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SNPD > SEC Filings for SNPD > Form 10-K on 14-Jun-2012All Recent SEC Filings

Show all filings for SOUTHERN PRODUCTS, INC.



Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the Years Ended February 29, 2012 and February 28, 2011.

We generated gross revenues of $7,141,976 during the fiscal year ended February 29, 2012. Our cost of goods sold was $7,037,070, resulting in a gross profit of $104,906. Our total operating expenses during the fiscal year ended February 29, 2012 were $1,520,428. Our loss from operations was therefore $1,415,522. We incurred net other expenses of $55,961 during the fiscal year ended February 29, 2012. Our loss for the fiscal year ended February 29, 2012 was therefore $1,471,483. Our expenses during the fiscal year consisted of general and administrative expenses of $223,697, salaries and wages of $497,308, professional fees of $386,996, sales commissions of $89,173, rent expense of $74,202, promotional and marketing of $248,052, and consulting fees of $1,000.

By comparison, during the fiscal year ended February 28, 2011, we generated no revenues and incurred total expenses and a net loss of $47,966.

Approximately 78% of our revenue earned during the year ended February 29, 2012 was generated from two customers, Fry's Electronics and Costco, representing net sales of $4,716,939 and $824,700, respectively. During the fiscal year ended February 29, 2012, our products were sold primarily under promotional pricing in order to generate growing consumer interest in our products as they were brought to market. Various discounts, points, and price reductions granted to retailers to market our product resulted in a reduction of our gross revenues in the amount of $450,231 as compared to the revenues which would have been generated by product sales under our listed regular prices. As a result, we experienced only a nominal gross profit for the twelve months ended February 29, 2012. As we move forward and continue to establish our brand, we expect that we will have to rely less on promotional pricing to generate sales of our products and, therefore, we anticipate that our gross profit margin, as well as our total sales, will increase; contingent, however, upon our obtaining sufficient working capital.

Our revenues, cost of goods sold, and expenses during the fiscal year ended February 29, 2012 increased dramatically as compared to the same period last year because, commencing in April of 2011, we abandoned our original line of product sales and began to design, market, and sell our SIGMAC-branded flat screen televisions.

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Liquidity and Capital Resources

As of February 29, 2012, we had current assets in the amount of $2,072,315, consisting of cash in the amount of $493,759, accounts receivable of $1,047,023, inventory for resale of $494,076, and prepaid expenses of $37,457. As of February 29, 2012, the bulk of our outstanding accounts receivable were amounts due from our two largest customers together with amounts held in reserve by our factoring firm, PBCC. At fiscal year end, we had accounts receivable from Fry's Electronics in the amount of $501,111 and from Costco in the amount of $288,077. Total amounts held in reserve by our factoring firm at fiscal year-end were $247,835

Our current liabilities as of February 29, 2012 were $3,584,393, consisting of accounts payable and accrued liabilities of $3,334,383, accrued compensation owed to related parties of $246,500, and customer deposits of $3,510. Our working capital deficit as of February 29, 2012 was therefore $1,512,078. Our largest accounts payable as of February 29, 2012, were to our two primary Chinese suppliers, Anhui Technology Import & Export Co. in the amount of $1,933,960 and to AHCOF International Development Co., Ltd., in the amount of $709,400.

In December of 2011, we obtained a credit facility from A/R Funding to finance our outstanding accounts receivable. The cost of this funding was one and one-half percent (1.50%) per month and secured by an assignment for security of the receivables financed. Under the Agreement, A/R Funding would finance up to a maximum amount of $4,000,000 in receivables, with a minimum sum of $300,000 in receivables to be financed per calendar quarter. As protection against possible returns, payment disputes, and similar items, A/R Funding could reserve an amount equal to sixty percent (60%) of the of the face amount of the receivables financed. Within two (2) days of receiving payment on an assigned receivable, A/R Funding would make available the reserves held on the individual paid receivable, less any deductions held by customers, charges or expenses, and any invoices that A/R Funding had not been paid within 90 days of billing date or when A/R Funding determined the invoice to be in dispute or not payable, whichever is earliest. In late December of 2011, we cancelled our agreement with A/R Funding. During the period the agreement was effective, A/R Funding purchased trade receivables with a face value of $2,092,248.

On January 11, 2012, we replaced our accounts receivable financing arrangement with A/R Funding with a similar arrangement from Pacific Business Capital Corporation ("PBCC"). The cost of the funding from PBCC is a discount of .813% of the gross amount of each receivable factored through PBCC, with an additional discount of .054% per day for accounts receivable that remain unpaid fifteen
(15) days after they are purchased by PBCC. Under the agreement, PBCC will advance a portion of the invoice upon factoring (generally 70%), and reserve the remainder of the invoice amount. The reserve will be applied to amounts due from us to PBCC, with the remainder of the reserve funds to be rebated to us on an invoice-by-invoice basis. Our obligations to PBCC are secured by all of our assets, and are guaranteed by our officers, Edward Meadows and Edward Wang. During the year ended February 29, 2012, we sold total trade receivables to PBCC in the face amount of $851,829 at a discount of $6,925, for proceeds of $596,280, net of reserves. The amount held in reserve by PBCC as February 29, 2012 totaled $247,835.

Our ability to obtain finished products and component parts is presently severely constrained by our limited access to sufficient working capital. At present, our existing Chinese suppliers have refused to provide us with additional credit, rendering us unable to obtain products to fill orders from our customers. We are presently negotiating with these suppliers to provide us with additional credit but there can be no assurance what we will be successful in obtaining that additional credit on acceptable terms, or at all. We are also seeking equity and debt capital from other sources. With additional capital, we would be able to purchase additional product necessary for our current and expected distribution opportunities as well as negotiate more favorable supplier terms. In addition, if we are able to increase our equity base, we expect that we will be able to obtain better terms on our current accounts receivable and inventory financing. If we are unable to obtain that additional credit or capital, however, we will be unable to fill our existing orders or to make any additional sales and implementation of our business plan will be adversely affected.

In addition to the cost of producing and delivering product for sale, we anticipate incurring approximately $1,600,000 in general operating expenses over the course of the next year to support our growth.

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Going Concern

We have negative working capital and have incurred losses since inception. These factors create substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.

Our ability to continue as a going concern is dependent on generating cash from the sale of our common stock and/or obtaining debt financing and attaining future profitable operations. Management's plans include selling our equity securities and obtaining debt financing to fund our capital requirement and ongoing operations; however, there can be no assurance we will be successful in these efforts.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results or operations, liquidity, capital expenditures or capital resources that is deemed material.

Purchase or Sale of Equipment

We do not expect to purchase or sell any plant or significant equipment in the coming fiscal year.

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