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AXESSTEL INC - 10-Q - 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 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 Poland, Scandinavia, and the United States.
Recent Developments
We spent the last two years transitioning our business to address challenges
imposed by the global economic recession and increased competition from large
competitors based in China. We undertook a program to re-design our products to
be more price competitive, increase sales in markets that support better
margins, and aggressively reduce operating costs. These initiatives began
producing results in the second half of 2011. During that period we achieved
record profitability for any six month period in our company's history. Through
a combination of the launch of our new line of gateway products, increased
revenues from sales of our wire-line replacement terminals in North America, and
tight control over operating expenses, we generated net income of $1.1 million
for fiscal 2011.
Our industry has been characterized by declining average selling prices year
over year. This trend accelerated with the economic recession beginning in 2009.
In response to these challenges, we undertook efforts to reduce our costs of
goods and to sell more aggressively into markets with higher profit margins. We
established an operating subsidiary in China in the beginning of 2010 to manage
our supply chain and manufacturing operations. Through that entity, we
established relationships with contract manufacturers that assisted us in the
development of a re-engineered lower cost product line. At the same time, we
focused our new product development initiatives on addressing specific
requirements of key customers in our core markets, ensuring us of market demand
for new products, strengthening our relationships with our customers, and in
some instances, allowing us to be the sole supplier of certain products to our
customers. We began delivering our new line of products in 2011.
We also took steps beginning in 2009 to introduce our products into carriers in
the North American market. During 2010 we were approached by Sprint in the
United States to design an OEM version of our terminal product that could be
sold as part of a "wire-line replacement" strategy. The terminal acts as a
communication hub in the home where conventional handsets and wireless handsets
can be plugged into our wireless terminal, as opposed to connecting to the fixed
line provided by the local telephone operator. We are manufacturing the terminal
to Sprint's specifications and the terminal is sold under the Sprint name.
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We generated our first significant revenues from our wire-line replacement
terminals in the second half of 2011, receiving orders and completing sales of
$14.4 million. Sales for the three months ended March 31, 2012 were lower than
this rate, primarily as a result of the timing of orders. We have significant
orders for our Sprint terminal product for delivery in both the second and third
quarters as a result of Sprint's recently increased marketing efforts for its
nationwide "Sprint Phone Connect" wire-line replacement program. We are
currently working with Sprint engineers on the next generation of the terminal
product which is expected to be released in the second half of 2012.
Revenues for the three months ended March 31, 2012 were $12.0 million, a
decrease of 5% from the $12.6 million generated in the same period last year.
The decreased revenue was mainly attributable to reduced revenue from Latin
America. We had strong sales out of Venezuela in the three months ended March
31, 2011, but our sales in this region declined after the first quarter of 2011
as a result of intense price competition from Chinese competitors. We also
experienced decreased demand in Europe during the first quarter of 2012. These
decreases were partially offset by continued shipments of our wire-line
replacement terminals in North America and shipments to a new significant
customer in MEA. Revenues by geographic region based on customer locations were
as follows:
Three Months Ended
March 31, March 31,
2012 2011
Revenues
Europe $ 6,650,010 $ 7,994,715
North America (United States and Canada) 3,962,776 795,268
MEA 929,000 30,036
Latin America 367,600 3,659,403
Asia 134,415 157,608
Total revenues $ 12,043,801 $ 12,637,030
We experienced near record gross margins in the quarter ended March 31, 2012.
Gross margin improved principally as a result of a change in product mix. Gross
margin was 26% in the first quarter of 2011 compared to 20% in 2011.
Operating expenses were $2.3 million for the quarter ended March 31, 2012,
compared to $2.8 million in the same period last year. The decrease in operating
expenses was primarily related to the decrease in sales commissions. We had a
larger order to Venezuela in the first quarter of 2011 which generated
significant commissions to third party agents. We did not have a similar order
in 2012.
Despite our lower revenue, the combination of improved gross margins, and tight
control over operating expenses resulted in a substantial improvement in net
income. We generated net income of $472,000 for the quarter ended March 31,
2012, compared to a net loss of $539,000 for the same period last year.
At March 31, 2012, we had cash and cash equivalents of $1.9 million and negative
working capital of $11.3 million. The net income we have generated since the
second half of 2011 is beginning to improve our capital position. Nonetheless,
we do not currently have significant cash reserves or credit facilities
available to us. If we were to incur a significant operating loss, we may not
generate sufficient capital to fund our operations. In addition, we rely on a
combination of open credit terms from our manufacturers and the ability to
finance our accounts receivable to minimize our working capital requirements. If
our contract manufacturers restrict our credit terms or we are unable to secure
financing for our accounts receivables on terms acceptable to us, it would have
a significant impact on our ability to fund our operations.
Outlook
In order to achieve 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. Despite lower revenues in the
first quarter of 2012, we were able to maintain profitability because of our
strong gross margins. 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. For the full year, we are continuing to
target gross margins in the mid to low twenty percent range. Any significant
reduction of average selling prices could push gross margins to the low end of
that range.
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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. We are also attempting to reduce
our cost of borrowing in 2012 in an effort to improve profitability.
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 operator or, in the case of sales to
distributors, at the price to the distributor. Our products are sold on a fixed
price-per-unit basis. The telecommunications operators resell our products to
end users as part of the end users' service activation.
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. In order to minimize foreign exchange risk, we have made all sales to
date in United States dollars.
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, particularly over the past three years. 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.
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.
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.
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.
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.
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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 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.
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 consolidated
statements of operations data (in thousands) and the percentages of total
revenues thereto.
Three Months Ended Three Months Ended
($ in thousands) March 31, 2012 March 31, 2011
Revenues $ 12,032 100.00 % $ 12,637 100.00 %
Cost of goods sold 8,855 73.60 10,090 79.84
Gross margin 3,177 26.40 2,547 20.16
Operating expenses:
Research and development 576 4.79 492 3.89
Sales and marketing 738 6.13 1,301 10.30
General and administrative 1,002 8.33 964 7.63
Total operating expenses 2,316 19.25 2,757 21.82
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Three months ended Three months ended
($ in thousands) March 31, 2012 March 31, 2011
Operating income (loss) 861 7.15 (210 ) (1.66 )
Interest expense, net 364 3.02 329 2.60
Income (loss) before income tax provision 497 4.13 (539 ) (4.26 )
Income tax provision 25 0.21 0 0.00
Net income (loss) $ 472 3.92 % $ (539 ) (4.26 )%
Comparison of the Three Months Ended March 31, 2012 to the Three Months Ended
March 31, 2011
General
For the three months ended March 31, 2012, which we refer to as Q1 2012,
revenues were $12.0 million with net income of $472,000. For the three months
ended March 31, 2011, which we refer to as Q1 2011, we recorded revenue of $12.6
million with a net loss of $539,000. This represents an improvement to net
income of $1.0 million over the comparable period, and highlights the continued
success of transitioning our business over the past two years and the resulting
impact to our business model. During these two years, we transitioned our
business to address challenges imposed by the global economic recession and
increased competition from large competitors based in China. We undertook a
program to re-design our products to be more price competitive, increase sales
in markets that support better margins, and aggressively reduce operating costs.
These initiatives began producing results in the second half of 2011, allowing
us to achieve record profitability for any six month period in our company's
history, and Q1 2012 marks our third straight quarter of profitability since
completing the transition.
Based on our transition to a lower cost product line, combined with the
successful launch in 2011 of key new products such as our wire-line replacement
terminals to a Tier 1 carrier in North America and our 4G gateway devices into
Europe, we expect to achieve consistent quarterly profitability in 2012 and
experience year over year revenue growth. At the same time, we expect our
quarterly revenue and margin performance to vary as a result of our customer
concentration, product mix and timing of large customer orders. In fact, we
experienced lower revenue in Q1 2012 as compared to revenues experienced in the
third and fourth quarters of 2011, mainly attributable to the timing of customer
orders. Looking forward in 2012, we have significant orders for our Sprint
terminal product for delivery in the second and third quarters. We also
anticipate strong revenue from Europe, as two of our primary customers there
have launched our new 4G EV-DO Rev. B Wi-Fi gateway with VOIP capability into
their markets. In addition, we are working on the development of the next
generation of our wireless terminal with Sprint, a dual-mode gateway device for
our Europe market, and a security alert device for our North America market that
we expect to launch in the second half of 2012.
Revenues
For Q1 2012, revenues were $12.0 million compared to $12.6 million for Q1 2011,
representing a 5% decrease. The decrease in revenues is mainly attributable to a
decrease in sales from our Latin America region where we have lost market share
due to intense price competition from larger Chinese competitors, reducing from
$3.7 million in Q1 2011 to $368,000 in Q1 2012, and lower sales from Europe,
principally due to a decline in the average selling prices for our products.
These decreases were partially offset by shipments of our wire-line replacement
terminals in North America and increased demand for our low cost products in
MEA.
In Q1 2012, our revenues were derived principally from four customers, which
together represented 88% of revenues, and individually represented 34%, 21%, 20%
and 13% of revenues, respectively. In Q1 2011, our revenues were derived
principally from three customers, which together represented 83% of revenues,
and individually represented 31%, 26% and 26% of revenues, respectively. Our
revenues for Q1 2012 consisted of 25% for voice products and 75% for data
products. For Q1 2011, our revenues consisted of 30% for voice products and 70%
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
For Q1 2012, cost of goods sold was $8.9 million compared to $10.1 million for
Q1 2011, a decrease of 12%. This decrease is mainly attributable to the 5%
decrease of revenues from the comparative periods combined with reductions in
the average cost of our products.
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Gross Margin
For Q1 2012, gross margin as a percentage of revenues was 26% compared to 20%
for Q1 2011. The increased gross margin from the comparative period was mainly
attributable to product mix, and the roll-out of our newer product lines
including our low cost gateway products, wire-line replacement terminals and 4G
gateway device.
We do not expect any significant inventory write offs or non-recurring
transactions in 2012. We are targeting gross margins from the mid-twenties to
the low twenties. However, intense price competition and aggressive new product
releases by our competitors could put additional pressure on gross margins.
Research and Development
For Q1 2012, research and development expenses were $576,000 compared to
$492,000 for Q1 2011, an increase of 17%. As a percentage of revenues, research
and development expenses for Q1 2012 were 5% compared to 4% for Q1 2011. The
increase from the comparable period is mainly attributable by increased
development fees associated with the completion of our 4G gateway device.
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 working on the development of the next
generation of our Sprint-branded wireless terminal, a dual-mode gateway device
for our Europe market, and a security alert device for our North America market.
Sales and Marketing
For Q1 2012, sales and marketing expenses were $738,000 compared to $1.3 million
for Q1 2011, a decrease of 43%. This decrease was mainly attributable to
decreased revenues from our Latin America region where we paid third party sales
commissions on our sales in Venezuela, which comprised a substantial portion of
our Q1 2011 revenue. As a percentage of revenue, sales and marketing expenses
were 6% in Q1 2012 compared to 10% in Q1 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
For Q1 2012, general and administrative expenses were $1.0 million compared to
$964,000 for Q1 2011, an increase of 4%. As a percentage of revenue, general and
administration expenses were 8% in Q1 2012 and Q1 2011.
We expect general and administrative expenses to remain stable in 2012.
Interest Expense, net
For Q1 2012, interest expense was a net expense of $364,000, compared to a net
expense of $329,000 for Q1 2011. Substantially all of the expense resulted from
interest expense associated with borrowings under our credit facilities and
financing activities.
Based on our improving operating performance, we expect to reduce our cost of
capital on our accounts receivable credit facility and reduce interest expense
on our borrowings during 2012.
Provision for Income Taxes
For Q1 2012, we recorded an income tax provision of $25,000 for foreign income
taxes. For Q1 2011, no income tax provisions were recorded. Currently, we have
established a full reserve against all deferred tax assets.
Net Income (Loss)
For Q1 2012, net income was $472,000 compared to net loss of $539,000 for Q1
2011.
Liquidity and Capital Resources
Liquidity
At March 31, 2012, cash and cash equivalents was $1.9 million compared to
$850,000 at December 31, 2011. In addition, at March 31, 2012, accounts
receivable were $9.6 million, compared to $8.9 million at December 31, 2011. At
March 31, 2012, we had negative working capital of $11.3 million compared to
negative working capital of $11.8 million at December 31, 2011. At March 31,
2012, we had bank financings of $6.7 million compared to $6.1 million at
December 31, 2011.
For the three month period ended March 31, 2012, we generated $530,000 of cash
from operations which was derived from the cash net income of $490,000 (net
income adjusted for depreciation and amortization expense, stock based
compensation and provision for losses on accounts receivable) and changes in
operating assets and liabilities of $40,000. During the three months ended
March 31, 2012, we consumed $17,000 of cash from investing activities, and as of
March 31, 2012, we did not have any significant commitments for capital
expenditures. Financing activities generated $595,000 of cash during the three
months ended March 31, 2012, from the net financings of accounts receivable.
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Credit Terms with Manufacturers
We rely on a combination of accounts receivable financing and open credit terms
from our manufacturing partners to fund our operating 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.
We do not have any firm commitment from any of our contract manufacturers to
extend open credit terms for any specific period of time. As we have diversified
our manufacturing base, new manufacturers have generally required partial or
full payments on initial orders before extending substantial credit to us. We
expect to rely on credit terms from new contract manufacturers to support our
working capital requirements. 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.
We are currently past due in payments to one of our contract manufacturers. At
March 31, 2012 we owed this manufacturer $8.3 million of which $7.3 million was
past due under our open credit terms with this manufacturer. We entered into an
arrangement with this manufacturer for 2011 in which we agreed to pay for
products (along with a premium to bring down the past due amount) within three
days of shipment. We complied with this agreement during 2011, but it has since
expired. We are continuing to make payments to bring down the amount owed to
this manufacturer, but do not have any formal plan or standstill agreement in
place. We do not currently expect to place significant orders for products with
this manufacturer in 2012.
Bank Financing
We have two bank financing arrangements. We currently maintain an accounts
receivable credit facility that permits us to factor, on a limited recourse
basis, certain credit insured accounts receivable. The lender has the discretion
to accept or reject any individual account receivable for factoring. For
accepted accounts, the lender advances us 80% of the amount of the receivable.
In some cases, the factors advance us funds upon the receipt of a customer
purchase order prior to the product shipment and creation of the receivable.
Borrowings for the amounts advanced bear interest ranging from 18% to 24% per
annum and are secured by a lien on all of our receivables. At March 31, 2012, we
had borrowings of $5.1 million under this credit facility. We repay the amounts
borrowed under this facility as the underlying accounts receivable are paid. The
lender has indicated that it will allow us to borrow up to $11.0 million under
this facility, subject to their approval of the underlying account receivable.
In March 2011, 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 March 31,
2012). This loan bears interest based on the People's Bank of China twelve month
adjustable rate, which was 7% per annum at March 31, 2012. This loan was repaid
in April 2012 and we entered into a new working capital agreement with the same
commercial bank in China on the same basic terms as the previous loan. The term
of the new loan expires on April 10, 2013.
We have approached our existing lenders and others to replace our accounts
receivable credit facilities and enter into new facilities with lower borrowing
costs. In addition, we are actively seeking to identify a source for term debt
that would augment our working capital and reduce our dependency on the accounts
receivable credit facilities. To date, we have received nonbinding indications
of interest to provide funding, subject to the continuation of improved
operating results. Except as described above, we do not have any other bank
financing or credit facilities currently available to us.
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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