Fiscal Year 2016: A Year of Change
Lantronix, Inc.
is a global provider of secure data access and
management solutions for Internet of Things (IoT)
and information technology (IT) assets.
Our Mission
is to be the leading supplier of IoT
gateways that enable companies to
dramatically simplify the creation,
deployment, and management of IoT
projects while providing secure access
to data for applications and people.
Our Solutions
are deployed inside millions of machines, serving
a wide range of industries, including data center,
industrial, medical, security, transportation, retail,
fi nancial, environmental and government.
October 2016
Dear Stockholders:
Fiscal 2016 was a year of change for Lantronix as we took bold steps to put in place new leadership and move forward in
defining a modified strategy to leverage the growth opportunities in the emerging Internet of Things (IoT) market.
Lantronix today is clearly focused on one mission: to be the leader in delivering secure data access and management
solutions for IoT and IT assets.
Fiscal 2016: A Year of Change
When I joined the company in December 2015, I saw a company that had good people, great products and a loyal
customer base, which included leading Fortune 500 companies. At the same time, our results did not reflect the growth
that should have come from participating in the emerging IoT marketplace – one that is estimated to grow to $1.5 trillion
by 2020. (Source: Gartner Research)
While it was clear that our customers valued our products and solutions, we realized that to create greater value for our
stockholders, we needed a different strategy and better execution to enable us to leverage the growth opportunities in the
market.
We moved quickly to attract outside talent to strengthen the management team by adding a Chief Technology Officer and
bringing on a new Vice President of Worldwide Sales. We also moved with a sense of urgency on three key objectives
during the second half of fiscal 2016: Driving Operational Excellence, Rationalizing Our Product Roadmap, and Honing
Our IoT Strategy.
Driving Operational Excellence Across the Business
• We initiated and completed a restructuring of our worldwide organization to reduce and redirect our spending.
This included making tough choices to make way for new investments in sales, marketing and engineering.
• Renewed focus in our sales team translated into improved results and sequential growth during the third and
fourth quarters of fiscal 2016. In addition, we implemented new sales force initiatives and recruited a number of
talented people to expand our worldwide reach. While it will take time for our new sales resources to have an
impact on results, I believe that we are off to a good start.
• On the marketing front, we launched several new outbound campaigns that helped to contribute to increased
demand for our SLC 8000 product line. Combined with better sales execution, SLC 8000 revenue for fiscal 2016
grew more than 200%.
•
In addition to investing in new sales and marketing resources, we began building out our engineering team and in
July 2016 announced the official opening of our IoT software lab in Hyderabad, India. The new lab brings
additional software skills and capacity to the team and will play an important role in the execution of our
expanded IoT strategy during fiscal 2017.
Rationalizing Our Product Roadmap
• We completed rationalization of our product roadmap to allow greater emphasis and investment in the markets
where we believe we can drive profitable growth. This meant that we substantially reduced our investment in
xPrintServer®, and consolidated software releases on legacy products, which freed up further resources to invest
in IoT solutions.
• We continued to deliver IoT solutions that play a key role in helping companies connect their machines to the
Internet, which included the launch of PremierWave® 2050, a production-ready embedded Wi-Fi gateway
designed specifically to make it easier to network machines, relieving OEMs the headaches of designing their
own connectivity solution whether they need wired or wireless capability in support of their business critical
industrial applications. This product is already in production and ramping with several new customers, with more
design wins in progress.
Honing Our IoT Strategy and Investing for Growth
• We defined a clear direction for the company going forward. Over the past 27 years, Lantronix has built a
reputation for delivering IoT solutions that our customers describe as “easy-to-deploy” and “they just work.” It’s
why many Fortune 500 companies rely on Lantronix connectivity solutions today. As we move ahead with a more
focused product roadmap and strategy, our objective will be to bring these same qualities to the new software-led
gateway solutions we will be developing and launching in fiscal 2017 and beyond.
Our efforts already started to bear fruit as we recorded modest year-over-year and sequential revenue growth in the
fourth quarter of fiscal 2016, reversing five consecutive quarters of year-over-year declines, and contributing to the
company achieving non-GAAP profitability for fiscal 2016. In addition, a $2.9 million reduction in net inventories during
fiscal 2016 and a $2 million equity investment from Hale Capital Partners in June 2016 strengthened our balance sheet
and working capital position as we head in to fiscal 2017.
Bottom line: we made solid progress in fiscal 2016, but we still have much left to do. It will take time and continued
execution for us to accomplish our long-term goals. I believe that we are on the right path and as a team we have
demonstrated that we’re making the right changes to move the business forward.
Fiscal 2017: One Team with a Clear Focus
As we move into fiscal 2017, our efforts will be centered on three key initiatives:
• Continuing to drive operational excellence;
• Driving continued growth in our IT Management business through share gains enabled by better deal execution,
targeted marketing and improved channel engagement; and
• Executing our strategic direction and investing in new IoT offerings to more broadly participate in this fast growing
market.
The journey is just beginning for us to build on our more than two decades of experience in developing robust machine-
to-machine networking hardware to create the new IoT data access and management solutions that will contribute to our
long-term growth. We believe that we have identified some interesting opportunities where we can provide new offerings
that leverage our know-how and existing routes to market to solve a bigger piece of the IoT problem. Our new mission is
to be the leading supplier of IoT gateways that dramatically simplify the creation, deployment, and management of IoT
projects while providing secure access to data for applications and people.
We hope you will stay engaged with us as we continue on this journey to reinvent Lantronix!
Sincerely,
Jeffrey Benck
President and Chief Executive Officer
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2016
For the transition period from ________ to ________
Commission File Number 1-16027
LANTRONIX, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
33-0362767
(I.R.S. Employer Identification No.)
7535 Irvine Center Drive, Suite 100, Irvine, California 92618
(Address of principal executive offices)
(949) 453-3990
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities registered pursuant to Section 12(g) of the Act: None.
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 (§232.405 of this chapter) 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 (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of 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, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates based upon the closing sales price of the
common stock as reported by the NASDAQ Capital Market on December 31, 2015, the last trading day of the registrant’s second
fiscal quarter, was approximately $7.4 million. The determination of affiliate status for this purpose shall not be a conclusive
determination for any other purpose.
As of August 1, 2016, there were 17,253,799 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2016 annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, are incorporated by reference into Part III of this Annual Report on Form 10-K. With
the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related
proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K.
LANTRONIX, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2016
TABLE OF CONTENTS
PART I
Page
Item 1.
Business ............................................................................................................................................................ 2
Item 1A. Risk Factors ...................................................................................................................................................... 6
Item 1B. Unresolved Staff Comments ............................................................................................................................. 15
Item 2.
Properties .......................................................................................................................................................... 15
Item 3.
Legal Proceedings ............................................................................................................................................. 15
Item 4.
Mine Safety Disclosures ................................................................................................................................... 15
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ........................................................................................................................................................... 16
Item 6.
Selected Financial Data*................................................................................................................................... 15
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................ 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk * ....................................................................... 25
Item 8.
Financial Statements and Supplementary Data ................................................................................................. 25
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................... 25
Item 9A. Controls and Procedures ................................................................................................................................... 25
Item 9B. Other Information ............................................................................................................................................. 26
PART III
Item 10.
Directors, Executive Officers and Corporate Governance ................................................................................ 26
Item 11.
Executive Compensation .................................................................................................................................. 26
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......... 26
Item 13.
Certain Relationships and Related Transactions and Director Independence ................................................... 26
Item 14.
Principal Accountant Fees and Services ........................................................................................................... 26
Item 15.
Consolidated Financial Statements and Exhibits .............................................................................................. 27
* Not required for a “smaller reporting company.”
PART IV
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended June 30, 2016, or the Report, contains forward-looking
statements within the meaning of the federal securities laws, which statements are subject to substantial risks and
uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report,
or incorporated by reference into this Report, are forward-looking statements. Throughout this Report, we have attempted to
identify forward-looking statements by using words such as “may,” “believe,” “will,” “could,” “project,” “anticipate,”
“expect,” “estimate,” “should,” “continue,” “potential,” “plan,” “forecasts,” “goal,” “seek,” “intend,” other forms of
these words or similar words or expressions or the negative thereof. In particular, this Report contains forward-looking
statements relating to, among other things:
•
•
•
•
•
•
•
•
predictions of or assumptions about earnings, revenues, expenses or other financial matters;
forecasts of our liquidity position, financial condition, results of operations or available cash resources;
the impact of changes in our relationship with customers;
plans or expectations with respect to our product development activities, business strategies or restructuring
activities;
demand for our products or for the products of our competitors;
the impact of pending litigation;
the impact of recent accounting pronouncements; and
assumptions or estimates underlying any of the foregoing.
We have based our forward-looking statements on our management’s current expectations and projections about trends
affecting our business and industry and other future events. Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Forward-looking statements are subject
to substantial risks and uncertainties that could cause our results or experiences, or future business, financial condition,
results of operations or performance, to differ materially from our historical results or those expressed or implied in any
forward-looking statement contained in this Report. Some of the risks and uncertainties that may cause actual results to differ
from those expressed or implied in the forward-looking statements are described in “Risk Factors” in Item 1A of this Report,
as well as in our other filings with the Securities and Exchange Commission, or the SEC. In addition, actual results may differ
as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as
material to our business.
You should read this Report in its entirety, together with the documents that we file as exhibits to this Report and the
documents that we incorporate by reference into this Report, with the understanding that our future results may be materially
different from what we currently expect. The forward-looking statements we make speak only as of the date on which they are
made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to
conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law
or the rules of The NASDAQ Stock Market, LLC. If we do update or correct any forward-looking statements, investors should
not conclude that we will make additional updates or corrections.
We qualify all of our forward-looking statements by these cautionary statements.
Item 1.
Business
Overview
PART I
Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global provider of secure data
access and management solutions for Internet of Things, or IoT, and information technology, or IT, assets. Our mission is to
be the leading supplier of IoT gateways that enable companies to dramatically simplify the creation, deployment, and
management of IoT projects while providing secure access to data for applications and people.
With more than two decades of experience in creating robust machine to machine, or M2M, technologies, Lantronix is an
innovator in enabling our customers to build new business models and realize the possibilities of the IoT. Our connectivity
solutions are deployed inside millions of machines serving a wide range of industries, including data center, medical, security,
industrial, transportation, retail, financial, environmental and government.
We were incorporated in California in 1989 and reincorporated in Delaware in 2000.
Our Strategy
Today, more and more companies are seeking to connect their machines and electronic devices to the Internet. The growth
in the IoT market is being driven by the growing importance of data, and the rapidly falling cost of sensors, connectivity,
computing and storage. While the promise of IoT is great, many companies find designing and deploying an IoT project to be
complex, costly and time-consuming.
Our strategy is to leverage our networking and software development expertise to develop technologies that make it easier
for our customers to participate in the IoT. We are primarily focused on the following market transitions:
•
•
•
the increasing role of wireless networks for IoT communication;
the desire to remotely access, monitor and manage machines and IT infrastructure assets; and
the increasing importance of security in IoT deployments.
During the third quarter of the fiscal year ended June 30, 2016, we kicked off a strategic initiative to better position us for
growth in the IoT market. We plan to address this market with a combination of new hardware and software solutions that will
combine our portfolio of robust and secure connectivity solutions with new advanced data access and management features for
enterprise IoT assets. We expect that these new offerings will help companies to simplify and speed their IoT deployments,
reduce complexity and assist them in creating value-added business models.
Products and Solutions
We organize our products and solutions into three product lines: IoT, IT Management and Other.
IoT
Our IoT products typically connect to one or more existing machines and provide network connectivity and are designed
to enhance the value and utility of machines by making the data from the machines available to users, systems and processes
or by controlling their properties and features over the network.
Our IoT products currently consist of IoT Gateways and IoT Building Blocks. IoT Gateways are designed to provide
secure connectivity and the ability to add integrated device management and advanced data access features. IoT Building
Blocks provide basic secure machine connectivity and unmanaged data access.
Our IoT products may be embedded into new designs or attached to existing machines. Our IoT products include wired
and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure
network connectivity, application hosting, protocol conversion, secure access for distributed IoT deployments and many other
functions. Many of the products are offered with software tools intended to further decrease our customer’s time-to-market and
increase their value add.
Most of our IoT products are pre-certified in a number of countries thereby significantly reducing our original equipment
manufacturer, or OEM, customers’ regulatory certification costs and accelerating their time to market.
The following product families are included in our IoT product line: EDS, EDS-MD, PremierWave® EN, PremierWave®
XC, PremierWave® XN, UDS, WiPort®, xDirect®, xPico®, xPico® Wi-Fi, xPress™® and XPort® .
2
IT Management
Today, organizations are managing an ever-increasing amount of devices and data on enterprise networks where 24/7
reliability is mission critical. Out-of-band management, or OOBM, is a technique that uses dedicated channels to manage
critical network devices to ensure management connectivity (including the ability to determine the status of any network
component) independent of the status of other in-band network components. Remote OOBM allows organizations to
effectively manage their enterprise IT resources and at the same time, optimize their IT support resources.
Our IT Management product line includes console management, power management, and keyboard video mouse , or
KVM, products that provide remote OOBM access to IT and networking infrastructure deployed in test labs, data centers and
server rooms.
The following product families are included in our IT Management product line: SLB™, SLC™ 8000, and Spider™. In
addition, this product line includes vSLM™, a virtualized central management solution that simplifies secure administration of
enterprise IT out-of-band devices and attached equipment through a standard web browser. vSLM is designed to operate with
both our IT Management products and certain other manufacturers’ IT infrastructure equipment.
Other
We categorize products that are non-focus or end-of-life as Other. Our Other product line includes non-focus products
such as the xPrintServer®, xSenso®, and WiBox. In addition, our Other product line includes end-of-life versions of our
MatchPort®, SLC™, SLP™, and xPress Pro product families
Net Revenue by Product Line
We have one operating and reportable business segment. A summary of our net revenue by product line is found in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Report, which is
incorporated herein by reference. A discussion of factors potentially affecting our net revenue and other operating results is set
forth in “Risk Factors” in Item 1A of this Report, which is incorporated herein by reference.
Sales Cycle
Our embedded IoT solutions are typically sold to OEMs, original design manufacturers, or ODMs, contract manufacturers
and distributors. OEMs design and sell products under their own brand that are either manufactured by the OEM in-house or
by third-party contract manufacturers. ODMs design and manufacture products for third parties, which then sell those products
under their own brand. The design cycles using our embedded solutions typically range from 12 to 24 months and can generate
revenue for the entire life-cycle of an end-user’s product.
Our IT Management and device IoT Solutions are typically sold through value added resellers, or VARs, systems
integrators, distributors, e-tailers and, to a lesser extent, OEMs. Sales are often project-based and may result in significant
quarterly fluctuations.
Sales Channels
Distributors
A majority of our sales are made through distributors. Distributors resell our products to a wide variety of resellers and
end customers including OEMs, ODMs, VARs, systems integrators, consumers, online retailers, IT resellers, corporate
customers and government entities.
Resellers
Our products are often sold by industry-specific system integrators and VARs, who often obtain our products from our
distributors. Additionally, our products are sold by direct market resellers such as CDW, ProVantage, and Amazon.com.
Direct Sales
We sell products directly to larger OEMs and end users. We also maintain an ecommerce site for direct sales at
store.lantronix.com.
Sales and Marketing
We sell our products through both an internal sales force and to a lesser extent, third-party manufacturers’ representatives.
Our internal sales force, which includes sales managers, inside sales personnel and field applications engineers in major
regions throughout the world, manages our relationships with our sales partners, identifies and develops new sales
3
opportunities and increases penetration at existing accounts. We implement marketing programs, tools and services to generate
sales leads and increase demand for our products.
Manufacturing
Our manufacturing operations are primarily conducted through third-party contract manufacturers. We utilize the
following contract manufacturers primarily located in China to manufacture most of our products: AsteelFlash Group; Hana
Microelectronics; and Universal Global Technology Co., Ltd. In addition, we use eSilicon Corporation to manage Taiwan
Semiconductor Manufacturing Company, Ltd., a third-party foundry located in Taiwan, which manufactures our large scale
integration chips. We manufacture certain products with final assembly in the U.S. to meet trade compliance requirements.
Our contract manufacturers source raw materials, components and integrated circuits, in accordance with our
specifications and forecasts, and perform printed circuit board assembly, final assembly, functional testing and quality control.
Our products are manufactured and tested to our specifications with standard and custom components. Most of these
components are available from multiple vendors. However, we have several single-sourced supplier relationships, either
because alternative sources are not available or because the relationship is advantageous to us.
Research and Development
Our research and development efforts are focused on the development of hardware and software technology to
differentiate our products and enhance our competitive position in the markets we serve. Product research and development is
primarily done in-house and supplemented with outsourced resources.
The following table presents our research and development expenses:
Research and development expenses .................................. $
Competition
Years Ended June 30,
2016
2015
(In thousands)
6,910 $
6,923
Our industry is highly competitive and characterized by rapid technological advances and evolving industry standards.
The market can be affected significantly by new product introductions and marketing activities of industry participants. We
believe that we compete for customers on the basis of product features, software capabilities, company reputation, brand
recognition, technical support, relationships with partners, quality, reliability, product development capabilities, price and
availability. A discussion of factors potentially affecting our ability to compete in the markets in which we operate is set forth
in “Risk Factors” in Item 1A of this Report, which is incorporated herein by reference.
Intellectual Property Rights
We believe that a considerable portion of our value resides in our intellectual property. We have developed proprietary
methodologies, tools, processes and software in connection with delivering our products and services. We protect our
intellectual property through a combination of patents, copyrights, trademarks, trade secrets, licenses, non-disclosure
agreements and contractual provisions. We enter into a non-disclosure and confidentiality agreement with each of our
employees, consultants and third parties that have access to our proprietary technology. Pursuant to assignment of inventions
agreements, all of our employees and consultants assign to us all intellectual property rights for the relevant inventions created
in connection with such person’s employment or contract with us. We currently hold United States and international patents
covering various aspects of our products, with additional patent applications pending.
United States and Foreign Government Regulation
Many of our products are subject to certain mandatory regulatory approvals in the regions in which our products are
deployed. In particular, wireless products must be approved by the relevant government authority prior to these products being
offered for sale. In addition, certain jurisdictions have regulations requiring products to use environmentally friendly
components. Some of our products employ security technology, which is subject to various U.S. export restrictions.
Employees
As of July 31, 2016, we had 114 full time employees, none of whom is represented by a labor union. We have not
experienced any labor problems resulting in a work stoppage and believe we have good relations with our employees.
Customer and Geographic Concentrations
We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle
East, and Africa, or EMEA, and Asia Pacific Japan, or APJ. A discussion concerning sales to our significant customers and
4
related parties, sales within geographic regions as a percentage of net revenue and sales to significant countries as a percentage
of net revenue is set forth in Note 9 of Notes to Consolidated Financial Statements in Item 8 of this Report, which is
incorporated herein by reference. A discussion of factors potentially affecting our customer and geographic concentrations is
set forth in “Risk Factors” in Item 1A of this Report, which is incorporated herein by reference.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on
Schedule 14A and other reports and information that we file or furnish pursuant to the Securities Exchange Act of 1934, as
amended, or the the Exchange Act, are available free of charge on our website at www.lantronix.com as soon as reasonably
practicable after filing or furnishing such reports with the SEC. The public may read and copy any materials we file with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Our
audit committee charter; corporate governance and nominating committee charter; and compensation committee charter are
also posted on our website at www.lantronix.com under “Investor Relations.” The contents of our website are not incorporated
by reference into this Report. References to our website address in this Report are inactive textual references only.
References in this Report to “fiscal 2016” refer to the fiscal year ended June 30, 2016 and references to “fiscal 2015” refer
to the fiscal year ended June 30, 2015.
Executive Officers of the Registrant
Executive officers serve at the discretion of the board of directors. There are no family relationships between any of our
directors or executive officers. The following table presents the names, ages, and positions held by our executive officers:
Name
Age
Position
Jeffrey W. Benck
Jeremy R. Whitaker
Sanjeev Kumar Datla
Michael A. Fink
Daryl R. Miller
Kurt E. Scheuerman
Kevin M. Yoder
51
45
42
45
55
48
52
President and Chief Executive Officer
Chief Financial Officer
Chief Technology Officer
Vice President of Operations
Vice President of Engineering
Vice President, General Counsel and Secretary
Vice President of Worldwide Sales
Jeffrey W. Benck has served as our President, Chief Executive Officer and as a member of our board of directors since
December 2015. Mr. Benck served as president and chief executive officer of Emulex Corporation, a global supplier of
advanced networking, monitoring and management solutions, from July 2013 until Emulex was acquired by Avago
Technologies in May 2015. He joined Emulex in May 2008 as executive vice president and chief operating officer and was
subsequently appointed to president and chief operating officer in August 2010. Prior to joining Emulex, Mr. Benck was
president and chief operating officer of QLogic Corporation, a supplier of storage networking solutions. Prior to that, he spent
18 years at IBM Corporation where he held a variety of executive leadership roles, including serving as vice president of
xSeries, BladeCenter and Retail Store Solutions development. Mr. Benck also serves as a director of Netlist, Inc., a provider of
high performance memory subsystems. Mr. Benck holds a Master of Science degree in management of technology from
University of Miami and a Bachelor of Science degree in mechanical engineering from Rochester Institute of Technology.
Jeremy R. Whitaker has served as our Chief Financial Officer since September 2011. Mr. Whitaker returned to Lantronix
after serving as Vice President, Corporate Controller at Mindspeed from January 2011 to September 2011. Mr. Whitaker
previously served as our Vice President of Finance and Accounting from September 2010 to January 2011, where he was
responsible for managing all worldwide finance and accounting functions. Mr. Whitaker also served as our Senior Director of
Finance and Accounting from February 2006 to September 2010 and our Director of Finance and Accounting from August
2005 to February 2006. Prior to August 2005, Mr. Whitaker held vice president and director level finance and accounting
positions with two publicly-traded companies, and worked in the assurance practice for six years at Ernst & Young LLP. Mr.
Whitaker earned a Bachelor of Arts in business administration with a concentration in accounting from the California State
University at Fullerton and a Masters of Science degree in accountancy from the University of Notre Dame’s Mendoza
College of Business.
Sanjeev Kumar Datla has served as our Chief Technology Officer since February 2016. Prior to joining Lantronix, Mr.
Datla served as chief executive officer and founder of Moxtreme Corporation, a Silicon Valley-based startup technology
company focused on the development of a cloud-based application-defined IoT and virtualized real-time messaging platform.
From August 2010 to August 2013, he served as vice president of cloud initiatives for Emulex Corporation. Prior to that, he
was part of the founding management team of ServerEngines, an enterprise networking company that was acquired by
Emulex. Mr. Datla previously served in senior technology development roles at Broadcom Corporation, ServerWorks
Corporation and NEC Electronics. He earned a Masters in Technology degree in electronics design and technology with
distinction from the Indian Institute of Science and a Bachelors of Engineering degree from Osmania University.
5
Michael A. Fink joined Lantronix in February of 2012 as Vice President of Operations. From April 2010 to February
2012, Mr. Fink served as Director of Operations for Networking and Communication Products for Inphi, an analog
semiconductor company. From July 2008 to March 2010, Mr. Fink was Executive Director of Product and Test Engineering at
Sierra Monolithics, a supplier of analog and mixed-signal semiconductors. Mr. Fink also served as Executive Director of
Product and Test Engineering at Mindspeed from October 2005 to July 2008. Prior to that he held management positions at
Peregrine Semiconductor and Analog Devices. Mr. Fink earned a Bachelor of Science degree in electronic engineering from
the California Polytechnic State University at San Luis Obispo.
Daryl R. Miller joined Lantronix in January 2000 and has served as our Vice President of Engineering since March 2008.
Mr. Miller served as our Interim Vice President of Engineering from October 2007 to March 2008. Prior to this, Mr. Miller
served as Director and a Senior Director within our Engineering Department. Before joining Lantronix, Mr. Miller spent 14
years at Tektronix and held several positions within the Microprocessor Development and Computer Graphics/Networking
divisions, and as Worldwide Director of Service and Support for Network Computing Devices (NCD). Mr. Miller holds a
Bachelor of Science degree with honors in business information systems and Masters of Business Administration from the
University of California, Irvine, where he graduated Dean’s Scholar and Beta Gamma Sigma.
Kurt E. Scheuerman has served as our Vice President and General Counsel since November 2012, and as Corporate
Secretary since February 2013. Prior to joining Lantronix, Mr. Scheuerman served as Vice President, General Counsel and
Corporate Secretary of DDi Corp., a publicly-held printed circuit board manufacturer, from October 2005 to July 2012. From
2000 to 2005, Mr. Scheuerman was an associate with the international law firm of Paul Hastings LLP, where his practice
emphasized corporate finance, securities regulation and other transactional work. Prior to that, he practiced corporate and
transactional law as an associate in two regional law firms and served a clerkship with the Oregon Supreme Court. He earned a
Bachelor of Arts degree in rhetoric from the University of California at Berkeley and received a Juris Doctorate from the
University of Oregon, where he graduated Order of the Coif.
Kevin M. Yoder joined Lantronix in March 2016 as Vice President of Worldwide Sales. Prior to joining Lantronix, Mr.
Yoder served as vice president of sales for the Americas region at Avago Technologies (now Broadcom Limited), where he
was responsible for driving more than $1.3 billion in annual revenues. Prior to joining Avago, Mr. Yoder was vice president of
worldwide sales for XMOS, a start-up semiconductor company. Earlier, he held sales leadership positions at Analog Devices,
Texas Instruments, and CoWare. Mr. Yoder earned a Bachelor of Science degree in electrical engineering from Notre Dame
University.
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves numerous risks and uncertainties. Before deciding to
purchase, hold or sell our common stock, you should carefully consider the risks described in this section, as well as other
information contained in this Report and in our other filings with the SEC. This section should be read in conjunction with the
consolidated financial statements and accompanying notes thereto, and Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in this Report. If any of these risks or uncertainties actually occurs, our
business, financial condition, results of operations or prospects could be materially harmed. In that event, the market price for
our common stock could decline and you could lose all or part of your investment. In addition, risks and uncertainties not
presently known to us or that we currently deem immaterial may also adversely affect our business.
Certain of our products are sold into mature markets, which could limit our ability to continue to generate revenue from
these products. Our ability to sustain and grow our business depends on our ability to develop, market, and sell new
products.
Certain of our products are sold into mature markets that are characterized by a trend of declining demand. As the overall
market for these products decreases due to the adoption of new technologies, we expect that our revenues from these products
will continue to decline. As a result, our future prospects will depend on our ability to develop and successfully market new
products that address new and growing markets. Our failure to develop new products or failure to achieve widespread
customer acceptance of such new products could cause us to lose market share and cause our revenues to decline. There can be
no assurance that we will not experience difficulties that could delay or prevent the successful development, introduction,
marketing and sale of new products or product enhancements. Factors that could cause delays include regulatory and/or
industry approvals, product design cycle and failure to identify products or features that customers demand. In addition, the
introduction and sale of new products often involves a significant technical evaluation, and we often face delays because of
our customers’ internal procedures for evaluating and deploying new technologies. For these and other reasons, the sales cycle
associated with new products is typically lengthy, often lasting six to 24 months and sometimes longer. Therefore, there can be
no assurance that our introduction or announcement of new product offerings will achieve any significant or sustainable
degree of market acceptance or result in increased revenue in the near term.
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We may experience significant fluctuation in our revenue because the timing of large orders placed by some of our
customers is often project-based.
Our operating results fluctuate because we often receive large orders from customers that coincide with the timing of the
customer’s project. Sales of our products and services may be delayed if customers delay approval or commencement of
projects due to budgetary constraints, internal acceptance review procedures, timing of budget cycles or timing of competitive
evaluation processes. In addition, sometimes our customers make significant one-time hardware purchases for projects which
are not repeated. We sell primarily on a purchase order basis rather than pursuant to long-term contracts, and we expect
fluctuations in our revenues as a result of one-time purchases to continue in the future. In addition, our sales may be subject to
significant fluctuations based on the acceleration, delay or cancellation of customer projects, or our failure to complete one or
a series of significant sales opportunities. Because a significant portion of our operating expenses are fixed, even a single order
can have a disproportionate effect on our quarterly revenues and operating results. As a result of the factors discussed above,
and due to the complexities of the industry in which we operate, it is difficult for us to forecast demand for our current or
future products with any degree of certainty, which means it is difficult for us to forecast our sales. If our quarterly or annual
operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline
substantially.
The lengthy sales cycle for our products and services and delay in customer completion of projects, make the timing of our
revenues difficult to predict.
We have a lengthy sales cycle for many of our products that generally extends between 6 and 24 months and sometimes
longer due to a lengthy customer evaluation and approval process. The length of the sales cycle can be affected by factors over
which we have little or no control, including the user’s budgetary constraints, timing of the user’s budget cycles, and concerns
by the user about the introduction of new products by us or by our competitors. As a result, sales cycles for user orders vary
substantially from user to user. The lengthy sales cycle is one of the factors that has caused and may continue to cause our
revenues and operating results to vary significantly from quarter to quarter. In addition, we may incur substantial expenses and
devote significant management effort and expense to develop potential relationships that do not result in agreements or
revenues and may prevent us from pursuing other opportunities. Accordingly, excessive delays in sales could be material and
adversely affect our business, financial condition or results of operations.
The nature of our products, customer base and sales channels causes us to lack visibility regarding future demand for our
products, which makes it difficult for us to predict our revenues or operating results.
We use forecasts based on anticipated product orders to manage our manufacturing and inventory levels and other aspects
of our business. However, several factors contribute to a lack of visibility with respect to future orders, including:
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the lengthy and unpredictable sales cycle for our products that can extend from six to 24 months or longer;
the project-driven nature of many of our customers’ requirements;
the fact that we primarily sell our products indirectly through distributors;
the uncertainty of the extent and timing of market acceptance of our new products;
the requirement to obtain industry certifications or regulatory approval for our products;
the lack of long-term contracts with our customers;
the diversity of our product lines and geographic scope of our product distribution;
the fact that we have some customers who make single, non-recurring purchases; and
the fact that a large number of our customers typically purchase in small quantities.
This lack of visibility impacts our ability to forecast our requirements. If we overestimate our customers’ future
requirements for products, we may have excess inventory, which would increase our costs and potentially require us to write-
off inventory that becomes obsolete. Additionally, if we underestimate our customers’ future requirements, we may have
inadequate inventory, which could interrupt and delay delivery of our products to our customers, harm our reputation, and
cause our revenues to decline. If any of these events occur, they could prevent us from achieving or sustaining profitability.
We have a history of losses.
We incurred net losses of approximately $2.0 million and $2.8 million for fiscal 2016 and 2015, respectively. There can
be no assurance that we will generate net profits in future periods. Further, there can be no assurance that we will be cash flow
positive in future periods. In the event we fail to achieve profitability in future periods, the value of our common stock may
decline. In addition, if we were unable to achieve or maintain positive cash flows, we would be required to seek additional
funding, which may not be available on favorable terms, if at all.
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Delays in qualifying product revisions of existing products at certain of our customers could result in the delay or loss of
sales to those customers, which could negatively impact our business and financial results.
Our industry is characterized by intense competition, rapidly evolving technology and continually changing customer
preferences and requirements. As a result, we frequently develop and introduce new versions of our existing products.
Prior to purchasing our products, some of our customers require that products undergo a qualification process, which may
involve testing of the products in the customer’s system. A subsequent revision to a product’s hardware or firmware, changes
in the manufacturing process or our selection of a new supplier may require a new qualification process, which may result in
delays in sales to customers, loss of sales, or us holding excess or obsolete inventory.
After products are qualified, it can take additional time before the customer commences volume production of
components or devices that incorporate our products. If we are unsuccessful or delayed in qualifying any new or revised
products with a customer, such failure or delay would preclude or delay sales of such products to the customer, and could
negatively impact our financial results. In addition, new revisions to our products could cause our customers to alter the timing
of their purchases, by either accelerating or delaying purchases, which could result in fluctuations of net revenue from quarter
to quarter.
Delays in deliveries or quality control problems with our component suppliers could damage our reputation and could
cause our net revenue to decline and harm our results of operations.
We and our contract manufacturers are responsible for procuring raw materials for our products. Our products incorporate
some components and technologies that are only available from single or limited sources of supply. Depending on a limited
number of suppliers exposes us to risks, including limited control over pricing, availability, quality and delivery schedules.
Moreover, due to the limited amount of our sales, we may not be able to convince suppliers to continue to make components
available to us unless there is demand for such components from their other customers. If any one or more of our suppliers
cease to provide us with sufficient quantities of components in a timely manner or on terms acceptable to us, we would have to
seek alternative sources of supply and we may have difficulty identifying additional or replacement suppliers for some of our
components.
In particular, some of our integrated circuits are only available from a single source and in some cases are no longer being
manufactured. From time to time, integrated circuits, and potentially other components used in our products, will be phased
out of production by the manufacturer. When this happens, we attempt to purchase sufficient inventory to meet our needs until
a substitute component can be incorporated into our products. Nonetheless, we may be unable to purchase sufficient
components to meet our demands, or we may incorrectly forecast our demands, and purchase too many or too few
components. In addition, our products use components that have been subject to market shortages and substantial price
fluctuations in the past. From time to time, we have been unable to meet customer orders because we were unable to purchase
necessary components for our products. We do not have long-term supply arrangements with most of our vendors to obtain
necessary components or technology for our products and instead purchase components on a purchase order basis. If we are
unable to purchase components from these suppliers, our product shipments could be prevented or delayed, which could result
in a loss of sales. If we are unable to meet existing orders or to enter into new orders because of a shortage in components, we
will likely lose net revenues and risk losing customers and harming our reputation in the marketplace, which could adversely
affect our business, financial condition or results of operations.
We outsource substantially all of our manufacturing to contract manufacturers in Asia. If our contract manufacturers are
unable or unwilling to manufacture our products at the quality and quantity we request, our business could be harmed.
We use contract manufacturers based in Asia to manufacture substantially all of our products. Generally, we do not have
long-term agreements with our contract manufacturers or suppliers. If any of these subcontractors or suppliers were to cease
doing business with us, we might not be able to obtain alternative sources in a timely or cost-effective manner. Our reliance on
third-party manufacturers exposes us to a number of significant risks, including:
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reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
lack of guaranteed production capacity or product supply;
reliance on these manufacturers to maintain competitive manufacturing technologies;
unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
reduced protection for intellectual property rights in some countries;
differing labor regulations;
disruptions to the business, financial stability or operations, including due to strikes, labor disputes or other
disruptions to the workforce, of these manufacturers;
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compliance with a wide variety of complex regulatory requirements;
fluctuations in currency exchange rates;
changes in a country’s or region’s political or economic conditions;
effects of terrorist attacks abroad;
greater difficulty in staffing and managing foreign operations; and
increased financial accounting and reporting burdens and complexities.
Any problems that we may encounter with the delivery, quality or cost of our products from our contract manufacturers or
suppliers could cause us to lose net revenue, damage our customer relationships and harm our reputation in the marketplace,
each of which could materially and adversely affect our business, financial condition or results of operations.
From time to time, we may transition the manufacturing of certain products from one contract manufacturer to another.
When we do this, we may incur substantial expenses, risk material delays or encounter other unexpected issues.
We depend on distributors to generate a majority of our sales and complete order fulfillment.
Resale of products through distributors accounts for a substantial majority of our worldwide net revenues. In addition,
sales through our top five distributors accounted for approximately 50% of our net revenues in fiscal 2016. A significant
reduction of effort by one or more distributors to sell our products or a material change in our relationship with one or more
distributors may reduce our access to certain end customers and adversely affect our ability to sell our products. Furthermore,
if a key distributor materially defaults on a contract or otherwise fails to perform, our business and financial results would
suffer.
In addition, the financial health of our distributors and our continuing relationships with them are important to our
success. Current economic conditions may adversely impact the financial health of some of these distributors. This could
result in the insolvency of certain distributors, the inability of distributors to obtain credit to finance the purchase of our
products, or cause distributors to delay payment of their obligations to us and increase our credit risk exposure. Our business
could be harmed if the financial health of these distributors impairs their performance and we are unable to secure alternate
distributors.
Our ability to sustain and grow our business depends in part on the success of our channel partner distributors and
resellers.
A substantial part of our revenues is generated through sales by channel partner distributors and resellers. To the extent
our channel partners are unsuccessful in selling our products or if we are unable to obtain and retain a sufficient number of
high-quality channel partners, our operating results could be materially and adversely affected. In addition, our channel
partners may devote more resources to marketing, selling and supporting products and services that are competitive with ours,
than to our products. They also may have incentives to promote our competitors' products over our products, particularly for
our competitors with larger volumes of orders, more diverse product offerings and a longer relationship with our distributors
and resellers. In these cases, one or more of our important channel partners may stop selling our products completely or may
significantly decrease the volume of products they sell on our behalf. Our channel partner sales structure also could subject us
to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality
of our products or services to customers, violate laws or our corporate policies. If we fail to effectively manage our existing or
future sales channel partners effectively, our business and operating results could be materially and adversely affected.
Changes to the average selling prices of our products could affect our net revenue and gross margins and adversely affect
results of operations.
In the past, we have experienced reductions in the average selling prices and gross margins of our products, We expect
competition to continue to increase, and we anticipate this could result in additional downward pressure on our pricing. Our
average selling prices for our products might also decline as a result of other reasons, including promotional programs
introduced by us or our competitors and customers who negotiate price concessions. To the extent we are able to increase
prices, we may experience a decline in sales volumes if customers decide to purchase competitive products. If any of these
were to occur, our gross margins could decline and we might not be able to reduce the cost to manufacture our products to
keep up with the decline in prices.
If we are unable to sell our inventory in a timely manner, it could become obsolete, which could require us to increase our
reserves or write off obsolete inventory, which could harm our operating results.
At any time, competitive products may be introduced with more attractive features or at lower prices than ours. If this
occurs, and for other reasons, we may not be able to accurately forecast demand for our products and our inventory levels may
increase. There is a risk that we may be unable to sell our inventory in a timely manner to avoid it becoming obsolete. In the
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event we are required to substantially discount our inventory or are unable to sell our inventory in a timely manner, we would
be required to increase our inventory reserves or write off obsolete inventory and our operating results could be substantially
harmed.
Our failure to compete successfully in our highly competitive market could result in reduced prices and loss of market
share.
The market in which we operate is intensely competitive, subject to rapid technological advances and highly sensitive to
evolving industry standards. The market can also be affected significantly by new product and technology introductions and
marketing and pricing activities of industry participants. Our products compete directly with products produced by a number
of our competitors. Many of our competitors and potential competitors have greater financial and human resources for
marketing and product development, more experience conducting research and development activities, greater experience
obtaining regulatory approval for new products, larger distribution and customer networks, more established relationships with
contract manufacturers and suppliers, and more established reputations and name recognition. For these and other reasons, we
may not be able to compete successfully against our current or potential future competitors. In addition, the amount of
competition we face in the marketplace may change and grow as the market for IoT and M2M networking solutions grows and
new companies enter the marketplace. Present and future competitors may be able to identify new markets, adapt new
technologies and, develop and commercialize products more quickly, and may gain market acceptance of products with greater
success. As a result of these competitive factors, we may fail to meet our business objectives and our business, financial
condition and operating results could be materially and adversely affected.
Our products may contain undetected software or hardware errors or defects that could lead to an increase in our costs,
reduce our net revenue or damage our reputation.
We currently offer warranties ranging from one to five years on each of our products. Our products could contain
undetected software or hardware errors or defects. If there is a product failure, we might have to replace all affected products
without being able to book revenue for replacement units, or we might have to refund the purchase price for the units.
Regardless of the amount of testing we undertake, some errors might be discovered only after a product has been installed and
used by customers. Any errors discovered after commercial release could result in loss of net revenue and claims against us.
Significant product warranty claims against us could harm our business, reputation and financial results and cause the price of
our stock to decline.
Our inability to obtain appropriate telecommunications carrier certifications, industry certifications or approvals from
governmental regulatory bodies could impede our ability to grow revenues in our wireless products.
The sale of our wireless products in certain geographical markets is sometimes dependent on the ability to gain
telecommunications carrier certifications and/or approvals by certain governmental bodies. In addition, many of our products
are certified as meeting various industry quality and/or compatibility standards. Failure to obtain these certifications or
approvals, or delays in receiving such certification or approvals, could impact our ability to compete effectively or at all in
these markets and could have an adverse impact on our revenues.
If software that we incorporate into our products were to become unavailable or no longer available on commercially
reasonable terms, it could adversely affect sales of our products, which could disrupt our business and harm our financial
results.
Certain of our products contain software developed and maintained by third-party software vendors or which are available
through the “open source” software community. We also expect that we may incorporate software from third-party vendors
and open source software in our future products. Our business would be disrupted if this software, or functional equivalents of
this software, were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case,
we would be required to either redesign our products to function with alternate third-party software or open source software, or
develop these components ourselves, which would result in increased costs and could result in delays in our product
shipments. Furthermore, we might be forced to limit the features available in our current or future product offerings.
We face risks associated with our international operations that could impair our ability to grow our revenues abroad as
well as our overall financial condition.
We believe that our future growth is dependent in part upon our ability to increase sales in international markets. These
sales are subject to a variety of risks, including geopolitical events, fluctuations in currency exchange rates, tariffs, import
restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts receivable payment
cycles, potentially adverse tax consequences, and export license requirements. In addition, we are subject to the risks inherent
in conducting business internationally, including political and economic instability and unexpected changes in diplomatic and
trade relationships. In many markets where we operate, business and cultural norms are different than those in the United
States, and practices that may violate laws and regulations applicable to us such as the Foreign Corrupt Practices Act
(“FCPA”), unfortunately are more commonplace. Although we have implemented policies and procedures with the intention
of ensuring compliance with these laws and regulations, our employees, contractors and agents, as well as channel partners
involved in our international sales, may take actions in violation of our policies. Many of our vendors and strategic business
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allies also have international operations and are subject to the risks described above. Even if we are able to successfully
manage the risks of international operations, our business may be adversely affected if one or more of our business partners
are not able to successfully manage these risks. There can be no assurance that one or more of these factors will not have a
material adverse effect on our business strategy and financial condition.
Our failure to comply effectively with regulatory laws pertaining to our foreign operations could have a material adverse
effect on our revenues and profitability.
We are required to comply with U.S. government export regulations in the sale of our products to foreign customers,
including requirements to properly classify and screen our products against a denied parties list prior to shipment. We are also
required to comply with the provisions of the FCPA and all other anti-corruption laws, such as the UK Anti-Bribery Act, of all
other countries in which we do business, directly or indirectly, including compliance with the anti-bribery prohibitions and the
accounting and recordkeeping requirements of these laws. Violations of the FCPA or other similar laws could trigger
sanctions, including ineligibility for U.S. government insurance and financing, as well as large fines. Failure to comply with
the aforementioned regulations could also affect our decision to sell our products in international jurisdictions, which could
have a material adverse effect on our revenues and profitability.
Our failure to comply effectively with the requirements of applicable environmental legislation and regulation could have a
material adverse effect on our revenues and profitability.
Certain states and countries have passed regulations relating to chemical substances in electronic products and requiring
electronic products to use environmentally friendly components. For example, the European Union has the Waste Electrical
and Electronic Equipment Directive (“WEEE”), the restrictions of Hazardous Substances Directive (“RoHS”) and the
Regulation on Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”). In the future, China and
other countries including the United States are expected to adopt further environmental compliance programs. In order to
comply with these regulations, we may need to redesign our products to use different components, which may be more
expensive, if they are available at all. If we fail to comply with these regulations, we may not be able to sell our products in
jurisdictions where these regulations apply, which could have a material adverse effect on our revenues and profitability.
Foreign currency exchange rates may adversely affect our results.
We are exposed to market risk primarily related to foreign currencies and interest rates. In particular, we are exposed to
changes in the value of the U.S. dollar versus the local currency in which our products are sold and our services are purchased,
including devaluation and revaluation of local currencies. Accordingly, fluctuations in foreign currency rates could adversely
affect our revenues.
In particular, the uncertainty with respect to the ability of certain European countries to continue to service their sovereign
debt obligations and the related European financial restructuring efforts may cause the value of the Euro and other European
currencies to fluctuate. If the value of European currencies, including the Euro, deteriorates, thus reducing the purchasing
power of European customers, our sales could be adversely affected.
Current or future litigation could adversely affect us.
We are subject to a wide range of claims and lawsuits in the course of our business. Any lawsuit may involve complex
questions of fact and law and may require the expenditure of significant funds and the diversion of other resources. The results
of litigation are inherently uncertain, and adverse outcomes are possible.
In particular, litigation regarding intellectual property rights occurs frequently in our industry. The results of litigation are
inherently uncertain, and adverse outcomes are possible. Adverse outcomes may have a material adverse effect on our
business, financial condition or results of operations.
There is a risk that other third parties could claim that our products, or our customers’ products, infringe on their
intellectual property rights or that we have misappropriated their intellectual property. In addition, software, business
processes and other property rights in our industry might be increasingly subject to third- party infringement claims as the
number of competitors grows and the functionality of products in different industry segments overlaps. Other parties might
currently have, or might eventually be issued, patents that pertain to the proprietary rights we use. Any of these third parties
might make a claim of infringement against us. The results of litigation are inherently uncertain, and adverse outcomes are
possible.
Responding to any infringement claim, regardless of its validity, could:
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be time-consuming, costly and/or result in litigation;
divert management’s time and attention from developing our business;
require us to pay monetary damages, including treble damages if we are held to have willfully infringed;
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require us to enter into royalty and licensing agreements that we would not normally find acceptable;
require us to stop selling or to redesign certain of our products; or
require us to satisfy indemnification obligations to our customers.
If any of these occur, our business, financial condition or results of operations could be adversely affected.
We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive
position or require us to incur significant expenses to enforce our rights.
We rely primarily on a combination of laws, such as patent, copyright, trademark and trade secret laws, and contractual
restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Despite any
precautions that we have taken:
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laws and contractual restrictions might not be sufficient to prevent misappropriation of our technology or deter
others from developing similar technologies;
other companies might claim intellectual property rights based upon prior use that negatively impacts our ability to
enforce our trademarks and patents;
policing unauthorized use of our patented technology and trademarks is difficult, expensive and time-consuming,
and we might be unable to determine the extent of this unauthorized use.
Also, the laws of some of the countries in which we market and manufacture our products offer little or no effective
protection of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our
proprietary technology could enable third parties to benefit from our technology without paying us for it. Consequently, we
may be unable to prevent our proprietary technology from being exploited by others in the U.S. or abroad, which could require
costly efforts to protect our technology. Policing the unauthorized use of our technology, trademarks and other proprietary
rights is expensive, difficult and, in some cases, impracticable. Litigation may be necessary in the future to enforce or defend
our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our
business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or
misappropriating our intellectual property, which may harm our business, financial condition and results of operations.
The impact of natural disasters could negatively impact our supply chain and customers resulting in an adverse impact to
our revenues and profitability.
Certain of our components and other materials used in producing our products are from regions susceptible to natural
disasters. A natural disaster could damage equipment and inventory at our suppliers’ facilities, adversely affecting our supply
chain. If we are unable to obtain these materials, we could experience a disruption to our supply chain that would hinder our
ability to produce our products in a timely manner, or cause us to seek other sources of supply, which may be more costly or
which we may not be able to procure on a timely basis. In addition, our customers may not follow their normal purchasing
patterns or temporarily cease purchasing from us due to impacts to their businesses in the region, creating unexpected
fluctuations or decreases in our revenues and profitability. Natural disasters in other parts of the world on which our operations
are reliant also could have material adverse impacts on our business.
Business interruptions could adversely affect our business.
Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure, cyber security breaches, IT systems failure, terrorist attacks and other events beyond our control.
A substantial portion of our facilities, including our corporate headquarters and other critical business operations, are located
near major earthquake faults and, therefore, may be more susceptible to damage if an earthquake occurs. We do not carry
earthquake insurance for direct earthquake-related losses. If a business interruption occurs, our business could be materially
and adversely affected.
If our products become subject to cyber security breaches, or if public perception is that they are vulnerable to cyber-
attacks, our reputation and business could suffer.
We could be subject to liability or our reputation could be harmed if technologies integrated into our products fail to
prevent cyber-attacks, or if our partners or customers fail to safeguard the systems with security policies that conform to
industry best practices. In addition, any cyber-attack or security breach that affects a competitor’s products could lead to the
negative perception that our solutions are or could be subject to similar attacks or breaches.
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Acquisitions, strategic partnerships, joint ventures or investments may impair our capital and equity resources, divert our
management’s attention or otherwise negatively impact our operating results.
We may pursue acquisitions, strategic partnerships and joint ventures that we believe would allow us to complement our
growth strategy, increase market share in our current markets and expand into adjacent markets, broaden our technology and
intellectual property and strengthen our relationships with distributors, OEMs and ODMs. Any future acquisition, partnership,
joint venture or investment may require that we pay significant cash, issue equity or incur substantial debt. Acquisitions,
partnerships or joint ventures may also result in the loss of key personnel and the dilution of existing stockholders to the extent
we are required to issue equity securities. In addition, acquisitions, partnerships or joint ventures require significant managerial
attention, which may be diverted from our other operations. These capital, equity and managerial commitments may impair the
operation of our business. Furthermore, acquired businesses may not be effectively integrated, may be unable to maintain key
pre-acquisition business relationships, may not result in an increase in revenues or earnings or the delivery of new products,
may contribute to increased fixed costs, and may expose us to unanticipated liabilities. If any of these occur, we may fail to
meet our business objectives and our business, financial condition and operating results could be materially and adversely
affected.
If we are unable to attract, retain or motivate key senior management and technical personnel, it could seriously harm our
business.
Our financial performance depends substantially on the performance of our executive officers and of key engineers,
marketing and sales employees. We are particularly dependent upon our technical personnel, due to the specialized technical
nature of our business. If we were to lose the services of our executive officers or any of our key personnel and were not able
to find replacements in a timely manner, our business could be disrupted, other key personnel might decide to leave, and we
might incur increased operating expenses associated with finding and compensating replacements.
We may experience difficulties associated with utilizing third-party logistics providers.
A majority of our physical inventory management process, as well as the shipping and receiving of our inventory, is
performed by third-party logistics providers in Los Angeles, California and Hong Kong. There is a possibility that these third-
party logistics providers will not perform as expected and we could experience delays in our ability to ship, receive, and
process the related data in a timely manner. This could adversely affect our financial position, results of operations, cash flows
and the market price of our common stock.
Relying on third-party logistics providers could increase the risk of the following: failing to receive accurate and timely
inventory data, theft or poor physical security of our inventory, inventory damage, ineffective internal controls over inventory
processes or other similar business risks out of our immediate control.
Cyber security breaches and other disruptions could compromise our information and expose us to liability, which could
cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary
business information and that of our customers, suppliers and business partners, and personally identifiable information of our
employees, on our networks. The secure processing, maintenance and transmission 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.
We may need additional capital and it may not be available on acceptable terms, or at all.
To remain competitive, we must continue to make significant investments to operate our business and develop our
products. Our future capital requirements will depend on many factors, including the timing and amount of our net revenue,
research and development expenditures, expenses associated with any strategic partnerships or acquisitions and infrastructure
investments, and expenses related to litigation, each of which could negatively affect our ability to generate additional cash
from operations. If cash generated from operations is insufficient to satisfy our working capital requirements, we may need to
raise additional capital. Looking ahead at long-term needs, we may need to raise additional funds for a number of purposes,
including:
•
•
•
to fund working capital requirements;
to update, enhance or expand the range of products we offer;
to increase our sales and marketing activities; or
13
•
to respond to competitive pressures or perceived opportunities, such as investment, acquisition and international
expansion activities.
We may seek additional capital from public or private offerings of our capital stock, borrowings under our existing or
future credit lines or other sources. If we issue equity or debt securities to raise additional funds, our existing stockholders may
experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our
existing stockholders. In addition, if we raise additional funds through collaborations, licensing, joint ventures, or other similar
arrangements, it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies, or
grant licenses on terms that are not favorable to us. There can be no assurance that we will be able to raise any such capital on
terms acceptable to us, if at all. If we are unable to secure such additional financing, we may not be able to develop or enhance
our products, take advantage of future opportunities, respond to competition or continue to operate our business.
The terms of our amended credit facility may restrict our financial and operational flexibility and, in certain cases, our
ability to operate.
The terms of our amended credit facility restrict, among other things, our ability to incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with other persons, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets. Further, we are currently and may in the future be required to maintain specified financial ratios,
including pursuant to a Minimum Tangible Net Worth covenant and satisfy certain financial conditions. Our ability to meet
those financial ratios and tests can be affected by events beyond our control, and there can be no assurance that we will meet
those tests. Pursuant to our amended credit agreement and the related loan and security agreement, we have pledged
substantially all of our assets to our lender, Silicon Valley Bank.
Our quarterly operating results may fluctuate, which could cause our stock price to decline.
We have experienced, and expect to continue to experience, significant fluctuations in net revenue, expenses and
operating results from quarter to quarter. We therefore believe that quarter to quarter comparisons of our operating results are
not a good indication of our future performance, and you should not rely on them to predict our future operating or financial
performance or the future performance of our stock. A high percentage of our operating expenses are relatively fixed and are
based on our forecast of future revenue. If we were to experience an unexpected reduction in net revenue in a quarter, we
would likely be unable to adjust our short-term expenditures significantly. If this were to occur, our operating results for that
fiscal quarter would be harmed. In addition, if our operating results in future fiscal quarters were to fall below the expectations
of equity analysts and investors, the price of our common stock would likely fall.
The trading price of our common stock may be volatile based on a number of factors, many of which are not under our
control.
The trading price of our common stock has been highly volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, many of which are out of our control, including:
•
•
•
•
•
•
•
•
•
adverse change in domestic or global economic conditions;
new products or services offered by our competitors;
our completion of or failure to complete significant one-time sales of our products;
actual or anticipated variations in quarterly operating results;
changes in financial estimates by securities analysts;
announcements of technological innovations;
our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
conditions or trends in the industry;
additions or departures of key personnel;
• mergers and acquisitions; and
•
sales of common stock by our stockholders or us or repurchases by us.
In addition, the NASDAQ Capital Market often experiences price and volume fluctuations. These fluctuations often have
been unrelated or disproportionate to the operating performance of companies listed on the NASDAQ Capital Market.
14
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
We lease approximately 27,000 square feet for our corporate headquarters in Irvine, California. Our corporate
headquarters includes sales, marketing, research and development, operations and administrative functions. Our lease
agreement for our corporate headquarters expires in November 2020. In addition, we lease sales offices in the Netherlands,
China and Hong Kong. In June 2016 we entered into a lease to open an engineering and design center in Hyderabad, India.
We believe our existing facilities are adequate to meet our needs. If additional space is needed in the future, we believe
that suitable space will be available on commercially reasonable terms.
Item 3.
Legal Proceedings
From time to time we are involved in various legal and government proceedings incidental to our business. These
proceedings are in various procedural stages. We believe as of the date of this Report that provisions or accruals made for any
potential losses, to the extent estimable, are adequate and that any liabilities or costs arising out of these proceedings are not
likely to have a materially adverse effect on our financial position, results of operations or liquidity. However, the outcome of
legal proceedings is inherently uncertain, and if unfavorable outcomes were to occur, there is a possibility that they could,
individually or in the aggregate, have a materially adverse effect on our financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures
None.
15
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities
Price Range of Common Stock
Our common stock is traded on the NASDAQ Capital Market under the symbol “LTRX.” The number of holders of
record of our common stock as of August 1, 2016 was approximately 24. The following table presents, for the periods
indicated, the high and low sales prices for our common stock:
Fiscal Year Ended June 30, 2016
First Quarter ............................................................................ $
Second Quarter ........................................................................
Third Quarter ..........................................................................
Fourth Quarter .........................................................................
Fiscal Year Ended June 30, 2015
First Quarter ............................................................................ $
Second Quarter ........................................................................
Third Quarter ..........................................................................
Fourth Quarter .........................................................................
High
Low
$
$
1.70
1.43
1.30
1.49
2.40
2.05
2.27
1.84
1.11
1.08
0.80
0.83
1.76
1.76
1.61
1.51
Dividend Policy
We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends on
our common stock in the foreseeable future, and we intend to retain any future earnings for use in the expansion of our
business and for general corporate purposes. Any future decision to declare or pay dividends will be made by our board of
directors in its sole discretion and will depend upon our financial condition, operating results, capital requirements and other
factors that our board of directors deems appropriate at the time of its decision.
Issuer Repurchases
We did not repurchase any shares of our common stock during fiscal 2016.
Item 6.
Selected Financial Data
Not required for a “smaller reporting company.”
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our consolidated financial statements and the
related notes included in Item 8 of this Report. This discussion and analysis contains forward-looking statements that are
based on our management’s current beliefs and assumptions, which statements are subject to substantial risks and
uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as
a result of many factors, including those discussed in “Risk Factors” in Item 1A of this Report. Please also see “Cautionary
Note Regarding Forward Looking Statements” at the beginning of this Report.
Overview
Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global provider of secure data
access and management solutions for Internet of Things, or IoT, and information technology, or IT, assets. Our mission is to
be the leading supplier of IoT gateways that enable companies to dramatically simplify the creation, deployment, and
management of IoT projects while providing secure access to data for applications and people.
We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle
East, and Africa, or EMEA; and Asia Pacific Japan, or APJ.
Products and Solutions
To more closely align the categorization of our product lines with how we position them in the marketplace, we have re-
organized our products and solutions into three product lines: IoT, IT Management and Other. Until this recent change, we had
organized our products and solutions into two product lines: IoT Modules and Enterprise Solutions. In addition, we had
defined “New Products” as those that had been released since the start of the second quarter of the fiscal year ended June 30,
16
2012; all other products had been referred to as “Legacy Products.” Going forward, we do not plan to disclose our net revenue
by the old categorizations.
IoT
Our IoT products typically connect to one or more existing machines and provide network connectivity and are designed
to enhance the value and utility of machines by making the data from the machines available to users, systems and processes
or by controlling their properties and features over the network.
Our IoT products currently consist of IoT Gateways and IoT Building Blocks. IoT Gateways are designed to provide
secure connectivity and the ability to add integrated device management and advanced data access features. IoT Building
Blocks provide basic secure machine connectivity and unmanaged data access.
The following product families are included in our IoT product line: EDS, EDS-MD, PremiereWave® EN, PremierWave®
XC, PremierWave® XN, UDS, WiPort®, xDirect®, xPico®, xPico® Wi-Fi, xPress™ and xPort®,
IT Management
Our IT Management product line includes console management, power management, and keyboard video mouse, or
KVM, products that provide remote out-of-band management access to IT and networking infrastructure deployed in test labs,
data centers and server rooms.
The following product families are included in our IT Management product line: SLB™, SLC™ 8000 and Spider™. In
addition, this product line includes vSLM, a virtualized central management solution that simplifies secure administration of
enterprise IT out-of-band devices and attached equipment through a standard web browser. vSLM is designed to operate with
both our IT Management products and certain other manufacturers’ IT infrastructure equipment.
Other
We categorize products that are non-focus or end-of-life as Other. Our Other product line includes non-focus products
such as the xPrintServer®, xSenso®, and WiBox. In addition, our Other product line includes end-of-life versions of our
MatchPort®, SLC™, SLP™, and xPress Pro product families.
Recent Accounting Pronouncements
Refer to Note 1 of Notes to Consolidated Financial Statements included in Item 8 of this Report, which is incorporated
herein by reference, for a discussion of recent accounting pronouncements.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in accordance with U.S. generally accepted accounting
principles requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period. We
regularly evaluate our estimates and assumptions related to net revenue, allowances for doubtful accounts, sales returns and
allowances, inventory valuation, valuation of deferred income taxes, goodwill valuation, warranty reserves, litigation and other
contingencies. We base our estimates and assumptions on historical experience and on various other factors that we believe 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. To the extent there are material differences between our
estimates and the actual results, our future results of operations will be affected.
We believe the following critical accounting policies require us to make significant judgments and estimates in the
preparation of our consolidated financial statements:
Revenue Recognition
We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery
has occurred or services have been rendered; our price to the buyer is fixed or determinable; and collectability is reasonably
assured.
Establishing accruals for product returns and pricing adjustments requires the use of judgment and estimates that impact
the amount and timing of revenue recognition. When product revenue is recognized, we establish an estimated allowance for
future product returns based primarily on historical returns experience. We also record reductions of revenue for pricing
adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recognized, based
on approved pricing adjustments and historical experience. Actual product returns or pricing adjustments that differ from our
estimates could result in increases or decreases to our net revenue.
17
A significant portion of our sales are made to distributors under agreements which contain a limited right to return unsold
products and price adjustment provisions. Given these provisions, we have concluded the price to these distributors is not fixed
and determinable at the time we deliver products to them. Accordingly, revenue and the related cost of revenue from sales to
these distributors is not recognized until the distributor resells the product. These distributors provide us with periodic data
regarding product, price, quantity and customers when products are shipped to their customers, as well as quantities of our
products that they still have in stock.
From time to time, we may enter into arrangements with customers that provide for multiple deliverables that generally
include the sale of products, professional engineering services and other product qualification or certification services, which
we refer to collectively as deliverables. Pursuant to the applicable accounting guidance, when multiple deliverables in an
arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified
separate units that have stand-alone value at the inception of the contract based on a relative selling price hierarchy. We
determine the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price, or VSOE,
if available, third-party evidence, or TPE, if VSOE is not available, and our best estimate of selling price, or BESP, if neither
VSOE nor TPE is available. Determining the BESP for a deliverable requires significant judgment and consideration of
various factors including market conditions, items contemplated during negotiation of customer arrangements, as well as
internally-developed pricing models. Significant judgment is also required in determining whether an arrangement includes
multiple elements, and if so, whether VSOE or TPE of fair value exists for those elements. We recognize the relative fair value
of the deliverables as they are delivered assuming all other revenue recognition criteria are met. In any period, a portion of
revenue may be recorded as unearned due to elements of an arrangement that are undelivered. Changes to the elements in an
arrangement, the ability to identify VSOE, TPE or BESP for those elements, and the fair value of the respective elements
could materially impact the amounts of earned and unearned revenue we record.
Warranty Reserve
The standard warranty periods for our products typically range from one to five years. We establish reserves for estimated
product warranty costs at the time revenue is recognized based upon our historical warranty experience, and additionally for
any known product warranty issues. Although we engage in extensive product quality programs and processes, our warranty
obligation is affected by product failure rates, use of materials or service delivery costs that differ from our estimates. As a
result, increases or decreases to warranty reserves could be required, which could impact our gross margins.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make
required payments. Our evaluation of the collectability of customer accounts receivable is based on various factors. In cases
where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent
to the original sale, we will record an allowance against amounts due. For all other customers, we estimate an allowance for
doubtful accounts based on the length of time the receivables are past due, our history of bad debts and general industry
conditions. If a major customer’s credit-worthiness deteriorates, or our customers’ actual defaults exceed our estimates, our
financial results could be impacted.
Inventory Valuation
We value inventories at the lower of cost (on a first-in, first-out basis) or market, whereby we make estimates regarding
the market value of our inventories, including an assessment of excess and obsolete inventories. We determine excess and
obsolete inventories based on an estimate of the future sales demand for our products within a specified time horizon, which is
generally twelve months. The estimates we use for demand are also used for near-term capacity planning and inventory
purchasing. In addition, specific reserves are recorded to cover risks in the area of end-of-life products, inventory located at
our contract manufacturers, deferred inventory in our sales channel and warranty replacement stock. If actual product demand
or market conditions are less favorable than our estimates, additional inventory write-downs could be required, which would
increase our cost of revenue and reduce our gross margins.
Valuation of Deferred Income Taxes
We have recorded a valuation allowance to reduce our net deferred tax assets to zero, primarily due to historical net
operating losses and uncertainty of generating future taxable income. We consider estimated future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we determine that it is
more likely than not that we will realize a deferred tax asset that currently has a valuation allowance, we would be required to
reverse the valuation allowance, which would be reflected as an income tax benefit in our consolidated statements of
operations at that time.
Goodwill Impairment Testing
We evaluate goodwill for impairment on an annual basis in our fiscal fourth quarter or more frequently if we believe
indicators of impairment exist that would more likely than not reduce the fair value of our single reporting unit below its
carrying amount. We begin by assessing qualitative factors to determine whether it is more likely than not that the fair value of
18
our single reporting unit is less than its carrying value. Based on that qualitative assessment, if we conclude that it is more
likely than not that the fair value of a reporting unit is less than its carrying value, we conduct a two-step goodwill impairment
test. The first step of the impairment test involves comparing the estimated fair value of our single reporting unit with its
carrying value, including goodwill. We estimate the fair value of our reporting unit using a combination of the income and
market approach. If the carrying value of the reporting unit exceeds its estimated fair value, we perform the second step of the
goodwill impairment test which involves comparing the implied fair value of the reporting unit’s goodwill with the carrying
value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is
recognized as an impairment loss.
Significant management judgment is required in estimating the reporting unit’s fair value and in the creation of the
forecasts of future operating results that are used in the discounted cash flow method of valuation, including (i) estimation of
future cash flows, which is dependent on internal forecasts, (ii) estimation of the long-term rate of growth of our business, (iii)
estimation of the useful lives over which cash flows will occur and (iv) the determination of our weighted average cost of
capital, which helps determine the discount rate. Our estimate of the reporting unit’s fair value would also generally include
the consideration of a control premium, which is the amount that a buyer is willing to pay over the current market price of a
company as indicated by the traded price per share (i.e., market capitalization), in order to acquire a controlling interest. If our
actual financial results are not consistent with our assumptions and judgments used in estimating the fair value of our reporting
unit, we may be exposed to goodwill impairment losses.
During the fourth quarter of fiscal 2016, using a combination of the income and market approaches of valuation, we
performed the first step of the two-step goodwill impairment test described above. Such test resulted in an estimated fair value
of our reporting unit in excess of our book value. Accordingly, we concluded that no goodwill impairment existed as of June
30, 2016.
Share-Based Compensation
We record share-based compensation in our consolidated statements of operations as an expense, based on the estimated
grant date fair value of our share-based awards, whereby such fair values are amortized to expense over the requisite service
period. Our share-based awards are currently comprised of stock options, restricted stock units and common stock purchase
rights granted under our employee stock purchase plan. The fair value of our stock options and stock purchase rights is
generally estimated on the grant date using the Black-Scholes-Merton, or BSM, option-pricing formula. While utilizing the
BSM model meets established requirements, the estimated fair values generated by the model may not be indicative of the
actual fair values of our share-based awards as the model does not consider certain factors important to those awards to
employees, such as continued employment and periodic vesting requirements as well as limited transferability. The
determination of the fair value of share-based awards utilizing the BSM model is affected by our stock price and a number of
assumptions, including the expected term, expected volatility, risk-free interest rate and expected dividend yields. The
expected term of our stock options is generally estimated using the simplified method, as permitted by guidance issued by the
Securities and Exchange Commission, or SEC. The expected volatility is based on the historical volatility of our stock price.
The risk-free interest rate assumption is based on the U.S. Treasury interest rates appropriate for the expected term of our stock
options and stock purchase rights. The fair value of our restricted stock units is based on the closing market price of our
common stock on the date of grant. If factors change and we employ different assumptions, share-based compensation expense
may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the
underlying unvested share-based awards, we may be required to accelerate, increase or cancel any remaining unearned share-
based compensation expense.
Results of Operations - Fiscal Years Ended June 30, 2016 and 2015
Summary
References to “fiscal 2016” refer to the fiscal year ended June 30, 2016 and references to “fiscal 2015” refer to the fiscal
year ended June 30, 2015.
For fiscal 2016, our net revenue declined by approximately $2.4 million, or 5.5%, as compared to fiscal 2015. Our net loss
for fiscal 2016 was $2.0 million as compared to $2.8 million for fiscal 2015. Operating expenses for fiscal 2016 declined by
approximately $1.7 million, or 7.2%, as compared to fiscal 2015.
19
Net Revenue
The following tables present our net revenue by product lines and by geographic region:
Years Ended June 30,
% of Net
Revenue
% of Net
Revenue
2015
2016
Change
$
%
IoT ...................................... $
IT Management ..................
Other ..................................
$
30,568
5,279
4,745
40,592
(In thousands, except percentages)
75.3% $
13.0%
11.7%
100.0% $
32,067
3,871
7,008
42,946
74.7% $
9.0%
16.3%
100.0% $
(1,499 )
1,408
(2,263 )
(2,354 )
(4.7% )
36.4%
(32.3% )
(5.5% )
Years Ended June 30,
% of Net
Revenue
% of Net
Revenue
2015
2016
Change
$
%
Americas ............................ $
EMEA ................................
Asia Pacific Japan ..............
$
20,643
13,135
6,814
40,592
IoT
(In thousands, except percentages)
50.8% $
32.4%
16.8%
100.0% $
23,178
12,933
6,835
42,946
54.0% $
30.1%
15.9%
100.0% $
(2,535 )
202
(21 )
(2,354 )
(10.9% )
1.6%
(0.3% )
(5.5% )
Net revenue from our IoT product line decreased in fiscal 2016 as we experienced a decline in unit shipments of many of
our legacy product families. The decline in our legacy products was in line with our expectations, and it was relatively
consistent with the approximate 10% annual rate of decline that we experienced in the two prior fiscal years. The overall
decrease in net revenue was partially offset by increased unit sales of the xPico Wi-Fi, primarily in the EMEA region.
IT Management
Fiscal 2016 net revenue from our IT Management product line increased due to growth in our new SLC 8000 in both the
Americas and EMEA regions, as we transitioned from the legacy SLC to the SLC 8000 throughout fiscal 2016. The overall
increase in this product line was partially offset by a decline in unit shipments of our SLB2 product family in the Americas, as
we experienced stronger sales in fiscal 2015 in connection with a deployment with a large tier 1 customer.
Other
The overall decline in fiscal 2016 net revenue from our Other product line was driven by decreased unit shipments in our
legacy SLC product, as we transitioned to the new SLC 8000 during fiscal 2016, as described above.
For comparative purposes, the following tables present our product line categorizations prior to our decision to reorganize
how we present this information during the fourth quarter of fiscal 2016. As discussed above, going forward we do not plan to
disclose our net revenue by these categorizations.
Years Ended June 30,
% of Net
Revenue
2016
% of Net
Revenue
2015
Change
$
%
IoT Modules ....................... $
Enterprise Solutions ...........
$
20,747
19,845
40,592
(In thousands, except percentages)
51.1% $
48.9%
100.0% $
21,230
21,716
42,946
49.4% $
50.6%
100.0% $
(483 )
(1,871 )
(2,354 )
(2.3% )
(8.6% )
(5.5% )
Years Ended June 30,
% of Net
Revenue
% of Net
Revenue
2015
2016
Change
$
%
New Products ..................... $
Legacy Products .................
$
8,559
32,033
40,592
(In thousands, except percentages)
21.1% $
78.9%
100.0% $
6,762
36,184
42,946
15.7% $
84.3%
100.0% $
1,797
(4,151 )
(2,354 )
26.6%
(11.5% )
(5.5% )
20
Gross Profit
Gross profit represents net revenue less cost of revenue. Cost of revenue consists of the cost of raw material components,
subcontract labor assembly from contract manufacturers, manufacturing overhead, establishing or relieving inventory reserves
for excess and obsolete products or raw materials, warranty costs, royalties and share-based compensation.
The following table presents gross profit:
Years Ended June 30,
% of Net
Revenue
% of Net
Revenue
2015
2016
Change
$
%
Gross profit ........................ $
19,378
(In thousands, except percentages)
$
20,298
47.3%
47.7% $
(920 )
(4.5% )
Gross profit as a percentage of net revenue (referred to as “gross margin”) for fiscal 2016 was consistent with fiscal 2015.
In fiscal 2016 we saw lower material production costs, which were substantially offset by higher manufacturing overhead
expenses in the current fiscal year.
Selling, General and Administrative
Selling, general and administrative expenses consisted of personnel-related expenses including salaries and commissions,
share-based compensation, facility expenses, information technology, advertising and marketing expenses and professional
legal and accounting fees.
The following table presents selling, general and administrative expenses:
Years Ended June 30,
% of Net
Revenue
2016
% of Net
Revenue
2015
Change
$
%
Personnel-related expenses .......... $ 8,976
Restructuring and severance
expenses ....................................
571
Professional fees and outside
services ..................................... 1,185
Advertising and marketing ........... 1,407
Facilities and insurance ................ 1,025
632
Share-based compensation ...........
227
Depreciation .................................
373
Other.............................................
(In thousands, except percentages)
$
10,553
$
–
1,302
1,678
1,115
745
217
431
(1,577 )
(14.9% )
571
100.0%
(117 )
(271 )
(90 )
(113 )
10
(58 )
(9.0% )
(16.2% )
(8.1% )
(15.2% )
4.6%
(13.5% )
Selling, general and
administrative .....................
$ 14,396
35.5% $
16,041
37.4% $
(1,645 )
(10.3% )
The decrease in selling, general and administrative expenses for fiscal 2016 was primarily due to (i) lower headcount-
related expenses, as we reduced headcount in order to reduce our operating expenses for fiscal 2016 and (ii) decreased
spending on outside marketing programs and trade shows in connection with our efforts to reevaluate certain marketing
strategies.
In February 2016, we initiated a strategic realignment plan to enable us to reallocate resources which was intended to
optimize our sales and product development efforts. The restructuring activities were substantially completed by June 30,
2016, and consisted of severance, lease termination and other associated costs. These activities resulted in charges to selling,
general and administrative expenses of approximately $223,000 for fiscal 2016. Also included in the “Restructuring and
severance expenses” line item in the table above are severance charges totaling $348,000, which is comprised of (i) a $286,000
charge related to severance for our former President and Chief Executive Officer and (ii) $62,000 in severance expenses
related to our former Vice President of Worldwide Sales.
Research and Development
Research and development expenses consisted of personnel-related expenses and share-based compensation, as well as
expenditures to third-party vendors for research and development activities, and product certification costs.
21
The following table presents research and development expenses:
Years Ended June 30,
% of Net
Revenue
2015
% of Net
Revenue
2016
Change
$
%
4,788
$
4,707
$
81
1.7%
(In thousands, except percentages)
24
734
763
237
175
55
134
6,910
17.0% $
–
744
808
286
201
90
87
6,923
16.1% $
24
(10 )
(45 )
(49 )
(26 )
(35 )
47
(13 )
100.0%
(1.3% )
(5.6% )
(17.1% )
(12.9% )
(38.9% )
54.0%
(0.2% )
Personnel-related expenses ...... $
Restructuring and severance
expenses...............................
Facilities ..................................
Outside services .......................
Product certifications ...............
Share-based compensation ......
Depreciation ............................
Other ........................................
Research and development $
Research and development spending in fiscal 2016 was down slightly compared to the prior fiscal year, driven principally
by lower outside services and product certification costs. We incurred approximately $24,000 in restructuring charges
recorded in connection with the strategic realignment plan discussed further above. In July 2016, we announced the launch of
our new subsidiary and IoT software lab in India to strengthen our product development efforts and we have plans to continue
to expand our team in India. We expect to fund a significant portion of this expansion by reducing our spending on Outside
Services for engineering resources.
Other Expense, Net
Other expense, net, is comprised primarily of foreign currency remeasurement and transaction adjustments related to our
foreign subsidiaries whose functional currency is the U.S. dollar.
Provision for Income Taxes
The following table presents the provision for income taxes:
Years Ended June 30,
% of Net
Revenue
2016
% of Net
Revenue
2015
Change
$
%
(In thousands, except percentages)
Provision for income taxes ... $
63
0.2% $
58
0.1% $
5
8.6%
The following table presents our effective tax rate based upon our provision for income taxes:
Years Ended June 30,
2016
2015
Effective tax rate .........................................................................................................
(3.3%)
(2.1%)
We utilize the liability method of accounting for income taxes. The difference between our effective tax rate and the
federal statutory rate resulted primarily from the effect of our domestic losses recorded without a tax benefit, as well as the
effect of foreign earnings taxed at rates differing from the federal statutory rate. We record net deferred tax assets to the extent
we believe these assets will more likely than not be realized. As a result of our cumulative losses and uncertainty of generating
future taxable income, we provided a full valuation allowance against our net deferred tax assets for fiscal 2016 and 2015.
Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of our net operating loss, or NOL,
carryforwards and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods. As
a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce
future income tax liabilities. The following table presents our NOLs:
Federal .............................................................................................. $
State .................................................................................................. $
June 30, 2016
(In thousands)
88,394
27,140
Our NOL carryovers for federal income tax purposes begin to expire in the fiscal year ending June 30, 2021. Our NOL
carryovers for state income tax purposes began to expire in fiscal 2013. At June 30, 2016, our fiscal 2013 through 2016 tax
years remain open to examination by the federal taxing jurisdiction and our fiscal 2012 through 2016 tax years remain open to
22
examination by the state taxing jurisdictions. However, we have NOLs beginning in the fiscal year ended June 30, 2001 which
would cause the statute of limitations to remain open for the year in which the NOL was incurred.
Liquidity and Capital Resources
Liquidity
The following table presents details of our working capital and cash and cash equivalents:
June 30,
2016
2015
(In thousands)
Increase
Working capital ......................................................................... $
Cash and cash equivalents ......................................................... $
9,061 $
5,962 $
7,889 $
4,989 $
1,172
973
Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts
available under our line of credit, and cash generated from operations. We believe that these sources will be sufficient to fund
our current requirements for working capital, capital expenditures and other financial commitments for at least the next 12
months. We anticipate that the primary factors affecting our cash and liquidity are net revenue, working capital requirements
and capital expenditures.
Management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when
purchased. We maintain cash and cash equivalents balances at certain financial institutions in excess of amounts insured by
federal agencies. Management does not believe this concentration subjects us to any unusual financial risk beyond the normal
risk associated with commercial banking relationships. We frequently monitor the third-party depository institutions that hold
our cash and cash equivalents. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those
funds.
Our future working capital requirements will depend on many factors, including the timing and amount of our net
revenue, research and development expenses, and expenses associated with any strategic partnerships or acquisitions and
infrastructure investments.
On June 16, 2016, we entered into a Common Stock Purchase Agreement with Hale Capital Partners, LP, or Hale Capital,
pursuant to which we issued 1,941,748 shares of our common stock to Hale Capital at a price of $1.03 per share, for an
aggregate purchase price of $2.0 million. After legal fees, we received net proceeds of $1.975 million from the sale of these
shares.
We expect our existing cash and cash equivalents, amounts available under our credit facilities and cash generated from
operations to be sufficient to fund our capital expenditures, our working capital and other cash requirements. From time to
time, we may seek additional capital from public or private offerings of our capital stock, borrowings under our existing or
future credit lines or other sources in order to (i) develop or enhance our products, (ii) take advantage of future opportunities,
(iii) respond to competition or (iv) continue to operate our business. We currently have a Form S-3 shelf registration statement
on file with the SEC. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience
dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing
stockholders. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all.
As of June 30, 2016, approximately $192,000 of our cash was held in foreign subsidiary bank accounts. This cash is
unrestricted with regard to foreign liquidity needs; however, our ability to utilize a portion of this cash to satisfy liquidity
needs outside of such foreign locations may be subject to approval by the relevant foreign subsidiary’s board of directors.
Loan Agreement
On September 30, 2014, we entered into an amendment, or the Amendment, to our existing Loan and Security Agreement
dated May 23, 2006 (as amended, the “Loan Agreement”) with Silicon Valley Bank, or SVB. The Amendment provides,
among other things, for (i) a renewal of our $4.0 million revolving line of credit with an extended maturity date of September
30, 2016 and (ii) a modification of the revolving credit line borrowing base formula to include a portion of our foreign
accounts receivable to the borrowing base and increase the borrowing limit related to domestic accounts receivable. We are
currently in negotiations with SVB to renew the terms of the Loan Agreement that are set to expire on September 30, 2016.
The Loan Agreement provides for an interest rate per annum equal to the greater of the prime rate plus 0.75% or 4.0%,
provided that we maintain a monthly quick ratio of 1.0 to 1.0 or greater. The quick ratio measures our ability to use our cash
and cash equivalents maintained at SVB to extinguish or retire our current liabilities immediately. If this ratio is not met, the
interest rate will become the greater of the prime rate plus 1.25% or 4.0%. At June 30, 2016, we met the 1.0 to 1.0 or greater
quick ratio.
23
The Loan Agreement includes a covenant requiring us to maintain a certain Minimum Tangible Net Worth, or Minimum
TNW, currently required to be at least $8.0 million, which was adjusted upward from the previous $6.0 million as a result of
our sale of common stock to Hale Capital in June 2016, as further discussed above. The Minimum TNW is subject to
adjustment upward to the extent we raise additional equity or debt financing or achieve net income in future quarters. Our
Actual Tangible Net Worth, or Actual TNW, is calculated as total stockholders’ equity, less goodwill. If we continue to incur
net losses, we may have difficulty satisfying the Minimum TNW financial covenant in the future, in which case we may be
unable to borrow funds under the Loan Agreement and any amounts outstanding may need to be repaid immediately.
The following table sets forth the Minimum TNW compared to our Actual TNW:
Minimum TNW ................................................................................ $
Actual TNW ...................................................................................... $
June 30, 2016
(In thousands)
8,000
10,230
The following table presents certain information with respect to the Loan Agreement with SVB:
Outstanding borrowings on the line of credit ............................................................... $
Available borrowing capacity on the line of credit ...................................................... $
Outstanding letters of credit ......................................................................................... $
June 30,
2016
2015
(In thousands)
– $
2,620 $
51 $
700
1,736
110
Our outstanding letters of credit at June 30, 2016 and 2015 were used as security deposits.
Cash Flows
The following table presents the major components of the consolidated statements of cash flows:
Years Ended June 30,
2016
2015
(In thousands)
Increase
(Decrease)
Net cash provided by (used in) operating activities ....... $
Net cash used in investing activities ..............................
Net cash provided by financing activities ......................
213 $
(570 )
1,330
(1,640 ) $
(577 )
942
1,853
(7 )
388
Operating Activities
Net cash provided by operating activities in fiscal 2016 increased as compared to the prior year due primarily to (i) a
lower net loss and (ii) a decrease in inventories during fiscal 2016 of approximately $2.9 million, driven by our efforts to
reduce inventory purchases to align with demand, along with the sale of inventories built up in the prior fiscal year. We also
experienced a decrease in accounts payable of approximately $912,000 during fiscal 2016 as we lowered current year
inventory levels and paid for inventories accumulated in the prior fiscal year. Additionally, accounts receivable increased
$506,000 from June 30, 2015 to June 30, 2016 due primarily to increased net revenues in the fourth quarter of fiscal 2016 as
compared to the fourth quarter of fiscal 2015.
Investing Activities
Cash used in investing activities in fiscal 2016 was related to capital expenditures for the purchase of property and
equipment, primarily related to (i) a software license we acquired for product development and (ii) tooling and test equipment
for new product deployment. Cash used in investing activities in fiscal 2015 related primarily to purchases of tooling and test
equipment and website development costs.
Financing Activities
The increase in net cash provided by financing activities was primarily related to approximately $2.0 million in net
proceeds we received from the sale of 1.9 million shares of our common stock in June 2016, as discussed above, partially
offset by the repayment of $700,000 in borrowings on our line of credit. During fiscal 2016, we also received $174,000 in
proceeds from the sale of our common stock to participants in our employee stock purchase plan.
24
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose
entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of June 30, 2016, we were not involved in any material relationships with
unconsolidated SPEs.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for a “smaller reporting company.”
Item 8.
Financial Statements and Supplementary Data
All financial statements required by this Item 8, including the report of our independent registered public accounting firm,
are listed in Item 15 of this Report, as set forth beginning on page F-1 of this Report, and are hereby incorporated by reference
into this Item 8.
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
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of June 30, 2016. The term “disclosure controls and procedures,” as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Based on the evaluation of our disclosure controls and procedures as of June 30, 2016, our Chief Executive Officer and Chief
Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as
defined in Rule 13a-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our
internal control over financial reporting as of June 30, 2016 based on the criteria set forth in the Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the
assessment, our management has concluded that our internal control over financial reporting was effective as of June 30, 2016.
This Report does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by our independent registered public
accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Report because we
are a “smaller reporting company.”
(c) Changes in internal controls over financial reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation
required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2016 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d) Inherent Limitation on Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, 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 the Company have been detected. These inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by
the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The
design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures
25
may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
Item 9B. Other Information
None.
PART III
Portions of our definitive Proxy Statement on Schedule 14A relating to our 2016 annual meeting of stockholders, which
will be filed with the SEC within 120 days after the end of the fiscal year covered by this Report, are incorporated by reference
into Part III of this Report, as indicated below.
Item 10. Directors, Executive Officers and Corporate Governance
The names of our executive officers and their ages, titles and biographies as of the date hereof are set forth in Item 1 in the
section entitled “Executive Officers of the Registrant” in Item 1 of this Report, which is incorporated herein by reference.
The other information required by this Item is incorporated by reference to our Proxy Statement on Schedule 14A relating
to our 2016 annual meeting of stockholders.
Item 11.
Executive Compensation
The information required by this Item is incorporated by reference to our Proxy Statement on Schedule 14A relating to
our 2016 annual meeting of stockholders.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to our Proxy Statement on Schedule 14A relating to
our 2016 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated by reference to our Proxy Statement on Schedule 14A relating to
our 2016 annual meeting of stockholders.
Item 14.
Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to our Proxy Statement on Schedule 14A relating to
our 2016 annual meeting of stockholders.
26
Item 15. Consolidated Financial Statements and Exhibits
Consolidated Financial Statements
PART IV
The following consolidated financial statements and related Report of Independent Registered Public Accounting Firm are
filed as part of this Report.
Report of Independent Registered Public Accounting Firm, Squar Milner LLP ......................................................
Page
F-1
Consolidated Balance Sheets as of June 30, 2016 and 2015 .....................................................................................
F-2
Consolidated Statements of Operations for the fiscal years ended June 30, 2016 and 2015 ....................................
F-3
Consolidated Statements of Stockholders’ Equity for the fiscal years ended June 30, 2016 and 2015 ....................
F-4
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2016 and 2015 ...................................
F-5
Notes to Consolidated Financial Statements ............................................................................................................. F-6 – F-21
Financial Statement Schedules
None.
Exhibits
The exhibits listed on the accompanying Index to Exhibits immediately following the consolidated financial statements
are filed as part of, and incorporated by reference into, this Report.
27
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: August 24, 2016
LANTRONIX, INC.
By:
/s/ JEFFREY BENCK
Jeffrey Benck
President and Chief Executive Officer and
Director
(Principal Executive Officer)
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:
Signature
Title
Date
/s/ JEFFREY BENCK
Jeffrey Benck
/s/ JEREMY WHITAKER
Jeremy Whitaker
/s/ BERNHARD BRUSCHA
Bernhard Bruscha
/s/ BRUCE EDWARDS
Bruce Edwards
/s/ PAUL FOLINO
Paul Folino
/s/ MARTIN HALE
Martin Hale
/s/ HOSHI PRINTER
Hoshi Printer
President and Chief Executive Officer and Director
August 24, 2016
(Principal Executive Officer)
Chief Financial Officer
August 24, 2016
(Principal Financial and Accounting Officer)
Chairman of the Board
August 24, 2016
Director
Director
Director
Director
August 24, 2016
August 24, 2016
August 24, 2016
August 24, 2016
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Lantronix, Inc.
We have audited the accompanying consolidated balance sheets of Lantronix, Inc. and subsidiaries as of June 30, 2016
and 2015, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended.
These 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). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 thereon. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
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 referred to above present fairly, in all material respects, the
consolidated financial position of Lantronix, Inc. and subsidiaries as of June 30, 2016 and 2015, and the results of their
operations and their consolidated cash flows for the years then ended, in conformity with U.S. generally accepted accounting
principles.
/s/ Squar Milner LLP
Newport Beach, California
August 24, 2016
F-1
LANTRONIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)
Assets
Current Assets:
Cash and cash equivalents .................................................................................
Accounts receivable (net of allowance for doubtful accounts of $37 and $45 at
June 30, 2016 and 2015, respectively) ...............................................................
Inventories, net ....................................................................................................
Contract manufacturers' receivable ......................................................................
Prepaid expenses and other current assets ...........................................................
Total current assets ..........................................................................................
$
Property and equipment, net ................................................................................
Goodwill ..............................................................................................................
Other assets ..........................................................................................................
Total assets ...................................................................................................... $
Liabilities and stockholders' equity
Current Liabilities:
Accounts payable ................................................................................................. $
Line of credit .......................................................................................................
Accrued payroll and related expenses .................................................................
Warranty reserve ..................................................................................................
Other current liabilities ........................................................................................
Total current liabilities ....................................................................................
Long-term capital lease obligations .........................................................................
Other non-current liabilities .....................................................................................
Total liabilities ................................................................................................
Commitments and contingencies (Note 8)
Stockholders' equity:
June 30,
2016
June 30,
2015
5,962 $
4,989
3,164
6,584
369
580
16,659
1,569
9,488
63
27,779 $
2,721 $
–
1,817
138
2,922
7,598
116
347
8,061
2,658
9,503
369
400
17,919
1,471
9,488
93
28,971
3,633
700
1,685
163
3,849
10,030
152
80
10,262
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued and
outstanding ........................................................................................................
Common stock, $0.0001 par value; 100,000,000 shares authorized; 17,253,799
and 15,089,720 shares issued and outstanding at June 30, 2016 and 2015,
respectively ........................................................................................................
Additional paid-in capital ....................................................................................
Accumulated deficit .............................................................................................
Accumulated other comprehensive income .........................................................
Total stockholders' equity ................................................................................
Total liabilities and stockholders' equity ......................................................... $
–
–
2
209,297
(189,952 )
371
19,718
27,779 $
2
206,326
(187,990 )
371
18,709
28,971
See accompanying notes.
F-2
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Net revenue (1) .......................................................................................................... $
Cost of revenue ..........................................................................................................
Gross profit ................................................................................................................
Operating expenses:
Selling, general and administrative ........................................................................
Research and development ....................................................................................
Total operating expenses ............................................................................................
Loss from operations ..................................................................................................
Interest expense, net ...................................................................................................
Other income (expense), net ......................................................................................
Loss before income taxes ...........................................................................................
Provision for income taxes .........................................................................................
Net loss and comprehensive loss ................................................................................ $
Years Ended June 30,
2016
2015
40,592 $
21,214
19,378
14,396
6,910
21,306
(1,928 )
(32 )
61
(1,899 )
63
(1,962 ) $
42,946
22,648
20,298
16,041
6,923
22,964
(2,666 )
(17 )
(30 )
(2,713 )
58
(2,771 )
Net loss per share (basic and diluted) ......................................................................... $
(0.13 ) $
(0.19 )
Weighted average shares (basic and diluted) .............................................................
15,260
14,904
Net revenue from related parties ................................................................................ $
113 $
298
(1) Includes net revenue from related parties
See accompanying notes.
F-3
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Paid-In Accumulated
Shares
Amount Capital
Deficit
Additional
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Balance at June 30, 2014 .....................
14,787 $
1 $ 205,013 $
(185,219 ) $
371 $
20,166
Shares issued pursuant to stock
awards, net .....................................
Minimum tax withholding paid on
behalf of employees for restricted
shares .............................................
Share-based compensation...............
Net loss ............................................
Balance at June 30, 2015 .....................
Shares issued pursuant to stock
awards, net .....................................
Shares issued pursuant to equity
offering ..........................................
Minimum tax withholding paid on
behalf of employees for restricted
shares .............................................
Share-based compensation...............
Net loss ............................................
Balance at June 30, 2016 .....................
303
1
351
–
–
352
–
–
–
371 $
–
–
–
–
–
371 $
(53 )
1,015
(2,771 )
18,709
174
1,975
(48
)
870
(1,962 )
19,718
–
–
–
15,090
222
–
–
–
2
–
(53 )
1,015
–
206,326
–
–
(2,771 )
(187,990 )
174
–
–
1,942
–
1,975
–
–
–
17,254 $
(48
)
–
870
–
–
–
2 $ 209,297 $
–
–
(1,962 )
(189,952 ) $
See accompanying notes.
F-4
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities
Net loss ....................................................................................................................... $
(1,962 ) $
(2,771 )
Years Ended June 30,
2016
2015
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Share-based compensation ..................................................................................
Depreciation ........................................................................................................
Provision for excess and obsolete inventories .....................................................
Loss (gain) on disposal of property and equipment.............................................
Changes in operating assets and liabilities:
Accounts receivable ........................................................................................
Inventories ......................................................................................................
Contract manufacturers' receivable .................................................................
Prepaid expenses and other current assets ......................................................
Other assets .....................................................................................................
Accounts payable ............................................................................................
Accrued payroll and related expenses .............................................................
Warranty reserve .............................................................................................
Other liabilities ...............................................................................................
Cash received related to tenant lease incentives .............................................
Net cash provided by (used in) operating activities ....................................
Investing activities
Purchases of property and equipment ......................................................................
Net cash used in investing activities ....................................................................
Financing activities
Minimum tax withholding paid on behalf of employees for restricted shares .........
Proceeds from borrowings on line of credit .............................................................
Payment of borrowings on line of credit ..................................................................
Net proceeds from issuances of common stock .......................................................
Payment of capital lease obligations ........................................................................
Net cash provided by financing activities............................................................
Increase (decrease) in cash and cash equivalents ........................................................
Cash and cash equivalents at beginning of year ..........................................................
Cash and cash equivalents at end of year .................................................................... $
870
759
293
7
(506 )
2,626
–
(180 )
16
(965 )
132
(25 )
(905 )
53
213
(570 )
(570 )
(48 )
2,100
(2,800 )
2,149
(71 )
1,330
973
4,989
5,962 $
Supplemental disclosure of cash flow information
Interest paid ............................................................................................................. $
Income taxes paid .................................................................................................... $
32 $
32 $
1,015
878
222
(2 )
973
(1,321 )
(10 )
124
12
(960 )
(178 )
13
365
–
(1,640 )
(577 )
(577 )
(53 )
1,000
(300 )
352
(57 )
942
(1,275 )
6,264
4,989
19
39
See accompanying notes.
F-5
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
1. Summary of Significant Accounting Policies
The Company
Lantronix, Inc. (referred to in these consolidated financial statements as “Lantronix”, “we,” “our,” or “us”), is a global
provider of secure data access and management solutions for Internet of Things (“IoT”) and information technology assets.
Our mission is to be the leading supplier of IoT gateways that enable companies to dramatically simplify the creation,
deployment, and management of IoT projects while providing secure access to data for applications and people.
We were incorporated in California in 1989 and re-incorporated in Delaware in 2000.
Basis of Presentation
The consolidated financial statements include the accounts of Lantronix and our wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in consolidation. At June 30, 2016, approximately
$2.3 million of our tangible assets were located outside of the United States (“U.S.”), and were substantially comprised of
inventory held at (i) our third-party logistics provider in Hong Kong and (ii) our contract manufacturers in China.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”)
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The industry in which we operate is characterized by rapid technological change. As a
result, estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, sales
returns and allowances, inventory reserves, goodwill valuation, deferred income tax asset valuation allowances, share-based
compensation and warranty reserves. To the extent there are material differences between our estimates and actual results,
future results of operations will be affected.
Reclassifications
Certain reclassifications have been made to the prior fiscal year financial information to conform to the current fiscal year
presentation.
Revenue Recognition
We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery
has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectability is reasonably
assured.
For each of the fiscal years ended June 30, 2016 and 2015, approximately 99% of our net revenues came from sales of
hardware products. The remaining 1% of our net revenues in each of these years was primarily attributable to professional
engineering services and extended warranty services. We sell extended warranty services which extend the warranty period for
an additional one to three years, depending upon the product. Warranty net revenue is deferred and recognized ratably over the
warranty service period.
When product revenue is recognized, we establish an estimated allowance for future product returns based on historical
returns experience. We also record reductions of revenue for pricing adjustments, such as competitive pricing programs and
rebates, in the same period that the related revenue is recognized, based on approved pricing adjustments and historical
experience. Actual product returns or pricing adjustments that differ from our estimates could result in increases or decreases
to our net revenue.
A significant portion of our sales are made to distributors under agreements which contain a limited right to return unsold
products and price adjustment provisions. Given these provisions, we have concluded the price to these distributors is not fixed
and determinable at the time we deliver products to them. Accordingly, revenue and the related cost of revenue from sales to
these distributors is not recognized until the distributor resells the product. In addition, when the deferred revenue attributable
to any distributor exceeds their receivable balance due to Lantronix at the balance sheet date, such excess is reclassified from
net accounts receivable to a customer deposit and refunds liability, which is included in other current liabilities on the
accompanying consolidated balance sheets.
F-6
Multiple-Element Arrangements
From time to time, we may enter into arrangements with customers that provide for multiple deliverables that generally
include the sale of products, professional engineering services and other product qualification or certification services
(collectively, the “deliverables”). Pursuant to the applicable accounting guidance, when multiple deliverables in an
arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified
separate units that have stand-alone value at the inception of the contract based on a relative selling price hierarchy. We
determine the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”),
if available, third-party evidence (“TPE”), if VSOE is not available, and our best estimate of selling price, if neither VSOE nor
TPE is available. We recognize the relative fair value of the deliverables as they are delivered assuming all other revenue
recognition criteria are met.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make
required payments. Our evaluation of the collectability of customer accounts receivable is based on various factors, including
the length of time the receivables are past due, our history of bad debts and general industry conditions. Accounts that are
deemed uncollectible are written off against the allowance for doubtful accounts.
Concentration of Credit Risk
Our accounts receivable are primarily derived from revenue earned from customers located throughout North America,
Europe and Asia. We perform periodic credit evaluations of our customers’ financial condition and maintain allowances for
potential credit losses. Credit losses have historically been within our expectations. We generally do not require collateral or
other security from our customers.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, accounts receivable, contract manufacturers’
receivable, accounts payable, accrued liabilities and long-term debt. The fair value of a financial instrument is the amount that
would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market
participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in
the market and the degree to which the inputs are observable. The categorization of financial instruments within the valuation
hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized
into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Inputs are based on quoted market prices for identical assets and liabilities in active markets at the
measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical
or similar assets or liabilities in markets that are not active near the measurement date.
Level 3: Inputs include management’s best estimate of what market participants would use in pricing the asset or
liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if
available, when determining fair value. We do not have any assets or liabilities that were measured at fair value on a recurring
basis, and during the years ended June 30, 2016 and June 30, 2015 we did not have any assets or liabilities that were measured
at fair value on a non-recurring basis.
We believe all of our financial instruments’ recorded values approximate their current fair values because of the nature
and short duration of these instruments. The fair value of long-term debt approximates its carrying value because the related
effective rates of interest approximate current market rates available to us for debt with similar terms and similar remaining
maturities.
Foreign Currency Remeasurement
The functional currency for all our foreign subsidiaries is currently the U.S. dollar. Non-monetary and monetary foreign
currency assets and liabilities are valued in U.S. dollars at historical and end-of-period exchange rates, respectively. Exchange
gains and losses from foreign currency transactions and remeasurements are recognized in the consolidated statements of
operations. Translation adjustments for foreign subsidiaries whose functional currency was previously the local currency are
suspended in accumulated other comprehensive income.
F-7
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is composed of accumulated translation adjustments as of June 30, 2016 and
2015. We did not have any other comprehensive income or losses during the fiscal years ended June 30, 2016 or 2015.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments, with original maturities of 90 days or less.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. We provide reserves for excess and
obsolete inventories determined primarily based upon estimates of future demand for our products. Shipping and handling
costs are classified as a component of cost of revenue in the consolidated statements of operations.
Inventory Sale and Purchase Transactions with Contract Manufacturers
Under certain circumstances, we sell raw materials to our contract manufacturers and subsequently repurchase finished
goods from the contract manufacturers which contain such raw materials. Net sales of raw materials to the contract
manufacturers are recorded on the consolidated balance sheets as contract manufacturers’ receivables, and are eliminated from
net revenue as we intend to repurchase the raw materials from the contract manufacturers in the form of finished goods.
We have contractual arrangements with certain of our contract manufacturers that require us to purchase unused inventory
that the contract manufacturer has purchased to fulfill our forecasted manufacturing demand. To the extent that inventory on-
hand at one or more of these contract manufacturers exceeds our contractually reported forecasts, we record the amount we
may be required to purchase as part of other current liabilities and inventories on the consolidated balance sheets.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided using the straight-line method over the assets’
estimated useful lives, generally ranging from three to five years. Depreciation and amortization of leasehold improvements
are computed using the shorter of the remaining lease term or five years. Major renewals and betterments are capitalized,
while replacements, maintenance and repairs, which do not improve or extend the estimated useful lives of the respective
assets, are expensed as incurred.
Capitalized Internal Use Software Costs
We capitalize the costs of computer software developed or obtained for internal use. Capitalized computer software costs
consist of purchased software licenses and implementation costs. Capitalized software costs are amortized on a straight-line
basis over a period of three to five years.
Goodwill
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair
value of the acquired net tangible and intangible assets acquired. We evaluate goodwill for impairment on an annual basis in
our fiscal fourth quarter or more frequently if we believe indicators of impairment exist that would more likely than not reduce
the fair value of our single reporting unit below its carrying amount. We begin by assessing qualitative factors to determine
whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value. Based on that
qualitative assessment, if we conclude that it is more likely than not that the fair value of a reporting unit is less than its
carrying value, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the
estimated fair value of our single reporting unit with its carrying value, including goodwill. We estimate the fair value of our
reporting unit using a combination of the income and market approach. If the carrying value of the reporting unit exceeds its
estimated fair value, we perform the second step of the goodwill impairment test which involves comparing the implied fair
value of the reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the
goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.
During the fourth quarter of fiscal 2016, using a combination of the income and market approaches of valuation, we
performed the first step of the two-step goodwill impairment test described above. Such test resulted in an estimated fair value
of our reporting unit in excess of our book value. Accordingly, we concluded that no goodwill impairment existed as of June
30, 2016.
Income Taxes
Income taxes are computed under the liability method. This method requires the recognition of deferred tax assets and
liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The
impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences
F-8
are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. A valuation
allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.
Financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical
merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition
threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-not
threshold of being realized upon ultimate settlement with a taxing authority. We recognize potential accrued interest and
penalties related to unrecognized tax benefits as income tax expense.
Share-Based Compensation
We account for share-based compensation by expensing the estimated grant date fair value of our shared-based awards
over the requisite service period. We record amortization of share-based compensation expense ratably over the requisite
service period of the grant. We also estimate forfeitures based on historical experience in our calculation of share-based
compensation expense.
Net Income (Loss) Per Share
Net income (loss) per share (basic) is calculated by dividing net income (loss) by the weighted average number of
common shares outstanding during the fiscal year. Net income (loss) per share (diluted) is calculated by adjusting the weighted
average number of common shares outstanding, assuming any dilutive effects of outstanding share-based awards using the
treasury stock method.
Research and Development Costs
Costs incurred in the research and development of new products and enhancements to existing products are expensed as
incurred. Development costs of computer software to be sold, leased or otherwise marketed are subject to capitalization
beginning when a product’s technological feasibility has been established and ending when a product is available for general
release to customers. In most instances, we believe our current process for developing products is essentially completed
concurrently with the establishment of technological feasibility and as a result, software development costs have been
expensed as incurred.
Warranty
The standard warranty periods for our products typically range from one to five years. We establish reserves for estimated
product warranty costs at the time revenue is recognized based upon our historical warranty experience, and additionally for
any known product warranty issues. Although we engage in extensive product quality programs and processes, our warranty
obligation is affected by product failure rates, use of materials or service delivery costs that differ from our estimates.
Advertising Expenses
Advertising costs are expensed in the period incurred.
Segment Information
We have one operating and reportable business segment.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which superseded
existing revenue recognition guidance under current U.S. GAAP. The standard is a comprehensive new revenue recognition
model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that
reflects the consideration it expects to receive in exchange for those goods or services. In doing so, among other things,
companies will generally need to use more judgment and make more estimates than under the current guidance. The standard
permits the use of either a retrospective or cumulative effect transition method. In July 2015, FASB deferred the effective date
of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with
the original effective date. More recently, FASB has issued guidance clarifying certain topics such as (i) gross versus net
revenue reporting, (ii) identifying performance obligations and licensing and (iii) accounting for shipping and handling fees
and costs and accounting for consideration given by a vendor to a customer. The standard will be effective for Lantronix in the
fiscal year beginning July 1, 2018, with an option to adopt the standard for the fiscal year beginning July 1, 2017. We are
currently evaluating this standard and have not yet selected a transition method or the effective date on which we plan to adopt
the standard, nor have we determined the effect of the standard on our financial statements and related disclosures.
In August 2014, FASB issued an accounting standard which requires management of an entity to assess, for each annual
and interim period, if there is substantial doubt about the entity’s ability to continue as a going concern within one year of the
financial statement issuance date. The definition of substantial doubt within the new standard incorporates a likelihood
F-9
threshold of “probable” similar to the use of that term under current U.S. GAAP for loss contingencies. Certain disclosures are
required if conditions give rise to substantial doubt about the entity’s ability to continue as a going concern. The standard will
be effective for Lantronix in the fiscal year beginning July 1, 2016. We do not expect adoption of this standard to have a
material impact on our financial statements and related disclosures.
In November 2015, FASB issued final guidance simplifying the balance sheet classification of deferred taxes. The
guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as
noncurrent on the balance sheet. As a result, each jurisdiction now only has one net noncurrent deferred tax asset or liability.
The guidance does not change the existing requirement that only permits offsetting within a jurisdiction – that is, companies
are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another
jurisdiction. Lantronix elected to adopt this guidance as of the fiscal quarter ended December 31, 2015. We have
retrospectively applied this guidance to the accompanying consolidated balance sheet as of June 30, 2015, which had the effect
of increasing our working capital by $442,000 as compared to what was originally reported as of that date.
In February 2016, FASB issued an accounting standard that revises lease accounting guidance. The standard requires
lessees to put most leases on their balance sheets, but recognize expenses on their income statements in a manner similar to the
previous guidance. The standard will be effective for Lantronix in the fiscal year beginning July 1, 2019. Early adoption is
permitted. We are currently evaluating the impact of this standard on our financial statements and related disclosures.
In March 2016, FASB issued accounting guidance that changes how companies account for certain aspects of share-based
payments to employees. Among other things, under the new guidance companies will no longer record excess tax benefits and
certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or
benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively.
Another component of the new guidance allows companies to make an accounting policy election for the impact of forfeitures
on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or
recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a
modified retrospective approach. The guidance will be effective for Lantronix in the fiscal year beginning July 1, 2017. Early
adoption is permitted. We are currently evaluating the impact of this standard on our financial statements and related
disclosures.
2. Supplemental Financial Information
Inventories
The following table presents details of our inventories:
Finished goods ............................................................................................................ $
Raw materials ..............................................................................................................
Finished good held by distributors ..............................................................................
Inventories, net ........................................................................................................
$
Property and Equipment
The following table presents details of property and equipment:
Computer, software and office equipment .................................................................. $
Furniture and fixtures ..................................................................................................
Production, development and warehouse equipment ..................................................
Construction-in-progress* ...........................................................................................
Property and equipment, gross.................................................................................
Less accumulated depreciation ...................................................................................
Property and equipment, net ....................................................................................
$
June 30,
2016
2015
(In thousands)
3,822 $
1,653
1,109
6,584 $
6,044
2,122
1,337
9,503
June 30,
2016
2015
(In thousands)
3,298 $
468
3,724
509
7,999
(6,430 )
1,569 $
3,547
990
3,595
282
8,414
(6,943 )
1,471
____________
* Includes $470,000 and $255,000 of capitalized software costs at June 30, 2016 and 2015, respectively.
F-10
The following table presents details of property and equipment recorded in connection with capital lease obligations:
Property and equipment .............................................................................................. $
Less accumulated depreciation ...................................................................................
Total .........................................................................................................................
$
266 $
(71 )
195 $
386
(108 )
278
The amortization of property and equipment recorded in connection with capital lease obligations is included within
depreciation expense recorded in the applicable functional line items on our consolidated statements of operations.
June 30,
2016
2015
(In thousands)
Warranty Reserve
The following table presents details of our warranty reserve:
Beginning balance ....................................................................................................... $
Charged to cost of revenues ....................................................................................
Usage ......................................................................................................................
Ending balance ............................................................................................................ $
163 $
91
(116 )
138 $
150
112
(99 )
163
Years Ended June 30,
2016
2015
(In thousands)
Other Liabilities
The following table presents details of our other liabilities:
Current
Customer deposits and refunds ................................................................................... $
Accrued raw materials purchases ................................................................................
Deferred revenue .........................................................................................................
Capital lease obligations .............................................................................................
Taxes payable ..............................................................................................................
Accrued operating expenses ........................................................................................
Total other current liabilities....................................................................................
$
Non-current
Deferred rent ............................................................................................................... $
Deferred revenue .........................................................................................................
Total other non-current liabilities ............................................................................
$
Advertising Expenses
The following table presents details of our advertising expenses:
Advertising expenses .................................................................................................. $
June 30,
2016
2015
(In thousands)
663 $
582
427
64
275
911
2,922 $
225 $
122
347 $
854
916
690
62
247
1,080
3,849
–
80
80
Years Ended June 30,
2016
2015
(In thousands)
173 $
185
F-11
Computation of Net Loss per Share
The following table presents the computation of net loss per share:
Years Ended June 30,
2016
2015
(In thousands, except per share
data)
Numerator:
Net loss and comprehensive loss ............................................................................. $
(1,962 ) $
(2,771 )
Denominator:
Weighted-average shares outstanding (basic and diluted) ......................................
15,260
14,904
Net loss per share (basic and diluted) .......................................................................... $
(0.13 ) $
(0.19 )
The following table presents the common stock equivalents excluded from the diluted net loss per share calculation
because they were anti-dilutive for the periods presented. These excluded common stock equivalents could be dilutive in the
future.
Common stock equivalents .........................................................................................
Separation Agreement with Former President and Chief Executive Officer
Years Ended June 30,
2016
2015
(In thousands)
3,450
2,323
In December 2015, we entered into a separation and release agreement (the “Separation Agreement”) with Kurt F. Busch,
our former President and Chief Executive Officer. The Separation Agreement provided for (i) release of all claims by Mr.
Busch in favor of Lantronix; (ii) a cash payment to Mr. Busch of $271,000, which was paid in January 2016; and (iii) the
acceleration of vesting of 50,000 restricted stock units, for which we recorded a net $52,000 share-based compensation charge.
Both the $271,000 cash payment and the share-based compensation charge are included in selling, general and administrative
expense in our consolidated statement of operations for the year ended June 30, 2016.
Restructuring
In February 2016, we initiated a strategic realignment plan to enable us to reallocate resources intended to optimize our
sales and product development efforts. The restructuring activities were substantially completed by June 30, 2016, and
consisted of severance, lease termination and other associated costs. These activities resulted in total charges of approximately
$247,000, and are included in the applicable functional line items within our consolidated statement of operations for the year
ended June 30, 2016.
Supplemental Cash Flow Information
The following table presents non-cash investing and financing transactions excluded from the consolidated statements of
cash flows:
Accrued property and equipment paid for in the subsequent period ........................... $
Non-cash acquisition of property and equipment under capital leases........................ $
Non-cash acquisition of property and equipment through non-monetary exchange ... $
Non-cash tenant improvements paid by landlord ........................................................ $
3. Bank Line of Credit
Years Ended June 30,
2016
2015
(In thousands)
43 $
37 $
10 $
190 $
46
217
–
–
On September 30, 2014, we entered into an amendment (the “Amendment”) to our existing Loan and Security Agreement
dated May 23, 2006 (as amended, the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Amendment provides,
among other things, for (i) a renewal of our $4.0 million revolving line of credit with an extended maturity date of September
30, 2016 and (ii) a modification of the revolving credit line borrowing base formula to include a portion of our foreign
accounts receivable to the borrowing base and increase the borrowing limit related to domestic accounts receivable.
F-12
The Loan Agreement provides for an interest rate per annum equal to the greater of the prime rate plus 0.75% or 4.0%,
provided that we maintain a monthly quick ratio of 1.0 to 1.0 or greater. The quick ratio measures our ability to use our cash
and cash equivalents maintained at SVB to extinguish or retire our current liabilities immediately. If this ratio is not met, the
interest rate will become the greater of the prime rate plus 1.25% or 4.0%. At June 30, 2016, we met the 1.0 to 1.0 or greater
quick ratio.
The Loan Agreement includes a covenant requiring us to maintain a certain Minimum Tangible Net Worth (“Minimum
TNW”), currently required to be at least $8.0 million, which was adjusted upward from the previous $6.0 million as a result of
our sale of common stock in June 2016, as further discussed in Note 4. The Minimum TNW is subject to adjustment upward to
the extent we raise additional equity or debt financing or achieve net income in future quarters. Our Actual Tangible Net
Worth (“Actual TNW”) is calculated as total stockholders’ equity, less goodwill. If we continue to incur net losses, we may
have difficulty satisfying the Minimum TNW financial covenant in the future, in which case we may be unable to borrow
funds under the Loan Agreement and any amounts outstanding may need to be repaid immediately.
The following table presents the Minimum TNW compared to our Actual TNW:
Minimum TNW ............................................................................................................................................ $
Actual TNW .................................................................................................................................................. $
June 30, 2016
(In thousands)
8,000
10,230
The following table presents certain information with respect to the Loan Agreement with SVB:
Outstanding borrowings on the line of credit .............................................................. $
Available borrowing capacity on the line of credit ..................................................... $
Outstanding letters of credit ........................................................................................ $
June 30,
2016
2015
(In thousands)
– $
2,620 $
51 $
700
1,736
110
Our outstanding letters of credit at June 30, 2016 and 2015 were used as security deposits.
4. Stockholders’ Equity
Private Placement Sale of Common Stock
On June 16, 2016, we entered into a common stock purchase agreement with Hale Capital Partners, LP (“Hale Capital”),
pursuant to which we issued 1,941,748 shares of our common stock to Hale Capital at a price of $1.03 per share, which
reflects the closing price of our common stock as of June 15, 2016, for an aggregate purchase price of $2.0 million. After legal
fees, we received net proceeds of $1.975 million from the sale of these shares.
The sale of the shares was not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance
on the exemption afforded by Section 4(a)(2) thereof and Rule 506(b) of Regulation D promulgated thereunder, as a
transaction not involving a public offering.
Stock Incentive Plans
We have stock incentive plans in effect under which non-qualified and incentive stock options to purchase shares of
Lantronix common stock (“stock options”) have been granted to employees, non-employees and board members. In addition,
we have previously granted restricted common stock awards (“non-vested shares”) to employees and board members under
these plans. Our current stock incentive program is governed by our Amended and Restated 2010 Stock Incentive Plan (the
“2010 SIP”). Shares reserved for issuance under this plan include rollover shares, which are any shares subject to equity
compensation awards granted under our previous stock plan that expire or otherwise terminate without having been exercised
in full or that are forfeited or repurchased by Lantronix by virtue of their failure to vest. A maximum of 2.1 million such shares
are eligible for rollover. The 2010 SIP authorizes awards of stock options (both incentive and non-qualified), stock
appreciation rights, non-vested shares, restricted stock units (“RSUs”) and performance shares. New shares are issued to
satisfy stock option exercises and share issuances. As of June 30, 2016, approximately 2.6 million shares remain available for
issuance under the 2010 SIP.
The Compensation Committee of our board of directors determines eligibility, vesting schedules and exercise prices for
options and shares granted under the plans. Stock option awards are generally granted with an exercise price equal to the
market price of our common stock at the date of grant. Stock option awards generally have a contractual term of seven to ten
years. Share-based awards generally vest and become exercisable over a one to four year service period. As of June 30, 2016,
no stock appreciation rights, non-vested shares, or performance shares were outstanding. No income tax benefit was realized
from activity in the share-based plans during the fiscal years ended June 30, 2016 and 2015.
F-13
Stock Option Awards
The fair value of each stock option grant is estimated on the grant date using the Black-Scholes-Merton (“BSM”) option-
pricing formula. Expected volatilities are based on the historical volatility of our stock price. The expected term of options
granted is estimated using the simplified method, as permitted by guidance issued by the Securities and Exchange
Commission. We use the simplified method because we believe we are unable to rely on our limited historical exercise data or
alternative information as a reasonable basis upon which to estimate the expected term of such options. The risk-free interest
rate assumption is based on the U.S. Treasury interest rates appropriate for the expected term of our stock options.
The following weighted-average assumptions were used to estimate the fair value of all of our stock option grants:
Expected term (in years) .............................................................................................
Expected volatility ......................................................................................................
Risk-free interest rate ..................................................................................................
Dividend yield .............................................................................................................
4.99
67%
1.48%
0.00%
4.82
67%
1.63%
0.00%
The following table presents a summary of activity for all of our stock options:
Years Ended June 30,
2016
2015
Number of
Shares
Balance outstanding at June 30, 2015 ....
Options granted ..................................
Options forfeited ................................
Options expired ..................................
Options exercised ...............................
Balance outstanding at June 30, 2016 ....
Vested or expected to vest at June 30,
(In thousands)
3,546 $
1,317
(453 )
(804 )
–
3,606 $
2016 ..................................................
Options exercisable at June 30, 2016 .....
3,355 $
1,993 $
Weighted-Average
Exercise
Price
Per Share
Remaining
Contractual
Term
(In years)
Aggregate
Intrinsic
Value
(In thousands)
2.19
1.14
1.72
2.25
–
1.85
1.89
2.30
4.6 $
4.5 $
3.4 $
39
32
–
The following table presents a summary of grant-date fair value and intrinsic value information for all of our stock
options:
Weighted-average grant-date fair value per share .................................................................................. $
Intrinsic value of options exercised ........................................................................................................ $
(In thousands,
except per share data)
1.04
0.64 $
14
– $
Years Ended June 30,
2016
2015
Restricted Stock Units
The fair value of our RSUs is based on the closing market price of our common stock on the date of grant.
The following table presents a summary of activity with respect to our RSUs during the fiscal year ended June 30, 2016:
Balance of RSUs outstanding at June 30, 2015...........................................................
Granted ....................................................................................................................
Vested .....................................................................................................................
Balance of RSUs outstanding at June 30, 2016...........................................................
28 $
520
(88 )
460 $
1.98
1.12
1.52
1.10
Weighted-
Average Grant
Date Fair Value
per Share
Number of
Shares
(In thousands)
F-14
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (the “ESPP”), under which 1.3 million shares of our common stock were
initially reserved for future issuance. The ESPP is intended to provide employees with an opportunity to purchase our common
stock through accumulated payroll deductions. Each of our employees (including officers) is eligible to participate in the
ESPP, subject to certain limitations, as defined in the ESPP.
The ESPP is implemented by consecutive, overlapping offering periods lasting 24 months (an “Offering Period”), with a
new Offering Period commencing on the first trading day on or after May 16 and November 16 of each year. Common stock
may be purchased under the ESPP every six months (a “Purchase Period”), at a price not less than 85% of the lesser of the fair
market value of our common stock on the (i) the first trading day of each Offering Period or (ii) the last trading day of each
Purchase Period. To the extent the fair market value of our common stock on the enrollment date of a new Offering Period is
lower than the fair market value of our common stock on the enrollment date of the immediately preceding Offering Period,
then all participants in the immediately preceding Offering Period will be automatically withdrawn from such Offering Period
immediately after the exercise of their options on the exercise date immediately preceding the new Offering Period and
automatically re-enrolled in the new Offering Period as of the first day thereof. Generally, a participant in the ESPP may
withdraw from an Offering Period at any time without affecting his or her eligibility to participate in future Offering Periods
and may increase or decrease the rate of their payroll deductions during an Offering Period.
The per share fair value of stock purchase rights granted in connection with the ESPP was estimated using the following
weighted-average assumptions:
Expected term (in years) .............................................................................................
Expected volatility ......................................................................................................
Risk-free interest rate ..................................................................................................
Dividend yield .............................................................................................................
1.25
62%
0.62%
0.00%
1.25
57%
0.32%
0.00%
The following table presents a summary of activity under our ESPP during the fiscal year ended June 30, 2016:
Years Ended June 30,
2016
2015
Year Ended
June 30, 2016
(In thousands,
except per share
data)
Shares available for issuance at June 30, 2015 .............................................................................................
Shares issued .............................................................................................................................................
Shares available for issuance at June 30, 2016 .............................................................................................
Weighted-average purchase price per share .................................................................................................. $
Intrinsic value of ESPP shares on purchase date ........................................................................................... $
906
(170 )
736
1.02
39
In accordance with the terms of our ESPP, the purchase price of 93,000 shares that were issued on November 13, 2015
was adjusted to $1.02 per share, which represents 85% of the closing market price of our common stock on that date.
Share-Based Compensation Expense
The following table presents a summary of share-based compensation expense included in each functional line item on
our consolidated statements of operations:
Cost of revenues .......................................................................................................... $
Selling, general and administrative .............................................................................
Research and development ..........................................................................................
Total share-based compensation expense ............................................................... $
Years Ended June 30,
2016
2015
(In thousands)
63 $
632
175
870 $
69
745
201
1,015
F-15
The following table summarizes the remaining unrecognized share-based compensation expense related to our outstanding
share-based awards as of June 30, 2016:
Remaining
Unrecognized
Compensation
Cost
Remaining
Weighted-
Average
Years to
Recognize
Stock options ............................................................................................................... $
Restricted stock units ..................................................................................................
Stock purchase rights under ESPP ..............................................................................
(In thousands)
1,074
407
190
2.8
2.4
1.6
If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to
accelerate, increase or cancel remaining unearned share-based compensation expense. Future share-based compensation
expense and unearned share-based compensation will increase to the extent that we grant additional share-based awards.
5. 401(k) Plan
We have a savings plan (the “Plan”) which is qualified under Section 401(k) of the Internal Revenue Code. Eligible
employees may elect to make contributions to the Plan through salary deferrals up to 100% of their base pay, subject to
limitations. In October 2014, we reinstated a limited matching contribution. We made approximately $112,000 and $84,000 in
matching contributions to participants in the Plan during the fiscal years ended June 30, 2016 and 2015, respectively.
In addition, we have the ability to make discretionary profit sharing contributions, subject to limitations. During the fiscal
years ended June 30, 2016 and 2015, we made no such contributions to the Plan.
6. Litigation
From time to time, we are subject to other legal proceedings and claims in the ordinary course of business. We are
currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a
material adverse effect on our business, prospects, financial position, operating results or cash flows.
7. Income Taxes
The income tax provision consists of the following components:
Current:
Federal .................................................................................................................... $
State ........................................................................................................................
Foreign ....................................................................................................................
Deferred:
Federal ....................................................................................................................
State ........................................................................................................................
Provision for income taxes .................................................................................. $
The following table presents U.S. and foreign income (loss) before income taxes:
United States ............................................................................................................... $
Foreign ........................................................................................................................
Loss before income taxes ........................................................................................ $
Years Ended June 30,
2016
2015
(In thousands)
– $
2
61
63
–
–
–
63 $
2
3
53
58
–
–
–
58
Years Ended June 30,
2016
2015
(In thousands)
(2,021 ) $
122
(1,899 ) $
(2,569 )
(144 )
(2,713 )
F-16
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
Deferred tax assets:
$
Tax losses and credits ..............................................................................................
Reserves not currently deductible ............................................................................
Deferred compensation ............................................................................................
Inventory capitalization ...........................................................................................
Marketing rights ......................................................................................................
Depreciation.............................................................................................................
Other ........................................................................................................................
Gross deferred tax assets ............................................................................................
Valuation allowance ...................................................................................................
Deferred tax assets, net ..............................................................................................
Deferred tax liabilities:
State taxes ................................................................................................................
Deferred tax liabilities ................................................................................................
Net deferred tax assets (liabilities) ............................................................................. $
Years Ended June 30,
2016
2015
(In thousands)
31,005 $
2,763
398
1,126
175
430
216
36,113
(35,850 )
263
(263 )
(263 )
– $
31,097
2,780
593
1,007
263
453
185
36,378
(35,994 )
384
(384 )
(384 )
–
We have recorded a valuation allowance against our net deferred tax assets. The valuation allowance was established due
to uncertainties surrounding the realization of the deferred tax assets.
The following table presents a reconciliation of the income tax provision to taxes computed at the U.S. federal statutory
rate:
Statutory federal provision (benefit) for income taxes ................................................ $
Increase (decrease) resulting from:
State taxes, net of federal benefit .............................................................................
Change in tax rate ....................................................................................................
Stock options ...........................................................................................................
Permanent differences .............................................................................................
Change in valuation allowance ................................................................................
Deferred compensation ............................................................................................
Foreign tax rate variances ........................................................................................
Other ........................................................................................................................
Provision for income taxes ..................................................................................
$
Years Ended June 30,
2016
2015
(In thousands)
(646 ) $
(38 )
15
250
10
(133 )
185
19
401
63 $
(923 )
(56 )
569
1,986
15
(1,909 )
209
102
65
58
Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of our net operating loss (“NOL”)
carryforwards and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods. As
a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce
future income tax liabilities. The following table summarizes our NOLs:
Federal ....................................................................................................................................................... $
State ........................................................................................................................................................... $
June 30, 2016
(In thousands)
88,394
27,140
Our NOL carryovers for federal income tax purposes begin to expire in the fiscal year ending June 30, 2021. Our NOL
carryovers for state income tax purposes began to expire in the fiscal year ended June 30, 2013. Deferred income taxes were
not provided on undistributed earnings of certain foreign subsidiaries because such undistributed earnings are expected to be
reinvested indefinitely.
The following table summarizes our liability for uncertain tax positions for the fiscal year ended June 30, 2016 (in
thousands):
Balance as of June 30, 2015 .......................................................................................................................... $
Change in balances related to uncertain tax positions ...............................................................................
Balance as of June 30, 2016 .......................................................................................................................... $
6,700
(100 )
6,600
F-17
At June 30, 2016, we had $6.6 million of gross unrecognized tax benefits. Of the total unrecognized benefits at June 30,
2016, $6.6 million was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in our valuation
allowance of $6.6 million. To the extent such portion of unrecognized tax benefits is recognized at a time such valuation
allowance no longer exists, the recognition would reduce the effective tax rate. Our continuing practice is to recognize interest
and penalties related to income tax matters in income tax expense. During the fiscal years ended June 30, 2016 and 2015 we
recorded an immaterial expense for interest and penalties related to income tax matters in the provision for income taxes. At
June 30, 2016, we had approximately $169,000 of accrued interest and penalties related to uncertain tax positions.
At June 30, 2016, our fiscal 2013 through 2016 tax years remain open to examination by the federal taxing jurisdiction
and our fiscal 2012 through 2016 tax years remain open to examination by the state taxing jurisdictions. However, we have
NOLs beginning in fiscal 2001 which would cause the statute of limitations to remain open for the year in which the NOL was
incurred. Our fiscal 2009 through fiscal 2016 tax years remain open to examination by foreign taxing authorities. We do not
anticipate that the amount of unrecognized tax benefits as of June 30, 2016 will significantly increase or decrease within the
next 12 months.
8. Commitments and Contingencies
Leases
We lease office equipment and office and warehouse facilities under non-cancelable capital and operating leases.
We currently lease approximately 27,000 square feet of office space for our corporate headquarters in Irvine, California.
The lease for this facility commenced in July 2015, and is for a term of 65 months. The lease agreement provided for a tenant
improvement allowance from the landlord of up to $243,000 for tenant improvements and other qualified expenses. In
connection with this allowance, the landlord paid for approximately $190,000 in tenant improvements, and, in September
2015, reimbursed Lantronix for the remaining $53,000.
The following schedule represents minimum lease payments for all non-cancelable operating and capital leases as of June
30, 2016:
Years Ending June 30,
Capital Operating
Leases Leases
Total
2017 ............................................................................................................................................
2018 ............................................................................................................................................
2019 ............................................................................................................................................
2020 ............................................................................................................................................
2021 ............................................................................................................................................
Total ............................................................................................................................................
Amounts representing interest .....................................................................................................
Present value of net minimum lease payments ...........................................................................
Less: capital lease obligations, short-term portion (included in other current liabilities) ..........
Capital lease obligations, long-term portion ...............................................................................
The following table presents rent expense:
$
684 $ 756
569 634
549 602
549 553
255 255
2,606 $ 2,800
(In thousands)
72 $
65
53
4
–
194 $
(14 )
180
64
$ 116
Rent expense ............................................................................................................... $
9. Significant Geographic, Customer and Supplier Information
Years Ended June 30,
2016
2015
(In thousands)
738 $
757
The following table presents our sales within geographic regions as a percentage of net revenue:
Americas .....................................................................................................................
Europe, Middle East, and Africa .................................................................................
Asia Pacific Japan .......................................................................................................
Total ............................................................................................................................
Years Ended June 30,
2016
2015
51%
32%
17%
100%
54%
30%
16%
100%
F-18
The following table presents sales to significant countries as a percentage of net revenue:
U.S. and Canada ..........................................................................................................
Germany ......................................................................................................................
United Kingdom ..........................................................................................................
Japan ...........................................................................................................................
50%
17%
9%
8%
54%
17%
9%
8%
Years Ended June 30,
2016
2015
Customers
The following table presents sales to our significant customers as a percentage of net revenue:
Top five customers (1)(2) ...........................................................................................
Ingram Micro ..............................................................................................................
Arrow ..........................................................................................................................
* Less than 10%
(1) Includes Ingram Micro and Arrow
(2) All top five customers are distributors, who are part of our product distribution system
Years Ended June 30,
2016
2015
50%
20%
11%
50%
21%
*
No other customer represented more than 10% of our annual net revenue during these fiscal years.
Related Party Transactions
Net revenue from related parties represented less than 1% of our total net revenues for the fiscal years ended June 30,
2016 and 2015.
We have historically reported net revenues from two international customers, Lynx IT-Systeme GmbH (“Lynx”) and
Barix AG (“Barix”), as related party transactions due to common ownership by our largest stockholder and Lantronix director,
Bernhard Bruscha. Beginning on February 1, 2014, we no longer sell our products directly to Lynx; however, Lynx continues
to purchase our products from independent third party distributors and such sales are not included in our net revenue from
related parties. In December 2015, we were informed that Mr. Bruscha had sold his investment in Barix. While we continue to
sell to Barix, subsequent to December 2015, such revenues are no longer classified as net revenue from related parties.
Suppliers
We do not own or operate a manufacturing facility. All of our products are manufactured by third-party contract
manufacturers and foundries located primarily in Asia. We have several single-sourced supplier relationships, either because
alternative sources are not available or because the relationship is advantageous to us. If these suppliers are unable to provide a
timely and reliable supply of components, we could experience manufacturing delays that could adversely affect our
consolidated results of operations.
F-19
INDEX TO EXHIBITS
Exhibit
Number
Exhibit Description
Incorporated by Reference
Filed
Herewith Form Exhibit
Filing
Date
3.1 Amended and Restated Certificate of Incorporation of Lantronix, Inc., as
10-K 3.1 08/29/2013
amended
3.2 Amended and Restated Bylaws of Lantronix, Inc.
10.1* Lantronix, Inc. Amended and Restated 2000 Stock Plan
8–K
3.2 11/15/2012
10–K 10.35 09/28/2009
10.2* Form of Stock Option Agreement under the Lantronix, Inc. Amended and
10–K 10.4.1 9/11/2007
Restated 2000 Stock Plan
10.3* Lantronix, Inc. 2010 Inducement Equity Incentive Plan
10–Q 10.2 11/08/2010
10.4* Form of Stock Option Agreement under the Lantronix, Inc. 2010 Inducement
10–Q 10.3 11/08/2010
Equity Incentive Plan
10.5* Lantronix, Inc. Amended and Restated 2010 Stock Incentive Plan
S-8
4.2 05/09/2013
10.6* Form of Stock Option Agreement under the Lantronix, Inc. Amended and
S-8
4.3 05/09/2013
Restated 2010 Stock Incentive Plan
10.7* Form of Restricted Stock Award Agreement under the Lantronix, Inc. Amended
S-8
4.4 05/09/2013
and Restated 2010 Stock Incentive Plan
10.8* Lantronix, Inc. 2013 Employee Stock Purchase Plan
S–8
4.1 05/09/2013
10.9* Letter Agreement dated September 8, 2011 between Lantronix, Inc. and Jeremy
8–K 10.1 09/26/2011
Whitaker
10.10* Amendment to Offer Letter between Lantronix, Inc. and Jeremy Whitaker, dated
8-K 99.2 11/15/2012
as of November 13, 2012
10.11* Lantronix, Inc. Non-Employee Director Compensation Policy, dated November
8-K 99.4 11/15/2012
12, 2012, effective January 1, 2013
10.12* Form of Indemnification Agreement entered into between Lantronix, Inc. with its
8-K 10.2 06/20/2016
directors and certain of its executive officers
10.13 Loan and Security Agreement dated May 31, 2006 between Lantronix, Inc. and
10–Q 10.2 02/14/2012
Silicon Valley Bank
10.14 Amendment dated August 14, 2008 to the Loan and Security Agreement between
10–K 10.27 09/19/2008
Lantronix, Inc. and Silicon Valley Bank
10.15 Amendment dated September 2010, to the Loan and Security Agreement between
10–Q 10.1 11/08/2010
Lantronix, Inc. and Silicon Valley Bank
10.16 Amendment dated August 18, 2011 to the Loan and Security Agreement between
8–K 10.1 08/24/2011
Lantronix, Inc. and Silicon Valley Bank
10.17 Amendment dated January 19, 2012 to the Loan and Security Agreement
10–Q 10.1 02/14/2012
between Lantronix, Inc. and Silicon Valley Bank
10.18 Amendment dated October 16, 2012 to the Loan and Security Agreement
8–K 99.1 10/22/2012
between Lantronix, Inc. and Silicon Valley Bank
10.19 Amendment dated September 30, 2014 to the Loan and Security Agreement
8–K 99.1 10/02/2014
between Lantronix, Inc. and Silicon Valley Bank
10.20 Lease dated January 9, 2015 between Lantronix, Inc. and The Irvine Company,
8–K 99.1 01/20/2015
LLC
10.21 Summary of Lantronix, Inc. Annual Bonus Program
8-K 99.1 09/08/2015
10.22 Lantronix, Inc. Stock Ownership Guidelines for Non-Employee Directors, as
8-K 99.2 09/08/2015
revised
10.23 Lantronix, Inc. Non-Employee Director Compensation Policy, as revised
8-K 99.3 09/08/2015
10.24* Offer Letter dated December 5, 2015 between Lantronix, Inc. and Jeffrey W.
8–K 99.1 12/07/2015
Benck
10.25 Separation Agreement dated December 8, 2015 between Lantronix, Inc. and Kurt
8-K 99.1 12/10/2015
F. Busch
10.26* Form of Restricted Stock Unit Award Agreement by and between Lantronix, Inc.
S–8
4.4 04/28/2016
and Jeffrey Benck
10.27* Form of Inducement Stock Option Agreement by and between Lantronix, Inc.
S–8
4.5 04/28/2016
and Kevin Yoder
10.28* Form of Inducement Stock Option Agreement by and between Lantronix, Inc.
S–8
4.6 04/28/2016
and Sanjeev Datla
10.29 Common Stock Purchase Agreement by and between Lantronix, Inc. and Hale
8-K 10.1 06/20/2016
Capital Partners, LP, dated June 16, 2016
10.30* Offer Letter dated January 22, 2016 between Lantronix, Inc. and Kevin Yoder
21.1 Subsidiaries of Lantronix, Inc.
23.1 Consent of Independent Registered Public Accounting Firm, Squar Milner LLP
31.1 Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32.1** Certification of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
X
X
X
X
X
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
__________
*
**
Indicates management contract or compensatory plan, contract or arrangement.
Furnished, not filed.
Board of Directors
Executive Team
Stockholder Information
Bernhard Bruscha
Chairman of the Board and
Independent Director
Jeffrey Benck
President & Chief Executive
Officer of Lantronix, Inc.
Bruce Edwards
Independent Director
Paul Folino
Independent Director
Martin Hale, Jr.
Independent Director
Hoshi Printer
Independent Director
Jeffrey Benck
President & Chief Executive Officer
Jeremy Whitaker
Chief Financial Officer & Treasurer
Sanjeev Datla
Chief Technology Officer
Michael Fink
Vice President, Operations
Daryl Miller
Vice President, Engineering
Tom Morton
Vice President, Human Resources
Kurt Scheuerman
Vice President, General Counsel & Secretary
Kevin Yoder
Vice President, Worldwide Sales
Corporate Headquarters
Lantronix, Inc.
7535 Irvine Center Drive, Suite 100
Irvine, CA 92618
949.453.3990
www.lantronix.com
Stock Listing
The Company’s common stock trades on the NASDAQ
Global Select Market under the symbol LTRX.
Annual Stockholder Meeting
The Annual Meeting of Stockholders for Lantronix, Inc.
will be held on November 16, 2016,
at the Company’s corporate headquarters.
Independent Auditors
Squar Milner LLP
Newport Beach, CA 92660
Transfer Agent and Registrar
Computershare
250 Royall Street
Canton, MA 02021
877.854.4580
www.computershare.com
Investor Relations
E.E. Wang Lukowski
Director, Corporate Marketing & Investor Relations
investors@lantronix.com
949.614.5879
Forward Looking Statements: This annual report contains forward-looking statements within the meaning of the federal securities laws. Our
actual results could differ materially from the results anticipated in these forward-looking statements as a result of the factors set forth
under the captions “Cautionary Note Regarding Forward-looking Statements” and “Risk Factors” located in the annual report on Form 10-K
included herein, and other factors identified from time to time in our filings with the Securities and Exchange Commission.