Pending Transaction
On July 5, 2018, we entered into an Agreement and Plan of Merger, or Merger Agreement, with Zebra Technologies Corporation, a Delaware corporation, or Zebra, and Wolfdancer Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Zebra, or Merger Sub, providing for the acquisition of us by Zebra through a tender offer by Zebra and Merger Sub, which we call the Offer, followed by a merger of Merger Sub with and into us, or the Merger, effected under Section 251(h) of the Delaware General Corporation Law.
The following is a summary of certain provisions of the Merger Agreement and certain other agreements we entered into in connection with the Merger Agreement. This summary of the Merger Agreement is qualified in its entirety by reference to the full description of the Merger Agreement and Merger contained in our Current Report on Form 8-K dated July 3, 2018, which was filed with the Securities and Exchange Commission on July 5, 2018, and to the full text of the Merger Agreement, a copy of which was filed as an Exhibit to that Current Report and is incorporated herein by reference. Stockholders and other interested parties should read the Merger Agreement for a more complete description of the provisions summarized below.
The Merger Agreement provides that Zebra will commence the Offer as promptly as practicable, but in no event later than ten business days after July 5, 2018. Subject to the having a majority of the outstanding shares of our common stock being tendered in the Offer, and the other conditions that are described in the Merger Agreement, Zebra will cause Merger Sub to irrevocably accept for purchase and thereafter pay for all shares of our common stock validly tendered and not properly withdrawn pursuant to the Offer as soon as practicable after the expiration of the Offer and, in any event, no later than three business days after the Offer acceptance. If the Offer is consummated, each of our stockholders will receive $6.00 for each share of our common stock validly tendered and not properly withdrawn by such stockholder prior to the date of the expiration of the Offer, without interest thereon and subject to deduction for any withholding taxes. The Offer must stay open for 20 business days and can be extended for up to two consecutive periods of five days (or other period agreed to by the parties). Zebra has the right (but is not obligated) to at any time, and from time to time, in its sole discretion waive any condition or modify the terms of the Offer.
The Merger Agreement provides that the closing of the Merger will take place on a date to be specified by the parties no later than the third business day after the acceptance of the Offer, unless the parties otherwise agree in writing.
Except as expressly required or permitted by the Merger Agreement, as required by applicable law, as set forth in the applicable schedules to the Merger Agreement or as consented to in writing by Zebra, during the period between the date of the Merger Agreement and the earlier of the effective time of the Merger or the termination of the Merger Agreement pursuant to its terms, we have agreed to: (A) conduct our business in the ordinary course of business as historically conducted in all material respects; (B) ensure that we have a specified level of working capital at the effective time of the Merger; (C) ensure that the aggregate of (x) our net indebtedness plus (y) all amounts payable in the Offer and the Merger in respect of shares of our common stock, outstanding options to purchase shares of our common stock and outstanding restricted stock units, or RSUs, is less than or equal to $90,000,000 as of immediately prior to the effective time of the Merger; and (D) use our reasonable best efforts to preserve our assets and business organization and maintain our existing relations and goodwill with material customers, suppliers, distributors, regulators and business partners.
The closing of the Offer is subject to the following conditions:
(i) the Merger Agreement has not been terminated in accordance with its terms;
(ii) at least 50% of the outstanding shares of our common stock, plus one share, have been tendered;
(iii) there has been no judgment enacted, promulgated, issued, entered, amended or enforced by any governmental authority or any applicable law that enjoins or otherwise prohibits the consummation of the Offer or the Merger;
(iv) our representations and warranties set forth in the Merger Agreement are generally true and correct, except where the failure to be true and correct would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on us;
(v) we have complied with and performed in all material respects our obligations required to be complied with or performed;
(vi) since the date of the Merger Agreement there shall not have been any effect, change, event or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on us;
(vii) the aggregate of (x) our net indebtedness plus (y) all amounts payable in the Offer and the Merger in respect of the shares of our common stock, options to purchase our common stock and RSUs shall be less than or equal to $90,000,000; and
(viii) the receipt of foreign regulatory approvals.
We have agreed that we will not, and will not authorize or permit any of our officers, directors, investment bankers, attorneys, accountants and other advisors, agents and representatives to, directly or indirectly through another person, solicit any offers from third parties to acquire our business. In certain limited circumstances, we have the right to engage with a third party in the event such third party submits a superior proposal to acquire our business, subject to Zebra’s ongoing right to match and negotiate the acquisition.
The Merger Agreement includes certain termination rights, including our right to terminate the Merger Agreement to accept a superior proposal, and provides that, upon termination of the Merger Agreement by us or Zebra related to such a superior proposal, we will pay Zebra a termination fee of $3,000,000.
Overview
We are engaged in the development, integration and marketing of rugged mobile personal computer and hand held devices. Our rugged devices are designed to withstand hazardous conditions, such as extreme temperatures, driving rain, repeated vibrations, dirt, dust and concussive shocks. The intrinsically safe, ruggedized and reliable nature of our products facilitates the extension of traditional computing systems to a broader range of field personnel, including energy pipeline inspectors, public safety responders, warehouse workers and pharmaceutical scientists. Our devices are fitted with a range of performance-matched accessories, including multiple docking solutions, wireless connectivity alternatives, global positioning system modules, biometric and smartcard options, as well as traditional peripherals, such as keyboards and cases. Additionally, our most rugged devices are waterproof for up to 30 minutes in water up to a depth of three feet, are impervious to drops from as high as seven feet, are readable in direct sunlight, can be mounted on vehicles and include LTE and Wi-Fi connectivity options for real-time data access. Our end-user customers include major telecommunications companies, leading heavy equipment manufacturers, vehicle manufacturers, healthcare providers, oil and gas production companies, the military and first responders.
Through 2014, we focused on a single ultra-rugged tablet, the iX014, through multiple generations of that product. In 2014, we began the introduction of multiple fully-rugged and rugged tablets that are lighter and less expensive than our original product. In 2015, we acquired the assets of Motion Computing, Inc., or Motion, another producer of rugged tablets, which acquisition was designed to expand our market share and reach. During our fiscal year 2018, we refined our focus yet again. We redefined our business model as a provider of rugged mobility systems, and began the process of introducing even more rugged products, such as the XBOOK 2-in-1 device and the Xplore M60 handheld device. We made these changes in order to expand our addressable market and to serve the needs of our existing end-users and distribution channels.
Our rugged mobile device portfolio has offerings in both Windows and Android. We believe that by having a broader portfolio of products, in terms of ruggedness, price and operating systems, we can address a broader range of end user needs. Looking forward, our strategy is to build increased market awareness of our product offerings, in an effort designed to increase our revenue and expand our share of the markets addressed by those offerings.
We believe that we are positioned for future revenue growth in the markets in which we compete. We have introduced a line of devices that, based upon third‑party certifications, surpasses the performance standards and specifications that have been the accepted measures for rugged tablet devices in today’s marketplace.
Our key initiatives for future revenue growth include the following:
|
•
|
New product development—based on input from customer and key industry participants;
|
|
•
|
The expansion of sales activities in non-U.S. markets, particularly in Europe;
|
|
•
|
Continued penetration into the Fortune 500/Global 2000 markets;
|
|
•
|
Establishment of key relationships with new distributors; and
|
|
•
|
Expanded focus on military and public safety markets.
|
The timing of large orders, and the related shipping dates of the ordered products, creates variability in our reported revenues. While we may experience some variability in our quarterly operating results as a consequence of the impact of large orders, our goal is to grow our year-over-year revenues. Our revenue for the fiscal year ended March 31, 2018 was approximately 12% higher than the prior fiscal year.
We are a Delaware corporation and our common stock trades on The NASDAQ Stock Market under the symbol “XPLR.” Following the consummation of the Merger, there will be no public market for our common stock, which will cease to be traded on The NASDAQ Stock Market, and we will no longer be required to file periodic reports with the Securities and Exchange Commission.
Recent Developments
In fiscal year 2016, we introduced two new products, the XSLATE B10 and the XSLATE D10, which were the replacements for our former RangerX product. In fiscal year 2017, we introduced the XSLATE R12, which was a replacement for our former Motion R12 product. Our products are described in more detail below.
On April 17, 2017, our existing Loan and Security Agreement with Square 1 Bank matured and was replaced by a Loan and Security Agreement with Bank of America N.A., which we call the Bank of America Credit Agreement, pursuant to which Bank of America provided us with a revolving asset based line of credit of up to $15 million. The new facility with Bank of America, which initially had a three-year term, is secured by substantially all of our assets, and bears interest at LIBOR plus between 2.25% and 2.75% per annum, based upon our fixed charge coverage ratio. The balance of drawn funds at any one time cannot exceed the lesser of $15 million or the sum of (1) 85% of our eligible accounts receivable and (2) the lesser of (a) 65% of the carried value of eligible inventory or (b) 85% of the liquidation value of eligible inventory, minus certain reserves. The maximum amount of eligible receivables comprised of accounts receivable outside of the United States of America and Canada is 25% of the balance of eligible accounts receivable.
The Bank of America Credit Agreement contains a financial covenant regarding our available liquidity, which is tested monthly. Our failure to meet this covenant, or the triggering of other events of default under the Bank of America Credit Agreement, could result in acceleration of all of our payment obligations and the termination of the obligations of Bank of America to make loans and extend credit to us under the Bank of America Credit Agreement. The Bank of America Credit Agreement contains certain representations and warranties made by us and certain conditions that we must met to cause Bank of America to make loans under the facility. The Bank of America Credit Agreement also contains customary affirmative and negative covenants, events of default and remedies upon default, including acceleration.
Effective January 25, 2018, the Bank of America Credit Agreement was amended to increase our line of credit to $20 million and to extend the termination date to January 25, 2021.
On July 3, 2018, we entered into Amendment No. 2 to Loan and Security Agreement with Bank of America, to be effective as of May 30, 2018. The amendment provides for additional borrowing capacity under the underlying line of credit by increasing the number of eligible accounts receivable against which we can borrow under the credit agreement. The amendment also adjusts certain triggers leading to enhanced reporting by us under the agreement. As of March 31, 2018, we had drawn $14,159,000 on this line of credit, and as of June 30, 2018, we had drawn $12,405,000.
In February 2018, we introduced two new products, the XBOOK B10 and XBOOK D10, both of which are rugged 2-in-1 devices. In May 2018, we introduced the Xplore M60, a rugged handheld device. Our products are described in more detail below.
Products
Our devices offer the following features:
Rugged
— We have designed and built our tablet products from the inside out, developing design elements that provide a heightened and proven level of durability. Some of our products meet some of the strictest specifications in the world, such as those established by the U.S. military, including Military Standard Testing for Environmental Extremes. By being designed to meet these specifications, some of our products can withstand damage from being dropped onto concrete from a height of up to seven feet, from being submerged for up to 30 minutes in up to three feet of water, and from being exposed to extreme temperatures are as low as −60° Fahrenheit and as high as 160° Fahrenheit. In addition, some of our products are designed to continue to function when subjected to vibration, sand storms and other challenging outdoor work environments.
For our hand held products, we leveraged available housing designs, and then built our products from the inside with the assistance of our contract manufacturers. We expect to be able to swiftly bring products and modifications to the market using this approach. As handheld devices have less concerns regarding heat disbursement, we have been able to create sealed devices with less ports. We expect these devices to have robust bar code scanning capabilities, so we focused on delivering the products with a rugged bar code scanner integrated into the device. Our handheld products can withstand damage from being dropped from four feet and are waterproof. They have a temperature range from 0° Fahrenheit to as high as 120° Fahrenheit. In addition, our products are designed to continue to function when subjected to vibration, sand storms and other challenging outdoor work environments.
Screen Technology
— We strive to be a leader in developing screen technology with award winning displays. We have designed our “Sunlight Readable” screen to be viewable in challenging lighting conditions, including direct sunlight and dimly-lit environments, at virtually any angle, and to enable glove touch capability. Our screens also offer Dual Mode inputs—simultaneous use of a digital pen and/or finger to control the unit. The Dual Mode supports more precise inputs through the pen with more directional finger touch inputs—all in a single unit with automatic switching capabilities.
Processing Power
— We have the ability to provide processing power alternatives for our products on a timely and cost-effective basis. Our systems use Intel processors and associated chipsets, as well as other performance enhancement technologies that we believe are essential in many field applications (such as mapping and remote connectivity).
Remote Connectivity
— Our devices have a range of wireless communications options (wLAN, Bluetooth, 4G LTE and NFC) as well as two meter and sub-meter GPS options.
Accessories—
We offer a broad range of add-on modules and accessories that we believe better enable our customers to adapt our devices to their intended use. In particular, we believe our functional, durable and reliable docking solutions are tailored to our customers’ needs. We have supplied service, desktop, vehicle, forklift, armored vehicle and mobile cart docking systems to our customers.
Heightened Safety Standards—
Some models of our line of wireless-enabled tablet PC systems have been tested and certified both in North America and in the European Union for use in hazardous conditions.
Our devices are designed to be used as a mobile computing system. These systems are comprised of a hardware platform that is fully integrated with one or more software applications. Through its wide feature set, we believe our line of products allows for the customization of a platform that best suits any given application. Our computers combine processing power, viewability, ruggedness and connectivity, and are designed to operate in extreme environments.
Set forth below are descriptions of the various product lines that we offer.
iX104 Product Line
We have spent more than a decade on research, development and product improvements with each generation of our iX104 ultra-rugged tablet, achieving what we believe are a number of industry “firsts,” such as being the first manufacturer to incorporate dual-mode inputs with active pen and finger touch capabilities. Our signature iX104 tablets have consistently been recognized for their ruggedness, versatility and best-in-class technologies. We believe that we pioneered, and continue to offer, the best outdoor‑readable display and wLAN wireless solutions. Our specially designed Dual Mode Sunlight Readable screen is viewable in challenging lighting conditions, including direct sunlight and dimly-lit environments, from virtually any angle.
We believe that our recent versions of the iX104 have continued to introduce “industry firsts” and differentiating features. Our iX104C product line includes a tool-less removable dual solid state drive (SSD) module, tool-less access to the SIM and MicroSD ports, and an ingress protection rating of IP 67 for submersion in water. Our iX104C product line also features the Intel Core i7 processor and runs on Windows 7, 8 and 10 operating systems.
Our line of iX104 tablets is designed to operate in challenging work environments, including extreme temperatures, constant vibrations, rain, blowing dirt and dusty conditions. Our iX104 systems can be fitted with a wide range of performance matched accessories, including multiple docking station solutions, wireless connectivity alternatives, Global Positioning System (GPS) modules, biometric and smartcard modules, as well as traditional peripherals like keyboards, mice and cases.
XSLATE
B10
In September 2015, we launched the XSLATE B10 rugged tablet, which is targeted at potential end-users who may be considering Panasonic’s most popular rugged tablet, the FX-G1.
Built with unfailing protection in mind, the IP65 and MIL-STD-810G rated XSLATE B10 rugged tablet endures even the most extreme work environments. It also doesn’t compromise critical PC capabilities despite weighing only 2.4 lbs. We believe that t
he XSLATE
B10 offers superior standard I/O features, a unique set of peripherals, and greater environmental resiliency than the Panasonic FX-G1.
Like all of our other products, environmental resiliency is a core strength of the XSLATE B10. Key features of the XSLATE B10 include:
·
|
10.1” display with sunlight-viewable chemically strengthened glass;
|
·
|
Commonly used port connections sealed from behind;
|
·
|
C1D2/ATEX compliant and tested to MIL-STD-810G and IP65 standards to ensure rugged computer mobility;
|
·
|
Magnesium alloy midframe;
|
·
|
Rugged accessories and peripherals resistant to the elements; and
|
·
|
Operation in bitter cold – as low as -34° C, with a cold start at -20° C.
|
The XSLATE B10 also addresses customers’ requirements for more expansive and flexible I/O options, giving users a standard that we believe is unmatched by competitive products. No other rugged tablet PC that we are aware of can deliver at least eight ports that are available all the time. The XSLATE B10 users can customize their I/O configurations to fit their unique workflow needs, with the following options:
·
|
Built-in RJ 45, Micro SDXC, Micro HDMI-out, True Serial, 2 x USB 3.0 ports;
|
·
|
G2 office dock with six additional USB ports, plus DVI/VGA, HDMI DB9 serial ports and audio jacks;
|
·
|
Wacom active pen and digitizer;
|
·
|
Advanced touch mode application with glove touch and wet modes; and
|
·
|
A spill resistant companion keyboard that attaches directly to the device and offers additional screen protection when the XSLATE B10 is not in use.
|
The XSLATE B10 also features 4G LTE broadband and 802.11ac Wi-Fi access, and 20 hours of operation with the hot-swappable battery option. The XSLATE B10 is powered by the Intel Broadwell i5 CPU, comes standard with 8GB of RAM, a 128GB SSD and supports
Windows 10, 8.1, or 7.
XSLATE R12
The XSLATE R12, which replaced our former Motion R12, merges our core rugged engineering expertise with a sleek, aesthetically appealing industrial design. With a full high definition 12.5’ display, the XSLATE R12 transitions seamlessly among the office, the vehicle and the field. A full suite of accessories supports this mobile desktop replacement, including:
·
|
Office dock that supports additional ports, a second monitor, and full size keyboard and mouse;
|
·
|
Companion keyboard and kickstand that magnetically attached to the back of the tablet when not in use;
|
·
|
Hands free kit that enables a field worker to carry and view the device while performing other work-related activities;
|
·
|
Crash-tested vehicle dock that makes the device useful for in-transit tasks like mapping, as well as improves driver safety with the optional screen blanking technology; and
|
·
|
SlateMate expansion module that integrates RFID, barcode reader, and serial communications.
|
Despite its sleek styling, the XSLATE R12 is tough. It is tested to MIL-STD-810G standards, IP54 rated, uses a Gorilla Glass 3 display, has a rubberized non-slip enclosure, and a magnesium-alloy internal frame. The product was also designed to support compute intensive Windows software like GIS mapping and architectural engineering applications. The product is powered by an Intel Core i7 vPro (processor options include an Intel Celeron). It supports Windows 10, 8.1, or 7 Pro 64-bit operating systems, and can be configured with SSD configurations up to 256GM, and RAM configurations up to 8GB.
Security features are also a priority in the XSLATE R12 design and include:
·
|
Integrated fingerprint reader;
|
·
|
Integrated smart card reader (optional);
|
·
|
Trusted Platform Module (TPM 2.0); and
|
·
|
Absolute Data & Device Security (DDS) theft prevention (optional).
|
Motion F5m/C5m
The Motion F5m and Motion C5m are easily recognized by their iconic integrated handle design, which was introduced by Motion in 2008. The Motion C5 was originally introduced in white for clinical applications. Motion then followed up with a black version of the Motion C5, the Motion F5, for field applications.
The rugged tablets’ fifth generation Intel Core processors, including the highest performing Intel i7 vPro processor, provide the power to quickly move through computation-intensive applications, while increasing overall power efficiency for longer battery life.
These products have a 10.4” View Anywhere display that mimics the size of many standard forms for which input is made easy with both touch and digital pen interfaces. An optional barcode scanner is integrated into the handle for easy push-button reads. A
high resolution digital camera and the “SnapWorks by Xplore” camera application make it easy to capture images, annotate those images with the pen, and share the data with other applications. An optional UHF RFID scanner enables long range reads of RFID tags up to nine feet away. And, the “EasyConnect” expansion module can be populated with a magstripe reader to accept payments in real-time at the point of service.
These products are often used in large metropolitan areas, where LTE networks are susceptible to traffic congestion that negatively impacts connectivity performance. To overcome that challenge, the products were designed and certified to support the additional spectrum of AWS (Advanced Wireless Services), commonly marketed by some carriers as XLTE.
Bobcat
At 2.4 pounds, the Bobcat is a fully-rugged Windows tablet with comprehensive standardized interfaces, an array of options through its proprietary Xpansion Port and a lightweight design. The Bobcat operates Windows 8.1 or Windows 7 Pro operating systems and is certified fully-rugged, with a MIL-STD 810G certification and IP65 rating. The Bobcat’s direct bonded IPS screen, 500 nits of luminance and an 800-to-1 contrast ratio provides for outdoor readability, and a 10-finger multi-touch screen provides users with ease-of-use and touch optimization. The Bobcat is used in a variety of industries, including manufacturing, warehousing and distribution, utilities, telecommunications and the military.
Bobcat offers a suite of standard inputs and outputs, enabling the transition across different business applications. The Bobcat comes with two full-sized USB 3.0s, Micro SDXC, Micro SIM, Micro HDMI-Out, RJ-45 Ethernet, GPS engine and a serial port connection. We believe that the Bobcat is the only fully-rugged tablet on the market that offers GPS, RJ-45 Ethernet and a serial port connection in one device.
We have developed a suite of optional features designed to optimize Bobcat for specific industries. Our proprietary Xpansion Port includes integration options such as a 1D/2D barcode scanner, common access card (CAC) reader and near-field communications (NFC) reader. Warehousing and distribution businesses can consolidate operations and reduce equipment costs with the Bobcat’s barcode scanner or NFC reader capabilities, while the military and other governmental entities can use the CAC reader for increased security.
XSLATE D10
Launched in December 2015, the XSLATE D10 is the follow on to our Android Ranger X.
The hardened exterior, doubly-powerful interior and “all ports, all the time” connectivity of the XSLATE D10 rugged tablet gives the Android 5.1, Lollipop OS what we believe is a tough, new edge over its competition.
Unlike many other Android products, the XSLATE D10 is fully rugged with a broad range of purpose-built capabilities to support demanding workflows. The product is IP-65 rated for protection against rain, water and dust. Using the MIL-STD-810G protocol, it is rated for five foot drops. Elastomer bumpers, a chemically hardened display, and a stiff magnesium alloy midframe, help protect the XSLATE D10 against screen breakage. The product is also compliant with C1D2 and ATEX standards for hazardous locations and explosive environments. Similar to the XSLATE B10, the XSLATE D10 provides eight standard I/O ports, including 2x USB 3.0, Micro SDXC, Micro HDMI-out, and RJ45 Gigabit Ethernet connection and optional HDMI Input module. The XSLATE D10 is certified for 4G LTE networks and also is equipped with Wi-Fi and Bluetooth standard. Additionally, the product is compatible with our full range of G2-class accessories, including industrial and vehicle docks, companion keyboard, top handle, kickstand, barcode reader, CAC/SmartCard reader, NFC and HDMI-In modules.
The XSLATE D10 also provides the power customers need, along with the battery life required for all day operation. It is powered by an Intel x86 Atom-series core processor with 4GB RAM and a 64GB SSD. It provides up to 20 hours of battery life with the optional hot-swappable second battery option, and leverages Google’s Project Volta and Android ultra-power saving mode for energy consumption savings.
XBOOK B10/D10
Leveraging the XSLATE B10 and the XSLATE D10 products described above, in February 2018 we introduced the XBOOK, which allows the user to choose between a tablet and a notebook. We developed a semi-rugged detachable keyboard that also provides enhanced protection for the device screen when attached and closed. With a built in kickstand, this device can be opened and used like a traditional notebook computer, or the keyboard can be removed and stored.
By designing the interface as a semi-rugged add-on, we were able to deliver this device at a lower price than competitive products offering fully rugged keyboards.
Xplore M60
In May 2018, we introduced our first handheld unit, the Xplore M60. This Android powered device is rugged, mobile and features a long life battery to support all day field deployment. The Xplore M60’s six inch screen is a unique offering in rugged mobile computing, and the optional integrated bar code scanner provides for expanded use.
·
|
Weighing in at only 0.81 lbs. (369g), this 6” Android handheld is the easiest way to keep every piece of job-related data close at hand 24/7 without feeling weighed down.
|
·
|
The combination of Wi-Fi, GPS, Bluetooth, LTE Data and Voice, and NFC wireless technologies provides an all-access pass to information-generating IoT, Industry 4.0 or GIS systems that are crucial to making revenue-driven, or cost-saving, business decisions throughout the day.
|
·
|
High-definition cameras and voice capabilities make it easy for all employees to up-level actionable information to management whether they’re working on the shop floor, from the road, or in the field.
|
The highly accurate data imported from the front lines via the built-in barcode scanner and NFC technology enables allows the user to track, trace and manage everything from raw materials and finished goods to trucks and trains.
Strategy
Our strategy is to become the leading developer and marketer of rugged mobile wireless personal computer and hand held devices. We currently compete in the rugged tablet PC and rugged 2-in-1 market, and in May 2018 we entered into the rugged hand held device market.
Continue Expansion into New Rugged Product Markets
We have successfully broadened our offerings and opportunity by development and acquisition of new products. During fiscal year 2018, we launched the XBOOK B10 and XBOOK D10. We also received the third full refresh of products from our largest customer, which was fulfilled with our XSLATE B10 product. Our recent launch of the Xplore M60 opens up another rugged device market, and provides us with a form factor requested by many of our existing customers
We believe that our lines of rugged devices make us uniquely positioned to capitalize on the convergence of four current market trends:
·
|
Continuous expansion in the use of wireless data;
|
·
|
Increased awareness and rapid adoption of mobile computing;
|
·
|
Transition toward rugged computing solutions in the face of high failure rates for non-rugged devices that have been deployed in non-traditional working environments; and
|
·
|
Proliferation of the internet-of-things, and resulting demand for instant data.
|
We believe that many enterprises are coming to the realization that the total cost of computer ownership is improved with rugged computing solutions.
Leverage Existing Markets
We continue to analyze the needs of the vertical markets that we are currently addressing, so that we can continue to increase our sales in those markets. We intend to continue to focus on customer specific applications by leveraging our core products and technology, as well as our key strategic alliances.
Our strategy includes the following key elements:
Identifying and targeting vertical markets, major account and OEM opportunities
— To achieve broad market penetration with our products, we intend to continue to focus on specific vertical market applications, major accounts and relationships with our original equipment manufacturers, or OEMs.
Outsourcing manufacturing and nurturing of key relationships—
We intend to continue to outsource our manufacturing function through our engineering and manufacturing collaborations with our contract manufacturers, so that we can continue to focus our resources on our technology and product development, customer applications and project deployment activities. In addition, we plan to continue nurturing our key distributor and reseller relationships.
Flexible product design and customer-centric approach
— We believe that the design of our products provides us with the flexibility to respond to customer‑specific requirements. We involve our customers in our product development and enhancement efforts, which is intended to result in improved communication throughout the entire sales cycle, and is designed to position our products as the optimal mobile computing platform for our customers.
Delivery of high quality, reliable systems
— We measure and seek to improve product quality through rigorous quality assurance programs implemented through our strategic alliances, in concert with performing our custom‑designed test programs. We also utilize feedback provided to us by our customers.
Marketing and distribution relationships
— Within each targeted vertical market, we intend to focus on entering into co-marketing relationships with key application providers and systems integrators. This strategy is designed to allow us to use multiple sales channels within a region, while maintaining key strategic alliances.
Sales
Our direct customers primarily consist of distribution companies, such as large computer companies, specialized system integrators, software vendors, distributors and value-added resellers, and to a lesser extent end-users of our devices. For fiscal year 2018, approximately 92% of our total revenues were attributable to sales through our distribution and reseller channels, and approximately 8% of our total revenues were attributable to sales directly to end-users. We currently have relationships with more than 120 distributors and direct resellers. Our distributors and resellers generally have large sales organizations that, in turn, sell our products to entities that are the ultimate end-users. In any given year, a single distributor may account for a significant portion of our revenue. In fiscal year 2018, we had three resellers located in the United States who accounted for approximately 45% of our total revenue in the aggregate.
As of March 31, 2018, we had a sales team of twenty-three individuals that either have geographic responsibilities for direct and indirect sales opportunities or responsibilities for specific enterprise customers, without limitation by geography. Our regional and international sales teams work closely with our distributors and resellers in defined regions. Our enterprise sales team works on specific large accounts and industry verticals. Our distributors are currently selling our products into the public safety, utility, telecommunications, field service, warehousing logistics, transportation, oil and gas production, manufacturing, route delivery, military and homeland security markets.
Our North American revenue was approximately 70% of our total revenue in fiscal year 2018, as compared to approximately 73% of total revenue in fiscal year 2017.
Marketing
There are three primary areas of focus for our marketing efforts:
·
|
Brand awareness and lead generation;
|
·
|
Channel development; and
|
Brand Awareness and Lead Generation
Our brand awareness and lead generation initiatives use digital media, are focused on industry vertical markets, and leverage our channel distributors to amplify our message into the market. Key elements of these initiatives include:
·
|
11 search engine optimized websites in six different languages;
|
·
|
PPC campaigns with Google across multiple countries, supported by industry specific landing pages;
|
·
|
A content marketing engine that establishes us as an authority in the rugged tablet space and draws prospects to our website for conversion to leads, including whitepapers, thought leadership blogs, best practices webinars, case studies, and infographics;
|
·
|
Active presence in social media channels including LinkedIn, Twitter, and Facebook;
|
·
|
Advertising and content syndication on vertically focused media properties (online and offline);
|
·
|
Vertically targeted email campaigns;
|
·
|
Industry-specific tradeshows and online events;
|
·
|
Public relations activity that includes sales announcements, earned media coverage, and bylined articles for publications; and
|
·
|
Making all creative assets available to our channel distributors for easy delivery to their prospects and customers.
|
Channel Development
Our go-to-market strategy is channel driven, and includes (i) distributors that enable quick product delivery and third party product configuration, (ii) direct and indirect IT resellers with rugged mobility expertise in key verticals, (iii) systems integrators that may bring elements such as wireless communication systems to a project, (iv) installation and deployment companies, and (v) application software suppliers that service our target verticals. Our channel development efforts are focused on identifying and recruiting distributors that add value to our customer deployments and provide the tools and resources that enable them to be successful in positioning our products and designing and deploying world-class solutions for our shared end-customers. To achieve this, we:
·
|
Provide both onsite and online training curriculum, including sales and service certification courses;
|
·
|
Fund turn-key case study and web content syndication programs;
|
·
|
Provide market development funding for joint brand awareness and demand generation campaigns;
|
·
|
Provide a knowledge base for frequently asked questions and fast problem resolution;
|
·
|
Hold annual conferences in the Americas and in Europe to share success stories and future plans; and
|
·
|
Solicit feedback on how we can further improve our programs to increase channel effectiveness.
|
Product Marketing
Our product marketing work starts with aligning our product development plans with the anticipated needs of our target end-users. We recognize that, as a smaller company, our key to success depends on our ability to provide better products than our larger competitors, and to be more responsive to our customers’ needs. As such, our product innovations are grounded in combining emerging technologies with customer needs. When embarking on the development of a new product or an upgrade of an existing one, we devote resources to engaging end-users, distributors and industry experts in the design process. We believe that this process, combined with our flexibility to make quick decisions with the support of our contract manufacturers, has enabled us to deliver products with market leading technology ahead of our competitors.
The market prices for rugged devices are higher than those for commercial grade devices used in traditional office settings. However, we believe that the total cost of ownership of a rugged device over a three to five-year period can be significantly lower than the cost of a cheaper non-rugged computer in certain environments. Several of our customers have disclosed in our customer‑based market research studies that they experienced higher direct costs using non-rugged devices, with more frequent damage, information retrieval costs and replacement costs, as well as higher indirect costs, such as prolonged downtime. This conclusion is also supported by third-party research.
Market Segments
We target a number of different market segments in which we believe the deployment of rugged mobile computers can greatly improve operating efficiencies, reduce related costs, and improve end-user service levels.
Telecommunications, Utilities & Energy
. Generally, to remain competitive, telecommunications, utility and energy related companies continuously have to respond to their customers’ requests for service and infrastructure maintenance expeditiously and efficiently. We believe that the reliable and real-time movement of information to and from the field is vital to the success of any field automation system. To fully leverage the value of mobile computing in these environments, the devices must also be safe to use in hazardous environments where explosive gases may be present – particularly relevant to the oil and gas industry. We have responded with products that are compliant with C1D2 and ATEX standards for use in these environments. Two global top ten telecommunications providers in the world are end-users of our products, as well as several of the world’s largest utility and energy companies, including Hydro One in Canada, EDF in France, RWE in Germany, Sydney Water in Australia, and Thames Water in the United Kingdom.
Military.
As the military continues to transition to commercial and industrial grade rugged mobile computing systems, we expect this market segment will represent a significant opportunity for our products. In particular, we believe the U.S. Department of Defense is generally moving away from full military specifications adherence, except for system‑critical operations, and instead is increasing emphasis on purchasing commercial, off-the-shelf (COTS) equipment. The military market sector includes ground and C4I (Command, Control, Communications, Computers and Intelligence) systems. We have deployed solutions across the Army, Air Force, and Navy in the U. S., as well as military operations in other countries.
Public Safety.
Given the focus in the U.S. on homeland security matters and the continued commitment by Federal, state and municipal governments on law enforcement, fire and emergency medical services, members of the public safety sector are searching for efficiencies that will better enable them to do their jobs. Rugged mobile computing devices assist these groups in a variety of ways. For example, having a reliable and durable tablet computer provides law enforcement agencies with immediate and reliable access in the field to national and local criminal databases. In this market segment, our products have been sold to hundreds of public safety organizations across the world, including the Abu Dhabi Police, Danish Ambulance Service, and the German Red Cross.
Manufacturing.
Manufacturing floor environments demand resiliency and mobility, and require more rugged computing power than ever before, to store large amounts of data and display complex and highly detailed drawings. Whether assembly, maintenance, or repair operations are confined to an indoor factory, an enclosed hangar, or an outdoor testing facility, the environmental elements and vibrations from equipment and forklifts can be harmful to the average computing device. Our rugged tablet IP ratings and the results of extensive MIL-STD-810G tests are particularly relevant to this segment. We have experienced particular success in the Automotive and Aerospace sectors of this market segment, with end-users that include Boeing, Bombardier in Canada, Embraer in Brazil, Dassault Aviation in France, Audi in Germany, and Volkswagen in Italy.
Transportation and Distribution.
We believe that globalization, increased competition and heightened consumer expectations are contributing factors to the adoption of mobile computing technologies by many leading transportation and distribution companies.
That means mobilizing highly complex and integrated logistical tasks in a way that is simple and straightforward, whether on planes, trains, forklifts or tractor-trailers.
These operations typically require real time price modifications, product introductions and transitions, timely inventory management, load balancing and scheduling. We believe that this market segment will continue to automate order fulfillment, inventory control and management systems as part of an overall effort to integrate enterprise resource planning and supply chain management information systems. Our end-users include leading railroad, trucking and airline companies, package delivery companies, as well as the warehouse operations of large automotive manufacturing and food processing plants. We have a diverse set of customers in this segment, including Norfolk Southern, CSX, UPS, and Hertz.
Research and Development
We have assembled an experienced engineering and product development team. Through the collaboration of our employees and the engineering teams of our contract manufacturers, we believe we are able to bring significant resources to the research, development and design of our products.
We seek to design and manage product life cycles through a controlled and structured process. We involve customers and industry experts from our target markets in the definition and refinement of our product development. Product development emphasis is placed on meeting industry standards and product specifications, ease of integration, ease of use, cost reduction, design-for manufacturability, quality and reliability.
We continue to invest in research and development to enhance and expand our rugged mobile devices. We are considering additional form factors, operating systems and screen technologies for integration into our rugged devices as we seek to expand into additional markets. During the fiscal years ended March 31, 2018 and 2017, we expended $3,354,000 and $4,462,000, respectively, on research and development activities, none of which was borne by our customers.
Competition
Competition in our industry is intense and is characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and rapid changes in end-user requirements. To be competitive, we must continue to develop and introduce, on a timely and cost-effective basis, new products and product features that keep pace with technological developments and emerging industry standards, and address the increasingly sophisticated needs of end-users. We believe that the principal competitive factors affecting the market for our products are the products’ performance, features and reliability, price, customer service, reputation in the industry and brand loyalty. We believe that our strongest competitive advantages are our products’ durability and reputation in the industry. In order to compete, we will be required to continue to respond promptly and effectively to the challenges of technological changes and our competitors’ innovations.
Our primary competitors in the mobile rugged computer market include the following:
·
|
Panasonic
. Panasonic is the largest provider of mobile rugged computers and offers a series of traditional and convertible notebooks. Panasonic promotes a rugged computer, known as the Toughbook, which is well known in the industry.
|
·
|
Getac
. Getac is a provider of mobile rugged computers, including tablets and traditional and convertible notebooks.
|
·
|
Mobile Demand
. Mobile Demand is a provider of rugged tablet computers.
|
·
|
Dell
. Dell is a relative newcomer to the rugged tablet business, currently offering a single product.
|
·
|
DRS Technologies
. DRS is a provider of rugged mounted computer systems, primarily to the U.S. Military.
|
Panasonic and Getac have more product offerings and greater financial, technical, and research and development resources and marketing capabilities than we do. Dell has greater financial, technical, and research and development resources and marketing capabilities than we do. DRS produces tablets with specific connectivity required by the U.S. Military.
We also face competition from manufacturers of non-rugged mobile devices, such as Samsung, Dell, Hewlett‑Packard, Apple, Sony and Toshiba, to the extent end-users decide to purchase less expensive traditional devices for use in environments that we believe are better suited for mobile rugged devices.
Manufacturing
We have a scalable manufacturing infrastructure to support our manufacturing operations. Our primary contract manufacturers, Wistron Corporation (Wistron), Pegatron Corporation (Pegatron) and Ubiqconn Technology, Inc. (Ubiqconn), are located in Taiwan. Wistron, the supplier of our iX104 and XSLATE B10 products, is recognized as a leading provider of computers and electronic components to some of the world’s largest technology companies, including Dell and Hewlett‑Packard. Pegatron, the supplier of our XSLATE R12 and F5/C5 products, is also a leading provider of computers and electronic components to the world’s largest technology companies. Ubiqconn, the supplier of our XSLATE D10 and Bobcat products, was spun off from the First International Computer (FIC) Group in 2011 and is a wholly-owned subsidiary of FIC. FIC has been a dominant force in technology research, product development and manufacturing services since 1980. Ubiqconn is comprised of FIC’s Industrial Computer Business Unit and FIC’s original research and development team, which has accumulated over twenty years of experience in developing IT products for worldwide first tier companies. We contract with BeiJing UniStrong Science & Technology, Ltd. (UniStrong) for the production of our Xplore M60 rugged handheld device. We expect our relationships with our contract manufacturers will support our expected sales and product demand for the foreseeable future.
We outsource the majority of our manufacturing services for our rugged devices to our contract manufacturers, including board production, parts procurement, assembly, some quality assurance testing, warranty repair and service. We have design and manufacturing agreements with our contract manufacturers and they collaborate with us on product specifications and provide us with the flexibility to make changes to our products as market conditions change.
Under the terms of our agreements with our contract manufacturers for our tablets and 2-in-1 devices, they provide us with design, manufacturing and support services related to our rugged devices. The purchase price of our products is determined based on the specific configuration of the device being produced, and may be subject to cost reduction plans and volume based discounts. At least quarterly, we meet with each of our contract manufacturers to develop cost reduction plans. The plans take into account alternative suppliers along with components, design, process changes and other cost savings procedures. Each month we provide the contract manufacturers with a six month rolling forecast of the products we anticipate ordering. Generally, each of the contract manufacturers have approximately 90 days after its acceptance of our purchase order to ship the product. If products ordered during any quarter exceed the volume projected in the forecast, each of the contract manufacturers has agreed to use its reasonable best efforts to deliver the excess products within 45 days after its acceptance of the applicable purchase order.
Our contract manufacturers provide several warranties to us, including that they have all necessary rights required to sell the products, that each product will be free from any material defect, that the products will be free from any liens, encumbrances or defects in title and that the products will comply with all specifications. The current terms of our agreements with our contract manufacturers are for one year and automatically renew for additional one year terms, unless either party provides written notice of its intent to terminate the agreement at least 90 days prior to the expiration of any renewal term. In addition, the agreements contain provisions that allow for termination for any reason by either party upon 120 days’ notice.
We purchase materials, supplies and product subassemblies for our rugged mobile personal computer tablets and 2-in-1 devices from a number of vendors. Some key components included in our line of products are currently available only from single or limited sources. In the past, we have experienced significant price increases and limited availability of certain components that are not available from multiple sources. We are dependent upon Microsoft Corporation for various software products, including products included in our rugged devices.
Like other participants in the computer manufacturing industry, we ordinarily acquire materials and components through a combination of blanket and scheduled purchase orders to support our requirements for periods averaging 90 to 150 days. At times, we have been constrained by parts availability in meeting our product orders. From time to time, we have obtained scarce components for somewhat higher prices on the open market, which may have a negative impact on our gross margins on our products, but does not disrupt production. On occasion, we have also acquired component inventory from our suppliers in anticipation of supply constraints.
Intellectual Property
Our performance and ability to compete are dependent to a significant degree on our proprietary technology. We rely primarily upon a combination of patent, trademark, copyright and trade secret laws and license agreements to establish and protect proprietary rights in our products and technology. On March 31, 2018, we had thirty-eight U.S. patents and thirteen non-US patents. In addition, we had one U.S. patent application, one Chinese patent application, one European Union patent application and one Taiwanese patent application related to proprietary elements of our tablet devices, and one U.S. patent application, one Taiwanese patent application and one International PCT patent application related to our wireless dock. Even with patent protection, it may be possible for a third party to copy or otherwise obtain and use our products or technology without our authorization, or to develop similar technology independently. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in certain foreign countries.
We do not believe that any of our products infringe on the proprietary rights of any third parties. There can be no assurance, however, that third parties will not claim such infringement by us or our licensees with respect to our current or future products. In the past, we have had third parties assert exclusive patent, copyright, trademark or other intellectual property rights to technologies or marks that are important to our business. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements with the claimant, any of which could delay the development and commercialization of our products or increase the costs of our products. Since 2015, three companies have filed lawsuits against us for alleged infringement of their patents by the products we acquired from Motion. We have settled two of the lawsuits by entering into license agreements, with a modest one-time payment for each. We believe that we have no potential liability to the third claimant because we had, and continue to have, an existing license agreement with that company. We have received correspondence from one additional company alleging infringement of their patent, and offering to enter into a license agreement with a modest fee.
We work closely with our contract manufacturers to stay abreast of the latest developments in rugged mobile technology. We obtain patent licenses for some technologies, some of which require significant royalty payments, when we believe those licenses are necessary or advantageous to our business. We have entered into non-exclusive licensing arrangements with Microsoft and other software suppliers for various operating systems and application software that we sell with our rugged devices.
Government Regulation
Our business is subject to regulation by various federal and state governmental agencies in the United States. Such regulation includes the radio frequency emission regulatory activities of the U.S. Federal Communications Commission, the anti-trust regulatory activities of the U.S. Federal Trade Commission and Department of Justice, the consumer protection laws of the Federal Trade Commission, the import/export regulatory activities of the U.S. Department of Commerce, the product safety regulatory activities of the U.S. Consumer Products Safety Commission and environmental regulation by a variety of regulatory authorities in each of the areas in which we conduct business.
Our business is subject to additional government regulation related to our international operations, including local trade regulations and procedures and actions affecting production, pricing and marketing of products, and local labor regulations, including local labor issues faced by our suppliers and OEMs. We are also subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, as a result of our business operations in many foreign countries, particularly in those with developing economies, where companies engage in business practices prohibited by the FCPA.
Employees
As of March 31, 2018, we had 95 full-time employees, of which 48 were employed in the operations, engineering, research and development and customer support areas, nine were involved in corporate, finance and administrative areas and 38 were employed in sales and marketing. We anticipate that we will need to hire additional employees going forward. Our employees are not represented by a union or other collective bargaining unit and we have never experienced a work stoppage. We believe that our employee relations are good.
Trademarks and Service Marks
Each trademark, trade name or service mark of any other company appearing in this Annual Report on Form 10-K belongs to its holder.
There are many risks that affect our business and results of operations, some of which are beyond our control. If any of the following risks actually occur, our business, financial condition or operating results could be materially harmed. This could cause the trading price of our common stock to decline, and you may lose all or part of your investment. Additional risks that we do not yet know of or that we currently think are immaterial may also affect our business and results of operations.
Risks Relating to our Business
We have a history of net losses which may continue.
Until fairly recently, we have incurred net losses in each fiscal year since our inception. As of March 31, 2018, our accumulated deficit was approximately $142 million, primarily due to our past losses. Historically, our losses have been primarily due to our expenses incurred in research and development of our technology and products and from selling and marketing our products, which expenses do not vary with levels of our revenue. We may continue to incur additional operating losses as we continue our research and development efforts, introduce new products and expand our sales and marketing activities.
Since we acquired the Motion assets in 2015, our operating expenses have more than doubled. We also incurred additional expenses beginning in fiscal 2016 related to (i)
interest payments on the indebtedness we initially incurred in connection with the Motion acquisition, (ii) amortization of intangible assets associated with the acquisition, (iii) other related acquisition, integration and financing costs, and (iv) related depreciation and other amortization. W
e cannot assure you that our future revenue will be adequate to offset these increased operating expenses, which may
keep us from being profitable going forward. We cannot assure you that we will generate net profits from operations in fiscal 2019 or any subsequent years.
We cannot assure you that our revenue will increase or that we will be profitable in any future period.
In fiscal year 2018, we derived more than 10% of our revenue from three different customers. If we are unable to replace revenues generated from one or more of our major resellers or end-users with revenues from others in future periods, our revenues may decline and our growth would be limited.
Historically, in any given year a single customer, either reseller or end-user, could account for more than 10% of our annual revenue. In fiscal year 2018, three resellers, Prosys, Synnex Information Technologies, Inc. and SHI International, Inc., accounted for approximately 21%, 14% and 10% of our total revenue, respectively. SHI International and Synnex Information Technologies, accounted for approximately 20% and 16% of our total revenue, respectively, for fiscal year 2017. If we are unable to replace revenues generated from one or more of our major resellers or end-users with revenues from others, our revenues may decline, we may incur losses due to our fixed expenses, and our growth could be limited.
We experience lengthy sales cycles for our products and the delay of an expected large order could result in a significant unexpected revenue shortfall.
The purchase of our rugged devices is often an enterprise-wide decision for prospective end-users, which requires us to engage in sales efforts over an extended period of time and provide a significant level of education to prospective end-users regarding the uses and benefits of such devices. As a result, our products generally have a lengthy sales cycle, ranging from several months to several years. Consequently, if our forecasted sales from a specific end-user are not realized, we may not be able to generate revenue from alternative sources in time to compensate for the shortfall. The loss or delay of an expected large order could also result in a significant unexpected revenue shortfall. Moreover, to the extent we enter into and deliver our products pursuant to significant contracts earlier than we expected, our operating results for subsequent periods may fall below expectations.
Our quarterly operating results are likely to fluctuate as a result of many factors, and our quarterly operating results may not be indicative of results in any given fiscal year or future quarter.
Our quarterly revenue, expenses, operating results, and gross profit margins may vary significantly from quarter to quarter. Such fluctuation may result from our inability to replace revenue generated from large orders from one of our major resellers or end-users in one quarter with revenue from other resellers and end-users in subsequent quarters, the lengthy sales cycle related to our products and any delays in the delivery of products or components. Our quarterly revenue could also be materially affected in any period by a decline in the economic prospects of our end-users or the economy in general, which could alter current or prospective end-users’ spending priorities or budget cycles, or extend our sales cycle for the period. For example, in fiscal year 2016, one of our largest end-users was the subject of an extended labor strike. During the duration of that strike, that end-user greatly reduced its orders for our products. Due to such factors, our quarterly operating results are likely to fluctuate, and such results may not be indicative of our results in any given fiscal year or future quarter. As a result, our operating results may fall below the expectations of securities analysts and investors in some quarters, which could result in a decrease in the market price of our common stock. You should not rely on quarter-to-quarter comparisons of our results of operations as an indicator of our future results
.
We are currently dependent on contract manufacturers to manufacture our products and products under development and our reliance on contract manufacturers subjects us to significant operational risks, many of which would impair our ability to deliver products to our customers should they occur.
We currently rely primarily on contract manufacturers for the manufacture of our products. Such reliance involves a number of risks, including:
·
|
reduced management and control of component purchases;
|
·
|
reduced control over delivery schedule and quality assurance;
|
·
|
reduced control over manufacturing yields;
|
·
|
lack of adequate capacity during periods of excess demand;
|
·
|
limited warranties on products supplied to us;
|
·
|
potential increases in prices;
|
·
|
interruption of supplies from assemblers as a result of fire, natural calamity, strike or other significant events, and
|
·
|
misappropriation of our intellectual property.
|
Our business is therefore dependent upon our contract manufacturers for our manufacturing capabilities. During the fiscal years ended March 31, 2018 and 2017, we purchased inventory and engineering services of approximately $55.0 million and $38.0 million, respectively, from our contract manufacturers. Our agreements with the contract manufacturers contain provisions that allows for termination by either party for any reason. Each of our contract manufacturers supplies a higher volume of products to our larger competitors. We cannot assure you that our contract manufacturers will continue to work with us, that they will continue to be able to operate profitably, that they will be able to meet our manufacturing needs in a satisfactory and timely manner or that we can obtain additional or alternative manufacturers when and if needed.
The availability of our contract manufacturers and the amount and timing of resources to be devoted by them to our activities is not within our control, and we cannot assure you that we will not encounter manufacturing problems that would materially harm our business. The loss of one of our contract manufacturers, a significant price increase that we cannot pass on to our customers, an interruption of supply or the inability to obtain an additional or alternative manufacturer when and if needed would impair our ability to deliver our products to our customers.
We face competition from competitors that have greater resources than we do and we may not be able to effectively compete against these companies.
We operate in a highly competitive industry. Our primary competitors in the mobile rugged computer market include Panasonic, Getac, DRS Technologies and Mobile Demand in the tablet computer market and Panasonic in the notebook market. We also face competition from manufacturers of non-rugged mobile computers, such as Samsung, Dell, Hewlett-Packard, Apple, Sony and Toshiba, to the extent end-users decide to purchase less expensive traditional devices for use in environments that we believe are better suited for mobile rugged devices. The principal competitive factors in our industry include:
·
|
product performance, features and reliability;
|
·
|
product availability and lead times.
|
Most of our competitors have a wider variety of products, longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. In addition, because of the higher volume of components that many of our competitors purchase from their suppliers, they are able to keep their costs of supply relatively low and, as a result, may be able to recognize higher margins on their product sales than we do. Many of our competitors may also have existing relationships with our contract manufacturers, the resellers who we use to sell our products, or with our potential customers. This competition may result in reduced prices, reduced margins and longer sales cycles for our products. The introduction of lower-priced devices, combined with the brand strength, more product offerings to address shifting demand for specific rugged product form factors, extensive distribution channels and financial resources of the larger competitors, could cause us to lose market share and could reduce our margins on those devices we sell. If any of our larger competitors were to commit greater technical, sales, marketing and other resources to our markets, our ability to compete would be adversely affected. If we are unable to successfully compete with our competitors, our sales would suffer and, as a result, our financial condition would be adversely affected.
If we are unable to acquire key components or are unable to acquire them on favorable terms, our business will suffer.
Some key components included in our line of products are currently available only from single or limited sources. In addition, some of the suppliers of these components are also supplying certain of our competitors. We cannot be certain that our suppliers will be able to meet our demand for components in a timely and cost-effective manner. We carry little inventory of our products or our products’ components and, as a result, rely on our suppliers to deliver our products and necessary components to us or our contract manufacturers in a timely manner based upon forecasts we provide. If any of our suppliers become unreliable in providing components, we may not be able to develop an alternative source of supply in a timely manner, which could hurt our ability to deliver our products to our customers. In addition, if we are unable to buy these components on a timely and a cost-efficient basis, we may not be able to deliver products to our customers, or the margins we receive for our products may suffer, which would negatively impact our future financial performance and, in turn, seriously harm our business.
At various times, some of the key components for our products have been in short supply. Delays in receiving components would harm our ability to deliver our products on a timely basis. In addition, because we expect to rely on purchase orders rather than long-term contracts with our suppliers, we cannot predict with certainty our ability to procure components in the longer term. If we receive a smaller allocation of components than is necessary to manufacture our products in quantities sufficient to meet our customers’ demand, those customers could choose to purchase competing products.
In January 2015, the supplier of screens for our iX104C6 product went out of business without giving us any prior notice. In addition, the same supplier supplied screens for approximately 50% of Motion’s products. We suffered delays in shipping some of our iX104C6 product orders, as well as some of the Motion C5 and F5 product orders, in the first quarter of our fiscal year ending March 31, 2016, some of which may have caused the loss of sales in the that fiscal year and beyond. We continue to have to manage our suppliers of screens for our products, and may experience additional disruptions in the future. In addition, any delays in shipping our products may shift some of our revenues into later periods, which may make it even more difficult for you to rely on quarter-to-quarter comparisons of our results of operations as an indicator of our future results.
If we are unable to successfully protect our intellectual property, our competitive position will be harmed.
Our ability to compete is heavily affected by our ability to protect our intellectual property. We rely on a combination of patents, copyright and trademark laws, trade secret, confidentiality procedures and contractual provisions to protect our proprietary rights. We also enter, and plan to continue to enter, into confidentiality or license agreements with our employees, consultants and other parties with whom we contract, and control access to and distribution of our software, documentation and other proprietary information. The steps we take to protect our technology may be inadequate. Existing trade secret, trademark and copyright laws offer only limited protection. Unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, time consuming and costly, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. We cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, the effect of either of which would harm our competitive position in the market.
Others could claim that our products infringe on their intellectual property rights, which may result in costly and time consuming litigation and could delay or otherwise impair the development and commercialization of our products.
In recent years, there has been a significant increase in litigation in the United States involving patents and other intellectual property rights. We do not believe that our products infringe on the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by us or our licensees with respect to current or future products. Claims for alleged infringement and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our intellectual property rights. Any such claims, with or without merit, could be time consuming, expensive to defend, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could delay the development and commercialization of our products or reduce our margins. If we are unable to obtain a required license, our ability to sell or use certain products may be impaired. In addition, if we fail to obtain a license, or if the terms of the license are burdensome to us, our operations could be materially harmed.
We are subject to risks by doing business outside of the United States that could impair our ability to grow our revenues.
In the fiscal years ended March 31, 2018 and March 31, 2017, approximately 30% and 27%, respectively, of our revenue was comprised of sales made outside of the United States. Our future business and financial performance could suffer due to a variety of factors related to our international operations, including:
·
|
ongoing instability or changes in a country’s or region’s economic or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military or political conflicts;
|
·
|
longer collection cycles and financial instability among customers;
|
·
|
trade regulations and procedures and actions affecting production, pricing and marketing of products, including policies adopted by countries that may champion or otherwise favor domestic companies and technologies over foreign competitors and governmental currency controls or devaluations versus the U.S. Dollar, which could make our products more expensive in those markets;
|
·
|
local labor conditions and regulations, including local labor issues faced by specific suppliers and OEMs;
|
·
|
changes in the international, national or local regulatory and legal environments;
|
·
|
differing technology standards or customer requirements;
|
·
|
import, export or other business licensing requirements or requirements relating to making foreign direct investments, which could increase our cost of doing business in certain jurisdictions, prevent us from shipping products to particular countries or markets, affect our ability to obtain favorable terms for components, increase our operating costs or lead to penalties or restrictions; and
|
·
|
fluctuations in freight costs and duty costs, limitations on shipping and receiving capacity, and other disruptions in the transportation and shipping infrastructure at important geographic points of exit and entry for our products and shipments.
|
The factors described above also could disrupt our product and component manufacturing and key suppliers located outside of the United States. For example, we rely on contract manufacturers in Taiwan for the production of our tablet devices.
In many foreign countries, particularly in those with developing economies, there are companies that engage in business practices prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act of 1977, as amended, or the FCPA. Although we have are implemented policies, procedures and training designed to facilitate compliance with these laws, our employees, contractors and agents may take actions in violation of these policies. Any such violation, even if prohibited by our policies, could have an adverse effect on our business and reputation.
As we continue expanding our cross-border operations into foreign markets, we will face risks associated with expanding into markets in which we have limited or no experience and in which we may be less well-known. We may be unable to attract a sufficient number of customers, fail to anticipate competitive conditions or face difficulties in operating effectively in these new markets or across markets. The expansion of our international business will also expose us to risks relating to staffing and managing those operations, increases in duty rates, exchange or price controls, increased costs to protect intellectual property, tariffs and other trade barriers, differing and potentially adverse tax consequences, increased and conflicting regulatory compliance requirements, political, social and economic changes and disruptions, lack of acceptance of our product offerings, challenges caused by distance, language and cultural differences and possible difficulty in enforcing contracts or legal rights under foreign legal systems. Accordingly, any efforts we make to expand our international operations may not be successful, which would have a material and adverse effect on our business, financial condition and results of operations.
If we are unable to retain key personnel, we may not be able to execute our business strategy.
Our operations are dependent on the abilities, experience and efforts of a number of key personnel, including our president and chief executive officer, Tom Wilkinson, who was previously our chief financial officer. Should any of these key employees be unable or unwilling to continue in our employ, our ability to execute our business strategy may be adversely effected. In addition, our success is highly dependent on our continuing ability to identify, hire, train, motivate and retain highly qualified management, technical and sales and marketing personnel. Competition for such personnel is intense. We may be unable to attract and retain the personnel necessary for the development of our business. Because we have experienced operating losses in the past, which resulted in a reduction in our workforce and a decline in the market price of our stock, we may have a more difficult time in attracting and retaining the employees we need. Also, we do not have “key person” life insurance policies covering any of our employees. The inability to attract or retain qualified personnel in the future or delays in hiring skilled personnel could harm our relations with our customers and our ability to respond to technological change, which could prevent us from executing our business strategy. Our ability to manage future growth effectively will also require us to successfully attract, train, motivate, retain and manage new employees and continue to update and improve our operational, financial and management controls and procedures.
If we fail to predict our manufacturing requirements accurately, we could incur additional costs or experience manufacturing delays, which could reduce our gross margins or cause us to lose sales.
We provide, and will continue to provide, forecasts of our demand to our contract manufacturers prior to the scheduled delivery of products to our customers. If we overestimate our requirements, our contract manufacturers may have excess component inventory, which could increase our costs. If we underestimate our requirements, our contract manufacturers may have an inadequate component inventory, which could interrupt the manufacturing of our products and result in delays in shipments and revenue. In addition, lead times for materials and components that we order vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. We may also experience shortages of components from time to time, which also could delay the manufacturing of our products or increase the costs of our products.
Our inability to obtain any third-party license required to develop new products and product enhancements could seriously harm our business, financial condition and results of operations.
From time to time, we are required to license technology from third parties to develop new products or product enhancements. Third-party licenses may not be available to us on commercially reasonable terms, or at all. Our inability to obtain any third-party license necessary to develop new products or product enhancements could require us to obtain substitute technology of lower quality or performance standards, or at greater cost, which could seriously harm our business, financial condition and results of operations.
We must respond quickly and effectively to new technological developments, and the failure to do so could have a material and adverse effect on our results of operations.
Our failure to maintain our technological capabilities or to respond effectively to technological changes could adversely affect our business, results of operations or financial condition. Our future success also depends on our ability to enhance existing hardware and systems and to respond to changing technological developments. If we are unable to successfully develop and bring to market new hardware and systems in a timely manner, our competitors’ technologies or services may render our products or services noncompetitive or obsolete.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we store sensitive data, including intellectual property, our proprietary business information and that of our customers and suppliers, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure maintenance of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business, revenues and competitive position.
Our implementation of an ERP software solution and other information technology systems could result in significant disruptions to our operations.
We completed our plan to implement an enterprise resource planning, or ERP, system during our 2018 fiscal year. This project will continue with the implementation of other complementary information technology systems over the next several years. Implementation of these solutions and systems is highly dependent on coordination of numerous software and system providers and internal business teams. The interdependence of these solutions and systems is a significant risk to the successful completion of the initiatives and the failure of any one system could have a material adverse effect on the implementation of our overall information technology infrastructure. We may experience difficulties as we transition to these new or upgraded systems and processes, including loss or corruption of data, delayed shipments, decreases in productivity as our personnel and third party providers implement and become familiar with new systems, increased costs and lost revenues.
In addition, transitioning to these new systems requires significant capital investments and personnel resources. Difficulties in implementing new or upgraded information systems or significant system failures could disrupt our operations and have a material adverse effect on our capital resources, financial condition, results of operations or cash flows. Implementation of this new information technology infrastructure has a significant impact on our business processes and information systems across a significant portion of our operations. As a result, we will be undergoing significant changes in our operational processes and internal controls as our implementation progresses, which in turn will require significant change management, including recruiting and training of qualified personnel. If we are unable to successfully manage these changes as we implement these systems, including harmonizing our systems, data, processes and reporting analytics, our ability to conduct, manage and control routine business functions could be negatively affected and significant disruptions to our business could occur. In addition, we could incur material unanticipated expenses, including additional costs of implementation or costs of conducting business. These risks could result in significant business disruptions or divert management’s attention from key strategic initiatives and have a material adverse effect on our capital resources, financial condition, results of operations or cash flows.
Risks Relating to Ownership of our Common Stock
The anti-takeover effect of our rights plan and certain of our charter provisions could adversely affect holders of our common stock.
On July 1, 2016, in connection with the adoption of a stockholder rights plan, our board of directors declared a dividend of one right for each of our issued and outstanding shares of common stock. The dividend was paid to stockholders of record at the close of business on July 15, 2016. Each such right entitles the registered holder, subject to the terms of a rights agreement, to purchase from us one one-thousandth of a share of our Series E Participating Preferred Stock. The purpose of the rights plan is to diminish the risk that our ability to use our significant tax benefits to reduce potential future federal income tax obligations would become subject to limitations by reason of us experiencing an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986. Initially, the rights plan made it more difficult for a third party to acquire 5% or more of the voting power of our voting securities without the cooperation of our board of directors. On October 4, 2017, our board of directors amended the rights plan to increase that level to 10% or more of the voting power of our voting securities. At either level, the condition could deprive holders of our common stock of a premium that they might otherwise realize in connection with the acquisition of us by a third party. On July 3, 2018, our board of directors amended the rights plan again to exclude Zebra and its affiliates from application of the rights plan. With that exclusion, the rights plan could deprive holders of our common stock of a premium that they might otherwise realize in connection with a competing acquisition of us by a third party other than Zebra.
In addition, our authorized capital consists of preferred stock issuable in one or more series. Our board of directors has the authority to issue preferred stock and determine the price, designation, rights, preferences, privileges, restrictions and conditions, including voting and dividend rights, of those shares without any further vote or action by stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The issuance of additional preferred stock, while providing desirable flexibility in connection with possible financings and acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the voting power of our outstanding voting securities, which could also deprive holders of our common stock of a premium that they might otherwise realize in connection with the acquisition of us by a third party.
Volatility in the price for our common stock could adversely affect the long-term price of our common stock.
The trading price of our common stock has been highly volatile and may continue to fluctuate substantially. We believe that a variety of factors have caused and could in the future cause the stock price of our common stock to fluctuate significantly, including:
·
|
announcements of developments related to our business;
|
·
|
quarterly fluctuations in our actual or anticipated operating results;
|
·
|
announcements of technological innovations;
|
·
|
new products or product enhancements introduced by us or by our competitors;
|
·
|
developments in patents and other intellectual property rights and related litigation;
|
·
|
developments in our relationships with our third party manufacturers and/or strategic partners;
|
·
|
developments in our relationships with our customers and/or suppliers; and
|
·
|
general conditions in the global economy.
|
In addition, in recent years the stock market in general, and the market for shares of smaller capitalization technology companies in particular, has experienced substantial price and volume fluctuations, which have often been unrelated or disproportionate to the operating performance of the affected companies. Any such fluctuations in the future could adversely affect the market price of our common stock and the market price of our common stock may decline.
As of June 29, 2018, Phoenix Venture Fund LLC and its affiliates beneficially own approximately 12.6% of our common stock, and thus may have significant influence over matters requiring stockholder approval.
One of our stockholders, Phoenix Venture Fund LLC, or Phoenix, which is co-managed by Philip S. Sassower, our former chairman of the board, and Andrea Goren, one of our directors, beneficially owns approximately 9.2% of our common stock. In addition, excluding the shares beneficially owned by Phoenix, Mr. Sassower personally beneficially owns approximately 2.3% of our common stock through stock options he holds, and Mr. Goren, personally and through other entities controlled by him other than Phoenix, beneficially owns approximately 1.4% of our common stock. Thus, Phoenix, Mr. Sassower and Mr. Goren, together, beneficially own in the aggregate, approximately 12.6% of our common stock. Accordingly, Phoenix, Mr. Sassower and Mr. Goren may have the ability to exercise significant influence over matters generally requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, which could have the effect of delaying or preventing a third party from acquiring control over us.
We do not expect to pay dividends on our common stock.
We have never paid cash dividends on our common stock. Our current policy is to retain any future earnings to finance the future development and expansion of our business. Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, capital requirements, operating and financial conditions and on such other factors the board of directors deems relevant. Under the terms of our financing agreement with our senior lender, we are prohibited from paying cash dividends to holders of our common stock.