Cash Problems Plague Netrix

Cash Problems Plague Netrix

By Bob Starzynski
Staff Writer

If Netrix cannot generate or borrow adequate cash in the near future, "a sale, liquidation or restructuring of the company will be required, in whole or in part," according to an Aug. 13 quarterly report to shareholders.

That assessment threw investors ? who thought the 13-year-old company was finishing a year-long turnaround ? for a loop. Not anticipating such bad news, investors reacted by sending shares of the Herndon, Va., company down sharply on the Nasdaq National Market. In the week following the quarterly report, Netrix shares lost more than half of their value, closing at $1.19 Aug. 21.

"The cash matter has escalated to a very immediate and pressing priority," Lynn Chapman, president and chief executive officer of the 170-employee company, said last week. "We need to announce progress on the issue within weeks."

However, Chapman said the debacle was expected. "The fact that cash is an issue is no surprise to management." The cash crunch may not have caught company executives off guard, but it is a surprise to investors.

"They are way off schedule," said Bonnie Wachtel, an investor with Wachtel & Co., a stockbrokerage in Washington. "There is certainly a lot more risk associated with this company than they were letting on."

Wachtel has added to her position in Netrix in the wake of the price collapse because she believes in the product, Network Exchange. That product allows companies to run voice communication through their Internet connection. Launched five months ago, it is marketed to corporations large enough to have their own network infrastructure.

During the past year, Netrix has shifted gears to concentrate on this Internet telephony market. Its earlier focus was on providing telecommunications switching technology to large corporations.

In recent months, the company's main problem has been not meeting its ambitious sales expectations for the product, Wachtel said.

In April, Chapman told Washington Technology that his company had passed the "low-water mark." He said the company had just begun shipping its new Internet telephony product, and that he expected sales to ramp up fast enough to turn a profit by the third or fourth quarter of this year. Almost simultaneous with the shipping of new product, Netrix netted $1.5 million through a private placement.

That money, along with bank financing, should have carried Netrix to profitability. But the company hit several snags along the way, Chapman said last week.

First, while ramping up for sales of the new product, the company took its eye off the ball last quarter by not diligently collecting money on older services, Chapman said.

"We had an up-tick in our receivables, which ate up a fair amount of cash," he said.

As of the end of June, Netrix's accounts receivable totaled $7.4 million, not including $3.8 million that was labeled "doubtful accounts."

Chapman also said Netrix has been delayed in getting the new product to customers.

"We have gotten positive feedback on the product itself, but some customers are complaining about installation delays," Chapman said. He did not offer further information on the delays.

Additionally, the new product is generating revenue, but not at a fast enough pace to counter the decline in revenue from products and services that have been phased out.

In the second quarter, the company lost $2.8 million on $7.8 million in revenue, compared with a loss of $1.7 million on revenue of $8.5 million in the same quarter of 1997.

Last week, Chapman conceded there is no way for the company to turn a profit in the current quarter, but he would not rule out the possibility of a profit in either the last quarter of 1998 or first quarter of 1999.

But Netrix's most serious problem is a shaky relationship with its lending bank, Coast Business Credit. The bank notified Netrix early this month that, because of the company's financial problems, it will no longer treat international receivables as a means of lending collateral, according to the quarterly report.

That means that Netrix will not be able to borrow as much money from the bank. Additionally, the bank is raising the interest rate that it is charging Netrix, according to the report.

The report also indicated that if a new credit facility for international receivables cannot be found, the company has only "sufficient cash and borrowing ability to operate for approximately three months."

That predicament leaves Chapman with four options:

• Working with Coast Business Credit to get the line of credit that the company needs;
• Find another bank that is more willing to negotiate a line of credit on Netrix's terms;
• Secure a bridge loan to carry the company until sales pick up; or
• Offer another private stock placement.

If the company solves its financial problems, it could have a very bright future, analysts contend.

"This market will go from zero to billions in a few years' time," said Vik Grover, an analyst who covers Internet telephony companies for Kaufman Brothers in New York. "Netrix has some good technology."

But, he said, "they have to focus on distribution of their product and on making sure that they continue to feed [research and development]. In this business, a good product today will be outdated in six months."

"The company has a technically superior position in the Internet telephony equipment market, which is permitting it to make significant progress toward establishing important major distribution relationships," Ted Flomenhaft, an analyst with L. Flomenhaft & Co. of New York, wrote in a report this month after Netrix released its quarterly report.

Despite his optimism, Flomenhaft has a "hold" rating on Netrix's stock because of its financial problems.

But optimism over Netrix's product is spreading. In next month's issue of Internet Telephony magazine, the product is slated to receive the Editor's Choice Award.