Summary of TXP CORP - Yahoo! Finance

Item 6. Management's Discussion and Analysis or Plan of Operation.

WE URGE YOU TO READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO BEGINNING ON PAGE F-1. THIS DISCUSSION MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING BUT NOT LIMITED TO THE RISKS AND UNCERTAINTIES DISCUSSED UNDER THE HEADING "RISK FACTORS" IN THIS FORM 10K-SB AND IN OUR OTHER FILINGS WITH THE SEC. SEE "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."

Overview

We are a Nevada corporation formed in June 1994 under the name Cyber Synergy, Inc. to develop stock market related software applications. In November 1999, we changed our name to Jesse Livermore.com, Inc. In December 2001, we changed our name to Stock Market Solutions, Inc.

Our company was originally founded to assist professional mutual and hedge fund traders and managers, as well as individual investors, to more skillfully trade in the stock market. We were inactive until entering the development stage in January 1999. We intended to offer a teaching and a computer-trading program designed to provide educational/instructional assistance and aid to those stock market traders who wish to learn how to trade in the stock market using a system previously developed by an early 20th century stock market trader, Jesse Livermore.

On June 13, 2005, we and a wholly-owned subsidiary of Stock Market Solutions, Inc. (SMS) entered into an agreement and plan of merger with Texas Prototypes, Inc. (TXP) whereby SMS, following the effectuation of a 1 for 10 reverse stock split, issued shares of its common stock to TXP on May 4, 2006 equal to 94.7% of its total outstanding shares of common stock, or 89,298,042 shares, within ten days after completion of the closing conditions under the agreement and plan of merger, the principal requirement being the completion of the reverse stock split. On March 31, 2006, SMS obtained the majority vote of its shareholders necessary to effect the 1-for-10 reverse stock split. In exchange, TXP issued 100% of the outstanding shares of common stock, or 221,051,400 shares, to SMS. TXP merged into a wholly owned subsidiary of SMS and the separate corporate existence of such subsidiary ceased. TXP continued as the surviving corporation.

On April 21, 2006, we changed our name to YTXP Corporation, in anticipation of a reverse merger with a wholly owned subsidiary of SMS and Texas Prototypes, Inc., and our stock symbol was changed to "YTXO". In addition, on July 14, 2006 we changed our name to TXP Corporation and our stock symbol was changed to "TXPO". Further, on July 14, 2006 we amended our articles of incorporation to increase the number of authorized shares of our common stock from 100,000,000 shares to 300,000,000 shares.

On April 26, 2006, the certificate of merger between TXP and a wholly owned subsidiary of SMS was filed with the Secretary of State of the State of Texas. The directors and officers of TXP were appointed directors and officers of the surviving corporation pursuant to which Michael C. Shores and Robert Bruce, the president and former chief financial officer of TXP, respectively, were appointed as directors and officers of SMS, and Richard Smitten resigned as the chief executive officer and sole director of SMS. The parties completed the merger and satisfied all closing conditions as set forth in the agreement and plan of merger on April 28, 2006.

For accounting purposes, the acquisition has been treated as recapitalization of Texas Prototypes, Inc. with Texas Prototypes, Inc. as the acquirer and as the continuing reporting entity. Accordingly, financial statements filed for post-merger periods will depict the acquisition of YTXP by the accounting acquirer and will include financial statements of the accounting acquirer for the pre-merger comparable periods.

We are a provider of pre-manufacturing services for the global electronics industry, supporting original equipment manufacturers, original design manufacturers, contract manufacturers and new technology innovators. Pre-manufacturing, also referred to as pre-production, consists of the initial activities required to prepare a product for manufacturing. The success of these early activities directly impacts the speed with which a product can be brought to market. Pre-manufacturing services generally include: electrical design of the product, design and fabrication of the printed circuit board (PCB) based on the design, development of the material supply chain for parts required to build the desired electronic product, manufacture of a small number of initial prototype boards, development of procedures and protocol for testing the proper functioning of the assembled boards, manufacture of another small set of PCB's (referred to as a pilot production) to effectively confirm the manufacturing process, and then the transfer of all product build data into a production environment.

We have developed a position in the outside plant cabinet retrofit business. Our kits cover a diverse range of cabinets of differing sizes and line counts from a majority of the industry's access vendors. We believe that our retrofit kits offer carriers the ability to upgrade their network infrastructure for substantially less cost than using new cabinets. Retrofits are generally deployed due to a generational change of access equipment supporting the latest telecom services which require power and/or cooling upgrades.

In December of 2006, we created a new business unit, iPhotonics, which focuses primarily on the development and sale of Optical Network Terminals ("ONTs") and related accessories and to a lesser extent related design and development services. The iPhotonics business unit operates as an original design manufacturer (ODM) which means we will manufacture products that are ultimately branded by another organization for sale. A primary attribute of this business model is that the ODM owns and/or designs in-house the products that are branded by the buying firm. ONTs are the customer premise located devices used by a carrier to serve residential and business customers over a PON-based (passive optical networking) system. PON is a maturing point-to-multipoint technology which is being adopted by telephone companies globally because of its cost effectiveness in extending fiber-based service delivery all the way to the customer premise (fiber-to-the-home [FTTH] or fiber-to-the-premise [FTTP]). Our ONTs will sit at each customer premise and will be connected over fiber to an optical line terminal (OLT) generally located in the carrier's central office. A single OLT can deliver services to thousands of ONTs.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 of the notes to our consolidated financial statements contained herein. The following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Accounting for Convertible Debentures, Warrants and Derivative Instruments

We account for our embedded conversion features and freestanding warrants pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock," which requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company's balance sheet, with any changes in fair value recorded in the company's results of operations. In accordance with EITF 00-19, certain warrants to purchase common stock and embedded conversion options are accounted for as liabilities at fair value and the unrealized changes in the values of these derivatives are recorded in our consolidated statement of operations as "Changes in Fair Value of Derivative Financial Instruments". The recognition of derivative liabilities is applied first to the proceeds of such issuance, at the date of issuance, and the excess of derivative liabilities over the proceeds is recognized in our consolidated statement of operations as "Changes in Fair Value of Derivative Financial Instruments."

We use the Black-Scholes pricing model to determine fair values of our derivatives. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, exchange rates and option volatilities. Selection of these inputs involves management's judgment and may impact net income. The fair value of the derivative liabilities are subject to the changes in the trading value of our common stock. As a result, our financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of our stock at the balance sheet date, the amount of shares converted by note holders and/or exercised by warrant holders. Consequently, our financial position and results of operations may vary from quarter-to-quarter based on conditions other than our operating revenues and expenses.

We have penalty provisions in the registration rights agreement executed prior to the year 2007 of our YA Global debentures and warrants that require us to file a registration statement no later than 45 days from the date of closing and to use our best efforts to cause the registration statement to be declared effective no later than 120 days after filing and to insure that the registration statement remains in effect until all of the shares of common stock issuable upon conversion of the debentures and exercise of the warrants have been sold. In the event of a default of our obligations under the registration rights agreements, including our agreement to file the registration statement for the shares of common stock issuable upon conversion of the debentures and exercise of the warrants with the Securities and Exchange Commission no later than 45 days from the date of closing, or if the registration statement is not declared effective within 120 days of filing, we are required that we pay to YA Global, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock at YA Global's option equal to 2% of the liquidated value of the debentures. The agreement does not specify whether the liquidated damages may be satisfied in unregistered shares or how the payment in shares would be valued should YA Global elect to be paid liquidated damages in common stock. We obtained a waiver from YA Global waiving any claim or payment of liquidated damages up through and including May 15, 2007. On May 14, 2007, the SEC declared our registration statement effective for the aforementioned shares of common stock issuable upon conversion of the debentures and exercise of the warrants.

On October 11, 2006, we entered into a securities purchase agreement which provided for the filing of a registration statement by the us with the Securities and Exchange Commission registering the shares and the shares common stock issuable upon exercise of the warrants. We are obligated to file the registration statement no later than December 15, 2006 and to use our best efforts to cause the registration statement to be declared effective no later than 90 days after filing. If we do not meet the aforementioned filing and effectiveness deadlines, we shall pay to the investor an amount equal to 1% of the purchase price for the first 60 days or part thereof of the pendency of such non-registration event and 2% for each 30 days or part thereof thereafter, of the purchase price of the shares and the warrants; provided, however, that the aforementioned liquidated damages shall only accrue, if at all, for 12 months after the closing date. We obtained a waiver from the investor waiving any claim or payment of liquidated damages up through and including May 15, 2007. On May 14, 2007, the SEC declared our registration statement effective for the aforementioned shares and the shares of common stock issuable upon exercise of the warrants.

On March 30, 2007, we entered into a securities purchase agreement which provided for the filing of a registration statement with the Securities and Exchange Commission registering 100% of the shares of common stock issuable upon conversion of the notes and exercise of the warrants within 30 days of receipt of written demand of YA Global. We are obligated to use our best efforts to cause the registration statement to be declared effective no later than 90 days after filing and to insure that the registration statement remains in effect until all of the shares of common stock issuable upon conversion of the notes and exercise of the warrants have been sold. In the event of a default of our obligations under the registration rights agreements, including our agreement to file the registration statement with the Securities and Exchange Commission no later than 30 days from receipt of a written demand from YA Global, or if the registration statement is not declared effective within 90 days of filing we are required pay to YA Global, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, a cash amount equal to 2% of the liquidated value of the notes. Notwithstanding the foregoing, we shall not be liable for liquidated damages with respect to any warrants or warrant shares and the maximum aggregate liquidated damages payable to YA Global by us, if any, shall be 15% of the aggregate purchase price paid by YA Global pursuant to the purchase agreement. On December 13, 2007, we and YA Global entered into Amendment No. 1 to the Registration Rights Agreement pursuant to which the scheduled filing date was revised to 180 calendar days from December 13, 2007.

On September 6, 2007, we entered into a securities purchase agreement with a strategic investor/qualified institutional buyer pursuant to which provides for the filing of a registration statement by us with the Securities and Exchange Commission registering the shares and the shares of common stock issuable upon exercise of the warrants. We are obligated to file the registration statement no later than December 15, 2007 and to use our best efforts to cause the registration statement to be declared effective by the Securities and Exchange Commission no later than 90 days after filing. If we do not meet the aforementioned filing and effectiveness deadlines, we shall pay to the investor an amount equal to 1% of the purchase price of the shares and warrants, in cash or, at the investor's election, in shares of common stock, for each 30 days or part thereof for the first 60 days after the occurrence of a non-registration event and 2% for each 30 days or part thereof thereafter; provided, however, that the aforementioned liquidated damages shall only accrue, if at all, for 12 months after the closing date. As of December 31, 2007, an aggregate of $5,161 in liquidated damages has been accrued. As of March 31, 2008, an aggregate of $49,333 in liquidated damages has been accrued.

We account for these penalties as contingent liabilities, applying the accounting guidance of Financial Accounting Standard No. 5, "Accounting for Contingencies". This accounting is consistent with views established by the Emerging Issues Task Force in its consensus set forth in EITF 05-04 and FASB Staff Positions FSP EITF 00-19-2 "Accounting for Registration Payment Arrangements", which was issued December 21, 2006. Accordingly, we recognize the damages when it becomes probable that they will be incurred and amounts are reasonably estimable.

Revenue Recognition

Revenues are derived from the following sources:

� Prototyping and assembly services;

� Prototyping - photonics/optoelectronics services;

� Material supply chain management services;

� Turn-key solution - consists of material supply chain management services and one of the other services listed above;

� Telecom cabinet retrofit kits and design solutions;

� Optical network terminal product and accessory sales; and

� ONT design and development services.

The following is a description of each revenue source and our revenue recognition policy for each source:

Prototyping and assembly services typically consist of assembling and designing surface mount technology and other build-to-order products in accordance with customer provided design specifications. These services are priced based on the complexity, time-to turn and unit volume of the customer project. The majority of our prototyping and assembly services projects are completed in less than three weeks. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, services have been performed, the sales price is fixed or determinable and collectability is probable. These criteria are generally met after an internal quality control review of the product and at the time product is shipped.

Prototyping - Photonics/optoelectronics services typically consist of assembling and designing optical and optical related products in accordance with customer provided design specifications. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, services have been performed, the sales price is fixed or determinable and collectability is probable. These criteria are generally met after an internal quality control review of the product and at the time product is shipped.

Material supply chain management services consist of locating and procuring materials according to customer design specifications, qualifying components and auditing vendors, inventorying materials, and providing dual vendor sourcing if necessary. The pricing is solely dependent on the complexity and volume of the services performed. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, services have been performed, the sales price is fixed or determinable and collectability is probable. These criteria are generally met at the time materials have been received and inventoried, and the materials have shipped.

Turn-key solution is a combination of material supply chain management and one of the other service revenue sources described above. Revenue is generally recognized after both services have been performed and the products have shipped.

Telecom cabinet retrofit revenue and design solutions typically consist of designing and assembling retrofit kits to enable incumbent local exchange carriers to upgrade their local access service delivery infrastructure. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, services have been performed, the sales price is fixed or determinable and collectability is probable. These criteria are generally met after an internal quality control review of the product and at the time product is shipped.

Optical network terminal (ONT) product and accessory sales. In December of 2006, we created a new business unit, iPhotonics, which focuses primarily on the development and sale of ONT's and related accessories. ONTs are the customer premise located devices used by a carrier to serve residential and business customers over a PON-based (passive optical networking) system. PON is a maturing point-to-multipoint technology which is being adopted by telephone companies globally because of its cost effectiveness in extending fiber-based service delivery all the way to the customer premise (fiber-to-the-home [FTTH] or fiber-to-the-premise [FTTP]). Our ONTs will sit at each customer premise and will be connected over fiber to an optical line terminal (OLT) generally located in the carrier's central office. A single OLT can deliver services to thousands of ONTs. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, services have been performed, the sales price is fixed or determinable and collectability is probable. These criteria are generally met after an internal quality control review of the product and at the time product is shipped.

ONT design and development services. We offer contract services related to the design and development of ONT products and accessories. We recognize design and development services revenue using the percentage-of-completion method of accounting, in accordance with SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Revenues are recognized primarily based on costs incurred to date compared with total estimated contract costs. Generally our design and development service costs consist of engineering labor costs and the costs of third party services.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts relates to trade accounts receivable. The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectibility of specific accounts and the overall condition of the receivable portfolios. We specifically analyze individual customer balances in trade receivables, historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should we determine that we would be able to realize more of its receivables in the future than previously estimated, an adjustment to the allowance would increase income in the period such determination was made. The allowance for doubtful accounts is reviewed on a quarterly basis and adjustments are recorded as deemed necessary.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over estimated useful lives, which are generally three to seven years.

Results of Operations

Year ended December 31, 2007 as compared to the year ended December 31, 2006

Revenues

We currently derive the majority of our revenue from our prototyping and assembly and material supply chain management services. Prototyping services are priced based on the complexity, time-to turn and volume of the customer project. Our material supply chain management services are priced on a cost of the material plus basis. Prototyping and assembly and material supply chain services projects are typically purchase order driven rather than driven by long-term contracts and vary significantly from customer to customer. Thus, our revenues can be difficult to predict and may vary significantly from quarter to quarter.

Total revenues increased 34% from $8,228,000 for the year ended December 31, 2006 to $10,986,000 for the year ended December 31, 2007, or by $2,758,000. Material supply chain management services increased 63% from $2,359,000 in 2006 to $3,847,000 in 2007. Prototyping and assembly services increased 22% from $3,842,000 for the year ended December 31, 2006 to $4,678,000 for the year ended December 31, 2007. Revenues from sales of retrofit kits increased by 35% from $1,029,000 in 2006 to $1,387,000 in 2007. In addition, we had revenues of $747,000 for the year ended December 31, 2007 related to royalties and design and development services performed by our iPhotonics group which was formed in the fourth quarter of 2006. $332,000 of the design and development services revenue is attributable to design and development work performed for Siemens related to completing certain optical network terminal (ONT) development hardware and software releases compared to $997,000 in 2006. The Siemens design and development project was consideration given by us in a non-monetary transaction whereby we received certain ONT assets from Siemens (see Note 18 of the audited financial statements included herein for further discussion of the non-monetary transaction). We also had revenues of $327,000 related to GPON and BPON ONT product and accessory sales for the year ended December 31, 2007 compared to $0 for the year ended December 31, 2006, as the iPhotonics group was not formed until late fourth quarter of 2006. The overall increase in revenues is attributed to an increasing customer base, continued demand from existing customers, and our new iPhotonics offerings including GPON and BPON development services and product and accessory sales. We expanded our customer base from 110 for the year ended December 31, 2006 to 139 for the year ended December 31, 2007. Total active customers for the year ended December 31, 2007 and 2006 were 71 and 58, respectively. Our top five customers accounted for 56% of revenue in 2007 and 57% of revenue in 2006.

Cost of Sales and Gross Profit

Cost of sales consists of direct material, manufacturing overhead, labor costs, depreciation expense on machinery and equipment, equipment lease, and set-up and tooling charges associated with performing our services. Cost of sales increased from $5,523,000 for the year ended December 31, 2006 to $7,332,000 for the year ended December 31, 2007, or by $1,809,000. Other direct material costs and production supplies increased from $3,715,000 in 2006 to $5,067,000 in 2007, or by $1,352,000. Manufacturing overhead and labor cost increased from $1,808,000 for the year ended December 31, 2006 to $2,265,000 for the year ended December 31, 2007, or by $457,000, primarily attributable to increased headcount due to expanded operations. Equipment lease decreased from $158,000 in 2006 to $0 in 2007 as we terminated an equipment lease in the fourth quarter of 2006 and purchased the equipment. This was offset by increases in indirect overhead, depreciation, and manufacturing supplies. Depreciation charged to cost of sales increased from $170,000 for the year ended December 31, 2006 to $207,000 for the year ended December 31, 2007 in-line with capital expenditures on equipment and other fixed assets used in the manufacturing process.

Gross profit is dependent on the scope and the nature of the customer project and thus can vary significantly. Customer projects requiring a turnkey solution which includes both prototyping and material supply chain management services typically results in a lower margin than prototyping services only. Gross profit increased from $2,705,000 for the year ended December 31, 2006 to $3,654,000 for the year ended December 31, 2007, or by $949,000. Revenues increased for the same period by $2,758,000. During the same period the gross margin increased slightly from just under 33% in 2006 to just over 33% in 2007.

Selling, General and Administrative Expenses

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