not be considered an alternative to, or more meaningful than, net income (loss) or other measures of financial performance derived in accordance with GAAP. Our segment adjusted EBITDA may not be comparable to similarly titled measures of other companies because other entities may not calculate segment adjusted EBITDA in the same manner.

Our segment Adjusted EBITDA is defined as income from continuing operations before income taxes, interest, depreciation and amortization, and excluding other items. Such items include stock-based compensation expense, non-cash inventory provisions, franchise taxes, acquisition related charges, restructuring charges, financing related costs, foreign exchange losses, lease payments related to the Sale/Leaseback and a change in benefit liability.

 

		(dollar amounts in thousands) Three months ended February 28,
		2015				2014				% Change
Revenues by segments:
SSC		$	38,386			$	39,661				(3.2	)%
EMS			8,206				13,858				(40.8	)%
SSIA			4,258				5,399				(21.1	)%
		$	50,850			$	58,918				(13.7	)%

We recorded a 13.7% decrease in overall revenues for the three months ended February 28, 2015 over the same period in 2014. The decrease was due to lower revenues in our EMS, SSIA and SSC segments, compared to the three months ended February 28, 2014. During the three months ended February 28, 2015, the decrease in our SSC segment revenues was primarily due to timing of certain programs and approximately $0.6 million is due to the devaluation of the Pound Sterling to the US dollar during the quarter ended February 28, 2015, compared to the same period in the prior year. Revenues for the EMS segment were negatively impacted by

 

22

---

Table of Contents

the timing of certain programs and the fact that its opening backlog, as at November 30, 2014, was much lower than the prior year. The decrease in the SSIA segment revenue was primarily due to lower revenues in Canada, which was in part (approximately $0.2 million) due to the devaluation of the Canadian dollar compared to the US dollar during the quarter ended February 28, 2015, compared to the same period in the prior year.

 

		(dollar amounts in thousands) Three months ended February 28,
		2015				2014				% Change
Segment Adjusted EBITDA:
SSC		$	5,242			$	4,390				19.4	%
EMS			50				1,023				(95.2	)%
SSIA			755				1,081				(30.2	)%

The SSC segment adjusted EBITDA for the three months ended February 28, 2015 was higher than the comparable period in 2014 primarily due to reductions in labor and manufacturing overhead costs. During the three months ended February 28, 2015, the decrease in our EMS and SSIA segments adjusted EBITDA was primarily due to the impact of lower revenues.

Operating Expenses

Cost of Revenue and Gross Margin

 

		Three months ended February 28,
		2015				2014
Gross margin by segments:
SSC			29.1	%			24.7	%
EMS			6.5	%			13.1	%
SSIA			29.6	%			32.3	%
Overall			25.5	%			22.7	%

Our combined gross margin for the three months ended February 28, 2015 increased by approximately 2.8 percentage points compared to the three months ended February 28, 2014. Gross margin varies from period to period and can be affected by a number of factors, including product mix, production efficiency, and restructuring activities. Overall cost of revenues from continuing operations as a percentage of sales decreased in the three months ended February 28, 2015 from 77.3% to 74.5% compared to the same period last year. The SSC segment cost of revenues percentage for the three months ended February 28, 2015 decreased by 4.4 percentage points compared to the same period in 2014, primarily due to lower labor and manufacturing overhead costs in the quarter ended February 28, 2015 compared to the same period last year. The EMS segment cost of revenues percentage for the three months ended February 28, 2015 increased by 6.6 percentage points compared to the same period in 2014, primarily due to the impact of lower revenues and therefore lower coverage of our fixed costs. The SSIA segment realized an increase in cost of revenues of 2.7 percentage points primarily due to the impact of lower revenues and therefore lower coverage of our fixed costs. Combined restructuring costs recorded in the three months ended February 28, 2015 were approximately $0.1 million compared to approximately $0.3 million in the comparable period of 2014.

General and Administrative Expenses

General and administrative expenses decreased to approximately $5.3 million for the three months ended February 28, 2015 from $5.7 million for the three months ended February 28, 2014. The decrease is primarily a result of lower depreciation and amortization as certain intangible assets became fully amortized, partially offset by an increase in stock based compensation. As a percentage of sales, general and administrative expenses were 10.4% for the three months ended February 28, 2015, compared to 9.7% for the three months ended February 28, 2014.

 

23

---

Table of Contents

The major components of general and administrative expenses are as follows:

 

		(dollar amounts in thousands) Three months ended February 28,
		2015				% of sales				2014				% of sales
Depreciation and Amortization		$	2,026				4.0	%		$	2,516				4.3	%
Accounting and Administration		$	1,989				3.9	%		$	1,848				3.1	%
Stock based compensation		$	79				0.2	%		$	(48	)			(0.1	)%
Professional Services		$	402				0.8	%		$	428				0.7	%

Selling Expenses

Selling expenses were substantially the same, approximately $3.7 million for the three months ended February 28, 2015 compared to approximately $3.8 million for the three months ended February 28, 2014. As a percentage of sales, selling expenses were 7.2% for the three months ended February 28, 2015, compared to 6.4% for the three months ended February 28, 2014.

The major components of selling expenses are as follows:

 

		(dollar amounts in thousands) Three months ended February 28,
		2015				% of sales				2014				% of sales
Payroll Expense – Sales		$	2,000				3.9	%		$	2,130				3.6	%
Commissions		$	1,101				2.2	%		$	1,091				1.9	%
Advertising		$	300				0.6	%		$	289				0.5	%

Research and Development Expenses

Research and development costs decreased to approximately $2.0 million for the three months ended February 28, 2015 compared to approximately $2.1 million for the three months ended February 28, 2014. As a percentage of sales, research and development expenses were 3.9% for the three months ended February 28, 2015, compared to 3.5% for the three months ended February 28, 2014.

Business acquisition and related charges

Business acquisition charges primarily represent costs of engaging outside legal, accounting, due diligence, business valuation consultants and accelerated stock option expenses related to business combinations. For the three months ended February 28, 2015, business acquisition charges of approximately $0.1 million of costs primarily related to the evaluation of strategic alternatives compared to approximately $0.1 million for the three months ended February 28, 2014.

Operating Income

We posted operating income from continuing operations for the three months ended February 28, 2015 of approximately $1.1 million compared to operating income of approximately $1.6 million for the three months ended February 28, 2014. The decrease in operating income of approximately $0.5 million is primarily attributed to higher restructuring costs primarily associated with costs related to our change in CEO, and partially due to the impact of lower revenues in the quarter.

Other Expenses (Income)

Total other expense for the three months ended February 28, 2015 amounted to approximately $3.0 million, compared to other expense of $3.2 million for the three months ended February 28, 2014.

The decrease in other expense in the three month period ended February 28, 2015, compared to the comparable period in 2014 is largely attributable to lower amortization of note discounts and deferred financing costs as a result of the refinancing and extinguishment of our previous term loans in 2014, partially offset by higher interest expense in the quarter ended February 28, 2015, compared to the comparable period in 2014.

 

24

---

Table of Contents

Income Taxes

Income taxes from continuing operations amounted to a net expense of approximately $0.3 million for the three months ended February 28, 2015 compared to a net expense of $0.5 million in the three months ended February 28, 2014. The expense during the three months ended February 28, 2015, is primarily due to the tax amortization of indefinite lived intangibles, and foreign and state taxes incurred during the period. The current provision is less than the statutory tax rate due to valuation allowances placed upon the deferred tax assets. The prior year expense related to the tax amortization of indefinite lived intangibles, and foreign and state taxes incurred during the period.

Net loss

We recorded a net loss for the three months ended February 28, 2015 of approximately $2.2 million, compared to the net loss of approximately $2.1 million for the three months ended February 28, 2014. The net loss in the three month period ended February 28, 2015 is consistent with the comparable period in 2014 despite the impact of lower revenues, higher restructuring costs and higher interest expenses, which were partially offset by reductions in labor and manufacturing overhead costs, and lower amortization of note discounts and deferred financing costs as a result of the refinancing and extinguishment of our previous term loans in fiscal 2014.

Liquidity and Capital Resources

Overview and Summary

Our principal sources of liquidity include cash flows from operations, funds from borrowings and existing cash on hand.

At February 28, 2015, we held cash and cash equivalents of approximately $6.2 million compared to $8.3 million at November 30, 2014. We believe that our available cash and cash equivalents and future cash flows from operations will be sufficient to satisfy our anticipated cash requirements for the next twelve months, including scheduled debt repayment, lease commitments, planned capital expenditures, and research and development expenses. There can be no assurance, however, that unplanned capital replacements or other future events, will not require us to seek additional debt or equity financing and, if so required, that it will be available on terms acceptable to us, if at all. Any issuance of additional equity could dilute our current stockholders’ ownership interests.

On March 21, 2014, we entered into Amendment No. 2, which, among other things, amends the Term Loan Agreement to provide for the Incremental Term Loan Facility. The Incremental Term Loan Facility is subject to substantially the same terms and conditions, including the applicable interest rate and the maturity date of February 6, 2018, as the $165.0 million term loan facility provided upon the initial closing of the Term Loan Agreement. As of March 21, 2014, we had borrowed $126.7 million under the Term Loan Agreement. As of February 28, 2015, we had borrowed $119.3 million under the Term Loan Agreement.

Term Loan Agreement

The term loans incurred pursuant to the Term Loan Agreement, as amended, including the term loans incurred pursuant to the Incremental Term Loan Facility (collectively, the “Term Loans”), bear interest, at our option, at the base rate plus 6.50% or an adjusted LIBOR rate (based on one, two or three-month interest periods) plus 7.50%. For purposes of the Term Loan Agreement, the “base rate” means the highest of Wells Fargo Bank, National Association’s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 3-month interest period plus a margin equal to 1.00%.

Interest is due and payable in arrears monthly for Term Loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of Term Loans with interest periods greater than three months) in the case of Term Loans bearing interest at the adjusted LIBOR rate. Principal payments of the Term Loans are paid at the end of each of our fiscal quarters, with the balance of any outstanding Term Loans due and payable in full on February 6, 2018. The quarterly principal payments will amortize at 1.875% for the fiscal quarters through the end of our 2015 fiscal year and at 2.50% for each of the fiscal quarters thereafter.

Under certain circumstances, we are required to prepay the Term Loans upon the receipt of cash proceeds of certain asset sales, cash proceeds of certain extraordinary receipts and cash proceeds of certain debt or equity financings, and based on a calculation of annual excess cash flow. Mandatory prepayments resulting from assets sales or certain debt financings may require the payment of certain prepayment premiums.

 

25

---

Table of Contents

The Term Loans are secured by a security interest in substantially all of the assets owned by the Company and the subsidiary guarantors.

The Term Loan Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, dispose of assets and pay dividends or make distributions to stockholders, in each case subject to customary exceptions for a term loan of this size and type.

Pursuant to the Term Loan Agreement, we are required to maintain compliance with an interest coverage ratio and a leverage ratio and to limit our annual capital expenditures to $4.0 million per fiscal year (subject to carry-over rights). The interest coverage ratio is defined as the ratio of Consolidated EBITDA to cash Interest Expense (as each term as defined in the Term Loan Agreement), as at the end of each fiscal quarter. For each of the first three fiscal quarters during the fiscal year ending November 30, 2015, the interest coverage ratio must be not less than the ratio of 2.20:1.00 and for the fourth quarter end November 30, 2015, it must not be less that the ratio of 2.30:1.00. The leverage ratio is defined as the ratio of Funded Debt to Consolidated EBITDA (as each term as defined in the Term Loan Agreement), as at the end of each fiscal quarter. For each of the fiscal quarters during the fiscal year ending November 30, 2015, the leverage ratio must be not greater than 5.25:1.00.

As at February 28, 2015, we were in compliance with our financial covenants under the Term Loan Agreement.

The Term Loan Agreement includes customary events of default including, among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, non-compliance with ERISA laws and regulations, defaults under the security documents or guaranties, material judgment defaults, and a change of control default, in each case subject to certain exceptions for a term loan of this type. The occurrence of an event of default could result in an increased interest rate equal to 2.0% above the applicable interest rate for loans, the acceleration of our obligations pursuant to the Term Loan Agreement and an obligation of the subsidiary guarantors to repay the full amount of our borrowings under the Term Loan Agreement. If we were unable to obtain a waiver for a breach of covenant and the lenders accelerated the payment of any outstanding amounts, such acceleration may cause our cash position to deteriorate or, if cash on hand were insufficient to satisfy the payment due, may require us to obtain alternate financing to satisfy the accelerated payment. If our cash is utilized to repay any outstanding debt, we could experience an immediate and significant reduction in working capital available to operate our business.

Quarter Ended February 28, 2015 Compared to February 28, 2014

Cash provided by operating activities of approximately $0.7 million for the three months ended February 28, 2015 (“Q1 FY2015”) was lower than cash provided by operating activities of approximately $2.5 million for the three months ended February 28, 2014 (“Q1 FY2014”). The decrease in cash provided by operating activities resulted primarily from higher interest payments and changes in operating assets and liabilities in Q1 FY2015 compared to Q1 FY2014.

Cash used in investing activities for the three months ended February 28, 2015 was approximately $0.3 million, which consisted of the acquisition of fixed and intangible assets. Cash provided by investing activities for the three months ended February 28, 2014 was approximately $16.4 million, which consisted primarily of the $15.1 million proceeds from the sale of the State College facility, and a $1.4 million tax refund related to the SenDEC acquisition, partially offset by the acquisition of fixed and intangible assets of $0.2 million.

Cash used by financing activities for the three months ended February 28, 2015 totaled approximately $2.5 million, and resulted from the repayment of long-term debt, mainly related to the term loans under the Term Loan Agreement. During the three months ended February 28, 2014 cash used by financing totaled approximately $16.0 million, and resulted from the repayment of long-term debt, mainly related to the term loans under the Term Loan Agreement including the repayment using the proceeds of the sale/leaseback of the State College facility, partially offset by net proceeds associated with the Revolving Loan Agreement.

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 2 to the unaudited consolidated financial statements in Item 1 of this Report and the effects of any recently adopted accounting pronouncements in Note 3 to the unaudited consolidated financial statements in Item 1 of this Report. There were no significant changes in our accounting policies or critical accounting estimates that are discussed in our Annual Report on Form 10-K for the year ended November 30, 2014.

Off-Balance Sheet Arrangements

During the year ended November 30, 2014 and the three months ended February 28, 2015, the Company did not have any off-balance sheet arrangements.

 

26

---

Table of Contents

FORWARD-LOOKING STATEMENTS

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” “expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs or current expectations.

Management wishes to caution investors that any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the year ended November 30, 2014 and in our other filings with the SEC. These uncertainties and other risk factors include, but are not limited to: general economic and business conditions, including without limitation, reductions in government defense spending; governmental laws and regulations surrounding various matters such as environmental remediation, contract pricing and international trading restrictions; our ability to integrate and consolidate our operations; our ability to expand our operations in both new and existing markets; the ability of our review of strategic alternatives to maximize stockholder value; the effect of growth on our infrastructure; our ability to maintain compliance with our financial covenants; and continued access to capital markets.

Management wishes to caution investors that other factors might, in the future, prove to be important in affecting the Company’s results of operations. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency

Certain of our European sales and related selling expenses are denominated in Euros, British Pounds Sterling, and other local currencies. In addition, certain of our operating expenses are denominated in Canadian dollars, Mexican Pesos and Chinese Yuan. As a result, fluctuations in currency exchange rates may positively or negatively affect our operating results and cash flows. For each of the periods presented herein, currency exchange rate gains and losses were not material and we do not anticipate that exposure to foreign currency rate fluctuations will be material for the fiscal year ending November 30, 2015.

Interest Rate Exposure

We have market risk exposure relating to possible fluctuations in interest rates under our credit facility. We may utilize interest rate hedging products in the future to minimize the risks and costs associated with variable rate debt, however, we have not done so to date. We do not enter into derivative financial instruments for trading or speculative purposes. As of February 28, 2015, the Company has borrowed $119.3 million under its Term Loan Agreement. The loan amounts under the Term Loan Agreement bear interest at adjusted LIBOR plus 7.50%, all of which is subject to variable interest rates. The adjusted LIBOR, as defined in the Term Loan Agreement, has a floor of 1.50%. Based on LIBOR at February 28, 2015, an increase of 100 basis points in the interest rate would result in a 0.1% increase in our overall annual interest expense, due to the 1.50% floor. A 100 basis point increase in the interest rate above the 1.5% floor would result in a $1.2 million increase in our annual interest expense on the term loan borrowings, assuming the

 

27

---

Table of Contents

entire $119.3 million was outstanding. Such potential increases or decreases are based on certain simplified assumptions, including minimum quarterly principal repayments made on variable-rate debt for all maturities and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the periods. Any debt we incur in the future may also bear interest at floating rates.

 

ITEM 4.

CONTROLS AND PROCEDURES

Controls and Procedures

 

(a)	Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. We have carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of February 28, 2015. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of February 28, 2015.

 

(b)	Changes in Internal Control over Financial Reporting

During the quarter ended February 28, 2015, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

Information with respect to legal proceedings can be found in Note 12 “Commitments and Contingencies” to the Consolidated Financial Statements contained in Part I, Item 1 of this report.

 

ITEM 1A.

RISK FACTORS

There are no material changes from the risk factors set forth under Part I, Item 1A–“Risk Factors” in our Annual Report on Form 10-K for the year ended November 30, 2014.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None.

(b) Not applicable.

(c) None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5.

OTHER INFORMATION

None.

 

28

---

Table of Contents

ITEM 6.

EXHIBITS

 

Exhibit Number		Exhibit Title
10.1		Employment letter agreement with Robert Tavares (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on March 2, 2015).
31.1		Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer (filed herewith).
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith).
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).
32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

29

---

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				API TECHNOLOGIES CORP.
Date: April 8, 2015				By:		/S/ CLAUDIO MANNARINO
						Claudio Mannarino
						Senior Vice President and Chief Financial Officer (Duly Authorized Officer)

 

30