10-Q 1 a12-2254_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended December 31, 2011

 

or

 

o

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

 

For the transition period from                to               

 

Commission file number: 000-52697

 

XPLORE TECHNOLOGIES CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

26-0563295

(State or Other Jurisdiction of Incorporation

 

(IRS Employer Identification No.)

or Organization)

 

 

 

14000 Summit Drive, Suite 900, Austin, Texas

 

78728

(Address of Principal Executive Offices)

 

(Zip Code)

 

(512) 336-7797

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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 x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

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

 

As of January 31, 2012, the registrant had 221,825,552 shares of common stock outstanding.

 

 

 



Table of Contents

 

Xplore Technologies Corp.

FORM 10-Q

For the Quarterly Period Ended December 31, 2011

Table of Contents

 

 

 

Page

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

a) Consolidated Balance Sheets as of December 31, 2011 and March 31, 2011

3

 

 

 

 

b) Consolidated Statements of Income (Loss) for the Three and Nine Months Ended December 31, 2011 and 2010

4

 

 

 

 

c) Consolidated Statements of Cash Flows for the Three and Nine Months Ended December 31, 2011 and 2010

5

 

 

 

 

d) Notes to the Unaudited Consolidated Financial Statements

6

 

 

 

 

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

14

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

21

 

 

 

 

Item 4. Controls and Procedures

21

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1. Legal Proceedings

22

 

 

 

 

Item 1A. Risk Factors

22

 

 

 

 

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

22

 

 

 

 

Item 3. Defaults Upon Senior Securities

22

 

 

 

 

Item 4. (Removed and Reserved)

22

 

 

 

 

Item 5. Other Information

22

 

 

 

 

Item 6. Exhibits

23

 

 

 

 

Signature

24

 

2



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

XPLORE TECHNOLOGIES CORP.

Consolidated Balance Sheets

(in thousands)

 

 

 

December 31,
2011

 

March 31,
2011

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

917

 

$

168

 

Accounts receivable, net

 

6,902

 

2,682

 

Inventory, net

 

2,718

 

3,754

 

Prepaid expenses and other current assets

 

132

 

201

 

Total current assets

 

10,669

 

6,805

 

Fixed assets, net

 

412

 

467

 

 

 

$

11,081

 

$

7,272

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Short-term indebtedness

 

$

 

$

566

 

Accounts payable and accrued liabilities

 

6,118

 

2,908

 

Total current liabilities

 

6,118

 

3,474

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Series A Preferred Stock, par value $0.001 per share; authorized 64,000; shares issued 62,874 and 62,874, respectively

 

63

 

63

 

Series B Preferred Stock, par value $0.001 per share; authorized 10,000; shares issued 7,732 and 8,232, respectively

 

8

 

8

 

Series C Preferred Stock, par value $0.001 per share; authorized 20,000; shares issued 17,074 and 17,074 respectively

 

17

 

17

 

Series D Preferred Stock, par value $0.001 per share; authorized 15,000; shares issued 13,985 and 10,692 respectively

 

14

 

11

 

Common Stock, par value $0.001 per share; authorized 1,350,000; shares issued 221,635 and 178,471, respectively

 

222

 

178

 

Additional paid-in capital

 

140,476

 

133,929

 

Accumulated deficit

 

(135,837

)

(130,408

)

 

 

4,963

 

3,798

 

 

 

$

11,081

 

$

7,272

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

 

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Income (Loss)—Unaudited

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,
2011

 

December 31,
2010

 

December 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

8,918

 

$

4,308

 

$

16,696

 

$

13,714

 

Cost of revenue

 

6,182

 

3,041

 

11,758

 

9,276

 

Gross profit

 

2,736

 

1,267

 

4,938

 

4,438

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Sales, marketing and support

 

976

 

711

 

2,791

 

2,098

 

Product research, development and engineering

 

487

 

575

 

1,420

 

1,568

 

General administration

 

914

 

649

 

2,377

 

1,962

 

 

 

2,377

 

1,935

 

6,588

 

5,628

 

Profit (loss) from operations

 

359

 

(668

)

(1,650

)

(1,190

)

 

 

 

 

 

 

 

 

 

 

Other expenses:

 

 

 

 

 

 

 

 

 

Interest expense

 

(64

)

(1,401

)

(155

)

(3,695

)

Other

 

(11

)

(6

)

(43

)

(29

)

 

 

(75

)

(1,407

)

(198

)

(3,724

)

Net income (loss)

 

$

284

 

$

(2,075

)

$

(1,848

)

$

(4,914

)

Dividends attributable to Preferred Stock

 

(1,372

)

(482

)

(3,353

)

(1,304

)

Net loss attributable to common stockholders

 

(1,088

)

(2,557

)

(5,201

)

(6,218

)

Net income (loss) per common share

 

0.00

 

(0.01

)

(0.01

)

(0.03

)

Dividends attributable to Preferred Stock

 

(0.01

)

(0.00

)

(0.02

)

(0.01

)

Loss per share attributable to common stockholders, basic and fully diluted

 

$

(0.01

)

$

(0.02

)

$

(0.03

)

$

(0.04

)

Weighted average number of common shares outstanding, basic and fully diluted

 

213,517,230

 

159,187,150

 

197,829,190

 

146,874,482

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

 

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Cash Flows—Unaudited

(in thousands)

 

 

 

Three Months Ended
December 31,

 

Nine Months Ended
December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Cash used in operations:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

284

 

$

(2,075

)

$

(1,848

)

$

(4,914

)

Items not affecting cash:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

156

 

43

 

524

 

208

 

Allowance for doubtful accounts

 

28

 

(46

)

18

 

(106

)

Amortization of deferred financing costs

 

 

1,037

 

 

2,458

 

Stock-based compensation expense

 

260

 

156

 

754

 

483

 

Equity instruments issued in exchange for services

 

13

 

42

 

50

 

163

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(4,464

)

276

 

(4,238

)

1,828

 

Inventory

 

473

 

(12

)

1,036

 

(1,691

)

Prepaid expenses and other current assets

 

30

 

503

 

69

 

405

 

Accounts payable and accrued liabilities

 

2,952

 

(41

)

3,213

 

450

 

Net cash used in operating activities

 

(268

)

(117

)

(422

)

(716

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Additions to fixed assets

 

(111

)

 

(469

)

(615

)

Net cash used in investing activities

 

(111

)

 

(469

)

(615

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

920

 

4,278

 

9,180

 

13,011

 

Repayment of short-term indebtedness

 

(1,932

)

(4,806

)

(9,746

)

(13,340

)

Net proceeds from issuance of Series D Preferred Stock

 

2,182

 

 

2,182

 

 

Net proceeds from issuance of promissory notes exchanged for Series D Preferred Stock

 

 

743

 

 

1,593

 

Net proceeds from issuance of Common Stock

 

12

 

5

 

24

 

26

 

Net cash provided by financing activities

 

1,182

 

220

 

1,640

 

1,290

 

 

 

 

 

 

 

 

 

 

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

803

 

103

 

749

 

(41

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

114

 

245

 

168

 

389

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

917

 

$

348

 

$

917

 

$

348

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

Payments for interest

 

$

64

 

$

42

 

$

155

 

$

112

 

Payments for income taxes

 

$

 

$

 

$

 

$

 

Preferred Stock dividends issued in the form of stock

 

$

1,287

 

$

408

 

$

3,581

 

$

1,234

 

Payments for interest satisfied with the issuance of stock

 

$

 

$

408

 

$

 

$

874

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

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 business of the development, integration and marketing of rugged mobile wireless PC computing systems. The Company’s products enable the extension of traditional computing systems to a range of field and on-site personnel, regardless of location or environment. Using a range of wireless communication mediums together with the Company’s rugged computing products, the Company’s end-users are able to receive, collect, analyze, manipulate and transmit information in a variety of environments not suited to traditional non-rugged computing devices. The Company’s end-users are in the following markets: utilities, telecommunications, warehousing/logistics, public safety, field service, transportation, oil and gas, manufacturing, route delivery, military and homeland security.

 

2. SIGNIFICANTACCOUNTING POLICIES

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results for the three and nine month periods ended December 31, 2011 are not necessarily indicative of the results to be expected for the full year.

 

The consolidated balance sheet at March 31, 2011 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 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 24, 2011.

 

a)  Basis of consolidation and presentation

 

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

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has accumulated significant losses as it has been developing its current and next generation rugged computer products. The Company has had recurring losses and expects to report an operating loss for fiscal 2012. The Company believes that cash flow from operations, together with funds from its senior lender and financial support from an affiliate of Phoenix Venture Fund LLC (together with affiliates “Phoenix”) will be sufficient to fund the anticipated operations for fiscal 2012.  These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period of time.

 

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

 

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b)  Reclassification

 

Certain prior year amounts have been reclassified between sales, marketing and support and general administration expenses in the consolidated statements of income (loss) for consistency with the current year presentation.

 

3. INVENTORY

 

 

 

December 31,
2011

 

March 31,
2011

 

Finished goods

 

$

2,484

 

$

2,486

 

Computer components

 

234

 

1,268

 

Total inventory

 

$

2,718

 

$

3,754

 

 

4. LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

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

 

The following shares of common stock issuable upon the conversion or exercise of the following securities were not considered in the loss per share attributable to common stockholders calculations for the three and nine months ended:

 

 

 

December 31,
2011

 

December 31,
2010

 

Series A Preferred Shares

 

153,078,543

 

137,110,703

 

Series B Preferred Shares

 

16,561,521

 

16,538,391

 

Series C Preferred Shares

 

35,104,119

 

31,259,012

 

Series D Preferred Shares

 

349,630,450

 

237,937,500

 

Warrants

 

176,194,500

 

144,494,500

 

Options

 

62,248,923

 

17,246,054

 

Other Common Stock Equivalents

 

5,250,000

 

1,815,000

 

 

 

798,068,056

 

586,401,160

 

 

5. SHORT-TERM INDEBTEDNESS

 

On December 10, 2009, the Company’s wholly-owned subsidiary entered into an Accounts Receivable Purchasing Agreement (the “ARPA”) with DSCH Capital Partners, LLC d/b/a Far West Capital (“FWC”). Pursuant to the ARPA, as amended to date, most recently on December 30, 2011, FWC may purchase, in its sole discretion, eligible accounts receivable of the Company’s subsidiary on a revolving basis, up to a maximum of $8,500. Under the terms of the ARPA, FWC purchases eligible receivables from the subsidiary with full recourse for the face amount of such eligible receivables, less a discount of 0.52%.  FWC retains 15% of the purchase price of the purchased receivables as a reserve amount.  The subsidiary is required to pay FWC a monthly cost of funds fee equal to the net funds employed by FWC (i.e., the daily balance of the purchase price of all purchased receivables less the reserve amount, plus any unpaid fees and expenses due from the subsidiary to FWC under the ARPA) multiplied by the annual prime lending rate reported in The Wall Street Journal plus 11.50%, which fees accrue daily.  The ARPA provides that advances of up to $1,200 may be based upon eligible accounts receivable resulting from sales outside North America, provided that total funds advanced on such accounts receivable does not exceed 55% of total funds advanced by FWC under the facility and provided further that no single account balance with the Company’s subsidiary for an account debtor outside North America may exceed $60 unless the Company’s subsidiary purchases credit insurance to cover the amount exceeding $60 for such account debtor.  On August 26, 2011, the Company’s subsidiary and FWC entered into an inventory finance rider to the ARPA (the “Rider”) to provide for advances up to $700 based upon eligible finished goods Tablet PC inventory, provided that total funds advanced on such inventory does not exceed 30% of all eligible inventory and provided further that the advances shall at no time exceed 40% of the sum of (1) total funds advanced by FWC under the ARPA and (2) products scheduled to be shipped in satisfaction of customer purchase orders within 90 days. Eligible inventory is valued at the lower of cost or market value. Prior to the execution of the Rider, which gave the Company’s subsidiary the ability to receive advances on its inventory, FWC has the ability to purchase eligible purchase orders from the subsidiary, less a

 

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discount of 1.00%, under the ARPA.  In the December 30, 2011 amendment to the ARPA, the maximum amount of the eligible accounts receivable and purchase orders that FWC may purchase was increased from $4,750 to $8,500.

 

The ARPA also provides that FWC has the right to require the subsidiary to repurchase any purchased accounts receivable: (a) if there is a dispute as to the validity of such receivable by the account debtor, (b) if certain covenants, warranties or representations made by the subsidiary with respect to such receivables are breached, (c) upon and during the continuance of an event of default under the ARPA or upon the termination of the ARPA, or (d) if such receivable remains unpaid 90 days after the invoice date. The ARPA has an initial term of one year with automatic renewals for successive one-year periods. Notwithstanding that, FWC may terminate the ARPA at any time upon 150 days prior written notice or without prior notice upon and during the continuance of an event of default.

 

The ARPA contains standard representations, warranties, covenants, indemnities and releases for agreements governing financing arrangements of this type. The Company has guaranteed the obligations of its subsidiary under the ARPA pursuant to a corporate guaranty and suretyship. In addition, pursuant to the ARPA, the subsidiary’s obligations under the ARPA are secured by a first priority security interest on all assets of the subsidiary. On December 31, 2011, there were no borrowings under the ARPA.

 

6. PROMISSORY NOTES

 

 

 

 

 

 

 

 

 

Exchanged for

 

 

 

 

 

 

 

Balance

 

 

 

Value

 

Series D

 

Accretion

 

Balance

 

Promissory Note

 

March 31,

 

New

 

Assigned

 

Preferred

 

of Non-Cash

 

March 31,

 

Issuance Date

 

2010

 

Issuances

 

to Warrants

 

Stock

 

Interest

 

2011

 

September 5, 2008

 

$

825

 

$

 

$

 

$

(1,000

)

$

175

 

$

 

October 21, 2008

 

1,624

 

 

 

(2,000

)

376

 

 

February 27, 2009

 

410

 

 

 

(555

)

145

 

 

March 5, 2009

 

74

 

 

 

(100

)

26

 

 

March 11, 2009

 

221

 

 

 

(300

)

79

 

 

May 26, 2009

 

69

 

 

 

(100

)

31

 

 

June 15, 2009

 

13

 

 

 

(20

)

7

 

 

July 1, 2009

 

10

 

 

 

(15

)

5

 

 

November 5, 2009

 

2,110

 

 

 

(3,210

)

1,100

 

 

August 18, 2010

 

 

250

 

(151

)

(250

)

151

 

 

September 2, 2010

 

 

600

 

(363

)

(600

)

363

 

 

December 16, 2010

 

 

1,178

 

 

(1,178

)

 

 

 

 

$

5,356

 

$

2,028

 

$

(514

)

$

(9,328

)

$

2,458

 

$

 

 

On December 16, 2010, all of the Company’s senior secured subordinated promissory notes and secured subordinated promissory notes and related accrued interest were exchanged for shares of the Company’s Series D Preferred Stock, at an exchange rate of one share for each $1.00 of such indebtedness.  The exchange resulted in the issuance of 9,498,366 shares of the Company’s Series D Preferred Stock.  Prior to their exchange, the Company’s senior secured subordinated promissory notes and secured subordinated promissory notes bore interest at the rate of 10% per annum.  Interest was payable quarterly and could be paid in cash or, at the option of the Company, in shares of the Company’s common stock.  The Company elected to pay the interest on the promissory notes with shares of common stock, and therefore, the effective interest rate under the notes was increased by approximately 2.5%.  Interest expense for the three and nine months ended December 31, 2010 was $168 and $677.  Payment for the three and nine months ended December 31, 2010 was rendered with the issuance of 3,653,122 and 3,169,611 shares of common stock in October 2010 and July 2010, respectively, and with the issuance of 170,866 shares of the Company’s Series D Preferred stock upon the exchange of the notes in December 2010.

 

Warrants issued by the Company prior to fiscal year 2011 in connection with the issuance of the Company’s senior secured subordinated promissory notes and secured subordinated promissory notes have been valued separately using the Black Scholes methodology. The fair value calculations assumed a discount rate of approximately 1.40%, volatility of approximately 125%, no dividends and that all of the shares will vest. The relative fair value of the warrants, as compared to the notes, resulted in a value of $3,333 assigned to the warrants issued to the promissory note holders, which was recorded as additional paid-in capital and a discount to the promissory notes.  The modifications of the expiration dates of the warrants resulted in recalculations of fair value, which are reflected in the value of $3,333.  The discounts were amortized over the terms of the senior secured subordinated promissory notes and secured subordinated promissory notes.  Interest expense for the three and nine months ended December 31, 2010 attributable to the warrants was $1,037 and $2,458, respectively.  In connection with the Company’s recapitalization, the Company’s senior secured subordinated promissory notes and secured subordinated promissory notes were exchanged for equity in December 2010 and the amortization period of the discounts accordingly reduced, resulting in an additional $758 and $1,458 of interest expense for the three and nine months ended December 31, 2010.

 

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7. SHARE CAPITAL

 

On October 14, 2011, the Company raised net proceeds of $2,182 in a private placement through the issuance of 2,320,000 shares of its Series D Preferred Stock. Philip S. Sassower, the Company’s Chairman of the Board and Chief Executive Officer, purchased 500,000 shares of Series D Preferred Stock in the private placement. In connection with the private placement of the Series D Preferred Stock, the Company paid SG Phoenix LLC, an affiliate, an administrative fee of $100 in cash and a warrant to purchase 2,500,000 shares of common stock at an initial exercise price of $0.04 per share.  The warrant is substantially similar to the warrants issued with the private placement of 1,000,000 shares of the Series D Preferred Stock on February 23, 2011, except that the warrant expires on October 13, 2014 rather than December 15, 2013.

 

On December 16, 2010, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware.  As a result, the Company is now authorized to issue 1,500,000,000 shares of capital stock, consisting of 1,350,000,000 shares of common stock, $.001 par value, and 150,000,000 shares of preferred stock, $.001 par value.

 

On December 16, 2010, the Company raised $1,178 in private placements through the issuance of secure promissory notes and warrants to purchase up to 29,437,500 shares of the Company’s common stock at $.04 per share.  The terms of the warrants are consistent with the terms of the warrants issued to purchasers of the secured promissory notes previously issued.

 

On December 16, 2010, the Company also issued 9,498.366 shares of the Company’s Series D Preferred Stock in exchange for all of the Company’s outstanding Senior Notes and secured subordinated promissory notes and related accrued interest, at an exchange rate of one share of Series D Preferred Stock for each $1.00 of such indebtedness.  The Series D Preferred Stock has a par value of $0.001 and was recorded net of issuance costs of $435.

 

The Company’s outstanding shares of preferred stock accrue cumulative dividends, which are paid quarterly on the first day of June, September, December and March.

 

The dividend rate for the Company’s Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock was 5% of the original issue price of such Preferred Stock through November 30, 2010 and 7.5% of the original issue price after November 30, 2010.  The dividends for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are paid in the number of shares of the Company’s common stock determined by dividing (i) the aggregate amount of the dividend then payable by (ii) the volume weighted average trading price of the common stock over the 10 trading days ending on the third trading day immediately preceding the dividend payment date, less a discount of 25% of the volume weighted average trading price of the common stock.

 

The dividend rate for the Series D Preferred Stock is 10% of the original issue price of the Series D Preferred Stock.  The dividends for the Series D Preferred Stock are paid, at the Company’s option, in cash or additional shares of Series D Preferred Stock valued at $1.00 per share. No dividends may be paid on the Company’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or common stock so long as any dividends on the Series D Preferred Stock remain unpaid.

 

The values for dividends paid and dividends accrued and unpaid are determined based on the closing market prices of the Company’s common stock as of the dates of share issuances and accrual multiplied by the equivalent common shares.

 

A summary of paid dividends for the three and nine months ended December 31, 2011 and 2010, and accrued and unpaid dividends as of December 31, 2011 and 2010, is as follows:

 

 

 

 

 

 

 

Dividends

 

 

 

Paid For Qtr Ended
December 31,

 

Paid For Nine Months
Ended December 31,

 

Accrued and Unpaid as
of

December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

Series A Preferred Stock

 

$

511

 

$

267

 

$

1,498

 

$

805

 

$

148

 

$

136

 

Series B Preferred Stock

 

63

 

35

 

189

 

107

 

18

 

18

 

Series C Preferred Stock

 

204

 

106

 

598

 

322

 

59

 

55

 

Series D Preferred Stock

 

509

 

 

1,296

 

 

119

 

39

 

 

In the event the Company voluntarily or involuntarily liquidates, dissolves or winds up, the holders of the Series D Preferred Stock will be entitled to receive a liquidation preference in the amount of $1.00 per share plus any accrued and unpaid dividends. After receipt of the liquidation preference, the shares of Series D Preferred Stock will participate with the Company’s common stock in remaining liquidation proceeds (after payment of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock liquidation preferences, including accrued and unpaid dividends) pro rata on an as-converted basis. A merger or

 

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consolidation (other than one in which the then current stockholders own a majority of the voting power in the surviving or acquiring corporation) or a sale, lease transfer, exclusive license or other disposition of all or substantially all of the Company’s assets will be treated as a liquidation event triggering the liquidation preference. Each series of Series A, Series B and Series C Preferred Stock ranks on parity with the other series with respect to dividends and liquidation.  At December 31, 2011, the liquidation preference values of the Series A, Series B, Series C and Series D Preferred Stock were $21,377, $2,629, $8,537 and $13,985, respectively.

 

At December 31, 2011, the conversion rates into common stock for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock were approximately 2.4347, 2.1419, 2.0560 and 25.0000, respectively.

 

During the nine months ended December 31, 2011, 500,000 shares of Series B Preferred Stock were converted into 1,013,039 shares of the Company’s common stock.

 

The Company’s board of directors approved an employee stock purchase plan that was implemented on January 1, 2009 and approved by stockholders on November 4, 2009 (the “ESPP”).  The current offering period under the ESPP is from April 1, 2011 to March 31, 2012. The Company will issue shares quarterly to participants at a price of $0.07125 per share during the current offering period. On January 3, 2012, the Company issued 190,955 shares of common stock under the ESPP for the three months ended December 31, 2011.  On January 1, 2011, the Company issued 27,928 shares of common stock under the ESPP for the three months ended December 31, 2010, based on an offering price of $0.08075 per share.

 

Warrants outstanding

 

There were warrants to purchase an aggregate of 176,194,500 shares of common stock outstanding at December 31, 2011, as detailed in the table below:

 

Number of Warrants/Number Exercisable

 

Exercise Price (1)

 

Expiration Date

 

4,367,000/4,367,000

 

$

0.068

 

February 27, 2012

 

4,090,000/4,090,000

 

$

0.068

 

July 27,2012

 

3,750,000/3,750,000

 

$

0.076

 

January 30, 2013

 

74,600,000/74,600,000

 

$

0.068

 

January 14, 2013

 

82,387,500/82,387,500

 

$

0.040

 

December 15, 2013

 

2,500,000/2,500,000

 

$

0.040

 

October 13, 2014

 

3,000,000/3,000,000

 

$

0.089

 

June 10, 2014

 

1,500,000/1,500,000

 

$

0.073

 

May 13, 2015

 

 


(1)         Exercise price may change subject to anti-dilutive terms.

 

8. STOCK-BASED COMPENSATION PLAN

 

a)  Stock Options

 

In 1995, the Company’s board of directors approved a Share Option Plan, which was amended and restated in December 2004, and amended thereafter (the “Amended Share Option Plan”). The Amended Share Option Plan is administered by the Company’s board of directors and provides that options may be granted to employees, officers, directors and consultants to the Company. The exercise price of an option is determined at the date of grant and is based on the closing price of the common stock on the stock exchange or quotation system where the Company’s common stock is listed or traded, on the day preceding the 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.

 

On July 28, 2009, the Company’s board of directors adopted the 2009 Stock Incentive Plan (the 2009 Stock Plan). The 2009 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, to encourage their focus on strategic long-range corporate objectives, and to attract and retain exceptionally qualified personnel. The 2009 Stock Plan became effective as of June 10, 2009 and was approved by the Company’s stockholders on January 14, 2010.

 

At December 31, 2011, the maximum aggregate number of shares of common stock reserved for issuance upon the exercise of all options granted under the Amended Share Option Plan and 2009 Stock Plan may not exceed an aggregate of 77,004,954 shares.  This amount consists of 75,000,000 shares under the 2009 Stock Plan and 2,004,954 under the Amended Share Option Plan. The options under the plans generally vest over a 3-year period in equal annual amounts and expire five years after the issuance date.

 

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A summary of the activity in the Company’s Amended Share Option Plan and 2009 Stock Plan during the nine months ended December 31, 2011 is as follows:

 

 

 

Nine months ended December 31, 2011

 

 

 

Options

 

Weighted
Average
Exercise Price
(US$)

 

Outstanding at March 31, 2011

 

57,737,370

 

$

0.10

 

Granted

 

10,100,000

 

$

0.05

 

Exercised

 

 

$

 

Forfeited

 

(5,588,447

)

$

0.37

 

Outstanding at end of period

 

62,248,923

 

$

0.07

 

 

At December 31, 2011, the total number of shares of common stock issued in connection with the exercise of options since the inception of the Amended Share Option Plan is 671,385.

 

A summary of the options outstanding and exercisable as at December 31, 2011 is as follows:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices
US$ 

 

Number Outstanding

 

Weighted Average
Remaining
Contractual Life

 

Number Exercisable

 

Weighted Average
Remaining
Contractual Life

 

$0.04—0.06

 

57,285,000

 

4.3

 

11,798,335

 

4.3

 

$0.07—0.10

 

1,208,954

 

2.4

 

805,186

 

2.3

 

$0.11—0.34

 

3,074,969

 

4.3

 

2,892,645

 

4.3

 

$0.35—0.54

 

680,000

 

0.9

 

680,000

 

0.9

 

 

 

62,248,923

 

4.2

 

16,176,166

 

4.0

 

 

Prior to June 20, 2007, the Company was incorporated under the laws in Canada and the exercise prices for stock grant awards were in Canadian dollars; thus the exercise prices for 410,000 options outstanding are in Canadian dollars. The range of stock grant awards is subject to changes in the exchange rates between the Canadian dollar and United States dollar.

 

On October 31, 2011, the Company’s board of directors approved the grant of options to purchase 1,600,000 shares of the Company’s common stock to non-executive employees, with an exercise price of $0.0405 per share.  On November 8, 2011, the Company’s board of directors approved the grant of options to purchase 500,000 shares of the Company’s common stock to a new member of the Company’s board of directors, with an exercise price of $0.05.  The fair value of these option grants to be recognized as stock compensation expense is $80.

 

The options have been valued separately using the Black-Scholes methodology and the calculations for issuances in fiscal 2012 and 2011 assumed discount rates of approximately 0.81% and 1.3%, respectively, and volatility of approximately 184% and 158%, respectively, and no dividends for both years. The Company recorded compensation cost of $207 and $156 for the three months ended December 31, 2011 and 2010, respectively, and $596 and $483 for the nine months ended December 31, 2011 and 2010, respectively. This expense was recorded in the employee related functional classification.

 

Compensation expense has been determined based on the fair value at the grant date for options granted in the current fiscal year. The aggregate intrinsic value of options exercisable at December 31, 2011 was zero as the fair value of the Company’s common stock is less than the exercise prices of the options. The future compensation expense to be recognized for unvested option grants at December 31, 2011 was $1,857, which is to be recognized over the next three years.

 

b)  Stock Compensation

 

On August 4, 2011, the Company’s board of directors approved an award of 10,000 shares of the Company’s Series D Preferred Stock, which will fully vest on March 31, 2012, to each director for services to be rendered during the year ending March 31, 2012.  The total fair value of the Series D Preferred Stock was $60 and stock compensation expense of $15 and $45 was recorded for the three and nine months ended December 31, 2011, respectively.

 

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9. RELATED PARTY TRANSACTIONS

 

On May 14, 2010, the Company’s board of directors approved the issuance of a warrant to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $0.11 per share, which fully vested on March 31, 2011, to SG Phoenix LLC, an affiliate of the Company, for services rendered during the year ending March 31, 2011.  The fair value of the warrant was approximately $137 and expense of $34 and $103 was recorded for the three and nine months ended December 31, 2010, respectively.

 

In connection with the Company’s issuance of its Series D Preferred Stock in exchange for its outstanding subordinated secured promissory notes on December 16, 2010, the Company paid SG Phoenix LLC, an affiliate, a structuring fee of $100 in cash and issued SG Phoenix LLC a three-year warrant to purchase 2,500,000 shares of common stock at an exercise price of $0.04 per share.

 

On December 16, 2010, Phoenix exchanged $1,940 in principal amount of the Company’s promissory notes for shares of the Company’s Series D Preferred Stock.  For the three months ended December 31, 2010, interest expense of $38 was recognized and paid to Phoenix through the issuance of 37,760 shares of the Company’s Series D Preferred Stock.

 

On December 16, 2010, Phoenix Enterprises Family Fund LLC, an affiliate, exchanged $718 in principal amount of the Company’s promissory notes for shares of the Company’s Series D Preferred Stock.  For the three months ended December 31, 2010, interest expense of $15 was recognized and paid to Phoenix Enterprises Family Fund LLC through the issuance of 15,136 shares of the Company’s Series D Preferred Stock.

 

On December 16, 2010, JAG Multi Investments LLC, an affiliate, exchanged $1,018 in principal amount of the Company’s promissory notes for shares of the Company’s Series D Preferred Stock.  For the three months ended December 31, 2010, interest expense of $21 was recognized and paid to JAG Multi Investments LLC through the issuance of 21,464 shares of the Company’s Series D Preferred Stock.

 

On December 16, 2010, Philip S. Sassower, the Company’s Chairman and Chief Executive Officer, exchanged $1,000 in principal amount of the Company’s promissory notes for shares of the Company’s Series D Preferred Stock.  For the three months ended December 31, 2010, interest expense of $21 was recognized and paid to Mr. Sassower through the issuance of 21,095 shares of the Company’s Series D Preferred Stock.

 

On August 4, 2011, the Company’s board of directors approved an award of 150,000 shares of Series D Preferred Stock, which will fully vest on March 31, 2012, to SG Phoenix LLC, an affiliate, for services to be rendered during the year ending March 31, 2012.  The fair value of the Series D Preferred Stock was $150 and stock compensation expense of $38 and $113 were recorded for the three and nine months ended December 31, 2011, respectively.

 

On October 14, 2011, the Company raised net proceeds of $2,182 in a private placement through the issuance of 2,320,000 shares of its Series D Preferred Stock. Philip Sassower, the Company’s Chairman of the Board and Chief Executive Officer, purchased 500,000 shares of Series D Preferred Stock in the private placement. In connection with the private placement of the Series D Preferred Stock, the Company paid SG Phoenix LLC, an affiliate, an administrative fee of $100 in cash and a warrant to purchase 2,500,000 shares of common stock at an initial exercise price of $0.04 per share.  The warrant is substantially similar to the warrants issued with the private placement of 1,000,000 shares of the Series D Preferred Stock on February 23, 2011, except that the warrant expires on October 13, 2014 rather than December 15, 2013.

 

10. SEGMENTED INFORMATION

 

The Company operates in one segment, the sale of rugged mobile wireless Tablet PC computing systems. The United States, Germany and Canada accounted for approximately 67%, 11% and 10% respectively, of the Company’s total revenue for the three months ended December 31, 2011. The United States, Germany and Canada accounted for approximately 57%, 12% and 11% respectively, of the Company’s total revenue for the nine months ended December 31, 2011. The United States and Germany accounted for 49% and 15%, respectively, of the Company’s total revenue for the three months ended December 31, 2010.  The United States, Canada and Germany accounted for 40%, 14% and 10%, respectively, of the Company’s total revenue for the nine months ended December 31, 2010.

 

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The distribution of revenue by country is segmented as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,
2011

 

December 31,
2010

 

December 31,
2011

 

December 31,
2010

 

Revenue by country:

 

 

 

 

 

 

 

 

 

United States

 

$

5,939

 

$

2,125

 

$

9,441

 

$

5,502

 

Germany

 

955

 

651

 

2,066

 

1,373

 

Canada

 

911

 

304

 

1,836

 

1,886

 

Other

 

1,113

 

1,228

 

3,353

 

4,953

 

 

 

$

8,918

 

$

4,308

 

$

16,696

 

$

13,714

 

 

The Company has a variety of customers, and in any given year a single customer can account for a significant portion of sales. For the three months ended December 31, 2011, the Company had one customer located in the United States who accounted for more than 10% of total revenue and that same customer accounted for more than 10% of total revenue for the nine months ended December 31, 2011. For the three months ended December 31, 2010, the Company had one customer located in Germany who accounted for more than 10% of total revenue.  For the nine months ended December 31, 2010, the Company had no customer who accounted for more than 10% of total revenue

 

Three Months Ended

 

Total
Revenue
(in millions)

 

Number of
Customers with
Revenue
> 10% of Total
Revenue

 

Customer
Share as a
Percent of Total
Revenue

 

December 31, 2011

 

$

8.9

 

1

 

43

%

December 31, 2010

 

$

4.3

 

1

 

13

%

 

Nine Months Ended

 

Total
Revenue
(in millions)

 

Number of
Customers with
Revenue
> 10% of Total
Revenue

 

Customer
Share as a
Percent of Total
Revenue

 

December 31, 2011

 

$

16.7

 

1

 

27

%

December 31, 2010

 

$

13.7

 

 

 

 

At December 31, 2011, the Company had one customer that accounted for more than 10% of the outstanding net receivables.

 

Nine Months Ended

 

Accounts
Receivable
(in millions)

 

Number of
Customers with
Revenue
> 10% of Total
Receivables

 

Customer
Share as a
Percent of Total
Receivables

 

December 31, 2011

 

$

6.9

 

1

 

54

%

 

The Company relies on a single supplier for the majority of its finished goods. At December 31, 2011 and 2010, the Company owed this supplier $3,199 and $1,743, respectively, 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 nine months ended December 31, 2011 and 2010.

 

11. COMMITMENTS AND CONTINGENT LIABILITIES

 

a)            Premises

 

The Company leases facilities in Austin, Texas. The annual lease commitment is $191 and the lease expires on August 31, 2014. Rent expense for the three months ended December 31, 2011 and 2010, was $56 and $56, respectively. Rent expense for the nine months ended December 31, 2011 and 2010, was $158 and $164, respectively.

 

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

 

2012

 

$

57

 

2013

 

236

 

2014

 

240

 

2015

 

100

 

 

 

$

633

 

 

b)                                     Purchase commitment

 

At December 31, 2011, the Company had purchase obligations of approximately $14,952 related to future 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 Operation.

 

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, 2011 and elsewhere in this quarterly report on 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 Xplore is positioned for future revenue growth in our addressable markets with the launch of our fifth generation iX104C line of rugged Tablet PCs in May 2011.  At a time when we believe awareness and demand for tablet computers is exploding, Xplore has 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 newest generation of the iX104 Tablet PC system. We believe the markets’ response to our iX104 has been favorable based upon initial beta testing of the product with our existing customers, purchase orders that we have received to date and our results for the three months ended December 31, 2011, when we reported net income for the first time in our history.  Our iX104C5 introduces “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 new C5 family also features the Intel® Core™ i7 processor and Windows® 7 operating system.  Our specially designed AllVue screen is viewable in virtually all challenging lighting conditions, including direct sunlight and dimly-lit environments, and features an improved screen contrast ratio of 600:1.

 

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Our management believes that if we can continue to gain awareness of our newest generation of the iX104 Tablet PC we should be able to continue to increase our revenues in the future.

 

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 and for the three and nine months ended December 31, 2011 and 2010. 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 and 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. The majority of our warranty obligations related to revenue recognized are generally covered by warranty coverage agreements provided by Wistron. 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 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.

 

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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 have been valued separately using the Black-Scholes methodology. The notes originally reflected in our financial statements were at a discounted value and the difference between this discounted amount and the face value of the notes was amortized as additional non-cash interest expense over the term of the notes, which were exchanged for Series D Preferred Stock in December 2010. The determination of the value attributed to the warrants and notes 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 valuation is impacted by the assumptions used in this calculation.

 

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 legal fees for litigation defense and litigation settlement payments, corporate expenses, and costs associated with being a reporting 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 or letters of credit 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.

 

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Recent Accounting Pronouncements

 

There have been no new recent accounting pronouncements that impact our financial statements.

 

Three and Nine Months Ended December 31, 2011 vs. Three and Nine Months Ended December 31, 2010

 

Revenue.  Total revenue for the three months ended December 31, 2011 was $8,918,000, as compared to $4,308,000 for the three months ended December 31, 2010, an increase of $4,610,000, or approximately 107%, primarily due to an increase in unit sales during the three months ended December 31, 2011 compared to the three months ended December 31, 2010, along with an increase in revenue of approximately 3% attributable to an increase in average selling prices associated with a more favorable product configuration mix. The increase in unit sales was primarily attributable to approximately $3,900,000 of revenue related to the fulfillment of a portion of the previously announced purchase orders we received from one of the world’s largest utility companies approximating $14,000,000. Total revenue for the nine months ended December 31, 2011 was $16,696,000, as compared to $13,714,000 for the nine months ended December 31, 2010, an increase of $2,982,000, or approximately 22%.  An increase in unit sales accounted for an increase in revenue of approximately 26% for the nine months ended December 31, 2011 compared to the nine months ended December 31, 2010, offset by a decline of approximately 4% in average selling prices attributable to a larger product mix of earlier generation Tablet PCs sold at discounted prices in the first half of the current fiscal year.

 

We operate in one segment, the sale of rugged mobile wireless Tablet PC computing systems. The United States, Germany and Canada accounted for approximately 67%, 11% and 10%, respectively, of our total revenue for the three months ended December 31, 2011.  The United States and Germany accounted for approximately 49% and 15%, respectively, of our total revenue for the three months ended December 31, 2010.  The United States, Germany and Canada accounted for approximately 57%, 12%, and 11%, respectively, of our total revenue for the nine months ended December 31, 2011 and approximately 40%, 10% and 14%, respectively, of our total revenue for the nine months ended December 31, 2010.

 

We have a number of customers, and in any given period a single customer can account for a significant portion of our sales.  For the three months ended December 31, 2011, we had one customer located in the United States who accounted for approximately 43% of our revenue.  For the nine months ended December 31, 2011, that same customer accounted for approximately 27% of our revenue.  For the three months ended December 31, 2010, we had one customer located in Germany who accounted for approximately 13% of our total revenue.  For the nine months ended December 31, 2010, there was no single customer who accounted for more than 10% our revenue.  At December 31, 2011, there was one customer with a receivable balance that was approximately 54% of our outstanding receivables.  At December 31, 2010, there were two customers with receivable balances that totaled approximately 25% of our outstanding receivables.  We previously announced that we have received purchase orders from one customer for the purchase of over 4,000 of our newly launched iX104C5 rugged tablet PCs, representing over $14,000,000 in revenue.  As a result, we expect that our concentration of total revenue with this one customer and in the United States, where the customer is located, will continue to be significant in the fourth quarter of our fiscal 2012 and the first quarter of our fiscal 2013.

 

Cost of Revenue.  Total cost of revenue for the three months ended December 31, 2011 was $6,182,000, compared to $3,041,000 for the three months ended December 31, 2010, an increase of $3,141,000, or approximately 103%.  The aforementioned increase in unit sales accounted for the increase of approximately 102% in cost of revenue. Total cost of revenue for the nine months ended December 31, 2011, was $11,758,000, compared to $9,276,000 for the nine months ended December 31, 2010, an increase of $2,482,000, or approximately 27%.  An increase in unit sales accounted for an increase of approximately 27% in cost of revenue.

 

We rely on a single supplier for the majority of our finished goods.  The year to date inventory purchases and engineering services from this supplier as of December 31, 2011 and 2010 were $8,096,000 and $7,710,000, respectively.  At December 31, 2011 and 2010, we owed this supplier $3,199,000 and $1,743,000, respectively, recorded in accounts payable and accrued liabilities.

 

Gross Profit.  Total gross profit increased by $1,469,000 to $2,736,000 (30.7% of revenue) for the three months ended December 31, 2011 from $1,267,000 (29.4% of revenue) for the three months ended December 31, 2010.  The increase in gross profit for the three months ended December 31, 2011 was due primarily to the increase in unit sales. The increase in the gross profit percentage was primarily due to spreading our indirect labor and logistics costs, which are predominately fixed in nature, over more revenue, which was partially offset by the effect of tooling amortization that was not incurred in the three months ended December 31, 2010.  Total gross profit increased by $500,000 to $4,938,000 (29.6% of revenue) for the nine months ended December 31, 2011 from $4,438,000 (32.4% of revenue) for the nine months ended December 31, 2010.  The increase in gross profit for the nine months ended December 31, 2011 was due primarily to the increase in unit sales.  The decrease in the gross profit percentage was primarily due to lower special pricing associated with larger volume order and the effect of tooling amortization that was not incurred in the nine months ended December 31, 2010, partially offset by the impact of spreading the indirect labor and logistics costs, which are predominately fixed in nature, over more revenue.

 

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Sales, Marketing and Support Expenses.  Sales, marketing and support expenses for the three months ended December 31, 2011 were $976,000, compared to $711,000 for the three months ended December 31, 2010.  The increase of $265,000, or approximately 37%, was due primarily to an increase in sales commissions of $103,000 due to the revenue increase during the period, an increase in expenses related to demonstration units of $62,000 associated with the marketing of our iX104C5 launched in our first quarter of fiscal 2012, an increase in our headcount related costs of $60,000 and an increase in stock compensation expense of $43,000.  Sales, marketing and support expenses for the nine months ended December 31, 2011 were $2,791,000, compared to $2,098,000 for the nine months ended December 31, 2010.  The increase of $693,000, or approximately 33%, was due primarily to an increase in expenses related to demonstration units of $181,000 associated with the marketing of our iX104C5, an increase in our headcount related costs of $175,000, an increase for stock compensation expense of $131,000, an increase in sales commissions of $103,000 associated with the revenue increase during the period and an increase in travel costs of $78,000.  Our marketing expenses also increased by $23,000 due to promotional activities supporting the new C5 product launch.

 

Product Research, Development and Engineering Expenses.  Product research, development and engineering expenses for the three months ended December 31, 2011 were $487,000, a decrease of $88,000, or approximately 15%, compared to $575,000 for the three months ended December 31, 2010.  The decrease was due primarily to a decrease in product developments costs of $72,000 arising from the completion and launch of the new C5 product in May 2011 and a decrease in patent filings costs, primarily legal, of $43,000 offset by an increase in headcount related expense of $25,000.  Product research, development and engineering expenses for the nine months ended December 31, 2011 were $1,420,000, a decrease of $148,000, or approximately 9%, compared to $1,568,000 for the nine months ended December 31, 2010.  The decrease was primarily due to a $218,000 decrease in product development costs, offset by increases in head count related costs of $58,000 and C5 patent filing costs of $7,000.  During the nine months ended December 31, 2011, our product development focus was predominantly on the completion and testing of the C5, which was launched in May 2011, and the development of the recently announced new docking accessories including a wireless docking system compared to our product development focus during the nine months ended December 31, 2010, which was solely on major development activities related to the C5.

 

General Administration Expenses.  General administration expenses for the three months ended December 31, 2011 were $914,000, compared to $649,000 for the three months ended December 31, 2010, an increase of $265,000, or approximately 41%.  The increase was due to a charge of $100,000 to be paid over the next 18 months arising from the January 2012 settlement agreement of a patent infringement claim, an increase in our allowance for doubtful accounts of $76,000 associated with an increase in accounts receivables, an increase in stock compensation of $40,000, an increase in professional fees of $29,000 and an increase in head count related expense of $25,000 offset by a decrease in various office related expenses aggregating $5,000.  General administration expenses for the nine months ended December 31, 2011 were $2,377,000, compared to $1,962,000 for the nine months ended December 31, 2010, an increase of $415,000, or approximately 21%.  The increase was primarily due to an increase in professional fees of $168,000, an increase in headcount related costs of $102,000, which includes non-recurring recruiting costs of $18,000, the $100,000 settlement charge, and an increase in stock compensation of $79,000, principally due a company-wide stock grant in March 2011.  These increases were offset by decreases in various office related expenses aggregating $34,000.

 

For the three months ended December 31, 2011 and 2010, the fair value of employee/director stock-based compensation expense was $260,000 and $156,000, respectively.  For the nine months ended December 31, 2011 and 2010, the recorded employee/director stock-based compensation expense was $754,000 and $483,000, respectively.  The increases for both periods were principally due to our board of directors granting options to purchase an aggregate of 47,685,000 shares of our common stock, at an exercise price of $0.06 per share, to all employees, directors and certain consultants in March 2011.  The majority of the options included in the March 2011grant vest ratably over three years.  Stock compensation expense was recorded in the employee related functional classification.

 

Depreciation and amortization expenses for the three months ended December 31, 2011 and 2010 were $156,000 and $43,000, respectively.  Depreciation and amortization expenses for the nine months ended December 31, 2011 and 2010 were $524,000 and $208,000, respectively.  The increase in depreciation and amortization expense is principally due to the depreciation of our new C5Tablet PC demonstration units of $56,000 and $154,000, respectively, and the tooling amortization associated with the C5 of approximately $60,000 and $170,000, respectively, for the three and nine months ended December 31, 2011.  Depreciation and amortization is recorded in the related functional classification.

 

Interest Expense.  Interest expense for the three months ended December 31, 2011 was $64,000 compared to $1,401,000 for the three months ended December 31, 2010, a decrease of $1,337,000.  Interest expense for the nine months ended December 31, 2011 was $155,000, compared to $3,695,000 for the nine months ended December 31, 2010, a decrease of $3,540,000.  The decreases in both periods are attributable primarily to the reduction in outstanding borrowings resulting from the exchange of all of our outstanding secured promissory notes for shares of our Series D Preferred Stock on December 16, 2010.  The interest expense of $64,000 and $155,000 in the three and nine months ended December 31, 2011, respectively, was attributable to borrowings associated with our

 

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working capital facility, as compared to $42,000 and $112,000 for the three and nine months ended December 31, 2010, respectively, from the same credit facility.

 

Other Expenses.  Other expenses for the three months ended December 31, 2011 were $11,000, compared to $6,000 for the three months ended December 31, 2010.  Other expenses for the nine months ended December 31, 2011 were $43,000, compared to $29,000 for the nine months ended December 31, 2010.

 

Net Income (Loss).  Net income for the three months ended December 31, 2011 was $284,000, as compared to a net loss of $2,075,000 for the three months ended December 31, 2010, an increase in income of $2,359,000.  The increase in income was primarily due to the increase in revenue and gross profit and the reduction in interest expense. The net loss for the nine months ended December 31, 2011 was $1,848,000 as compared to a net loss of $4,914,000 for the nine months ended December 31, 2010, a decrease of $3,066,000.  The decrease in net loss was due to the reduction in interest expense and the increase in revenue offset by an increase in operating expenses.

 

Net Loss Attributable to Common Stockholders.  Net loss attributable to common stockholders for the three months ended December 31, 2011 was $1,088,000, compared to $2,557,000 for the three months ended December 31, 2010, a decrease of $1,469,000, due primarily to the increase in income of $2,359,000 offset by an increase in dividends of $890,000.  Net loss attributable to common stockholders for the nine months ended December 31, 2011 was $5,201,000, compared to $6,218,000 for the nine months ended December 31, 2010, a decrease of $1,017,000 attributable to the decrease in net loss of $3,066,000 offset by an increase in dividends of $2,049,000.  Our outstanding shares of preferred stock accrue cumulative dividends that are paid quarterly on the first day of June, September, December and March.  The dividends attributable to these shares for the three months ended December 31, 2011 and 2010 were $1,372,000 and $482,000, respectively.  The dividends attributable to these shares for the nine months ended December 31, 2011 and 2010 were $3,353,000 and $1,304,000, respectively.  The increase in dividends was attributable to the increase in the dividend rates on our existing preferred stock and the issuance of our Series D Preferred Stock in connection with our recapitalization on December 16, 2010 and subsequent private placements of our Series D Preferred Stock.  The dividend rate for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock was 5% through November 30, 2010, and was increased to 7.5% for periods after November 30, 2010 in connection with our recapitalization.  The dividends for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock were paid in the number of shares of our common stock determined by dividing (i) the aggregate amount of the dividend then payable by (ii) 75% of the volume weighted average trading price of the common stock over the 10 trading days ending on the third trading day immediately preceding the dividend payment date.  The dividend rate for the Series D Preferred Stock is 10%, payable in additional shares of Series D Preferred Stock valued at $1.00 per share.  The values for dividends paid in shares of our common stock and related dividends accrued and unpaid are determined based on the market prices of our common stock as of the dates of share issuances or accrual multiplied by the equivalent common shares.

 

A summary of paid dividends for the three months ended December 31, 2011 and 2010 and accrued and unpaid dividends as of December 31, 2011 and 2010 is as follows:

 

 

 

 

 

 

 

Dividends

 

 

 

Paid For Qtr Ended
December 31,

 

Paid For Nine Months
Ended December 31,

 

Accrued and Unpaid as
of

December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

Series A Preferred Stock

 

$

511

 

$

267

 

$

1,498

 

$

805

 

$

148

 

$

136

 

Series B Preferred Stock

 

63

 

35

 

189

 

107

 

18

 

18

 

Series C Preferred Stock

 

204

 

106

 

598

 

322

 

59

 

55

 

Series D Preferred Stock

 

509

 

 

1,296

 

 

119

 

39

 

 

Liquidity and Capital Resources

 

For much of our history, the rate of growth in the market for our products and our success in gaining market share has been less than we anticipated.  We have incurred net losses in each fiscal year since our inception and we expect to report a net loss through at least the end of our fiscal year ending March 31, 2012.  As of December 31, 2011, our working capital was $4,551,000 and our cash and cash equivalents were $917,000.  From inception, we have financed our operations and met our capital expenditure requirements primarily from the gross proceeds of private and public sales of debt and equity securities totaling approximately $108.5 million.  We reported quarterly net income for the three months ended December 31, 2011 for the first time in our history. We believe the strength of our iX104C5 product family combined with the growing tablet PC market and acceptance of the tablet form factor accounted for our recent revenue growth and improved profitability.

 

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Sources of capital that are immediately available to us are through a credit facility with a specialty finance company and through affiliates of our principal stockholder, Phoenix Venture Fund LLC, or Phoenix.

 

On December 10, 2009, our wholly-owned subsidiary entered into an Accounts Receivable Purchasing Agreement, or the ARPA, with DSCH Capital Partners, LLC d/b/a Far West Capital, or FWC.  Pursuant to the ARPA, as amended to date, most recently on December 30, 2011, FWC may purchase, in its sole discretion, eligible accounts receivable of our subsidiary on a revolving basis, up to a maximum of $8,500,000.  Under the terms of the ARPA, FWC purchases eligible receivables from the subsidiary with full recourse for the face amount of such eligible receivables or, less a discount of 0.52%.  In addition, our subsidiary is required to pay FWC a monthly cost of funds fee equal to the net funds employed by FWC (i.e., the daily balance of the purchase price of all purchased receivables less the reserve amount, plus any unpaid fees and expenses due from the subsidiary to FWC under the ARPA) multiplied by the annual prime lending rate reported in The Wall Street Journal plus 11.50%, which fees accrue daily.  FWC also retains 15% of the purchase price of the purchased receivables and as a reserve amount.  The ARPA provides that advances of up to $1,200 may be based upon eligible accounts receivable resulting from sales outside North America, provided that total funds advanced on such accounts receivable does not exceed 55% of total funds advanced by FWC under the facility and provided further that no single account balance with our subsidiary for an account debtor outside North America may exceed $60,000 unless the subsidiary purchases credit insurance to cover the amount exceeding $60,000 for such account debtor.  On August 26, 2011, our subsidiary and FWC entered into an inventory finance rider to the ARPA to provide for advances up to $700,000 based upon eligible finished goods Tablet PC inventory, provided that total funds advanced on such inventory does not exceed 30% of all eligible inventory and provided further that the advances shall at no time exceed 40% of the sum of (1) total funds advanced by FWC under the ARPA and (2) products scheduled to be shipped in satisfaction of customer purchase orders within 90 days.  Eligible inventory is valued at the lower of cost or market value.  Prior to the execution of the rider, which gave our subsidiary the ability to receive advances on its inventory, FWC had the ability to purchase eligible purchase orders from our subsidiary, less a discount of 1.00%, under the ARPA.  In the December 30, 2011 amendment to the ARPA, the maximum amount of the eligible accounts receivable that FWC may purchase was increased from $4,750,000 to $8,500,000.

 

The ARPA also provides that FWC has the right to require us to repurchase any purchased accounts receivable: (a) if there is a dispute as to the validity of such receivable by the account debtor, (b) if certain covenants, warranties or our representations with respect to such receivables are breached, (c) upon and during the continuance of an event of default under the ARPA or upon the termination of the ARPA, or (d) if such receivable remains unpaid 90 days after the invoice date.  The ARPA has an initial term of one year with automatic renewals for successive one-year periods. Notwithstanding that, FWC may terminate the ARPA at any time upon 150 days prior written notice or without prior notice upon and during the continuance of an event of default.

 

The ARPA contains standard representations, warranties, covenants, indemnities and releases for transactions of this type.  We have guaranteed the obligations under the ARPA pursuant to the terms and provisions of a corporate guaranty and suretyship.  In addition, pursuant to the ARPA, our obligations under the ARPA are secured by a first priority security interest on all of our assets.

 

As of February 7, 2012, there were $1,778,000 borrowings outstanding under the ARPA.

 

On October 14, 2011, we raised net proceeds of $2,182,000 in a private placement through the issuance of 2,320,000 shares of our Series D Preferred Stock.  Philip Sassower, our Chairman of the Board and Chief Executive Officer, purchased 500,000 shares of our Series D Preferred Stock in the private placement.

 

We believe that cash flow from operations, together with borrowings under the ARPA and, if necessary, continued financial support from Phoenix will be sufficient to fund our anticipated operations, working capital, capital expenditures and debt service for the remainder of fiscal year 2012.  However, we may seek to access the public or private markets whenever conditions are favorable even if we do not have an immediate need for additional capital at that time.

 

Cash Flow Results

 

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

 

 

 

Three Months Ended
December 31,

 

Nine Months Ended
December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands of dollars)

 

Cash used in operating activities

 

$

(268

)

$

(117

)

$

(422

)

$

(716

)

Cash used in investing activities

 

(111

)

 

(469

)

(615

)

Cash provided by financing activities

 

1,182

 

220

 

1,640

 

1,290

 

Cash and cash equivalents

 

917

 

348

 

917

 

348

 

 

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Our operating activities used $268,000 of net cash for the three months ended December 31, 2011, as compared to $117,000 of net cash used by operating activities for the three months ended December 31, 2010, an unfavorable increase of $151,000.  The increase in net cash used by operating activities was primarily due to cash being used to fund a $4,464,000 increase in accounts receivable during fiscal 2012, as compared to a decrease in accounts receivable of $276,000 in fiscal 2011.  The increase in accounts receivable resulted from the timing of billing and collections of accounts receivable as our revenue increased by107% and approximately $6,400,000 of this revenue was billed in December 2011.  Net cash used by operating activities was also decreased by an unfavorable reduction in cash provided by prepaid expenses of $473,000, which was offset by a favorable reduction in the use of cash arising from the timing of payables of $2,993,000 and a favorable reduction in cash used by inventory of $485,000.  In addition, our profitable quarter resulted in the elimination of the net loss, net of items not affecting cash, of $1,584,000.  Our operating activities used $422,000 of net cash for the nine months ended December 31, 2011, as compared to $716,000 of net cash used in operating activities for the nine months ended December 31, 2010, a favorable decrease of $294,000, or approximately 41%.  The decrease in net cash used by operating activities is primarily due to a favorable decrease in the use of cash arising from the timing of payables of $2,763,000, a favorable reduction in the use of cash for inventory of $2,727,000 and a decrease in the net loss, net of items not affecting cash, of $1,206,000 offset by a reduction in cash resulting from the timing of billing and collections of accounts receivable of $6,066,000 and an unfavorable reduction in cash provided by prepaid expenses of $336,000.

 

Net cash used in investment activities for the three and nine months ended December 31, 2011 consists primarily of investments in demonstration units of our newly launched C5 Tablet PCs of $111,000 and $469,000, respectively.  For the nine months ended December 31, 2010, the cash used in investment activities consisted primarily of tooling equipment of $478,000 related to the C5.

 

Our financing activities provided $1,182,000 of net cash for the three months ended December 31, 2011 as compared to $220,000 of net cash provided in financing activities for the three months ended December 31, 2010.  For the nine months ended December 31, 2011 our financing activities provided $1,640,000, compared to $1,290,000 for the nine months ended December 31, 2010.  Net cash provided by financing activities for the three and nine months ended December 31, 2011, consisted of the net proceeds of $2,182,000 from the issuance of our Series D Preferred Stock in private placements and net repayments of our working capital facility of $1,012,000 and $566,000, respectively.  For the three and nine months ended December 31, 2010, net proceeds from the issuance of promissory notes and equity of $748,000 and $1,619,000, respectively, and net repayment of $528,000 and $329,000, respectively, from our working capital facility accounted for net cash provided by financing activities.

 

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 December 31, 2011, 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.

 

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PART II—OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

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 1A.  Risk Factors

 

Our Annual Report on Form 10-K for the year ended March 31, 2011 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, 2011.

 

Risks Relating to our Business

 

For the three months ended December 31, 2011, we had one customer 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 December 31, 2011, one customer located in the United States accounted for approximately 43% of our total revenue.  We previously announced that we have received purchase orders from this customer for the purchase of over 4,000 of our newly launched iX104C5 rugged tablet PCs, representing over $14,000,000 in revenue.  As a result, we expect that our concentration of total revenue with this one customer and in the United States, where the customer is located, will continue to be significant at least through the first quarter of our fiscal 2013.  After the purchases by this customer are completed, if we are unable to replace the revenue generated from this major customer, with revenue from other customers or resellers 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

 

During the three months ended December 31, 2011, we issued a total of 212,500 shares of common stock to Martin Janis & Company, Inc., who we reasonably believe is an “accredited investor,” as such term is defined in Rule 501 under the Securities Act, in return for approximately $12,750 of investor relations services provided to us from October15, 2011 to November 14, 2011.  The issuance of the shares was made without registration under the Securities Act of 1933, as amended, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act, as the transaction did not involve a public offering, and in reliance on similar exemptions under applicable state laws.  No general solicitation or general advertising was used in connection with the offering of the shares. We disclosed to the recipient that the common stock could not be sold unless the sale is registered under the Securities Act or unless an exemption from registration is available, and the certificates representing the common stock included a legend to that effect. The shares were issued as follows:

 

Date Issued

 

Number of Shares

 

Price Per Share

 

October 15, 2011

 

106,250

 

$

0.08

 

November 15, 2011

 

106,250

 

$

0.08

 

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  (Removed and Reserved)

 

Item 5.  Other Information.

 

None.

 

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Item 6.  Exhibits.

 

Exhibit
Number

 

Description of Exhibit

 

 

 

 

 

31.1*

 

Certification of Philip S. Sassower, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2*

 

Certification of Michael J. Rapisand, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1*

 

Certifications of Philip S. Sassower, Chief Executive Officer, and Michael J. Rapisand, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

101.INS*

 

XBRL Instance Document

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 


*Filed herewith.

 

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SIGNATURE

 

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

 

 

 

XPLORE TECHNOLOGIES CORP.

 

 

 

 

 

 

Dated: February 13, 2012

 

By:

/s/ MICHAEL J. RAPISAND

 

 

 

Michael J. Rapisand

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer and Duly Authorized Officer)

 

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