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TMCNet:  ZHONE TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 08, 2014]

ZHONE TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "goal," "intend," "may," "plan," "project," "seek," "should," "target," "will," "would," variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; future growth and revenues from our Single Line Multi-Service (SLMS) and FiberLAN products; our ability to refinance or repay our existing indebtedness prior to the applicable maturity date; future economic conditions and performance; anticipated performance of products or services; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified under the heading "Risk Factors" in Part II, Item 1A, elsewhere in this report and our other filings with the Securities and Exchange Commission (the SEC). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, the ability to generate sufficient revenue to achieve or sustain profitability, the ability to raise additional capital to fund existing and future operations or to refinance or repay our existing indebtedness, defects or other performance problems in our products, the economic slowdown in the 13-------------------------------------------------------------------------------- Table of Contents telecommunications industry that has restricted the ability of our customers to purchase our products, commercial acceptance of our SLMS and FiberLAN products, intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same networks needs as our products, higher than anticipated expenses that we may incur, and other factors identified elsewhere in this report and in our most recent reports on Forms 10-K, 10-Q and 8-K. We undertake no obligation to revise or update any forward-looking statements for any reason.


OVERVIEW We believe that we are the first company dedicated solely to developing the full spectrum of next-generation access network solutions to cost-effectively deliver high bandwidth services while simultaneously preserving the investment in today's networks. Our next-generation solutions are based upon our SLMS architecture. From its inception, this SLMS architecture was specifically designed for the delivery of multiple classes of subscriber services (such as voice, data and video distribution), rather than being based on a particular protocol or media. In other words, our SLMS products are built to support the migration from legacy circuit to packet technologies and from copper to fiber technologies. This flexibility and versatility allows our products to adapt to future technologies while allowing service providers to focus on the delivery of additional high bandwidth services. Because this SLMS architecture is designed to interoperate with existing legacy equipment, service providers can leverage their existing networks to deliver a combination of voice, data and video services today, while they migrate, either simultaneously or at a future date, from legacy equipment to next-generation equipment with minimal interruption. We believe that our SLMS solution provides an evolutionary path for service providers from their existing infrastructures, as well as gives newer service providers the capability to deploy cost-effective, multi-service networks that can support voice, data and video.

In addition to our established product offerings in our core business, we launched our new FiberLAN Passive Optical LAN in 2012, which provides an alternative to switched copper-based LANs. Target customers of our FiberLAN business include hospitality, government, education, manufacturing and business enterprises. We believe FiberLAN Passive Optical LAN is one of the most cost-effective, efficient and environmentally friendly alternatives to existing copper-based Ethernet LAN infrastructure. Our FiberLAN Passive Optical LAN is comprised of our MXK Optical Line Terminals (OLT) and zNID Optical Network Terminals (ONT), and delivers Gigabit Passive Optical Network (GPON) and Active Ethernet-based LAN services to enterprises. Both our core business and FiberLAN business leverage the same R&D efficiencies. Our FiberLAN solution (including FiberLAN OLT and ONT Passive Optical Network (PON)) was granted JITC (Joint Interoperability Test Command) certification by the Defense Information Systems Agency. This certification provides new sales opportunities in military and government markets, while helping to demonstrate the capabilities and security aspects of our FiberLAN solution.

Our global customer base for our core business includes regional, national and international telecommunications carriers. To date, our products are deployed by over 750 network service providers on six continents worldwide. Our global FiberLAN customer base includes hotels, universities, military bases, government institutions, manufacturing facilities and businesses. We believe that we have assembled the employee base, technological breadth and market presence to provide a simple yet comprehensive set of next-generation solutions to the bandwidth bottleneck in the access network and the other problems encountered by network service providers when delivering communications services to subscribers.

Although we generated net income of $4.3 million for the year ended December 31, 2013 and net income of $0.7 million for the six months ended June 30, 2014, we have incurred net losses in prior years and there can be no assurance that we will continue to generate net income or have positive cash flows from operations in any future period. We had an accumulated deficit of $1,036.2 million as of June 30, 2014. If we are unable to access or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, or if the economic, market and geopolitical conditions in the United States and the rest of the world deteriorate, we may experience material adverse impacts on our business, operating results and financial condition. During the past four years, we have continued our focus on cost control and operating efficiency along with restrictions on discretionary spending.

Going forward, our key financial objectives include the following: • Increasing revenue while continuing to carefully control costs; • Continued investments in strategic research and product development activities that will provide the maximum potential return on investment; and • Minimizing consumption of our cash and cash equivalents.

14-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year ended December 31, 2013.

15-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS We list in the table below the historical condensed consolidated statement of comprehensive income data as a percentage of net revenue for the periods indicated.

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net revenue 100 % 100 % 100 % 100 % Cost of revenue 66 % 61 % 64 % 62 % Gross profit 34 % 39 % 36 % 38 % Operating expenses: Research and product development 13 % 13 % 14 % 13 % Sales and marketing 15 % 17 % 16 % 17 % General and administrative 5 % 5 % 5 % 6 % Total operating expenses 33 % 35 % 35 % 36 % Operating income 1 % 4 % 1 % 2 % Interest expense 0 % 0 % 0 % 0 % Other income (expense), net 0 % 0 % 0 % 0 % Income before income taxes 1 % 4 % 1 % 2 % Income tax provision 0 % 0 % 0 % 0 % Net income 1 % 4 % 1 % 2 % Other comprehensive income (loss) 0 % 0 % 0 % 0 % Comprehensive income 1 % 4 % 1 % 2 % Net Revenue Information about our net revenue for products and services for the three and six months ended June 30, 2014 and 2013 is summarized below (in millions): Three Months Ended Six Months Ended June 30, June 30, Increase/ Increase/ 2014 2013 (Decrease) % change 2014 2013 (Decrease) % change Products $ 30.8 $ 27.7 $ 3.1 11.2 % $ 57.6 $ 54.0 $ 3.6 6.7 % Services 1.6 2.3 (0.7 ) (30.4 )% 3.4 4.4 (1.0 ) (22.7 )% Total $ 32.4 $ 30.0 $ 2.4 8.0 % $ 61.0 $ 58.4 $ 2.6 4.5 % 16-------------------------------------------------------------------------------- Table of Contents Information about our net revenue for North America and international markets for the three and six months ended June 30, 2014 and 2013 is summarized below (in millions): Three Months Ended Six Months Ended June 30, June 30, Increase Increase 2014 2013 (Decrease) % change 2014 2013 (Decrease) % change Revenue by geography: United States $ 8.1 $ 10.1 $ (2.0 ) (19.8 )% $ 17.5 $ 19.3 $ (1.8 ) (9.3 )% Canada 0.7 1.1 (0.4 ) (36.4 )% 1.3 1.8 (0.5 ) (27.8 )% Total North America 8.8 11.2 (2.4 ) (21.4 )% 18.8 21.1 (2.3 ) (10.9 )% Latin America 4.8 7.6 (2.8 ) (36.8 )% 9.8 12.3 (2.5 ) (20.3 )% Europe, Middle East, Africa 17.5 10.0 7.5 75.0 % 30.5 23.2 7.3 31.5 % Asia Pacific 1.3 1.2 0.1 8.3 % 1.9 1.8 0.1 5.6 % Total International 23.6 18.8 4.8 25.5 % 42.2 37.3 4.9 13.1 % Total $ 32.4 $ 30.0 $ 2.4 8.0 % $ 61.0 $ 58.4 $ 2.6 4.5 % For the three months ended June 30, 2014, net revenue increased 8% or $2.4 million to $32.4 million from $30.0 million for the same period last year. For the six months ended June 30, 2014, net revenue increased 5% or $2.6 million to $61.0 million from $58.4 million for the same period last year. For the three months ended June 30, 2014, product revenue increased 11% or $3.1 million to $30.8 million, compared to $27.7 million for the same period last year. For the six months ended June 30, 2014, product revenue increased 7% or $3.6 million to $57.6 million, compared to $54.0 million for the same period last year. The increases in net revenue and product revenue were primarily due to increased sales of our ONT products.

International net revenue increased 26% or $4.8 million to $23.6 million for the three months ended June 30, 2014 from $18.8 million for the same period last year, and represented 73% of total net revenue compared with 63% during the same period of 2013. International net revenue increased 13% or $4.9 million to $42.2 million for the six months ended June 30, 2014 from $37.3 million for the same period last year. The increase in international net revenue was due to increased sales to a customer in the Middle East.

For the three months ended June 30, 2014, service revenue decreased by 30% or $0.7 million to $1.6 million, compared to $2.3 million for the same period last year. For the six months ended June 30, 2014, service revenue decreased by 23% or $1.0 million to $3.4 million, compared to $4.4 million for the same period last year. Service revenue represents revenue from maintenance and other services associated with product shipments. The decrease in service revenue for the three and six months ended June 30, 2014 was primarily due to decreased sales of installation services due to the completion of a large broadband development project in 2013.

For the three months ended June 30, 2014 and 2013, two customers represented 35% and 21% of net revenue, respectively. For the six months ended June 30, 2014 and 2013, two customers represented 30% and 24% of net revenue, respectively. We anticipate that our results of operations in any given period may depend to a large extent on sales to a small number of large accounts. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.

Cost of Revenue and Gross Profit Total cost of revenue, including stock-based compensation, increased 16% or $3.0 million to $21.4 million for the three months ended June 30, 2014, compared to $18.4 million for the three months ended June 30, 2013. Cost of revenue increased 8% or $2.9 million to $39.2 million for the six months ended June 30, 2014 compared to $36.3 million for the same period last year. The increases in cost of revenue for the three and six months ended June 30, 2014 was primarily due to higher shipments of ONT products. Gross margin decreased due primarily to greater sales of products with lower gross margin, such as ONT products.

We expect that in the future our cost of revenue as a percentage of net revenue will vary depending on the mix and average selling prices of products sold. In addition, continued competitive and economic pressures could cause us to reduce our prices, adjust the carrying values of our inventory, or record inventory charges relating to discontinued products and excess or obsolete inventory.

17-------------------------------------------------------------------------------- Table of Contents Research and Product Development Expenses Research and product development expenses increased 6% or $0.3 million to $4.2 million for the three months ended June 30, 2014 compared to $3.9 million for the three months ended June 30, 2013, and increased 10% or $0.7 million to $8.3 million for the six months ended June 30, 2014 compared to $7.6 million for the six months ended June 30, 2013. The increase in the three months ended June 30, 2014 was primarily due to $0.1 million in higher personnel-related expenses and $0.1 million of higher consultant expenses. The increase in the six months ended June 30, 2014 was primarily due to $0.5 million of higher personnel-related expenses and $0.1 million of higher consultant expenses. The increase in personnel-related expenses for the six months ended June 30, 2014 was due to a higher headcount in 2014 compared to 2013, as well as $0.3 million in higher health benefit expenses due to a credit recorded in 2013. We recorded a $0.6 million credit to our statement of comprehensive income in the quarter ended March 31, 2013 as a result of a vendor refund received in 2013 which related to overpayments for health benefits made in 2012. We allocated $0.3 million of the credit to research and product development expenses. There was no similar credit in the current period. We intend to continue to invest in research and product development to attain our strategic product development objectives while seeking to manage the associated costs through expense controls.

Sales and Marketing Expenses Sales and marketing expenses decreased 5% or $0.3 million to $4.8 million for the three months ended June 30, 2014 compared to $5.1 million for the three months ended June 30, 2013, and decreased 4% or $0.4 million to $9.5 million for the six months ended June 30, 2014 compared to $9.9 million for the six months ended June 30, 2013. The decrease in the three months ended June 30, 2014 was primarily due to $0.3 million in lower consultant expenses. The decrease in the six months ended June 30, 2014 was primarily due to $0.5 million decrease in consulting expenses, which was offset by $0.1 million in higher commissions.

General and Administrative Expenses General and administrative expenses increased 8% or $0.1 million to $1.6 million for the three months ended June 30, 2014 compared to $1.5 million for the three months ended June 30, 2013 due primarily to higher accounting and legal fees.

General and administrative expenses increased 4% or $0.1 million to $3.3 million for the six months ended June 30, 2014 compared to $3.2 million for the six months ended June 30, 2013 due primarily to $0.2 million in higher accounting and legal fees offset by $0.1 million in lower stock based compensation expense.

In addition, we recorded a $0.6 million credit to our statement of comprehensive income in the quarter ended March 31, 2013 as a result of a vendor refund received in 2013 which related to overpayments for health benefits made in 2012.

We allocated $0.2 million of the credit to general and administrative expenses.

The increase was offset by decreases in travel of $0.1 million and bonus expense of $0.1 million for the six months ended June 30, 2014.

Income Tax Provision During the three and six months ended June 30, 2014 and 2013, no material provision or benefit for income taxes was recorded, due to our previous operating losses and the significant uncertainty regarding the realization of our net deferred tax assets, against which we have continued to record a full valuation allowance.

OTHER PERFORMANCE MEASURES In managing our business and assessing our financial performance, we supplement the information provided by our GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) non-cash equity-based compensation expense, and (v) material non-recurring non-cash transactions, such as gain (loss) on sale of assets or impairment of fixed assets. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.

Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are: • Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual requirements; 18-------------------------------------------------------------------------------- Table of Contents • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principalpayments, on our debts; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to bereplaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; • non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and • other companies in our industry may calculate Adjusted EBITDA and similar measures differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) or any other performance measures calculated in accordance with GAAP or as a measure of liquidity.

Management understands these limitations and compensates for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.

Set forth below is a reconciliation of net income to Adjusted EBITDA, which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net income $ 369 $ 1,056 $ 671 $ 1,286 Add: Interest expense 5 10 21 49 Provision for taxes 10 40 53 72 Depreciation and amortization 93 92 183 174 Non-cash equity-based compensation expense 108 134 167 312 Adjusted EBITDA $ 585 $ 1,332 $ 1,095 $ 1,893 LIQUIDITY AND CAPITAL RESOURCES Our operations are financed through a combination of our existing cash, cash equivalents, available credit facilities, and sales of equity and debt instruments, based on our operating requirements and market conditions.

At June 30, 2014, cash and cash equivalents were $15.6 million compared to $15.7 million at December 31, 2013. The $0.1 million decrease in cash and cash equivalents was attributable to net cash used in investing activities totaling $0.2 million, partially offset by net cash provided by operating and financing activities of $0.1 million.

Operating Activities Net cash provided by operating activities for the six months ended June 30, 2014 consisted of net income of $0.7 million, adjusted for non-cash credits totaling $0.1 million and offset by an increase in net operating assets totaling $0.7 million. The most significant components of the changes in net operating assets were an increase in accounts receivable of $1.7 and a decrease in accrued liabilities of $0.8 million offset by a decrease of inventory of $2.2 million.

The increase in accounts receivable was primarily the result of increased sales in the current year period. The decrease in accrued liabilities was primarily due to reduced commission and consulting expenses. The decrease in inventory was due to better utilization of inventory in the current year period.

Net cash provided by operating activities for the six months ended June 30, 2013 consisted of net income of $1.3 million, adjusted for non-cash charges totaling $1.3 million and offset by an increase in net operating assets totaling $0.7 million. The most significant components of the changes in net operating assets were an increase of $2.8 million in accounts receivable, offset by a decrease of $1.3 million in inventory . The increase in accounts receivable was primarily the result of increased sales to several large customers. The decrease in inventory was primarily due to better utilization of inventory.

19-------------------------------------------------------------------------------- Table of Contents Investing Activities Net cash used in investing activities for the six months ended June 30, 2014 and 2013 consisted of purchases of property and equipment.

Financing Activities Net cash provided by financing activities for the six months ended June 30, 2014 was $0.1 million, which consisted of proceeds related to exercises of stock options. Net cash provided by financing activities for the six months ended June 30, 2013 was immaterial and consisted of proceeds related to exercises of stock options.

Cash Management Our primary source of liquidity comes from our cash and cash equivalents which totaled $15.6 million at June 30, 2014, and our $25.0 million revolving line of credit and letter of credit facility with WFB. At current revenue levels, we anticipate that some portion of our existing cash and cash equivalents may be consumed by operations.

As of June 30, 2014, we had a $25.0 million revolving line of credit and letter of credit facility with WFB to provide liquidity and working capital through March 31, 2016. The amount that we are able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the agreement, as long as the aggregate principal amount outstanding does not exceed $25.0 million less the amount committed as security for letters of credit. In addition, under the WFB Facility, we are able to utilize the facility as security for letters of credit. At June 30, 2014, our borrowing base was $25.0 million. To maintain availability of funds under the WFB Facility, we pay a commitment fee on the unused portion. The commitment fee is 0.25% and is recorded as interest expense.

We had $10.0 million outstanding at June 30, 2014 under the WFB Facility. In addition, $3.3 million was committed as security for letters of credit. We had $11.7 million of borrowing availability under the WFB Facility as of June 30, 2014. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin of 3.0%. The interest rate on the WFB Facility was 3.23% at June 30, 2014.

Our obligations under the WFB Facility are secured by substantially all of our personal property assets and those of our subsidiaries that guarantee the WFB Facility, including our intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants.

If we default under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell our assets to satisfy the obligations under the WFB Facility. As of June 30, 2014, we were in compliance with these covenants. We make no assurances that we will be in compliance with these covenants in the future.

Future Requirements and Funding Sources Our fixed commitments for cash expenditures consist primarily of payments under operating leases, inventory purchase commitments, and payments of principal and interest for debt obligations. Our operating lease commitments include $1.5 million of future minimum lease payments spread over the three-year lease term under the lease agreement we entered into in July 2013 for our manufacturing facility in Largo, Florida. In addition, we have $0.8 million of future minimum lease payments spread over the remaining lease period with respect to our Oakland, California campus following the sale of our campus in a sale-leaseback transaction. The total remaining operating lease commitments relate to our various other offices around the world.

From time to time, we may provide or commit to extend credit or credit support to our customers. This financing may include extending the terms for product payments to customers. Any extension of financing to our customers will limit the capital that we have available for other uses.

Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of June 30, 2014, three customers accounted for 60% of net accounts receivable and receivables from customers in countries other than the United States of America represented 87% of net accounts receivable. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt.

Although we generated net income of $4.3 million for the year ended December 31, 2013 and net income of $0.7 million for the first half of 2014, we have incurred net losses in prior years and there can be no assurance that we will continue to generate net income or have positive cash flows from operations in any future period. In order to meet our liquidity 20-------------------------------------------------------------------------------- Table of Contents needs and finance our capital expenditures and working capital needs for our business, we may be required to sell assets, issue debt or equity securities or borrow on potentially unfavorable terms. In addition, we may be required to reduce our operations in low margin regions, including reductions in headcount.

We may be unable to sell assets, issue securities or access additional financing to meet these needs on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. Likewise, any equity financing could result in additional dilution of our stockholders. If we are unable to obtain additional capital or are required to obtain additional capital on terms that are not favorable to us, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. In addition, we may be required to reduce our operations in low margin regions, including reductions in headcount.Based on our current plans and business conditions, we believe that our existing cash, cash equivalents and available credit facilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.

Contractual Commitments and Off-Balance Sheet Arrangements At June 30, 2014, our future contractual commitments by fiscal year were as follows (in thousands): Payments due by period Total 2014 2015 2016 2017 2018 and thereafter Operating leases $ 2,958 $ 868 $ 1,466 $ 541 $ 83 $ - Purchase commitments 10,737 10,737 - - - - Line of credit (1) 10,000 10,000 - - - - Total future contractual commitments $ 23,695 $ 21,605 $ 1,466 $ 541 $ 83 $ - (1) The specified payment period reflects our current intent to repay all outstanding borrowings within the current year. The maturity date under the WFB Facility is March 31, 2016.

Operating Leases The operating lease amounts shown above represent primarily off-balance sheet arrangements. For operating lease commitments, a liability is generally not recorded on our balance sheet unless the facility represents an excess facility for which an estimate of the facility exit costs has been recorded on our balance sheet, net of estimated sublease income. For operating leases that include contractual commitments for operating expenses and maintenance, estimates of such amounts are included based on current rates. Payments made under operating leases will be treated as rent expense for the facilities currently being utilized.

Purchase Commitments The purchase commitments shown above represent non-cancellable inventory purchase commitments as of June 30, 2014. The inventory purchase commitments typically allow for cancellation of orders 30 days in advance of the required inventory availability date as set by us at time of order.

Line of Credit The line of credit obligation has been recorded as a liability on our balance sheet. The line of credit obligation amount shown above represents the scheduled principal repayment, but not the associated interest payments which may vary based on changes in market interest rates. At June 30, 2014, the interest rate under the WFB Facility was 3.23%.

As of June 30, 2014, we had $10.0 million outstanding under our line of credit under the WFB Facility and an additional $3.3 million committed as security for letters of credit. See above under "Cash Management" for further information about the WFB Facility.

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