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ANYI > SEC Filings for ANYI > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for ANYTHINGIT, INC.


31-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

The following discussion of our financial condition and results of operations for the three months ended September 30, 2013 and 2012 should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2013 as filed with the Securities and Exchange Commission. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.

Overview

We are a provider of green technology solutions, managing the equipment disposition needs of our government and commercial clients by buying, reselling, or recycling, in an environmentally and regulatory compliant manner, computers and other technology hardware. We operate in one segment. We generate revenues from:

? fees for logistics, inventory management and data destruction services,
? sales of used equipment to wholesalers providing a second life to IT equipment that may otherwise be discarded, and
? sales to companies that specialize in removing recyclable or remarketable parts of electronics from equipment that no longer has a usable life.

Our industry is relatively new and has grown during the past few years. We believe that this growth has been driven by both the increasing rate of changes in IT which accelerates the rate at which IT equipment becomes obsolete, the expansion of the remarketing and demanufacturing segments of our industry and a general increased awareness of the "green" aspect of information technology asset disposition, or ITAD.

We expect the growth of our industry, as well as the growth of our company, to continue in the future. Our business strategy is based upon leveraging our experience and building on our existing business model by expanding our relationships and resources and includes:

? expanding our sources of technology equipment; ? expanding our resources for environmentally compliant recycling, reuse and data storage and destruction; ? expanding our geographical footprint; ? expanding the demanufacturing and recycling services we provide; and
? further penetrating the large global market for the resale of useful equipment.

Our business model is to grow our company both organically and through acquisitions of similar or complementary businesses. To support this expected growth, during fiscal 2011 we leased space which effectively doubled our warehouse space to enable us to store inventory in the local market. In an effort to further accelerate our organic growth, we are investing in our relationships with our existing partners through training sessions and other efforts to increase awareness and educate their organizations of the value of practicing sound asset recovery. During fiscal 2012 we realized our infrastructure, including warehouse configuration, product flow, processes and systems, limited our ability to grow while maintaining our profit margins. As such, in fiscal 2013 we redesigned the product flow and processes in both of our New Jersey facilities and implemented a new management system in our main warehouse in New Jersey. We also realized the optimal configuration for a facility, which we utilized in the selection of leased space in Tampa, FL. The facility in Tampa is designed with more space to move product freely from one point to the other, it has more receiving and shipping doors to keep a good flow without a bottleneck and it went live on our new management system when it opened in March 2013. In the second quarter of fiscal 2014 we will consolidate our two warehouses in New Jersey to streamline processes, reduce operating costs and realize efficiencies. We believe the new infrastructure, processes and system enable us to be scalable and have a repeatable solution to grow both organically and through acquisitions.


As the e-waste industry is not a mature industry, federal regulations have not yet been adopted and companies are left to their own accord to adopt best practices. We have decided that a differentiator in our industry will be companies that comply with standards that reflect policies that closely monitor where e-waste and scrap is sent after leaving a recycling facility. In this vein, in October 2011 we were awarded certifications for the Recycling Industry Operating Standard (RIOS) responsible recycling R2 practices as well as ISO 14001:2004 Environmental Management System for responsible electronics recyclers which are administered by the ISRI Services Corporation and the International Organization for Standardization (ISO). Additionally, in June 2012, we were awarded the ISO 9001 Quality Management Certification as well as the e-Stewards Certification from the Basel Action Network. We believe these industry certifications will assist us in building awareness of the benefits of our services. We have a zero landfill policy and prioritize resale over other potential means of recycling.

In fiscal 2013 we expanded our footprint by opening a facility in Tampa, FL. Even though we had some sales challenges in the first quarter of fiscal 2013, we still expect to further expand into geographical areas where we have an existing customer base to expand our footprint and our business presence. In order for us to continue to grow, we will need to raise additional capital to fund an expansion of our operations. We also expect to seek to acquire additional companies whose operations are complementary to ours, including companies with similar business models located in different geographical areas, and companies that offer different services, such as demanufacturers. Based upon our internal analysis of our industry and our competitors, we believe that there are a number of potential target companies, but there are no assurances our beliefs are correct or that we will ever close any acquisitions.

The biggest challenges we are facing in our organic growth efforts are our ability to sustain growth and increase sales, our access to sufficient qualified employees, extensive competition and sufficient capital to support our efforts, all of which are necessary to support the expansion of our business. We have hired additional management personnel and are using a staffing company to provide qualified personnel to fill our technical and labor needs. This approach allows us to control our overhead expenses. While we are located in an area with a good supply of qualified candidates, the process, however, of evaluating the candidates is time intensive for our management and maintaining a sufficiently qualified workforce will continue to be a challenge for us in the near future. We have implemented a new, fully automated, management system to support our operations. We went live on the new system in the first quarter of fiscal 2013 in our main warehouse in NJ, went live in Tampa in the fourth quarter of fiscal 2013 and went live in the second NJ warehouse in the first quarter of fiscal 2014. This new system provides operating and reporting efficiencies to enable us to grow our business while minimizing the need to expand warehouse space and personnel.

In the first quarter of fiscal 2014, our net sales declined by 22% from the comparable period in fiscal 2013, our gross profit margins decreased 24% while our operating expenses remained relatively constant. This decline in gross profit has adversely impacted our working capital, which declined from approximately $10,000 to $(575,000) between the respective periods. While we do not have any commitments for capital expenditures, in order for us to sustain our current operations and grow our business we will need to raise additional working capital. As a small public company with a limited market for our common stock, we face a number of challenges in accessing the capital markets, and the number of sources to raise working capital are limited. During fiscal 2013 and the first quarter of fiscal 2014 we explored a number of options to provide additional capital to our company and we are continuing our efforts to raise additional working capital, either in the form of equity, debt or a combination of the two. However, we do not have any commitments for additional capital, and there are no assurances we will be successful in raising capital upon terms acceptable to us, if at all. If we are unable to raise additional working capital, absent a significant increase in our net sales, we will have to reduce certain operating expenses, which may not be sufficient to sustain our operations. In order to reduce our operating expenses we have opted out of the second warehouse lease in New Jersey, effective November 1, 2013. We have also made some personnel reductions in accordance with the sales decline. If we are unable to grow sales we will potentially have to make additional personnel reductions. If we are unable to increase sales or significantly reduce costs, our current cash position will only sustain operations for approximately three months.

Going Concern

For fiscal 2013 we reported a net loss of approximately $1,321,000 and net cash used for operating activities of approximately $725,000. For the first quarter of fiscal 2014 the Company reported a net loss of approximately $673,000 and net cash used for operating activities of approximately $38,000. At September 30, 2013 we had an accumulated deficit of approximately $9,547,000. The report of our independent registered public accounting firm on our financial statements for the year ended June 30, 2013 contains an explanatory paragraph regarding our ability to continue as a going concern based upon the loss for the current year, the accumulated deficit and the net cash used in operating activities. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances we will be successful in our efforts to increase our sales and report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.


Results of Operations

Our business is driven by either businesses or the government entities updating older equipment or partnering with our company to dispose of old or unused equipment. As such, the timing of equipment inflow is not consistent or predictable. Sales for the first quarter of fiscal 2014 decreased 22% as compared to the comparable period in fiscal 2013. Our sales decreased in fiscal 2014 as a result of the reduction of equipment volume from a significant customer who was sending equipment to our New Jersey facility. We do not expect the volume from that customer to return to prior levels. In order to offset this loss in business we are marketing our services to new customers, however we do not expect to see the result of these efforts until the latter part of the second quarter of fiscal 2014. We are hosting webinars and sales training sessions for existing customers with a view towards leveraging those existing relationships. Additionally, we were contemplating the completion of a significant one-off transaction for consigned inventory sales that was supposed to be closed that is still pending. The significant one-off transaction was for the recycling of over 600 units of high valued laptops which we sourced that get refurbished and sold primarily to government entities through one of our refurbishing partners. We expect the consigned inventory to be sold by the third quarter of fiscal 2014. However, the government budget uncertainties can adversely impact this time frame. We added one additional sales person in the third quarter of fiscal 2013 and one additional sales person in June 2013. We believe the additional sales people will help us grow sales to existing and new customers in the coming quarters.

Our gross profit margin depends on various factors, including product mix, pricing strategies, market conditions, personnel levels and other factors, any of which could result in changes in gross margins from period to period. Gross profit decreased 69% in the first quarter of fiscal 2014 as compared to the comparable period in fiscal 2013, which was directly attributable to the reduction in sales, reduced gross profit margins on equipment sales and increased freight costs for the shipment of goods to Tampa. As a percentage of sales, the gross profit margin was 15% in first quarter of fiscal 2014 and 39% in the first quarter of fiscal 2013. The decrease in gross profit margin was due to buying equipment from other remarketers to complete orders reducing margins by approximately 16%, as well as the increase in net freight expenses and higher labor costs as a % of sales. Warehouse labor was relatively unchanged, approximately $220,000 in each period, but increased as a % of sales from 22% for the first quarter of fiscal 2013 to 28% for the first quarter of fiscal 2014. We expect margins to return to prior levels in the coming quarters.

Selling, general and administrative expenses decreased 2% in the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013, while increasing as a percentage of sales to 99% versus 79% in the respective periods as a result of the decline in sales in fiscal 2014.

Other expense decreased 65% in the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013. The decrease is the result of the reduction of amortization of the debt discount for the value of the warrants issued in this note offering, including the warrants issued to the placement agent as a fee since they were amortized through January 2013.

Net loss in the first quarter of fiscal 2014 was approximately $(673,000) compared to net loss of approximately $(451,000) in the first quarter of fiscal 2013 resulting from a decrease in sales and gross profit margin.

Liquidity and capital resources

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for operating the business. At September 30, 2013 we had a working capital deficit of approximately $575,000 as compared to working capital of approximately $10,000 at June 30, 2013. The decreased working capital at September 30, 2013 is primarily attributable to a decrease in cash and accounts receivable and an increase in accounts payable and customer deposits, which is partially offset by decreases in accrued expenses and an increase in inventories.

Cash decreased 35% at September 30, 2013 from June 30, 2013 primarily as a result of cash used for operations. Accounts receivable decreased 78% at September 30, 2013 from June 30, 2013 which is attributable to timing of sales. Accounts payable increased 38% at September 30, 2013 from June 30, 2013 due to cash constraints resulting in pushing vendor payables beyond their normal terms. Customer deposits increased 139% at September 30, 2013 from June 30, 2013 which is attributable to prepayments by customers for orders that had not shipped by the end of the third quarter of fiscal 2013 and the processing of invoices for customer equipment purchases net in accounts receivable. By recording the invoices net, instead of recording them separately as accounts receivable and accounts payable, some customers have a net credit balance in accounts receivable that may have had a debit balance in accounts receivable and a credit balance in accounts payable previously. At the end of the quarter, we reclassify the credit balances from accounts receivable into customer deposits. Inventories increased 90% at September 30, 2013 from June 30, 2013. Unlike many companies in other businesses which time inventory purchases to maintain an adequate amount of inventory for its anticipated sales, our inventory levels will fluctuate primarily based upon the decommissioning schedules for legacy IT by our clients which determine when we take possession of the used IT equipment. As a result, our inventory levels have historically fluctuated from period to period and we expect that fluctuation to continue in future periods. Additionally, at September 30, 2013 we had a significant increase in consigned inventory which represented 75% of our inventories at that date. Our refurbishing partner believes they can sell the units by the end of the third quarter of fiscal 2014. If they are not able to move the units, we will find other customers, which could result in a sale for below our basis. Accrued expenses decreased 40% at September 30, 2013 from June 30, 2013 due to timing of payroll and invoices that were not received at period end.


Cash flows

Net cash used from operating activities was approximately $(38,000) for the three months ended September 30, 2013 as compared to net cash used in operating activities of approximately $(156,000) for the three months ended September 30, 2012.

In the three months ended September 30, 2013 cash was used as follows:

? Net loss was approximately $(673,000), partially offset by an ? Increase in working capital resulting from non-cash balance sheet changes of approximately $547,000, and
? Non-cash operating expenses of approximately $88,000.

In the three months ended September 30, 2012 cash was used as follows:

? Net loss was approximately $(450,000), partially offset by an ? Increase in working capital resulting from non-cash balance sheet changes of approximately $171,000, and
? Non-cash operating expenses of approximately $123,000.

Net cash used in investing activities was approximately $0 for the three months ended September 30, 2013 as compared to approximately $(20,000) for the three months ended September 30, 2012. The three months ended September 30, 2012 reflects the purchase of additional equipment and there was no comparable increase in the three months ended September 30, 2013. The equipment purchases in the fiscal 2013 period are primarily for the system and process changes.

Net cash used in financing activities was approximately $(6,000) for the three months ended September 30, 2013 as compared to approximately $(11,000) for the three months ended September 30, 2012. Both periods utilized cash for payments on our notes payable and capital leases.

Off Balance Sheet Arrangements

In December 2012, we entered into a standby letter of credit with our future landlord in Tampa, Florida. The standby letter of credit is for $60,000 in year one, $40,000 in year two and $20,000 in year three. The letter of credit is not reflected on our balance sheet and is collateralized by a certificate of deposit. Refer to restricted cash in the notes to our financial statements. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.


Critical Accounting Policies

Revenue Recognition

For product sales, the Company recognizes revenue at the time products are shipped and title is transferred, which is in accordance with the stated shipping terms. Revenue is recognized in accordance with these shipping terms so long as a purchase order, electronic, written or phone commitment has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. If uncertainties exist regarding customer acceptance or collectability, revenue is recognized when those uncertainties have been resolved. The Company provides a limited as-is warranty on some of its products. The Company analyzes its estimated warranty costs and provides an allowance as necessary, based on experience. At September 30, 2013 and June 30, 2013, a warranty reserve was not considered necessary.

The Company is party to some transactions whereby a customer will sell us equipment for a fixed price which we in-turn broker downstream for a fixed price. Based upon the parameters of the transaction, including the nature of the risk and control by the Company, these sales may be recorded on a gross or net basis.

Service fees are recognized once the services have been performed and the results reported to the client. These services are data destruction, inventory management, auditing and logistics. In those circumstances where the Company disposes of the client's product, or purchases the product from the client for resale, the product is placed into inventory at cost, until sold.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based on the expected collectability of its accounts receivable. The Company performs credit evaluations of significant customers and establishes an allowance for doubtful accounts based on the aging of receivables, payment performance factors, historical trends and other information. In general, the Company reserves 2% of the receivables outstanding 31 to 60 days, 5% of the receivables outstanding 61 to 90 days and 20% of the receivables outstanding more than 90 days. The Company evaluates and revises the reserve on a quarterly basis based on a review of specific accounts outstanding and our history of uncollectible accounts. As of September 30, 2013 and June 30, 2013, the Company recorded $41,764 and $47,449, respectively of allowance for doubtful accounts.

General

The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable.


Recent Accounting Pronouncements

We have adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on our financial position or results of operations.

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