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AXESSTEL INC - 10-Q/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
Statements in the following discussion and throughout this report that are not
historical in nature are "forward-looking statements". You can identify
forward-looking statements by the use of words such as "expect," "anticipate,"
"estimate," "may," "should," "intend," "believe," and similar expressions.
Although we believe the expectations reflected in these forward-looking
statements are reasonable, such statements are inherently subject to risk and we
can give no assurances that our expectations will prove to be correct. Actual
results could differ from those described in this report because of numerous
factors, many of which are beyond our control. These factors include, without
limitation, those described under Item 1A "Risk Factors." We undertake no
obligation to update these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect actual outcomes.
Please see "Special Note Regarding Forward Looking Statements" at the beginning
of this report.
The following discussion of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial
statements and the related notes and other financial information appearing
elsewhere in this report.
Overview
We develop fixed wireless voice and broadband access solutions for the worldwide
telecommunications market. Our product portfolio includes fixed wireless phones,
wire-line replacement terminals, and 3G and 4G broadband gateway devices used to
access voice calling and high-speed data services.
Our fixed wireless phones and 3G and 4G gateway products have similar
functionality to phones and modems that use traditional landline
telecommunications networks; however, our products are wireless and can be
substituted for wired phones and modems. Our wire-line replacement terminals act
as communication devices in homes where conventional handsets and wireless
handsets can be plugged into our wireless terminals and serviced on a wireless
network, as opposed to connecting to the fixed line provided by the local
telephone or cable operator. Our products are based on CDMA (Code Division
Multiple Access), GSM (Global System for Mobile Communications), GPRS (General
Packet Radio Service), WCDMA (Wideband Code Division Multiple Access), and HSPA
(High-Speed Packet Access) technologies.
We develop and manufacture our products with third party engineering and
manufacturing suppliers, particularly in China. Our design team works with these
manufacturers to develop and customize products to incorporate our design and
functional requirements on their baseline designs. We strive to retain
intellectual property rights in key areas, while outsourcing commoditized work.
We use this approach to reduce research and development expenses, shorten time
to market for new products, and leverage supply chains and economies of scale to
reduce product costs.
We sell our products to telecommunications operators worldwide. In developing
countries, where large segments of the population do not have telephone or
internet service, telecommunications operators deploy wireless networks as a
more cost effective alternative to traditional wired communications. In
developed countries, telecommunications operators are using wireless networks to
augment or supplant existing wire-line infrastructure. Currently, our largest
customers are located in the United States, Scandinavia, and Poland.
Recent Developments
We have reshaped our business, designing a more competitive product portfolio,
increasing sales in markets that support better margins, and aggressively
reducing operating costs. These initiatives began producing results in the
second half of 2011, and we have since recorded five consecutive quarters of
profitability. During the quarter ended September 30, 2012, we took advantage of
that improved operating performance to restructure a significant portion of our
liabilities, reduce our cost of borrowing and improve our working capital
position.
Sales of our 4G gateway with VoIP capability into the Europe region continued to
be robust during the third quarter, making that device our number one selling
product globally. Our gateways enable operators in this region to attract new
subscribers and increase their revenue with broadband data and voice packages to
both small office and residential users. We also continued to experience strong
sales of our wireless terminal product in our North American region for the
third quarter of 2012. Operators in the United States have initiated wire-line
replacement efforts. Our wireless terminal is a communication hub in the home
into which users can plug conventional handsets and wireless handsets, replacing
traditional wire-line phone service.
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We work very closely with our customers in the development of our products. Our
2012 research and development initiatives are focused on three product areas.
First, we will be introducing a line of self-sustained, affordable wireless
alert products that allow wireless operators to enter the security market with
another 'cut the cord' solution for residential and small business use. Second,
we will be launching a new dual-mode gateway supporting both GSM and CDMA
technologies in one device, making it easier for operators to meet customer
needs while optimizing network usage. This gateway complements our 4G gateway,
which is our number one selling product globally. Finally, we are working with
customers on the design of the next generation of our wire-line replacement
terminal. We expect to begin initial shipments of these products in the late
2012, early 2013 timeframe.
Revenues for the nine months ended September 30, 2012 were $43.9 million, an
increase of 18% from the $37.2 million generated in the same period last year.
The increased revenue was mainly attributable to increased revenue from Europe,
North America and MEA offset by reduced revenue from Latin America. We saw
strong sales of our gateway devices and our wire-line replacement terminals. We
also had significant shipments to a new customer in MEA. Sales to Latin America
declined compared to the same period last year, as a result of intense price
competition from Chinese competitors. Revenues by geographic region based on
customer locations were as follows:
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2012 2011 2012 2011
Revenues
Europe $ 8,324,425 $ 4,593,700 $ 22,115,807 $ 17,997,081
North America (United States
and Canada) 6,897,638 8,687,454 16,634,320 10,836,210
MEA (Middle East and Africa) 797,330 2,865,900 4,226,330 2,987,936
Latin America 308,250 914,810 780,550 5,224,565
Asia 0 0 134,415 192,988
Total revenues $ 16,327,643 $ 17,061,864 $ 43,891,422 $ 37,238,780
Gross margin was 26% in the first nine months of 2012 compared to 23% in the
first nine months of 2011. Gross margin improved principally as a result of the
introduction of our new products and a change in product mix.
Operating expenses were $7.5 million for the nine months ended September 30,
2012, compared to $7.4 million in the same period last year.
We generated net income of $3.5 million for the nine months ended September 30,
2012, compared to $81,000 for the same period last year.
In addition to our continued profitable operations, we entered into two
transactions during the quarter ended September 30, 2012, that resulted in a
$5.3 million improvement in our working capital position and reduced the
effective interest rates on advances under a new credit facility to 6% to 7% at
current market rates, down from 16% to 24%.
On September 7, 2012, we entered into a Payment Confirmation Agreement with
Wistron Neweb Corporation ("WNC"), which settled all disputes with WNC arising
out of our prior manufacturing relationship, including restructure of an $8.2
million account payable which was past due. In connection with the Payment
Confirmation Agreement, we paid WNC $458,000 in cash and issued WNC a Promissory
Note with a face value of $7.7 million and a discounted value of $6.9 million.
The Promissory Note obligates us to make payments of $50,000 per month, plus an
additional payment on or before March 31 each year in the amount, if any, that
would make the total of all payments to WNC for the prior year equal to 50% of
our net income for that year. The issuance of the Promissory Note had a $5.3
million positive impact on our working capital at September 30, 2012, as that
amount was reclassified from a current liability to a long-term liability. This
Note does not bear interest, and we recognized a one-time note payable discount
of $791,000 which boosted our net income for the three and nine months ended
September 30, 2012. The restructuring of the WNC account payable combined with
our continued profitable operations has improved our working capital position
from a negative $11.8 million at December 31, 2012 to a negative $2.8 million at
September 30, 2012.
On September 25, 2012, we entered into a one year $7.0 million credit facility
with Silicon Valley Bank ("SVB"). The facility is a working capital based
revolving line of credit where SVB, in its discretion, will make advances in the
amount of up to 80% of the value of (i) eligible accounts receivable and
(ii) eligible purchase orders for inventory in transit to a customer. For each
account receivable or purchase order financed, we pay interest based on SVB's
prime rate, plus a specified margin, multiplied by the face amount of the
eligible account receivable or purchase order. For eligible accounts receivable,
the specified margin is 1.0% and for eligible purchase orders the margin is
1.4%. However, if our EBITDA for any trailing six month period falls below $1.0
million, the specified margins increase to 3.0% and 3.2%, respectively. At
September 30, 2012, we had borrowings of $3.4 million under this credit facility
and the effective interest rate on the borrowed funds was 6% per annum.
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Outlook
In order to maintain profitability under our current business model, we need to
generate revenues of approximately $50 to $60 million annually with gross
margins in the mid to low twenty percent range. Our primary goal for 2012 is to
achieve consistent quarterly profitability and year over year revenue growth.
The economic and competitive climate remains challenging and price competition
in our markets remains intense. We anticipate continued erosion in the average
selling prices for our products in 2012. This will require us to sell more units
in order to achieve revenue growth or introduce new products with higher
margins. For the full year, we are targeting gross margins in the mid twenty
percent range. Any significant reduction of average selling prices could push
gross margins to the low end of that range.
We expect our overall operating expenses to be consistent with the prior year,
subject to fluctuating certification and test fees from the launch of new
products and variable selling and operating expenses based on revenue levels and
customer and product mix experienced during the year. We believe that our
operations can support higher revenues, without significant increases to
operating expenses and our goal is to scale our revenues and continue to reduce
operating expenses as a percentage of revenue.
Critical Accounting Policies and Estimates
Management believes that the most critical accounting policies important to
understanding our financial statements and financial condition are our policies
concerning Revenue Recognition, Accounts Receivable, Inventories, and Warranty
Costs.
Revenue Recognition
Our Revenue Recognition policy calls for us to recognize revenue on sales when
ownership and title pass to the customer. We generally sell our products either
FCA (Free Carrier) shipping port, or DDU (Delivery Duty Unpaid). When we ship
FCA shipping port, title and risk of loss pass to the customer when the product
is received by the customer's freight forwarder. When we ship DDU, title and
risk of loss pass when the product is received at the customer's warehouse.
Because our sales are characterized by large orders, the timing of when the
revenue is recognized may have a significant impact on results of operations.
Accounts Receivable-Allowance for Doubtful Accounts
Under our Accounts Receivable policy, our management exercises judgment in
establishing allowances for doubtful accounts based on information collected
from individual customers. We have traditionally experienced high customer
concentration, resulting in large accounts receivable from individual customers.
The determination of the credit worthiness of these customers and whether or not
an allowance is appropriate could have a significant impact on our results of
operations.
Inventories-Provision for Excess and Obsolete
Inventories are stated at the lower of cost (first-in, first-out method) or
market. We review the components of our inventory and our inventory purchase
commitments on a regular basis for excess and obsolete inventory based on
estimated future usage and sales. Write-downs in inventory value or losses on
inventory purchase commitments depend on various items, including factors
related to customer demand, economic and competitive conditions, and
technological advances or new product introductions by us or our customers that
vary from our current expectations. The determination of the provision for
excess and obsolete inventories requires significant management judgment and can
have a significant impact on our results of operations.
Warranty Costs
Our standard terms of sale provide a limited warranty, generally for a period of
one to two years from purchase or initialization of the product. We establish a
warranty reserve based on management's estimates of anticipated service and
replacement costs over the term of outstanding warranties. Management's
estimates are based on historical warranty experience. However, we frequently
introduce new products to the market. In addition, our products are purchased
from third party design and manufacturing firms, or are comprised of components
acquired from third party suppliers, which are manufactured and assembled to our
specifications by contract manufacturers. As a result, we may have limited
experience from which to establish an estimate for an applicable warranty
reserve for a specific product. Any significant change in warranty expense may
have a substantial impact on our results of operations.
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Accounting Policies and Estimates
Please see "Note 3-Significant Accounting Policies" to our financial statements
for a more complete discussion of the accounting policies we have identified as
the most important to an understanding of our current financial condition and
results of operations.
The preparation of financial statements in conformity with United States
generally accepted accounting principles, or "GAAP," requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management routinely makes judgments and estimates
about the effects of matters that are inherently uncertain. As the number of
variables and assumptions affecting the probable future resolution of the
uncertainties increase, these judgments become even more subjective and complex.
Quarterly Results of Operations
The following table sets forth, for the periods indicated, the unaudited
consolidated statements of operations data (in thousands) and the percentages of
total revenues thereto.
Three months ended Three months ended Nine months ended Nine months ended
($ in thousands) September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011
Revenues $ 16,327 100.00 % $ 17,062 100.00 % $ 43,891 100.00 % $ 37,239 100.00 %
Cost of goods sold
11,802 72.28 12,888 75.53 32,559 74.18 28,650 76.94
Gross margin 4,525 27.72 4,174 24.47 11,332 25.82 8,589 23.06
Operating expenses:
Research and development 706 4.32 513 3.00 1,777 4.05 1,518 4.08
Sales and marketing
880 5.39 987 5.79 2,266 5.16 2,981 8.00
General and administrative
1,292 7.91 945 5.54 3,476 7.92 2,893 7.77
Total operating expenses 2,878 17.62 2,445 14.33 7,519 17.13 7,392 19.85
Operating income 1,647 10.10 1,729 10.14 3,813 8.69 1,197 3.21
Other income (expense):
Interest expense, net (204 ) (1.25 ) (422 ) (2.48 ) (930 ) (2.12 ) (1,116 ) (2.99 )
Note payable discount 791 4.84 0 0.00 791 1.80 0 0.00
Total other income (expense) 587 3.59 (422 ) (2.48 ) (139 ) (0.32 ) (1,116 ) (2.99 )
Income before income tax provision 2,234 13.69 1,307 7.66 3,674 8.37 81 0.22
Income tax provision 112 0.69 0 0.00 184 0.42 0 0.00
Net income $ 2,122 13.00 % $ 1,307 7.66 % $ 3,490 7.95 % $ 81 0.22 %
Comparison of the Three and Nine months Ended September 30, 2012 to the Three
and Nine months Ended September 30, 2011
Revenues
We sell our products directly and through third party distributors to
telecommunications operators worldwide. Revenues are recorded at the prices
charged to the telecommunications operators or, in the case of sales to
distributors, at the prices to the distributors. Our products are sold on a
fixed price-per-unit basis.
All of our sales are based on purchase orders or other short-term arrangements.
We negotiate the pricing of our products based on the quantity and the length of
the time for which deliveries are to be made. For orders involving a significant
number of units, or which involve deliveries over a long period of time, we
typically receive rolling forecasts or a predetermined quantity for a fixed
period of time from our customers, which in turn allows us to forecast internal
volume and component requirements for manufacturing. In order to minimize our
collection risks, we attempt to sell to our international customers under
guaranteed letters of credit or open terms secured by credit insurance. At
times, we extend credit based on our evaluation of the customer's financial
condition and payment history. In order to minimize foreign exchange risk, we
have made all sales to date in United States dollars.
For the three months ended September 30, 2012, which we refer to as Q3 2012,
revenues were $16.3 million compared to $17.1 million for the three months ended
September 30, 2011, which we refer to as Q3 2011, representing a 4% decrease.
This decrease is mainly attributable to the general nature of quarterly revenue
activity in our business, as revenue can often fluctuate from quarter to quarter
based on our current reliance on large-volume orders from only a few customers.
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For the nine months ended September 30, 2012, revenues were $43.9 million
compared to $37.2 million for the nine months ended September 30, 2011,
representing an 18% increase. The year over year increase is mainly attributable
to overall strong demand for our gateway products and wire-line replacement
terminals in our Europe, North America, and MEA markets. These increases were
partially offset by a decrease in sales from our Latin America region where we
have lost market share due to intense price competition from larger Chinese
competitors.
In Q3 2012, our revenues were derived principally from three customers, which
together represented 86% of revenues, and individually represented 39%, 37% and
10% of revenues. In Q3 2011, our revenues were derived principally from four
customers, which together represented 90% of revenues, and individually
represented 47%,16%,16% and 11% of revenues. Our revenues for Q3 2012 consisted
of 45% for voice products and 55% for data products. For Q3 2011, our revenues
consisted of 56% for voice products and 44% for data products.
For the nine months ended September 30, 2012, our revenues were derived
principally from three customers, which together represented 79% of revenues,
and individually represented 32%, 32% and 15% of revenues. For the nine months
ended September 30, 2011, our revenues were derived principally from four
customers, which together represented 72% of revenues, and individually
represented 22%, 21%, 19% and 10% of revenues. Our revenues for the nine months
ended September 30, 2012, consisted of 40% for voice products and 60% for data
products. For the nine months ended September 30, 2011, our revenues consisted
of 40% for voice products and 60% for data products.
Our objective is to increase revenues through maintaining close relationships
with our core customers and helping them expand their markets. At the same time,
we are actively seeking new customer opportunities where we have the ability to
deliver products that address unique customer requirements with the potential to
lead to significant sales.
Cost of Goods Sold
Cost of goods sold consists of direct materials, manufacturing expense, freight
expense, warranty expense, royalty fees, and the cost of obsolete inventory. The
wireless communications industry has been characterized by declining average
selling prices. We expect this trend to continue. We actively manage our costs
of goods sold through the following initiatives: outsourcing manufacturing to
larger contract manufacturers who can achieve economies of scale; increasing our
purchasing power through increased volume; using standardized parts across our
product lines; contracting with manufacturing partners in low cost regions;
engineering our products with new technologies and expertise to decrease the
number of components; and increasing reliance on software based applications
rather than hardware.
For Q3 2012, cost of goods sold was $11.8 million compared to $12.9 million for
Q3 2011, a decrease of 8%. The decrease is primarily attributable to the 4%
revenue decrease from the comparative period and improved gross margins.
For the nine months ended September 30, 2012, cost of goods sold was $32.6
million compared to $28.7 million for the nine months ended September 30, 2011,
an increase of 14%. The increase is primarily attributable to the 18% revenue
increase from the comparative period partially offset by improved gross margins.
Gross Margin
For Q3 2012, gross margin as a percentage of revenues was 28% compared to 24%
for Q3 2011. For the nine months ended September 30, 2012, gross margin as a
percentage of revenues was 26% compared to 23% for the nine months ended
September 30, 2011. These margin differences are mainly reflective of product
and customer mix in the comparable periods.
We are targeting gross margins in the mid-twenties for the full year 2012.
However, intense price competition and aggressive new product releases by our
competitors could put additional pressure on gross margins.
Research and Development
Research and development expenses consist primarily of salaries and related
payroll expenses for engineering personnel, facility expenses, employee travel,
contract engineering fees, prototype development costs, test fees and
depreciation of developmental test equipment for software, mechanical and
hardware product development. We expense research and development costs as they
are incurred.
We conduct our research and development activities through a combination of
internal and external development initiatives. Our third party development
agreements generally provide for one of two types of payments. In some
agreements we pay a non-recurring engineering fee for the development services
against performance of specified milestones. Under these agreements, we expense
the non-recurring engineering fee to research and development expense as it is
incurred. In other agreements, we pay a royalty to the third party developer in
connection with product sales. This may be in addition to, or in lieu of, any
non-recurring engineering fee. In these cases, the royalty payments are charged
to cost of goods sold in the period in which the revenue from the sale of the
product is recognized.
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For Q3 2012, research and development was $706,000 compared to $513,000 for Q3
2011, an increase of 38%. As a percentage of revenues, research and development
for Q3 2012 increased to 4% from 3% in Q3 2011. For the nine months ended
September 30, 2012, research and development was $1.8 million compared to $1.5
million for the nine months ended September 30, 2011, an increase of 17%. As a
percentage of revenues, research and development was 4% for the nine months
ended September 30, 2012 and 2011. The increases from both periods were mainly
attributable to increased bonus expense. For the three and nine months ended
September 31, 2012, we accrued bonus expense of $121,000 and $252,000,
respectively. For the three and nine months ended September 31, 2011, we did not
accrue any bonus expense since we had not achieved our internal milestone goals
on profitability.
We anticipate that 2012 research and development expenses will remain at current
levels, with the exception of fluctuating certification and test fees from the
launch of new products. For 2012, we are developing a new product line of
security alert devices, a dual-mode gateway product for our Europe market, and
the next generation of our wire-line replacement terminals.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related payroll
expenses for sales, marketing, and technical sales personnel. Other costs
include facility expenses, employee travel, internal and external commissions,
and trade show expense.
For Q3 2012, sales and marketing expenses were $880,000 compared to $987,000 for
Q3 2011, a decrease of 11%. As a percentage of revenue, sales and marketing
expenses were 5% in Q3 2012 compared to 6% in Q3 2011. For the nine months ended
September 30, 2012, sales and marketing expenses were $2.3 million compared to
$3.0 million for the nine months ended September 30, 2011, a decrease of 24%. As
a percentage of revenue, sales and marketing expenses were 5% for the nine
months ended September 30, 2012 compared to 8% for the nine months ended
September 30, 2011. These decreases were mainly attributable to decreased
revenues from our Latin America region where we paid third party sales
commissions on our sales in Venezuela in 2011.
We expect sales and marketing expenses to remain stable in 2012, with the
exception of fluctuating selling expenses based on the revenue levels and the
customer mix experienced during the year.
General and Administrative
General and administrative expenses consist primarily of salaries and related
payroll expenses for executive and operational management, finance, human
resources, information technology, and administrative personnel. Other costs
include facility expenses, employee travel, bank and financing fees, insurance,
legal expense, collection fees, accounting, consulting and professional service
providers, board of director expense, stockholder relations, amortization of
intangible assets, depreciation expense of software and other fixed assets, and
bad debt expense.
For Q3 2012, general and administration expenses were $1.3 million compared to
$1.0 million for Q3 2011, an increase of 37%. For the nine months ended
September 30, 2012, general and administration expenses were $3.5 million
compared to $2.9 million for the nine months ended September 30, 2011, an
increase of 20%. The increases from both periods were mainly attributable to
increased bonus expense. For the three and nine months ended September 31, 2012,
we accrued bonus expense of $235,000 and $602,000, respectively. For the three
and nine months ended September 31, 2011, we did not accrue any bonus expenses
since we had not achieved our internal milestone goals on profitability. As a
percentage of revenue, general and administration expenses for Q3 2012 were 8%
compared to 6% for Q3 2011. As a percentage of revenue, general and
administration expenses for the nine months ended September 30, 2012 were 8%
compared to 8% for the nine months ended September 30, 2011.
We expect selling, general and administrative expenses to remain stable at the
current 2012 levels.
Interest Expense, net
For Q3 2012, net interest expense was $204,000 compared to $422,000 for Q3 2011.
For the nine months ended September 30, 2012, net interest expense was $930,000
compared to $1.1 million for the nine months ended September 30, 2011.
Substantially all of the expense resulted from interest expense associated with
borrowings under our credit facilities and financing activities.
We expect our outstanding loan balances to fluctuate over the next several
quarters based on volume and timing of customer orders, but at greatly reduced
interest rates. Under our new credit facility, effective interest rates on
borrowed funds are 6% to 7% at current market rates, a substantial reduction
from the 16% to 24% we were paying under our prior factoring arrangement.
Note Payable Discount
On September 7, 2012, we issued a $7,714,000 Promissory Note to Wistron Neweb
Corporation (WNC) in connection with a payment and settlement agreement. This
Note does not bear interest, and we have discounted the Note based on an imputed
interest rate of 6.25% over an estimated repayment term of approximately four
years resulting in a note payable discount of $791,000.
For the three and nine months ended September 30, 2012, we recorded a gain of
$791,000 to other income. For the three or nine months ended September 30, 2011,
there was no activity in other income.
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Provision for Income Taxes
For the three and nine months ended September 30, 2012, we recorded income tax
provisions of $112,000 and $184,000, respectively. No income tax provisions were
recorded for the three or nine months ended September 30, 2011. Currently, we
have established a full reserve against all deferred tax assets.
Net Income
For Q3 2012, net income was $2.1 million compared to net income of $1.3 million
for Q3 2011. For the nine months ended September 30, 2012, net income was $3.5
million compared to net income of $81,000 for the nine months ended
September 30, 2011.
Liquidity and Capital Resources
Liquidity
At September 30, 2012, cash and cash equivalents was $1.6 million compared to
$850,000 at December 31, 2011. In addition, at September 30, 2012, accounts
receivable were $11.7 million compared to $8.9 million at December 31, 2011. At
September 30, 2012, we had negative working capital of $2.8 million compared to
negative working capital of $11.8 million at December 31, 2011. At September 30,
2012, we had bank financings of $5.0 million compared to $6.1 million at
December 31, 2011. At September 30, 2012, we had a note payable with a face
value of $7.7 million and a discounted value of $6.9 million compared to no note
payable at December 31, 2011.
For the nine month period ended September 30, 2012, we generated $2.1 million of
cash from operations which was derived from the cash net income of $2.9 million
(net income adjusted for depreciation and amortization expense, stock based
compensation, recoveries from losses on accounts receivable, and gain from note
discount based on imputed interest) less changes in operating assets and
liabilities of $774,000. During the nine months ended September 30, 2012, we
consumed $201,000 of cash from investing activities, and as of September 30,
2012, we did not have any significant commitments for capital expenditures.
Financing activities consumed $1.1 million of cash during the nine months ended
September 30, 2012, from the net financings of accounts receivable.
Bank Financing
We have two bank financing arrangements.
In September 2012, we entered into a one year $7.0 million credit facility with
Silicon Valley Bank ("SVB"). The facility is a working capital based revolving
line of credit where SVB, in its discretion, will make advances in the amount of
up to 80% of the value of (i) eligible accounts receivable and (ii) eligible
purchase orders for inventory in transit to a customer. For each account
receivable or purchase order financed, we pay interest based on SVB's prime
rate, plus a specified margin, multiplied by the face amount of the eligible
account receivable or purchase order. For eligible accounts receivable, the
specified margin is 1.0% and for eligible purchase orders the margin is 1.4%.
However, if our EBITDA for any trailing six month period falls below $1.0
million, the specified margins increase to 3.0% and 3.2%, respectively. At
September 30, 2012, we had borrowings of $3.4 million under this credit facility
and the effective interest rate on the borrowed funds was 6% per annum.
In April 2012, we entered into a one year term loan with a commercial bank in
China, totaling 10,000,000 Chinese Yuan (equivalent to $1.6 million at
September 30, 2012). This loan bears interest based on the People's Bank of
China twelve month adjustable rate, which was 7% per annum at September 30,
2012.
Credit Terms with Manufacturers
In addition to credit facilities, we rely on open credit terms with our
manufacturing partners to help fund our working capital requirements. Generally,
we order products from our contract manufacturers only upon receipt of a
purchase order from a customer. Often, we can finance our accounts receivable
and use the proceeds from that borrowing to pay our manufacturers. However, our
contract manufacturers order certain parts with long lead times based on rolling
sales forecasts that we provide. If our forecasts are inaccurate and our
contract manufacturers do not use the long lead time parts, or if we have a
customer notify us of their cancellation or inability to pay for a purchase
order, our contract manufacturers have the right, after a specified period of
time, to deliver the parts or finished goods inventory to us and demand payment.
New manufacturers generally require partial or full payments on initial orders
before extending substantial credit to us. Once we establish a payment history
with a manufacturer, we request open credit terms. We rely on those open credit
terms to support our working capital requirements and reduce our borrowing
costs. If our contract manufacturers restrict their credit terms with us, we may
need to identify alternative manufacturers or secure additional capital in order
to finance the production of our products.
Based on our current operating projections, we expect to generate positive cash
from operations over the next twelve month period, and believe that our existing
capital resources will be sufficient to fund our working capital needs during
that time. However, if we experience a substantial decline in product sales or
our bank lenders or contract manufacturers refuse to extent us credit under
their current terms, we may not generate sufficient cash to cover our operating
expenses. If needed, we intend to secure additional working capital through the
sale of debt or equity securities. No arrangements or commitments for any such
financings are in place at this time, and we cannot give any assurances about
the availability or terms of any future financing.
-20---------------------------------------------------------------------------------
Table of Contents
Recent Accounting Pronouncements
Please see the section entitled "Recent Accounting Pronouncements" contained in
"Note 3 - Significant Accounting Policies" to our financial statements included
in Part I-Item 1. Financial Statements of this report
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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