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Rushford Hypersonic seeks and gets controversial funding

By Kirsten Zoellner

Fri, Aug 30th, 2013
Posted in Rushford Government

A full house packed city hall for the Monday, August 26 council meeting in Rushford, Minn. The joint meeting of the council and the Economic Development Authority (EDA) included a public hearing regarding futher funding of Rushford Hypersonic. After weeks of discussion by the EDA, it was recommended that the city approve a $145,000 subsidy loan financing the low-scale production of products for distribution. For some in attendance, it was just the same old story.

Hypersonic has to date received $500,000 in funding through the EDA Revolving Loan Fund, the maximum amount allowed to one company. Those funds, according to Rushford Hypersonic President Jay Skranka, were utilized for research, design, development, and fine tuning for testing. This funding would allow the company to begin production of its coated drill bits for industrial use. Fastenal has provided a letter of intent to the company regarding the product but no purchase or distribution agreements are in place.

“We have amazing, wonderful technology here. We’ve spent six years developing the technology to take Nano particles, to take a product a product and make it better. This will help bridge the gap into production,” said Skranka.

Contrary to what some thought, this funding will not provide new machinery. Instead, it will fund a carousel component that will be inserted in existing machines to allow for greater consistency in the product. “We’re working on repeatability to a consistent performance standard,” he added. The bits themselves, when coated, are remarkable. When compared to a standard carbide bit, which drilled 60 holes before wearing out, the Nano-coated bit drilled 1,500 holes and under inspection, the 1,500th hole was no different than the first.

Still, not everyone was sold. The initial loan to Rushford Hypersonic is in a period of forbearance. “My concern is where the $145,000 will be spent. Will it be spent in a logical way and will there be a way for us to get something out of this as a city?” asked Mitch Bublitz. “This is all well if it works, but if it doesn’t, do you have a plan?”

“We were skeptical, too,” responded EDA chair Tom Driscoll. “But the arguments were persuasive when weighed against the alternative of letting this company languish. We tore this thing apart, went through everything, asking every possible question given the history of this company and the city. It’s in the best interest of the city to assist the company.”

“We’ve hit a few stumbling blocks,” added Skranka. “The patent is from the University of Minnesota. It didn’t work quite as expected. If it would have, we wouldn’t be asking for the funding.” Since the patent problems, Hypersonic has restructured their board and have adopted a business plan suited to the materials they can use and including small volume manufacturing.

Just who the company owners and stakeholders are was another issue of contention. “If these numbers are true, we should follow through here. Are they going to personally guarantee it? Are they committed?”

The company’s work has been funded by the city loan, a SMIF loan, and by private investor. While Skranka wouldn’t comment much on the investors, he alluded to the fact that if something tangible is put forth as a product, investments in it will follow. The security on the loan is the equipment held by Rushford Hypersonic. “We will be secure against this loan,” added Driscoll. “And we’ll find a way to share in the success of this company. Even if there are a few bumps, the projections are impressive. We’re trying to protect the interests of this city. We want to be extremely careful. Part of this risk analysis is finding a way to help them succeed. To coin a phrase, we’re already in bed with this company.”

“One of the benefits is to get Hypersonic successful, then make an investment in the town,” added RinTek President Kevin Klungtvedt. “This is an investment in Rushford’s future.”

“If what you say is true, I’d invest. If I invested and it wasn’t true, I’d own your house,” stated Bublitz. “I’ll go on record that I’ll personally borrow you the $145,000 if they’ll personally guarantee it.” No one took Bublitz up on his offer, but Skranka alluded that he was confident in the product and stands behind it. The EDA loan process, it was pointed out, doesn’t operate like a bank with personal collateral.

Following the public hearing, which lasted over an hour, the city took the issue to decision during regular business. “We’re violating the policy of no more than $500,000 to one company,” noted City Administrator Steve Sarvi. “We’ve done this with one other company, but their loan was not in forbearance. Because of the exception of policy that would be needed to grant Hypersonic’s loan request, the EDA has required additional security on the loan.” A lien on 2 percent of the Class A stock will be held by the EDA until both the total amount due, $636,000, is repaid. In addition, the city is finalizing a royalty amount, which is looking like $.03 per drill bit. The minimum royalty paid would be $3,300 per year and the maximum of $50,000.

Should the production phase work as expected, the company will start cranking out bits in 60 days, with an additional 30 days to fine tune the process. The goal is to create 10,000 coated drill bits per eight-hour shift, with one shift per day, a $40,000 a month profit to the company. It is possible that up to three shifts could be added should the need be present.

“If successful, down the road, are you going to come back and ask for money for a building?” asked Councilor Roger Colbenson.

“That scenario would be different,” responded Skranka. “Our goal here is to become self-sustaining.”

“We’ve said loud and clear, you’re going to have to find future infusions of cash,” said Driscoll. “This just starts that revenue stream.”

“We’ve got $2 million invested in research and development. We’re looking for a small capital investment to get this to a tangible project,” noted Skranka.

City attorney Terry Chiglo, who had initially given approval to the language of the subsidy to Hypersonic, temporarily halted that approval prior to the council vote. “If the bits don’t sell or aren’t made, your security is no better than we have right now,” he cautioned the council. “Because of the reference tonight of $2 million in investments, which I wasn’t aware of, I want it certified that the city is first in collateral in case of liquidation. The other requirement that I’d recommend is that this company will comply with the EDA loan policy.”

The council approved the funding in a 4 to 1 vote, contingent on Chiglo’s recommendations. Final closing documents still need to be drafted. The clock is now ticking on Hypersonic’s self-given 90-day window to churn out the product. It appears the community will certainly be watching.

In other news, the city has moved forward with the Family Dollar project. The council has approved the site plan review based on a Planning Commission recommendation. The city has also entered into a purchase agreement with SMR Acquisitions Company for FD Rushford Minnesota Miller Circle LLC. The purchase includes 1.22 acres of land (block 2, lot 1) in the Himlie Business Park. The amount recaptures the value of the land and utility improvements.

Deed work, soil reviews, and other associated costs were all paid for by the company up front. The closing is scheduled for August 30. The site is expected to be completed March of 2014, with opening in the spring.

The next regularly scheduled council meeting is Monday, September 9, at 6:30 p.m., at city hall. The public is encouraged to attend.

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