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 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

or

 

☐

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: 000-52697

 

XPLORE TECHNOLOGIES CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		26-0563295
(State or Other Jurisdiction of Incorporation		(IRS Employer Identification No.)
or Organization)

 

14000 Summit Drive, Suite 900, Austin, Texas		78728
(Address of Principal Executive Offices)		(Zip Code)

 

(512) 336-7797

(Registrant’s Telephone Number, 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. Yes ☒  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ☒  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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of July 31, 2015, the registrant had 10,803,049 shares of common stock outstanding.

 

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Xplore Technologies Corp.

FORM 10-Q

For the Quarterly Period Ended June 30, 2015

Table of Contents

 

		Page
Part I.	Financial Information
	Item 1. Financial Statements
	a) Consolidated Balance Sheets as at June 30, 2015 and March 31, 2015	3
	b) Consolidated Statements of Loss for the Three Months Ended June 30, 2015 and 2014	4
	c) Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2015 and 2014	5
	d) Notes to the Unaudited Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
	Item 4. Controls and Procedures	19
Part II.	Other Information
	Item 1. Legal Proceedings	19
	Item 1A. Risk Factors	20
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
	Item 3. Defaults Upon Senior Securities	20
	Item 4. Mine Safety Disclosures	20
	Item 5. Other Information	20
	Item 6. Exhibits	20
	Signature	21

 

  

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

XPLORE TECHNOLOGIES CORP.

Consolidated Balance Sheets

(in thousands)

		June 30, 2015				March 31, 2015
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	11,017			$	19,455
Accounts receivable, net			18,252				6,633
Inventory, net			15,609				7,883
Prepaid expenses and other current assets			275				315
Total current assets			45,153				34,286
Fixed assets, net			1,705				1,030
Intangible assets, net			2,049				—
Goodwill			16,690				—
		$	65,597			$	35,316
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Short-term indebtedness with bank		$	3,810			$	—
Deferred revenue and warranty liabilities			4,797				414
Accounts payable and accrued liabilities			22,219				4,594
Total current liabilities			30,826				5,008
Deferred revenue and non-current warranty liabilities			5,592				1,517
Total liabilities			36,418				6,525
Commitments and contingencies			—				—
STOCKHOLDERS’ EQUITY:
Preferred Stock, par value $0.001 per share; authorized 5,000; no shares issued			—				—
Common Stock, par value $0.001 per share; authorized 15,000; shares issued 10,790 and 10,784, respectively			11				11
Additional paid-in capital			169,012				168,379
Accumulated deficit			(139,844	)			(139,599	)
			29,179				28,791
		$	65,597			$	35,316

  

See accompanying notes to unaudited consolidated financial statements.

 

 

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Loss—Unaudited

(in thousands of dollars, except share and per share amounts)

 

		Three Months Ended
		June 30, 2015				June 30, 2014
Revenue		$	24,043			$	8,267
Cost of revenue			15,893				5,203
Gross profit			8,150				3,064
Expenses:
Sales, marketing and support			3,620				1,598
Product research, development and engineering			1,830				991
General administration			2,331				1,007
			7,781				3,596
Income (loss) from operations			369				(532	)
Other income (expense):
Other			63				(19	)
Cost of integration			(670	)			—
Interest expense			(6	)			—
			(613	)			(19	)
Net loss		$	(244	)		$	(551	)
Loss per common share		$	(0.02	)		$	(0.07	)
Weighted average number of common shares outstanding, basic and fully diluted			10,789,967				8,432,347

 

See accompanying notes to unaudited consolidated financial statements.

 

 

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Cash Flows—Unaudited

(in thousands)

 

		Three Months Ended June 30,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash (used in) provided by operations:
Net loss		$	(244	)		$	(551	)
Items not affecting cash:
Depreciation and amortization			358				172
Provision for doubtful accounts			(84	)			—
Stock-based compensation expense			607				159
Equity issued in exchange for services			—				3
Changes in operating assets and liabilities:
Accounts receivable			(4,151	)			1,577
Inventory			(1,932	)			(4,085	)
Prepaid expenses and other current assets			11				188
Accounts payable and accrued liabilities			1,788				(160	)
Net cash used in operating activities			(3,647	)			(2,697	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received in purchase transaction			653				—
Additions to fixed assets			(237	)			(71	)
Net cash provided by (used in) investing activities			416				(71	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings			5,000				—
Repayment of short-term indebtedness			(10,233	)			—
Net proceeds from issuance of Common Stock			26				10
Net cash provided by (used in) financing activities			(5,207	)			10
CHANGE IN CASH AND CASH EQUIVALENTS			(8,438	)			(2,758	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			19,455				5,400
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	11,017			$	2,642
NONCASH INVESTING AND FINANCINGACTIVITIES:
Net assets acquired with debt in purchase transaction		$	9,079			$	—
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Payments for interest		$	6			$	—
Payments for income taxes		$	—			$	9

 

See accompanying notes to unaudited consolidated financial statements.

 

 

XPLORE TECHNOLOGIES CORP.

Notes to the Unaudited Consolidated Financial Statements

(In thousands of dollars, except share and per share amounts)

 

1. DESCRIPTION OF BUSINESS

 

Xplore Technologies Corp. (the “Company”), incorporated under the laws of the State of Delaware, is engaged in the development, integration and marketing of rugged mobile personal computer (“PC”) systems. The Company’s rugged tablet PCs are designed to withstand hazardous conditions such as extreme temperatures, driving rain, repeated vibrations, dirt, dust and concussive shocks. The intrinsically safe, ruggedized and reliable nature of the Company’s products enable the extension of traditional computing systems to a range of field personnel, including oil field pipeline inspectors, public safety personnel, warehouse workers and pharmaceutical scientists. The Company’s tablets are fitted with a range of performance-matched accessories, including multiple docking station solutions, wireless connectivity alternatives, global positioning system modules, biometric and smartcard modules, as well as traditional peripherals, such as keyboards and cases. Additionally, the Company’s tablets are waterproof for up to 30 minutes in a depth of up to three feet, impervious to drops from as high as seven feet, readable in direct sunlight, can be mounted on vehicles and include LTE and Wi-Fi connectivity options for real-time data access. The Company’s customers include major telecommunications companies, leading heavy equipment manufacturers, oil and gas companies, the military and first responders.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results for the three months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year.

 

The consolidated balance sheet at March 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These accompanying unaudited consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and related notes included in the Company’s fiscal 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 29, 2015.

 

Basis of consolidation and presentation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Xplore Technologies Corporation of America and Xplore Technologies International Corp.

 

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. These estimates and assumptions are affected by management’s application of accounting policies. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact the Company’s financial condition, changes in financial condition or results of operations. On an ongoing basis, the Company evaluates the estimates, including those related to its revenue recognition, allowance for doubtful accounts, inventory valuation, warranty reserves, tooling amortization, financial instruments, stock-based compensation and income taxes. The estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from management’s estimates and assumptions.

 

Motion Acquisition

 

On April 16, 2015, Xplore Technologies Corporation of America, a wholly-owned subsidiary of the Company, entered into a Foreclosure Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Motion Computing, Inc., Motion Computing Pty, Ltd., Motion Computing Holding Company, Inc. (collectively “Motion”) and Square 1 Bank, Motion’s senior secured lender (“Square 1”), pursuant to which the Company’s subsidiary agreed to purchase certain of the assets of Motion, including cash, cash equivalents, accounts receivable, inventory, equipment, personal property and other assets of Motion for an aggregate purchase price of approximately $9 million in cash, plus the assumption of approximately $8 million in liabilities, net of current assets, subject to the terms and conditions thereof (the “Motion Acquisition”). The assumed liabilities include accounts payable and obligations for service contracts and product warranties. The closing of the Motion Acquisition occurred on April 17, 2015.

 

 

The Motion Acquisition was accounted for under the acquisition method of accounting in accordance with the provisions of FASB ASC Topic No. 805 Business Combinations (ASC 805). The total purchase price for the Motion assets was approximately $9 million and was comprised of cash consideration paid by the Company to Square 1.

 

Under the acquisition method of accounting under ASC 805, the total estimated purchase price of the acquired company is allocated to the assets acquired and the liabilities assumed based on their fair values. The Company has made significant estimates and assumptions in determining the preliminary allocation of the purchase price. The preliminary allocation of purchase consideration is subject to change based on further review of the fair value of the assets acquired and liabilities assumed. The following table is the allocation of the purchase price (in thousands, except years): 

 

		Fair Value				Weighted Average Estimated Useful Life (In Years)
Cash and cash equivalents		$	653
Accounts receivable			7,384
Inventory			5,793
Other assets			7
Fixed assets			715				3
Goodwill			16,690
Identifiable intangible assets			2,130				6
Accounts payable and accrued liabilities			(15,561	)
Deferred revenue			(8,732	)
Total purchase price		$	9,079

 

Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination and the potential synergy of combining the operations of the Company and Motion.  The Company expects the entire amount of goodwill recorded in this acquisition will be deducted for tax purposes ratably over a 15 year period.  The identified intangible assets consist of trademarks, copyrights, and developed technology, including patents.  The estimated fair values of the trademark, copyrights and developed technology were determined using the “Relief from Royalty” method.  Trademark, developed technology, non-compete and customer relationship will be amortized on a straight-line basis over their estimated useful lives.  The Company expects the amortization of acquired intangibles will be approximately $400 per year for the remaining estimated useful lives.

 

Goodwill and other intangible assets 

 

Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business acquisitions and combinations. Goodwill and other intangible assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate impairment may exist, such as a significant adverse change in the business climate. In assessing the value of goodwill, assets and liabilities are assigned to the reporting units and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. Identified intangible assets are amortized using the straight-line method over their estimated useful lives which are estimated to be between three and seven years.

 

Long-lived asset impairment  

 

Long-lived assets include property and equipment and definite-lived intangible assets. Definite-lived intangible assets consist of customer relationships, trade names and non-compete agreements. Long-lived assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate that the carrying value of the assets may not be recoverable.

 

Cash and cash equivalents and liquidity

 

At June 30, 2015, the Company had cash and cash equivalents of approximately $11,017, working capital of approximately $14,327 and total equity of approximately $29,179. The Company’s management believes that it has adequate cash and cash equivalents on hand and projected cash flow from operations to finance its operations for at least 12 months.

 

3. INVENTORY

 

		June 30, 2015				March 31, 2015
Finished goods		$	9,035			$	5,687
Computer components			6,574				2,196
Total inventory		$	15,609			$	7,883

 

4. LOSS PER SHARE 

 

Loss per share has been computed based on the weighted-average number of shares of common stock issued and outstanding during the period, and is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. The effects of the options granted under the Company’s option plans, the exercise of outstanding options and the exercise of outstanding warrants were excluded from the loss per share calculations for the periods presented as their inclusion is anti-dilutive. Accordingly, diluted loss per share has not been presented.

 

 

The following securities were not considered in the loss per share calculations for the three months ended:

 

		June 30, 2015				June 30, 2014
Warrants			120,000				130,000
Options			2,032,826				1,406,856
			2,152,826				1,536,856

 

5. SHORT-TERM INDEBTEDNESS

 

On December 10, 2009, the Company’s wholly-owned subsidiary entered into an Accounts Receivable Purchasing Agreement (as amended to date, the “ARPA”) with DSCH Capital Partners, LLC d/b/a Far West Capital (“FWC”). Pursuant to the ARPA, FWC could purchase, in its sole discretion, eligible accounts receivable of the Company’s subsidiary on a revolving basis, up to a maximum of $8,500, with full recourse for the face amount of such eligible receivables. FWC retained 15% of the purchase price of the purchased receivables as a reserve amount. The subsidiary was required to pay FWC a monthly cost of funds fee equal to the net funds employed by FWC (i.e., the daily balance of the purchase price of all purchased receivables less the reserve amount, plus any unpaid fees and expenses due from the subsidiary to FWC under the ARPA) multiplied by the annual prime lending rate reported in The Wall Street Journal plus 10%, which fees accrued daily. The ARPA contained standard representations, warranties, covenants, indemnities and releases for agreements governing financing arrangements of this type. The Company guaranteed the obligations of its subsidiary under the ARPA pursuant to a corporate guaranty and suretyship. In addition, pursuant to the ARPA, the subsidiary’s obligations under the ARPA were secured by a first priority security interest on all assets of the subsidiary.

 

On April 17, 2015, the Company terminated the ARPA and entered into a new credit agreement in connection with the consummation of the Motion Acquisition. There were no borrowings under the ARPA immediately prior to such termination.  The Company and its wholly-owned subsidiary entered into a Loan and Security Agreement with Square 1 (the “Square 1 Credit Agreement”) pursuant to which Square 1 agreed to provide revolving loans of up to an aggregate principal amount of $15 million to the Company’s subsidiary. The Square 1 Credit Agreement has a two-year term. Payment and performance under the Square 1 Credit Agreement is secured by a first priority security interest in and to substantially all of the assets of the Company and its subsidiary. Pursuant to the Square 1 Credit Agreement, the loans consist of formula revolving loans and non-formula revolving loans. The maximum amount of formula revolving loans outstanding at any one time cannot exceed the lesser of $15 million or 85% of eligible accounts receivable of the Company’s subsidiary. The maximum amount of non-formula revolving loans outstanding at any one time cannot exceed $4 million through April 16, 2016, and thereafter steps-down in $480,000 increments every three months until the cap reaches $2.08 million, which will be maximum allowable amount outstanding at any one time thereafter until the maturity date.

 

The interest rate on the loans is variable, and will be equal to the prime rate in effect from time to time plus 1.25% per annum, provided that the interest rate on any day shall not be less than 4.5% per annum. As of April 17, 2015, the outstanding principal amount of loans drawn under the Square 1 Credit Agreement was approximately $9 million, which the Company’s subsidiary used to fund the cash portion of the purchase price of the Motion Acquisition.

 

The Square 1 Credit Agreement contains a financial covenant regarding liquidity, which is tested monthly. Failure to meet such covenant or the triggering of other events of default could result in acceleration of all payment obligations and the termination of the obligations of Square 1 to make loans and extend credit under the Square 1 Credit Agreement. The Square 1 Credit Agreement contains certain representations and warranties that must be made and certain other conditions that must be met for the Purchaser and the Company to cause Square 1 to make loans. The Square 1 Credit Agreement also contains customary affirmative and negative covenants, events of default and remedies upon default including acceleration. The Company agreed to a financial covenant requiring that the sum of aggregate undrawn portion of the loans available under the Square 1 Credit Agreement plus the aggregate amount of all non-restricted cash and cash equivalents of the Company as shown on the Company's monthly financial statements provided to Lender as required hereunder shall be at least $3 million.

 

On June 30, 2015, there were $3,810 in borrowings under the Square 1 Credit Agreement.

 

6. SHARE CAPITAL

 

On November 1, 2012, the Company filed its second amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, which integrated the then-in-effect provisions of the Company’s amended and restated certificate of incorporation and further amended those provisions by decreasing the Company’s authorized shares of common and preferred stock. The second amended and restated certificate of incorporation became effective on the date of filing. As a result of the second amended and restated certificate of incorporation, the number of authorized shares of common stock of the Company was reduced from 1,350,000,000 to 15,000,000 and the number of authorized shares of preferred stock of the Company was reduced from 150,000,000 to 5,000,000.

 

 

Warrants Outstanding

 

At June 30, 2015, there were warrants to purchase an aggregate of 120,000 shares of common stock outstanding, all of which are fully exercisable, as detailed in the table below:

 

Number of Exercisable Warrants		Exercise Price (1)			Expiration Date
20,000			$5.00 to $5.75		May 31, 2016
100,000			$6.25		October 24, 2017

                                                                  

(1)

Exercise price may change subject to anti-dilutive terms.

 

7. STOCK-BASED COMPENSATION PLAN

 

a) Stock Options

 

On July 28, 2009, the Company’s board of directors (the “Board of Directors”) adopted the 2009 Stock Incentive Plan (the “Stock Plan”). The Stock Plan provides for equity-based awards in the form of incentive stock options and non-statutory options, restricted shares, stock appreciation rights and restricted stock units. Awards are made to selected employees, directors and consultants to promote stock ownership among award recipients, encourage their focus on strategic long-range corporate objectives, and attract and retain exceptionally qualified personnel. The exercise price of an option is determined at the date of grant and is based on the closing price of the Company’s common stock on the stock exchange or quotation system on which the common stock is listed or traded on the day of grant. Unless otherwise provided for, the options are exercisable only during the term of engagement of the employee, officer or consultant or during the period of service as a director of the Company. The Stock Plan became effective as of June 10, 2009 and was approved by the Company’s stockholders on January 14, 2010.

  

On April 7, 2015, the Board of Directors approved grants of additional options to purchase a total of 240,374 shares of the Company’s common stock, with an exercise price of $6.38, of which options to purchase 87,437 shares were granted to the Company's Chairman and Chief Executive Officer, options to purchase 75,000 shares were granted to the Company's President, options to purchase 50,000 shares were granted to the Company's former Chief Financial Officer and options to purchase 27,937 shares were granted to Andrea Goren, a member of the Board of Directors. The options vest on the first anniversary of the Motion Acquisition, and have a term of seven and one half years from the date of the grant. These grants are contingent upon stockholder approval of an increase in the maximum number of shares to be authorized for issuance under the Stock Plan.

 

 

A summary of the activity in the Stock Plan during the three months ended June 30, 2015 was as follows:

 

		Three months ended June 30, 2015
		Options				Weighted Average Exercise Price (US$)
Outstanding at March 31, 2015			1,905,405			$	6.30
Granted			240,374				6.38
Exercised			(3,333	)			3.44
Forfeited			(109,620	)			7.25
Outstanding at end of period			2,032,826			$	6.26

 

At June 30, 2015, the total number of shares of common stock issued in connection with the exercise of options since the inception of the Stock Plan was 73,929 and the total number of shares of common stock issued in connection with the vesting of restricted stock awards was 4,268.

 

 

A summary of the options outstanding and exercisable at June 30, 2015 was as follows:

 

		Options Outstanding and Expected to Vest								Options Exercisable
Range of Exercise Prices US$		Number Outstanding				Weighted Average Remaining Contractual Life				Number Exercisable				Weighted Average Remaining Contractual Life
$ 3.44 — 4.99			330,069				3.2				93,397				3.23
$ 5.00 — 7.50			1,604,522				5.9				608,236				5.0
$ 7.51 — 26.99			98,175				.78				98,175				.78
$27.00 — 40.00			60				0.6				60				0.6
			2,032,826				5.2				799,868				4.3

 

The weighted average exercise price of options exercisable at June 30, 2015 was $7.38 per share.

 

The options have been valued separately using the Black-Scholes methodology. The options issued to the Board of Directors officers and non-officer employees in fiscal 2015 have different expected terms and, accordingly, different volatility and discount rates. The calculations for issuances to the Board of Directors in the three months ended June 30, 2015 and to officers in the three months ended June 30, 2015 assumed discount rates of approximately 2.11% and 1.51%, respectively, volatility of approximately 57% and 55%, , respectively, and expected terms of approximately seven years and approximately four and half years, respectively. There were no dividends paid to holders of the Company’s common stock for either year. The Company recorded stock compensation cost of $607 and $159 for the three months ended June 30, 2015 and 2014, respectively. This expense was recorded in the employee related functional classification.

 

Compensation expense has been determined based on the fair value at the grant date for options granted in the current fiscal year. The aggregate intrinsic value of options exercisable at June 30, 2015 was $529. The future compensation expense to be recognized for unvested option grants at June 30, 2015 was $2,334, which is to be recognized over the next three years.

 

b)  2009 Employee Stock Purchase Plan

 

The Board of Directors approved an employee stock purchase plan that was implemented on January 1, 2009 and approved by the Company’s stockholders on November 4, 2009 (the “ESPP”). The offering price per common share and number of common shares purchased for the periods ended June 30, 2015 and 2014 are as follows:

 

		Three Months Ended June 30,
		2015				2014
Offering Price per Common Share		$	6.03			$	6.03
Common Shares Purchased			9,749				4,664

 

8. RELATED PARTY TRANSACTIONS

 

On April 7, 2015, the Board of Directors approved grants of additional options to purchase a total of 240,374 shares of the Company’s common stock, with an exercise price of $6.38, of which options to purchase 87,437 shares were granted to Phillip Sassower, the Company's Chairman and Chief Executive Officer, and options to purchase 27,937 shares were granted to Andrea Goren, a member of the Board of Directors. The options vest on the first anniversary of the Motion Acquisition, and have a term of seven and one half years from the date of the grant. These grants are contingent upon stockholder approval of an increase in the maximum number of shares to be authorized for issuance under the Stock Plan.

 

On May 1, 2015, the Board of Directors amended the Company’s transaction bonus pool such that the 15% formerly unallocated portion of the transactional bonus pool is now allocated as follows: 9.375% of the pool to Mr. Sassower and 5.625% of the pool to Mr. Goren.

 

On June 12, 2012, the Board of Directors approved the payment to each member of the Board of Directors of an annual fee of $10, to be paid quarterly in the amount of $2.5. On November 4, 2014, the Board of Directors approved the payment of an additional annual fee to each member of the Board of Director’s audit committee and compensation committee, in the amount of $4 for each committee on which such member serves, to be paid quarterly in the amount of $1, effective October 1, 2014. General administration expense includes an expense of $21 and $21 for the three months ended June 30, 2015 and 2014, respectively, relating to these fees.

 

 

On June 12, 2012, the Board of Directors approved the payment to SG Phoenix LLC, an affiliate of the Company, of an annual fee of $150, to be paid monthly in the amount of $12.5, for services rendered during the year ended March 31, 2014. On February 6, 2014, the Board of Directors approved an increase in this annual fee from $150 to $200, effective February 1, 2014, for additional services to be rendered by SG Phoenix LLC. On April 7, 2015, the Board of Directors approved an increase in the annual fee paid to SG Phoenix LLC, an affiliate of the Company, from $200 to $287.5, effective April 1, 2015. General administration expense includes an expense of $72 and $50 for the three months ended June 30, 2015 and 2014, respectively, for these fees.

  

During the three months ended June 30, 2015 and 2014, the Company purchased approximately $46 and $190 in components for the Company’s tablet PCs from Ember Industries, Inc., a contract manufacturer.  Thomas F. Leonardis, a member of the Board of Directors, is the Chief Executive Officer and the majority shareholder of Ember Industries.  The Company purchased the components from Ember Industries pursuant to standard purchase orders at Ember Industries’ standard prices.  The disinterested members of the Board of Directors reviewed, approved and ratified the Company’s purchase of component parts from Ember Industries on the described terms. As of June 30, 2015, the Company owed $4 to Ember Industries for purchases of such components.

 

9. SEGMENTED INFORMATION

 

The Company operates in one segment, the sale of rugged mobile tablet PC systems. The United States accounted for approximately 78% and 78% of the Company’s total revenue for the three months ended June 30, 2015 and 2014, respectively. No other country accounted for more than 10% of the Company’s total revenue for the three months ended June 30, 2015 and 2014.

 

The distribution of revenue by country is segmented as follows:

 

		Three Months Ended
		June 30, 2015				June 30, 2014
Revenue by country:
United States		$	18,671			$	6,480
Other			5,372				1,787
		$	24,043			$	8,267

 

The Company has a variety of customers, and in any given year a single customer can account for a significant portion of sales. For the three months ended June 30, 2015, the Company had two customers located in the United States who accounted for more than 10% of total revenue. For the three months ended June 30, 2014, the Company had two customers located in the United States who accounted for more than 10% of total revenue.

 

Three Months Ended		Total Revenue (in millions)				Number of Customers with Revenue > 10% of Total Revenue				Customer Share as a Percent of Total Revenue
June 30, 2015		$	24.0				2				30	%
June 30, 2014		$	8.3				2				48	%

 

At June 30, 2015, the Company had two customers that accounted for more than 10% of the outstanding net receivables.

 

Three Months Ended		Accounts Receivable (in millions)				Number of Customers with Account Balance > 10% of Total Receivables				Customer Share as a Percent of Total Receivables
June 30, 2015		$	18.2				2				53	%

 

The Company currently relies on four suppliers for the majority of its finished goods and engineering services related to product development, as compared to two in the prior year. At June 30, 2015 and 2014, the Company owed these suppliers $27,385 and $2,462, respectively, which is recorded in accounts payable and accrued liabilities.

 

Substantially all of the Company’s capital assets are owned by its wholly-owned subsidiary, Xplore Technologies Corporation of America, a Delaware corporation. No more than 10% of the Company’s assets were located in any country, other than the United States, during each of the three months ended June 30, 2015 and 2014.

 

 

10. COMMITMENTS AND CONTINGENT LIABILITIES

 

a)

Premises

 

The Company leases facilities in Austin, Texas. The current annual lease commitment is $228 and the lease expires on August 31, 2019. Rent expense for the three months ended June 30, 2015 and 2014, was $206 and $59, respectively.

 

Minimum annual payments by fiscal year required under all of the Company’s operating leases are:

 

2016		$	296
2017			322
2018			310
2019			310
2020			122
		$	1,360

 

b)	Purchase commitment

 

At June 30, 2015, the Company had purchase obligations for fiscal 2016 of approximately $16,539 related to inventory and product development items.

 

c)	Litigation

 

The Company and its subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. None of these actions, individually or in the aggregate, are expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Certain statements in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015 and elsewhere in this Form 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Overview

 

We are engaged in the development, integration and marketing of rugged mobile personal computer systems, or PCs. Our rugged tablet PCs are designed to withstand hazardous conditions, such as extreme temperatures, driving rain, repeated vibrations, dirt, dust and concussive shocks. The intrinsically safe, ruggedized and reliable nature of our products facilitates the extension of traditional computing systems to a broader range of field personnel, including energy pipeline inspectors, public safety responders, warehouse workers and pharmaceutical scientists. Our tablets are fitted with a range of performance-matched accessories, including multiple docking solutions, wireless connectivity alternatives, global positioning system modules, biometric and smartcard options, as well as traditional peripherals, such as keyboards and cases. Additionally, our tablets are waterproof for up to 30 minutes in water up to a depth of three feet, are impervious to drops from as high as seven feet, are readable in direct sunlight, can be mounted on vehicles and include LTE and Wi-Fi connectivity options for real-time data access. Our end user customers include major telecommunications companies, leading heavy equipment manufacturers, oil and gas production companies, the military and first responders.

 

 

Historically, we have competed and derived our revenue through the sale of our iX104 tablets in a subset of the rugged PC market, given the larger size and ultra-rugged attributes of our iX104 product family, which weighs approximately 5.4 pounds. While we are dependent upon the continued market acceptance of our iX104 systems, to broaden the market for our products and increase our opportunities for revenue growth, we have been developing multiple fully-rugged tablets that are lighter weight and less expensive than our iX104 family of products. We believe that these new products will allow us to compete in significantly larger segments of the rugged PC market. On July 10, 2014, we announced the first of our new products with the launch of RangerX Pro, our first fully-rugged Android tablet, which weighs approximately 2.2 pounds. On June 24, 2014, we announced the second of these new products with the launch of Bobcat, a fully-rugged tablet that has a Windows operating system and weighs approximately 2.4 pounds. We believe the lighter and less expensive RangerX Pro and Bobcat tablets are ideal for field service applications and significantly more mobile market opportunities, as compared to our iX104.

 

Looking forward, our strategy is to build increased marketplace awareness of our iX104, RangerX Pro and Bobcat product families, in an effort that we believe will enable us to increase our revenue and to expand our share of the markets addressed by those product families. We also expect to increase our revenue and expand our total market share through our acquisition of new product families previously sold by Motion Computing, Inc. and its subsidiaries, which we refer to herein as Motion, as described below.

 

We believe we are positioned for future revenue growth in the markets in which we compete. At a time when we believe awareness and demand for tablet computers is increasing significantly, we have introduced a family of computers that, based upon third-party certifications, surpasses the performance standards and specifications that have been the accepted measuring sticks for rugged tablet computers in today’s marketplace.

 

On April 17, 2015, we completed the acquisition of certain assets of Motion, which we refer to herein as the Motion Acquisition. Pursuant to the terms of a Foreclosure Purchase and Sale Agreement with Motion and Square 1 Bank, Motion’s senior secured lender, our subsidiary, Xplore Technologies Corporation of America, purchased certain of Motion’s assets, including cash, cash equivalents, accounts receivable, inventory, equipment, personal property and other assets. The aggregate purchase price for the Motion assets we purchased was approximately $9 million, plus the assumption of approximately $8 million in certain liabilities, net of current assets, including accounts payable and obligations for service contracts and product warranties.

 

Also on April 17, 2015, in connection with the Motion Acquisition, our subsidiary entered into a Loan and Security Agreement with Square 1 Bank, pursuant to which Square 1 Bank provided us with formula and non-formula revolving loans for up to an aggregate amount of $15 million, which replaced our existing Accounts Receivable Purchase Agreement with DSCH Capital Partners, LLC d/b/a Far West Capital. The new facility with Square 1 Bank has a two year term, is secured by substantially all of our assets, and bears interest at the greater of the current prime lending rate plus 1.25% per annum or 4.5% per annum. The maximum amount of formula revolving loans outstanding at any one time cannot exceed the lesser of $15 million or 85% of our eligible accounts receivable. The maximum amount of non-formula loans outstanding at any time cannot exceed $4 million through April 16, 2016, with the maximum allowable amount reducing by $480,000 increment every three months thereafter, until the maximum amount reaches $2.08 million, where it will remain until maturity. On April 17, 2015, we borrowed approximately $9 million under this facility to fund the cash portion of the purchase price for the Motion Acquisition.

 

You should read the following discussion and analysis in conjunction with our financial statements and notes included in this quarterly report on Form 10-Q.

 

Critical Accounting Policies

 

Our unaudited interim consolidated financial statements and accompanying notes included in this quarterly report are prepared in accordance with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. These estimates and assumptions are affected by management’s application of accounting policies. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact our financial condition, changes in financial condition or results of operations. Our significant accounting policies are discussed in Note 2 of the Notes to our audited Annual Consolidated Financial Statements as of March 31, 2015 and 2014 and for the years ended March 31, 2015 and 2014 included in our annual report on Form 10-K filed with the SEC on June 29, 2015. On an ongoing basis, we evaluate our estimates, including those related to our revenue recognition, allowance for doubtful accounts, inventory valuation, warranty reserves, tooling amortization, financial instruments, stock based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

 

Our consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. These estimates and assumptions are affected by management’s application of accounting policies. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact our financial condition, changes in financial condition or results of operations. Our significant accounting policies are discussed in Note 2 of the Notes to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. On an ongoing basis, we evaluate our estimates, including those related to our revenue recognition, allowance for doubtful accounts, inventory valuation, warranty reserves, tooling amortization, financial instruments, stock based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

Our critical accounting policies are as follows:

 

Revenue Recognition. Our revenue is derived from the sale of rugged mobile technology, which includes rugged mobile tablet PC computers and related accessories. Our customers are predominantly resellers. However, we also sell directly to end-users. We recognize revenue, net of an allowance for estimated returns, when title and risks of ownership are transferred to the customer, all significant contractual obligations have been satisfied, the sales price is fixed or determinable and the ability to collect is reasonably assured. Our revenue recognition criteria have generally been met when the product has been shipped. Shipments are based on firm purchase orders from our customers with stated terms. However, with the addition of Motion, a number of our sales are not recognized until the customer receives the goods. The shipping terms are F.O.B. shipping point. We do not have installation, training or other commitments subsequent to shipment that are other than incidental. Our prices are determined based on negotiations with our customers and are not subject to adjustment. Generally, we do not hold inventory at our resellers and we do not expect resellers to hold inventories of our products other than in limited circumstances in which such inventory is monitored by us. As a result, we expect returns to be minimal. We have not had material adjustments, as our returns have been minimal. Revenue from separately priced extended warranty contracts is deferred and recognized in income on a straight-line basis over the related contract period. 

 

Allowance for Doubtful Accounts. We regularly review and monitor collections of our accounts receivables and make estimated provisions, generally monthly, based on our experience, aging attributes, results of collection efforts and current market conditions. If our estimate for allowance for doubtful accounts is too low, additional charges will be incurred in future periods, which additional charges could have a material adverse effect on our financial position and results of operations. Historically, our estimates have not required significant adjustment due to actual experience of very small amount of doubtful accounts.

 

Warranty Reserves. We make provisions for warranties at the time of sale, which are based on our experience and monitored regularly. The revenue related to warranty is recognized when our obligations are generally covered by a warranty coverage agreement provided by a third party. A portion of our warranty obligations related to revenue recognized are primarily covered by warranty coverage agreements provided by our contract manufacturers; however, we also provide the coverage on the portion of our obligations which is not covered by these agreements, for which we establish related reserves at the time of sale. We are moving to more of a self-insured model due to changes in our warranty offerings and warranty claim experience. If our estimates for warranties and returns are too low, additional charges will be incurred in future periods and these additional charges could have a material adverse effect on our financial position and results of operations. Historically, our estimates have not required significant adjustment due to actual experience.

 

Inventory Valuation. We adjust our inventory values so that the carrying value does not exceed net realizable value. The valuation of inventory at the lower of average cost or net realizable value requires us to use estimates regarding the amount of current inventory that will be sold and the prices at which it will be sold, and our assessment of expected orders from our customers. Additionally, the estimates reflect changes in our products or changes in demand because of various factors, including the market for our products, obsolescence, production discontinuation, minimum order quantities, technology changes and competition. While the estimates are subject to revisions and actual results could differ materially, our estimates have not required significant adjustment due to actual experience.

 

Tooling Amortization. We amortize tooling costs over a two year period or estimated life, whichever is shorter. Those costs are recorded as a cost of revenue, subject to an assessment that future revenue will be sufficient to fully recover the cost of the tooling. This assessment requires an assessment of the market for our products and our future revenue expectations. On a quarterly basis, this assessment is reviewed and the cost of tooling is written down to its net realizable value if its recoverability is not reasonably expected based on estimates of future revenue. There have been no instances in which we determined that useful life was significantly less than two years. Accordingly, we have not recorded material adjustments.

 

Goodwill and Other Intangible Assets. Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business acquisitions and combinations. Goodwill and other intangible assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate impairment may exist, such as a significant adverse change in the business climate. In assessing the value of goodwill, assets and liabilities are assigned to the reporting units and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. Identified intangible assets are amortized using the straight-line method over their estimated useful lives which are estimated to be between three and seven years.

 

Long-lived asset impairment.  Long-lived assets include property and equipment and definite-lived intangible assets. Definite-lived intangible assets consist of customer relationships, trade names and non-compete agreements. Long-lived assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate that the carrying value of the assets may not be recoverable.

 

Income Taxes. We have a significant valuation allowance that we intend to maintain until it is more likely than not that our deferred tax assets will be realized. Our income tax expense recorded in the future will be reduced to the extent of decreases in our valuation allowances. While we can utilize net operating loss carry-forwards to reduce our Federal income taxes, we will be subject to alternative minimum tax charges. Changes in the tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We are not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.

 

 

Financial Instruments. The warrant we issued in connection with the issuance of stock or for services has been valued separately using the Black-Scholes methodology. The determination of the values attributed to the warrant required the use of estimates and judgments particularly related to the assumptions used in the Black-Scholes calculation. In addition, options and warrants to acquire common stock issued to employees, directors and consultants have been valued using a Black-Scholes calculation and their valuations are impacted by the assumptions used in this calculation.

 

Stock-Based Compensation Expense. We apply the fair value method of accounting for all of our employee stock-based compensation. We use the Black-Scholes option pricing model to determine the fair value of stock option awards at the date of the issuance of the award. The value is expensed over the vesting period, which is generally three years. See Note 8 to our Annual Consolidated Financial Statements included in our Annual Report on Form 10-K for required disclosures.

 

Our estimates of stock-based compensation expense require a number of complex and subjective assumptions, including our stock price volatility, employee exercise patterns, future forfeitures, dividend yield, related tax effects and the selection of an appropriate fair value model. In addition, we have estimated volatility on shares issued in the three months ended June 30, 2015 and the year ended March 31, 2015 based on an average volatility of a set of companies considered comparable to us. We use historical data to estimate pre-vesting forfeitures, and we record stock-based compensation expense only for those awards that are expected to vest. The dividend yield assumption is based on our history and future expectations of dividend payouts.

 

The assumptions used in calculating the fair value of stock-based compensation expense and related tax effects represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, or if we decide to use a different valuation model, our stock-based compensation expense could be materially different in the future from what we have recorded in the current period, which could materially affect our results of operations.

 

Recent Accounting Pronouncements

 

We have implemented all new accounting pronouncements that are in effect and that may impact our consolidated financial statements.  We do not believe that there are any new accounting pronouncements that have been issued that might have a material impact on our consolidated financial position or results of operations.

 

In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs", which changes the presentation of debt issuance costs in financial statements. Under the ASU, such costs are presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. Early adoption is allowed for all entities for financial statements that have not been previously issued. The guidance is to be applied retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). ASU 2015-03 will be effective for us beginning in fiscal 2018. We are currently evaluating the impact that the adoption of ASU 2015-03 may have on our consolidated financial statements.

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (ASU 2015-02). The objective of ASU 2015-02 is to modify the consolidation requirements of Topic 810 to ensure that reporting entities do not consolidate other legal entities in situations where deconsolidation actually more accurately represents operational and economic results. Among other changes, the amendments to ASC 810 include lessening the relevance on fees paid to a decision-maker or service provider and the related party tiebreaker test.

 

The amendments are effective for private business entities for fiscal years, and for interim periods within those fiscal years beginning after December 15, 2016. This ASU may be adopted using a full retrospective approach or a modified retrospective approach by recording a cumulative effect adjustment to equity as of the beginning of the fiscal year of adoption. ASU 2015-02 will be effective for us beginning in fiscal 2017. We are currently evaluating the impact that the adoption of ASU 2015-02 may have on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts”. The core principle of ASU 2014-09 is that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable users of our financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. We will also be required to disclose information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require us to apply ASU 2014-09 to each prior reporting period presented. The second method would require us to retrospectively apply with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. ASU 2014-09 will be effective for us beginning in fiscal 2018; however, a delay in the effective date is currently being considered by the FASB, which we expect will result in at least a one year deferral. The FASB may also permit companies to adopt ASU 2014-09 early, but not before the original public company effective date (that is, annual periods beginning after December 15, 2016). We are currently evaluating the impact that the adoption of ASU 2014-09 may have on our consolidated financial statements.

 

 

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which changes the requirements for reporting discontinued operations in Subtopic 205-20 “Presentation of Financial Statements - Discontinued Operations.” The ASU changes the definition of discontinued operations by limiting discontinued operations reporting to disposals that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. Under current U.S. GAAP, many disposals, some of which may be routine in nature and not representative of a substantive change in an entity’s strategy, are reported in discontinued operations. ASU 2014-08 requires expanded disclosures for discontinued operations designed to provide users of financial statements with more information about the assets, liabilities, revenues, expenses and cash flows related to discontinued operations. ASU 2014-08 also requires an entity to disclose the pretax profit or loss (or change in net assets for a not-for-profit entity) of an individually significant component of an entity that does not qualify for discontinued operations reporting. The amendments in ASU 2014-08 are effective prospectively for fiscal years, and interim periods, beginning after December 15, 2014. ASU 2014-08 will be effective for us beginning in Q1 FY 2016 and we will evaluate each divestiture to determine the appropriate presentation and disclosure requirements associated with our consolidated financial statements.

 

Results of Operations

 

Revenue. We derive revenue from sales of our rugged wireless tablet PC systems, which encompass a family of active pen and touch tablet PC computers, embedded wireless, desktop, vehicle, fork-lift or truck docking stations and a range of supporting performance-matched accessories, peripherals and support services. Our revenue also includes service revenue derived from out-of-warranty repairs and from separately priced extended warranty contracts which is deferred and recognized in income on a straight-line basis over the related contract period.

 

Cost of Revenue. Cost of revenue consists of the costs associated with manufacturing, assembling and testing our products, related overhead costs, maintenance, compensation, freight and other costs related to manufacturing support, including depreciation of tooling assets and logistics. We use contract manufacturers to manufacture our products and supporting components, which represents a significant majority of our cost of revenue. In addition, the costs associated with providing warranty repairs, as well as the costs associated with generating service revenue, are included in cost of revenue.

 

Gross Profit. Gross profit has been, and will continue to be, affected by a variety of factors, including competition, product mix and average selling prices of products, maintenance, new product introductions and enhancements, the cost of components and manufacturing labor, fluctuations in manufacturing volumes, component shortages, the mix of distribution channels through which our products are sold, and warranty costs.

 

Sales, Marketing and Support. Sales, marketing and support expenses include salaries, commissions, agent fees and costs associated with co-operative marketing programs, as well as other personnel-related costs, travel expenses, advertising programs, trade shows and other promotional activities associated with the marketing and selling of our products. We also believe part of our future success will be dependent upon establishing and maintaining successful relationships with a variety of resellers.

 

Product Research, Development and Engineering. Product research, development and engineering expenses consist of salaries and related expenses for development and engineering personnel, and non-recurring engineering costs, including prototype costs, related to the design, development, testing and enhancement of our product families. We expense our research and development costs as they are incurred. There may be components of our research and development efforts that require significant expenditures, the timing of which can cause quarterly fluctuation in our expenses.

 

General Administration. General administration expenses consist of salaries and related expenses for finance, accounting, procurement and information technology personnel, investor relations, professional fees, including legal fees for litigation defense and litigation settlement payments, corporate expenses, and costs associated with being a U.S. public company, including regulatory compliance costs.

 

 

Interest. Interest expense includes interest on borrowings or transaction processing fees related to our credit facility.

 

Other Income and Expense. Other income and expense includes gains and/or losses on dispositions of assets and other miscellaneous income and expense.

 

Inflation. During the three months ended June 30, 2015 and 2014, we believe inflation and changing prices have not had material impact on our revenue or on net loss from continuing operations.

 

Three Months Ended June 30, 2015 vs. Three Months Ended June 30, 2014

 

Revenue. Total revenue for the three months ended June 30, 2015 was $24,043,000, compared to $8,267,000 for the three months ended June 30, 2014, an increase of $15,776,000, or approximately 191%. A 31% increase in our revenue was attributable our legacy product line, with the remaining increase coming from the product line we acquired in the Motion Acquisition.

 

We operate in one segment, the sale of rugged mobile tablet PC systems. The United States accounted for approximately 78% and 78% of our total revenue for the three months ended June 30, 2015 and 2014, respectively. No other country accounted for more than 10% of our total revenue for the three months ended June 30, 2015 and 2014.

 

We have a number of customers, and in any given period a single customer may account for a significant portion of our sales. For the three months ended June 30, 2015, we had two customers located in the United States who accounted for approximately 30% of our revenue. For the three months ended June 30, 2014, we had two customers located in the United States who accounted for approximately 48% of our total revenue. At June 30, 2015, we had two customers with receivable balances that totaled approximately 54% of our outstanding receivables.

 

Cost of Revenue. Total cost of revenue for the three months ended June 30, 2015 was $15,893,000, compared to $5,203,000 for the three months ended June 30, 2014, an increase of $10,690,000, or approximately 205%. A 35% increase in our cost of revenue was attributable to our legacy product line, with the remaining increase coming from the product line we acquired in the Motion Acquisition.

 

We rely on four suppliers for the majority of our finished goods. The inventory purchases and engineering services from these suppliers for the three months ended June 30, 2015 and 2014 were $11,500,000 and $7,972,000, respectively. At June 30, 2015 and 2014, we owed these suppliers $10,635,000 and $2,462,000, respectively, which is recorded in accounts payable and accrued liabilities.

 

Gross Profit. Total gross profit increased by $5,086,000 to $8,150,000 (33.9% of revenue) for the three months ended June 30, 2015, from $3,064,000 (37.1% of revenue) for the three months ended June 30, 2014. The increase in gross profit for the three months ended June 30, 2015 was due primarily to the increases in unit sales and revenue from our legacy product line, as well as the product line we acquired in the Motion Acquisition. The decrease in the gross profit percentage was due to the changes in the product mix sold.

 

Sales, Marketing and Support Expenses. Sales, marketing and support expenses for the three months ended June 30, 2015 were $3,620,000, compared to $1,598,000 for the three months ended June 30, 2014. The increase of $2,022,000, or approximately 127%, was due primarily to an increase in headcount related costs of $1,448,000, marketing related expenses of $451,000 consistent with our plans to generate more awareness of our products through expanded sales and marketing initiatives, an increase in travel related expenses of $113,000 and sales meeting related expenses of $66,000.

 

Product Research, Development and Engineering Expenses. Product research, development and engineering expenses for the three months ended June 30, 2015 were $1,830,000, an increase of $839,000, or approximately 85%, compared to $991,000 for the three months ended June 30, 2014. The increase in these expenses was due primarily to an increase in product development costs of $475,000, mostly associated with new products and an increase in headcount related costs associated with new hires of $373,000, offset by other expenses of $9,000. All of these increased expenses were primarily attributable to the Motion Acquisition.

 

General Administration Expenses. General administration expenses for the three months ended June 30, 2015 were $2,331,000, compared to $1,007,000 for the three months ended June 30, 2014, an increase of $1,324,000, or approximately 131%. The increase primarily consists of an increase in stock-based compensation expense of $447,000 due to a grant of options to members of our Board of Directors and certain of our officers in April 2015, an increase in headcount related costs of $429,000, an increase in overhead related costs of $255,000, and increase in depreciation expense of $87,000. The increases in head count and overhead were primarily attributable to the Motion Acquisition.

 

 

 

For the three months ended June 30, 2015 and 2014, the fair value of employee stock-based compensation expense was $607,000 and $159,000, respectively. On April 7, 2015, our board of directors approved grants of additional options to purchase a total of 240,374 shares of our common stock, with an exercise price of $6.38, of which options to purchase 87,437 shares were granted to our chairman and chief executive officer, options to purchase 75,000 shares were granted to our president, options to purchase 50,000 shares were granted to our former chief financial officer and options to purchase 27,937 shares were granted to Andrea Goren, a member of our board of directors. The options vest on the first anniversary of the closing of the Motion Acquisition, and have a term of seven and one half years from the date of the grant. These grants are contingent upon stockholder approval of an increase in the maximum number of shares to be authorized for issuance under our stock incentive plan. In June 2014, our board of directors granted options to purchase 797,000 shares of our common stock at an exercise price of $5.00 per share to the members of our board of directors and certain of our officers. These options vest in three equal annual installments, beginning on October 31, 2014, and have a term of seven and a half years from the date of grant. The increase in stock compensation expense was principally due to the grants made on April 7, 2015.

 

Depreciation and amortization expenses for the three months ended June 30, 2015 and 2014 were $358,000 and $172,000, respectively. The increase was primarily due to tooling amortization associated with the new product lines we acquired in the Motion Acquisition. Depreciation and amortization is recorded in the related functional classification.

 

Interest Expense. Interest expense for the three months ended June 30, 2015 was $6,000, compared to no expense for the three months ended June 30, 2014, an increase of $6,000. The increase was due to amounts we borrowed under our new credit facility with Square 1 Bank in connection with the Motion Acquisition.

 

Other Income/Expense. Other expense for the three months ended June 30, 2015 was $613,000, primarily resulting from costs related to the integration of operations we acquired in the Motion Acquisitions compared to $19,000for the three months ended June 30, 2014.

 

Net Loss. Our net loss for the three months ended June 30, 2015 was $244,000, compared to a net loss of $551,000 for the three months ended June 30, 2014.

 

Liquidity and Capital Resources

 

Until recently, the rate of growth in the market for our tablet products and our success in gaining market share has been less than we anticipated. Other than in fiscal years 2015 and 2013, we incurred net losses in each full fiscal year since our inception. From inception, we have financed our operations and met our capital expenditure requirements primarily from the gross proceeds of private and public sales of debt and equity securities totaling approximately $126.6 million. As of June 30, 2015, our working capital was $14,327,000 and our cash and cash equivalents were $11,017,000.  

 

On April 17, 2015, in connection with the Motion Acquisition, our subsidiary entered into a Loan and Security Agreement with Square 1 Bank, pursuant to which Square 1 Bank provided us with formula and non-formula revolving loans for up to an aggregate amount of $15 million, which replaced the ARPA, under which there were no borrowings at the time. The new facility with Square 1 Bank has a two year term, is secured by substantially all of our assets, and bears interest at the greater of the current prime lending rate plus 1.25% per annum or 4.5% per annum. The maximum amount of formula revolving loans outstanding at any one time cannot exceed the lesser of $15 million or 85% of our eligible accounts receivable. The maximum amount of non-formula loans outstanding at any time cannot exceed $4 million through April 16, 2016, with the maximum allowable amount reducing by $480,000 increment every three months thereafter, until the maximum amount reaches $2.08 million, where it will remain until maturity. On April 17, 2015, we borrowed approximately $9 million under this facility to fund the cash portion of the purchase price for the Motion assets.

 

As of August 11, 2015, there were $3,810 in borrowings outstanding under the Square 1 Bank facility.

 

We believe that our current cash and cash flow from operations, together with our borrowing capacity under our new credit facility, will be sufficient to fund our anticipated operations, working capital and capital spending needs for the next 12 months.

 

Cash Flow Results

 

The table set forth below provides a summary statement of cash flows for the periods indicated:

 

		Three Months Ended June 30,
		2015				2014
Net cash (used in) by operating activities		$	(3,647,000	)		$	(2,697,000	)
Net cash provided (used in) investing activities			416,000				(71,000	)
Net cash provided (used in) financing activities			(5,207,000	)			10,000
Cash and cash equivalents, end of period			11,017,000				2,642,000

 

 

Net cash used in our operating activities was $3,647,000 for the three months ended June 30, 2015, as compared to $2,697,000 for the three months ended June 30, 2014, an increase of $950,000. The increase in net cash used by operating activities was due to an unfavorable variance resulting from the timing of accounts receivable billings and collections of $5,728,000, an increase in the use of cash arising from the timing of accounts payables and accrued liabilities of $1,948,000, an increase in prepaid expenses of $177,000, offset by a favorable variance in inventory and by a favorable variance in our net loss, net of items not affecting cash, of $854,000.

 

Net cash provided in investment activities for the three months ended June 30, 2015 consisted primarily of the net cash received in the Motion Acquisition of $653,000, offset by investments in fixed assets of $191,000 and investments in demonstration units of $46,000. For the three months ended June 30, 2014, net cash used in investment activities consisted primarily of investments in demonstrations units of our new products of $64,000 and purchases of computer equipment of $7,000.

 

Our financing activities used $5,207,000 of net cash for the three months ended June 30, 2015, primarily due to net repayments of our bank indebtedness of $5,233,000. Our financing activities provided $10,000 of net cash for the three months ended June 30, 2014 from the issuance of common stock by the employee stock purchase plan.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.   Controls and Procedures.

 

(a)	Evaluation of disclosure controls and procedures.

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, an evaluation of the effectiveness of our “disclosure controls and procedures” (as that term is defined under the Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer concluded as of the period covered by this report that our disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified in the Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding the required disclosure.

 

(b)	Changes in internal control over financial reporting.

 

During the three months ended June 30, 2015, there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1.   Legal Proceedings.

 

At June 30, 2015, we were not involved in any legal actions, arising in the ordinary course of business or otherwise. From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. We believe that the ultimate outcome of these matters would not have a material adverse impact on our financial condition or the results of operations.

 

 

Item 1A.   Risk Factors

 

Our Annual Report on Form 10-K for the year ended March 31, 2015 includes a detailed discussion of our risk factors. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in the Annual Report on Form 10-K for the year ended March 31, 2015.

 

Risks Relating to our Business

 

For the three months ended June 30, 2015, we had two customers that accounted for more than 10% of our total revenue. If we are unable to replace revenue generated from one of our major resellers or end-user customers with revenue from others in future periods, our revenue may decrease and our growth would be limited.

 

Historically, in any given quarter a single customer, either reseller or end-user customer, could account for more than 10% of our revenue. For the three months ended June 30, 2015, two customers located in the United States who accounted for approximately 30% of our total revenue. If we are unable to replace revenue generated from our major customers, including resellers, with revenue from others our revenue may decrease and our growth would be limited.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

Recent Sales of Unregistered Securities

 

None.

 

Item 3.   Defaults Upon Senior Securities.

 

None.

 

Item 4.   Mine Safety Disclosures

 

None.

 

Item 5.   Other Information.

 

None.

 

Item 6.   Exhibits.

 

Exhibit Number		Description of Exhibit
31.1*		Certification of Philip S. Sassower, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Tom Wilkinson, Interim Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certifications of Philip S. Sassower, Chief Executive Officer, and Tom Wilkinson, Interim Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

                                                            

*Filed herewith.

 

 

SIGNATURE

 

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.

 

	XPLORE TECHNOLOGIES CORP.
Dated: August 13, 2015	By:	/s/ TOM WILKINSON
		Tom Wilkinson
		Interim Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Officer)

 

 

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