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[April 04, 2014]
OXFORD TECHNOLOGIES INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Edgar Glimpses Via Acquire Media NewsEdge) This Annual Report on Form 10-K contains forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995, and information relating to the Company that is based on beliefs of the management of the Company, as well as assumptions made by and information currently available to management of the Company. When used in this Report, the words "estimate," "project," "believe," "could," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview The Company was incorporated in the State of Delaware on March 8, 2002, as a blank check company. On February 12, 2003, the Company acquired 100% of the outstanding securities of Axiom Manufacturing Services Ltd. ("Axiom") with the exchange and issuance of 13,564,002 shares of the Company's common stock (the "Merger"). Although the Company is the legal survivor in the Merger and remains the registrant with the SEC, under generally accepted accounting principles in the United States, the Merger was accounted for as a reverse acquisition, whereby Axiom is considered the "Acquirer" for financial reporting purposes as its stockholders controlled more than 50% of the post transaction combined company. Among other matters, this requires us to present all financial statements, prior historical financial and other information concerning Axiom, and requires a retroactive restatement of Axiom's historical stockholders investment for the equivalent number of shares of common stock received in the Merger. Accordingly, the Company's consolidated financial statements present the results of operations of Axiom for the year ended December 31, 2002, and reflect the acquisition of the Company on February 12, 2003, under the purchase method of accounting. Subsequent to February 12, 2003, the Company's operations reflect the combined operations of the former Oxford and Axiom.
The Company conducts its business through its subsidiary, Axiom Manufacturing Services Limited. Prior to its acquisition by Great Admirer Ltd. in April 2002, Axiom was a wholly owned subsidiary of Aiwa Europe Limited, which was itself a wholly owned subsidiary of the Aiwa Company of Japan. The Aiwa Company of Japan was effectively acquired by Sony Corporation on October 1, 2002. As the sole original equipment manufacturer of Aiwa's own brand products in Europe, Axiom was responsible for producing consumer electronics products, primarily audio and visual products for distribution in the UK, France, Germany, Poland and the Netherlands. In December 2000, due to gradually declining profit margins, Axiom started to provide electronic manufacturing services (EMS) for third parties and in July 2001 production of all Aiwa branded products was terminated, with Axiom becoming solely an EMS provider. On March 31, 2002, Axiom completed its first full year of operations as a contract electronics manufacturing services provider.
On July 29, 2008 the Company acquired 100% of the share capital (1,000 shares) of Axiom M S Limited ("AMS").
In January 2011 the Company transferred all of its 13,564,002 shares in Axiom Manufacturing Services Limited to Axiom MS Limited. In exchange Axiom MS Limited issued 700 shares of its common stock to Oxford Technologies Inc.
- 11 - -------------------------------------------------------------------------------- The Company provides electronics manufacturing services in the business to business or business to industry sectors and to original equipment manufacturers in the following market sectors: O Medical devices O Industrial control equipment O Domestic appliances O Ministry of Defense products O Computer and related products O Testing and instrumentation products As a result of efficiently managing costs and assets, Axiom is able to offer its customers an outsourcing solution that represents a lower total cost of acquisition than that typically provided by the OEM's own manufacturing operation. OEM contracts with Axiom to build their products or to obtain services related to product development and prototyping, volume manufacturing or aftermarket support. In many cases, Axiom builds products that carry the brand name of its customers. Substantially all of Axiom's manufacturing services are provided on a turnkey basis where Axiom purchases customer specific components from suppliers, assembles the components onto printed circuit boards, performs post production testing and provides the customer with production process and test documentation. Axiom also provides manufacturing services on a consignment basis where material is free issued by the customer for Axiom to build into finished printed circuit boards or product. Axiom offers its customers flexible just in time delivery programs which allow product shipments to be closely coordinated with the customers' inventory requirements. Additionally Axiom completes the assembly of final product for its customers by integrating the manufactured printed circuit boards into the customers' finished products.
Results of Operations The following table presents, for the periods indicated, the percentage relationship that certain items of the Company's statements of income bear to revenue and the percentage increase or (decrease) in the dollar amount of such items: Year ended December 31, 2013 2012 US $'000 US $'000 Amount % Amount % % change Net sales 44,235 100% 47,609 100% (7) Cost of sales 37,360 84% 39,649 83% (6) Gross profit 6,875 16% 7,960 17% (14) Operating expenses 6,248 14% 6,377 13% (2) Operating profit 627 1% 1,583 3% (60) Other income and expenses 684 2% 773 2% (12) Income before income taxes 1,311 3% 2,356 5% (44) Income tax benefit 307 1% 183 0% 68 Net income 1,618 4% 2,539 5% (36) The final results show that there was a decrease in income between 2013 and 2012, and a comparable decrease in the gross profit margin.
Comparison of Fiscal Years Ended December 31, 2013 and 2012 Revenues Revenue for the years ending December 31, 2013 and 2012 respectively were $44.2 million $47.6 million which is a decrease of 7%. Revenue in 2012 was higher due to there being a number of one off customer contracts. The number of customers was 39 as of December 31, 2013.
Cost of Sales Cost of sales consists of the material cost of goods sold, direct overhead, direct wages, direct utilities and direct depreciation expense. For the years ending December 31, 2013 and 2012 respectively the Company's cost of sales were - 12 - -------------------------------------------------------------------------------- $37.4 million and $39.6 million respectively. The cost of sales as a percentage of sales is 84% compared to 83% for 2012. The small increase is due to the percentage of wages to sales increasing by 1%.
Operating Expenses Operating expenses consist of selling, general and administrative expenses, plus restructuring costs. For the years ending December 31, 2013 and 2012 respectively these were $6.2 million and $6.4 million. Operating expenses as a percentage of sales is 14% as compared 13% for the prior year. The increase can be attributed to a small increase in the following - training, depreciation, utilities, marketing, computer maintenance and severance costs.
Rental Income For the year ended December 31, 2013 rental income was $0.8 million compared to $0.9 million for the year ended December 31, 2012. The decrease in rental income was due to part of the building being vacated by the current tenant therefore less rental income charged.
Interest Income Interest income remains consistent for both of the years ending December 31, 2013 and 2012.
Interest Expense Interest expense remains consistent for both of the years ending December 31, 2013 and 2012.
Net Income As a result of the factors discussed above, the Company reported a net income of $1.6 million and $2.5 million for the years ended December 31, 2013 and 2012 respectively. This resulted in basic and diluted net income per share of $0.09 on weighted average common shares outstanding of 18,564,002 for the year ended December 31, 2013, as compared to $0.14 on weighted average common shares outstanding of 18,564,002 for the previous year.
LIQUIDITY AND CAPITAL RESOURCES Our primary uses of cash are for working capital, capital expenditures and general corporate purposes.
Our cash and cash equivalents totaled $2.4 million and $2.5 million for December 31, 2013 and 2012 respectively.
Operating activities During the twelve months ended December 31, 2013 and 2012 operating activities provided $0.6 million and $4.9 million respectively. The cash decrease primarily came from a decrease in accounts payable and deferred income.
Investing activities During the twelve months ended December 31, 2013 cash used in investing activities was $0.8 million as compared to $1.1 million for the previous 12 months. The cash was used to purchase fixed assets.
Financing activities During the twelve months ended December 31, 2013 cash provided by financing activities was $0.1 million as compared to cash used in financing activities of $3.9 million for the previous year. Much of the cash increase was from line of credit and proceeds from related party.
Some of our short-term liquidity needs were met by invoice discounting, finance lease arrangements, inter-company and bank loans. Our banking facilities are an invoice discounting facility with a maximum advance limit of $3.3 million subject to the level of qualifying sales invoiced. Interest rates are calculated with reference to bank base rates. At December 31, 2013 interest on the invoice discounting facility was charged at 2% above Base (our accounts receivable is collateral for this arrangement), the inter-company loan interest rate is 5%, the finance lease agreements have varying interest rates ranging from 6% to 7.5% and the note payable demands an interest rate of 6%.
The following summarizes our debt and other contractual obligations at December 31, 2013: - 13 - -------------------------------------------------------------------------------- Description Amount Term $'000 Invoice discounting 5 Ongoing until facility terminated.
Note payable - related party 1,443 Payable in full on December 31, 2013 Inter-company loan 1,245 Mix of 3 & 10 year term commencing August Finance lease agreements 154 2005 to October 2012 2,847 As of the date of this report, we are in compliance with all covenants under our existing credit facilities. The note payable is renewed every year.
For the next two or three years, we will need to spend more capital on the acquisition of further plant, machinery and computer equipment which will enable us to remain competitive in our product offering, and ensure compliance with new European Commission directives as well as responding to changes in technology - smaller components, larger printed circuit boards.
In the event that adequate funding is not available from existing credit facilities, we would consider leasing or working with existing lenders to identify additional sources of financing. We have no current plans to make significant capital expenditures. At present we do not have any arrangements for financing except those mentioned above. While there can be no assurance that we will have sufficient funds over the next twelve months, we believe that funds generated from operations plus borrowings under our invoice discounting facility will be adequate to meet our anticipated operating expenses, capital expenditure and debt obligations for at least the next twelve months. Nevertheless, our continuing operating and investing activities may require us to obtain additional sources of financing. There can be no assurance that any necessary additional financing will be available to us on commercially reasonable terms, if at all.
Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements.
Seasonality The Company does not believe that seasonality has had a material effect on its operations.
Inflation The Company does not believe that inflation has had a material effect on its operations.
CRITICAL ACCOUNTING POLICIES The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. The Company bases its estimates and judgments on historical experience and on various other assumptions the Company believes to be reasonable under the circumstances. Future events, however, may differ markedly from the Company's current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements, the Company believes revenue recognition and accounts receivable and allowance for doubtful accounts are two critical accounting policies that involve the most complex, difficult and subjective estimates and judgments.
Revenue recognition The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 13.A "Revenue Recognition." SAB 13.A requires that revenue generally can be recognized when all of the following four criteria are met: (1) Persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.
Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided - 14 - -------------------------------------------------------------------------------- for in the same period in which the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time when the Company and its customers jointly determine that the product has been delivered or no refund will be required.
Accounts Receivable and Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The allowance is calculated based upon the evaluation and the level of past due accounts and the relationship with, and the economic status of, the Company's customers. The Company analyzes historical bad debts, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. At December 31, 2013 there is no allowance for doubtful accounts.
The Company's customer base consists of 39 customers and relationships with customer staff are maintained across the Company's business including the finance department. Most of the revenue growth comes from customers for whom the Company has provided an EMS service for some time and who have a strong financial status. Accounts receivable issues are identified and resolved with the customer prior to the date at which the invoice falls due for payment and issues escalated and resolved through the sales force if necessary. Equally late payments are followed up promptly to ensure the earliest identification of problems and that further product is not shipped to compound the problem. Thus the accounts receivable ledger reflects receivables which are current or one month past due and therefore the need for an allowance for doubtful accounts is small.
Inventories and Reserves Inventories are valued at the lower of cost and net realizable value after making due allowance for obsolete and slow moving items. Work in progress is valued based on materials at cost, labour time and a proportion of overhead costs. On an annual basis the Company takes a physical inventory verifying the materials on hand and comparing its perpetual records to physical counts.
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