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Liquidity And Going Concern
12 Months Ended
Dec. 31, 2011
Liquidity And Going Concern [Abstract]  
Liquidity And Going Concern

2. LIQUIDITY AND GOING CONCERN

Although we generated net income of $1.1 million for the year ended December 31, 2011, we have experienced significant net losses to date from operations. At December 31, 2011, we had cash and cash equivalents of $850,000, negative working capital of $11.8 million, and stockholders' deficit of $11.6 million.

We incurred losses in 2009 and 2010 which reduced our working capital position from $241,000 at December 31, 2008 to a deficit of $11.8 million at December 31, 2011. While we generated net income in the year ended December 31, 2011 and improved our working capital position, because of our limited cash position, any significant reduction in cash flow from operations could have an impact on our ability to fund operations.

Other than cash provided by operations, our primary source of working capital is borrowings which are secured by our accounts receivable. We rely on a combination of financing our accounts receivable and open credit terms from our manufacturing partners to facilitate our working capital requirements.

Our accounts receivable financing arrangements have generally taken one of two forms. For customers that qualify for credit insurance, we can factor their accounts receivable to financial institutions. For other accounts, we generally require the customer or distributor to provide a letter of credit to secure the payment obligation under the purchase order. In those instances, we can immediately discount and sell the letter of credit, generally back to the issuing bank.

We currently maintain accounts receivable credit facilities that permit us to factor, on a limited recourse basis, certain credit insured accounts receivable. The lenders have the discretion to accept or reject any individual account receivable for factoring. For accepted accounts, the lenders advance us 75% to 80% of the amount of the receivable. The amounts advanced bear interest at rates ranging from 7% to 28% per annum and are secured by a lien on all of our receivables. We repay the amounts borrowed under the facilities as the underlying accounts receivable are paid. At December 31, 2011, we had borrowings of $4.5 million under these credit facilities. The lenders have indicated that they will allow us to borrow up to $14.0 million under these facilities, 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 December 31, 2011). This loan bears interest based on the People's Bank of China twelve month adjustable rate, which was 7% per annum at December 31, 2011.

 

In addition to credit facilities, we have relied on open credit terms with our manufacturing partners to fund our operating requirements. We are currently past due in payments to one of our contract manufacturers. At December 31, 2011, we owed this manufacturer $8.8 million of which $7.2 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 now 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. A change in open credit terms from this contract manufacturer, or any change in credit terms from our other contract manufacturers, could disrupt our ability to accept and fulfill purchase orders and negatively impact our results of operations.

We are also working with contract manufacturers where we do not have a substantial payment history. These manufacturers currently require payment of some portion of the purchase price upon order, with the balance due on open credit terms or upon shipment. In some instances we are using purchase order financing to provide the capital for these orders. We are evaluating additional manufacturing and financing arrangements to increase our available working capital and to allow us to grow our business without the sale of additional debt or equity securities.

If we can grow our business and secure products from our contract manufacturers in sufficient quantities, we believe that we will be able to generate cash from operations and will be able to secure accounts receivable and other financing to provide sufficient cash to finance our operations. However, if we fail to generate sufficient product sales, we will 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 financing are in place at this time, and we cannot give any assurances about the availability or terms of any future financing.

Because of our historic net losses and negative working capital position, our independent auditors, in their report on our financial statements for the year ended December 31, 2011, expressed substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.