XPLR Xplore Technologies Corp (delisted)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 8-K/A

(Amendment No. 1)

 

CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): April 17, 2015

 

Xplore Technologies Corp.
(Exact name of registrant as specified in its charter)

 

Delaware	000-52697	26-0563295
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

 

14000 Summit Drive, Suite 900
Austin, Texas 78728
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code:

 

(512) 336-7797

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

[  ]Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

[  ]Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

[  ]Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

[  ]Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Section 2— Financial Information

 

Item 2.01 Completion of Acquisition or Disposition of Assets

 

This Current Report on Form 8-K/A (“Form 8-K/A”) amends and supplements the Current Report on Form 8-K of Xplore Technologies Corp. (the “Company”), filed with the Securities and Exchange Commission on April 17, 2015, disclosing, among other things, the Company’s acquisition of certain assets of Motion Computing, Inc., and its wholly owned subsidiaries (collectively, the “Motion Companies”) on April 17, 2015. This Form 8-K/A includes the historical audited financial information of the Motion Companies and the unaudited pro forma financial information required by Item 9.01 of Form 8-K.

 

Section 9 — Financial Statements and Exhibits

 

Item 9.01 Financial Statements and Exhibits

 

(a)

Financial statements of business acquired.

 

The audited consolidated balance sheets of the Motion Companies as of December 31, 2014 and 2013, and the related consolidated statements of operations and other comprehensive income (loss), changes in redeemable preferred stock and stockholders’ deficit and cash flows for each of the two years ended December 31, 2014, including notes thereto, and the related reports of PMB Helin Donovan and Ernst & Young, independent registered public accounting firms, are attached as Exhibit 99.1 to this Form 8-K/A. The unaudited consolidated balance sheets of the Motion Companies as of March 31, 2015 and December 31, 2014, and the related consolidated statements of operations and comprehensive loss and cash flows for the three months ended March 31, 2015 and 2014, including notes thereto, are attached as Exhibit 99.2 to this Form 8-K/A.

 

(b)

Pro forma financial information.

 

The unaudited pro forma condensed combined balance sheet as of March 31, 2015, unaudited pro forma condensed combined statements of operations for the year ended March 31, 2015, and the accompanying notes, are attached as Exhibit 99.3 to this Form 8-K/A.

 

(d)

Exhibits

 

Exhibit No.		Description
23.1   23.2		Consent of PMB Helin Donovan   Consent of Ernst & Young
99.1		Audited consolidated balance sheets of the Motion Companies as of December 31, 2014 and 2013, and the related consolidated statements of operations and other comprehensive income (loss), changes in redeemable preferred stock and stockholders’ deficit and cash flows for each of the two years ended December 31, 2014, including notes thereto.
99.2		Unaudited consolidated balance sheets of the Motion Companies as of March 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss and cash flows for the three months ended March 31, 2015 and December 31, 2014, including notes thereto.
99.3		Unaudited pro forma condensed combined balance sheet as of March 31, 2015, unaudited pro forma condensed combined statements of operations for the year ended March 31, 2015, and the accompanying notes.

 

 

Forward Looking Statements

 

This Form 8-K/A, with respect to the pro forma financial information and notes thereto (and related estimates, assumptions and adjustments) included as Exhibit 99.3 that reflect the Company’s financial condition and results of operations on a pro forma basis giving effect to its acquisition of certain assets of the Motion Companies, contains statements which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward- looking statements and other information are based on the Company’s beliefs, as well as assumptions made by the Company using information currently available.

 

The words “believe,” “plan,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “should” and similar expressions are intended to identify forward-looking statements. Such statements reflect the Company’s current expectations, assumptions and estimates, including the estimates and assumptions related to the preparation of the pro forma financial information contained herein (including the preliminary purchase price allocation based upon the estimated fair values of the assets acquired and liabilities assumed of the Motion Companies as of the date of acquisition). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions, including adjustments to the fair values of the assets acquired and liabilities assumed of the Motion Companies once the related valuations have been finalized. We do not intend to update these forward-looking statements, except as required by law.

 

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Form 8-K/A, any exhibits to this Form 8-K/A and other public statements the Company makes. Such factors are discussed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended March 31, 2015, which is being filed with the Securities and Exchange Commission on June 29, 2015.

 

 

SIGNATURES

 

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 hereunto duly authorized.

 

	Xplore Technologies Corp.
	By:	/s/Michael J. Rapisand
	Name:	Michael J. Rapisand
	Title:	Chief Financial Officer

 

Dated: June 29, 2015

 

 

 4

 

 

Exhibit 23.1

 

 

 

 

 

 

Consent of Independent Auditors

 

We consent to the incorporation by reference therein of our report dated June 29, 2015 with respect to the financial statements of Motion Computing, Inc. and subsidiaries for the year ended December 31, 2014 included in the Current Report (Form 8-K) for 2015 filed with the Securities and Exchange Commission.

 

 

/s/ PMB Helin Donovan, LLP

 

Austin, Texas

 

June 29, 2015

 

Exhibit 23.2

 

 

 

 

  

 

 

Consent of Independent Auditors

 

We consent to the incorporation by reference therein of our report dated June 29, 2015 with respect to the financial statements of Motion Computing, Inc. and subsidiaries for the year ended December 31, 2013 included in the Current Report (Form 8-K) for 2015 filed with the Securities and Exchange Commission.

 

 

/s/ Ernst & Young LLP

 

Austin, Texas

 

June 29, 2015

 

Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

 

AUDITED CONSOLIDATED FINANCIAL STATEMENTS   Motion Computing, Inc. and Subsidiaries Years Ended December 31, 2014 and 2013 With Reports of Independent Auditors

 

 

Report of Independent Auditors

 

The Board of Directors and Stockholders

Motion Computing, Inc.

 

We have audited the accompanying consolidated financial statements of Motion Computing, Inc. and subsidiaries, which comprise the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ deficit, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Motion Computing, Inc. and subsidiaries at December 31, 2014, and the consolidated results of their operations and comprehensive loss and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

 

Other Matters

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(a) to the consolidated financial statements, the Company has incurred significant operating losses since its inception and on February 13, 2015, the Company was notified by its senior secured creditor that it was in default with certain covenants of its loan facility. The Company did not cure the events of default. On April 17, 2015, the senior secured creditor foreclosed on the majority of the Company's assets and sold certain of those assets to an independent buyer in a private foreclosure. Certain assets of the Company that did not secure the loan facility were sold to the buyer of the foreclosed assets by the Company. As a result of the foreclosure, the Company is in the process of winding down its remaining operations. The accompanying consolidated financial statements do not include any adjustments that resulted from these actions.

 

 

 /s/ PMB Helin Donovan, LLP

 

June 29, 2015 

 

 

Report of Independent Auditors

 

The Board of Directors and Stockholders

Motion Computing, Inc.

 

We have audited the accompanying consolidated financial statements of Motion Computing, Inc. and subsidiaries, which comprise the consolidated balance sheet as of December 31, 2013, and the related consolidated statements of operations and comprehensive income, changes in redeemable convertible preferred stock and stockholders’ deficit, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Motion Computing, Inc. and subsidiaries at December 31, 2013, and the consolidated results of their operations, and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

 

Other Matters

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(a) to the consolidated financial statements, the Company has incurred significant operating losses since its inception and on February 13, 2015, the Company was notified by its senior secured creditor that it was in default with certain covenants of its loan facility. The Company did not cure the events of default. On April 17, 2015, the senior secured creditor foreclosed on the majority of the Company's assets and sold certain of those assets to an independent buyer in a private foreclosure. Certain assets of the Company that did not secure the loan facility were sold to the buyer of the foreclosed assets by the Company. As a result of the foreclosure, the Company is in the process of winding down its remaining operations. The accompanying consolidated financial statements do not include any adjustments that resulted from these actions.

 

 

 /s/ Ernst & Young, LLP

 

June 29, 2015 

 

 

 

Motion Computing, Inc. and Subsidiaries

Audited Consolidated Financial Statements

Years Ended December 31, 2014 and 2013

 

 

 

 

Contents

 

 

Consolidated Financial Statements
Consolidated Balance Sheets	2
Consolidated Statements of Operations and Comprehensive Income (Loss)	3
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit	4
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7

 

 

Motion Computing, Inc. and Subsidiaries

Consolidated Balance Sheets 

(amounts in thousands, except share amounts)

 

		December 31
		2014				2013
Assets
Current assets:
Cash and cash equivalents		$	1,943			$	2,933
Accounts receivable, net of allowance for doubtful accounts of $239 and $5 at December 31, 2014 and 2013, respectively			10,565				12,606
Inventory			6,404				5,762
Prepaid expenses and other current assets			453				401
Total current assets			19,365				21,702
Other assets			489				225
Property and equipment, net			1,968				889
Total assets		$	21,822			$	22,816
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
Current liabilities:
Accounts payable		$	11,691			$	9,487
Accrued expenses and other liabilities			5,663				3,102
Deferred revenue			4,944				4,471
Current portion of long-term debt			2,564				1,740
Long-term debt and accrued interest in default			28,882				-
Total current liabilities			53,744				18,800
Deferred revenue			5,366				4,919
Other long-term liabilities			51				84
Long-term debt and accrued interest			-				25,704
Warrants for redeemable convertible preferred stock			-				1,833
Total liabilities			59,161				51,340
Commitments and contingencies			-				-
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $0.001 par value; 5,800,000 shares authorized; 5,264,992 shares issued and outstanding at December 31, 2014 and 2013; liquidation preference of $6,286,000			11,711				11,208
Series B redeemable convertible preferred stock, $0.001 par value; 5,600,000 shares authorized; 3,445,066 shares issued and outstanding at December 31, 2014 and 2013; liquidation preference of $7,200,000			12,938				12,362
Series B-1 redeemable convertible preferred stock, $0.001 par value; 9,400,000 shares authorized, 2,065,706 shares issued and outstanding at December 31, 2014 and 2013; liquidation preference of $4,317,000			7,828				7,482
Series C redeemable convertible preferred stock, $0.001 par value; 4,600,000 shares authorized; 4,371,176 shares issued and outstanding at December 31, 2014 and 2013; liquidation preference of $25,150,000			45,328				43,316
Series D redeemable convertible preferred stock, $0.001 par value; 11,800,000 shares authorized; 1,605,289 shares issued and outstanding at December 31, 2014 and 2013; liquidation preference of $18,472,000			13,290				11,524
Total redeemable convertible preferred stock			91,095				85,892
Stockholders’ deficit:
Common stock, $0.001 par value; 53,200,000 shares authorized; 6,705,262 and 6,301,096 shares issued and outstanding at December 31, 2014 and 2013, respectively			7				6
Accumulated other comprehensive income			92				41
Accumulated deficit			(128,533	)			(114,463	)
Total stockholders’ deficit			(128,434	)			(114,416	)
Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit		$	21,822			$	22,816

 

See accompanying notes to consolidated financial statements.

 

 

Motion Computing, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss)

(amounts in thousands, except share amounts)

 

		Years Ended December 31
		2014				2013
Revenue		$	83,298			$	91,523
Cost of revenue			64,148				66,101
Gross profit			19,150				25,422
Operating expenses:
Selling, general, and administrative			20,595				21,680
Research and development			6,078				5,350
Total operating expenses			26,673				27,030
Operating loss			(7,523	)			(1,608	)
Other income (expense):
Interest expense			(2,747	)			(2,318	)
Accretion of warrant valuation			1,833				8,701
Other expense			(402	)			(579	)
Income (loss) before income taxes			(8,839	)			4,196
Income tax expense			60				19
Net income (loss)		$	(8,899	)		$	4,177
Other comprehensive income:
Foreign currency translation adjustment			51				40
Total other comprehensive income			51				40
Total comprehensive income (loss)		$	(8,948	)		$	4,217

 

See accompanying notes to consolidated financial statements.

 

 

Motion Computing, Inc. and Subsidiaries

Consolidated Statements of Changes in Redeemable
Convertible Preferred Stock and Stockholders’ Deficit

(amounts in thousands, except share amounts)

 

		Redeemable Convertible Preferred Stock								Stockholders’ Deficit
										Common Stock								Other Accumulated Comprehensive				Accumulated				Total Stockholders’
		Shares				Amount				Shares				Amount				Income				Deficit				Deficit
Balance at December 31, 2012			16,752,229			$	80,659				6,027,876			$	6			$	1			$	(113,475	)		$	(113,468	)
Issuance of common stock pursuant to the exercise of stock options			-				-				273,220				-				-				10				10
Employee stock compensation			-				-				-				-				-				58				58
Accrued redemption premium on Series A redeemable convertible preferred stock			-				503				-				-				-				(503	)			(503	)
Accrued redemption premium on Series B redeemable convertible preferred stock			-				576				-				-				-				(576	)			(576	)
Accrued redemption premium on Series B-1 redeemable convertible preferred stock			-				345				-				-				-				(345	)			(345	)
Accretion of Series C and D redeemable convertible preferred stock issuance cost			-				1,058				-				-				-				(1,058	)			(1,058	)
Accrued redemption premium on Series C redeemable convertible preferred stock			-				2,012				-				-				-				(2,012	)			(2,012	)
Accrued redemption premium on Series D redeemable convertible preferred stock			-				739				-				-				-				(739	)			(739	)
Comprehensive income:
Net income			-				-				-				-				-				4,177				4,177
Foreign currency translation adjustment			-				-				-				-				40				-				40
Balance at December 31, 2013			16,752,229			$	85,892				6,301,096			$	6			$	41			$	(114,463	)		$	(114,416	)

 

 

Continued on following page

 

 

Motion Computing, Inc. and Subsidiaries

Consolidated Statements of Changes in Redeemable

Convertible Preferred Stock and Stockholders’ Deficit (continued)

(amounts in thousands, except share amounts)

 

 

		Redeemable Convertible Preferred Stock								Stockholders’ Deficit
										Common Stock								Other Accumulated Comprehensive				Accumulated				Total Stockholders’
		Shares				Amount				Shares				Amount				Income				Deficit				Deficit
Balance at December 31, 2013			16,752,229			$	85,892				6,301,096			$	6			$	41			$	(114,463	)		$	(114,416	)
Issuance of common stock pursuant to exercise of stock options		–				–					404,166				1			–					11				12
Employee stock compensation		–				–				–				–				–					21				21
Accrued redemption premium on Series A redeemable convertible preferred stock		–					503			–				–				–					(503	)			(503	)
Accrued redemption premium on Series B redeemable convertible preferred stock		–					576			–				–				–					(576	)			(576	)
Accrued redemption premium on Series B-1 redeemable convertible preferred stock		–					346			–				–				–					(346	)			(346	)
Accretion of Series C and D redeemable convertible preferred stock issuance cost		–					1,026			–				–				–					(1,026	)			(1,026	)
Accrued redemption premium on Series C redeemable convertible preferred stock		–					2,012			–				–				–					(2,012	)			(2,012	)
Accrued redemption premium on Series D redeemable convertible preferred stock		–					740			–				–				–					(740	)			(740	)
Comprehensive income:
Net loss		–				–				–				–				–					(8,899	)			(8,899	)
Foreign currency translation adjustment		–				–				–				–					51			–					51
Balance at December 31, 2014			16,752,229			$	91,095				6,705,262			$	7			$	92			$	(128,533	)		$	(128,434	)

 

 

See accompanying notes to consolidated financial statements.

 

 

Motion Computing, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(amounts in thousands, except per share amounts)

 

 

		Years Ended December 31
		2014				2013
Operating activities
Net income (loss)		$	(8,899	)		$	4,177
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			1,175				501
Noncash interest expense			1,140				826
Gain on sale of property and equipment			(294	)			(41	)
Noncash stock compensation expense			21				58
Noncash warrant valuation (income) expense			(1,833	)			(8,701	)
Changes in operating assets and liabilities:
Accounts receivable, net			2,041				658
Inventory, net			(642	)			1,144
Prepaid expenses and other current assets			(316	)			606
Accounts payable			2,204				(1,768	)
Accrued expenses and other liabilities			2,561				(2,126	)
Deferred revenue			920				258
Net cash used in operating activities			(1,922	)			(4,408	)
Investing activities
Purchase of property and equipment			(2,403	)			(575	)
Proceeds from sale of assets			500				-
Cash paid in connection with acquisition			-				(68	)
Capitalized software development costs			(28	)			(73	)
Other investing activities			-				58
Net cash used in investing activities			(1,931	)			(658	)
Financing activities
Payments on line of credit			(88,666	)			(5,341	)
Proceeds from line of credit			92,481				6,448
Payments on term loan			(999	)			-
Proceeds from (payment of) capital lease obligation			(16	)			49
Proceeds from debt issuance, net			-				1,949
Proceeds from exercise of stock options			12				12
Net cash provided by financing activities			2,812				3,117
Effect of foreign exchange rate on cash and cash equivalents			51				27
Net decrease in cash and cash equivalents			(990	)			(1,922	)
Cash and cash equivalents, beginning of year			2,933				4,855
Cash and cash equivalents, end of year		$	1,943			$	2,933
Supplemental disclosures of noncash investing and financing activities:
Interest paid		$	1,424			$	1,315
Cash paid for taxes		$	-			$	90

 

 

See accompanying notes to consolidated financial statements.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(amounts in thousands, except share amounts)

 

1. Description of Business

 

Motion Computing, Inc. (Motion or the Company), a Delaware corporation, is a provider of integrated mobile computing solutions, featuring products and services customized for the unique needs of its target vertical markets. Motion’s enhanced line of rugged tablet personal computers, mobile point-of-care solutions, accessories, and services is designed to increase mobile productivity while providing portability, security, power, and versatility. Founded in 2001 and headquartered in Austin, Texas, Motion sells through its global network of resellers and distributors.

 

The Company established a wholly owned subsidiary, Motion Computing Holding Company, Inc., a Delaware corporation, on March 10, 2004. The subsidiary holds the Company’s foreign subsidiaries and branches.

 

2. Summary of Significant Accounting Policies

 

a) Principles of Consolidation and Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany transactions and balances have been eliminated.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant operating losses since its inception and on February 13, 2015, the Company was notified by its senior secured creditor that it was in default with certain covenants of its loan facility. The Company did not cure the events of default. On April 17, 2015, the senior secured creditor foreclosed on the majority of the Company's assets and sold certain of those assets to an independent buyer in a private foreclosure. Certain assets of the Company that did not secure the loan facility were sold to the buyer of the foreclosed assets by the Company. As a result of the foreclosure, the Company is in the process of winding down its remaining operations. The accompanying consolidated financial statements do not include any adjustments that resulted from these actions.

 

b) Use of Estimates

 

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, depreciation, tooling amortization, financial instruments (including the warranty for redeemable convertible preferred stock), 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.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

c) Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents included $1,200 held in an interest-bearing overnight sweep account as of December 31, 2013.

 

d) Bad Debt Expense and Doubtful Account Reserves

 

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general administration expense. The change in reserve is charged to bad debt expense (income) and amounted to $237 and $(14) for the years ended December 31, 2014 and 2013, respectively. The doubtful account reserves were $239 and $5 as of December 31, 2014 and 2013, respectively.

 

e) Financial Instruments and Credit Risk

 

Financial instruments that potentially subject the Company to credit risk include cash and cash equivalents and accounts receivable from customers. Accounts receivables are generally unsecured. With respect to accounts receivables, the Company performs ongoing credit evaluations of customers and generally does not require collateral.

 

While the Company’s cash and cash equivalents are on deposit with high quality FDIC insured financial institutions, at times such deposits exceed the insured limits. The Company had cash balances in excess of federally insured limits of approximately $1,230 at December 31, 2014. The Company has not experienced any losses in such accounts.

 

Receivables are concentrated with a small number of customers. The Company maintains an allowance for doubtful accounts when deemed necessary.

 

The amounts reported for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are considered to approximate their fair values based on comparable market information available at the respective balance sheet dates and their short-term nature. The fair value of the Company’s long-term debt approximates its face value.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

f) Inventory

 

Inventory is stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The valuation of inventory requires the use of estimates regarding the amount of current inventory that will be sold and the prices at which it will be sold based on an assessment of expected orders for these products from the Company’s customers. Additionally, the estimates reflect changes in the Company’s products or changes in demand because of various factors including the market for the Company’s products, obsolescence, product discontinuation, technology changes and competition.

 

g) Property and Equipment

 

Property and equipment (P&E) are recorded at cost and depreciated over their estimated useful lives, which range from one to six years, using the straight-line method. Leasehold improvements are depreciated over the shorter of six years or the lease term. Upon retirement or sale, the cost and the accumulated depreciation of the assets retired or sold are removed from the P&E pool, and any resulting gain or loss is recognized in the period incurred. Repairs and maintenance costs are expensed as incurred if they do not significantly prolong the useful life of original P&E. The Company performs reviews for impairment of P&E whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company capitalizes eligible internal-use software development costs incurred subsequent to the completion of the preliminary project stage. Software development costs are amortized over the shorter of the expected useful life of the software or three years.

 

h) Revenue Recognition

 

Revenue includes sales of hardware, software, peripherals, and services, which include consulting, training, standard warranty, extended warranty contracts, and out-of-warranty repairs. These products and services are either sold separately or as part of a multiple-element arrangement. The Company allocates revenue from multiple-element arrangements based upon the relative fair value of the elements.

 

The Company generates revenues by selling products and services to distributors, value-added resellers, and end users. The Company’s policy is to recognize revenues when products or services have been delivered, title and risks of ownership have been transferred to the customer, persuasive evidence of an arrangement exists, prices are fixed or determinable, and collection of the resulting receivables is reasonably assured. The Company offers price protection and limited return rights to most of its distributors. Consequently, for transactions with distributors, revenue and related costs of sales are not recognized until such rights expire, which is upon receiving notification from distributors that products have been resold. As of December 31, 2014 and 2013, the cost of unsold products at distributors totaled $1,416 and $572, respectively.

 

Revenue from extended warranty contracts is recorded as deferred revenue and recognized over the term of the contract, or when the service is completed. Revenue from consulting and training contracts, provided that there are no post-delivery obligations and the price is fixed or determinable, is recorded upon completion and delivery of consulting services.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

i) Standard Warranty

 

The Company accounts for the costs that it estimates will be incurred under its standard warranty, which is typically one year, at the time of sale. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rate of warranty claims on those units, and the cost per claim to satisfy the Company’s warranty obligation. As these factors are affected by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liabilities at the end of each reporting period and adjusts the amounts as necessary.

 

j) Shipping Costs

 

The Company’s shipping and handling costs associated with product delivery and repair are included in cost of revenue for all periods presented.

 

k) Research and Development

 

Costs incurred in the research and development of the Company’s products are expensed as incurred.

 

l) Advertising Expenses

 

Advertising expenses consist primarily of costs, including those of public relations activities and trade shows, incurred promoting the Company’s products. The Company expenses all advertising costs as incurred, and net advertising expenses were $1,649 and $1,231 for the years ended December 31, 2014 and 2013, respectively.

 

m) Stock-Based Compensation

 

The Company follows the fair value recognition provisions in accounting for equity instruments exchanged for employee services. Share-based compensation cost is measured at the grant date based on the calculated fair value of the award. Stock-based payments to nonemployees are charged to operating expense at the fair value of the option awards granted.

 

n) Income Taxes

 

The Company accounts for its income taxes in accordance with the liability method under which deferred tax assets and liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established as considered necessary to reduce deferred tax assets if it is likely that some or all of the deferred tax assets will not be realized.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

o) Recent Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements.  The Company does not believe that there are any new accounting pronouncements that have been issued that might have a material impact on its consolidated financial position or results of operations.

 

In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs", which changes the presentation of debt issuance costs in financial statements. Under the ASU, such costs are presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. Early adoption is allowed for all entities for financial statements that have not been previously issued. The guidance is to be applied retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). ASU 2015-03 will be effective for the Company beginning in fiscal 2016. The Company is currently evaluating the impact that the adoption of ASU 2015-03 may have on the Company's consolidated financial statements.

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (ASU 2015-02). The objective of ASU 2015-02 is to modify the consolidation requirements of Topic 810 to ensure that reporting entities do not consolidate other legal entities in situations where deconsolidation actually more accurately represents operational and economic results. Among other changes, the amendments to ASC 810 include lessening the relevance on fees paid to a decision-maker or service provider and the related party tiebreaker test. The amendments are effective for private business entities for fiscal years, and for interim periods within those fiscal years beginning after December 15, 2016. This ASU may be adopted using a full retrospective approach or a modified retrospective approach by recording a cumulative effect adjustment to equity as of the beginning of the fiscal year of adoption. ASU 2015-02 will be effective for the Company beginning in 2017. The Company is currently evaluating the impact that the adoption of ASU 2015-02 may have on the Company's consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, "Revenue Recognition - Construction-Type and Production-Type Contracts”. The core principle of ASU 2014-09 is that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable users of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The Company will also be required to disclose information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in 2018; however, a delay in the effective date is currently being considered by the FASB, which the Company expects will result in at least a one year deferral. The FASB may also permit companies to adopt ASU 2014-09 early, but not before the original public company effective date (that is, annual periods beginning after December 15, 2016). The Company is currently evaluating the impact that the adoption of ASU 2014-09 may have on the Company’s consolidated financial statements.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08), which changes the requirements for reporting discontinued operations in Subtopic 205-20 “Presentation of Financial Statements - Discontinued Operations.” The ASU changes the definition of discontinued operations by limiting discontinued operations reporting to disposals that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. Under current U.S. GAAP, many disposals, some of which may be routine in nature and not representative of a substantive change in an entity’s strategy, are reported in discontinued operations. ASU 2014-08 requires expanded disclosures for discontinued operations designed to provide users of financial statements with more information about the assets, liabilities, revenues, expenses and cash flows related to discontinued operations. ASU 2014-08 also requires an entity to disclose the pretax profit or loss (or change in net assets for a not-for-profit entity) of an individually significant component of an entity that does not qualify for discontinued operations reporting. The amendments in ASU 2014-08 are effective prospectively for fiscal years, and interim periods, beginning after December 15, 2014. ASU 2014-08 will be effective for the Company beginning in 2015 and the Company will evaluate each divestiture to determine the appropriate presentation and disclosure requirements associated with the Company's consolidated financial statements.

 

3. Inventory

 

Inventory consists of the following at December 31:

 

		2014				2013
Raw materials		$	1,590			$	1,360
Finished goods			3,398				3,830
Channel inventory			1,416				572
Total		$	6,404			$	5,762

 

Substantially all of the Company’s inventory is consigned to its fulfillment and service partners, except for channel inventory. Channel inventory represents inventory at distributors for transactions in which revenue and related costs of sales are not recognized.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

4. Property and Equipment

 

Property and equipment consist of the following at December 31:

 

		Estimated Useful Life
		(Years)				2014				2013
Evaluation equipment		1				$	4,846			$	4,701
Production tooling		2					4,287				2,412
Software		3					2,089				2,011
Furniture, fixtures, and equipment		3–6					922				877
							12,144				10,001
Accumulated depreciation and amortization							(10,176	)			(9,112	)
						$	1,968			$	889

 

The Company’s management reviews the carrying value of its property and equipment at each reporting period to determine whether the carrying value of the property and equipment is greater than its fair value. In 2013, the Company’s management determined that the carrying value of certain software exceeded its fair value because the software product was not commercially viable. The Company recorded a $96 impairment charge as a result of this determination. The Company’s management determined that no impairment charge was necessary in the year ended December 31, 2014.

 

5. Debt

 

The following table summarizes the Company’s long-term debt at December 31:

 

		2014				2013
Current and long-term debt (in order of liquidation preference):
$12.5 million revolving line of credit, at the greater of prime plus 2.75% or 6.25% for formula borrowings and at the greater of prime plus 3.00% or 6.5% for non-formula borrowings with principal due on April 1, 2016, and interest due monthly.		$	10,610			$	-
$10 million revolving line of credit, at the greater of prime plus 2.75% or 6.0% with principal due on April 1, 2016, and interest due monthly.			-				6,795
$7 million issued on December 27, 2013, at 12% interest, with a term of 48 months. Interest paid monthly for the first 15 months and thereafter monthly payments equal to $248 for the following 33 months, with the unamortized balance plus a terminal fee of 16% of the original principal due on December 31, 2020.			6,001				7,000
$3 million notes convertible to preferred stock issued on December 22, 2008, at 10% with principal and interest due on January 1, 2017.			3,000				3,000
$3 million notes convertible to preferred stock issued on December 22, 2008, and $3 million notes convertible to preferred stock issued on February 27, 2009 and March 30, 2009, at 10% with the notes balance plus interest due on January 1, 2017.			6,196				6,196
			25,807				22,991
Terminal fee			576				148
Less current portion			(2,564	)			(1,740	)
Long-term interest payable			5,063				4,305
Total long-term debt and accrued interest in default		$	28,882			$	25,704

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

On March 8, 2010, the Company entered into a loan and security agreement with a commercial bank to provide a revolving line of credit of up to $10 million for working capital purposes (2010 Revolving Line of Credit). The 2010 Revolving Line of Credit was scheduled to expire on April 1, 2016, unless extended by mutual agreement.

 

Borrowings under the 2010 Revolving Line of Credit bore interest at the greater of 1.75% above the prime rate or 5.0%, or the greater of 2.75% above the prime rate or 6.0%, under certain conditions related to the ratio of borrowing to cash balances. For the years ended December 31, 2014 and December 31, 2013 the interest rate was 6.0% and 5.0%, respectively. The 2010 Revolving Line of Credit agreement required that the Company to comply with certain financial and reporting covenants. Outstanding borrowings under the 2010 Revolving Line of Credit were collateralized by substantially all of the Company’s assets and were senior to all other Company debt.

 

On April 30, 2014, the Company amended the 2010 Revolving Line of Credit to temporarily include a non-formula advance of up to $4 million and waive certain financial covenants. The non-formula line of credit provided an additional $4 million for working capital purposes.

 

On September 12, 2014, the Company entered into a loan and security agreement with a commercial bank to provide a revolving line of credit of up to $12.5 million for working capital purposes (2014 Revolving Line of Credit). Proceeds from the 2014 Revolving Line of Credit were used to retire the 2010 Revolving Line of Credit. The 2014 Revolving Line of Credit includes a non-formula advance provision of up to $2.5 million and the 2014 Revolving Line of Credit matures on April 1, 2016, unless extended by mutual agreement.

 

Borrowings under the 2014 Revolving Line of Credit associated with formula borrowings bear interest at the greater of 2.75% above the prime rate or 6.25% and non-formula borrowings at the greater of 2.75% above the prime rate or 6.5%. The 2014 Revolving Line of Credit agreement requires that the Company comply with certain financial and reporting covenants. Outstanding borrowings under the 2014 Revolving Line of Credit are collateralized by substantially all of the Company’s assets and are senior to all other Company debt.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

On February 13, 2015, the Company was notified by its senior secured creditor that it was in default with certain covenants of the 2014 Revolving Line of Credit. The Company did not cure the events of default. On April 17, 2015, the senior secured creditor foreclosed on the majority of the Company's assets and sold certain of those assets to an independent buyer in a private foreclosure. Certain assets of the Company that did not secure the 2014 Revolving Line of Credit were sold to the buyer of the foreclosed assets by the Company. As a result of the foreclosure, the Company is in the process of winding down its remaining operations.

 

On December 27, 2012, the Company entered into a note purchase agreement with certain investors to provide a $7 million term loan (the 2012 Term Loan). The 2012 Term Loan has a term of 48 months, commencing on December 27, 2012, with an annual fixed interest rate of 12%. The 2012 Term Loan provided up to $5 million to the Company for working capital and other purposes as of December 27, 2012, with an additional $2 million available after March 27, 2013. On December 27, 2012, the Company used $2.8 million of the proceeds from the 2012 Term Loan to repay in full the outstanding balance on a then-existing term loan. On March 28, 2013, the 2012 Term Loan provided an additional $2 million for working capital and other purposes.

 

During each of the first 12 months of the term of the 2012 Term Loan, the Company was required to pay interest on the outstanding balance. Beginning in the 13th month of the term of the 2012 Term Loan, the Company was required to pay interest and principal for a 36-month period, consisting of principal and interest. The remaining unamortized balance of the 2012 Term Loan plus 9% of the original principal was due in the 48th month of the term.

 

On December 31, 2013, the Company amended the 2012 Term Loan to extend the interest-only term to 15 months. Beginning in the 16^th month of the term of the 2012 Term Loan, the Company was required to pay interest and principal for a 33-month period, with a monthly payment of $248 consisting of principal and interest. The remaining unamortized balance of the 2012 Term loan plus 16% of the original principal was due in the 48^th month of the term. On March 20, 2014, the Company amended the 2012 Term Loan again to revise the monthly payment amounts for months 16 through 48. Beginning in the 16^th month of the term of the 2012 Term Loan, the Company was required to pay interest and principal for a 3-month period, with a monthly payment of $124 consisting of principal and interest. Beginning in the 19^th month of the term of the 2012 Term Loan, the Company was required to pay interest and principal for a 30-month period, with a monthly payment of $262 consisting of principal and interest. The remaining unamortized balance of the 2012 Term Loan plus 20% of the original principal was due in the 48^th month of the term. The 2012 Term Loan was not repaid in accordance with its terms on its maturity date, December 27, 2014.

 

The 2012 Term Loan requires the Company to comply with certain covenants related to financial performance, reporting, and indebtedness. Outstanding borrowings under the 2012 Term Loan are collateralized by substantially all of the Company’s assets, subordinate to the 2014 Revolving Line of Credit and senior to all convertible notes.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

On December 22, 2008, pursuant to a purchase agreement between the Company and certain investors (Convertible Note Purchase Agreement), the Company issued $6,125 in aggregate principal amount of subordinated convertible notes with a fixed interest rate of 10%.

 

On February 27, 2009 and March 30, 2009, the Company completed the second round of funding under the Convertible Note Purchase Agreement. This funding resulted in the issuance and sale of $3,071 in aggregate principal amount of subordinated convertible notes with a fixed interest rate of 10%. All of the subordinated convertible notes issued pursuant to the Convertible Note Purchase Agreement (Convertible Notes) mature on January 1, 2017.

 

The Convertible Notes are subordinate to the 2014 Revolving Line of Credit and the 2012 Term Loan. The Convertible Note Purchase Agreement requires the Company to comply with the covenants of the 2014 Revolving Line of Credit.

 

The Convertible Notes can be converted into the Company's Series D Redeemable Convertible Preferred Stock (Series D Preferred Stock) at the option of the note holder upon occurrence of a qualified financing, initial public offering, liquidation event, or an equity financing. The conversion price of the Convertible Notes in the case of a qualified financing is equal to 75% of the lowest price paid for such qualified securities. If an initial public offering of securities closes, the conversion price will be equal to 75% of the price per share that is sold to the public. In the case of an equity financing, the conversion price will be 75% of the lowest price per share paid for such equity securities. At December 31, 2013, the estimated intrinsic value of the beneficial conversion feature associated with the discounted conversion prices exceeded the value of the debt proceeds allocated to the Convertible Notes. If one of the above events occurs, the beneficial conversion option will be recorded as an additional discount on the value of the Convertible Notes.

 

In conjunction with the Convertible Notes issuance, the Company granted a warrant to purchase Series D Preferred Stock at a 25% discount to each of the investors. Warrant coverage was equal to the amount of the Convertible Notes plus accrued interest.

 

All of the long-term debt and accrued interest has been classified as a current liability as a result of the default and foreclosure under the 2014 Revolving Line of Credit.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

6. Deferred Revenue

 

Fees from extended warranty contracts are recorded as deferred revenue and subsequently are recognized ratably over the term of the contract. The Company provides for an estimate of costs that will be incurred under its standard warranty contemporaneously with the recognition of revenue for the associated products sold. Costs associated with service and extended warranty contracts are recognized as incurred.

 

Changes in the Company’s deferred revenue are as follows:

 

		December 31
		2014				2013
Deferred revenue, beginning of year		$	9,390			$	9,131
Revenue deferred and costs accrued for new warranties			7,510				7,117
Service obligations fulfilled			(2,117	)			(1,975	)
Amortization of deferred revenue			(4,473	)			(4,883	)
Deferred revenue, end of year			10,310				9,390
Current portion			4,944				4,471
Long-term portion		$	5,366			$	4,919

 

7. Redeemable Convertible Preferred Stock and Warrants

 

On February 12, 2010, February 25, 2010, and April 14, 2010, the Company issued a cumulative total of 104,132 shares of its Series D Preferred Stock to qualified investors at a price per share of $5.7536. In conjunction with this issuance of Series D Preferred Stock, the Company issued warrants to purchase 104,132 shares of Series D Preferred Stock at a price of $4.3152 per share for a warrant price per share of $0.01. Proceeds from the issuance of the Series D Preferred Stock and warrants were $600. The warrants were exercisable immediately. The Company recorded the value of the warrants at fair value of $4.87 per share. The fair value of the warrants was determined using the Black-Scholes option pricing model with a dividend rate of 0%, risk-free rate of 0.47%, and volatility of 60.77%. These warrants expired on December 22, 2014.

 

On December 22, 2009, the Company issued 971,614 shares of Series D Preferred Stock at $5.7536 per share. In conjunction with the issuance of the Series D Preferred Stock, the Company issued warrants to purchase an equal number of shares of Series D Preferred Stock at a price of $4.3152 per share for a warrant price per share of $0.01. The gross proceeds of the sale of Series D Preferred Stock and warrants were $5,600. The warrants were exercisable immediately. The Company recorded the warrants at fair value of $4.87 per share. The fair value of the warrants was determined using the Black-Scholes option pricing model with a dividend rate of 0%, risk-free rate of 0.47%, and volatility of 60.77%. As of December 31, 2014, there were 1,605,289 shares of Series D Preferred Stock outstanding, and there were no warrants to purchase shares of Series D Preferred Stock outstanding.

 

In July 2008, the Company authorized the issuance of 9,400,000 shares of Series B-1 Redeemable Convertible Preferred Stock (Series B-1 Preferred Stock). In conjunction with the purchase of shares of Series D Preferred Stock on July 29, 2008, the Company granted each investor purchasing Series D Preferred Stock and holding one or more shares of existing preferred stock (Series A, B, or C Preferred Stock) a conversion provision whereby such investor could exchange shares of such existing preferred stock for shares of Series B-1 Preferred Stock.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

The Series A Redeemable Convertible Preferred Stock, Series B Redeemable Convertible Preferred Stock, Series B-1 Redeemable Convertible Preferred Stock, Series C Redeemable Convertible Preferred Stock, and Series D Redeemable Convertible Preferred Stock (in aggregate, Preferred Stock) are described further in this section. A total of 37,200,000 common shares of the Company's common stock are reserved for issuance upon the conversion of the Preferred Stock.

 

The following is a summary of Preferred Stock at December 31, 2014:

 

																		Adjustment to Carrying Value
Series		Shares Authorized				Shares Issued and Outstanding				Liquidation Value 2014				Per Share Conversion Rate				Accretion of Issue Cost Through December 31 2014				Accrual of Redemption Premium Through December 31 2014
Series A			5,800,000				5,264,992			$	6,286			$	1.19			$	54			$	5,426
Series B			5,600,000				3,445,066				7,200				2.09				55				5,737
Series B-1			9,400,000				2,065,706				4,317				2.09				-				3,510
Series C			4,600,000				4,371,176				25,150				5.75				64				20,178
Series D			11,800,000				1,605,289				18,472				11.51				107				4,036

 

The Preferred Stock has the following characteristics:

 

Dividends

 

Subsequent to December 17, 2004, the holders of all Preferred Stock classes are entitled to receive noncumulative dividends at a rate of 8% of the original issuance price per share per annum, when and if declared by the Board of Directors (the Board). As of December 31, 2014, no dividends had been declared.

 

Voting

 

The holders of the Preferred Stock (Preferred Stockholders) are entitled to vote, together with the holders of common stock (Common Stockholders). Each Preferred Stockholder is entitled to the number of votes equal to the number of shares of common stock into which each preferred share is convertible at the time of such vote.

 

Common Stockholders, voting as a single class, are entitled to elect two of the six members of the Company's Board. The holders of the Series A Preferred Stock are entitled to elect one member of the Board. The holders of Series D Preferred Stock are entitled to elect two members of the Board. Common Stockholders and Preferred Stockholders, voting together as a single class (on an as-if-converted basis), are entitled to elect the remaining members of the Board.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

Preferred Stock Protective Provisions

 

Provided that at least 3,800,000 shares of Preferred Stock are then outstanding, the Company is required to obtain approval by the majority of the Preferred Stockholders (voting as a single class on an as-if-converted basis) on the following matters: (i) modify the number of members of the Board, unless such change is unanimously approved by the Board; (ii) amend the Company’s Certificate of Incorporation, its Bylaws, or any action in a manner that would materially alter or change any of the powers, preferences, privileges, or rights of the Preferred Stock; (iii) issue any other equity securities ranking senior to or on a parity with the Preferred Stock; (iv) sell all or substantially all of the Company’s assets or merger with any other entity; (v) increase or decrease the authorized number of shares of common stock or Preferred Stock; (vi) redeem, purchase, or acquire any shares of common stock (with customary exceptions) or Preferred Stock outside of the redemption provisions; (vii) declare or pay dividends to the Common Stockholders; (viii) allow a subsidiary to sell any stock; (ix) borrow an amount in excess of $2,000 or any amounts outside of the ordinary course of business; (x) make any loans to executive officers in excess of $100 or loans outside of the ordinary course of business; (xi) dissolve, liquidate, or wind up the Company; or (xii) increase the compensation of any of the five most highly compensated employees by more than 15% annually.

 

Conversion

 

Each share of Preferred Stock, at the option of the holder, is convertible at any time into a number of fully paid shares of common stock as determined by dividing the applicable Preferred Stock’s issuance price by the conversion price in effect at the time of conversion. Conversion is automatic immediately upon (i) the closing of a firm commitment underwritten public offering in which the pre-money valuation of the Company is at least $290,301 and the aggregate proceeds raised exceed $30,000 or (ii) the written consent or agreement of the holders of at least 55% of the then-outstanding shares of Series A, Series B, Series B-1, and Series C Preferred Stock and the holders of a majority of the Series D Preferred Stock.

 

Liquidation Preference

 

In the event of any liquidation, dissolution, or winding up of the affairs of the Company, the holders of the then-outstanding Series D Preferred Stock are entitled to receive, prior and in preference to all other classes of stock, an amount equal to two times the Series D Preferred Stock original issue price of $5.7536 per share plus declared but unpaid dividends.

 

The holders of the Series C and Series B-1 Preferred Stock are entitled to receive, prior and in preference to the Series A, Series B, and common stockholders, an amount equal to $5.7536 and $2.09, respectively, plus declared but unpaid dividends. The holders of the Series B and Series A shall be entitled to receive, on a pari passu basis, prior and in preference to all common stock, an amount equal to $2.09 and $1.194, respectively, per share. The remaining assets available for distribution are then to be distributed among the holders of common stock and Preferred Stock on a pro rata, as-converted into common stock, basis.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

Redemption

 

At any time after December 22, 2014, upon the written request of the majority of the Preferred Stockholders, the Company is required to redeem the Preferred Stock in three annual installments. The redemption amount will equal the original issuance price of the Preferred Stock plus an additional amount of 8% per year (referred to as the Redemption Premium). The carrying value of the Preferred Stock is being accreted up to the redemption amount at the date of redemption.

 

Warrants

 

The Company issued warrants to purchase shares of its redeemable preferred stock. The Company classified as a liability the fair value of these warrants because the terms of the warrants required the Company to transfer assets to the holders of the warrants. Changes in the fair value of these warrants were recognized as increases or decreases in interest expense in each reporting period.

 

The fair value of warrant liabilities are determined in accordance with the criteria established by Accounting Standards Codification (ASC) 820, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands on required disclosures regarding fair value measurements. ASC 820 inputs are referred to as assumptions that market participants would use in pricing the asset or liability. The use of inputs in the valuation process is categorized into a three-level fair value hierarchy. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities the Company has the ability to access. Level 2 inputs utilize inputs other than quoted prices in active markets for identical assets or liabilities. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The fair value of the warrant liabilities was estimated using an income approach discounted cash flow model that requires use of management assumptions regarding future performance and cost of equity and debt. The warrant liabilities were therefore all classified as Level 3 within the fair value framework. At December 31, 2013, the fair value of the warrant liabilities is included in a separate line item within the consolidated balance sheet.

 

For the years ended December 31, 2014 and 2013, the Company recorded $1,833 and $8,701, respectively, in other income, for the change in the fair value of these warrants.

 

8. Common Stock and Stock-Based Compensation

 

A total of 53,200,000 shares have been designated as common stock, at a par value of $0.001 per share. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board, subject to the priority rights of the Preferred Stock.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

Stock-based compensation expense for all employee share-based payment awards granted after January 1, 2006, is based upon the grant date fair value. The Company recognizes these compensation costs net of an estimated forfeiture rate, and recognizes these compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting period of four years.

 

The Company recognized $22 and $58 of stock-based compensation during the years ended December 31, 2014 and 2013, respectively.

 

Stock-Based Compensation Plan

 

The Company adopted its 2001 Stock Option Plan (the Plan) under which a maximum of 10,466,000 shares of common stock are available for grant to employees, directors, and service providers. Options granted under the Plan may be incentive stock options or non-statutory stock options. The Board determines the term of the option, option price, number of shares for which each option is granted, whether restrictions will be imposed on the shares subject to the option, and the rate at which each option is exercised. Generally, options become 25% vested after one year of service. The remaining 75% vests on a pro rata, monthly basis over the remaining three years of the service period. The term of each option is ten years.

 

The fair value of common stock options granted during the years ended December 31 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

 

	2014	2013
Volatility	65%	65%
Dividend yield	0%	0%
Risk-free interest rate	0.65%-1.50%	0.65%-1.50%
Expected life (in years)	3-10	3-10

 

For option grants made during the years ended December 31, 2014 and 2013, the expected term was calculated based upon historical employee data, including employee exercises and cancellations. Volatility was determined using the volatility of comparable publicly traded entities.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

The following table summarizes the activity of the Company’s stock option plan:

 

		Number of Shares			Exercise Price		Weighted- Average Exercise Price				Aggregate Intrinsic Value
Outstanding – December 31, 2012			7,035,000		$0.03–$3.96			0.40				570
Granted			3,425,000		$0.03–$0.03			0.03				-
Exercised			(273,000	)	$0.03–$0.50			0.04				-
Forfeited			(3,885,000	)	$0.03–$3.96			0.64				-
Outstanding – December 31, 2013			6,302,000		$0.03–$3.96			0.06				-
Granted			422,000		$0.03–$0.03			0.03				-
Exercised			(404,000	)	$0.03–$0.03			0.03				-
Forfeited			(979,000	)	$0.03–$6.50			0.64				-
Outstanding – December 31, 2014			5,341,000		$0.03–$3.96			0.06				-

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been received by the option holders had all option holders exercised their options on December 31, 2014 and 2013. The aggregate intrinsic value is determined by the fair value of the Company’s common stock and the per-share grant price. There was no intrinsic value for employee options exercised during the year ended December 31, 2013. The total fair value of employee options vested during the years ended December 31, 2014 and 2013, was none and $49, respectively.

 

The following table summarizes information about stock options outstanding at December 31, 2014:

 

	Options Outstanding																Options Exercisable
	Range of Exercise Price				Number Outstanding				Weighted-Average Remaining Contractual Life (in Years)				Weighted-Average Exercise Price				Number Exercisable				Weighted-Average Exercise Price
		$0.03				5,240,000				4.35			$	0.03				4,434,000			$	0.03
	$0.10–$3.45					64,000				3.40				0.70				64,000				0.70
		$3.93				26,000				1.88				3.93				26,000				3.93
		$3.96				11,000				2.59				3.96				11,000				3.96
						5,341,000												4,535,000

 

As of December 31, 2014, $13 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of less than one year.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

9. Income Taxes

 

The components of the provision for income taxes attributable to continuing operations are as follows for the years ended December 31:

 

		2014				2013
Current:
Federal		$	–			$	–
Foreign			55				14
State			5				5
Total current			60				19
Deferred:
Federal		–				–
Foreign		–				–
State		–				–
Total deferred		–				–
Total provision for income taxes		$	60			$	19

 

As of December 31, 2014, the Company had federal net operating loss carryforwards of approximately $81,396 and research and development credit carryforwards of approximately $2,508. These carryforwards will begin to expire in 2022 if not utilized.

 

Utilization of the net operating losses and tax credits may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and research and development credits before utilization.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes as of December 31 are as follows:

 

		2014				2013
Deferred tax assets:
Current deferred tax assets:
Deferred revenue		$	165			$	1,130
Accrued liabilities			896				1,010
Gross current deferred tax assets			1,061				2,140
Valuation allowance			(1,061	)			(2,140	)
Net current deferred tax assets			-				-
Noncurrent deferred tax assets:
Net operating loss			28,489				26,298
R&D and other credit carryforwards			2,508				2,886
Depreciation and amortization			150				177
Deferred revenue			156				384
Deferred compensation			-				450
Gross noncurrent deferred tax assets			31,303				30,195
Valuation allowance			(31,303	)			(30,195	)
Net noncurrent deferred tax assets		$	–			$	–

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

The Company has established a valuation allowance equal to the net deferred tax assets due to uncertainties regarding the realization of deferred tax assets based on the Company’s lack of earnings history. During the years ended December 31, 2014 and 2013, the valuation allowance increased by approximately $30 and $1,759, respectively, primarily due to operations.

 

The Company’s provision (benefit) for income taxes attributable to continuing operations differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 34% to income before income taxes for the years ended December 31 primarily as a result of the following:

 

		2014				2013
Tax (benefit) at statutory rate of 34%		$	(3,005	)		$	1,427
State taxes, net of federal benefit			(10	)			(54	)
Warrants			(623	)			(2,958	)
Permanent differences and other items			3,668				(155	)
Deferred assets not benefited			30				1,759
		$	60			$	19

 

The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and France. The Company’s income tax returns are for the years prior to 2011 are no longer subject to U.S. federal, state, and local, or non-U.S. income tax examination by taxing authorities. The tax years 2011 through 2014 remain open to examination by all the major taxing jurisdictions to which the Company is subject, although the Company is not currently under examination by any major taxing jurisdiction.

 

The Company adopted the provisions of ASC 740, Income Taxes, on January 1, 2009. As a result of the implementation of ASC 740, the Company recognized no changes in the liability for unrecognized tax benefits and no adjustments to the January 1, 2009, balance of retained earnings. The Company has recognized no liabilities for unrecognized tax benefits for the years ended December 31, 2014 and 2013.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

10. Employee Savings Plan

 

In 2002, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a tax-deferred basis. Company contributions to the plan may be made at the discretion of the Board. The Company contributions in 2014 were less than one thousand dollars, and were $81 in 2013.

 

11. Commitments, Contingencies, and Concentrations

 

a)

Premises

 

The Company leases facilities in Austin, Texas. In December 2014, the Company entered into an extension of its lease agreement to July 31, 2019 and to reduce the amount of occupied square footage effective July 31, 2015. The renewal's initial annual lease commitment is $627, the lease maturity date is July 31, 2019, and the related payments are included in the minimum annual payments table shown below. Rent expense for the years ended December 31, 2014 and 2013 was $740 and $744, respectively.

 

Future minimum lease payments under all operating leases and capital leases for each of the five succeeding years and thereafter are as follows:

 

		Operating				Capital
		Leases				Leases
Year ending December 31
2015		$	666			$	28
2016			632				28
2017			644				28
2018			656				7
2019 and thereafter			501				-
Total contractual cash obligations		$	3,099			$	91
Less amount representing interest and taxes						$	(24	)
Present value of minimum lease payments							67
Less current portion							(16	)
Capital lease obligation, net of current portion						$	51

 

b)

Purchase commitment

 

In the normal course of operations, the Company enters into purchase commitments for inventory and other goods and services.

 

c)

Litigation

 

The Company is subject to legal proceedings and claims in the ordinary course of business.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

Since the foreclosure sale of substantially all of the Company's assets, three companies have filed lawsuits against the Company and the buyer of certain of the Company's assets for alleged infringement of the claimant’s patent by the Company's products. The buyer of certain of the Company's assets believes the claims are without merit and that it is not liable for claims arising prior to the acquisition, and intends to pursue its defenses against those claims. The buyer of certain of the Company's assets subsequently settled one of the lawsuits by entering into a license agreement with a modest one-time payment.

 

12. Financial Instruments and Credit Risk

 

a) Interest rate risk

 

At December 31, 2014, the 2014 Revolving Line of Credit had a cost of funds fee interest rate with a variable component based on the Wall Street Journal’s prime rate. If the Company borrowed 100% of the available line for a full year and the bank’s prime lending rate increased by 1%, the Company’s costs would increase by approximately $125.

 

b) Foreign exchange risk

 

The Company’s revenues are denominated in seven currencies, U.S. Dollar, Swiss Francs, Euro, Canadian Dollar, British Pound, Australian Dollar and New Zealand Dollar. The majority of the Company’s expenses are in United States dollars, however, there are significant operating expenses, principally salaries for foreign based employees, denominated in their local currencies. Consequently, the Company is subject to foreign exchange risk. The Company marks to market all receivables denominated in foreign currency monthly, using current rates. Due to unfavorable fluctuations in foreign exchange rates, the Company incurred $325 of foreign exchange losses for the three months ended March 31, 2015.

 

c) Credit risk

 

Information regarding the Company’s accounts receivable credit risk is as follows:

 

As of December 31,		Accounts Receivable (in millions)				Number of Customers with Receivable Balance >10% of Total Receivables				Customer Share as a Percent of Total Receivables				Percentage Share of Total Receivables
2014		$	10.6				1				36	%			36	%
2013		$	5.8				1				40	%			40	%

 

The receivables representing 36% of the accounts receivable balance at December 31, 2014 were subsequently collected.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

13. Segmented Information

 

The Company operates in one segment, the sale of rugged mobile tablet PC systems. Approximately 55% and 51% of the Company’s revenue for 2014 and 2013, respectively, was derived from sales in the United States.

 

The distribution of revenue by country is segmented as follows:

 

		Years ended December 31,
		2014				2013
Revenue by country:
United States		$	45,370			$	46,804
All other countries			37,428				44,719
		$	83,298			$	91,523

 

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 year ended December 31, 2014, the Company had one customer that had sales that were greater than 10% of total revenue located in the United States of America. For the year ended December 31, 2013, the Company had three customers located in the United States of America that had sales that were greater than 10% of total revenue. The percentages of total revenue from these customers are as follows:

 

Fiscal Year		Total Revenue (in millions)				Number of Customers with Revenue of 10% or greater of Total Revenue				Customer Share as a Percent of Total Revenue				Percentage Share of Total Revenue
2014		$	83.3				1				44	%			44	%
2013		$	91.5				3				53	%			53	%

 

 

No more than 10% of the Company’s assets were located in any country, other than the United States, during each of the years ended December 31, 2014 and 2013.

 

14. Related-Party Transactions

 

The Company outsources manufacturing and certain warranty services for certain of its products to a Series A Preferred Stock investor. The total expenses for these services amounted to approximately $11,487 and $11,942 for the years ended December 31, 2014 and 2013, respectively. Included in accounts payable and accrued liabilities are amounts due to this investor of approximately $1,633 and $1,422 at December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, this investor held approximately 48% of the Series A Preferred Stock.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

15. Subsequent Events

 

On February 13, 2015, the Company was notified by its senior secured creditor that it was in default with certain covenants of its loan facility. The Company did not cure the events of default. On April 17, 2015, the senior secured creditor foreclosed on the majority of the Company's assets and sold certain of those assets to an independent buyer in a private foreclosure. Certain assets of the Company that did not secure the loan facility were sold to the buyer of the foreclosed assets by the Company. As a result of the foreclosure, the Company is in the process of winding down its remaining operations.

 

 

 

28 

Exhibit 99.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited Consolidated Financial Statements   Motion Computing, Inc. and Subsidiaries As of March 31, 2015 and December 31, 2014 Three Months Ended March 31, 2015 and 2014

 

 

 

Motion Computing, Inc. and Subsidiaries

Unaudited Consolidated Financial Statements

As of March 31, 2015 and December 31, 2014

and Three Months Ended March 31, 2015 and 2014

 

 

 

 

 

 

Contents

 

Consolidated Financial Statements

Consolidated Balance Sheets	2
Consolidated Statements of Operations and Comprehensive Loss	3
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	5

 

 

 

Motion Computing, Inc. and Subsidiaries

Consolidated Balance Sheets 

(amounts in thousands, except share amounts)

 

		March 31				December 31
		2015				2014
Assets		(Unaudited)				(Audited)
Current assets:
Cash and cash equivalents		$	373			$	1,943
Accounts receivable, net of allowance for doubtful accounts of $239 and $5 at March 31, 2015 and December 31, 2014 , respectively			6,736				10,565
Inventory			6,418				6,404
Prepaid expenses and other current assets			248				453
Total current assets			13,775				19,365
Other assets			402				489
Property and equipment, net			1,651				1,968
Total assets		$	15,828			$	21,822
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
Current liabilities:
Accounts payable		$	11,702			$	11,691
Accrued expenses and other liabilities			5,164				5,663
Deferred revenue			4,919				4,944
Long-term debt and accrued interest in default			29,276				31,446
Total current liabilities			51,061				53,744
Deferred revenue			4,636				5,366
Other long-term liabilities			46				51
Total liabilities			55,743				59,161
Commitments and contingencies			-				-
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $0.001 par value; 5,800,000 shares authorized; 5,264,992 shares issued and outstanding at March 31, 2015 and December 31, 2014 ; liquidation preference of $6,286,000			11,837				11,711
Series B redeemable convertible preferred stock, $0.001 par value; 5,600,000 shares authorized; 3,445,066 shares issued and outstanding at March 31, 2015 and December 31, 2014 ; liquidation preference of $7,200,000			13,082				12,938
Series B-1 redeemable convertible preferred stock, $0.001 par value; 9,400,000 shares authorized, 2,065,706 shares issued and outstanding at March 31, 2015 and December 31, 2014 ; liquidation preference of $4,317,000			7,914				7,828
Series C redeemable convertible preferred stock, $0.001 par value; 4,600,000 shares authorized; 4,371,176 shares issued and outstanding at March 31, 2015 and December 31, 2014 ; liquidation preference of $25,150,000			45,831				45,328
Series D redeemable convertible preferred stock, $0.001 par value; 11,800,000 shares authorized; 1,605,289 shares issued and outstanding at March 31, 2015 and December 31, 2014 ; liquidation preference of $18,472,000			13,475				13,290
Total redeemable convertible preferred stock			92,139				91,095
Stockholders’ deficit:
Common stock, $0.001 par value; 53,200,000 shares authorized; 6,705,262 shares issued and outstanding at March 31, 2015 and December 31, 2014			7				7
Accumulated other comprehensive income (loss)			130				92
Accumulated deficit			(132,191	)			(128,533	)
Total stockholders’ deficit			(132,054	)			(128,434	)
Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit		$	15,828			$	21,822

 

See accompanying notes to consolidated financial statements.

 

 

Motion Computing, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Loss

(amounts in thousands, except share amounts)

 

		Three Months Ended March 31,
		2015				2014
		(unaudited)
Revenue		$	15,018			$	19,563
Cost of revenue			11,137				15,601
Gross profit			3,881				3,962
Operating expenses:
Selling, general, and administrative			4,347				5,444
Research and development			846				1,452
Total operating expenses			5,193				6,896
Operating loss			(1,312	)			(2,934	)
Other expenses:
Interest expense			(771	)			(660	)
Other expense			(528	)			(108	)
Loss before income taxes			(2,611	)			(3,702	)
Income tax expense			7				6
Net loss		$	(2,618	)		$	(3,708	)
Other comprehensive (income) loss:
Foreign currency translation adjustment			38				(18	)
Total other comprehensive (income) loss			38				(18	)
Total comprehensive loss		$	(2,556	)		$	(3,690	)

 

See accompanying notes to consolidated financial statements.

 

 

Motion Computing, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(amounts in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended March 31,
		2015				2014
Operating activities
Net loss		$	(2,618	)		$	(3,708	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			406				139
Noncash interest expense			365				252
Loss (gain) on sale of property and equipment			4				(3	)
Noncash stock compensation expense			3				9
Changes in operating assets and liabilities:
Accounts receivable, net			3,829				4,047
Inventory, net			(14	)			377
Prepaid expenses and other current assets			292				(4	)
Accounts payable			11				563
Accrued expenses and other liabilities			(499	)			(138	)
Deferred revenue			(755	)			442
Net cash provided by operating activities			1,024				1,976
Investing activities
Purchase of property and equipment			(106	)			(111	)
Proceeds from sale of assets			-				9
Net cash used in investing activities			(106	)			(102	)
Financing activities
Payments on line of credit			(2,246	)			(2,505	)
Payments on term loan			(275	)			-
Proceeds from (payment of) capital lease obligation			(5	)			(3	)
Proceeds from exercise of stock options			-				3
Net cash used in financing activities			(2,526	)			(2,505	)
Effect of foreign exchange rate on cash and cash equivalents			38				37
Net decrease in cash and cash equivalents			(1,570	)			(594	)
Cash and cash equivalents, beginning of year			1,943				2,933
Cash and cash equivalents, end of year		$	373			$	2,338
Supplemental disclosures of noncash investing and financing activities:
Interest paid		$	327			$	1,313
Cash paid for taxes		$	3			$	50

 

See accompanying notes to consolidated financial statements.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

1. Description of Business

 

Motion Computing, Inc. (Motion or the Company), a Delaware corporation, is a provider of integrated mobile computing solutions, featuring products and services customized for the unique needs of its target vertical markets. Motion’s enhanced line of rugged tablet personal computers, mobile point-of-care solutions, accessories, and services is designed to increase mobile productivity while providing portability, security, power, and versatility. Founded in 2001 and headquartered in Austin, Texas, Motion sells through its global network of resellers and distributors.

 

The Company established a wholly owned subsidiary, Motion Computing Holding Company, Inc., a Delaware corporation, on March 10, 2004. The subsidiary holds the Company’s foreign subsidiaries and branches.

 

2. Summary of Significant Accounting Policies

 

a) Principles of Consolidation and Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany transactions and balances have been eliminated.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant operating losses since its inception and on February 13, 2015, the Company was notified by its senior secured creditor that it was in default with certain covenants of its loan facility. The Company did not cure the events of default. On April 17, 2015, the senior secured creditor foreclosed on the majority of the Company's assets and sold certain of those assets to an independent buyer in a private foreclosure. Certain assets of the Company that did not secure the loan facility were sold to the buyer of the foreclosed assets by the Company. As a result of the foreclosure, the Company is in the process of winding down its remaining operations. The accompanying consolidated financial statements do not include any adjustments that resulted from these actions.

 

b) Use of Estimates

 

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, depreciation, tooling amortization, financial instruments (including the warrant for redeemable convertible preferred stock), 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.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

c) Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

 

d) Financial Instruments and Credit Risk

 

Financial instruments that potentially subject the Company to credit risk include cash and cash equivalents and accounts receivable from customers. Accounts receivables are generally unsecured. With respect to accounts receivables, the Company performs ongoing credit evaluations of customers and generally does not require collateral.

 

While the Company’s cash and cash equivalents are on deposit with high quality FDIC insured financial institutions, at times such deposits exceed the insured limits.

 

Receivables are concentrated with a small number of customers. The Company maintains an allowance for doubtful accounts when deemed necessary.

 

The amounts reported for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are considered to approximate their fair values based on comparable market information available at the respective balance sheet dates and their short-term nature. The fair value of the Company’s long-term debt approximates its face value.

 

e) Inventory

 

Inventory is stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The valuation of inventory requires the use of estimates regarding the amount of current inventory that will be sold and the prices at which it will be sold based on an assessment of expected orders for these products from the Company’s customers. Additionally, the estimates reflect changes in the Company’s products or changes in demand because of various factors including the market for the Company’s products, obsolescence, product discontinuation, technology changes and competition.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

f) Property and Equipment

 

Property and equipment (P&E) are recorded at cost and depreciated over their estimated useful lives, which range from one to six years, using the straight-line method. Leasehold improvements are depreciated over the shorter of six years or the lease term. Upon retirement or sale, the cost and the accumulated depreciation of the assets retired or sold are removed from the P&E pool, and any resulting gain or loss is recognized in the period incurred. Repairs and maintenance costs are expensed as incurred if they do not significantly prolong the useful life of original P&E. The Company performs reviews for impairment of P&E whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company capitalizes eligible internal-use software development costs incurred subsequent to the completion of the preliminary project stage. Software development costs are amortized over the shorter of the expected useful life of the software or three years.

 

g) Revenue Recognition

 

Revenue includes sales of hardware, software, peripherals, and services, which include consulting, training, standard warranty, extended warranty contracts, and out-of-warranty repairs. These products and services are either sold separately or as part of a multiple-element arrangement. The Company allocates revenue from multiple-element arrangements based upon the relative fair value of the elements.

 

The Company generates revenues by selling products and services to distributors, value-added resellers, and end users. The Company’s policy is to recognize revenues when products or services have been delivered, title and risks of ownership have been transferred to the customer, persuasive evidence of an arrangement exists, prices are fixed or determinable, and collection of the resulting receivables is reasonably assured. The Company offers price protection and limited return rights to most of its distributors. Consequently, for transactions with distributors, revenue and related costs of sales are not recognized until such rights expire, which is upon receiving notification from distributors that products have been resold. As of March 31, 2015 and December 31, 2014, the cost of unsold products at distributors totaled $615 and $1,416, respectively.

 

Revenue from extended warranty contracts is recorded as deferred revenue and recognized over the term of the contract, or when the service is completed. Revenue from consulting and training contracts, provided that there are no post-delivery obligations and the price is fixed or determinable, is recorded upon completion and delivery of consulting services.

 

h) Standard Warranty

 

The Company accounts for the costs that it estimates will be incurred under its standard warranty, which is typically one year, at the time of sale. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rate of warranty claims on those units, and the cost per claim to satisfy the Company’s warranty obligation. As these factors are affected by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liabilities at the end of each reporting period and adjusts the amounts as necessary.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

i) Shipping Costs

 

The Company’s shipping and handling costs associated with product delivery and repair are included in cost of revenue for all periods presented.

 

j) Research and Development

 

Costs incurred in the research and development of the Company’s products are expensed as incurred.

 

3. Inventory

 

Inventory consists of the following at:

 

		March 31, 2015				December 31, 2014
Raw materials		$	2,250			$	1,590
Finished goods			3,553				3,398
Channel inventory			615				1,416
Total		$	6,418			$	6,404

 

Substantially all of the Company’s inventory is consigned to its fulfillment and service partners, except for channel inventory. Channel inventory represents inventory at distributors for transactions in which revenue and related costs of sales are not recognized.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

4. Debt

 

The following table summarizes the Company’s long-term debt at:

 

		March 31, 2015				December 31, 2014
Current and long-term debt (in order of liquidation preference):
$12.5 million revolving line of credit, at the greater of prime plus 2.75% or 6.25% for formula borrowings and at the greater of prime plus 3.00% or 6.5% for non-formula borrowings with principal due on April 1, 2016, and interest due monthly.		$	8,364			$	10,610
$7 million issued on December 27, 2013, at 12% interest, with a term of 48 months. Interest paid monthly for the first 15 months and thereafter monthly payments equal to $248 for the following 33 months, with the unamortized balance plus a terminal fee of 16% of the original principal due on December 31, 2020.			5,726				6,001
$3 million notes convertible to preferred stock issued on December 22, 2008, at 10% with principal and interest due on January 1, 2017.			3,000				3,000
$3 million notes convertible to preferred stock issued on December 22, 2008, and $3 million notes convertible to preferred stock issued on February 27, 2009 and March 30, 2009, at 10% with the notes balance plus interest due on January 1, 2017.			6,196				6,196
			23,286				25,807
Terminal fee			697				576
Long-term interest payable			5,293				5,063
Total long-term debt and accrued interest in default		$	29,276			$	31,446

 

 

On September 12, 2014, the Company entered into a loan and security agreement with a commercial bank to provide a revolving line of credit of up to $12.5 million for working capital purposes (2014 Revolving Line of Credit). Proceeds from the 2014 Revolving Line of Credit were used to retire the outstanding balance of the Company's previous revolving line of credit. The 2014 Revolving Line of Credit includes a non-formula advance provision of up to $4 million and the 2014 Revolving Line of Credit matures on April 1, 2016, unless extended by mutual agreement.

 

Borrowings under the 2014 Revolving Line of Credit associated with formula borrowings bear interest at the greater of 2.75% above the prime rate or 6.25% and non-formula borrowings at the greater of 2.75% above the prime rate or 6.5%. The 2014 Revolving Line of Credit agreement requires that the Company to comply with certain financial and reporting covenants. Outstanding borrowings under the 2014 Revolving Line of Credit are collateralized by substantially all of the Company’s assets and are senior to all other Company debt.

 

On February 13, 2015, the Company was notified by its senior secured creditor that it was in default with certain covenants of the 2014 Revolving Line of Credit. The Company did not cure the events of default. On April 17, 2015, the senior secured creditor foreclosed on the majority of the Company's assets and sold certain of those assets to an independent buyer in a private foreclosure. Certain assets of the Company that did not secure the 2014 Revolving Line of Credit were sold to the buyer of the foreclosed assets by the Company.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

On December 27, 2012, the Company entered into a note purchase agreement with investors to provide a $7 million term loan (the 2012 Term Loan). The 2012 Term Loan has a term of 48 months commencing on December 27, 2012, with an annual fixed interest rate of 12%. The 2012 Term Loan provided up to $5 million to the Company for working capital and other purposes as of December 27, 2012, with an additional $2 million available after March 27, 2013. On December 27, 2012, the Company used $2.8 million of the proceeds from the 2012 Term Loan to repay in full the outstanding balance on a then-existing term loan. On March 28, 2013, the 2012 Term Loan provided an additional $2 million for working capital and other purposes.

 

During each of the first 12 months of the term of the 2012 Term Loan, the Company was required to pay interest on the outstanding balance. Beginning in the 13th month of the term of the 2012 Term Loan, the Company was required to pay interest and principal for a 36-month period, consisting of principal and interest. The remaining unamortized balance of the 2010 Term Loan plus 9% of the original principal was due in the 48th month of the term.

 

On December 31, 2013, the Company amended the 2012 Term Loan to extend the interest-only term to 15 months. Beginning in the 16^th month of the term of the 2012 Term Loan, the Company was required to pay interest and principal for a 33-month period, with a monthly payment of $248 consisting of principal and interest. The remaining unamortized balance of the 2010 Term loan plus 16% of the original principal was due in the 48^th month of the term. On March 20, 2014, the Company amended the 2012 Term Loan again to revise the monthly payment amounts for months 16 through 48. Beginning in the 16^th month of the term of the 2012 Term Loan, the Company was required to pay interest and principal for a 3-month period, with a monthly payment of $124 consisting of principal and interest. Beginning in the 19^th month of the term of the 2012 Term Loan, the Company was required to pay interest and principal for a 30-month period, with a monthly payment of $262 consisting of principal and interest. The remaining unamortized balance of the 2010 Term Loan plus 20% of the original principal was due in the 48^th month of the term. The 2010 Term Loan was not repaid in accordance with its terms on its maturity date, December 27, 2014.

 

The 2012 Term Loan requires the Company to comply with certain covenants related to financial performance, reporting, and indebtedness. Outstanding borrowings under the 2012 Term Loan are collateralized by substantially all of the Company’s assets, subordinate to the 2014 Revolving Line of Credit and senior to all convertible notes.

 

On December 22, 2008, pursuant to a purchase agreement between the Company and certain investors (Convertible Note Purchase Agreement), the Company issued $6,125 in aggregate principal amount of subordinated convertible notes with a fixed interest rate of 10%.

 

On February 27, 2009 and March 30, 2009, the Company completed the second round of funding under the Convertible Note Purchase Agreement. This funding resulted in the issuance and sale of $3,071 in aggregate principal amount of subordinated convertible notes with a fixed interest rate of 10%. All of the subordinated convertible notes issued pursuant to the Convertible Note Purchase Agreement (Convertible Notes) mature on January 1, 2017.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

The Convertible Notes are subordinate to 2014 Revolving Line of Credit and the 2012 Term Loan. The Convertible Note Purchase Agreement requires the Company to comply with the covenants of the 2014 Revolving Line of Credit.

 

The Convertible Notes can be converted into the Company's Series D Redeemable Convertible Preferred Stock (Series D Preferred Stock) at the option of the note holder upon occurrence of a qualified financing, initial public offering, liquidation event, or an equity financing. The conversion price of the Convertible Notes in the case of a qualified financing is equal to 75% of the lowest price paid for such qualified securities. If an initial public offering of securities closes, the conversion price will be equal to 75% of the price per share that is sold to the public. In the case of an equity financing, the conversion price will be 75% of the lowest price per share paid for such equity securities. At December 31, 2013, the estimated intrinsic value of the beneficial conversion feature associated with the discounted conversion prices exceeded the value of the debt proceeds allocated to the Convertible Notes.

 

In conjunction with the Convertible Notes issuance, the Company granted a warrant to purchase Series D Preferred Stock at a 25% discount to each of the investors. Warrant coverage is equal to the amount of the Convertible Notes plus accrued interest. The warrant expired unexercised in 2014.

 

All of the long-term debt and accrued interest has been classified as a current liability as a result of the default and foreclosure under the 2014 Revolving Line of Credit.

 

6. Deferred Revenue

 

Fees from extended warranty contracts are recorded as deferred revenue and subsequently are recognized ratably over the term of the contract. The Company provides for an estimate of costs that will be incurred under its standard warranty contemporaneously with the recognition of revenue for the associated products sold. Costs associated with service and extended warranty contracts are recognized as incurred.

 

Changes in the Company’s deferred revenue are as follows:

 

		Three Months Ended March 31,
		2015				2014
Deferred revenue, beginning of period		$	10,310			$	9,390
Revenue deferred and costs accrued for new warranties			852				2,065
Service obligations fulfilled			(395	)			(505	)
Amortization of deferred revenue			(1,212	)			(1,118	)
Deferred revenue, end of year			9,555				9,832
Current portion			4,919				4,574
Long-term portion		$	4,636			$	5,258

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

7. Commitments, Contingencies, and Concentrations

 

a)

Premises

 

The Company leases facilities in Austin, Texas. In December 2014, the Company entered into an extension of their lease agreement to July 31, 2019 and to reduce their occupied square footage effective July 31, 2015. The renewal's initial annual lease commitment is $627 and the lease maturity date is July 31, 2019 and the related payments are included in the minimum annual payments table shown below. Rent expense for the three months ended March 31, 2015 and 2014 was $194 and $189, respectively.

 

Future minimum lease payments under all operating leases and capital leases for each of the five succeeding years and thereafter are as follows:

 

		Operating				Capital
		Leases				Leases
Period ending December 31:
2015		$	493			$	21
2016			632				28
2017			644				28
2018			656				7
2019 and thereafter			501				-
Total contractual cash obligations		$	2,926			$	84
Less amount representing interest and taxes						$	(21	)
Present value of minimum lease payments							63
Less current portion						$	(17	)
Capital lease obligation, net of current portion						$	46

 

b)

Purchase commitment

 

In the normal course of operations, the Company enters into purchase commitments for inventory and other goods and services.

 

c)

Litigation

 

The Company is subject to legal proceedings and claims in the ordinary course of business.

 

Since the foreclosure sale of substantially all of the Company's assets, three companies have filed lawsuits against the Company and the buyer of certain of the Company's assets for alleged infringement of the claimant’s patent by the Company's products. The buyer of certain of the Company's assets believes the claims are without merit and that it is not liable for claims arising prior to the acquisition and intends to pursue its defenses against those claims. The buyer of certain of the Company's assets subsequently settled one of the lawsuits by entering into a license agreement with a modest one-time payment.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

8. Financial Instruments and Credit Risk

 

a) Interest rate risk

 

At March 31, 2014, the 2014 Revolving Line of Credit had a cost of funds fee interest rate with a variable component based on the Wall Street Journal’s prime rate. If the Company borrowed 100% of the available line for a full year and the bank’s prime lending rate increased by 1%, the Company’s costs would increase by approximately $125.

 

b) Foreign exchange risk

 

The Company’s revenues are denominated in seven currencies, U.S. Dollar, Swiss Francs, Euro, Canadian Dollar, British Pound, Australian Dollar and New Zealand Dollar. The majority of the Company’s expenses are in United States dollars, however, there are significant operating expenses, principally salaries for foreign based employees, denominated in their local currencies. Consequently, the Company is subject to foreign exchange risk. The Company marks to market all receivables denominated in foreign currency monthly, using current rates. Due to unfavorable fluctuations in foreign exchange rates, the Company incurred $325 of foreign exchange losses for the three months ended March 31, 2015.

 

c) Credit risk

 

Information regarding the Company’s accounts receivable credit risk is as follows:

 

As of March 31,		Accounts Receivable (in millions)				Number of Customers with Receivable Balance >10% of Total Receivables				Customer Share as a Percent of Total Receivables				Percentage Share of Total Receivables
2015		$	6.7				2				44	%			44	%
2014		$	10.6				1				45	%			45	%

 

The receivables representing 98% of the accounts receivable balance at March 31, 2015 were subsequently collected.

 

9. Segmented Information

 

The Company operates in one segment, the sale of rugged mobile tablet PC systems. Approximately 53% and 59% of the Company’s revenue for the three months ended March 31, 2015 and 2014, respectively, was derived from sales in the United States.

 

 

Motion Computing, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

The distribution of revenue by country is segmented as follows:

 

		Three Months Ended March 31,
		2015				2014
Revenue by country:
United States		$	7,988			$	11,475
All other countries			7,030				8,088
		$	15,018			$	19,563

 

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 March 31, 2015, the Company had 1 customer that had sales that were greater than 10% of total revenue, and this customer was located in the United States of America. For the three months ended March 31, 2014, the Company had two customers located in the United States of America that had sales that were greater than 10% of total revenue. The percentages of total revenue from these customers are as follows:

 

Three Months Ended March 31,		Total Revenue (in millions)				Number of Customers with Revenue of 10% or greater of Total Revenue				Customer Share as a Percent of Total Revenue				Percentage Share of Total Revenue
2015		$	15.0				1				35	%			35	%
2014		$	19.6				2				56	%			56	%

 

 

No more than 10% of the Company’s assets were located in any country, other than the United States, during each of the three months ended March 31, 2015.

 

10. Subsequent Events

 

On February 13, 2015, the Company was notified by its senior secured creditor that it was in default with certain covenants of its loan facility. The Company did not cure the events of default. On April 17, 2015, the senior secured creditor foreclosed on the majority of the Company's assets and sold certain assets to an independent buyer in a private foreclosure. Certain of those assets of the Company that did not secure the loan facility were sold to the buyer of the foreclosed assets by the Company. As a result of the foreclosure, the Company is in the process of winding down its remaining operations.       

 

 

14 

Exhibit 99.3

 

---

 

Unaudited Pro Forma Combined Financial Statements

 

On April 17, 2015, Xplore Technologies Corp. ("Xplore") filed a Current Report on Form 8-K to report that on that date, Xplore had completed the acquisition of certain assets of Motion Computing, Inc. and its subsidiaries ("Motion"). The following unaudited pro forma combined condensed balance sheet and statement of operations combines the balance sheet data for Xplore and Motion as of March 31, 2015 and the statement of operations data for Xplore and Motion for the year ended March 31, 2015, as if the acquisition had been completed on April 1, 2014. The pro forma financial information is based upon the historical consolidated financial statements of Xplore and Motion and the assumptions, estimates, and adjustments described in the notes to the unaudited pro forma combined financial statements. The assumption, estimates, and adjustments are preliminary and have been made solely for purposes of developing such pro forma information. The unaudited pro forma combined financial statements include adjustments that have been made to reflect the preliminary purchase price allocations. The preliminary allocations represent estimates made for purpose of these pro forma financial statements and are subject to change upon a final determination of fair value.

 

The unaudited pro forma combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the consolidated financial position and consolidated results of operations of Xplore that would have been reported had the acquisition occurred on the dates indicated, nor do they represent a forecast of the consolidated results of operations of Xplore for any future period. Furthermore, no effect has been given in the unaudited pro forma combined statements of operations for potential synergistic benefits or cost savings that may be realized through the acquisition of the Motion operations by Xplore or costs that may be incurred in integrating the Motion assets into Xplore. The unaudited pro forma combined financial statements should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in Xplore’s Annual Report on Form 10-K for the period ended March 31, 2015, which is on file with the SEC, and the audited financial statements of Motion included in this Form 8-K.

---

 

 

 

 

XPLORE TECHNOLOGIES CORP.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF MARCH 31, 2015

(In thousands, except per share data)

(Historical)

 

		Xplore				Motion				Pro forma Adjustments					Pro forma Combined
ASSETS
Cash		$	19,455			$	373			$	9,079		(A)		$	19,828
											(9,079	)	(B)
Accounts receivable, net			6,633				6,736									13,369
Inventory, net			7,883				6,418				(1,000	)	(B)			13,301
Prepaid expenses and other current assets			315				248				137		(B)			700
Total current assets			34,286				13,775				(863	)				47,198
Fixed assets, net			1,030				1,651				(1,137	)	(B)			1,544
Other assets			—				402				(402	)	(C)			—
Goodwill			—				—				14,814		(B)			14,814
Intangible assets			—				—				2,400		(B)			2,400
		$	35,316			$	15,828			$	14,812				$	65,956
LIABILITIES, REDEEMABLE PREFERRED STOCK & SHAREHOLDERS' EQUITY
Current Liabilities:
Long-term debt & accrued interest in default		$	—			$	29,276			$	(29,276	)	(C)		$	—
Accounts payable & accrued liabilities			4,976				16,866				(3,905	)	(C)			17,937
Deferred revenue			32				4,919				(491	)	(B)			4,460
Total current liabilities			5,008				51,061				(33,672	)				22,397
Deferred revenue			1,033				4,636				(464	)	(B)			5,205
Non-current warranty liabilities & other			484				46				(46	)	(C)			484
Revolving line of credit			—				—				9,079		(A)			9,079
Total liabilities			6,525				55,743				(25,103	)				37,165
Redeemable preferred stock			—				92,139				(92,139	)	(C)			—
Shareholders' equity:
Common stock			11				7				(7	)	(C)			11
Additional paid-in-capital			168,379				—				—					168,379
Accumulated other comprehensive income			—				130				(130	)	(C)			—
Accumulated deficit			(139,599	)			(132,191	)			132,191		(C)			(139,599	)
Total shareholders' equity			28,791				(132,054	)			132,054					28,791
		$	35,316				15,828				14,812					65,956

 

 

 

XPLORE TECHNOLOGIES CORP.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR YEAR ENDED MARCH 31, 2015

(In thousands, except per share data)

(Historical)

 

		Xplore				Motion				Pro forma Adjustments					Pro forma Combined
Revenue		$	42,639			$	78,753			$	(491	)	(D)		$	120,901
Cost of revenue			28,320				59,684				(368	)	(D)			87,636
Gross profit			14,319				19,069				(123	)				33,265
Operating expenses:
Sales, marketing and support			6,352				13,345				(1,371	)	(E)			18,326
Research and development			3,537				5,472				(1,175	)	(E)			7,834
General administrative			4,103				6,153				(1,093	)	(E)			9,163
Total operating expenses			13,992				24,970				(3,639	)				35,323
Income (loss) from operations			327				(5,901	)			3,762					(2,058	)
Interest			(8	)			(2,858	)			2,557		(F)			(309	)
Change in fair value of warrant			—				1,833				1,833		(G)			—
Other			(31	)			(822	)			(400	)	(H)			(1,253	)
Income (loss) before income taxes			288				(7,748	)			4,086					(3,620	)
Income tax expense (benefit)			39				61				—					100
Net income (loss)		$	249			$	(7,809	)		$	4,086				$	(3,720	)
Net income (loss) per share
Primary		$	0.03			$	—			$	—				$	(0.43	)
Fully-diluted		$	0.03			$	—			$	—				$	(0.43	)
Weighted average shares outstanding
Primary			8,604				—				—					8,604
Fully-diluted			8,759				—				—					8,604

 

 

 

XPLORE TECHNOLOGIES CORP.

 

NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

 

Description of the Transaction and Basis of Presentation

 

 

The unaudited pro forma condensed combined financial statements have been prepared based on Xplore’s and Motion’s historical financial information, giving effect to the acquisition and related adjustments described in these notes. Xplore prepares its consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, as permitted by the Securities and Exchange Commission rules and regulations.

 

On April 16, 2015, Xplore’s wholly-owned subsidiary (the “Purchaser”) entered into a Foreclosure Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Motion and Square 1 Bank, Motion’s senior secured lender (“Square 1”), pursuant to which the Purchaser agreed to purchase certain assets of Motion, including cash, cash equivalents, accounts receivable, inventory, equipment, personal property and other assets, for an aggregate purchase price of approximately $9 million in cash, plus the assumption of approximately $8 million in certain liabilities of Motion, net of current assets, subject to the terms and conditions thereof (the “Motion Acquisition”). The assumed liabilities included certain accounts payable and obligations for service contracts and product warranties. The closing of the Motion Acquisition occurred on April 17, 2015.

 

We have accounted for the acquisition under the acquisition method of accounting in accordance with the provisions of FASB ASC Topic No. 805 Business Combinations (ASC 805). The total purchase price for the Motion assets was approximately $9 million and was comprised of cash consideration paid by Xplore to Square 1.

 

 

 

Under the acquisition method of accounting under ASC 805, the total estimated purchase price of the acquired company is allocated to the assets acquired and the liabilities assumed based on their fair values. We have made significant estimates and assumptions in determining the preliminary allocation of the purchase price. The preliminary allocation of purchase consideration is subject to change based on further review of the fair value of the assets acquired and liabilities assumed. The following table is the allocation of the purchase price (in thousands, except years): 

 

		Fair Value				Weighted Average Estimated Useful Life (In Years)
Cash and cash equivalents		$	373
Accounts receivable			6,736
Inventory			5,418
Other assets			385
Fixed assets			514
Goodwill			14,814
Identifiable intangible assets			2,400				6
Accounts payable and accrued liabilities			(12,961	)
Deferred revenue			(8,600	)
Total purchase price		$	9,079

 

Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination and the potential synergy of combining the operations of Xplore and Motion.  We expect the entire amount of goodwill recorded in this acquisition will be deducted for tax purposes ratably over a 15 year period.  The identified intangible assets consist of trademarks, copyrights, and developed technology, including patents.  The estimated fair values of the trademark, copyrights and developed technology were determined using the “Relief from Royalty” method.  Trademark, developed technology, non-compete and customer relationship will be amortized on a straight-line basis over their estimated useful lives.  We expect the amortization of acquired intangibles will be approximately $400,000 per year for the remaining estimated useful lives.

 

 

 

Pro Forma Adjustments

 

 

The unaudited pro forma combined financial information has been prepared to illustrate the effect of the Motion Acquisition. The historical consolidated financial statements have been adjusted in the unaudited pro forma combined financial information to give effect to the pro forma events that are directly attributable to the Motion Acquisition, factually supportable and expect to have a continuing impact on the combined results of Xplore and the acquired Motion operations. Furthermore, no effect has been given in the unaudited pro forma combined statements of operations for potential synergistic benefits or cost savings that may be realized through the combination of the acquired Motion operations and Xplore or costs that may be incurred in integrating the acquired Motion operations and Xplore.

 

The pro forma adjustments included in the unaudited pro forma combined statements of operations are as follows:

 

(A)

Adjustments to reflect that Xplore borrowed the purchase price from Square 1.

 

 

(B)

Adjustments to reflect Xplore’s purchase of certain Motion assets and liabilities from Square 1 for $9,079, with adjustment to the fair value of those assets.

 

 

(C)

Adjustments to eliminate assets and liabilities that were not acquired.

 

 

(D)

Adjustment to account for reduction in deferred revenue arising from fair value assessment.

 

 

(E)

Adjustments to eliminate headcount related costs related to former Motion employees who were not employed by Xplore and such positions were assumed to have been eliminated as a combined entity.

 

 

(F)

Adjustment to eliminate interest expense of approximately $2,557 for the year ended March 31, 2015 from Motion’s statement of operations for debt that was not assumed and Xplore’s reduced amount of borrowings under its revolver line of credit.

 

 

(G)

Adjustment to eliminate change in fair value of warrant valuation, which was directly impacted by the transaction and does not apply to Xplore.

 

 

(H)

Adjustment to represent amortization expense of acquired intangible assets.