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XPLR > SEC Filings for XPLR > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for XPLORE TECHNOLOGIES CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for XPLORE TECHNOLOGIES CORP


14-Nov-2012

Quarterly Report


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 ("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 engineer, develop, integrate and market rugged, mobile computing systems. Our line of iX™ tablet PCs is designed to operate in challenging work environments, including extreme temperatures, constant vibrations, rain, blowing dirt and dusty conditions. Our systems can be fitted with a wide 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 like keyboards, mice and cases.

Our revenue is currently derived through the sale of our iX104 systems in the rugged, mobile tablet PC market. We believe we are positioned for future revenue growth in the markets in which we compete. We launched our fifth generation iX104C line of rugged tablet PCs in May 2011, and we believe that customer response has been favorable. From fiscal 2011 to fiscal 2012, our revenue increased by approximately 55%, primarily due to $20.3 million in purchase orders we received during the last half of fiscal 2012 from one of the world's largest telecommunications companies and one of the largest conventional oil and natural gas producers in North America. Shipment of these orders occurred in the third and fourth quarters of fiscal 2012 and in the first and second quarters of fiscal 2013. We have completed four consecutive quarters of net income for the first time in our 16-year history, and for the 12 month period ended September 30, 2012 we had revenue of $37.2 million and net income of $2.7 million. At a time when we believe awareness and demand for tablet computers is significantly increasing, we have introduced a family of computers that, based upon third-party certifications, surpasses the standards and specifications that have been the accepted measuring sticks for rugged tablet computers in today's marketplace.

We are dependent upon the market acceptance of our current generation of the iX104 tablet PC system. Our iX104C5TM introduced what we believe are "industry firsts" and differentiating features, including a tool-less removable dual solid state drive (SSD) 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 the 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 features an improved screen contrast ratio of 600:1.

Our management believes that if we are successful in gaining more marketplace awareness of our iX104 tablet PC family of products, we should be able to increase our future revenue.

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 September 30, 2012 and March 31, 2012 and for the three months and six months ended September 30, 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.

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 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.

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 promissory note borrowings, interest on borrowings related to our credit facility, non-cash interest charges representing the amortization of the value assigned to warrants issued with promissory notes and discounts and amortization of deferred financing costs consisting principally of legal fees and commissions and fees related to financing transactions.

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 six month periods ended September 30, 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 Six Months Ended September 30, 2012 vs. Three and Six Months Ended September 30, 2011

Revenue. Total revenue for the three months ended September 30, 2012 was $7,473,000, as compared to $5,100,000 for the three months ended September 30, 2011, an increase of $2,373,000, or approximately 47%. An increase in unit sales accounted for an increase in revenue of approximately 37% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, along with an increase in our average sales price of approximately 10% due to favorable changes in the product mix sold. Total revenue for the six months ended September 30, 2012 was $17,423,000, as compared to $7,778,000 for the six months ended September 30, 2011, an increase of $9,645,000, or approximately 124%. An increase in unit sales accounted for an increase in revenue of approximate 110% for the six months ended September 30, 2012, compared to the six months ended September 30, 2011, along with an increase in our average sales price of approximately 14% 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 described above.

We operate in one segment, the sale of rugged mobile wireless tablet PC computing systems. The United States accounted for approximately 80% of our total revenue for the three months ended September 30, 2012. The United States, Germany and France accounted for approximately 47%, 12% and 10%, respectively, of our total revenue for the three months ended September 30, 2011. The United States and Canada accounted for approximately 69% and 16%, respectively, of our total revenue for the six months ended September 30, 2012. The United States, Germany and Canada accounted for approximately 45%, 14%, and 12%, respectively, of our total revenue for the six months ended September 30, 2011.

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 September 30, 2012, we had one customer located in the United States who accounted for approximately 61% of our revenue. For the six months ended September 30, 2012, we had one customer located in the United States who accounted for approximately 48% of our revenue and one customer located in Canada who accounted for approximately 12% of our revenue. For the three months ended September 30, 2011, we had one customer located in the United States who accounted for approximately 12% of our revenue, and for the six months ended September 30, 2011, we had one customer located in Germany who accounted for approximately 11% of our revenue. At September 30, 2012, we had two customers with receivable balances that totaled approximately 74% of our outstanding receivables. At September 30, 2011, we had three customers with receivable balances that totaled approximately 38% of our outstanding receivables, which balances were subsequently collected.

Cost of Revenue. Total cost of revenue for the three months ended September 30, 2012 was $5,167,000, compared to $3,471,000 for the three months ended September 30, 2011, an increase of $1,696,000, or approximately 49%. An increase in unit sales accounted for an increase of approximately 37% in cost of revenue, along with an increase in average unit cost of approximately 12% due to changes in the product mix sold. Total cost of revenue for the six months ended September 30, 2012 was $11,812,000, compared to $5,576,000 for the six months ended September 30, 2011, an increase of $6,236,000, or approximately 112%. An increase in unit sales accounted for approximately 104% in cost of revenue along with an increase in average cost per unit of approximately 8% 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 six months ended September 30, 2012 and 2011 were $9,644,000 and $3,955,000, respectively. At September 30, 2012 and 2011, we owed this supplier $1,448,000 and $1,387,000, respectively, recorded in accounts payable and accrued liabilities.


Gross Profit. Total gross profit increased by $677,000 to $2,306,000 (30.9% of revenue) for the three months ended September 30, 2012 from $1,629,000 (31.9% of revenue) for the three months ended September 30, 2011. The increase in gross profit for the three months ended September 30, 2012 was due primarily to the increase in unit sales and the decline in gross profit as a percentage of revenue was attributable to price reductions commensurate with large volume orders. Total gross profit increased by $3,409,000 to $5,611,000 (32.2% of revenue) for the six months ended September 30, 2012 from $2,202,000 (28.3% of revenue) for the six months ended September 30, 2011. The increase in gross profit for the six months ended September 30, 2012 was due primarily to the increase in unit sales and the increase in gross profit as a percentage of revenue was due to increase in revenue being spread over fixed costs.

Sales, Marketing and Support Expenses. Sales, marketing and support expenses for the three months ended September 30, 2012 were $855,000, compared to $1,016,000 for the three months ended September 30, 2011. The decrease of $161,000, or approximately 16%, was due primarily to a decrease in demonstration units' related costs of $144,000, a decrease in travel costs of $24,000 and a decrease in marketing expenses of $19,000, partially offset by an increase in commission expense of $21,000 attributable to the increase in revenue. Sales, marketing and support expenses for the six months ended September 30, 2012 were $1,818,000, compared to $1,815,000 for the six months ended September 30, 2011, an increase of $3,000. The increase was due primarily to an increase in commission expense of $211,000 commensurate with the increase in revenue, offset by a decrease in demonstration units' related costs of $141,000, a decrease in marketing expenses of $34,000 and a decrease in travel costs of $25,000. The demonstration unit and marketing costs were higher in the prior year due to the product launch of the C5 in May 2011.

Product Research, Development and Engineering Expenses. Product research, development and engineering expenses for the three months ended September 30, 2012 were $363,000, a decrease of $84,000, or approximately 19%, compared to $447,000 for the three months ended September 30, 2011. The decrease was due primarily to a decrease in product development costs of $87,000 arising from the completion of C5 testing in the prior year. Product research, development and engineering expenses for the six months ended September 30, 2012 were $914,000, a decrease of $19,000, or approximately 2%, compared to $933,000 for the six months ended September 30, 2011. The decrease was primarily due to a decrease in patent filing expenses of $56,000 as the prior year period included new patent filings associated with the C5 feature set and a decrease in product development costs of $38,000, offset by an increase in headcount related expenses of $76,000. 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 additional products and, to a lesser extent, the non-recurrence of the $398,000 reduction in fiscal year 2012 engineering expenses arising from the elimination of an accrual in the fourth quarter.

General Administration Expenses. General administration expenses for the three months ended September 30, 2012 were $804,000, compared to $761,000 for the three months ended September 30, 2011, an increase of $43,000, or approximately 6%. The increase was due primarily to an increase in professional fees of $51,000, primarily legal and public relations related, and an increase in information systems of $15,000 due to a system upgrade, partially offset by a $15,000 reduction in our general allowance for doubtful accounts associated with the decrease in accounts receivable. General administration expenses for the six months ended September 30, 2012 were $1,690,000, compared to $1,463,000 for the six months ended September 30, 2011, an increase of $227,000, or approximately 16%. The increase was primarily due to an increase in headcount related expenses of $99,000, consisting primarily of an incentive compensation accrual for meeting interim revenue and cash flow performance objectives with such payment contingent upon achievement at year end, an increase in professional fees of $101,000, primarily legal and public relations related, and an increase in information systems of $39,000 due to a system upgrade, partially offset by a decrease in business personal property tax of $12,000.

For the three months ended September 30, 2012 and 2011, the fair value of employee stock-based compensation expense was $181,000 and $217,000, respectively. For the six months ended September 30, 2012 and 2011, the recorded employee stock-based compensation expense was $367,000 and $419,000, 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 September 30, 2012 and 2011 were $121,000 and $250,000, respectively. Depreciation and amortization expenses for the six months ended September 30, 2012 and 2011 were $251,000 and $368,000, respectively. The decrease in depreciation expense is principally due to the aforementioned reduction of depreciation expense of C5 demonstration units of $135,000 and $137,000, respectively, partially offset by the tooling amortization associated with our new C5 Tablet PC of approximately $15,000 and $22,000, respectively, for the three and six months ended September 30, 2012. Depreciation and amortization is recorded in the related functional classification.

Interest Expense. Interest expense for the three months ended September 30, 2012 was $2,000 compared to $57,000 for the three months ended September 30, 2011, a decrease of $55,000. Interest expense for the six months ended September 30, 2012 was $64,000, compared to $91,000 for the six months ended September 30, 2011, a decrease of $27,000. The decreases in both periods are attributable primarily to no outstanding borrowings under our credit facility for the three . . .

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