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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-K

 

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Commission file number:    00-52697

(Exact Name of Registrant as Specified in Its Charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

 

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

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

As of September 30, 2016, the aggregate market value of the common equity held by non-affiliates of the registrant was $49,516,644 based on the closing sale price of $2.39, as reported on The NASDAQ Stock Market.

As of June 12, 2017, the registrant had 10,989,780 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain information required by Part III of Form 10-K is incorporated by reference to the registrant’s proxy statement for its 2017 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year ended March 31, 2017.

Table of Contents

 

Forward-Looking Statements

 

From time to time, we may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”).  These forward- looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

 

The words “believe,” “plan,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “should” and similar expressions are intended to identify forward-looking statements.  Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions.  We do not intend to update these forward-looking statements, except as required by law.

 

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Annual Report on Form 10-K and other public statements we make. Such factors are discussed in the “Risk Factors” section of this Annual Report on Form 10-K.  Unless otherwise indicated or the context requires otherwise, the words “we,” “us,” “our,” the “Company” and “Xplore” refer to Xplore Technologies Corp. and its wholly-owned subsidiaries.

 

 

PART I

 

Item 1.  Business

 Overview

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

Until 2014, we competed and derived our revenue through the sale of our iX104 tablets in a subset of the rugged PC market, given the larger size and ultra-rugged attributes of our iX104 tablets, which weighs approximately 5.4 pounds.  Since then, we have reduced our dependency upon the continued market acceptance of our iX104 systems by broadening the market for our products and increasing our opportunities for revenue growth.  We have broadened our product offering, through development and acquisition, to include multiple fully-rugged and rugged tablets that are lighter weight and less expensive than our iX104 line of products.  These new products have allowed us to compete in significantly larger segments of the rugged PC market.  In 2014, we introduced our first fully-rugged, lighter weight tablets, offering Android and Windows operating systems, and in 2015 we completed the acquisition of certain assets of Motion Computing, Inc. and its subsidiaries, which we refer to herein as Motion, more fully discussed below.  This acquisition expanded our product lines to include multiple additional rugged tablet products, and expanded our domestic and international customer base.  We believe these lighter and less expensive tablets are ideal for field service applications and significantly more mobile market opportunities, as compared to our iX104.

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

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

Our key initiatives for future revenue growth include the following:

•	New product development—based on input from customer and key industry participants;

•	Continued expansion of sales activities for the Motion line of products we acquired;

•	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, 2017, however, was approximately 22% lower than the prior year.

We are a Delaware corporation and our common stock trades on The NASDAQ Stock Market under the symbol “XPLR.”

Recent Developments

On April 17, 2015, we completed the acquisition of certain of the assets of Motion.  Pursuant to the terms of a Foreclosure Purchase and Sale Agreement with Motion and Square 1 Bank, Motion’s senior secured lender, our subsidiary, Xplore Technologies Corporation of America, purchased certain of Motion’s assets, including cash, cash equivalents, accounts receivable, inventory, equipment, personal property and other assets, which we refer to herein as the Motion Acquisition. 

Also on April 17, 2015, in connection with the Motion Acquisition, our subsidiary entered into a Loan and Security Agreement with Square 1 Bank, pursuant to which Square 1 Bank provided us with formula and non-formula revolving loans for up to an aggregate amount of $15 million, which replaced our existing Accounts Receivable Purchase Agreement with DSCH Capital Partners, LLC d/b/a Far West Capital.  On April 17, 2015, we borrowed approximately $9 million under this facility to fund the cash portion of the purchase price for the Motion Acquisition.

On April 17, 2017, the aforementioned Loan and Security Agreement with Square 1 Bank matured and was replaced by a Loan and Security Agreement with Bank of America N.A., pursuant to which Bank of America provided us with a revolving asset based line of credit up to $15 million.  The new facility with Bank of America has a three-year term, is secured by substantially all of our assets, and bears interest at LIBOR plus between 2.25% and 2.75% per annum, based upon our fixed charge coverage ratio.  The balance of drawn funds at any one time cannot exceed the lesser of $15 million or the sum (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.  As of June 9, 2017, we had drawn $631,000 on this line of credit.

In fiscal year 2016, we introduced two new products, the XSLATE B10 and the XSLATE D10, which was a replacement for our former RangerX product.  In fiscal year 2017, we introduced the XSLATE R12, which was a replacement for the Motion R12 product.  Our products are described in detail below.

Products

iX104 Product Line

We have spent more than a decade on research, development and product improvements with each generation of our iX104, 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 computers 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 continued to introduce “industry firsts” and differentiating features.  The 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.  The iX104C product line also features the Intel Core i7 processor and runs on Windows 7, 8 and 10 operating systems.

Our line of iX104 tablet PCs 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 of 2015 we launched the XSLATE B10 rugged tablet, which is targeted squarely at potential customers 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 being only 2.4 lbs. We believe that the XSLATE B10 offers superior standard I/O features, a unique set of peripherals, and greater environmental resiliency than the Panasonic FX-G1.

XSLATE R12

The XSLATE R12, which replaces the 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:

Security features are also a priority in the XSLATE R12 design and include:

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 a white color 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.

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 use the CAC reader for increased security.

XSLATE D10

Launched in December of 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 under-featured 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 our 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.

Our line of tablets offer the following features:

Rugged— We have designed and built our 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.

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 tablet PCs 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 tablet PCs 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 tablet PCs 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 a given application.  Our computers combine processing power, viewability, ruggedness and connectivity, and are designed to operate in extreme environments.

Strategy

Our strategy is to become the leading developer and marketer of rugged mobile wireless computer systems.  We currently compete in the rugged tablet PC market.

Continue Expansion into New Rugged Product Markets

We have successfully broadened our offerings and opportunity by development of new products and through the Motion Acquisition.  During fiscal year 2017, we launched the award winning XSLATE R12, and also received the largest single order in our history for our flagship Android fully rugged tablet, the XSLATE D10. We believe, based upon the 2016 annual white paper published by the Mobile and Wireless Practice of Venture Development Corporation, or VDC, that an increasing number of operations are requiring their employees to transact business in the field and/or other non-traditional office environments.  The research paper published by VDC projected worldwide sales in the rugged mobile computing market to grow to over $7.8 billion by the end of calendar 2017, and for the market for large form factor rugged devices to total $2.2 billion for calendar 2016.

We believe that our lines of rugged tablet PCs are uniquely positioned to capitalize on the convergence of four current market trends:

We believe that many enterprises are coming to the realization that the total cost of computer ownership is improved through the use of rugged computing solutions.

The Motion Acquisition has also opened up larger international markets to us through the addition of a multi-country sales team and new international distributor and reseller relationships.

Leverage Existing Markets

We seek to 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 by our products, we intend to continue to focus on specific vertical market applications, major accounts and OEM relationships.

Outsourcing manufacturing and nurturing of key relationships— We intend to continue to outsource our manufacturing function, so that we can continue to focus our resources on our technology and product development, customer application and project deployment activities, through our collaborations on engineering and manufacturing matters with our contract manufacturers.  In addition, we plan to continue nurturing a number of 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.  This approach 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.  Additionally, we utilize feedback provided 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 the end-users.  For fiscal year 2017, approximately 93% of our total revenues were attributable to sales through our distribution and reseller channels, and approximately 7% 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 2017, we had two resellers located in the United States, SHI International and Synnex Information Technologies Inc., who accounted for approximately 20% and 16% of our total revenue, respectively.

As of March 31, 2017, we had a sales team of nineteen 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 76% of our total revenue in fiscal year 2017, as compared to approximately 73% of total revenue in fiscal year 2016.  The significance of the North American revenue was primarily attributable to large volume orders from our large medical, military and telecommunications end-users located in the United States.

We have significantly expanded our distribution capacity by adding the Motion distribution channel, which had been developed over a period of over ten years.  Motion sold its products into the healthcare, public safety, construction, utility and retail markets.

Marketing

 There are three primary areas of focus for our marketing effort:

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 in the market.  Key elements of these initiatives include:

Channel Development

Our go-to-market strategy is channel driven, and includes distributors that enable quick product delivery and third party product configuration, direct and indirect IT resellers with rugged mobility expertise in key verticals, systems integrators that may bring elements such as wireless communication systems to a project, installation and deployment companies, as well as 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:

Product Marketing

Our product marketing work starts with aligning our product development plans with the anticipated needs of our target customers.  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 customers, 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 computers are higher than that for commercial grade computers used in traditional office settings.  However, we believe that the total cost of ownership of a rugged computer 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 to us 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 customer service levels.

Telecommunications, Utilities & Energy.  Generally, telecom, utility and energy related companies continuously have to respond to customers’ requests for service and infrastructure maintenance expeditiously and efficiently to remain competitive.  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, they 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 PC 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 laptop, desktop, or mobile PC.  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 customers 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 Taiwan-based 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 computing systems.  We are considering additional form factors, operating systems and screen technologies for integration into our rugged platforms as we seek to expand into additional markets.  During the fiscal years ended March 31, 2017 and 2016, we expended $4,462,000 and $5,771,000, 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 customer 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 our end users.  We believe that the principal competitive factors affecting the market for our products are the product’s 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 and Getac have more product offerings and 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 computers, such as Samsung, Inc., Dell, Inc., Hewlett‑Packard Company, Apple, Inc., Sony and Toshiba, to the extent customers decide to purchase less expensive traditional computers for use in environments that we believe are better suited for mobile rugged computers.

Manufacturing

We have a scalable manufacturing infrastructure to support our growing business.  Our primary contract manufacturers, Wistron Corporation (Wistron), Pegatron Corporation (Pegatron) and Ubiqconn Technology, Inc. (Ubiqconn), are located in Taiwan.  Wistron is the supplier of our iX104 and XSLATE B10 products.  Wistron is recognized as a leading provider of computers and electronic components to some of the world’s largest technology companies, including Dell, Inc. and Hewlett‑Packard Company.  Pegatron is the supplier of our XSLATE R12, F5/C5 and CL920 products.  Pegatron, is also a leading provider of computers and electronic components to the world’s largest technology companies.  Ubiqconn is the supplier of our XSLATE D10 and Bobcat products.  Ubiqconn 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 the 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 expect our relationships with our contract manufacturers will support our expected sales growth and product demand for the foreseeable future.

We outsource the majority of our manufacturing services for our rugged mobile PC tablets 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, they provide us with design, manufacturing and support services related to our rugged mobile PC tablets.  The purchase price of our products is determined based on the specific configuration of the tablet PC being produced, and is subject to cost reduction plans and volume based discounts.  At least quarterly, we meet with each of the 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 the 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 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 mobile PC tablets.

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, copyright and trade secret laws and license agreements to establish and protect proprietary rights in our products and technology.  On March 31, 2017, 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, all related to proprietary elements of our tablet products, and one U.S. patent application, one Taiwanese patent application and one International PCT patent application related to our wireless dock.  Of these patents a total of thirty-two US patents and thirteen non-U.S. patents were acquired in the Motion Acquisition.  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, copyright and trade secret protection may be unavailable or limited in certain foreign countries.

We do not believe that 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 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.  After the Motion Acquisition, three companies filed lawsuits against us and Motion for alleged infringement of the claimant’s patent by Motion’s products and our products.  We have settled two of the lawsuits by entering into license agreements, with a modest one-time payment.  We have no potential liability with the third claimant because we had, and continue to have, an existing license agreement with that company.

We work closely with our contract manufacturers to stay abreast of the latest developments in rugged mobile computer 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 tablet PCs.

Government Regulation

Our business is subject to regulation by various federal and state governmental agencies.  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.

Employees

As of March 31, 2017, we had 88 full-time employees, of which 45 were employed in the operations, engineering, research and development and customer support areas, 10 were involved in corporate, finance and administrative areas and 33 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.

Item 1A.  Risk Factors

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 and may never become profitable.

Until fairly recently, we have incurred net losses in each fiscal year since our inception.  As of March 31, 2017, our accumulated deficit was approximately $143 million, primarily due to our past losses.  Historically, our losses have resulted primarily from expenses incurred in research and development of our technology and products and from selling and marketing our products.  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.

In addition, prior to the Motion Acquisition, Motion incurred net losses in each fiscal year since its inception.  For its fiscal year ended December 31, 2014, Motion had a net loss of approximately $9 million and, as of December 31, 2014, its accumulated deficit was approximately $128 million, primarily due to its past losses.  

Since the Motion Acquisition, our operating expenses have more than doubled.  We also incurred additional expenses beginning in fiscal 2016 related to interest payments on the indebtedness we incurred in connection with the Motion Acquisition, amortization of intangible assets associated with the acquisition, other related acquisition, integration and financing costs, and related depreciation and other amortization.  We cannot assure you that our revenue will be adequate to offset these increased expenses, which may keep us from being profitable in the future.  We cannot assure you that we will generate net profits from operations in fiscal 2018 or subsequent years.  We cannot assure you that our revenue will increase or that we will be profitable in any future period.

In fiscal year 2017, we derived more than 10% of our revenue from two different customers.  If we are unable to replace revenues generated from one or more of our major resellers or end-user customers 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 customer, could account for more than 10% of our revenue.  In fiscal year 2017, two resellers, SHI International Corp. and Synnex Information Technologies, accounted for approximately 20% and 16% of our total revenue, respectively.  Synnex Information Technologies and Prosys Information Systems, Inc., accounted for approximately 23% and 11% of our total revenue, respectively, for fiscal year 2016.  If we are unable to replace revenues generated from one or more of our major resellers or end-user customers with revenues from others, our revenues may decline 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 computer systems is often an enterprise-wide decision for prospective end-user customers, which requires us to engage in sales efforts over an extended period of time and provide a significant level of education to prospective end-user customers regarding the uses and benefits of such systems.  As a result, our products generally have a lengthy sales cycle, ranging from several months to several years.  Consequently, if forecasted sales from a specific end-user customer 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 result in a significant unexpected revenue shortfall.  Moreover, to the extent we enter into and perform significant contracts earlier than expected, 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 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-user customers with revenue from other resellers and end-users, the lengthy sales cycle related to our products and delays in the delivery of products and components.  Our quarterly revenue could also be materially affected in any period by a decline in the economic prospects of our customers or the economy in general, which could alter current or prospective customers’ spending priorities or budget cycles or extend our sales cycle for the period.  For example, in fiscal year 2016, one of our largest end user customers was the subject of a labor strike, which was only recently settled.  During the duration of that strike, our customer 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 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.

The long-term success of the Motion Acquisition will depend in part on the success of our management in integrating the operations, technologies and personnel.  Our management’s inability to meet the challenges involved in integrating successfully the operations or otherwise to realize the anticipated benefits of the Motion Acquisition could seriously harm our results of operations.  In addition, the overall integration of the Motion operations into our company will continue to require substantial attention from our management, which could further harm our results of operations.

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. Our reliance involves a number of risks, including:

Our business is therefore dependent upon our contract manufacturers for their manufacturing capabilities.  During the fiscal years ended March 31, 2017 and 2016, we purchased inventory and engineering services of approximately $38.0 million and $48.0 million, respectively, from our contract manufacturers.  Our agreements with the contract manufacturers contain provisions that allows for termination for any reason.  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, an interruption of supply or the inability to obtain additional or an alternative manufacturer when and if needed would impair our ability to deliver our products to our customers.

We face competition from companies 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 PC market and Panasonic in the notebook market.  We also face competition from manufacturers of non-rugged mobile computers, such as Samsung, Inc., Dell, Inc., Hewlett-Packard Company, Apple, Inc., Sony and Toshiba, to the extent customers decide to purchase less expensive traditional computers for use in environments that we believe are better suited for mobile rugged computers. The principal competitive factors in our industry include:

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 personal computers, 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 vendors, could cause us to lose market share and could reduce our margins on those personal computers 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 will 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 product 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 identified a replacement supplier for this component to continue producing our iX104C6 product, but we were not able to finish the transition to the new component in time to avoid delays in shipping our iX104C6 product.  We also transitioned to a new supplier of screens for the Motion C5 and F5 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, which could harm our business, financial condition and results of operations.  We continue to have to manage our suppliers of screens for our products, and may experience additional disruptions in the future.  In addition, the delays in shipping shifted 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 we 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, 2017 and March 31, 2016, approximately 27% and 32%, respectively, of our revenue was comprised of sales made outside of the United States.  In the calendar year 2014, approximately 46% of Motion’s revenue was comprised of sales made outside of the United States, much of which was denominated in as many as six foreign currencies.  Our future business and financial performance could suffer due to a variety of international factors, including:

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 manufacturers in Taiwan for the production of our tablet computers.

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 are implementing 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 Mark Holleran, our president and chief executive officer and Tom Wilkinson, our chief financial officer and corporate secretary.  Should either of these persons or other 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, which resulted in a reduction in our workforce in the past, we may have a more difficult time in attracting and retaining the employees we need.  Other than an employment agreement with our president and chief executive officer, our relationships with our key employees are “at will.”  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.

We will depend on the continued performance of certain members of our senior management team and certain other key employees to assist in executing our strategy after the Motion Acquisition.  We also expect that our efforts to integrate the Motion product lines will place a significant strain on our personnel, management systems, infrastructure and other resources.  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 planned implementation of an ERP software solution and other information technology systems could result in significant disruptions to our operations.

We plan to implement an enterprise resource planning, or ERP, and 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 certain of our recently adopted 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.  However, the rights plan makes 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, which 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.

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:

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 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 14, 2017, Phoenix Venture Fund LLC and its affiliates beneficially own approximately 14.8% of our common stock, and thus 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 chairman of the board, and Andrea Goren, one of our directors, beneficially owns approximately 9.9% of our common stock.  In addition, Mr. Sassower, personally and through other entities controlled by him other than Phoenix, beneficially owns, in the aggregate, approximately 4.6% of our common stock, and Mr. Goren, personally and through other entities controlled by him other than Phoenix, beneficially owns, in the aggregate, approximately 0.5% of our common stock.  Thus, Phoenix, Mr. Sassower and Mr. Goren, together, beneficially own in the aggregate, approximately 14.8% of our common stock.  Accordingly, Phoenix, Mr. Sassower and Mr. Goren 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.

Item 1B.  Unresolved Staff Comments

  None.

Item 2.  Properties

We maintain our corporate functions, along with sales support, marketing and finance at a leased facility totaling approximately 16,228 square feet at 8601 Ranch Road 2222, Building II, Austin, Texas 78730.  This lease expires on June 30, 2020 and has a current annual base rent, before reimbursable operating expenses, of approximately $235,000.  We maintain our engineering and operating groups at a leased facility totaling 21,700 square feet at 14000 Summit Drive, Suite 900, Austin, Texas, 78730.  This lease expires on August 31, 2019, and has a current annual base rent, before reimbursable operating expenses, of approximately $228,000.  After the Motion Acquisition, during a portion of fiscal year 2016 we occupied, with the consent of the landlord, a portion of Motion’s former leased facility at 8601 Ranch Road 2222, where Motion maintained its corporate functions, along with sales support, marketing, finance, engineering and operating groups.  We did not assume Motion’s lease for the facility, and in fiscal year 2016 negotiated the terms of a new lease with the landlord, as described above, for a smaller portion of Motion’s former facility.  We believe that our present facilities are suitable for our existing and planned operations.

Item 3.  Legal Proceedings

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

Item 4.  Mine Safety Disclosures

Not applicable.

PART II

 

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is listed on The NASDAQ Stock Market under the symbol “XPLR.”  As of June 12, 2017, there were 243 registered holders of record of our common stock, and the closing price of our common stock on The NASDAQ Stock Market was $1.86.  

The following table sets forth the high and low sales price of our common stock on The NASDAQ Stock Market for each quarter period during the fiscal years ended March 31, 2017 and 2016, in U.S. dollars.

Dividend Policy

We have not declared or paid any dividends on our common stock during our last five fiscal years.  The payment of dividends on our common stock in the future will depend on our earnings, capital requirements, operating and financial condition and such other factors as our board of directors may consider appropriate.  Under the terms of our financing agreement with our senior lender, we are prohibited from paying cash dividends without the senior lender’s prior written consent.  We currently expect to use all available funds to finance the future development and expansion of our business and do not anticipate paying dividends on our common stock in the foreseeable future.

Recent Sales of Unregistered Securities

None.

Item 6.  Selected Financial Data.

Not applicable.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and notes included in this Annual Report on Form 10-K.  This discussion contains, in addition to historical information, forward‑looking statements that involve risks and uncertainty.  Our actual results could differ materially from those anticipated in the forward‑looking statements, including those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

General

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

Until 2014, we competed and derived our revenue through the sale of our iX104 tablets in a subset of the rugged PC market, given the larger size and ultra-rugged attributes of our iX104 tablet, which weighs approximately 5.4 pounds.  We have reduced our dependency upon the continued market acceptance of our iX104 systems, by broadening the market for our products and increasing our opportunities for revenue growth.  We have broadened our product offering, through development and acquisition, to include multiple fully-rugged and rugged tablets that are lighter weight and less expensive than our iX104 line of products.  These new products have allowed us to compete in significantly larger segments of the rugged PC market.  In 2014, we introduced our first fully-rugged, lighter weight tablets, offering Android and Windows operating systems. In 2015 we introduced an additional fully-rugged, lighter weight Windows tablet with greater processing speed, and we completed the acquisition of certain assets of Motion Computing, Inc. and its subsidiaries, which we refer to herein as Motion, more fully discussed below.  This acquisition, which we refer to herein as the Motion Acquisition, expanded our product lines to include multiple additional rugged tablet products, and expanded our domestic and international customer base.  We believe the lighter and less expensive tablets are ideal for field service applications and significantly more mobile market opportunities, as compared to our iX104.

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, and we experienced a surge in non-recurring orders as a result of the Motion Acquisition, our goal is to continue to grow our year-over-year revenues.  Our revenue for the fiscal year ended March 31, 2017, however, was approximately 22% lower than the prior fiscal year.

On April 17, 2015, we completed the Motion Acquisition.  Pursuant to the terms of a Foreclosure Purchase and Sale Agreement with Motion and Square 1 Bank, Motion’s senior secured lender, our subsidiary, Xplore Technologies Corporation of America, purchased certain of the Motion assets, including cash, cash equivalents, accounts receivable, inventory, equipment, personal property and other assets. 

Looking forward, our strategy is to build increased marketplace awareness of our products; an effort that we believe will enable us to increase our revenue and to expand our market share.  We also expect to significantly increase our revenue and substantially expand our total market share through the addition of our new product lines, including those that we recently acquired in the Motion Acquisition.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K are prepared in accordance with U.S. generally accepted accounting principles.  Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  These estimates and assumptions are affected by management’s application of accounting policies.  Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact our financial condition, changes in financial condition or results of operations.  Our significant accounting policies are discussed in Note 2 of the Notes to our Annual Consolidated Financial Statements included in this Annual Report on Form 10-K. 

On an ongoing basis, we evaluate our estimates, including those related to our revenue recognition, allowance for doubtful accounts, inventory valuation, warranty reserves, tooling amortization, financial instruments, stock based compensation and income taxes.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.

Our critical accounting policies are as follows:

Revenue Recognition.  Our revenue is derived from the sale of rugged mobile technology, which includes rugged mobile tablet PC computers and related accessories.  Our customers are predominantly distributors and resellers.  However, we also sell directly to end-users.  We recognize revenue, net of an allowance for estimated returns, when title and risks of ownership are transferred to the customer, all significant contractual obligations have been satisfied, the sales price is fixed or determinable and the ability to collect is reasonably assured.  Our revenue recognition criteria are met when either the product has been shipped, or when it has been received, depending upon agreed shipping terms.  Shipments are based on firm purchase orders from our customers with stated terms. We do not have installation, training or other commitments subsequent to shipment that are other than incidental.  Our prices are determined based on negotiations with our customers and are not subject to adjustment.  Generally, we do not hold inventory at our resellers and we do not expect resellers to hold inventories of our products other than in limited circumstances in which such inventory is monitored by us.  Our distributors do hold small amounts of inventory which we monitor.  This inventory is held in order to more quickly respond to their customer demand.  As a result of the low amount of reseller and distributor inventory, we expect returns to be minimal.  We have not had material adjustments, as our returns have been minimal.  Revenue from separately priced extended warranty contracts is deferred and recognized in income on a straight-line basis over the related contract period. 

Allowance for Doubtful Accounts. We regularly review and monitor collections of our accounts receivables and make estimated provisions, generally monthly, based on our experience, aging attributes, results of collection efforts and current market conditions.  If our estimate for allowance for doubtful accounts is too low, additional charges will be incurred in future periods, which additional charges could have a material adverse effect on our financial position and results of operations.  Historically, our estimates have not required significant adjustment due to actual experience of very small amount of doubtful accounts. 

Warranty Reserves.  We make provisions for warranties at the time of sale, which are based on our experience and monitored regularly.  The revenue related to warranty is recognized when our obligations are generally covered by a warranty coverage agreement provided by a third party.  A portion of our warranty obligations related to revenue recognized are primarily covered by warranty coverage agreements provided by our contract manufacturers; however, we also provide the coverage on the portion of our obligations that is not covered by these agreements, for which we establish related reserves at the time of sale.  We had been moving to more of a self-insured model due to changes in our warranty offerings and warranty claim experience. If our estimates for warranties and returns are too low, we will incur additional charges in future periods and these additional charges could have a material adverse effect on our financial position and results of operations.  Historically, our estimates have not required significant adjustment due to actual experience. However, during 2017, we began purchasing warranty coverage to cover the basic warranty on all units sold.  It is expected that beginning in fiscal year 2018, all new units will have basic warranties covered by warranties purchased from our contract manufacturers.

Inventory Valuation.  We adjust our inventory values so that the carrying value does not exceed net realizable value.  The valuation of inventory at the lower of average cost or net realizable value requires us to use estimates regarding the amount of current inventory that will be sold and the prices at which it will be sold, and our assessment of expected orders from our customers.  Additionally, the estimates reflect changes in our products or changes in demand because of various factors, including the market for our products, obsolescence, production discontinuation, minimum order quantities, technology changes and competition.  While the estimates are subject to revisions and actual results could differ materially, historically our estimates have not required significant adjustment due to actual experience. 

Tooling Amortization.  We amortize tooling costs over a two-year period or estimated life, whichever is shorter.  Those costs are recorded as a cost of revenue, subject to an assessment that future revenue will be sufficient to fully recover the cost of the tooling.  This assessment requires an assessment of the market for our products and our future revenue expectations.  On a quarterly basis, this assessment is reviewed and the cost of tooling is written down to its net realizable value if its recoverability is not reasonably expected based on estimates of future revenue.  Historically, there have been no instances in which we determined that useful life was significantly less than two years.  Accordingly, we have not recorded material adjustments.

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

Long-lived asset impairment.  Long-lived assets include property and equipment and definite-lived intangible assets. Definite-lived intangible assets consist of customer relationships, trade names and non-compete agreements. Long-lived assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate that the carrying value of the assets may not be recoverable. As a result of our decline in revenue and stock price, we made an assessment of impairment at March 31, 2017.  Based on that assessment, no impairment had occurred.

Income Taxes.  We have a significant valuation allowance that we intend to maintain until it is more likely than not that our deferred tax assets will be realized.  Our income tax expense recorded in the future will be reduced to the extent of decreases in our valuation allowances.  While we can utilize net operating loss carry-forwards to reduce our Federal income taxes, we will be subject to alternative minimum tax charges.  Changes in the tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.  We are not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.

Financial Instruments.  Warrants to acquire our common stock that we issued in connection with services provided to us related to an offering of our stock has been valued separately using the Black-Scholes methodology.  The determination of the values attributed to the warrant required the use of estimates and judgments particularly related to the assumptions used in the Black-Scholes calculation.  In addition, options and warrants to acquire common stock issued to employees, directors and consultants have been valued using a Black-Scholes calculation and their valuations are impacted by the assumptions used in this calculation.

Stock-Based Compensation Expense.  We apply the fair value method of accounting for all of our employee stock‑based compensation.  We use the Black‑Scholes option pricing model to determine the fair value of stock option awards at the date of the issuance of the award.  The value is expensed over the vesting period, which is generally three years. See Note 8 to our Annual Consolidated Financial Statements included in this Annual Report on Form 10-K for required disclosures.

Our estimates of stock-based compensation expense require a number of complex and subjective assumptions, including our stock price volatility, employee exercise patterns, future forfeitures, dividend yield, related tax effects and the selection of an appropriate fair value model.  In addition, we have estimated volatility on shares issued in the year ended March 31, 2017 based on an average volatility of a set of companies we consider comparable to us. We use historical data to estimate pre-vesting forfeitures, and we record stock-based compensation expense only for those awards that are expected to vest.  The dividend yield assumption is based on our history and future expectations of dividend payouts.

The assumptions used in calculating the fair value of stock-based compensation expense and related tax effects represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment.  As a result, if factors change and we use different assumptions, or if we decide to use a different valuation model, our stock-based compensation expense could be materially different in the future from what we have recorded in the current period, which could materially affect our results of operations.

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

Recent Accounting Pronouncements

Results of Operations

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

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

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

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

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

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

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

Other Income and Expense.  Other income and expense includes gains and/or losses on dispositions of assets, gains and losses from currency fluctuations and other miscellaneous income and expense.

Stock Based Compensation.  We recorded stock-based compensation expense in the employee related functional classification.

Inflation.  During the fiscal years ended March 31, 2017 and 2016, we believe inflation and changing prices have not had material impact on our revenue or on our net loss from continuing operations.

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

Fiscal Year Ended March 31, 2017 vs. Fiscal Year Ended March 31, 2016

Revenue.  Total revenue for the fiscal year ended March 31, 2017 was $77,928,000, compared to $100,530,000 for the fiscal year ended March 31, 2016, representing a decrease of $22,602,000, or approximately 22%.  The decrease in our revenue is attributed to both a decrease in unit sales of approximately 12% and a lower average selling price per unit of approximately 11%.  We believe that in fiscal year 2016, we benefited greatly from the resolution of supply chain issues experienced by Motion prior to the closing of the Motion Acquisition in April 2015.  We believe that this resolution resulted in a surge in shipments of pent-up demand to former Motion customers in fiscal 2016, which did not recur in fiscal year 2017. As a result, we experienced a decrease in unit sales and revenue in fiscal 2017.

We operate in one segment, the sale of rugged mobile wireless tablet PC computing systems.  Approximately 73% of our revenue in the year ended March 31, 2017 was derived from sales in the United States.  The United States accounted for approximately 68% of our revenue during the year ended March 31, 2016.  At March 31, 2017, we had a distributor customer, Synnex Information Technologies Inc., who had receivable balances accounting for approximately 11% of our total outstanding accounts receivables.  We collected the receivable balance from that customer subsequent to our fiscal year end.

In any year, a single customer may account for a significant portion of our sales.  For the fiscal year ended March 31, 2017, we had two customers located in the United States who accounted for approximately 20% and 16% of our total revenue, respectively.  For the fiscal year ended March 31, 2016, we had two customers located in the United States who accounted for approximately 23% and 11% of our total revenue, respectively.

Cost of Revenue.  Total cost of revenue for the year ended March 31, 2017 was $55,956,000, compared to $69,183,000 for the year ended March 31, 2016, representing a decrease of $13,227,000, or approximately 19%.  This decrease in cost of revenues is primarily attributable to the decrease in revenue discussed above and a change in the product mix we sold during the periods.

During the years ended March 31, 2017 and 2016, we relied on three suppliers for the majority of our finished goods.  The inventory purchases and cost of engineering services from our suppliers during the years ended March 31, 2017 and 2016 were $37,812,000 and $48,017,000, respectively.  At March 31, 2017 and 2016, we owed these suppliers $6,237,000 and $6,606,000, respectively, which we recorded in accounts payable and accrued liabilities.

Gross Profit.  Total gross profit decreased by $9,375,000, to $21,972,000 (28.2% of revenue) for the year ended March 31, 2017 from $31,347,000 (31.2% of revenue) for the year ended March 31, 2016.  The decrease in gross profit for the year ended March 31, 2017, as compared to the prior year, was mainly attributable to the decrease in revenue.  The decrease in the gross profit percentage was due to a different product mix we sold and significant large orders that we sold at discounts during fiscal 2017.

Sales, Marketing and Support Expenses.  Sales, marketing and support expenses for the year ended March 31, 2017 were $12,370,000, compared to $15,096,000 for the year ended March 31, 2016, a decrease of $2,726,000, or approximately 18%.  The decrease in these expenses was primarily due to a decrease in headcount related costs of $1,821,000, associated with lower commissions and personnel changes, a decrease in the consumption of demo units of $1,054 and a decrease in various other expenses of $273,000, which was partially offset by an increase in marketing related expenses of $402,000.

Product Research, Development and Engineering Expenses.  Product research, development and engineering expenses for the year ended March 31, 2017 were $4,462,000, as compared to $5,771,000 for the year ended March 31, 2016, a decrease of $1,309,000, or approximately 23%.  The decrease in these expenses was related to a decrease in headcount expenses of $601,000, a decrease in product development related expenses of $658,000, and a decrease in various other expenses of $50,000.

General Administration Expenses.  General administration expenses for the year ended March 31, 2017 were $7,193,000, compared to $9,427,000 for the year ended March 31, 2016, a decrease of $2,234,000, or approximately 24%.  The decrease primarily consisted of a decrease in stock-based compensation expense of $1,548,000, primarily due to the absence of a large grant of options to members of our board of directors and certain of our officers in fiscal 2016, a decrease in bad debt expense of $291,000, a decrease in officer bonus accruals of $248,000, a decrease in computer maintenance expense of $199,000, a decrease in rent expense of $153,000 and a decrease in various other expenses of $380,000which was partially offset by an increase in professional expenses of $184,000, an increase in depreciation expense of $105,000 and an increase in various other expenses of $48,000.

Stock Based Compensation Expense. For our fiscal years 2017 and 2016, the fair value of employee stock-based compensation expense was $511,000 and $2,156,000, respectively, reflecting a decrease of $1,645,000 for fiscal year 2017.  The decrease in employee stock-based compensation expense was due to the full vesting and expensing of options granted in fiscal 2016, partially offset by new grants of options and restricted stock units during the year ended March 31, 2017.

In February 2017, our board of directors approved the issuance of 171,000 restricted stock units, or RSUs, to certain of our non-officer employees valued at $340,290, based on the closing price of our common stock of $1.99 per share on the date of the grant.  These RSUs vest over a three-year period.  Upon vesting, underlying shares of our common stock will be issued.  The RSUs do not have an exercise price and the underlying shares of stock may be sold immediately after receipt.

On August 3, 2016, our board of directors granted to an officer of the Company 30,000 RSUs valued at $71,700, based upon the closing price of our common stock of $2.39 per share on the date of grant.  These RSUs had a three year vesting schedule, but were forfeited on December 2, 2016 due to termination of service by the officer.

In November 2015, our board of directors approved two sets of option grants to new employees, one for options to purchase a total of 249,282 shares of our common stock, with an exercise price of $5.49, including a grant of options to purchase 109,282 shares to our new chief financial officer, and the other for options to purchase 20,000 shares of our common stock, with an exercise price of $5.91.  These options vest in three equal annual installments, beginning in November 2016, and have a term of five years from the date of grant. 

On April 7, 2015, our board of directors approved grants of options to purchase a total of 240,374 shares of our common stock, with an exercise price of $6.38, of which options to purchase 87,437 shares were granted to our chairman, who was also chief executive officer at the time, options to purchase 75,000 shares were granted to our president, options to purchase 50,000 shares were granted to our chief financial officer at the time and options to purchase 27,937 shares were granted to a member of our board of directors.  The options vested on April 17, 2016, the first anniversary of the closing of the Motion Acquisition, and have a term of seven and one half years from the date of the grant.  The decrease in stock compensation expense from fiscal 2016 was principally due to the absence of similar grants in fiscal 2017. 

Depreciation and Amortization Expense. Depreciation and amortization expenses for fiscal years 2017 and 2016 were $1,571,000 and $1,730,000, respectively, reflecting a decrease of $159,000 for fiscal 2017.  The decrease in depreciation expense consisted primarily of a decrease of $242,000 in tooling amortization.   Depreciation and amortization expense is recorded in the related functional classification.

Interest Expense.  Interest expense for the year ended March 31, 2017 was $173,000, compared to $58,000 for the year ended March 31, 2016, an increase of $115,000.  The increase for the fiscal year was due to carrying higher balances under our credit facility with Square 1 Bank.  We had no borrowings under the credit facility as of March 31, 2017.  The existing credit facility was replaced on April 17, 2017, upon maturity, with a new credit facility with Bank of America, N.A.

Other Income/Expense.  Other expense for the year ended March 31, 2017 was $197,000, compared to other expense of $1,363,000 for the year ended March 31, 2016.  The decrease in expense is primarily due to what we expect to be non-recurring acquisition costs related to the Motion Acquisition in fiscal 2016.

Income Taxes.  Income tax expense for the year ended March 31, 2017 was $129,000, representing alternative minimum tax arising from the previous fiscal year ended March 31, 2016, but paid and expensed in the fiscal year ended March 31, 2017.  The income tax benefit of $6,000 for the year ended March 31, 2016 resulted from a true-up of the accrual of income tax, compared to an income tax expense for the year ended March 31, 2016.  Income taxes consist primarily of US alternative minimum tax.

Net Loss.  Net loss for the year ended March 31, 2017 was $2,552,000 ($0.23 per common share) compared to a net loss of $362,000 ($0.03 per common share) for the year ended March 31, 2016, an unfavorable variance of $2,190,000.  Our increase in net loss for fiscal year 2017 was a result of a decrease in sales and gross margin, partially offset by savings in operating expenses.

Liquidity and Capital Resources

Other than in fiscal years 2015 and 2013, we have incurred net losses in each full fiscal year since our inception.  From inception, we have financed our operations and met our capital expenditure requirements primarily from the gross proceeds of private and public sales of debt and equity securities totaling approximately $126.6 million, and with borrowings under our credit facilities.  As of March 31, 2017, our working capital was $14,486,000 and our cash and cash equivalents were $3,460,000.  

On April 17, 2015, in connection with the Motion Acquisition, our subsidiary entered into a Loan and Security Agreement with Square 1 Bank, pursuant to which Square 1 Bank provided us with formula and non-formula revolving loans for up to an aggregate amount of $15 million, which replaced our existing accounts receivable purchase facility, under which there were no borrowings at the time.  As of March 31, 2017, we had no borrowings under this facility.

On April 17, 2017, the aforementioned Loan and Security Agreement with Square 1 Bank matured and was replaced by a Loan and Security Agreement with Bank of America, pursuant to which Bank of America provided us with a revolving asset based line of credit up to $15 million.  The new facility with Bank of America has a three-year term, is secured by substantially all of our assets, and bears interest at LIBOR plus between 2.25% and 2.75% per annum, based upon our fixed charge coverage ratio.  The balance of drawn funds at any one time cannot exceed the lesser of $15 million or the sum (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.  At closing, we did not draw on this facility.

As of June 9, 2017, there were $631,000 in borrowings outstanding under the Bank of America facility.

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

Cash Flow Results

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

Net cash provided by operating activities in the year ended March 31, 2017, was $116,000, compared to $5,147,000 of net cash used in operating activities in the year ended March 31, 2016, a favorable variance of $5,263,000. The favorable variance in net cash used in operating activities was primarily due to the collection of customer accounts receivables and a favorable variance in inventory, offset by an outflow of payments of accounts payable and a decrease in the positive amount of items not affecting cash.

Net cash used in our investment activities in the year ended March 31 2017 was $2,385,000, compared to $219,000 net cash used in the year ended March 31, 2016.  For the year ended March 31, 2017, the net cash used consisted primarily of:

For the year ended March 31, 2016, the cash used consisted primarily of:

Net cash provided by financing activities for the year ended March 31, 2017 was $135,000, compared to $8,495,000 net cash used by financing activities for the year ended March 31, 2016.  Net cash provided by financing activities for the year ended March 31, 2017 was primarily related to the issuance of common stock through our employee stock purchase plan of $135,000. Net cash used in financing activities for the year ended March 31, 2016 was primarily related to net repayments of our bank indebtedness of $9,098,000, which we incurred in connection with the Motion Acquisition, partially offset by the issuance of shares of our common stock related to the exercise of stock options and through our employee stock purchase plan of $603,000.  

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 8.  Financial Statements and Supplementary Data.

The financial statements and other financial information required by this Item are listed in Item 15 of Part IV and are contained on pages F-1 through F-20 of this annual report and incorporated in this Item 8 by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.  Controls and Procedures.

(a)	Evaluation of disclosure controls and procedures.

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

(b)	Management’s report on internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2017 based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that, as of March 31, 2017, our internal control over financial reporting was effective based on the criteria established in Internal Control—Integrated Framework.

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting since rules of the SEC permit us to provide only management’s report on this Annual Report on Form 10-K.

(c)

Changes in internal control over financial reporting.

There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

(d)

Limitations on Effectiveness of Controls.

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of the control system are met.  Furthermore, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our organization have been detected.

Item 9B.  Other Information.

None.

PART III

As set forth below, the information required by Part III (Items 10, 11, 12, 13, and 14) is incorporated herein by reference to our definitive proxy statement to be used in connection with our 2017 Annual Meeting of Stockholders which will be filed with the SEC not later than 120 days after the end of our fiscal year ended March 31, 2017 (the “2017 Proxy Statement”), in accordance with General Instructions G(3) of Form 10-K.

Item 10.  Directors, Executive Officers and Corporate Governance.

The information required by Item 10 will be contained in the 2017 Proxy Statement, which information is hereby incorporated by reference into this Annual Report by reference.

Item 11.  Executive Compensation

The information required by Item 11 will be contained in, and is hereby incorporated by reference to, the 2017 Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 will be contained in, and is hereby incorporated by reference to, the 2017 Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required by Item 13 will be contained in, and is hereby incorporated by reference to, the 2017 Proxy Statement.

 

Item 14.   Principal Accounting Fees and Services

 The information required by Item 14 will be contained in, and is hereby incorporated by reference to, the 2017 Proxy Statement.

PART IV

Item 15.  Exhibits, Financial Statement Schedules.

Index to Consolidated Financial Statements

(2)          Financial Statement Schedules:

None

(3)          Management Contract or Compensatory Plan:

See Index to Exhibits.  Each of the following Exhibits described on the Index to Exhibits is a management contract or compensatory plan: Exhibits 10.15 through 10.19.

(b)          Exhibits:

See Index to Exhibits.

(d)          Schedules:

 

See financial statements and the accompanying notes.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 14th day of June 2017.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

INDEX TO FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS OF

XPLORE TECHNOLOGIES CORP.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

To the Board of Directors and

Stockholders of Xplore Technologies Corp.:

We have audited the accompanying consolidated balance sheets of Xplore Technologies Corp. and its subsidiary (collectively the “Company”) as of March 31, 2017 and 2016 as well as the related consolidated statements of income and operations, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Xplore Technologies Corp. and its subsidiary as of March 31, 2017 and 2016, including the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ PMB Helin Donovan, LLP

Austin, TX

June 14, 2017

XPLORE TECHNOLOGIES CORP.

Consolidated Balance Sheets

(in thousands)

See accompanying notes to consolidated financial statements.

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Income and Operations

(in thousands, except shares and per share amounts)

See accompanying notes to consolidated financial statements.

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

See accompanying notes to consolidated financial statements.

XPLORE TECHNOLOGIES CORP.

Consolidated Statements of Cash Flows

(in thousands)

See accompanying notes to consolidated financial statements.

XPLORE TECHNOLOGIES CORP.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

1. DESCRIPTION OF BUSINESS

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

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements were prepared using accounting principles generally accepted in the United States of America and reflect the following significant accounting policies:

a)            Basis of consolidation and presentation

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

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

Motion Acquisition

 On April 16, 2015, Xplore Technologies Corporation of America, a wholly-owned subsidiary of the Company, entered into a Foreclosure Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Motion Computing, Inc., Motion Computing Pty, Ltd., Motion Computing Holding Company, Inc. (collectively “Motion”) and Square 1 Bank, Motion’s senior secured lender (“Square 1”), pursuant to which the Company’s subsidiary agreed to purchase certain of the assets of Motion, including cash, cash equivalents, accounts receivable, inventory, equipment, personal property and other assets of Motion for an aggregate purchase price of approximately $9 million in cash, plus the assumption of approximately $6 million in certain liabilities, net of current assets, subject to the terms and conditions thereof (the “Motion Acquisition”). The assumed liabilities include certain accounts payable and obligations for service contracts and product warranties.  The closing of the Motion Acquisition occurred on April 17, 2015.

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

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

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

Goodwill and other intangible assets 

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

Long-lived asset impairment  

Long-lived assets include property and equipment and definite-lived intangible assets. Definite-lived intangible assets consist of customer relationships, trade names and non-compete agreements. Long-lived assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate that the carrying value of the assets may not be recoverable.  As a result of a decline in the Company’s revenue and stock price, the Company made an assessment of impairment at March 31, 2017.  Based on that assessment, no impairment had occurred.

b)

Cash and cash equivalents and liquidity

Cash and cash equivalents comprise cash and highly liquid investments with original maturities of less than ninety days.

The Company had cash and cash equivalents of approximately $3.5 million at March 31, 2017, working capital of approximately $14.5 million and total equity of approximately $29.3 million.  The Company’s management believes that it has adequate cash and cash equivalents on hand and cash flow from operations to finance its operations for at least 12 months.

The Company also has available a line of credit (Note 5). 

Foreign Currency Transactions

The Company does enter into transactions that are settled in a foreign currency.  The transactions are recorded in U.S. dollars based on the exchange rate in effect at the time a transaction is initiated.  When a transaction is settled, the foreign currency received to settle the transaction is converted to U.S. dollars based on the exchange rate in effect at the time of settlement.  A realized foreign currency exchange gain or loss is recorded based on the difference in the exchange rate in effect when a transaction is initiated, and the exchange rate in effect when a transaction is settled.  For the fiscal year ended March 31, 2017 and 2016, the Company reported a loss in foreign currency transactions of $153 and $472, respectively.

c)

Allowance for doubtful accounts

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general administration expense. The Company has not had material adjustments due to actual experience.

d)

Inventory

Inventory is recorded at the lower of average cost or net realizable value. The valuation of inventory requires the use of estimates regarding the amount of current inventory that will be sold and the prices at which it will be sold based on an assessment of expected orders for these products from the Company’s customers. Additionally, the estimates reflect changes in the Company’s products or changes in demand because of various factors including the market for the Company’s products, obsolescence, product discontinuation, technology changes and competition.

e)

Fixed assets

Fixed assets are recorded at cost. The straight line depreciation method is used to depreciate the recorded value of fixed assets over their estimated useful lives.

The Company performs reviews for the impairment of fixed assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

f)

Revenue recognition

The Company’s revenue is derived from the sale of rugged, mobile technology which includes rugged mobile tablet computers and related accessories. The Company’s customers are predominantly resellers. However, the Company also sells directly to end-users. Revenue is recognized, net of an allowance for estimated returns, when title and risks of ownership are transferred to the customer, all significant contractual obligations have been satisfied, the sales price is fixed or determinable and the ability to collect is reasonably assured. The Company’s revenue recognition criteria have generally been met when either the product has been shipped, or when it has been received, depending upon agreed shipping terms.  Shipments are based on firm purchase orders from our customers with stated terms. The Company does not have installation, training or other commitments subsequent to shipment that are other than incidental. Prices are determined based on negotiations with the Company’s customers and are not subject to adjustment. Generally, the Company does not hold inventory at its resellers and does not expect resellers to hold inventories of the Company’s products other than in limited circumstance, in which, such inventory is monitored by the Company. As a result, the Company expects returns to be minimal. The allowance for returns is calculated and regularly reviewed based on historical experience. The Company has not had material adjustments as returns have been minimal. The majority of the Company’s warranty obligations related to recognized revenue are generally covered by warranty coverage arrangements provided by a third party.  To the extent warranty coverage is not provided by a third party, the Company records a reserve for the future warranty obligation at the time of sale.  Revenue from separately priced extended warranty contracts is deferred and recognized in income on a straight-line basis over the related contract period.  At March 31, 2017 and 2016, the Company had deferred revenue of $5,089 and $7,256, respectively, from separately priced extended warranty contracts, of which $3,105 and $2,984, respectively, is reflected as a non-current liability on the accompanying consolidated balance sheets.

g)          Cost of revenue

The Company’s cost of revenue consists of the costs associated with manufacturing, assembling and testing its products, related overhead costs, maintenance, compensation, freight and other costs related to manufacturing support, including the depreciation of tooling assets. The Company uses contract manufacturers to manufacture its products and supporting components, and the significant majority of the Company’s cost of revenue is attributable to component costs and payments to these contract manufacturers.

Cost of revenue also includes warranty costs. The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its warranty. The specific warranty terms and conditions generally included are technical support, repair parts, and labor for a period that is generally three years. The Company re-evaluates its estimates to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary and any change, based on current information, is recorded as a change in estimate.  The estimates have not required significant adjustment due to actual experience, however the Company has reclassified amounts related to the Motion Acquisition.

The changes to the warranty liabilities are as follows:

h)

Income taxes

The Company accounts for income taxes in accordance with the asset and liability method. The determination of future tax assets and liabilities is based on the difference between financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the period in which the differences are expected to occur. Future tax assets are recorded to recognize tax benefits only to the extent that, based on available evidence, it is more likely than not that they will be realized.

The Company periodically assesses uncertain tax positions that the Company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). The Company evaluated its tax positions and determined that there were no uncertain tax positions for the years ended March 31, 2017 and 2016.

i)

Stock‑based compensation

The Company applies the fair value method of accounting for all of its employee stock‑based compensation. The Company uses the Black‑Scholes option pricing model to determine the fair value of stock option awards at the date of the issuance of the award. The value is expensed over the vesting period which is generally three years. See Note 8 to these consolidated financial statements for required disclosures.

j)

Financial instruments and credit risk

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

While the Company’s cash and cash equivalents are on deposit with high quality FDIC insured financial institutions, at times such deposits exceed the insured limits.  The Company had cash balances in excess of federally insured limits of approximately $3,050 at March 31, 2017.  The Company has not experienced any losses in such accounts.

Receivables are concentrated with a small number of customers. The Company maintains an allowance for doubtful accounts when deemed necessary. The allowance for doubtful accounts at March 31, 2017 and March 31, 2016 was $62 and $153, respectively.

The amounts reported for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are considered to approximate their fair values based on comparable market information available at the respective balance sheet dates and their short-term nature.

k)

Earnings (Loss) Per Share

Basic earnings (loss) per share has been computed based on the weighted‑average number of shares of common stock issued and outstanding during the year, and is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the year. There was no need to calculate diluted earnings per share for either of the years ended March 31, 2017 and 2016.

The following securities were not considered in the earnings per share calculation at their common stock equivalent for the years ended:

l)

Recent accounting pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements. 

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

In March 2016, the FASB amended the existing accounting standards for employee share-based payment arrangements. The amendments require all excess tax benefits and tax deficiencies associated with share-based payments to be recognized as income tax expense or income tax benefit, respectively, rather than as additional paid-in capital. The amendments also increase the amount an employer can withhold in order to cover income taxes on awards, allows companies to recognize forfeitures of awards as they occur, and requires companies to present excess tax benefits from stock-based compensation as an operating activity in the statement of cash flows rather than as a financing activity. The Company is required to adopt the guidance in the first quarter of fiscal 2018. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated and Combined Financial Statements.

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

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

3. INVENTORY

These amounts are presented net of a reserve for slow moving inventory and obsolescence totaling $1,246 and $1,405 as of March 31, 2017 and 2016, respectively.

During the year ended March 31, 2017, the Company made a change in estimate regarding the carrying value of inventory, including reassessing the amount of manufacturing costs, shipping costs and obsolescence reserves, which resulted in a net increase in the carrying value of inventory totaling $249 as of March 31, 2017.

4. FIXED ASSETS

Depreciation and amortization expense was $1,571 and $1,730 during the years ended March 31, 2017 and 2016, respectively.

5. SHORT-TERM INDEBTEDNESS

On December 10, 2009, the Company’s wholly‑owned subsidiary entered into an Accounts Receivable Purchasing Agreement (as amended to date, the “ARPA”) with DSCH Capital Partners, LLC d/b/a Far West Capital (“FWC”). Pursuant to the ARPA, FWC could purchase, in its sole discretion, eligible accounts receivable of the Company’s subsidiary on a revolving basis, up to a maximum of $8,500, with full recourse for the face amount of such eligible receivables.

On April 17, 2015, the Company terminated the ARPA and entered into a new credit agreement in connection with the consummation of the Motion Acquisition.  There were no borrowings under the ARPA immediately prior to such termination.  The Company and its wholly-owned subsidiary entered into a Loan and Security Agreement with Square 1 Bank (the “Square 1 Credit Agreement”) pursuant to which Square 1 agreed to provide revolving loans of up to an aggregate principal amount of $15 million to the Company’s subsidiary. The Square 1 Credit Agreement has a two-year term. Payment and performance under the Square 1 Credit Agreement was secured by a first priority security interest in and to substantially all of the assets of the Company and its subsidiaries. Pursuant to the Square 1 Credit Agreement, the loans consisted of formula revolving loans and non-formula revolving loans. The maximum amount of formula revolving loans outstanding at any one time could not exceed the lesser of $15 million or 85% of eligible accounts receivable of the Company’s subsidiary. The maximum amount of non-formula revolving loans outstanding at any one time could not exceed $4 million through April 16, 2016, and thereafter stepped down in $480,000 increments every three months until the cap reached $2.08 million, which was the maximum allowable amount outstanding at any one time thereafter until the maturity date.

On April 17, 2017, the Loan and Security Agreement with Square 1 Bank matured and was replaced by a Loan and Security Agreement with Bank of America, N.A. (the “Bank of America Credit Agreement”), pursuant to which Bank of America provided the Company with a revolving asset based line of credit up to $15 million.  The new facility with Bank of America has a three-year term, is secured by substantially all of our assets, and bears interest at LIBOR plus between 2.25% and 2.75% per annum, based upon the Company’s fixed charge coverage ratio.  The balance of drawn funds at any one time cannot exceed the lesser of $15 million or the sum (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.   As of June 9, 2017 the Company has a balance of $631 on this line of credit.

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

On March 31, 2017, there were no borrowings under the Square 1 Credit Agreement and at its maturity and replacement no amounts were due and no amounts were funded under the Bank of America Credit Agreement.

6. SHARE CAPITAL

On November 1, 2012, the Company filed its second amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, which integrated the then-in-effect provisions of the Company’s amended and restated certificate of incorporation and further amended those provisions by decreasing the Company’s authorized shares of common and preferred stock.  The second amended and restated certificate of incorporation became effective on the date of filing.  As a result of the second amended and restated certificate of incorporation, the number of authorized shares of common stock of the Company was reduced from 1,350,000,000 to 15,000,000 and the number of authorized shares of preferred stock of the Company was reduced from 150,000,000 to 5,000,000.

Warrants Outstanding

At March 31, 2017, there were warrants outstanding to purchase an aggregate of 100,000 shares of the Company’s common stock outstanding, all of which are fully exercisable as detailed in the table below:

 

7. STOCK‑BASED COMPENSATION PLAN

a)  Stock Options and Restricted Stock Units

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

On March 24, 2016, the stockholders approved an amendment to the Stock Plan to increase the number of shares of common stock issuable under the plan to three million shares.

On August 3, 2016, the Company granted to an officer of the Company 30,000 restricted stock units (“RSUs”) valued at $72, based upon the closing price of the Company’s common stock of $2.39 per share on the date of grant.  These RSUs had a three year vesting schedule, but were forfeited on December 2, 2016 due to termination of service by the officer.

On February 1, 2017, the Company granted to two new members of the board of directors options to purchase 60,000 shares of the Company’s common stock at $2.40 per share, vesting over three years.  The fair value of these options was $92.

On February 6, 2017, our board of directors approved the issuance of 171,000 RSUs to certain of our non-officer employees valued at $340, based on the closing price of our common stock of $1.99 per share on the date of the grant.  These RSUs vest over a three-year period.

The Board of Directors approved the following grants of options:

A summary of the activity in the 2009 Stock Plan during the years ended March 31, 2017 and 2016 is as follows:

A summary of the RSU activity in the Stock Plan during the twelve months ended March 31, 2017 was as follows:

No options were exercised in fiscal 2017. In fiscal 2016, options to purchase 101,330 shares of common stock were exercised, pursuant to which the Company received $465 of cash.  The intrinsic value and tax benefit realized for options exercised in the year ended March 31, 2016 was $101.

At March 31, 2017, the total number of shares of common stock issued in connection with the exercise of options since the inception of the 2009 Stock Plan is 171,927 and the total number of shares of common stock issued in connection with the vesting of restricted stock awards under the 2009 Stock Plan is 4,268.

A summary of the options outstanding and exercisable at March 31, 2017 is as follows:

At March 31, 2017, the weighted average exercise price of options exercisable is $5.34.

The options have been valued separately using the Black‑Scholes methodology. The options issued to the Board of Directors, officers and non-officers have different expected terms and, accordingly, different volatility and discount rates as follows:

There were assumed to be no dividends paid to holders of the Company’s common stock for either year.

The Company recorded stock compensation cost of $511 and $2,156 for the years ended March 31, 2017 and 2016, respectively. This expense was recorded in the employee related functional classification.  Compensation expense has been determined based on the fair value at the grant date for options granted in the current fiscal year. The future compensation expense to be recognized for unvested option grants at March 31, 2017 was $476, which is to be recognized over the next three years.

All outstanding stock options have strike prices greater than the market price of $2.05 as of March 31, 2017, and therefore had no intrinsic value. The weighted average grant date fair value of options granted during the year ended March 31, 2017 was $1.53 per share.

b)  2009 Employee Stock Purchase Plan

The Board of Directors approved an employee stock purchase plan (the “ESPP”), which was implemented on January 1, 2009 and approved by the Company’s stockholders on November 4, 2009.  The offering price per common share and number of common shares purchased for the years ended March 31, 2017 and 2016 are as follows (with 2017 being an average):

8. INCOME TAXES

The tax effect of temporary differences that give rise to future income tax assets are as follows:

The provision for income taxes varies from the expected provision at statutory rates for the following reasons:

The income tax expense of $129 for fiscal year 2017 represents alternative minimum tax arising from the previous fiscal year ended March 31, 2016, but paid and expensed in the current period.  The income tax benefit of $6 for fiscal year 2016 represents a true up of the prior year accrual to actual.  The prior year had federal income taxes due to the alternative minimum tax computation’s limitation of the utilization of net operating loss carry forwards and the alternative minimum tax rate of 20%.

The Company has accumulated net operating losses for income tax purposes totaling approximately $79,369, which under certain conditions, may be carried forward and applied to reduce future year’s taxable income.  Such losses may be subject to limitation under IRC Section 382 if there was a change in control as defined by the Internal Revenue Service. The potential benefit associated with these losses is not reflected in these statements as the Company’s management does not believe that recovery is more likely than not. The right to claim these losses will expire beginning 2018.

Tax years that remain open for examination by the Internal Revenue Service include 2012, 2013, 2014 and 2015.

9. FINANCIAL INSTRUMENTS AND CREDIT RISK

Interest rate risk

At March 31, 2017, the interest rate on the loans under the Square 1 Loan Agreement is variable, and was equal to the prime rate in effect from time to time plus 1.25% per annum, provided that the interest rate on any day shall not be less than 4.5% per annum. As of March 31, 2017, there was no balance due under the Square 1 Loan Agreement.

Foreign exchange risk

The Company does enter into transactions that are settled in a foreign currency.  The transactions are recorded in U.S. dollars based on the exchange rate in effect at the time a transaction is initiated.  When a transaction is settled, the foreign currency received to settle the transaction is converted to U.S. dollars based on the exchange rate in effect at the time of settlement.  A realized foreign currency exchange gain or loss is recorded based on the difference in the exchange rate in effect when a transaction is initiated, and the exchange rate in effect when a transaction is settled.  For the year ended March 31, 2017 and 2016, the Company reported a loss in foreign currency transactions of $153 and $472, respectively.  The Company’s foreign currency transactions and accounts receivable balances as of March 31, 2017 were as follows:

Credit risk

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

The receivables representing 11% of the accounts receivable balance at March 31, 2017 was subsequently collected.

Supplier Risk

The Company relies on a three suppliers for the majority of its finished goods. At March 31, 2017 and 2016, the Company owed the suppliers $6,237 and $6,606, respectively, which was recorded as accounts payable and accrued liabilities. The inventory purchases and engineering services from these suppliers for the years ended March 31, 2017 and 2016 were $37,812 and $48,017, respectively.

10. SEGMENTED INFORMATION

The Company operates in one segment, the sale of rugged mobile tablet PC systems. Approximately 73% of the Company’s revenue for fiscal 2017 was derived from sales in the United States.  For the fiscal year ended March 31, 2016, the United States accounted for 68% of the revenue.

The distribution of revenue by country is segmented as follows:

The Company has a variety of customers and in any given year a single customer can account for a significant portion of sales. For the year ended March 31, 2017, the Company had two customers that had sales that were greater than 10% of total revenue, and these two customers were located in the United States. For the year ended March 31, 2016, the Company had two customers that had sales that were greater than 10% of total revenue, and these two customers were located in the United States. The percentages of total revenue from these customers are as follows:

Substantially all of the Company’s capital assets are owned by its wholly-owned subsidiary, Xplore Technologies Corporation of America, a Delaware corporation. No more than 10% of the Company’s assets were located in any country, other than the United States, during each of the years ended March 31, 2017 and 2016.

11. COMMITMENTS AND CONTINGENT LIABILITIES

The Company maintains its corporate functions, along with sales support, marketing and finance at a leased facility totaling approximately 16,228 square feet at 8601 Ranch Road 2222, Building II, Austin, Texas 78730.  This lease expires on June 30, 2020 and has a current annual base rent, before reimbursable operating expenses, of approximately $235,000.  The Company maintains its engineering and operating groups at a leased facility totaling 21,700 square feet at 14000 Summit Drive, Suite 900, Austin, Texas, 78728.  This lease expires on August 31, 2019, and has a current annual base rent, before reimbursable operating expenses, of approximately $228,000.  As a result of the Motion Acquisition, during fiscal year 2016 the Company occupied, with the consent of the landlord, a portion of Motion’s former leased facility at 8601 RR 2222, Building II, Austin, Texas, where Motion maintained its corporate functions, along with sales support, marketing, finance, engineering and operating groups.  The Company did not assume Motion’s lease for the facility, and in fiscal year 2016 negotiated the terms of a new lease with the landlord as described above for a portion of Motion’s former space.  The Company believes that its present facilities are suitable for its existing and planned operations.

Rent expense for the years ended March 31, 2017 and 2016 was $802 and $1,002, respectively.

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

At March 31, 2017, the Company had purchase obligations extending into fiscal 2018 of approximately $30,704 related to inventory and product development items.

c)          Litigation

At March 31, 2017, the Company and its subsidiaries were not involved in any material legal actions.

12. RELATED PARTY TRANSACTIONS

During the fiscal year ended March 31, 2017 and 2016, the Company purchased approximately $1 and $117, respectively, in components for its tablet PCs from Ember Industries, Inc., a contract manufacturer.  Thomas F. Leonardis, a member of the Board of Directors until his resignation on November 11, 2016, is the Chairman and Chief Executive Officer of Ember Industries.  The Company purchased the components from Ember Industries pursuant to standard purchase orders at Ember Industries’ standard prices.  The disinterested members of the Board of Directors reviewed, approved and ratified the Company’s purchase of component parts from Ember Industries on the described terms.

On May 1, 2015, the Board of Directors amended the Company’s transaction bonus pool such that the 15% formerly unallocated portion of the transactional bonus pool was allocated to Philip Sassower, who acted as the Company’s Chief Executive Officer through March 28, 2017, and Andrea Goren, a member of the Board of Directors.  In November 2015, the Board of Directors reconsidered the reallocation of the pool and returned that portion of the pool to the unallocated portion.

On November 7, 2016, the Board of Directors approved payments to SG Phoenix LLC, an affiliate of Mr. Sassower and Mr. Goren, of an annual fee of $300 from $287.5 in the prior year, for services rendered, retroactive to April 1, 2016, which included compensation for the services of Mr. Sassower, who acted as the Company’s Chief Executive Officer through March 28, 2017.  Additionally, the Company made a bonus payment of $100 to SG Phoenix LLC in the first quarter of fiscal 2016 for services performed by SG Phoenix LLC in the preceding fiscal year. General administration expense includes an expense of $400 and $388 for the years ended March 31, 2017 and 2016, respectively, respectively for these fees.

On April 7, 2016, the Board of Directors approved grants of options to purchase a total of 240,374 shares of the Company’s common stock, with an exercise price of $6.38, to certain of the Company’s officers and directors, of which options to purchase 87,437 shares were granted to Mr. Sassower, and options to purchase 27,937 shares were granted to Mr. Goren.  The options vest in on the first anniversary of the date of grant, and have a term of seven and one half years from the date of the grant.

During the periods ended September 30, 2015, each member of the Board of Directors was paid a quarterly cash fee in the amount of $2.5 and an additional fee to each member of the Board of Director’s audit committee and compensation committee in the amount of $1 per quarter for each committee on which such member served. On June 15, 2016, the Board of Directors approved an increase in the quarterly fee to $6 per quarter and an increase in the quarterly committee fee to $2 for each committee on which such member serves, including the Board of Director’s nomination and corporate governance committee, up to a maximum of two committees for each member.  General administration expense includes an expense of $212 and $84 for each of the years ended March 31, 2016 and 2015, respectively, relating to these fees.

13. QUARTERLY DATA (UNAUDITED)

 

 

INDEX TO EXHIBITS

*	Filed herewith.

**	A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K.

†	Portions of this agreement have been omitted pursuant to a request for confidential treatment, which was granted by the SEC on May 14, 2007.

††	Portions of this agreement have been omitted pursuant to a request for confidential treatment, which was mailed to the SEC on June 25, 2014.