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XPLORE TECHNOLOGIES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
Certain statements in our Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), 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, 2012 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 PC
systems. 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 enable the extension of traditional computing systems to a 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 up to a
depth of three feet, impervious to drops from as high as seven feet, are
readable in direct sunlight, can be mounted on vehicles and include LTE and WiFi
connectivity options for real-time data access. Our end user customers include
major utility companies, leading heavy equipment manufacturers, oil and gas
companies, the military and first responders.
Our revenue is derived through the sale of our iX104 systems in the rugged,
tablet PC market. We are dependent upon the market acceptance of our iX104
systems. Our iX104C5TM introduced what we believe are "industry firsts" and
differentiating features, including a tool-less removable dual solid state drive
module, tool-less access to the SIM and MicroSD ports and an ingress protection
rating of IP 67 for submersion in water. The C5 family also features an Intel®
Core™ i7 processor and Windows® 7 operating system. Our specially designed
AllVueTM screen is viewable in challenging lighting conditions, including direct
sunlight and dimly lit environments, and also features a superior screen
contrast ratio of 600:1.
We launched our fifth generation iX104C line of rugged tablet PCs in May 2011
and have received favorable responses from our end user customers. From fiscal
2011 to fiscal 2012, our revenue increased by approximately 55%, primarily due
to $17.5 million in purchase orders received during the last half of fiscal 2012
from AT&T. Shipment of those orders occurred in the third and fourth quarters of
fiscal 2012 and in the first and second quarters of fiscal 2013. On October 15,
2012 we announced receipt of a $1.1 million purchase order from a leading
medical device company and on December 7, 2012 we announced the receipt of a
multi-million dollar purchase order for the U.S. military. The military purchase
order was for over 900 of our iX104C5M rugged military tablets, which are
scheduled for delivery over several quarters. These recent orders were our most
significant orders from the medical device and military markets and we believe
represent significant milestones. For the 12- month period ended December 31,
2012, we had revenue of $34.2 million and net income of $1.8 million. Our
revenue for the quarter ended December 31, 2012 was approximately 34% less than
the prior year period, in which shipments to AT&T accounted for approximately
43% of that quarter's revenue. The fluctuation in quarterly revenue reflects the
variability in our business associated with the timing of large orders and the
related shipping of the products. While we may experience some variability in
our quarterly operating results as a consequence, we believe our year-over-year
business is growing, as reflected by our fiscal year-to-date revenue numbers.
On October 31, 2012, we completed the closing of an underwritten public offering
of two million shares of our common stock, from which we received gross proceeds
of $10 million. In connection with the closing of the public offering, each
series of our outstanding preferred stock was automatically converted into
shares of our common stock. In addition, our common stock began trading on the
NASDAQ Capital Market under the symbol "XPLR."
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These actions strengthened our financial position and we believe improved the
liquidity of our common stock. We intend to use the net proceeds from the
offering to expand our sales and marketing efforts, increase our product
offerings to broaden our addressable markets and for working capital and general
corporate purposes. Consequently, we expect our operating expenses to increase
based on these investments, and we may continue to incur operating losses, at
least until we have completed the development of several new products. We
currently estimate that development of those products will be completed, and the
products will be launched, from mid 2013, through 2014.
Looking forward, our strategy is to build increased marketplace awareness of our
iX104 and new product families, in an effort that we believe will enable us to
continue increasing our revenue and to expand our market share.
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 unaudited consolidated financial statements as of
December 31, 2012 and March 31, 2012 and for the three months and nine months
ended December 31, 2012 and 2011. 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. Revenue is recognized, 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. 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 where 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.
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 and these additional
charges could have a material adverse effect on our financial position and
results of operations. Our estimates have not required significant adjustment
due to actual experience.
Warranty Reserves. Provisions are made at the time of sale for warranties, 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. Warranty obligations related to
revenue recognized are primarily covered by warranty coverage agreements
provided by Wistron Corporation, our contract manufacturer; however, we also
provide the coverage on some of our obligations for which we establish related
reserves at the time of sale. 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. 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, technology changes and competition. While the estimates are
subject to revisions and actual results could differ, our experience is that the
estimates used by current management have not been required to be adjusted based
on actual results. Accordingly, while any change to the estimates could have a
material impact, there have been no material adjustments to originally provided
amounts.
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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 for the periods covered by these financial
statements. There have been no instances where we determined that useful life
was significantly less than two years. Accordingly, we have not recorded
material adjustments.
Income Taxes. We have significant valuation allowances that we intend to
maintain until it is more likely than not the 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. 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 warrants we issued in connection with the issuance of
secured subordinated promissory notes or common stock or for services have been
valued separately using the Black-Scholes methodology. The notes were originally
reflected in our financial statements at a discounted value and the difference
between this discount amount and the face value of the notes, which is repayable
at maturity, was amortized as additional non-cash interest expense during the
expected terms of the notes. The determination of the values attributed to the
warrants 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 7 to our consolidated financial
statements 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. We estimate expected share
price volatility based on historical volatility using daily prices over the term
of past options. 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 the Company's
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 required new accounting pronouncements in effect that
may impact our consolidated financial statements. We do not believe any such new
accounting pronouncements might have a material impact on our consolidated
financial position or results of operations.
Results of Operations
Revenue. We derive revenue from sales of our rugged 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.
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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 litigation legal
fees and 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 related to our credit
facility.
Other Income and Expense. Other income and expense includes gains and/or losses
on dispositions of assets, foreign exchange and other miscellaneous income and
expense.
Inflation. During the three and nine month periods ended December 31, 2012 and
2011, we believe inflation and changing prices have not had a material impact on
our net revenue, or on income (loss) from continuing operations.
Three and Nine Months Ended December 31, 2012 vs. Three and Nine Months Ended
December 31, 2011
Revenue. Total revenue for the three months ended December 31, 2012 was
$5,927,000, as compared to $8,918,000 for the three months ended December 31,
2011, a decrease of $2,991,000, or approximately 34%. A decrease in unit sales
accounted for a decrease in revenue of approximately 35% for the three months
ended December 31, 2012, compared to the three months ended December 31, 2011, a
period in which shipments to AT&T accounted for approximately 43% of revenue.
The decrease in unit sales was partially offset by an increase in our average
sales price of approximately 1% due to favorable changes in the product mix
sold. The fluctuation in quarterly revenue reflects the variability in our
business associated with the timing of the deployment of large orders. While we
may experience some variability in our quarterly operating results, we believe
our business is growing as reflected by our revenue growth of approximately 40%
for the nine months ended December 31, 2012 as compared to the prior year
period. Revenue for the nine months ended December 31, 2012 was $23,350,000, as
compared to $16,696,000 for the nine months ended December 31, 2011, an increase
of $6,654,000. An increase in unit sales accounted for an increase in revenue of
approximate 32% for the nine months ended December 31, 2012, compared to the
nine months ended December 31, 2011, along with an increase in our average sales
price of approximately 8% due to favorable changes in the product mix sold. The
increase in unit sales was principally attributable to the fulfillment of a
portion of the significant purchase orders discussed above.
We operate in one segment, the sale of rugged mobile tablet PC systems. The
United States, Germany and England accounted for approximately 51%, 13%, and
10%, respectively, of our total revenue for the three months ended December 31,
2012. The United States, Germany and Canada accounted for approximately 67%, 11%
and 10%, respectively, of our total revenue for the three months ended December
31, 2011. The United States and Canada accounted for approximately 65% and 14%,
respectively, of our total revenue for the nine months ended December 31,
2012. The United States, Germany and Canada accounted for approximately 57%,
12%, and 11%, respectively, of our total revenue for the nine months ended
December 31, 2011.
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We have a number of customers, and in any given period a single customer can
account for a significant portion of our sales. For the three months ended
December 31, 2012, we had two customers located in the United States, and one
customer located in Germany who accounted for approximately 27% and 11%,
respectively, of our revenue. For the nine months ended December 31, 2012, we
had one customer located in the United States who accounted for approximately
36% of our revenue. For the three months ended December 31, 2011, we had one
customer located in the United States who accounted for approximately 43% of our
revenue. For the nine months ended December 31, 2011, we had two customers
located in the United States and Germany who accounted for approximately 27% and
10%, respectively, of our revenue. At December 31, 2012, we had two customers
with receivable balances that totaled approximately 40% of our outstanding
receivables. At December 31, 2011, we had one customer with receivable balances
that totaled approximately 54% of our outstanding receivables, which balances
were subsequently collected.
Cost of Revenue. Total cost of revenue for the three months ended December 31,
2012 was $3,864,000, compared to $6,182,000 for the three months ended December,
2011, a decrease of $2,318,000, or approximately 37%. A decrease in unit sales
accounted for a decrease of approximately 32% in cost of revenue, along with a
decrease in average unit cost of approximately 5% due to changes in the product
mix sold. Total cost of revenue for the nine months ended December 31, 2012 was
$15,676,000, compared to $11,758,000 for the nine months ended December 31,
2011, an increase of $3,918,000, or approximately 33%. An increase in unit sales
accounted for an increase of approximately 30% in cost of revenue, along with an
increase in average cost per unit of approximately 3% due to changes in the
product mix sold.
We rely on a single supplier for the majority of our finished goods. The
inventory purchases and engineering services from this supplier for the nine
months ended December 31, 2012 and 2011 were $12,094,000 and $8,096,000,
respectively. At December 31, 2012 and 2011, we owed this supplier $1,302,000
and $3,199,000, respectively, which is recorded in accounts payable and accrued
liabilities.
Gross Profit. Total gross profit decreased by $673,000 to $2,063,000 (34.8% of
revenue) for the three months ended December 31, 2012 from $2,736,000 (30.7% of
revenue) for the three months ended December 31, 2011. The decrease in gross
profit for the three months ended December 31, 2012 was due primarily to the
decreases in unit sales and revenue and the increase in gross profit as a
percentage of revenue was attributable to more favorable product mix. Total
gross profit increased by $2,736,000 to $7,674,000 (32.9% of revenue) for the
nine months ended December 31, 2012 from $4,938,000 (29.6% of revenue) for the
nine months ended December 31, 2011. The increase in gross profit for the nine
months ended December 31, 2012 was due primarily to the increase in unit sales
and revenue and the increase in gross profit as a percentage of revenue was due
to a more favorable product mix, as well as the favorable impact of spreading
indirect labor and logistics costs, which are predominately fixed in nature,
over more revenue.
Sales, Marketing and Support Expenses. Sales, marketing and support expenses for
the three months ended December 31, 2012 were $1,022,000, compared to $976,000
for the three months ended December 31, 2011. The increase of $46,000, or
approximately 5%, was primarily due to an increase in headcount related costs of
$68,000 for new sales and marketing personnel as well as incentive compensation
paid to sales and marketing personnel for meeting performance objectives and an
increase in marketing expenses of $47,000, primarily related to lead generation
activities. These increases were partially offset by a decrease in costs related
to demonstration units of $58,000, which were higher in the prior year due to
the product launch of the C5 in May 2011, and a reduction in stock compensation
of $18,000. Sales, marketing and support expenses for the nine months ended
December 31, 2012 were $2,840,000, compared to $2,791,000 for the nine months
ended December 31, 2011, an increase of $49,000. The increase was primarily due
to an increase in commission expense of $204,000 commensurate with the increase
in revenue, an increase in headcount related costs of $104,000 due to the
aforementioned factors and an increase in marketing expenses of $14,000,
partially offset by a decrease in costs related to demonstration units of
$197,000, a reduction in stock compensation of $46,000 and a decrease in travel
and office related expenses of $32,000.
Product Research, Development and Engineering Expenses. Product research,
development and engineering expenses for the three months ended December 31,
2012 were $695,000, an increase of $208,000, or approximately 43%, compared to
$487,000 for the three months ended December 31, 2011. The increase was due
primarily to an increase in product development costs of $170,000 associated
with three new products and an increase in headcount related expenses of $69,000
for new engineering personnel as well as incentive compensation paid to
engineering personnel for meeting performance objectives, offset by a decrease
in patent filing expenses of $33,000, in comparison to the prior year that
included new patent filings associated with the C5 feature set. Product
research, development and engineering expenses for the nine months ended
December 31, 2012 were $1,609,000, an increase of $189,000, or approximately
13%, compared to $1,420,000 for the nine months ended December 31, 2011. The
increase was primarily due to an increase in headcount related expenses of
$146,000 and an increase in product development expenses of $133,000, offset by
a decrease in patent filing expenses of $87,000. The reasons for the
fluctuations for the nine months ended December 31, 2012 are the same as those
described for the three months ended December 31, 2012. For our fiscal year
ending March 31, 2013, we expect our product research, development and
engineering expenses to increase primarily due to the development of the
additional products and, to a lesser extent, the non-recurrence of a $398,000
reduction in fiscal year 2012 engineering expenses arising from the elimination
of an accrual in the fourth quarter.
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General Administration Expenses. General administration expenses for the three
months ended December 31, 2012 were $965,000, compared to $914,000 for the three
months ended December 31, 2011, an increase of $51,000, or approximately 6%. The
increase primarily consists of an increase in incentive compensation of $122,000
paid to administrative personnel for meeting performance objectives, an increase
in investor and public relations related expenses of $47,000, primarily
associated with the up-listing of our common stock to NASDAQ, an increase in our
professional fees of $21,000, primarily legal, and an increase in depreciation
of $14,000, partially offset by the non-recurrence of a prior year charge of
$100,000 for patent infringement claims, reductions in stock compensation of
$17,000 and the general allowance for doubtful accounts of $17,000 associated
with the decrease in accounts receivable and a decrease in business personal
property tax of $11,000. General administration expenses for the nine months
ended December 31, 2012 were $2,655,000, compared to $2,377,000 for the nine
months ended December 31, 2011, an increase of $278,000, or approximately
12%. The increase was primarily due to an increase in headcount related expenses
of $205,000, consisting primarily of incentive compensation paid to
administrative personnel for meeting revenue and cash flow performance
objectives, as compared to the prior year period in which all incentive
compensation was accrued in the fourth quarter, an increase in investor and
public relations related expenses of $69,000, an increase in information systems
of $34,000 due to a system upgrade and an increase in depreciation of $11,000,
partially offset by a decrease in business personal property tax of $23,000 and
a decrease in the general allowance for doubtful accounts of $11,000.
For the three months ended December 31, 2012 and 2011, the fair value of
employee stock-based compensation expense was $164,000 and $222,000,
respectively. For the nine months ended December 31, 2012 and 2011, the recorded
employee stock-based compensation expense was $531,000 and $641,000,
respectively. The fluctuation in expense is attributable to the timing of the
granting of new awards and employee turnover. Stock compensation expense was
recorded in the employee related functional classification.
Depreciation and amortization expenses for the three months ended December 31,
2012 and 2011 were $129,000 and $156,000, respectively. Depreciation and
amortization expenses for the nine months ended December 31, 2012 and 2011 were
$380,000 and $524,000, respectively. The decrease in depreciation expense is
principally due to the aforementioned reduction of demonstration units of
$53,000 and $190,000, respectively, partially offset by the tooling amortization
associated with the C5 of approximately $12,000 and $34,000, and depreciation of
internal units and office equipment of $14,000 and $12,000, respectively, for
the three and nine months ended December 31, 2012. Depreciation and amortization
is recorded in the related functional classification.
Interest Expense. Interest expense for the three months ended December 31, 2012
was $1,000 compared to $64,000 for the three months ended December 31, 2011, a
decrease of $63,000. Interest expense for the nine months ended December 31,
2012 was $65,000, compared to $155,000 for the nine months ended December, 2011,
a decrease of $90,000. The decreases in both periods are attributable primarily
to no outstanding borrowings under our credit facility for the three months
ended December, 2012 and a reduction in outstanding borrowings under that
facility for the nine months ended December 31, 2012.
Other Expenses. Other expenses for the three months ended December 31, 2012 were
$6,000, compared to $11,000 for the three months ended December 31, 2011. Other
expenses for the nine months ended December 31, 2012 were $35,000, compared to
$43,000 for the nine months ended December 31, 2011.
Net Income (Loss). Our net loss for the three months ended December 31, 2012 was
$626,000, as compared to a net income of $284,000 for the three months ended
December 31, 2011, a decrease in income of $910,000. The decrease was due to a
decrease in revenue and an increase in operating expenses. The net income for
the nine months ended December 31, 2012 was $470,000 as compared to a net loss
of $1,848,000 for the nine months ended December 31, 2011, an increase in income
of $2,318,000. The increase was due to increases in revenue, partially offset by
an increase in operating expenses.
Net Loss Attributable to Common Stockholders. Net loss attributable to common
stockholders for the three months ended December 31, 2012 was $907,000, compared
to $1,088,000 for the three months ended December 31, 2011, a decrease of
$181,000, due primarily to the decrease of $1,091,000 in the dividends
attributable to Preferred Stock, as the Preferred Stock was outstanding for one
month in the current year as compared to three months in the prior year,
partially offset by the decrease in net income of $910,000. In connection with
the closing of the public offering on October 31, 2012, each series of our
outstanding preferred stock was automatically converted into common stock. Net
loss attributable to common stockholders for the nine months ended December 31,
2012 was $1,822,000, compared to $5,201,000 for the nine months ended December
31, 2011, a decrease of $3,379,000, attributable to a decrease in the net loss
of $2,318,000 and a decrease in dividends attributable to preferred stock of
$1,061,000, as the preferred stock was outstanding only through October 31,
2012. The outstanding shares of preferred stock accrued cumulative dividends
that were paid in shares of stock quarterly on the first day of June, September,
December and March, with the exception of the last dividends, which were paid
upon conversion on October 31, 2012. The dividends attributable to these shares
for the three months ended December 31, 2012 and 2011 were $281,000 and
$1,372,000, respectively. The dividends attributable to these shares for the
nine months ended December 31, 2012 and 2011 were $2,292,000 and $3,353,000,
respectively. The dividend rate for the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock was 7.5% per annum, and were paid
in shares of common stock determined by dividing (i) the aggregate amount of the
dividend then payable by (ii) the volume weighted average trading price of the
common stock over the 10 trading days ending on the third trading day
immediately preceding the dividend payment date, less a discount of 25% of the
volume weighted average trading price of the common stock. The dividend rate for
the Series D Preferred Stock was 10% per annum, payable in additional shares of
Series D Preferred Stock valued at $1.00 per share. The values for dividends
paid and dividends accrued and unpaid were determined based on the market prices
of our common stock as of the dates of share issuances or accrual multiplied by
the equivalent common shares.
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A summary of paid dividends for the three months ended December 31, 2012 and
2011 and accrued and unpaid dividends as of December 31, 2012 and 2011 is as
follows:
Dividends
Accrued and Unpaid as
Paid For Qtr Ended Paid For Nine Months of
December 31, Ended December 31, December 31,
2012 2011 2012 2011 2012 2011
Series A
Preferred Stock $ 350,000 $ 511,000 $ 1,365,000 $ 1,498,000 $ - $ 148,000
Series B
Preferred Stock 43,000 63,000 168,000 189,000 - 18,000
Series C
Preferred Stock 140,000 204,000 545,000 598,000 - 59,000
Series D
Preferred Stock 184,000 509,000 698,000 1,296,000 - 119,000
Liquidity and Capital Resources
We have incurred net losses in each fiscal year since our inception and we may
report a net loss for our fiscal year ending March 31, 2013. As of December 31,
2012, our working capital was $14,895,000 and our cash and cash equivalents were
$10,318,000. 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 $112.8 million.
Sources of capital available to us are a credit facility with a specialty
finance company.
On December 10, 2009, we entered into an Accounts Receivable Purchasing
Agreement (as amended, the "ARPA") with DSCH Capital Partners, LLC d/b/a Far
West Capital ("FWC"). Pursuant to the ARPA, FWC may purchase, in its sole
discretion, our eligible accounts receivable on a revolving basis, up to a
maximum of $8,500,000. Under the terms of the ARPA, FWC purchases eligible
receivables from our subsidiary with full recourse for the face amount of such
eligible receivables. FWC retains 15% of the purchase price of the purchased
receivables as a reserve amount. We are 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 to FWC under the ARPA) multiplied by the annual
prime lending rate reported in The Wall Street Journal plus 10.00%, which fees
accrue daily. In June 2012, in connection with the reduction of our cost of
funds rate and the elimination of the discount to FWC in connection with its
purchase of eligible receivables, we agreed to a net worth financial covenant
requiring, as of the last day of each fiscal quarter, our subsidiary to have a
net worth (defined as assets minus liabilities) of not less than $4,000,000. In
the event we are unable to maintain the minimum net worth requirement, the
monthly cost of funds fee required to be paid to FWC will be increased to equal
the net funds employed by FWC multiplied by the lesser of (a) the maximum rate
allowed under applicable law and (b) the annual prime lending rate reported in
The Wall Street Journal plus 16.0%, which fees accrue daily. On August 26, 2011,
we entered into an amendment to the ARPA to provide for advances up to $700,000
based upon eligible finished goods Tablet PC inventory, provided that total
funds advanced on such inventory does not exceed 30% of all eligible inventory
and provided further that the advances will at no time exceed 40% of the sum of
(1) total funds advanced by FWC under the ARPA and (2) products scheduled to be
shipped in satisfaction of customer purchase orders within 90 days. Eligible
inventory is valued at the lower of cost or market value.
The ARPA also provides that FWC has the right to require the subsidiary to
repurchase any purchased accounts receivable: (a) if there is a dispute as to
the validity of such receivable by the account debtor, (b) if certain covenants,
warranties or representations made by the subsidiary with respect to such
receivables are breached, (c) upon and during the continuance of an event of
default under the ARPA or upon the termination of the ARPA, or (d) if such
receivable remains unpaid 90 days after the invoice date. The ARPA has an
initial term of one year with automatic renewals for successive one-year
periods. Notwithstanding that, FWC may terminate the ARPA at any time upon
150 days prior written notice or without prior notice upon and during the
continuance of an event of default.
The ARPA contains standard representations, warranties, covenants, indemnities
and releases for agreements governing financing arrangements of this type. We
have guaranteed the obligations of our subsidiary under the ARPA pursuant to a
corporate guaranty and suretyship. In addition, pursuant to the ARPA, our
obligations under the ARPA are secured by a first priority security interest on
all our assets.
20--------------------------------------------------------------------------------As of February 6, 2013, there were no borrowings outstanding under the ARPA.
On October 31, 2012, we completed the closing of the public offering of
2,000,000 shares of common stock at an offering price of $5.00 per share and
received gross proceeds of $10,000,000, before deducting the underwriting
discount and offering expenses of $2,144,000. In connection with the closing of
the public offering, each series of our outstanding preferred stock was
automatically converted into common stock in accordance with the terms and
provisions of our amended and restated certificate of incorporation.
We believe that our current cash and cash flow from operations, including
proceeds from our recent public offering, together with borrowings under the
ARPA, will be sufficient to fund our anticipated operations, working capital and
capital spending 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 Nine Months Ended
December 31, December 31,
2012 2011 2012 2011
(in thousands of dollars)
Net cash provided by (used in)
operating activities $ 229,000 $ (268,000 ) $ 2,886,000 $ (422,000 )
Net cash used in investing
activities (238,000 ) (111,000 ) (649,000 ) (469,000 )
Net cash provided by financing
activities 7,856,000 1,182,000 7,882,000 1,640,000
Cash and cash equivalents, end
of period 10,318,000 917,000 10,318,000 917,000
Our operating activities provided $229,000 of net cash for the three months
ended December 31, 2012, as compared to $268,000 of net cash used by operating
activities for the three months ended December 31, 2011, a favorable improvement
of $497,000. The increase in net cash provided by operating activities was
primarily due to a favorable variance resulting from the timing of accounts
receivable billings and collections of $4,346,000 and a favorable decrease in
the prepaid expenses of $947,000, partially offset by an unfavorable increase in
the use of cash arising from the timing of payables of $3,709,000 and an
increase in net loss and the reduction in net income, net of items not affecting
cash, of $1,063,000. Our operating activities provided $2,886,000 of net cash
for the nine months ended December 31, 2012, as compared to $422,000 of net cash
used in operating activities for the nine months ended December 31, 2011, a
favorable improvement of $3,308,000. The increase in net cash provided by
operating activities was primarily due to an increase from favorable timing of
accounts receivable billings and collections of $9,241,000, and an increase from
our net income and the reduction in net loss, net of items not affecting cash,
of $1,897,000, partially offset by an unfavorable increase in the use of cash
arising from the timing of accounts payable of $6,695,000, an unfavorable
decrease in the net cash provided by inventory of $938,000 and an unfavorable
increase in prepaid expenses and other current assets of $197,000.
Net cash used in investment activities for the three months ended December 31,
2012 consists primarily of investments in tooling costs related to new products
being developed. Net cash used in investment activities for the nine months
ended December 31, 2012 consists of tooling costs of $472,000, investments in
demonstration units of $150,000 and $27,000 for a new phone system and other
assets. For the three and nine months ended December 31, 2011, the net cash used
in investment activities consisted primarily of investments in demonstration
units of our newly launched C5 tablet PCs of $111, 000 and $469,000,
respectively.
Our financing activities provided $7,856,000 of net cash for the three months
ended December 31, 2012, as compared to $1,182,000 of net cash provided in
financing activities for the three months ended December 31, 2011. For the nine
months ended December 31, 2012 our financing activities provided $7,882,000 of
net cash, compared to $1,640,000 of net cash for the nine months ended December
31, 2011. Net cash provided by financing activities for the three and nine
months ended December 31, 2012, consisted of net proceeds from the public
offering of our common stock of $7,856,000 and the issuance of capital stock by
the employee stock purchase plan of $0 and $26,000, respectively. For the three
and nine months ended December 31, 2011, net cash provided by financing
activities consisted of the net proceeds of $2,182,000 from the issuance of our
Series D Preferred Stock in a private placement and proceeds from the issuance
of capital stock by the employee stock purchase plan of $12,000 and $24,000,
respectively, partially offset by net repayments of our working capital facility
of $1,012,000 and $566,000, respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
21--------------------------------------------------------------------------------
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