Attached files
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EXCEL - IDEA: XBRL DOCUMENT - XRS Corp | Financial_Report.xls |
EX-32.1 - EXHIBIT - XRS Corp | exhibit321certificationfy1.htm |
EX-31.2 - EXHIBIT - XRS Corp | exhibit312certificationfy1.htm |
EX-10.1 - EXHIBIT - XRS Corp | exhibit101leaseagreementfy.htm |
EX-31.1 - EXHIBIT - XRS Corp | exhibit311certificationfy1.htm |
EX-32.2 - EXHIBIT - XRS Corp | exhibit322certificationfy1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
Form 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________ to ________
Commission File Number 0-27166
_______________________________________
XRS Corporation
(Exact name of registrant as specified in its charter)
Minnesota | 41-1641815 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
965 Prairie Center Drive | (952) 707-5600 | |
Eden Prairie, Minnesota, 55344 | (Registrant's telephone number, | |
(Address of principal executive offices) | including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer o | Accelerated Filer o | ||
Non-Accelerated File o | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
The number of shares of common stock outstanding on August 6, 2014 was 11,226,682.
Table of Contents
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EXHIBITS |
2
XRS Corporation
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||
(In thousands, except per share data) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Revenue | |||||||||||||||
Software | $ | 10,867 | $ | 11,266 | $ | 32,465 | $ | 34,613 | |||||||
Hardware systems | 1,689 | 1,798 | 5,610 | 6,569 | |||||||||||
Services | 257 | 340 | 825 | 913 | |||||||||||
Total revenue | 12,813 | 13,404 | 38,900 | 42,095 | |||||||||||
Costs and expenses | |||||||||||||||
Cost of goods sold | 5,049 | 5,225 | 15,795 | 16,577 | |||||||||||
Selling, general and administrative | 4,389 | 5,094 | 14,322 | 15,940 | |||||||||||
Research and development | 3,289 | 2,873 | 9,297 | 8,721 | |||||||||||
Total costs and expenses | 12,727 | 13,192 | 39,414 | 41,238 | |||||||||||
Operating income (loss) | 86 | 212 | (514 | ) | 857 | ||||||||||
Net interest and other expense | (6 | ) | (35 | ) | (52 | ) | (82 | ) | |||||||
Income (loss) before income taxes | 80 | 177 | (566 | ) | 775 | ||||||||||
Income tax (benefit) expense | — | (52 | ) | (6 | ) | 51 | |||||||||
Net income (loss) | 80 | 229 | (560 | ) | 724 | ||||||||||
Preferred stock dividends | (63 | ) | (59 | ) | (183 | ) | (175 | ) | |||||||
Preferred stock deemed dividends | (5 | ) | — | (5 | ) | — | |||||||||
Net income (loss) to common shareholders | $ | 12 | 170 | $ | (748 | ) | $ | 549 | |||||||
Net income (loss) per common share: | |||||||||||||||
Basic | $ | — | $ | 0.02 | $ | (0.07 | ) | $ | 0.05 | ||||||
Diluted | $ | — | $ | 0.01 | $ | (0.07 | ) | $ | 0.03 | ||||||
Weighted average common and common share equivalents: | |||||||||||||||
Basic | 11,159 | 10,858 | 11,043 | 10,831 | |||||||||||
Diluted | 12,184 | 28,345 | 11,043 | 27,766 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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XRS Corporation
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Net income (loss) | $ | 80 | $ | 229 | $ | (560 | ) | $ | 724 | ||||||
Foreign currency translation adjustments | 467 | (513 | ) | (555 | ) | (1,149 | ) | ||||||||
Comprehensive income (loss) | $ | 547 | $ | (284 | ) | $ | (1,115 | ) | $ | (425 | ) |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
4
XRS Corporation
Consolidated Balance Sheets (Unaudited)
June 30, | September 30, | ||||||
(In thousands) | 2014 | 2013 | |||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 13,017 | $ | 10,445 | |||
Accounts receivable, less allowances of $164 at June 30, 2014 | |||||||
and $151 at September 30, 2013 | 6,629 | 6,864 | |||||
Inventories | 1,156 | 1,710 | |||||
Deferred product costs | 426 | 625 | |||||
Prepaid expenses and other current assets | 1,639 | 1,417 | |||||
Total current assets | 22,867 | 21,061 | |||||
Equipment, leased equipment and leasehold improvements, net | 4,234 | 5,980 | |||||
Intangible assets, net | 3,221 | 4,578 | |||||
Goodwill | 16,199 | 16,640 | |||||
Deferred product costs, net of current portion | 112 | 213 | |||||
Other assets | 532 | 667 | |||||
Total assets | $ | 47,165 | $ | 49,139 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities | |||||||
Accounts payable | $ | 3,118 | $ | 2,885 | |||
Accrued expenses | 3,236 | 4,560 | |||||
Deferred revenue | 1,648 | 1,886 | |||||
Total current liabilities | 8,002 | 9,331 | |||||
Deferred revenue, net of current portion | 225 | 496 | |||||
Other long-term liabilities | 13 | 62 | |||||
Total liabilities | 8,240 | 9,889 | |||||
Commitments and contingencies (Note 10) | |||||||
Shareholders' equity | |||||||
Preferred stock, no par value; 50,000 shares authorized; 17,500 shares | |||||||
designated; shares issued and outstanding: 16,666 at June 30, | |||||||
2014 and 16,590 at September 30, 2013 | 44,728 | 44,524 | |||||
Common stock, par value $0.01 per share; 100,000 shares authorized; | |||||||
shares issued and outstanding: 11,221 at June 30, 2014 and | |||||||
10,900 at September 30, 2013 | 112 | 109 | |||||
Additional paid-in capital | 51,445 | 50,674 | |||||
Accumulated deficit | (57,436 | ) | (56,688 | ) | |||
Accumulated other comprehensive income | 76 | 631 | |||||
Total shareholders' equity | 38,925 | 39,250 | |||||
Total liabilities and shareholders' equity | $ | 47,165 | $ | 49,139 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
5
XRS Corporation
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||
(In thousands) | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance as of September 30, 2012 | 16,493 | $ | 44,292 | 10,808 | $ | 108 | $ | 49,979 | $ | (57,319 | ) | $ | 1,464 | $ | 38,524 | ||||||||||||||
Stock-based compensation | — | — | — | — | 644 | — | — | 644 | |||||||||||||||||||||
Issuance of common stock for share-based compensation awards | — | — | 61 | 1 | — | — | — | 1 | |||||||||||||||||||||
Preferred stock dividends | 97 | 232 | — | — | — | (235 | ) | — | (3 | ) | |||||||||||||||||||
Exercise of options | — | — | 31 | — | 51 | — | — | 51 | |||||||||||||||||||||
Comprehensive income | — | — | — | — | — | 866 | (833 | ) | 33 | ||||||||||||||||||||
Balance as of September 30, 2013 | 16,590 | 44,524 | 10,900 | 109 | 50,674 | (56,688 | ) | 631 | 39,250 | ||||||||||||||||||||
Stock-based compensation | — | — | — | — | 550 | — | — | 550 | |||||||||||||||||||||
Issuance of common stock for share-based compensation awards | — | — | 146 | 1 | (1 | ) | — | — | — | ||||||||||||||||||||
Preferred stock dividends | 95 | 241 | — | — | — | (183 | ) | — | 58 | ||||||||||||||||||||
Preferred stock deemed dividends | — | 5 | — | — | — | (5 | ) | — | — | ||||||||||||||||||||
Exercise of options | — | — | 155 | 2 | 181 | — | — | 183 | |||||||||||||||||||||
Cashless exercise of warrants | — | — | 1 | — | — | — | — | — | |||||||||||||||||||||
Conversion of Series F Preferred Stock into common stock | (19 | ) | (42 | ) | 19 | — | 41 | — | — | (1 | ) | ||||||||||||||||||
Comprehensive loss | — | — | — | — | — | (560 | ) | (555 | ) | (1,115 | ) | ||||||||||||||||||
Balance as of June 30, 2014 | 16,666 | $ | 44,728 | 11,221 | $ | 112 | $ | 51,445 | $ | (57,436 | ) | $ | 76 | $ | 38,925 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
6
XRS Corporation
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended | |||||||
June 30, | |||||||
(In thousands) | 2014 | 2013 | |||||
Operating activities | |||||||
Net (loss) income | $ | (560 | ) | $ | 724 | ||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 4,957 | 5,080 | |||||
Amortization of deferred financing costs | 38 | 57 | |||||
Deferred income taxes | — | (9 | ) | ||||
Loss on sale or disposal of equipment and leased equipment | 47 | 48 | |||||
Stock-based compensation | 550 | 498 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | 431 | 1,056 | |||||
Inventories, net | 555 | 1,165 | |||||
Deferred product costs | 299 | 242 | |||||
Prepaid expenses and other assets | (269 | ) | (672 | ) | |||
Accounts payable | 460 | (162 | ) | ||||
Accrued expenses and other liabilities | (1,432 | ) | (10 | ) | |||
Deferred revenue | (504 | ) | (837 | ) | |||
Net cash provided by operating activities | 4,572 | 7,180 | |||||
Investing activities | |||||||
Purchase of equipment | (2,023 | ) | (2,324 | ) | |||
Capitalized software development | (138 | ) | (355 | ) | |||
Proceeds from the sale of equipment | — | 16 | |||||
Net cash used in investing activities | (2,161 | ) | (2,663 | ) | |||
Financing activities | |||||||
Revolving line of credit | — | (2,300 | ) | ||||
Proceeds from exercise of options | 183 | 13 | |||||
Deferred financing costs | (30 | ) | (50 | ) | |||
Net cash provided by (used in) financing activities | 153 | (2,337 | ) | ||||
Effects of exchange rate on cash | 8 | 9 | |||||
Increase in cash and cash equivalents | 2,572 | 2,189 | |||||
Cash and cash equivalents | |||||||
Beginning | 10,445 | 7,120 | |||||
Ending | $ | 13,017 | $ | 9,309 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
7
XRS Corporation
Notes to the Unaudited Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
XRS Corporation and its wholly owned subsidiary, Turnpike Global Technologies, Inc. (collectively, XRS Corporation or the Company) delivers compliance and fleet management solutions to the commercial trucking industry. The Company's solutions enable customers to improve compliance with United States Department of Transportation (DOT) regulations, optimize the utilization of their assets and enhance the productivity of fleet operations across the entire supply chain. XRS Corporation's continued focus on leveraging the latest technology within its solutions has resulted in the Company contributing to the trucking industry's migration to the use of mobile devices for collecting and analyzing DOT compliance and management data.
Basis of Presentation and Preparation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements in conformity with the accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods have been made. Certain prior period amounts in the consolidated financial statements and notes thereto have been reclassified to conform to the current period’s presentation.
In addition, the consolidated financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. Therefore, these consolidated financial statements should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto for the fiscal year ended September 30, 2013, included in its Annual Report on Form 10-K. Unless otherwise stated, references to particular years or quarters refer to the Company's fiscal years ended in September and the associated quarters of those fiscal years.
Capitalized Software Development
Internal Use
Research and development costs are expensed as incurred, except for certain costs that are capitalized in connection with the development of software for internal use. Costs incurred in the preliminary stages of development of internal use software are expensed as incurred. The Company capitalizes eligible costs that are incurred subsequent to the determination that the project will be completed and the software will be used to perform the function intended. Capitalization ceases upon completion of all substantial testing performed to ensure the solution is ready for its intended use. Maintenance and training costs are expensed as incurred. Capitalized internal use software development costs are amortized beginning when the software is placed in service. Amortization is computed on a straight-line basis over the estimated economic life of the software.
As of June 30, 2014 and September 30, 2013, there were $0.4 million and $0.3 million, respectively, of capitalized internal use software development costs net of accumulated amortization included in other assets in the accompanying consolidated balance sheets.
External Use
The Company capitalizes costs related to development of software to be sold or otherwise marketed as part of a solution which are incurred after establishing technological feasibility. Capitalized external use software
8
development costs are amortized beginning when the solution is released for sale to the general public. Amortization is computed using the greater of the ratio of current units of the solution sold to the total of current and anticipated future unit sales or the straight-line method over the estimated economic life of the related solution (two to five years). Software development costs related to software to be sold or otherwise marketed as part of a solution that do not meet capitalization criteria are charged to research and development expense as incurred.
As of June 30, 2014 and September 30, 2013, there were $0.1 million and $0.2 million, respectively, of external use capitalized software development costs net of accumulated amortization included in other assets in the accompanying consolidated balance sheets.
Amortization of capitalized software development recorded in the accompanying consolidated statements of operations consists of (in thousands):
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Capitalized software amortization recorded in: | |||||||||||||||
Cost of goods sold | $ | 62 | $ | 55 | $ | 184 | $ | 106 |
Recently Issued Accounting Standards
Revenue from Contracts with Customers – In May 2014, the Financial Accounting Standards Board issued guidance relative to reporting on revenue created from contracts with customers. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is assessing the impact of adoption of this guidance on the Company's consolidated financial statements.
9
Note 2. Net Income (Loss) Per Common Share
Basic income (loss) per common share is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding for the period. Generally, net income per diluted common share reflects the potential dilution that could occur if securities or other obligations to issue common stock, such as options, restricted stock awards, restricted stock units, warrants or convertible preferred stock, were exercised or converted into common stock that then shared in the earnings of the Company. Net loss per diluted common share is equal to net loss per basic common share because the effect of including such securities or obligations would be antidilutive.
The calculation of net income (loss) per common share is summarized in the following table (in thousands, except per share data):
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net income (loss) per common share: | |||||||||||||||
Basic | $ | — | $ | 0.02 | $ | (0.07 | ) | $ | 0.05 | ||||||
Diluted | $ | — | $ | 0.01 | $ | (0.07 | ) | $ | 0.03 | ||||||
Numerator, basic: | |||||||||||||||
Net income (loss) to common shareholders | $ | 12 | $ | 170 | $ | (748 | ) | $ | 549 | ||||||
Denominator, basic: | |||||||||||||||
Weighted average common shares, basic | 11,159 | 10,858 | 11,043 | 10,831 | |||||||||||
Numerator, diluted: | |||||||||||||||
Net income (loss) to common shareholders | $ | 12 | $ | 170 | $ | (748 | ) | $ | 549 | ||||||
Preferred stock dividends | — | 59 | — | 175 | |||||||||||
Numerator, diluted | $ | 12 | $ | 229 | $ | (748 | ) | $ | 724 | ||||||
Denominator, diluted: | |||||||||||||||
Weighted average common shares, basic | 11,159 | 10,858 | 11,043 | 10,831 | |||||||||||
Effect of dilutive securities: | |||||||||||||||
Effect of stock options | 581 | 471 | — | 185 | |||||||||||
Effect of restricted stock units | 376 | 450 | — | 231 | |||||||||||
Effect of warrants | 68 | — | — | — | |||||||||||
Effect of preferred stock | — | 16,566 | — | 16,519 | |||||||||||
Weighted average common and common share equivalents, diluted | 12,184 | 28,345 | 11,043 | 27,766 |
There were $68,000 preferred stock dividends and deemed dividends and 17.7 million potentially dilutive securities, such as options, restricted stock awards, restricted stock units, warrants or convertible preferred stock, excluded from the computation of net income per diluted common share for the three months ended June 30, 2014 because their inclusion would have been antidilutive. For the three months ended June 30, 2013, there were no preferred stock dividends and deemed dividends excluded from the computation of net income per diluted common share; however, there were 2.9 million potentially dilutive securities, such as options, restricted stock awards, restricted stock units, warrants or convertible preferred stock, excluded from the computation of net income per diluted common share because their inclusion would have been antidilutive.
For the nine months ended June 30, 2014, there were $0.2 million preferred stock dividends and deemed dividends, and 18.2 million potentially dilutive securities, such as options, restricted stock awards, restricted stock units,
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warrants or convertible preferred stock, excluded from the computation of net loss per diluted common share because their inclusion would have been antidilutive. For the same period in fiscal 2013 there were no preferred stock dividends excluded from the computation of net income per diluted common share; however, there were 11.8 million potentially dilutive securities, such as options, restricted stock awards, restricted stock units or warrants excluded from the computation of net income per diluted common share because their inclusion would have been antidilutive.
Note 3. Revenue and Cost of Goods Sold Information
Revenue and cost of goods sold recorded in the accompanying consolidated statements of operations consist of (in thousands):
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue: | |||||||||||||||
Software | $ | 10,867 | $ | 11,266 | $ | 32,465 | $ | 34,613 | |||||||
Hardware systems | 1,689 | 1,798 | 5,610 | 6,569 | |||||||||||
Services | 257 | 340 | 825 | 913 | |||||||||||
Total revenue | $ | 12,813 | $ | 13,404 | $ | 38,900 | $ | 42,095 | |||||||
Cost of goods sold: | |||||||||||||||
Software | $ | 3,249 | $ | 3,092 | $ | 9,771 | $ | 9,226 | |||||||
Hardware systems | 1,252 | 1,474 | 4,316 | 5,632 | |||||||||||
Services | 548 | 659 | 1,708 | 1,719 | |||||||||||
Total cost of goods sold | $ | 5,049 | $ | 5,225 | $ | 15,795 | $ | 16,577 |
Software revenue includes monthly subscriptions from the XataNet, XRS and Turnpike solutions; monthly fees from the MobileMax solution; and activation fees. Hardware systems revenue includes hardware with embedded firmware and for the XataNet solution, software that can be hosted by the customer and warranty and repair revenue. Services revenue includes installation, implementation, training and professional services revenue.
Cost of software consists of communication costs for the XataNet and MobileMax solutions; hosting costs; depreciation of Relay and RouteTracker assets; and direct personnel costs related to network infrastructure, as well as technical support for the XRS and Turnpike solutions. Cost of hardware systems consists of direct product costs; warranty costs and product repair costs, as well as direct personnel costs and technical support for the XataNet and MobileMax solutions. Cost of services consists of third-party vendor costs and direct costs related to services personnel.
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Note 4. Supplemental Cash Flow and Non-Cash Information
The following table summarizes supplemental cash flow and non-cash information (in thousands)
For the Nine Months Ended | |||||||
June 30, | |||||||
2014 | 2013 | ||||||
Supplemental cash flow information: | |||||||
Cash paid for interest | $ | 11 | $ | 17 | |||
Cash paid for income taxes | 148 | 92 | |||||
Supplemental non-cash information: | |||||||
Preferred stock deemed dividends | 5 | — | |||||
Preferred stock dividends | 183 | 175 | |||||
Preferred stock dividends paid | 241 | 232 | |||||
Conversion of Series F Preferred Stock into common stock | 42 | — |
Note 5. Equipment, Leased Equipment and Leasehold Improvements
Equipment, leased equipment and leasehold improvements consist of (in thousands):
June 30, | September 30, | ||||||
2014 | 2013 | ||||||
Equipment, leased equipment and leasehold improvements: | |||||||
Engineering and SaaS equipment | $ | 12,089 | $ | 11,523 | |||
Relay and RouteTracker assets | 10,729 | 9,461 | |||||
Leasehold improvements | 2,686 | 2,686 | |||||
Office furniture and equipment | 1,028 | 1,028 | |||||
Assets not placed in service | 175 | 630 | |||||
Equipment, leased equipment and leasehold improvements, gross | 26,707 | 25,328 | |||||
Accumulated depreciation | (22,473 | ) | (19,348 | ) | |||
Equipment, leased equipment and leasehold improvements, net | $ | 4,234 | $ | 5,980 |
Depreciation recorded in the accompanying consolidated statements of operations consists of (in thousands):
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Depreciation recorded in: | |||||||||||||||
Cost of goods sold | $ | 746 | $ | 724 | $ | 2,294 | $ | 2,060 | |||||||
Selling, general and administrative expense | 260 | 333 | 811 | 1,045 | |||||||||||
Research and development expense | 122 | 178 | 423 | 574 | |||||||||||
Total depreciation of equipment, leased equipment and leasehold improvements | $ | 1,128 | $ | 1,235 | $ | 3,528 | $ | 3,679 |
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Note 6: Goodwill and Definite-Lived Intangible Assets
The following table summarizes the changes in goodwill (in thousands):
Balance as of September 30, 2013 | $ | 16,640 | |
Foreign currency translation adjustment | (441 | ) | |
Balance as of June 30, 2014 | $ | 16,199 |
Definite-lived intangible assets subject to amortization were as follows as of June 30, 2014 (in thousands):
Weighted Average Life (Years) | Cost | Accumulated Amortization | Foreign Currency Translation Adjustment | Net Carrying Amount | |||||||||||||
Definite-lived intangible assets: | |||||||||||||||||
Acquired customer contracts | 7.8 | $ | 11,400 | $ | (9,986 | ) | $ | 40 | $ | 1,454 | |||||||
Acquired technology | 7.0 | 2,700 | (1,838 | ) | 65 | 927 | |||||||||||
Reseller relationships | 6.0 | 1,500 | (1,191 | ) | 43 | 352 | |||||||||||
Trademark | 10.0 | 900 | (429 | ) | 14 | 485 | |||||||||||
Other definite-lived intangibles | 7.0 | 49 | (46 | ) | — | 3 | |||||||||||
Total | 7.7 | $ | 16,549 | $ | (13,490 | ) | $ | 162 | $ | 3,221 |
Amortization of definite-lived intangible assets recorded in the accompanying consolidated statements of operations consists of (in thousands):
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Amortization recorded in: | |||||||||||||||
Cost of goods sold | $ | 94 | $ | 100 | $ | 284 | $ | 305 | |||||||
Selling, general and administrative expense | 319 | 328 | 961 | 990 | |||||||||||
Total amortization of definite-lived intangible assets | $ | 413 | $ | 428 | $ | 1,245 | $ | 1,295 |
Future amortization expense of definite-lived intangible assets as of June 30, 2014 is expected to be as follows (in thousands):
Years ending September 30, | |||
Remainder of 2014 | $ | 418 | |
2015 | 1,666 | ||
2016 | 790 | ||
2017 | 153 | ||
2018 | 89 | ||
2019 | 89 | ||
Thereafter | 16 | ||
Total | $ | 3,221 |
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Note 7. Financing Arrangements
Effective March 13, 2014, the Company entered into an Amended and Restated Loan and Security Agreement (the Agreement) with Silicon Valley Bank, which provides the Company with a $6.0 million revolving line of credit. Borrowings on the revolving line of credit bear interest based on the nature of borrowing at a floating rate equal to (i) 2.5 percent over the LIBOR rate, provided certain liquidity conditions are met, or 3.5 percent over the LIBOR rate; or (ii) prime rate, provided certain liquidity conditions are met, or 1.0 percent over the prime rate. Throughout the term of the Agreement, the Company will also pay a fee equal to 0.25 percent of the average unused portion of the revolving line of credit. Interest is accrued monthly and paid monthly or quarterly based on the nature of the borrowing. The Amended and Restated Loan and Security Agreement replaces the Loan and Security Agreement with Silicon Valley Bank that matured on February 24, 2014.
Amounts borrowed under the revolving line of credit are secured by substantially all of the personal property of the Company and generally may be repaid and reborrowed at any time before maturity. The revolving line of credit is set to mature on March 13, 2017.
There were no balances outstanding on the revolving lines of credit in the accompanying consolidated balance sheets as of June 30, 2014 or September 30, 2013.
Amounts available under the revolving line of credit are subject to a borrowing base formula. Changes in the assets within the borrowing base formula can impact the amount available to the Company. Based on the facility’s borrowing base and other requirements at such dates, the Company had excess availability of $4.3 million at June 30, 2014, and $4.0 million at September 30, 2013.
The Amended and Restated Loan and Security Agreement contains customary representations, warranties, covenants and events of default including, without limitation, covenants restricting the Company's ability to incur indebtedness and liens and to merge or consolidate with another entity, as well as limitations on the Company's ability to declare and pay cash dividends, to merge or consolidate with another entity and also contains subjective acceleration clause. The Amended and Restated Loan and Security Agreement also includes financial covenants requiring the Company to maintain a minimum tangible net worth and an adjusted quick ratio. The Company was in compliance with these covenants as of June 30, 2014.
Note 8. Stock-Based Compensation
The Company had 810,603 shares authorized and available for future equity awards as of June 30, 2014. Equity awards granted are deducted from the shares available for grant under the Company's 2007 Long-Term Incentive and Stock Option Plan. Similarly, equity awards canceled are added back to the shares available for grant under the Company's stock plans.
Stock Options
The following table summarizes information related to stock option grants (number of options in thousands):
For the Nine Months Ended | |||||||
June 30, | |||||||
2014 | 2013 | ||||||
Stock option grants: | |||||||
Number of options granted | 578 | 1,182 | |||||
Weighted-average grant date fair value | $ | 1.55 | $ | 0.54 |
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The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted average assumptions for grants:
For the Nine Months Ended | |||||
June 30, | |||||
2014 | 2013 | ||||
Weighted average assumptions for grants: | |||||
Risk-free interest rate | 2.08 | % | 1.28 | % | |
Expected stock price volatility | 59.42 | % | 54.11 | % | |
Expected lives | 5.9 | 6.0 | |||
Expected dividend yield | — | — |
The following tables summarizes information relating to stock option activity (in thousands, except per option and weighted average remaining contractual life data):
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||
Options outstanding at September 30, 2013 | 2,955 | $ | 2.23 | 7.3 | ||||||||
Granted | 578 | 2.71 | ||||||||||
Exercised | (155 | ) | 1.18 | |||||||||
Expired | (120 | ) | 2.74 | |||||||||
Forfeited | (394 | ) | 1.29 | |||||||||
Options outstanding at June 30, 2014 | 2,864 | $ | 2.49 | 6.9 | $ | 1,626 | ||||||
Options exercisable at June 30, 2014 | 1,813 | $ | 2.85 | 5.6 | $ | 803 | ||||||
Options expected to vest after June 30, 2014 | 1,051 | $ | 1.87 | 9.0 | $ | 823 |
Aggregate intrinsic value represents the Company’s closing stock price on the last trading day of the fiscal period in excess of the exercise prices multiplied by the number of options outstanding, exercisable or expected to vest.
The following table summarizes stock option information by exercise price range as of June 30, 2014 (number of options in thousands):
Options Outstanding | Options Exercisable | ||||||||||||||||
Range of Exercise Price | Number of Options | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number of Options | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | |||||||||||
$0.69 - $0.85 | 505 | 8.6 | $ | 0.82 | 169 | 8.6 | $ | 0.82 | |||||||||
$1.20 - $1.85 | 595 | 8.1 | 1.56 | 364 | 8.0 | 1.50 | |||||||||||
$2.00 - $2.99 | 1,313 | 7.1 | 2.67 | 829 | 5.7 | 2.65 | |||||||||||
$3.00 - $3.94 | 53 | 5.2 | 3.28 | 53 | 5.2 | 3.28 | |||||||||||
$4.33 - $4.88 | 35 | 2.1 | 4.64 | 35 | 2.1 | 4.64 | |||||||||||
$5.03 - $5.40 | 363 | 2.2 | 5.35 | 363 | 2.2 | 5.35 | |||||||||||
2,864 | 6.9 | $ | 2.49 | 1,813 | 5.6 | $ | 2.85 |
As of June 30, 2014, there was $0.9 million of total unrecognized compensation costs related to stock option awards. The Company will recognize these costs over the remaining vesting periods of these stock options. The costs will be recognized over a weighted average period of 1.7 years.
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Restricted Stock Units
The following table summarizes information relating to restricted stock unit activity (in thousands, except per unit data):
Number of Units | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | ||||||||
Restricted stock units outstanding at September 30, 2013 | 678 | $ | 1.50 | |||||||
Granted | 167 | 2.72 | ||||||||
Settled | (120 | ) | 1.71 | |||||||
Forfeited | (155 | ) | 1.29 | |||||||
Restricted stock units outstanding at June 30, 2014 | 570 | $ | 1.87 | $ | 1,464 | |||||
Restricted stock units vested and unsettled at June 30, 2014 | 232 | $ | 1.87 | $ | 596 | |||||
Restricted stock units expected to vest after June 30, 2014 | 338 | $ | 1.87 | $ | 868 |
Aggregate intrinsic value represents the Company’s closing stock price on the last trading day of the fiscal period multiplied by the number of restricted stock units outstanding, vested and unsettled or expected to vest.
The total fair value of restricted stock units vested during the nine months ended June 30, 2014 was $0.4 million. As of June 30, 2014, there was $0.5 million of total unrecognized compensation costs related to restricted stock units. The Company will recognize these costs over the remaining vesting periods of these units. The costs will be recognized over a weighted average period of 1.7 years.
Common Stock Warrants
The following table summarizes information relating to common stock warrant activity (in thousands, except per warrant data):
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | ||||||
Common stock warrants outstanding at September 30, 2013 | 3,905 | $ | 3.02 | 3.0 | ||||
Exercised | (5 | ) | ||||||
Expired | (470 | ) | ||||||
Common stock warrants outstanding at June 30, 2014 | 3,430 | $ | 2.91 | 2.5 |
Note 9. Shareholders’ Equity
Common Stock
The Company is authorized to issue up to 100,000,000 shares of common stock.
Preferred Stock
The Company has authorized an undesignated class of preferred stock of 50,000,000 shares. The Board of Directors can issue preferred stock in one or more series and fix the terms of such stock without shareholder approval. Preferred stock may include the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion and redemption rights and other preferential provisions. Each share of preferred stock is convertible into one share of the Company's common stock.
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The following table summarizes information related to each of the Company's designated series of preferred stock (number of shares in thousands):
Shares Issued and Outstanding | ||||||||||||
Shares | Issuance or | June 30, | September 30, | |||||||||
Designated | Sale Price | 2014 | 2013 | |||||||||
Designated shares of preferred stock: | ||||||||||||
Series B | 3,000 | $ | 2.54 | 2,442 | 2,347 | |||||||
Series C | 1,400 | $ | 3.94 | 1,269 | 1,269 | |||||||
Series D | 1,600 | $ | 3.83 | 1,567 | 1,567 | |||||||
Series F | 1,400 | $ | 2.22 | 1,321 | 1,340 | |||||||
Series G | 10,100 | $ | 3.00 | 10,067 | 10,067 | |||||||
Total preferred stock | 17,500 | 16,666 | 16,590 |
In the second quarter of fiscal 2013 in conjunction with the Company's annual shareholder meeting, the shareholders of the Company approved the designation of an additional 750,000 shares of Series B Preferred Stock.
During the nine months ended June 30, 2014, the Company issued 95,000 shares of Series B Preferred Stock to Trident Capital Management-V, LLC for payment of accrued dividends. Based on the market value of the Company’s common stock on the date of the dividend payment, the payment of the dividend in additional shares of Series B Preferred Stock resulted in a non-cash dividend of $0.2 million for the nine months ended June 30, 2014.
In fiscal 2013, the Company issued 97,000 shares of Series B Preferred Stock to Trident Capital Management-V, LLC for payment of accrued dividends. Based on the market value of the Company’s common stock on the date of the dividend payment, the payment of the dividend in additional shares of Series B Preferred Stock resulted in a non-cash dividend of $0.2 million in fiscal 2013.
During the nine months ended June 30, 2014, 19,000 shares of Series F Preferred Stock were converted to common stock. During the nine months ended June 30, 2013, no shares of Series F Preferred Stock were converted to common stock.
Note 10. Commitments and Contingencies
On July 1, 2014, the Company entered into an operating lease agreement to lease office space in Minnetonka, Minnesota. The commencement date of the lease is January 1, 2015 and results in the relocation of Company headquarters. In accordance with this agreement, the Company entered into a letter of credit in the amount of $0.1 million as a security deposit for the leased facility, naming the Company's landlord as beneficiary. The lease for office space in Minnetonka, Minnesota expires in July 2022.
Legal
The Company is the subject of various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of business. Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, including settlements and judgments, where the Company has assessed that a loss is probable and an amount can be reasonably estimated.
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Note 11. Income Taxes
The Company's effective tax rate was 1.2 percent for the nine months ended June 30, 2014 compared to a tax rate of 6.6 percent for the comparable period in fiscal 2013. The lower tax rate for the nine months ended June 30, 2014 was attributable to the results from operations of the Company as of June 30, 2014.
The Company does not have objectively verifiable positive evidence of future taxable income. Accordingly, the Company concluded that recording a valuation allowance to the extent of the Company's deferred tax assets is appropriate. The realization of the deferred tax assets is dependent on future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The amount of the net deferred tax asset considered realizable could be increased in the future if the Company maintains profitability and it becomes more likely than not that these amounts would be realized.
As of September 30, 2013, the Company had federal and state net operating loss carryforwards of $39.7 million, and $10.6 million, respectively, both which are scheduled to expire from 2014 through 2032. As of September 30, 2013, the Company also had tax credit carryforwards of $3.0 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in this Report on Form 10-Q are forward-looking statements involving risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Numerous factors, risks and uncertainties affect the Company's operating results and could cause the Company's actual results to differ materially from forecasts and estimates or from any other forward-looking statements made by, or on behalf of, the Company, and there can be no assurance that future results will meet expectations, estimates or projections. Risks and uncertainties include, but are not limited to, the following:
• | Our growth and profitability depend on our timely introduction and market acceptance of new solutions, our ability to continue to fund research and development activities and our ability to establish and maintain strategic partner relationships; |
• | We are dependent on proprietary technology and communication networks owned and controlled by others, and accordingly, their problems may adversely impact us; |
• | We have generated operating losses in the past and additional operating losses may occur in the future and may be in excess of amounts that could be funded from operations, thus we may be dependent upon external investment to support our operations during these periods; and |
• | We are dependent upon existing customers continuing to utilize our solutions. |
Further information regarding these and other risks is included in “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, in this Form 10-Q and in subsequent filings we make with the Securities and Exchange Commission (SEC).
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Overview
XRS Corporation and its wholly owned subsidiary, Turnpike Global Technologies, Inc. (collectively, XRS Corporation, the Company, we, our, us) delivers compliance and fleet management solutions to the commercial trucking industry. Our solutions enable customers to improve compliance with United States Department of Transportation (DOT) regulations, optimize the utilization of their assets and enhance the productivity of fleet operations across the entire supply chain. We are leading the commercial trucking industry's migration to the use of mobile devices for collecting and analyzing DOT compliance and management data.
Our mobile solutions include:
• | XRS — The XRS solution is a mobile fleet optimization and compliance solution built with the scalability of cloud-based infrastructure and the functionality to support North America's largest fleets down to an individual owner/operator. It harnesses the power of mobility, transforming driver and truck data into an easy to use dashboard of information which is shared in real-time between drivers, dispatchers and fleet owners. The XRS solution uses a monthly subscription model with no upfront hardware costs. |
• | Turnpike — Turnpike is the Company's first generation mobile fleet optimization and compliance solution, which uses a monthly subscription model with no upfront hardware costs. |
Our legacy solutions include:
• | XataNet — A fleet optimization and compliance solution, utilizing a traditional on-board computer, integrated communications and a SaaS platform used by fleet managers, with broad functionality for enterprise customers seeking to maximize performance and minimize compliance risks. |
• | MobileMax — A traditional on-board communication solution for the for-hire trucking market with integrated back-office systems. |
With over 1,300 customers representing over 106,000 active truck subscriptions, we have a strong foundation as an industry leader in delivering Federal Motor Carrier Safety Administration compliant electronic logging devices with a track record of empowering fleet owners to leverage truck data to radically reduce costs. We have sales and distribution partnerships with various third-party resellers supporting the U.S. and Canadian commercial trucking industries.
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Results of Operations for the Three and Nine Months Ended June 30, 2014 and 2013
We operate as a single business segment and believe the information presented in our Management's Discussion and Analysis of Financial Condition and Results of Operations provides an understanding of our business, operations and financial condition. The following table sets forth detail related to revenue, cost of goods sold and gross margins (in thousands, except percentage data):
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Software | |||||||||||||||
Revenue | $ | 10,867 | $ | 11,266 | $ | 32,465 | $ | 34,613 | |||||||
Cost of goods sold | 3,249 | 3,092 | 9,771 | 9,226 | |||||||||||
Gross margin | $ | 7,618 | $ | 8,174 | $ | 22,694 | $ | 25,387 | |||||||
Gross margin % | 70.1 | % | 72.6 | % | 69.9 | % | 73.3 | % | |||||||
Hardware systems | |||||||||||||||
Revenue | $ | 1,689 | $ | 1,798 | $ | 5,610 | $ | 6,569 | |||||||
Cost of goods sold | 1,252 | 1,474 | 4,316 | 5,632 | |||||||||||
Gross margin | $ | 437 | $ | 324 | $ | 1,294 | $ | 937 | |||||||
Gross margin % | 25.9 | % | 18.0 | % | 23.1 | % | 14.3 | % | |||||||
Services | |||||||||||||||
Revenue | $ | 257 | $ | 340 | $ | 825 | $ | 913 | |||||||
Cost of goods sold | 548 | 659 | 1,708 | 1,719 | |||||||||||
Gross deficit | $ | (291 | ) | $ | (319 | ) | $ | (883 | ) | $ | (806 | ) | |||
Gross deficit % | (113.2 | )% | (93.8 | )% | (107.0 | )% | (88.3 | )% | |||||||
Total | |||||||||||||||
Revenue | $ | 12,813 | $ | 13,404 | $ | 38,900 | $ | 42,095 | |||||||
Cost of goods sold | 5,049 | 5,225 | 15,795 | 16,577 | |||||||||||
Gross margin | $ | 7,764 | $ | 8,179 | $ | 23,105 | $ | 25,518 | |||||||
Gross margin % | 60.6 | % | 61.0 | % | 59.4 | % | 60.6 | % |
In the above table, the revenue and cost of goods sold detail for categories listed are defined as follows:
• | Software revenue includes monthly subscriptions from the XataNet, XRS and Turnpike solutions; monthly fees from the MobileMax solution; and activation fees. |
• | Hardware systems revenue includes hardware with embedded firmware and, for the XataNet solution, software that can be hosted by the customer and warranty and repair revenue. |
• | Services revenue includes installation, implementation, training and professional services revenue. |
• | Software cost of goods sold consists of communication costs for the XataNet and MobileMax solutions; hosting costs; depreciation of Relay and RouteTracker assets; and direct personnel costs related to network infrastructure, as well as technical support for the XRS and Turnpike solutions. |
• | Hardware systems cost of goods sold consists of direct product costs, warranty costs and product repair costs, as well as direct personnel costs and technical support for the XataNet and MobileMax solutions. |
• | Services cost of goods sold consists of third-party vendor costs and direct costs related to services personnel. |
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Comparison of Fiscal 2014 Operating Results to Fiscal 2013
Third Quarter Results
Total Revenue
Total revenue for the three months ended June 30, 2014 decreased to $12.8 million from $13.4 million for the three months ended June 30, 2013.
For the three months ended June 30, 2014 mobile software revenue increased 18.6 percent compared with the comparable fiscal period in 2013 driven by continued growth in our XRS mobile solution subscription base. Total software revenue decreased 3.5 percent from $11.3 million for the three months ended June 30, 2013 to $10.9 million for the three months ended June 30, 2014 was attributable to continued growth in our mobile subscriptions, offset by attrition in our legacy subscription base and a decrease in average monthly subscription rate.
Hardware systems revenue decreased 6.1 percent, representing 13.2 percent of total revenue for the three months ended June 30, 2014, compared to 13.4 percent of revenue for the same period in fiscal 2013. This relative decrease was also reflective of the increased adoption of the Company's XRS mobile solution which has no upfront hardware costs to the customer.
Cost of Goods Sold and Gross Margins
Total cost of goods sold decreased 3.4 percent to $5.0 million for the three months ended June 30, 2014, compared to $5.2 million for the same period in fiscal 2013. Overall gross margins percentage remained consistent at 60.6 percent for the three months ended June 30, 2014 and 2013.
Software gross margins declined 2.5 percentage points to 70.1 percent for the three months ended June 30, 2014, compared to the same period in fiscal 2013. The decline in software gross margins is reflective of the Company's commitment to continue to support its legacy solutions while it transitions customers to its XRS mobile solution.
Hardware systems cost of goods sold of $1.3 million decreased 15.1 percent for the three months ended June 30, 2014, compared to $1.5 million for the same period in fiscal 2013. Hardware systems gross margins improved by 7.9 percentage points to 25.9 percent of revenue for the three months ended June 30, 2014, compared to 18.0 percent for the same period in fiscal 2013. Hardware system margins for the three months ended June 30, 2014 improved as a result of an increase in higher margin parts sales coupled with favorability in inventory obsolescence and warranty activity.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel costs for the Company's sales, marketing, client management and administration functions; sales commissions, marketing and promotional expenses; executive and administrative costs; and accounting and professional fees. Selling, general and administrative expenses decreased to $4.4 million, compared to $5.1 million for the comparable period in fiscal 2013, driven by a decrease in personnel costs.
Research and Development Expenses
Research and development expenses consist of personnel costs and expenses related to development of new solutions and added functionality to existing solutions. Research and development expenses were $3.3 million for the three months ended June 30, 2014, compared to $2.9 million for the same period in fiscal 2013. Research and development expenses increased as the Company continued to invest in new functionality within its XRS mobile solution including: trip management for managing routes and enhancements to fuel tax including print, sign and
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send automated reporting. This new functionality allows the XRS mobile solution to better meet the requirements of larger, more complex fleets, while further differentiating our solution from those offered by our competitors.
Net Income to Common Shareholders
Net income to common shareholders was $12,000 for the three months ended June 30, 2014, compared to $0.2 million for the same period in fiscal 2013. Net income to common shareholders reflects preferred stock dividends and preferred stock deemed dividends of $0.1 million for each of the three months ended June 30, 2014 and 2013.
Year-to-Date Results
Total Revenue
Total revenue was $38.9 million for the nine months ended June 30, 2014 compared to $42.1 million for the same period in the prior year.
Mobile software revenue increased 13.8 percent for the nine months ended June 30, 2014 over to the comparable period in fiscal 2013. Over the same periods, total software revenue decreased from $34.6 million for the nine months ended June 30, 2013 to $32.5 million for the nine months ended June 30, 2014. Despite the decrease in dollars, software revenue comprised 83.5 percent of total revenue for the nine months ended June 30, 2014, compared to 82.2 percent for the same period in fiscal 2013. Attrition of legacy customers and a lower monthly subscription rate on the XRS mobile solution contributed to the decreased software revenue.
Hardware revenue decreased 14.6 percent to $5.6 million for the nine months ended June 30, 2014 compared to $6.6 million for the same period in the prior year.
The fluctuations in the Company's revenue streams and overall revenue year-over-year are reflective of Company's continued transition from its legacy hardware-based solutions to its mobile solutions.
Cost of Goods Sold and Gross Margins
Total cost of goods sold decreased 4.7 percent to $15.8 million for the nine months ended June 30, 2014, compared to $16.6 million for the same period in fiscal 2013. Overall gross margins percentage remained relatively consistent at 59.4 percent and 60.6 percent for the nine months ended June 30, 2014 and 2013, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $14.3 million for the nine months ended June 30, 2014 from $15.9 million for the same period in the prior year. The decrease in selling, general and administrative expenses reflects decreases in personnel costs, as well as reduced legal expenses as the Company was involved in defending a patent litigation suit in the first half of fiscal 2013.
Research and Development Expenses
Research and development expenses were $9.3 million for the nine months ended June 30, 2014, compared to $8.7 million for the same period in fiscal 2013. Continued investment in the development and enhancement of the XRS mobile solution's functionality to meet the operational needs of larger, more complex fleets resulted in research and development expense increasing compared to the same period in fiscal 2013.
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Income Taxes
The Company's effective tax rate was 1.2 percent for the nine months ended June 30, 2014 compared to a tax rate of 6.6 percent for the comparable period in fiscal 2013. The lower tax rate for the nine months ended June 30, 2014 was attributable to the results from operations of the Company as of June 30, 2014.
The Company does not have objectively verifiable positive evidence of future taxable income. Accordingly, the Company concluded that recording a valuation allowance to the extent of the Company's deferred tax assets is appropriate. The realization of the deferred tax assets is dependent on future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The amount of the net deferred tax asset considered realizable could be increased in the future if the Company maintains profitability and it becomes more likely than not that these amounts would be realized.
As of September 30, 2013, the Company had federal and state net operating loss carryforwards of $39.7 million, and $10.6 million, respectively, both which are scheduled to expire from 2014 through 2032. As of September 30, 2013, the Company also had tax credit carryforwards of $3.0 million.
Net (Loss) Income to Common Shareholders
Net loss to common shareholders was $0.7 million for the nine months ended June 30, 2014, compared to net income of $0.5 million for the same period in fiscal 2013. Net income to common shareholders reflects preferred stock dividends and preferred stock deemed dividends of $0.2 million for each of the nine months ended June 30, 2014 and 2013.
Liquidity and Capital Resources
Operating activities provided $4.6 million of cash for the nine months ended June 30, 2014, compared to $7.2 million for the same period in fiscal 2013. Net loss of $0.6 million for the nine months ended June 30, 2014, compared to net income of $0.7 million for the same period in fiscal 2013, served as the primary contributor to the cash flow decrease.
Cash used in investing activities was $2.2 million for the nine months ended June 30, 2014, compared to $2.7 million for the same period in fiscal 2013. Consistent with the Company's business strategy, purchases of equipment used in the Company's mobile solutions served as the primary investing activities for the nine months ended June 30, 2014 and 2013.
Cash provided by financing activities was $0.2 million for the nine months ended June 30, 2014, which primarily reflects proceeds from the exercise of vested option awards. For the nine months ended June 30, 2013 cash used in financing activities was $2.3 million, which reflects the Company's payoff of all outstanding debt facilities. The Company maintained a debt-free balance sheet as of June 30, 2014 and September 30, 2013.
Non-GAAP Financial Measures
The Company recorded free cash flow of $2.4 million for the nine months ended June 30, 2014, a decrease of $2.1 million as compared to free cash flow of $4.5 million for the same period in fiscal 2013. The decrease in free cash flow was driven by a net loss of $0.6 million for the nine months ended June 30, 2014, compared to a net income of $0.7 million for the same period in fiscal 2013.
The continued generation of free cash flow contributed to working capital increased $3.1 million to $16.1 million as of June 30, 2014, compared to $13.0 million in working capital as of September 30, 2013.
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The following table is a reconciliation of free cash flow from net cash provided by operating activities and net cash used in investing activities, which are the most directly comparable financial measures calculated in accordance with GAAP (in thousands):
For the Nine Months Ended | |||||||
June 30, 2014 | |||||||
2014 | 2013 | ||||||
Net cash provided by operating activities | $ | 4,572 | $ | 7,180 | |||
Net cash used in investing activities: | |||||||
Purchase of equipment and leasehold improvements | (604 | ) | (319 | ) | |||
Purchase of Relay and RouteTracker assets | (1,419 | ) | (2,005 | ) | |||
Capitalized software development | (138 | ) | (355 | ) | |||
Proceeds from the sale of equipment | — | 16 | |||||
Net cash used in investing activities | (2,161 | ) | (2,663 | ) | |||
Free cash flow | $ | 2,411 | $ | 4,517 |
The following table is a reconciliation of working capital from current assets and current liabilities, which are the most directly comparable financial measures calculated in accordance with GAAP (in thousands):
June 30, | September 30, | ||||||
2014 | 2013 | ||||||
Current assets | $ | 22,867 | $ | 21,061 | |||
Current liabilities | (8,002 | ) | (9,331 | ) | |||
Net current assets | 14,865 | 11,730 | |||||
Current portion of deferred revenue net of deferred costs | 1,222 | 1,261 | |||||
Working capital | $ | 16,087 | $ | 12,991 |
Free cash flow and working capital are non-GAAP financial measures that management uses to assess the Company's performance. Management believes free cash flow and working capital provide useful information to management and investors by presenting measurements of cash generated from operations that are available to fund operations, invest in solution and infrastructure development. Calculations of free cash flow and working capital may not be comparable to similarly titled measures reported by other companies.
The Company believes that the cash flow from operations, existing funds, availability on a revolving line of credit and vendor terms will provide adequate cash to fund operating needs for the foreseeable future. If the Company does not generate anticipated cash flow levels, predictions regarding cash needs may prove inaccurate and additional financing may be required.
XRS Corporation Series B Preferred Stock prohibits payment of dividends to the holders of any other capital stock unless and until the Company has paid dividends accrued on the Series B Preferred Stock, which pays a cumulative dividend of 4.0 percent per annum of the original issue price (payable semi-annually). At the option of the Series B Preferred Stockholders, such dividends are payable in additional shares of Series B Preferred Stock or cash. During the nine months ended June 30, 2014 and the fiscal year ended September 30, 2013, the Company issued 95,000 and 97,000 shares, respectively, of Series B Preferred Stock for payment of accrued dividends.
Critical Accounting Policies
We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Form 10-K for the fiscal year ended September 30, 2013. There has been no significant change in our significant accounting policies or critical accounting estimates since the end of fiscal 2013.
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Recently Issued Accounting Standards
See Note 1 in the Notes to Consolidated Financial Statements located in Part I, Item 1 of this Report.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Our principal executive officer and principal financial officer, or persons performing similar functions, carried out an evaluation of the effectiveness, as of June 30, 2014, of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2014 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2014 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is the subject of various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of business. Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, including settlements and judgments, where the Company has assessed that a loss is probable and an amount can be reasonably estimated.
Item 1A. Risk Factors
In addition to the other information set forth in this report and our other Securities and Exchange Commission filings, you should carefully consider the factors discussed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2013, as updated by our subsequent Securities and Exchange Commission filings, which could have a material impact on our business, financial condition or results of operations. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits
Exhibit No. | Description of Exhibits | |
3.1 | Fifth Amended and Restated Articles of Incorporation, as amended through March 8, 2013 (1) | |
3.2 | Bylaws of XRS Corporation, as amended through March 8, 2013 (2) | |
10.1 | Lease Agreement, dated as of June 2, 2014, between Liberty Property Limited Partnership and XRS Corporation | |
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following materials from XRS Corporation's Quarterly Report on Form 10-Q for the three and nine months ended June 30, 2014 and 2013 are filed herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations for the three and nine months ended June 30, 2014 and 2013, (ii) the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2014 and 2013, (iii) the Consolidated Balance Sheets as of June 30, 2014 and September 30, 2013, (iv) the Consolidated Statements of Changes in Shareholders' Equity for the nine months ended June 30, 2014 and for the year ended September 30, 2013, (v) the Consolidated Statements of Cash Flows for the nine months ended June 30, 2014 and 2013, and (vi) the Notes to the Consolidated Financial Statements. |
Unless otherwise indicated, all documents incorporated into this Quarterly Report on Form 10-Q by reference to a document filed with the SEC pursuant to the Exchange Act are located under file number 0-27166.
(1) | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed March 14, 2013. |
(2) | Incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed March 14, 2013. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 8, 2014 | XRS Corporation | |
(Registrant) | ||
By: | /s/ Michael W. Weber | |
Michael W. Weber | ||
Chief Financial Officer | ||
(Signing as Principal Financial and Accounting Officer, and as Authorized Signatory of Registrant) |
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