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EXCEL - IDEA: XBRL DOCUMENT - XRS CorpFinancial_Report.xls
EX-32.1 - EXHIBIT - XRS Corpexhibit321certificationfy1.htm
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EX-10.1 - EXHIBIT - XRS Corpexhibit101leaseagreementfy.htm
EX-31.1 - EXHIBIT - XRS Corpexhibit311certificationfy1.htm
EX-32.2 - EXHIBIT - XRS Corpexhibit322certificationfy1.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

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
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.

3


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,

10


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.



11


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








12


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








13


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





14


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.

15


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.


16


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.






17


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.


18


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).


19


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.


20


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.



21


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

22


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.


23


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.



24


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.

25



Recently Issued Accounting Standards

See Note 1 in the Notes to Consolidated Financial Statements located in Part I, Item 1 of this Report.

26


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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