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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

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FORM 10-Q

 

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(Mark One)

☒

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

For the quarterly period ended September 30, 2017

or

☐

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

For the transition period from                             to                              

Commission file number: 000-52697

(Exact Name of Registrant as Specified in Its Charter)

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 31, 2017, the registrant had 11,020,905 shares of common stock outstanding.

Xplore Technologies Corp.

FORM 10-Q

For the Quarterly Period Ended September 30, 2017

Table of Contents

 

 

 

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

XPLORE TECHNOLOGIES CORP.

Consolidated Balance Sheets

(in thousands, except shares and per share amounts)

 

 

See accompanying notes to unaudited consolidated financial statements.

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Profit and Loss—Unaudited

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

 

 

See accompanying notes to unaudited consolidated financial statements.

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Cash Flows—Unaudited

(in thousands)

 

 

See accompanying notes to unaudited consolidated financial statements.

XPLORE TECHNOLOGIES CORP.

Notes to the Unaudited Consolidated Financial Statements

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

1. DESCRIPTION OF BUSINESS

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

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results for the six months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.

The consolidated balance sheet at March 31, 2017 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These accompanying unaudited consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and related notes included in the Company’s fiscal 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 14, 2017.

Basis of consolidation and presentation

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

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

Goodwill and other intangible assets 

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

Long-lived assets

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

 

Cash and cash equivalents and liquidity

At September 30, 2017, the Company had cash and cash equivalents of approximately $260, working capital of approximately $15,507 and total equity of approximately $30,199.  The Company’s management believes that it has adequate cash and cash equivalents on hand, and projected cash flow from operations, to finance its operations for at least the next 12 months.

 

Foreign Currency Transactions

The Company does enter into transactions that are settled in a foreign currency.  The transactions are recorded in U.S. dollars based on the exchange rate in effect at the time a transaction is initiated.  When a transaction is settled, the foreign currency received to settle the transaction is converted to U.S. dollars based on the exchange rate in effect at the time of settlement.  A realized foreign currency exchange gain or loss is recorded based on the difference in the exchange rate in effect when a transaction is initiated, and the exchange rate in effect when a transaction is settled.  For the six months ended September 30, 2017 and 2016, the Company reported as a component of other income (expense) a gain in foreign currency transactions of $58 and a loss in foreign currency transactions of $77, respectively.

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that amends the existing accounting standards for the classification of certain cash receipts and cash payments on the statement of cash flows. The Company is required to adopt the guidance in the first quarter of fiscal year 2020. Earlier adoption is permitted. The Company is currently evaluating the impact of this guidance on its Consolidated Financial Statements.

In March 2016, the Financial Accounting Standards Board (“FASB”) amended the existing accounting standards for employee share-based payment arrangements. The amendments require all excess tax benefits and tax deficiencies associated with share-based payments to be recognized as income tax expense or income tax benefit, respectively, rather than as additional paid-in capital. The amendments also increase the amount an employer can withhold in order to cover income taxes on awards, allows companies to recognize forfeitures of awards as they occur, and requires companies to present excess tax benefits from stock-based compensation as an operating activity in the statement of cash flows rather than as a financing activity. The Company adopted the guidance beginning in this quarter. Adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB amended the existing accounting standards for leases. The amendments require lessees to record, at lease inception, a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees may elect to not recognize lease liabilities and ROU assets for most leases with terms of 12 months or less. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives received, and the lessee’s initial direct costs. For finance leases, lease expense will be the sum of interest on the lease obligation and amortization of the ROU asset, resulting in a front-loaded expense pattern. For operating leases, lease expense will generally be recognized on a straight-line basis. The amended lessor accounting model is similar to the current model, updated to align with certain changes to the lessee model and the new revenue standard. The current sale-leaseback guidance, including guidance applicable to real estate, is also replaced with a new model for both lessees and lessors. The Company is required to adopt the guidance in the first quarter of fiscal 2020 using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts”. The core principle of ASU 2014-09 is that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable users of our financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The Company will also be required to disclose information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019. The Company is currently evaluating the impact that the adoption of ASU 2014-09 may have on its consolidated financial statements.

4. INCOME (LOSS) PER SHARE

Income (loss) per share has been computed based on the weighted‑average number of shares of common stock issued and outstanding during the period, and is calculated by dividing net income or loss by the weighted average number of common shares outstanding during the period. The effects of the options granted under the Company’s stock incentive plans, the exercise of outstanding options and the exercise of outstanding warrants were excluded from the income (loss) per share calculations for the periods presented, as their inclusion is anti-dilutive. The effects of restrictive stock units granted under the Company’s stock incentive plans were excluded from the income (loss) per share calculations for the periods presented, as they are not yet vested.  The effects of the Company’s employee stock purchase plan are not material. 

The following securities were not considered in the income (loss) per share calculations as they were anti-dilutive:

5. SHORT-TERM INDEBTEDNESS

On April 17, 2015, the Company and its wholly-owned subsidiary entered into a Loan and Security Agreement with Square 1 (the “Square 1 Credit Agreement”), pursuant to which Square 1 agreed to provide revolving loans of up to an aggregate principal amount of $15 million to the Company’s subsidiary. The Square 1 Credit Agreement had a two-year term. Payment and performance under the Square 1 Credit Agreement was secured by a first priority security interest in and to substantially all of the assets of the Company and its subsidiaries. Pursuant to the Square 1 Credit Agreement, the loans consisted of formula revolving loans and non-formula revolving loans. The maximum amount of formula revolving loans outstanding at any one time could not exceed the lesser of $15 million or 85% of eligible accounts receivable of the Company’s subsidiary. The maximum amount of non-formula revolving loans outstanding at any one time could not exceed $4 million through April 16, 2016, and thereafter stepped-down in $480 increments every three months until the cap reached $2.08 million, which was the maximum allowable amount outstanding at any one time thereafter until the maturity date.  The interest rate on the loans was variable, and was equal to the prime rate in effect from time to time plus 1.25% per annum, provided that the interest rate on any day could not be less than 4.5% per annum.

 

On April 17, 2017, the Loan and Security Agreement with Square 1 Bank matured and was replaced by a Loan and Security Agreement with Bank of America, N.A. (the “Bank of America Credit Agreement”), pursuant to which Bank of America provided the Company with a revolving asset based line of credit up to $15 million.  The new facility with Bank of America has a three-year term, is secured by substantially all of our assets, and bears interest at LIBOR plus between 2.25% and 2.75% per annum, based upon the Company’s fixed charge coverage ratio.  The balance of drawn funds at any one time cannot exceed the lesser of $15 million or the sum of (1) 85% of our eligible accounts receivable and (2) the lesser of (a) 65% of the carried value of eligible inventory or (b) 85% of the liquidation value of eligible inventory, minus certain reserves.  The maximum amount of eligible receivables comprised of accounts receivable outside of the United States of America and Canada is 25% of the balance of eligible accounts receivable.  

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

On September 30, 2017, there was $8,371 in borrowings under the Bank of America Credit Agreement, with an additional $4,629 available under the line of credit.

6. SHARE CAPITAL

The Company’s second amended and restated certificate of incorporation, has established the number of authorized shares of common stock of the Company as 15,000,000 and the number of authorized shares of preferred stock of the Company as 5,000,000.

Warrants Outstanding

At September 30, 2017, there were warrants outstanding to purchase an aggregate of 100,000 shares of common stock, all of which were fully exercisable at September 30, 2017, but which have expired since that date, as detailed in the table below:

 

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Issuance of Dividend

In the event that, after a person or a group of affiliated or associated persons has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction, or 50% or more of the Company’s assets or earning power are sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company having a market value at the time of that transaction equal to two times the Exercise Price.

The Board of Directors may amend or supplement the Rights Agreement without the approval of any holders of Rights, including, without limitation, in order to (a) cure any ambiguity, (b) correct inconsistent provisions, (c) alter time period provisions or (d) make additional changes to the Rights Agreement that the Board of Directors deems necessary or desirable. However, from and after any person or group of affiliated or associated persons becomes an Acquiring Person, the Rights Agreement may not be supplemented or amended in any manner that would adversely affect the interests of the holders of Rights.

7. STOCK-BASED COMPENSATION PLAN

a)  Stock Options and Restricted Stock Units

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

A summary of the stock option activity in the Stock Plan during the six months ended September 30, 2017 was as follows:

 

A summary of the restricted stock unit (“RSU”) activity in the Stock Plan during the six months ended September 30, 2017 was as follows:

 

At September 30, 2017, the total number of shares of common stock issued in connection with the exercise of options since the inception of the Stock Plan was 171,927 and the total number of shares of common stock issued in connection with the vesting of restricted stock awards was 4,268.

A summary of the options outstanding and exercisable at September 30, 2017 was as follows:

Stock options outstanding at September 30, 2017 have no intrinsic value, as the option exercise price exceeds the market value.

The weighted average exercise price of options exercisable at September 30, 2017 was $5.34 per share.

 

The options have been valued separately using the Black‑Scholes methodology. The options under the Stock Plan generally vest over a three-year period in equal annual amounts and expire five years after the issuance date.

 

The Company recorded stock compensation cost of $113 and $127 for the three months ended September 30, 2017 and 2016, respectively. The Company recorded stock compensation cost of $215 and $302 for the six months ended September 30, 2017 and 2016, respectively. This expense was recorded in the employee related functional classification.

 

Compensation expense has been determined based on the fair value at the grant date for options and RSUs granted in the current fiscal year. The future compensation expense to be recognized for unvested option grants at September 30, 2017 was $552, which is to be recognized over the next three years.

b)  2009 Employee Stock Purchase Plan

The Board of Directors approved an employee stock purchase plan that was implemented on January 1, 2009 and approved by the Company’s stockholders on November 4, 2009 (the “ESPP”).  A total of 300,000 shares are available under the plan.  The offering price per common share and number of common shares purchased for the periods ended September 30, 2017 and 2016 are as follows:

 

8. RELATED PARTY TRANSACTIONS

 

On June 15, 2016, the Board of Directors approved an increase in the quarterly fee payable to each member of the Board of Directors to $6 per quarter and an increase in the quarterly committee fee payable to members of the committees of the Board of Directors to $2 for each committee on which such member serves, including the nomination and corporate governance committee of Board of Directors, up to a maximum of two committees for each member. General administration expense includes an expense of $62 and $54 for the three months ended September 30, 2017 and 2016, and $114 and $102 for the six month ended September 30, 2017and 2016, respectively, relating to these fees.

 

On November 7, 2016, the Board of Directors approved payments to SG Phoenix LLC, an affiliate of Philip Sassower, who acted as the Company’s Chief Executive Officer through March 28, 2017, and Andrea Goren, a member of the Board of Directors, of an annual fee of $300 for services rendered, retroactive to April 1, 2016, which included compensation for the services of Mr. Sassower as the Company’s Chief Executive Officer.  In the prior fiscal year, the fee paid to SG Phoenix LLC for these services was $287.5. Additionally, the Company made a bonus payment of $90 to SG Phoenix LLC in the first quarter of fiscal 2018 for services performed by SG Phoenix LLC in the preceding fiscal year. General administration expense includes an expense of $40 and $72 for the three months ended September 30, 2017 and 2016, respectively, and $115 and $144 for the six months ended September 30, 2017 and 2016, respectively for these fees.  In July 2017, the Board of Directors determined that the services of Mr. Sassower as the Company’s chairman of the board will be paid directly to Mr. Sassower, at a rate of $92 per year, effective August 1, 2017.  The previous contract with SG Phoenix LLC, through which Mr. Sassower had previously been compensated, expired on its own terms on August 1, 2017.  Effective October 18, 2017, Mr. Sassower resigned from the board of directors and the company agreed to make equal monthly payments totaling $250 over a twelve month period, as well as provide an extension of time to exercise vested shares, without extending the term of any options.

 

9. SEGMENTED INFORMATION

The Company operates in one segment, the sale of rugged mobile tablet PC systems. The United States accounted for approximately 75% and 72% of the Company’s total revenue for the three and six months ended September 30, 2017, respectively. For the three and six months ended September 30, 2016, the United States accounted for 73% and 72% of the Company’s total revenue, respectively.

The distribution of revenue by country is segmented as follows:

 

The Company has a variety of customers, and in any given year a single customer can account for a significant portion of sales. For the three and six months ended September 30, 2017, the Company had three customers located in the United States who accounted for more than 10% of total revenue. For the three and six  months ended September 30, 2016, the Company had two customers located in the United States who accounted for more than 10% of total revenue.

 

At September 30, 2017, the Company had two customers that accounted for more than 10% of the Company’s outstanding net receivables.

 

The Company currently relies on three suppliers for the majority of its finished goods and engineering services related to product development, as compared to two in the prior year. At September 30, 2017 and 2016, the Company owed these suppliers $11,197 and $5,257, respectively, which is recorded in accounts payable and accrued liabilities.

Substantially all of the Company’s capital assets are owned by its wholly-owned subsidiary, Xplore Technologies Corporation of America, a Delaware corporation. No more than 10% of the Company’s assets were located in any country, other than the United States, during each of the six months ended September 30, 2017 and 2016.

10. COMMITMENTS AND CONTINGENT LIABILITIES

a)            Premises

The Company maintains its corporate functions, along with sales support, marketing and finance at a leased facility totaling approximately 16,228 square feet at 8601 Ranch Road 2222, Building II, Austin, Texas 78730.  This lease expires on June 30, 2020 and has a current annual base rent, before reimbursable operating expenses, of approximately $235.  The Company maintains its engineering and operating groups at a leased facility totaling 21,700 square feet at 14000 Summit Drive, Suite 900, Austin, Texas, 78728.  This lease expires on August 31, 2019 and has a current annual base rent, before reimbursable operating expenses, of approximately $228.  During fiscal year 2016 the Company occupied, with the consent of the landlord, a portion of the leased facility at 8601 RR 2222, Building II, Austin, Texas, where Motion Computing, Inc. (“Motion”) maintained its corporate functions, along with sales support, marketing, finance, engineering and operating groups, prior to the Company purchasing certain assets of Motion in April 2015.  The Company did not assume Motion’s lease for the facility, and in fiscal year 2016 negotiated the terms of the new lease with the landlord, as described above, for a portion of Motion’s former space.  The Company believes that its present facilities are suitable for its existing and planned operations. Rent expense for the three months ended September 30, 2017 and 2016, was $253 and $181, respectively. Rent expense for the six months ended September 30, 2017 and 2016, was $481 and $363, respectively.

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

b)              Purchase commitment

At September 30, 2017, the Company had purchase obligations for fiscal 2018 of approximately $24,787 related to inventory and product development items.

c)              Litigation

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

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

Certain statements in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017 and elsewhere in this Form 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

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

Our product line includes ultra-rugged, fully rugged and rugged tablets and accessories.  Our broad offering of products has allowed us to compete in a large segment of the rugged PC market.  Our products predominately operate with a Windows operating system, but we also offer a fully rugged Android tablet.

Looking forward, our strategy is to build increased marketplace awareness of our product offerings, in an effort that we believe will enable us to increase our revenue and to expand our share of the markets addressed by those products.

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Management believes that there have been no significant changes during the six months ended September 30, 2017 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, which is incorporated herein by reference.

Recent Accounting Pronouncements

For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements see Note 1, “Overview and Basis of Presentation”, to the Condensed Consolidated and Combined Financial Statements in Item 1, which is incorporated herein by reference.

Results of Operations (in thousands of dollars)

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

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

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

 

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

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

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

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

Other Income and Expense.  Other income and expense includes gains and/or losses on foreign currency balances, foreign currency denominated receivables and payables, dispositions of assets and other miscellaneous income and expense.

Inflation.  During the three and six months ended September 30, 2017 and 2016, we believe inflation and changing prices have not had material impact on our revenue or on net loss from continuing operations.

 

Foreign Currency Transactions. The Company will enter into transactions that are settled in a foreign currency.  The transactions are recorded in U.S. dollars based on the exchange rate in effect at the time a transaction is initiated.  When a transaction is settled, the foreign currency received to settle the transaction is converted to U.S. dollars based on the exchange rate in effect at the time of settlement.  A realized foreign currency exchange gain or loss is recorded based on the difference in the exchange rate in effect when a transaction is initiated, and the exchange rate in effect when a transaction is settled

Three and Six Months Ended September 30, 2017 vs. Three and Six Months Ended September 30, 2016

Revenue.  Total revenue for the three months ended September 30, 2017 was $22,748, compared to $20,007 for the three months ended September 30, 2016, an increase of $2,741, or approximately 14%.  This increase was a result of an increase in unit sales of 8% and an increase in the average selling price of 6%.  Total revenue for the six months ended September 30, 2017 was $42,746, compared to $36,480 for the six months ended September 30, 2016, an increase of $6,266, or approximately 17%. This increase was a result of an increase in unit sales of 13% and an increase in the average selling price of 4%.

We operate in one segment, the sale of rugged mobile tablet PC systems. The United States accounted for approximately 75% and 72% of our total revenue for the three and six months ended September 30, 2017, respectively.  The United States accounted for approximately 73% and 72% of our total revenue for the three and six months ended September 30, 2016, respectively.

We have a number of customers, and in any given period, a single customer may account for a significant portion of our sales.  For the three and six months ended September 30, 2017, we had three customers located in the United States who accounted for approximately 52% and 48% of our revenue in each period.  For the three and six months ended September 30, 2016, we had two customers located in the United States who accounted for approximately 53% and 41% of our  revenue in each period.  At September 30, 2017, we had two customers with receivable balances that totaled approximately 35% of our outstanding receivables.

Cost of Revenue.  Total cost of revenue for the three months ended September 30, 2017 was $16,395, compared to $14,371 for the three months ended September 30, 2016, an increase of $2,024, or approximately 14%. Total cost of revenue for the six months ended September 30, 2017 was $30,207, compared to $25,980 for the six months ended September 30, 2016, an increase of $4,227, or approximately 16%. The increase in cost of revenue in both periods is directly attributable to the increase in revenue discussed above.

We rely on three suppliers for the majority of our finished goods.  The inventory purchases and engineering services from these suppliers for the six months ended September 30, 2017 and 2016 were $30,960 and $20,779, respectively.  At September 30, 2017 and 2016, we owed these suppliers $11,197and $5,257, respectively, which is recorded in accounts payable and accrued liabilities.

 

Gross Profit.  Total gross profit increased by $717 to $6,353 (27.9% of revenue) for the three months ended September 30, 2017, from $5,636 (28.2% of revenue) for the three months ended September 30, 2016.  Total gross profit increased by $2,039 to $12,539 (29.3% of revenue) for the six months ended September 30, 2017, from $10,500 (28.8% of revenue) for the six months ended September 30, 2016. The increase in gross profit for the three and six months ended September 30, 2017 was due primarily to the increase in revenues discussed above.  The change in the gross profit percentage in in the three and six months ended September 30, 2017 were due to the changes in the product mix sold, as well as the mix of large customers, and is consistent with our expectations based upon the performance of our current product lines.

 

Sales, Marketing and Support Expenses.  Sales, marketing and support expenses for the three months ended September 30, 2017 were $3,166, compared to $2,896 for the three months ended September 30, 2016.  The increase of $270, or approximately 9%, was due primarily to an increase in headcount related costs of $172, demo equipment costs of $128, travel related costs of $43, and other support related costs of $17, offset by a decrease in marketing costs of $90. Sales, marketing and support expenses for the six months ended September 30, 2017 were $6,367, compared to $6,331 for the six months ended September 30, 2016, an increase of $36, or approximately 1%. This increase was due primarily to an increase in demo equipment costs of $126, support related costs of $124, headcount related costs of $105, and travel related costs of $34, offset by a decrease in marketing expense of $353.

Product Research, Development and Engineering Expenses.  Product research, development and engineering expenses for the three months ended September 30, 2017 were $922, a decrease of $395, or approximately 30%, compared to $1,317 for the three months ended September 30, 2016.  The decrease in these expenses was due primarily to a decrease in product development related costs of $334 and headcount related costs of $61.  Product research, development and engineering expenses for the six months ended September 30, 2017 were $1,729, a decrease of $541, or approximately 24%, compared to $2,270 for the six months ended September 30, 2016. The decrease is a result of incurring $351 less in product development, as compared to the same period last fiscal year, and a decrease in headcount costs of $190.  In any period, we may be engaged in different stages of one or more product development efforts, resulting in different levels of related expenses.  For the quarter and year to date ended September 30, 2017, we did not have the same level of product development activity as the prior year. In addition, much of the development cost for the newest products is being borne by our manufacturing partners, without a commitment for reimbursement.

 General Administration Expenses.  General administration expenses for the three months ended September 30, 2017 were $1,786, compared to $1,868 for the three months ended September 30, 2016, a decrease of $82, or approximately 4%.  The decrease primarily consists of a decrease in professional related expenses of approximately $203, offset by a negative variance in bad debt expense of $62 and increase in headcount related expenses of $44. General administration expenses for the six months ended September 30, 2017 were $3,736, compared to $3,907 for the six months ended September 30, 2016, a decrease of $171, or approximately 4%.  The decrease primarily consists of a decrease in professional related expenses of $118, headcount related expenses of $85, other expenses of $75, offset by a negative variance in bad debt expense of $107.

For the three months ended September 30, 2017 and 2016, the fair value of employee stock-based compensation expense was $113 and $127, respectively.  For the six months ended September 30, 2017 and 2016, the recorded employee stock-based compensation expense was $215, and $302, respectively.  The decrease in stock compensation expense was principally due to the full vesting of previously issued awards that were granted in prior periods having been completed in April of 2016.

Depreciation and amortization expenses for the three months ended September 30, 2017 and 2016 were $454 and $456, respectively. Depreciation and amortization expenses for the six months ended September 30, 2017 and 2016 were $927 and $804, respectively.  The increase for the six months ended September 30, 2017 was primarily due to demo equipment.  Depreciation and amortization is recorded in the related functional classification.

Interest Expense.  Interest expense for the three months ended September 30, 2017 was $79, compared to $69 expense for the three months ended September 30, 2016, an increase of $10. Interest expense for the six months ended September 30, 2017 was $104, compared to $118, for the six months ended September 30, 2016, and decrease of $14.  The changes in both periods was directly related to changes in average debt balances under our credit facility during the periods.

Other Income/Expense.  Other expense for the three months ended September 30, 2017 was $72, compared to $91 for the three months ended September 30, 2016. Other expense for the six months ended September 30, 2017 was $61, compared to $195 for the six months ended September 30, 2016. The decrease in both periods was related to a lower volatility in exchange rate gains and losses.

 

 Income Tax (Expense).  Income tax expense for the three and six months ended September 30, 2017 was $10, representing alternative minimum tax arising for the quarter. Income tax expense for the six months ended September 30, 2016 was $80, representing alternative minimum tax arising from the previous fiscal year ended March 31, 2016, but paid and expensed in the current period.

 

Net Income/Loss. Our net income for the three months ended September 30, 2017 was $397, compared to a net loss of $536 for the three months ended September 30, 2016, an increase in net income of $933. Net income for the six months ended September 30, 2017 was $636, compared to a net loss of $2,283 for the six months ended September 30, 2016, an increase in net income of $2,919. The increase in net income was directly related to the higher revenues achieved during the current periods, as compared to the same periods in the prior fiscal year.

Liquidity and Capital Resources

Other than in fiscal years 2015 and 2013, we incurred net losses in each full fiscal year since our inception.  From inception, we have financed our operations and met our capital expenditure requirements primarily from the gross proceeds of private and public sales of debt and equity securities totaling approximately $126.6 million.  As of September 30, 2017, our working capital was $15,507 and our cash and cash equivalents were $260.  

On April 17, 2017, our existing Loan and Security Agreement with Square 1 Bank matured and was replaced by a Loan and Security Agreement with Bank of America, N.A., pursuant to which Bank of America provided us with a revolving asset based line of credit up to $15 million.  The new facility with Bank of America has a three-year term, is secured by substantially all of our assets, and bears interest at LIBOR plus between 2.25% and 2.75% per annum, based upon our fixed charge coverage ratio.  The balance of drawn funds at any one time cannot exceed the lesser of $15 million or the sum of (1) 85% of our eligible accounts receivable and (2) the lesser of (a) 65% of the carried value of eligible inventory or (b) 85% of the liquidation value of eligible inventory, minus certain reserves.  The maximum amount of eligible receivables comprised of accounts receivable outside of the United States of America and Canada is 25% of the balance of eligible accounts receivable.  

 

Our credit agreement with Bank of America contains a financial covenants regarding available liquidity, which is tested monthly.  Our failure to meet such covenant or the triggering of other events of default could result in acceleration of all payment obligations and the termination of the obligations of Bank of America to make loans and extend credit under the agreement. The credit agreement contains certain representations and warranties that we must make and certain other conditions that we must met for us to cause Bank of America to make loans. Our credit agreement with Bank of America also contains customary affirmative and negative covenants, events of default and remedies upon default including acceleration. We agreed to a financial covenant requiring that the sum of the aggregate undrawn portion of the loans available under our credit facility with Bank of America plus the aggregate amount of all of our non-restricted cash and cash equivalents, as shown on our monthly financial statements provided to Bank of America, as required under the credit agreement, shall be at least $3 million.

 

On September 30, 2017, we had $8,371 in borrowings under our credit facility with Bank of America, with an additional $6,629 available under the line of credit, and $4,629 accessible under the line of credit according to the terms.

 

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

Cash Flow Results

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

Net cash used in our operating activities was $10,782 for the six months ended September 30, 2017, as compared to $10,488 for the six months ended September 30, 2016, an increase of $294. The increase in net cash used by operating activities, was impacted by our buildup in inventory of $9,655 related to anticipated shipments of our products in the coming quarters, and to meet our suppliers’ minimum order quantities for some of our newer products and their accessories.  Favorable cash flow variances related to accounts receivable collections were partially offset by our use of that cash for the reduction of accounts payable. We also experienced a use of cash to fund our increase in accounts receivable of $8,924, which resulted from the weighting of our revenue toward the end of the quarter ended September 30, 2017.

Net cash used in investment activities for the six months ended September 30, 2017 consisted of investments in fixed assets of $855, comprised of computer software of $524 and demonstration units of $331.  Net cash used in investment activities for the six months ended September 30, 2016 consisted of investments in fixed assets of $652, mainly leasehold improvements of $242, software of $142, investments in demonstration units of $191 and other equipment and tooling of $77. Additionally, in fiscal 2017 we paid off $287 of additional liabilities related to our acquisition of certain assets from Motion Computing, Inc. in April 2015.

Our financing activities provided $8,437 of net cash for the six months ended September 30, 2017, almost entirely due to net borrowings under our bank facility, partially offset by cash flows from stock purchases under our employee stock purchase plan of $66.  Our financing activities used $9,288 of net cash for the six months ended September 30, 2016, almost entirely due to net borrowings of on our bank indebtedness, partially offset by cash flows from stock purchases under our employee stock purchase plat of $42.  

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.  Controls and Procedures.

(a)          Evaluation of disclosure controls and procedures.

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

(b)         Changes in internal control over financial reporting.

During the three months ended September30, 2017, there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.  Legal Proceedings.

At September 30, 2017, we were not involved in any legal actions, arising in the ordinary course of business or otherwise.  From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business.  We believe that the ultimate outcome of these matters would not have a material adverse impact on our financial condition or the results of operations.

Item 1A.  Risk Factors

Our Annual Report on Form 10-K for the year ended March 31, 2017 includes a detailed discussion of our risk factors. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in the Annual Report on Form 10-K for the year ended March 31, 2017.

Risks Relating to our Business

For the three months ended September 30, 2017, we had two customers that accounted for more than 10% of our total revenue.  If we are unable to replace revenue generated from one of our major resellers or end-user customers with revenue from others in future periods, our revenue may decrease and our growth would be limited.

Historically, in any given quarter a single customer, either reseller or end-user customer, could account for more than 10% of our revenue. For the three months ended September 30, 2017, two customers located in the United States who accounted for approximately 45% of our total revenue.  If we are unable to replace revenue generated from our major customers, including resellers, with revenue from others our revenue may decrease and our growth would be limited.

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

Recent Sales of Unregistered Securities

None.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures

None.

Item 5.  Other Information.

None.

Item 6.  Exhibits.

*Filed herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.