2 0 2 1 Annual Report LAN AnnRep 4p US 9-29 B to 9-30.indd 1 LAN AnnRep 4p US 9-29 B to 9-30.indd 1 9/30/21 4:16 PM 9/30/21 4:16 PM Lantronix, Inc. is a global provider of secure turnkey solutions for the Internet of Things (IoT) and Remote Environment Management (REM), offering Software as a Service (SaaS), connectivity services, engineering services, and intelligent hardware. Our Mission is to be the leader in providing reliable and secure turnkey customer solutions which streamline deployments, accelerate time to market, and drive operational efficiencies. Our Solutions elegantly combine SaaS connectivity services, and intelligent hardware to dramatically simplify the architecture, deployment, and operation of IoT and REM projects. LAN AnnRep 4p US 9-29 B to 9-30.indd 2 LAN AnnRep 4p US 9-29 B to 9-30.indd 2 9/30/21 4:16 PM 9/30/21 4:16 PM September 29, 2021 Dear Fellow Shareholders, Fiscal 2021 was an exciting year for Lantronix. We grew revenues to $71.5 million, up over 19% from fiscal 2020, and added substantial scale to our model. We benefited from a full year of contribution from our second acquisition, Intrinsyc, and importantly, we grew organically thanks to a continuing focus on remote management at our customers, growing product acceptance, and accelerating adoption of our software solution. We exited fiscal 2021 with a record backlog and a growing pipeline of opportunities. In response, shares of Lantronix have risen nicely, and were up over 39% over the course of the fiscal year and are even higher as of the date of this letter. I am proud of these results. I am also proud of those things that shareholders do not see so readily. In another year marred by the pandemic, we worked as a team to transform Lantronix from remote locations. We managed supply chain disruptions, component shortages, and logistics challenges. And, in some cases, we even took care of each other. We are a stronger team for it, and while challenges will certainly persist in the coming year, I expect our results will continue to strengthen. As we look to the coming year, we are focused on integrating our newest addition. In August, we closed on our acquisition of Transition Networks and Net2Edge, bringing significant scale, a highly complementary product offering, and key exposure to smart cities, security, and surveillance applications. As we integrate these new businesses and execute on our plans, we expect to realize significant operating synergies. In our Q4 2021 earnings call we guided for fiscal 2022 revenue growth on the order of 45%-75%, while we expect growing efficiencies of scale to drive earnings growth of 85%-135%. Undoubtedly, there will be challenges. Supply chain disruptions and shortages are ongoing, Covid variants are keeping the pandemic alive and economies around the world at bay, but here at Lantronix we are stronger than ever before. I am excited about the future. We are thankful for the loyalty of our customers, shareholders, and talented employees who are working hard to make Lantronix a world-class company. I look forward to sharing our successes with you over the course of the coming year. Sincerely, Paul Pickle President and Chief Executive Officer 2021 Annual Report - signed copy 7.pdf 4 9/30/21 3:54 PM [This page intentionally left blank] 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 For the fiscal year ended June 30, 2021 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 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 (Address of principal executive offices) 92618 (Zip Code) (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 Trading Symbol(s) LTRX Name of each exchange on which registered The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ 2021 Annual Report - signed copy 7.pdf 5 9/30/21 3:54 PM 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, 2020, the last trading day of the registrant’s second fiscal quarter, was approximately $94,232,000. The determination of affiliate status for this purpose shall not be a conclusive determination for any other purpose. As of August 19, 2021, there were 29,128,745 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 2021 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. 2021 Annual Report - signed copy 7.pdf 6 9/30/21 3:54 PM LANTRONIX, INC. ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended June 30, 2021 TABLE OF CONTENTS PART I Cautionary Note Regarding Forward-Looking Statements Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PART II Item 6. Reserved Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk * Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation PART III Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions and Director Independence Item 14. Principal Accountant Fees and Services Item 15. Exhibits and Financial Statement Schedules Item 16. Form 10-K Summary * Not required for a “smaller reporting company.” PART IV i Page ii 1 7 20 21 21 21 22 22 22 35 35 35 36 36 37 37 37 37 37 38 41 2021 Annual Report - signed copy 7.pdf 7 9/30/21 3:54 PM CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K for the fiscal year ended June 30, 2021, or this 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. Additionally, statements concerning future matters such as our expected earnings, revenues, expenses and financial condition, our expectations with respect to the development of new products, expectations regarding the impact of the COVID-19 pandemic and other statements regarding matters that are not historical are forward-looking statements. We have based our forward-looking statements on 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 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. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to, those set forth under “Risk Factors” in Item 1A of Part I of this Report, as such factors may be updated, amended or superseded from time to time by subsequent quarterly reports on Form 10-Q or current reports on Form 8-K. 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, 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 Capital Market. 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. 2021 Annual Report - signed copy 7.pdf 8 9/30/21 3:54 PM ii ITEM 1. BUSINESS Overview PART I Lantronix, Inc. is a global provider of software as a service (“SaaS”), engineering services, and hardware for Edge Computing, the Internet of Things (“IoT”), and Remote Environment Management (“REM”). We enable our customers to provide reliable and secure solutions while accelerating their time to market. Our products and services dramatically simplify operations through the creation, development, deployment and management of customer projects at scale while providing quality, reliability and security. Our portfolio of services and products address each layer of the IoT Stack including Collect, Connect, Compute, Control and Comprehend, enabling our customers to deploy successful IoT and REM solutions. Our services and products deliver a holistic approach, addressing our customers’ needs by integrating a SaaS management platform with custom application development layered on top of external and embedded hardware, enabling intelligent edge computing, secure communications (wired, Wi-Fi, and cellular), location and positional tracking, and environmental sensing and reporting. With three decades of proven experience in creating robust industry and customer specific solutions, we are an innovator in enabling our customers to build new business models, leverage greater efficiencies and realize the possibilities of the IoT and REM. Lantronix’s solutions are deployed inside millions of machines at data centers, offices, and remote sites serving a wide range of industries, including energy, agriculture, medical, security, manufacturing, distribution, transportation, retail, financial, environmental, infrastructure and government. We were incorporated in California in 1989 and reincorporated in Delaware in 2000. References in this Report to “fiscal 2021” refer to the fiscal year ended June 30, 2021 and references to “fiscal 2020” refer to the fiscal year ended June 30, 2020. In addition, unless the context suggests otherwise, all reference in this Report to the “Company,” “we,” and “us,” refer to Lantronix, Inc. together with its subsidiaries. Our Strategy Today, more businesses are seeking to streamline their operations by connecting their machines and electronic devices to the Internet, manage them remotely, and create new business models. The growth in the IoT and REM markets are being driven by the growing importance of data, being able to act on that data, and the rapidly falling cost of sensors, connectivity, compute, and storage. While the promise is great, designing and deploying these projects is complex, costly and time-consuming. Our offerings are designed to help companies increase speed and reduce friction for their deployments through reduced complexity, decreased development costs, and increased ease of management for web-scale applications and real- world solutions; thus, driving customer value and success. We plan to address the market opportunity by offering our customers turnkey solutions by leveraging the layers of the IoT Stack, such as Collect, Connect, Compute, Control and Comprehend, through a combination of services, hardware and software solutions, accessible and manageable through our SaaS platform. We are executing a growth strategy that includes continuous innovation complemented by strategic acquisitions to expand our ability to offer complete IoT and REM solutions with the intent of increasing our scale and broadening our scope so that we can increase our value proposition to our customers. We believe this strategy will allow us to address a larger portion of our customers’ operational needs and engage with customers as a strategic "total solution" partner. We believe this will strengthen our position in the market as our customers come to us for a wider variety of solutions. 2021 Annual Report - signed copy 7.pdf 9 9/30/21 3:54 PM 1 Recent Acquisitions On July 5, 2019 we acquired Maestro Wireless Solutions Limited and its subsidiaries (together, “Maestro”). This acquisition added to our Connect and Collect solutions by providing additional and complementary cellular connectivity, LPWAN, and telematic technologies and devices to our portfolio. On January 16, 2020 we acquired Intrinsyc Technologies Corporation (“Intrinsyc”). This acquisition provided additional and complementary edge computing with embedded product design and application development capabilities, crucial to the development of intelligent Compute functionality for advanced customer implementations. On August 2, 2021 we acquired the Transition Networks and Net2 Edge businesses (the “TN Companies”) from Communication Systems, Inc. The TN Companies provide us with complementary IoT connectivity products and capabilities, including switching, power over ethernet and media conversion and adapter products. The above three acquisitions allow us to offer more value to our customers and substantially increase the markets that we serve. Products and Solutions We organize our products and solutions into three product lines: IoT, REM and Other. IoT IoT Connectivity Our IoT connectivity products typically connect to one or more existing machines or are built into new industrial devices to provide network connectivity. Our products 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 connectivity products may be embedded into new designs or attached to existing machines. These products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, power for IoT end devices through Power over Ethernet (PoE), application hosting, protocol conversion, media conversion, secure access for distributed IoT deployments and many other functions. Many of our products allow network operators to transmit voice and data across networks as well as provide connectivity and power in security and surveillance, smart building, smart city and intelligent transportation applications. Many of the products are offered with software tools intended to further accelerate our customer’s time-to-market and increase their value add. Most of our IoT connectivity products are pre-certified in a number of countries thereby significantly reducing our original equipment manufacturer (“OEM”) customers’ regulatory certification costs and accelerating their time to market. Our growing PoE products support remote devices such as cameras and wireless access points by passing electrical power along with data on Ethernet cabling, eliminating the need for traditional AC/DC electrical power in hard-to-reach locations. Our media converters and other customer premise equipment (“CPE”) assist customers in resolving challenges in the areas of bandwidth constraints, security risks, and distance limitations as networks extend from local area to wide area networks and adapt to ever increasing end-user demands. As more cities move to implement smart city technology, a major component will be solutions designed to protect and provide services to citizens, such as intelligent transportation and surveillance networks. Our switches deliver the necessary connectivity, bandwidth and power to enable these solutions. Many of our products incorporate features to perform advanced levels of fault management and diagnostics to troubleshoot networks and proactively fix problems. IoT Compute Our IoT compute products typically are embedded into a customer product, enabling advanced application functionality at the edge. Our products are designed to deliver advanced functionality and reduce time to market by leveraging our engineering expertise, engineering services, manufacturing experience, and strategic System on Chip (“SoC”) partners. Our compute products are normally embedded into new designs. These products include application processing that delivers compute to meet customer needs for data transformation, computer vision, machine learning, augmented / virtual reality, audio / video aggregation and distribution, and custom applications at the edge. Many of the products are offered with software tools intended to further accelerate our customers’ time-to-market and increase their value add. Most of our IoT compute products are pre- certified in a number of countries thereby significantly reducing our OEM customers’ regulatory certification costs and accelerating their time to market. 2021 Annual Report - signed copy 7.pdf 10 9/30/21 3:54 PM 2 IoT Telematics Our IoT telematics products are typically integrated into an OEM’s or System Integrator’s (“SI”) products. Our smart tracking devices are designed to deliver robust data logging and positional tracking functionality and reliability for supply chain and logistics solutions. Our telematics devices are designed to be flexible in the field and offer a variety of connectivity options to suit the customers’ needs across 2G, 3G, 4G, and LTE cellular networks. These power efficient products are designed to support communications across interfaces and industrial protocols for vehicle, fleet, and asset tracking and management. Many of the products are offered with software tools intended to further accelerate our customers’ time-to-market and increase their value add. Most of our IoT Telematics products are pre-certified in a number of countries thereby significantly reducing our OEM customers’ regulatory certification costs and accelerating their time to market. Engineering Services We leverage our engineering expertise and product development best practices to deliver high quality, innovative products, cost-effectively and on time. Our engineering services flexible business model allows for choosing turnkey product development or team augmentation for accelerating complex areas of product development such as; camera development and tuning, voice control, machine learning, artificial intelligence, computer vision, augmented / virtual reality, mechanical and radio-frequency design, thermal and power optimization, or in any specific area a customer needs assistance. In addition to our production-ready edge computing solutions, we offer experienced multidisciplinary engineering services across complete aspects of IoT product development, including hardware engineering, software engineering, mechanical engineering, rapid prototyping, and quality assurance. Software as a Service Our SaaS platform provides single pane of glass management for IoT deployments. Our platform enables customers to easily deploy, monitor, manage, and automate across their global deployments, all from a single platform login. OEMs and SIs can leverage our platform multitenancy functionality for supporting a wide customer base while ensuring customer separation. Over the Air (“OTA”) updates make it easy to ensure the latest security patches, firmware, and configurations are deployed and functional. The following product families are included in our IoT product line: EDS, EDS-MD, PremierWave® EN, PremierWave® XC, SGX™, UDS, WiPort®, xDirect®, xPico®, xPico® Wi-Fi, xPress™, XPort®, XPort® Pro, MicroM110, E210, E220, Bolero45, FOX3-2G, FOX3-3G, FOX3-4G, S40, and D2Sphere. In addition, we offer Network Switches, Media Converters. Power over Ethernet, NICS and Optical SFPs, System on Module (“SoM”), Single Board Computer (“SBC”), and Development Kits. We also offer services for mechanical, hardware, and software engineering for camera, audio, and artificial intelligence / machine learning development. REM Today, organizations are managing an ever-increasing number of devices and data on enterprise networks where 24/7 reliability is mission critical. REM allows for full comprehension and control of an IT deployment, across a range of sensors data (temperature, humidity, light, acceleration, open / close, etc.) providing status and alerting, automation, and remote control of devices and end stations. REM designs may be part of an out of band (“OOB”) or in band network design. OOB is a technique that uses a dedicated management network to access critical infrastructure components to ensure production independent management connectivity. REM allows organizations to effectively monitor, manage, and control their enterprise IT equipment and facilities (environments), either in or out of band, optimizing their IT support resources. 2021 Annual Report - signed copy 7.pdf 11 9/30/21 3:54 PM 3 Our SaaS platform provides single pane of glass management for REM (and IoT) deployments. Our platform enables customers to easily deploy, monitor, manage, and automate across their global deployments, all from a single platform login, virtually connected as though directly on each device. Our platform eliminates the need to have 24/7 personnel on site, and makes it easy to see and drill into an issue quickly, even in large scale deployments. Our REM product line includes out-of-band management, console management, power management, and IP connected keyboard-video-mouse (commonly referred to as “IPKVM”) products that provide remote access to IT and networking infrastructure deployed in test labs, data centers, branch offices, remote sites, and server rooms. The following product families are included in our REM product line: SLB™, SLC™8000, Spider™, ConsoleFlow, and EMG™. Other We categorize products that are non-focus or end-of-life as Other. Our Other product category includes non-focus products such as the xPrintServer®. In addition, this product category includes end-of-life versions of our MatchPort®, SLC™, SLP™, xPress Pro, xSenso®, PremierWave® XN, and WiBox 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” included in Part II, 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” included in Part I, Item 1A of this Report, which is incorporated herein by reference. Sales Cycle Our embedded IoT solutions are typically used by OEMs, original design manufacturers (“ODMs”) and contract manufacturers. 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 the third parties’ brands. The design cycles using our embedded solutions typically range from nine to 24 months and can generate revenue for the entire life cycle of an end user’s product. Our REM product line and external IoT solutions are typically sold to end users through value added resellers (“VARs”) systems integrators, distributors, online retailers and, to a lesser extent, OEMs. The design cycles for these products typically range from three to 18 months and are often project-based. 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, value-added resellers (“VARs”), systems integrators, consumers, online retailers, IT resellers, corporate customers and government entities. Resellers Our products are 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. 2021 Annual Report - signed copy 7.pdf 12 9/30/21 3:54 PM 4 Direct Sales To a lesser extent, we sell products directly to larger OEMs and end users. We also maintain an ecommerce site for direct sales. Sales and Marketing We sell our products primarily through an internal sales force, which includes regional sales managers, inside sales personnel and field applications engineers in major regions throughout the world. This team manages our relationships with our partners and end users, identifies and develops new sales opportunities and increases penetration at existing accounts. We implement marketing programs, tools and services, including displaying our products at industry-specific events, to generate sales leads and increase demand for our products. Manufacturing Our manufacturing operations are primarily conducted through two third-party contract manufacturers. We currently utilize Hana Microelectronics, primarily located in Thailand and China, and Honortone, primarily located in China, as our contract manufacturers for most of our products. In addition, we use Inphi 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. Many 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 performed in-house and supplemented with outsourced resources. Competition 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 based on 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” included in Part I, 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 their employment or contract with us. We currently hold U.S. and international patents covering various aspects of our products, with additional patent applications pending. 2021 Annual Report - signed copy 7.pdf 13 9/30/21 3:54 PM 5 U.S. 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 August 16, 2021, we had 312 total employees and 299 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 relationships 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 (“EMEA”); and Asia Pacific Japan (“APJ”). A discussion of sales to our significant customers and 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 11 of Notes to Consolidated Financial Statements included in Part II, 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” included in Part I, 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 (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 SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically. 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. Information About Our Executive Officers Executive officers serve at the discretion of our 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 as of the date of this Report: Name Paul H. Pickle Jeremy R. Whitaker Mohammed F. Hakam Roger Holliday Age 51 51 53 62 Position President and Chief Executive Officer Chief Financial Officer Vice President of Engineering Vice President of Worldwide Sales PAUL H. PICKLE joined Lantronix as its President and Chief Executive Officer and as a member of its Board of Directors in April 2019. Most recently, Mr. Pickle served as President and Chief Operating Officer of Microsemi Corporation, a leading provider of semiconductor and system solutions, from November 2013 until Microsemi was acquired by Microchip Technology Inc. in May 2018. Prior to his position as President and Chief Operating Officer, he served at Microsemi as Executive Vice President, leading business operations of the company’s Integrated Circuits group, where he played an integral role in the planning, developing, and execution of Microsemi’s leading edge IC solutions for communications, industrial, aerospace, and defense/security markets. 2021 Annual Report - signed copy 7.pdf 14 9/30/21 3:54 PM 6 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 at Ernst & Young LLP for six years. MOHAMMED F. HAKAM joined Lantronix in August of 2018 and serves as our Vice President of Engineering. Prior to joining Lantronix, Mr. Hakam served as the interim Senior Vice President of International Operations at Viewstream, Inc., a provider of videos and marketing content to technology companies, from September 2016 to July 2018, where he was instrumental in planning and expanding the company’s global media strategy. Before joining Viewstream, Mr. Hakam was founder and Senior Vice President of Engineering and Product Management of SwitchRay Inc., a global provider of communication service platforms for global telecom carriers, from 2012 until its acquisition by 46 Labs in September 2016. He previously spent 20+ years at a number of large companies such as Motorola and Kyocera Wireless in various engineering leadership roles, and has also been the founder of two technology companies (including SwitchRay Inc.) in the networking and telecom segment. Mr. Hakam has been a professor at National University in San Diego, teaching undergraduate and graduate courses in program and project management, international management, six sigma and statistical process control. ROGER HOLLIDAY joined Lantronix in January 2020 and serves as our Vice President of Worldwide Sales. Prior to joining Lantronix, Mr. Holliday served in various positions at Microsemi Corporation since 1999, serving most recently as Executive Vice President and General Manager from 2013 until Microsemi was acquired by Microchip Technology Inc. in May 2018. Prior to his time at Microsemi, Mr. Holliday served in various product marketing, applications and sales management roles at Linfinity Microelectronics until its acquisition by Microsemi in 1999. 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 included in Item 8 of this Report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of 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. Risks Related to Our Operations and Industry The effect of COVID-19 and other possible pandemics and similar outbreaks could result in material adverse effects on our business, financial position, results of operations and cash flows. The COVID-19 outbreak has spread globally and has led governments and other authorities around the world, including federal, state and local authorities in the United States and abroad, to impose measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders. The recent surges of COVID-19, including due to more contagious and/or vaccine-resistant variants, have resulted in the reimposition of certain restrictions and may lead to other restrictions being implemented in response to efforts to reduce the spread of COVID-19. Given the dynamic nature of these circumstances and the related adverse impact these restrictions have had, and may continue to have, on the economy generally, our business and the business of our suppliers, our results of operations and financial condition may be adversely impacted by the COVID-19 pandemic. 2021 Annual Report - signed copy 7.pdf 15 9/30/21 3:54 PM 7 Beginning in March 2020, most of our employees transitioned to remote working arrangements, which are continuing through the date of this Report. There can be no assurance that these arrangements will not ultimately result in lower work efficiency and productivity, which in turn may adversely affect our business. In addition, the COVID-19 pandemic resulted in industry events, trade shows and business travel being suspended, cancelled and/or significantly curtailed. The cessation of trade shows and business travel resulted in our lead pipeline being negatively impacted, which negatively affected our sales during fiscal 2021. While some industry events, trade shows and business travel have resumed, if these activities are suspended, cancelled and/or significantly curtailed in the future, whether due to surges of COVID-19 or otherwise related to the pandemic, our sales may continue to be negatively impacted in the future. In addition, the impact of the COVID-19 pandemic and measures to prevent its spread subject us to various risks and uncertainties that could materially adversely affect our business, results of operations and financial condition, including the following: significant volatility or decreases in the demand for our products or extended sales cycles; changes in customer behavior and preferences, as customers may experience financial difficulties and/or may delay orders or reduce their spending in light of COVID-19; adverse impacts on our ability to distribute or deliver our products or services, including due to the negative impact of COVID-19 on air travel, as well as temporary disruptions, restrictions or closures of the facilities of our suppliers or customers and their contract manufacturers; further disruptions in our contract manufacturers’ ability to manufacture our products, as some contract manufacturers and suppliers of materials used in the production of our products are located in areas more severely impacted by COVID-19, which could limit our ability to obtain sufficient materials to produce and manufacture our products; and volatility in the availability of raw materials and components that our contract manufacturers purchase and volatility in raw material and other input costs. The duration and extent of the COVID-19 pandemic’s effect on our operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted at this time, including new information which may emerge concerning the severity of COVID-19, actions taken to contain COVID-19, additional surges of COVID-19 infections due to the rate of public acceptance and efficacy of COVID-19 vaccines or due to new and more contagious and/or vaccine resistant variants, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience adverse impacts to our business, financial condition, results of operations, and prospects as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future. The adverse impact of the COVID-19 pandemic on our business, results of operations and financial condition could be material. We may experience constraints in the supply of certain materials and components that could affect our operating results. 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, including semiconductor chips, 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 revenue, risk losing customers and risk harm to our reputation in the marketplace, which could adversely affect our business, financial condition or results of operations. For instance, we have recently experienced increased delays in shipments of semiconductor chips. As a result, we have sought alternate sources of certain components, which have been at a higher cost. Because semiconductor chips continue to be subject to an ongoing significant shortage, our ability to source components that use semiconductor chips has been adversely affected. These supply interruptions have resulted in increased component delivery lead times and increased costs to obtain components with available semiconductor chips. To the extent this semiconductor chip shortage or other shortages continue, the production of our products may be impacted. 2021 Annual Report - signed copy 7.pdf 16 9/30/21 3:54 PM 8 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 our limited sales, we may not be able to convince suppliers to continue to make components available to us unless there is demand for these 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. 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 guaranteed supply 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, especially in countries outside of the U.S., exposes us to a number of significant risks, including: 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; 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. 2021 Annual Report - signed copy 7.pdf 17 9/30/21 3:54 PM 9 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 any 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, approving 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. Our software offerings are subject to the risks that differ from those facing our hardware products. We continue to dedicate significant engineering resources to our management software platform, applications, and SaaS offerings, including ConsoleFlow™. These product and service offerings are subject to significant additional risks that are not necessarily related to our hardware products. Our ability to succeed with these offerings will depend in large part on our ability to provide customers with software products and services that offer features and functionality that address the needs of particular businesses. We may face challenges and delays in the development of this product line as the marketplace for products and services evolves to meet the needs and desires of customers. We cannot provide assurances that we will be successful in operating and growing this product line. In light of these risks and uncertainties, we may not be able to establish or maintain market share for our software and SaaS offerings. As we develop new product lines, we must adapt to market conditions that are unfamiliar to us, such as competitors and distribution channels that are different from those we have known in the past. We have and will encounter competition from other solutions providers, many of whom may have more significant resources than us with which to compete. There can be no assurance that we will recover our investments in this product line, that we will receive meaningful revenue from or realize a profit from this new product line or that diverting our management’s attention to this product line will not have a material adverse effect on our existing business, and in turn on our results of operations, financial condition and prospects. 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 project-based 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 potential sales. 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. 2021 Annual Report - signed copy 7.pdf 18 9/30/21 3:54 PM 10 The lengthy sales cycle for our products and services, along with delays 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 six and 24 months and sometimes longer due to a lengthy customer evaluation and approval process. The length of this process can be affected by factors over which we have little or no control, including the customer’s budgetary constraints, timing of the customer’s budget cycles, and concerns by the customer about the introduction of new products by us or by our competitors. As a result, sales cycles for customer orders vary substantially among different customers. 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, which 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 into 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: 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; we primarily sell our products indirectly through distributors; the uncertainty of the extent and timing of market acceptance of our new products; the need 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; we have some customers who make single, non-recurring purchases; and a large number of our customers typically purchase in small quantities. This lack of visibility impacts our ability to forecast our inventory 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 and the value of our common stock may decline. Delays in qualifying revisions of existing products for 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, which we refer to as revisions. 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. 2021 Annual Report - signed copy 7.pdf 19 9/30/21 3:54 PM 11 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, that failure or delay would preclude or delay sales of these 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 our net revenue from quarter to quarter. We depend on distributors for a majority of our sales and to complete order fulfillment. We depend on the resale of products through distributor accounts for a substantial majority of our worldwide net revenue. In addition, sales through our top five distributors accounted for approximately 37% of our net revenue in fiscal 2021. 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. 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 distributors and resellers. A substantial part of our revenues is generated through sales by distributors and resellers. To the extent they are unsuccessful in selling our products, or if we are unable to obtain and retain a sufficient number of high-quality distributors and resellers, our operating results could be materially and adversely affected. In addition, our distributors and resellers 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 distributors or resellers may stop selling our products completely or may significantly decrease the volume of products they sell on our behalf. This sales structure also could subject us to lawsuits, potential liability and reputational harm if, for example, any of our distributors or resellers misrepresents the functionality of our products or services to customers, violates laws or our corporate policies. If we fail to effectively manage our existing or future distributors and resellers 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 enough or at all 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 write-down 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. If 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. 2021 Annual Report - signed copy 7.pdf 20 9/30/21 3:54 PM 12 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, develop and commercialize products more quickly and 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. 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. For instance, we acquired Maestro, Intrinsyc and the Transition Networks and Net2Edge businesses of CSI in 2019, 2020 and 2021, respectively. Our previous acquisitions have required, and any future acquisition, partnership, joint venture or investment may also require, that we pay significant cash, issue equity and/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 expected synergies, 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. 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. 2021 Annual Report - signed copy 7.pdf 21 9/30/21 3:54 PM 13 Risks Related to Technology, Cybersecurity and Intellectual Property Cybersecurity 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 and third-party cloud software providers. Increased global information technology (“IT”) security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. There have been several recent, highly publicized cases in which organizations of various types and sizes have reported the unauthorized disclosure of customer or other confidential information, as well as cyberattacks involving the dissemination, theft and destruction of corporate information, intellectual property, cash or other valuable assets. There have also been several highly publicized cases in which hackers have requested “ransom” payments in exchange for not disclosing customer or other confidential information or for not disabling the target company’s computer or other systems. The secure processing, maintenance and transmission of the information that we collect and store on our systems is critical to our operations and implementing security measures designed to prevent, detect, mitigate or correct these or other IT security threats involves significant costs. Although we have taken steps to protect the security of our information systems, we have, from time to time, experienced threats to our data and systems, including malware, phishing and computer virus attacks, and it is possible that in the future our safety and security measures will not prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. In addition, due to the fast pace and unpredictability of cyber threats, long-term implementation plans designed to address cybersecurity risks become obsolete quickly and, in some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. Any unauthorized 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. If our products become subject to cybersecurity breaches, or if public perception is that they are vulnerable to cyberattacks, our reputation and business could suffer. We could be subject to liability or our reputation could be harmed if technologies integrated into our products, or our products, fail to prevent cyberattacks, or if our partners or customers fail to safeguard the systems with security policies that conform to industry best practices. In addition, any cyberattack 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. Some of our software offerings may be subject to various cybersecurity risks, which are particularly acute in the cloud-based technologies operated by us and other third parties that form a part of our solutions. In connection with certain implementations of our management software platform, application, and SaaS offering, ConsoleFlow, we expect to store, convey and potentially process data produced by devices. This data may include confidential or proprietary information, intellectual property or personally identifiable information of our customers or other third parties with whom they do business. It is important for us to maintain solutions and related infrastructure that are perceived by our customers and other parties with whom we do business to provide a reasonable level of reliability and security. Despite available security measures and other precautions, the infrastructure and transmission methods used by our products and services may be vulnerable to interception, attack or other disruptive problems. 2021 Annual Report - signed copy 7.pdf 22 9/30/21 3:54 PM 14 If a cyberattack or other security incident were to allow unauthorized access to or modification of our customers’ data or our own data, whether due to a failure with our systems or related systems operated by third parties, we could suffer damage to our brand and reputation. The costs we would incur to address and fix these incidents could significantly increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and increased legal liability, including in some cases contractual costs related to customer notification and fraud monitoring. Further, as regulatory focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information become more complex, the potential risks and costs of compliance to our business will intensify. 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. 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, 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 financial losses and claims against us. Significant product warranty claims against us could harm our business, reputation and financial results and cause the market price of our common stock to decline. 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: 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; and 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. 2021 Annual Report - signed copy 7.pdf 23 9/30/21 3:54 PM 15 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 and other business interruptions 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. In addition, our operations and those of our suppliers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, cybersecurity 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, whether due to a natural disaster or otherwise, our business could be materially and adversely affected. Risk Related to Liquidity and Capital Resources We have a history of losses. We have historically incurred net losses. 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 that we fail to achieve profitability in future periods, the value of our common stock may decline. In addition, if we are 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. 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 to respond to competitive pressures or perceived opportunities, such as investment, acquisition and international expansion activities. 2021 Annual Report - signed copy 7.pdf 24 9/30/21 3:54 PM 16 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 needed capital on terms acceptable to us, if at all. If we are unable to secure additional financing in sufficient amounts or on favorable terms, 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 and restated senior credit facility and junior credit facility may restrict our financial and operational flexibility and, in certain cases, our ability to operate. The terms of our amended and restated senior credit facility and junior credit facility restrict, among other things, our ability to incur additional liens and indebtedness; dispose of assets; make investments; 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; or enter into certain speculative hedging arrangements. Further, we are currently and may in the future be required to maintain specified financial ratios, including pursuant to a maximum senior leverage ratio, a minimum fixed charge coverage ratio or a minimum liquidity test. 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 senior lender, Silicon Valley Bank, and our junior lender, SVB Innovation Credit Fund VIII, L.P. Risks Related to International Operations Rising concern regarding international tariffs could materially and adversely affect our business and results of operations. The current political landscape has introduced significant uncertainty with respect to future trade regulations and existing international trade agreements, as shown by the U.S.-initiated renegotiation of the North America Free Trade Agreement, and Brexit in Europe. This uncertainty includes the possibility of imposing tariffs or penalties on products manufactured outside the U.S., including the US government’s institution of a 25% tariff on a range of products from China and subsequent tariffs imposed by the U.S. as well as tariffs imposed by trading partners on U.S. goods, and the potential for increased trade barriers between the UK and the European Union. The institution of trade tariffs both globally and between the U.S. and China specifically, carries the risk of negatively affecting the overall economic conditions of both China and the U.S., which could have a negative impact on us. We cannot predict whether, and to what extent, there may be changes to international trade agreements or whether quotas, duties, tariffs, exchange controls or other restrictions on our products will be changed or imposed. If we are unable to source our products from the countries where we wish to purchase them, either because of regulatory changes or for any other reason, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition and results of operations. Furthermore, imposition of tariffs may result in local sourcing initiatives, or other developments that make it more difficult to sell our products in foreign countries, which would negatively impact our business and operating results. 2021 Annual Report - signed copy 7.pdf 25 9/30/21 3:54 PM 17 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 U.S., and practices that may violate laws and regulations applicable to us such as the Foreign Corrupt Practices Act (the “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 distributors and resellers involved in our international sales, may take actions in violation of our policies. Many of our vendors and strategic business 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. 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. Risks Related to Regulatory Compliance and Legal Matters Our inability to obtain appropriate 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 some geographical markets is sometimes dependent on the ability to gain certifications and/or approvals by relevant 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 any needed certifications or approvals, could impact our ability to compete effectively or at all in these markets and could have an adverse impact on our revenues. 2021 Annual Report - signed copy 7.pdf 26 9/30/21 3:54 PM 18 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, the Restrictions of Hazardous Substances Directive, and the Regulation on Registration, Evaluation, Authorization and Restriction of Chemicals. In the future, China and other countries including the U.S. 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. 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: 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; 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 General Risk Factors 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. 2021 Annual Report - signed copy 7.pdf 27 9/30/21 3:54 PM 19 Our quarterly operating results may fluctuate, which could cause the market price of our common stock 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 the market price of our common 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 market price of our common stock would likely fall. The market price of our common stock may be volatile based on a number of factors, many of which are not under our control. The market price of our common stock has been highly volatile. The market price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of which are out of our control, including: adverse changes in domestic or global economic, market and other 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; increased competition from industry consolidation; mergers and acquisitions; and sales of common stock by our stockholders or us or repurchases of common stock 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. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 2021 Annual Report - signed copy 7.pdf 28 9/30/21 3:54 PM 20 ITEM 2. PROPERTIES The following table presents details regarding our leased facilities: Locations Irvine, California, U.S.A. Vancouver, British Columbia, Canada Hyderabad, India Illmenau, Germany Taiwan Shanghai, China Primary Use Corporate headquarters; sales and marketing, research and development, operations and administration Engineering, operations and marketing Engineering and design Engineering, operations, sales and marketing Engineering, sales and marketing Sales and marketing Approximate Square Footage 27,000 12,000 18,000 7,500 5,500 1,000 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 A discussion of legal proceedings is set forth in Note 10 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Report, which is incorporated herein by reference. ITEM 4. MINE SAFETY DISCLOSURES None. 2021 Annual Report - signed copy 7.pdf 29 9/30/21 3:54 PM 21 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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 19, 2021 was approximately 37. 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 the fourth quarter of fiscal 2021. ITEM 6. RESERVED 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 accompanying notes thereto included in Part II, 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” included in Part I, Item 1A of this Report. Please also see “Cautionary Note Regarding Forward Looking Statements” at the beginning of this Report. Overview Lantronix, Inc. is a global provider of software as a service (“SaaS”), engineering services, and hardware for Edge Computing, the Internet of Things (“IoT”), and Remote Environment Management (“REM”). We enable our customers to provide reliable and secure solutions while accelerating their time to market. Our products and services dramatically simplify operations through the creation, development, deployment, and management of customer projects at scale while providing quality, reliability and security. We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”). 2021 Annual Report - signed copy 7.pdf 30 9/30/21 3:54 PM 22 References to “fiscal 2021” refer to the fiscal year ended June 30, 2021 and references to “fiscal 2020” refer to the fiscal year ended June 30, 2020. Products and Solutions We organize our products and solutions into three product lines: IoT, REM, and Other. Refer to “Products and Solutions” included in Part I, Item 1 of this Report, which is incorporated herein by reference, for further discussion. Recent Developments On August 2, 2021 we acquired the Transition Networks and Net2Edge businesses (the “TN Companies”) from Communication Systems, Inc. The TN Companies provide us with complementary IoT connectivity products and capabilities, including switching, power over ethernet and media conversion and adapter products. In connection with the closing of the acquisition we entered into new loan agreements with Silicon Valley Bank (“SVB”) which included (i) a new term loan of $17,500,000 with an available revolving credit facility of up to $2,500,000 and (ii) a second term loan of $12,000,000. Refer to Notes 3 and 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Report, which are incorporated herein by reference, for additional discussions regarding the August 2021 acquisition of the TN Companies and related financing arrangements, respectively. COVID-19 Update In response to the ongoing COVID-19 pandemic, we have taken measures to protect the health and safety of our employees and comply with local directives. Most of our employees transitioned to remote working arrangements commencing in March 2020, and many continue to primarily work remotely as of the date hereof. We continue to monitor the implications of the COVID-19 pandemic, including the emergence of new strains of the virus and the impact of ongoing vaccination efforts, on our business, as well as our customers’ and suppliers’ businesses. Our efforts to support customer engagement through industry events, trade shows and business travel also continue to be adversely affected. Prolonged shutdowns, or additional future shutdowns and other restrictions instituted by federal, state and local governments, may lead to a reduction in revenue during the coming quarters. To mitigate potential revenue declines, we continue to adjust our go-to-market approach by adding more distributors and value-added resellers, who are closer to the customers and end-customers. Our supply chain still faces challenges, as most of our manufacturing is performed in Thailand, Taiwan and China. We have recently experienced an increase in costs of components for certain products as well as increased freight costs. These and other factors have contributed to recent delays in shipments to some customers. Overall, in light of the changing nature and continuing uncertainty around the COVID-19 pandemic, our ability to predict the impact of the COVID- 19 pandemic on our business in future periods remains limited. The effects of the pandemic on our business are unlikely to be fully realized, or reflected in our financial results, until future periods. Recent Accounting Pronouncements Refer to Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Report, which is incorporated herein by reference, for a discussion of recent accounting pronouncements. 2021 Annual Report - signed copy 7.pdf 31 9/30/21 3:54 PM 23 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 revenue recognition, sales returns and allowances, allowance for doubtful accounts, inventory valuation, warranty reserves, restructuring charges, valuation of deferred income taxes, valuation of goodwill and long-lived and intangible assets, share-based compensation, 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 Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We apply the following five-step approach in determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied. A significant portion of our products are sold to distributors under agreements which contain (i) limited rights to return unsold products and (ii) price adjustment provisions, both of which are accounted for as variable consideration when estimating the amount of revenue to recognize. 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 and other known or anticipated returns. 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 primarily on approved pricing adjustments and our historical experience. Actual product returns or pricing adjustments that differ from our estimates could result in increases or decreases to our net revenue. A portion of our revenues are derived from engineering and related consulting service contracts with customers. These contracts generally include performance obligations in which control is transferred over time because the customer either simultaneously receives and consumes the benefits provided or our performance on the contract creates or enhances an asset that the customer controls. These contracts typically provide services on the following basis: Time & Materials (“T&M”) – services consist of revenues from software modification, consulting implementation, training and integration services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary depending on the actual time and materials incurred based on the customer’s needs. Fixed Price – arrangements to render specific consulting and software modification services which tend to be more complex. 2021 Annual Report - signed copy 7.pdf 32 9/30/21 3:54 PM 24 Performance obligations for T&M contracts qualify for the "Right to Invoice" practical expedient within the revenue guidance. Under this practical expedient, we may recognize revenue, over time, in the amount to which we have a right to invoice. In addition, we are not required to estimate variable consideration upon inception of the contract and reassess the estimate each reporting period. We determined that this method best represents the transfer of services as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to the customer of our performance completed to date. We recognize revenue on fixed price contracts, over time, using an input method based on the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete the contract performance obligation. We determined that this method best represents the transfer of services as the proportion closely depicts the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation. From time to time, we may enter into contracts with customers that include promises to transfer multiple performance obligations that may include sales of products, professional engineering services and other product qualification or certification services. Determining whether the promises in these arrangements are considered distinct performance obligations, that should be accounted for separately versus together, often requires judgment. We consider performance obligations to be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily available and when the promised good or service is separately identifiable from other promised goods or services in the contract. In these arrangements, we allocate revenue on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation. Additionally, estimating standalone selling prices for separate performance obligations within a contract may require significant judgment and consideration of various factors including market conditions, items contemplated during negotiation of customer arrangements and internally-developed pricing models. Changes to performance obligations that we identify, or the estimated selling prices pertaining to a contract, could materially impact the amounts of earned and unearned revenue that we record. 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 record an allowance against amounts due based on those particular circumstances. For all other customers, we estimate an allowance for doubtful accounts based on (i) the length of time the receivables are past due, (ii) our bad debt collection experience, and (iii) our understanding of 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 net realizable value, 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 12 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 for 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. 2021 Annual Report - signed copy 7.pdf 33 9/30/21 3:54 PM 25 Warranty Reserve The standard warranty periods we provide 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 for any known or anticipated product warranty issues. Our warranty obligations are impacted by a number of factors, including historical warranty costs, actual product failure rates, service delivery costs, and the use of materials. If our actual results are different from our assumptions, increases or decreases to warranty reserves could be required, which could impact our cost of revenue and gross margins. Restructuring Charges We recognize costs and related liabilities for restructuring activities when they are incurred. Our restructuring charges are primarily comprised of employee separation costs, asset impairments and contract exit costs. Employee separation costs include one-time termination benefits that are recognized as a liability at estimated fair value, at the time of communication to employees, unless future service is required, in which case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits are probable and reasonably estimable. Contract exit costs include contract termination fees and right-of-use asset impairments recognized on the date that we have vacated the premises or ceased use of the leased facilities. A liability for contract termination fees is recognized in the period in which we terminate the contract. Restructuring accruals are based upon management estimates at the time they are recorded and can change depending upon changes in facts and circumstances subsequent to the date the original liability is recorded. If actuals results differ, or if management determines revised estimates are necessary, we may record additional liabilities or reverse a portion or existing liabilities. 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 (“NOLs”) 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. Business Combinations We allocate the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), if applicable, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life. The valuation of acquired assets and assumed liabilities requires significant judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs, and discount rates. We estimate the fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed as incurred. 2021 Annual Report - signed copy 7.pdf 34 9/30/21 3:54 PM 26 Goodwill Impairment Testing We evaluate goodwill for impairment on an annual basis in our fourth fiscal 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 our evaluation of goodwill for impairment 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 our single reporting unit is less than its carrying value, we conduct a quantitative goodwill impairment test, which involves comparing the estimated fair value of our single reporting unit with its carrying value, including goodwill. We estimate the fair value of our single 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 recognize an impairment loss for the difference. 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. These include (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 period during which cash flows will be generated and (iv) the determination of our weighted-average cost of capital, which is a factor in determining 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) 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 2021, we made a qualitative assessment of whether goodwill impairment existed. Since our assessment of the qualitative factors did not result in a determination that it was more likely than not that the fair value of our single reporting unit is less than its carrying value, we were not required to perform the quantitative goodwill impairment test. As of June 30, 2021, the carrying value of our single reporting unit was $46,096,000, while our market capitalization was $150,093,000. We concluded that no goodwill impairment existed as of June 30, 2021. Long-Lived Assets and Intangible Assets We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Circumstances which could trigger a review include, but are not limited to the following: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; or current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. 2021 Annual Report - signed copy 7.pdf 35 9/30/21 3:54 PM 27 Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets and intangible assets may not be recoverable, we estimate the future cash flows expected to be generated by the asset from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. These significant judgments may include future expected revenue, expenses, capital expenditures and other costs, discount rates and whether or not alternative uses are available for impacted long-lived assets. 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, with the fair values amortized to expense over the requisite service period. Our share-based awards are currently comprised of restricted stock units, performance stock units, common stock options, and common stock purchase rights granted under our 2013 Employee Stock Purchase Plan (“ESPP”). The fair value of our restricted stock units is based on the closing market price of our common stock on the date of grant. The fair value of our performance stock units is estimated as of the grant date based upon the expected achievement of the performance metrics specified in the grant and the closing market price of our common stock on the date of grant. To the extent a grant of performance share units contains a market condition, the grant date fair value is estimated using a Monte Carlo simulation, which incorporates estimates of the potential outcomes of the market condition on the grant date fair value of each award. The fair value of our common stock options and ESPP common stock purchase rights is generally estimated on the grant date using the Black- Scholes-Merton (“BSM”) valuation model. The determination of the fair value of share-based awards utilizing the BSM model is affected by our stock price and various 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 (“SEC”). 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 these options. 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 common stock purchase rights. 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. If these events were to occur, it could increase or decrease our share-based compensation expense, which would impact our operating expenses and gross margins. Results of Operations - Fiscal Years Ended June 30, 2021 and 2020 Summary For fiscal 2021, our net revenue increased by $11,599,000, or 19.4%, compared to fiscal 2020. The increase in net revenue was driven by an 18.5% increase in net revenue in our IoT product line, as well as an increase of 28.3% in net revenues in our REM product line. We had a net loss of $4,044,000 for fiscal 2021 compared to a net loss of $10,738,000 for fiscal 2020. The decrease in net loss was driven by a 22.8% increase in gross profit as well as a 2.9% decrease in operating expenses. 2021 Annual Report - signed copy 7.pdf 36 9/30/21 3:54 PM 28 Net Revenue The following tables present our net revenue by product lines and by geographic region: 2021 59,167 11,843 467 71,477 2021 38,638 17,186 15,653 71,477 $ $ $ $ Years Ended June 30, % of Net Revenue 2020 % of Net Revenue (In thousands, except percentages) 82.8% $ 16.6% 0.6% 100.0% $ 49,911 9,228 739 59,878 83.4% $ 15.4% 1.2% 100.0% $ Years Ended June 30, % of Net Revenue 2020 % of Net Revenue (In thousands, except percentages) Change 9,256 2,615 (272) 11,599 Change $ $ 54.1% $ 24.0% 21.9% 100.0% $ 33,279 15,588 11,011 59,878 55.6% $ 26.0% 18.4% 100.0% $ 5,359 1,598 4,642 11,599 % % 18.5% 28.3% (36.8%) 19.4% 16.1% 10.3% 42.2% 19.4% IoT REM Other Americas EMEA APJ IoT Net revenue from our IoT product line in fiscal 2021 increased across all regions when compared to fiscal 2020 due primarily to the addition of sales of products and services obtained through the acquisition of Intrinsyc in January 2020. In addition to smaller increases in various other product families, we experienced strong growth in unit sales of (i) our XPico product family in the APJ and Americas regions, (ii) our XPort product family in the Americas and EMEA regions, and (iii) a last-time shipment of one of our end-of-life PremierWave products in the EMEA region. The overall increase in net revenues was partially offset by the exit of a low margin distribution business assumed in the acquisition of Maestro and various decreases in unit sales of some of our cellular and tracker products, as well as certain legacy product families, particularly in the EMEA and Americas regions. REM Net revenue from our REM product line for fiscal 2021 increased compared to fiscal 2020 due primarily to increased unit sales of (i) our SLC8000 product family across all regions, (ii) our Spider product family in the Americas and APJ regions, and (iii) our SLB product family in the Americas region. Other Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, declined slightly in all regions. Gross Profit Gross profit represents net revenue less cost of revenue. Cost of revenue consists primarily of the cost of raw material components, subcontract labor assembly by contract manufacturers, freight costs, personnel-related expenses, manufacturing overhead, inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties and share-based compensation. 2021 Annual Report - signed copy 7.pdf 37 9/30/21 3:54 PM 29 The following table presents our gross profit: Years Ended June 30, % of Net Revenue 2020 2021 % of Net Revenue Change $ % (In thousands, except percentages) Gross profit $ 33,025 46.2% $ 26,900 44.9% $ 6,125 22.8% Gross profit as a percent of revenue (referred to as “gross margin”) for fiscal 2021 increased compared to fiscal 2020 due primarily to our exit in fiscal 2021 of a low margin distribution business assumed in the acquisition of Maestro, as well as reduced charges in fiscal 2021 for inventory reserves. These benefits to our gross margin in fiscal 2021 were partially offset by growth in sales of products and services obtained through the acquisition of Intrinsyc, which typically have lower margins than the Lantronix products that existed prior to the acquisition. In addition, our gross margin was negatively impacted by increased supply chain costs in response to component shortages that resulted from the pandemic. 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 our selling, general and administrative expenses: Personnel-related expenses Professional fees and outside services Advertising and marketing Facilities and insurance Share-based compensation Other Selling, general and administrative 2021 12,927 2,464 712 1,415 2,719 571 20,808 $ $ Years Ended June 30, % of Net Revenue 2020 % of Net Revenue Change $ % (In thousands, except percentages) $ 29.1% $ 11,400 2,137 828 1,384 2,959 874 19,582 $ 32.7% $ 1,527 327 (116) 31 (240) (303) 1,226 13.4% 15.3% (14.0%) 2.2% (8.0%) (34.7%) 6.3% Selling, general and administrative expenses increased in fiscal 2021 when compared to fiscal 2020 primarily due to (i) higher personnel-related costs in our sales team and an increase in variable compensation and (ii) higher professional fees and outside services expenses resulting from the timing of certain legal and accounting projects. In addition, fiscal 2021 had personnel costs from the Intrinsyc acquisition for the entire fiscal year whereas fiscal 2020 only had six months of related personnel costs. The overall increase was partially offset by (i) lower share-based compensation expenses related to certain outstanding performance stock units and stock option awards and (ii) lower bad debt and depreciation expenses included in the “Other” category in the table above. 2021 Annual Report - signed copy 7.pdf 38 9/30/21 3:54 PM 30 Research and Development Research and development expenses consisted of personnel-related expenses, share-based compensation, and expenditures to third-party vendors for research and development activities and product certification costs. Our costs from period-to-period related to outside services and product certifications vary depending on our level and timing of development activities. The following table presents our research and development expenses: Personnel-related expenses Facilities Outside services Product certifications Share-based compensation Other Research and development 2021 7,954 1,335 209 531 584 500 11,113 $ $ Years Ended June 30, % of Net Revenue 2020 % of Net Revenue Change $ % (In thousands, except percentages) $ 15.5% $ 6,750 1,189 573 326 453 400 9,691 $ 16.2% $ 1,204 146 (364) 205 131 100 1,422 17.8% 12.3% (63.5%) 62.9% 28.9% 25.0% 14.7% Research and development expenses increased in fiscal 2021 when compared to fiscal 2020 largely due to increased personnel-related expenses driven by headcount growth and higher variable compensation. Fiscal 2021 had personnel costs from the Intrinsyc acquisition for the entire fiscal year whereas fiscal 2020 only had six months of related personnel costs. This increase was partially offset by a reduction in outside services costs for engineering consulting fees. Restructuring, Severance and Related Charges Fiscal 2021 During fiscal 2021, we incurred charges of approximately $506,000 related to headcount reductions and restructuring of non-essential operations, including certain acquisition-related functions we determined were redundant. We may incur additional restructuring, severance and related charges in future periods as we continue to identify cost savings and synergies resulting from our acquisitions. Fiscal 2020 During fiscal 2020, we executed on plans to realign certain personnel resources to better fit our business needs, particularly related to identifying cost savings and synergies from the acquisitions of Maestro and Intrinsyc. These activities resulted in total charges of approximately $3,844,000 in fiscal 2020. Acquisition-Related Costs During fiscal 2021, we incurred approximately $841,000 of acquisition-related costs, mostly banking and legal fees, related to the acquisition of the TN Companies and our exploration of other acquisition targets. 2021 Annual Report - signed copy 7.pdf 39 9/30/21 3:54 PM 31 During fiscal 2020, we incurred approximately $2,284,000 of acquisition-related costs in connection with the acquisitions of Maestro and Intrinsyc. These costs are mainly comprised of banking, legal, accounting and other professional fees. Amortization of Purchased Intangible Assets We acquired certain intangible assets through our fiscal 2020 acquisitions, which we recorded at fair-value as of the acquisition dates. These assets are generally amortized on a straight-line basis over their estimated useful lives, and resulted in charges of $3,094,000 and $2,037,000 during fiscal 2021 and 2020, respectively. Interest Income (Expense), Net For fiscal 2021 and 2020, we incurred net interest expense from interest incurred on borrowings on our term loan. We also earn interest on our domestic cash balances. 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. During fiscal 2021, we also incurred a loss of approximately $197,000 the on disposal of certain property and equipment. Provision for Income Taxes The following table presents our provision for income taxes: Provision for income taxes $ 195 0.3% $ 144 0.2% $ 51 35.4% Years Ended June 30, % of Net Revenue 2020 2021 % of Net Revenue Change $ % (In thousands, except percentages) The following table presents our effective tax rate based upon our provision for income taxes: Effective tax rate Years Ended June 30, 2021 (5.1%) 2020 (1.4%) 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 are more likely than not to 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 2021 and fiscal 2020. 2021 Annual Report - signed copy 7.pdf 40 9/30/21 3:54 PM 32 Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of our NOL carryforwards and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods. Due to 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, 2021 (In thousands) $ $ 91,974 11,038 For federal income tax purposes, our NOL carryovers generated for tax years beginning before July 1, 2018 began to expire in fiscal 2021. Of our federal NOLs as of June 30, 2021 in the table above, approximately $51,861,000 will expire by June 30, 2023. For state income tax purposes, our NOLs began to expire in the fiscal year ended June 30, 2013. Pursuant to the Tax Cuts and Jobs Act enacted by the U.S. federal government in December 2017, for federal income tax purposes, NOL carryovers generated for our tax years beginning after June 30, 2018 can be carried forward indefinitely, but will be subject to a taxable income limitation. Liquidity and Capital Resources Liquidity The following table presents our working capital and cash and cash equivalents: Working capital Cash and cash equivalents June 30, 2021 2020 (In thousands) Change $ $ 20,289 9,739 $ $ 18,741 7,691 $ $ 1,548 2,048 Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts available under our loan agreement with our bank, 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 following: timing and amount of our net revenue; our product mix and the resulting gross margins; research and development expenses; selling, general and administrative expenses; and expenses associated with any strategic partnerships, acquisitions or infrastructure investments. 2021 Annual Report - signed copy 7.pdf 41 9/30/21 3:54 PM 33 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 strategic 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 securities to raise additional funds, our existing stockholders may experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we issue debt securities to raise additional funds, we may incur debt service obligations, become subject to additional restrictions that limit or restrict our ability to operate our business, or be required to further encumber our assets. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all. Recent Acquisition On August 2, 2021 (the “Closing Date”) we acquired the TN Companies from Communication Systems, Inc. for approximately $25,028,000 in cash paid as of the Closing Date plus earnout payments of up to $7,000,000 payable following two successive 180-day intervals after the Closing Date based on revenue targets for the business of the TN Companies. In connection with the closing of the acquisition we entered into new loan agreements with SVB which included (i) a new term loan of $17,500,000 with an available revolving credit facility of up to $2,500,000 and (ii) a second term loan of $12,000,000. COVID-19 Update We have not experienced any significant payment delays or defaults by our customers as a result of the COVID-19 pandemic. However, additional economic shutdowns or a prolonged economic recovery may lead to declines in billings and cash collections and result in an unfavorable impact on our financial results in future periods. While we do have a credit line available, financial covenants associated with the credit line may not enable us to draw down funds as needed. We have in place a contingency plan that significantly reduces operating costs in the event that we experience liquidity issues in order to help mitigate our liquidity risk. Bank Loan Agreements Refer to Note 5 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Report, which is incorporated herein by reference, for a discussion of our loan agreements. Cash Flows The following table presents the major components of the consolidated statements of cash flows: Years Ended June 30, Net cash provided by (used in) operating activities Net cash used in investing activities Net cash (used in) provided by financing activities 2021 $ 2020 (In thousands) (Decrease) Increase $ 4,304 (783) (1,473) $ (2,521) (13,974) 5,904 6,825 (13,191) (7,377) 2021 Annual Report - signed copy 7.pdf 42 9/30/21 3:54 PM 34 Operating Activities Cash provided by operating activities during fiscal 2021 increased compared to fiscal 2020 due mainly to the decrease in our net loss, which was driven by our revenues and gross profit growth, along with a decrease in our operating expenses. For fiscal 2021, our net loss included $7,723,000 of non-cash charges, and the changes in operating assets and liabilities provided cash of $625,000. Accounts payable increased by $3,791,000, or 71.1%, from June 30, 2020 to June 30, 2021 primarily due to the increase and timing of our inventory purchases and related payments to vendors. Accrued payroll and related expenses increased by $2,284,000 from June 30, 2020 to June 30, 2021 due to accrued variable compensation costs. Accounts and contract manufacturers’ receivables increased, in total, by $3,727,000, or 31.7%, from June 30, 2020 to June 30, 2021 due to the growth and linearity of our sales during the fourth quarter of fiscal 2021 as well as the timing of materials shipments to our contract manufacturers. Inventories increased $1,278,000, or 9.3%, from June 30, 2020 to June 30, 2021 as we have increased our stocks for lead time and supply constraints, particularly due to the COVID-19 pandemic over the last year. Investing Activities We used significantly less cash in investing activities during fiscal 2021 than in fiscal 2020 due to the acquisitions of Maestro and Intrinsyc in the prior year. Cash used during fiscal 2021 was substantially all for the purchase of certain property and equipment. Financing Activities Net cash used in financing activities during fiscal 2021 was primarily the result of (i) monthly repayments on our term loan and (ii) withholding taxes paid related to the vesting of restricted stock units. In fiscal 2020 financing activities provided cash from the issuance of a term loan for $6,000,000 with SVB as well as stock option exercises and stock purchases by employees. 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 included in Part IV, Item 15 of this Report, as set forth beginning on page F-1 of this Report, and are incorporated by reference into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 2021 Annual Report - signed copy 7.pdf 43 9/30/21 3:54 PM 35 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that this information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible 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, 2021. Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. 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, 2021 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, 2021. Exemption from Attestation Report of Independent Registered Public Accounting Firm 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 because we are a non-accelerated filer. 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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the COVID-19 pandemic, resulting in many of our employees working remotely since March 2020, this has not materially affected our internal controls over financial reporting. We continue to monitor and assess the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness. ITEM 9B. OTHER INFORMATION None. 2021 Annual Report - signed copy 7.pdf 44 9/30/21 3:54 PM 36 PART III Portions of our definitive Proxy Statement on Schedule 14A relating to our 2021 annual meeting of stockholders (“Proxy Statement”), 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 “Information About Our Executive Officers” in Part I, Item 1 of this Report, which is incorporated herein by reference. We have adopted a code of business conduct and ethics that applies to all employees, including employees of our subsidiaries, as well as each member of our Board of Directors. The code of business conduct and ethics is available at our website at www.lantronix.com under the Investor Relations-Corporate Governance section. We intend to satisfy any disclosure requirement under applicable rules of the SEC or Nasdaq Stock Market regarding an amendment to, or waiver from, a provision of this code of business conduct and ethics by posting such information on our website, at the web address specified above. The other information required by this Item is incorporated by reference to our Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to our Proxy Statement. 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. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this Item is incorporated by reference to our Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference to our Proxy Statement. 2021 Annual Report - signed copy 7.pdf 45 9/30/21 3:54 PM 37 ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES 1. 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 Consolidated Balance Sheets as of June 30, 2021 and 2020 Consolidated Statements of Operations for the fiscal years ended June 30, 2021 and 2020 Consolidated Statements of Stockholders’ Equity for the fiscal years ended June 30, 2021 and 2020 Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2021 and 2020 Notes to Consolidated Financial Statements Page F-1 F-3 F-4 F-5 F-6 F-7 – F-30 2. Exhibits Exhibit Number Exhibit Description Share Purchase Agreement, dated July 5, 2019, by and among Lantronix Holding Company, Maestro Wireless Solutions Limited, Fargo Telecom Asia Limited and Maestro & FALCOM Holdings Limited Incorporated by Reference Filed Herewith Form Exhibit Filing Date 8-K 2.1 07/10/2019 Arrangement Agreement, dated October 30, 2019, by and between Lantronix and Intrinsyc 8-K 2.1 11/01/2019 Amended and Restated Certificate of Incorporation of Lantronix, Inc., as amended Amended and Restated Bylaws of Lantronix, Inc. Description of Lantronix Common Stock 10.1* Lantronix, Inc. 2010 Inducement Equity Incentive Plan 10-K 3.1 08/29/2013 8–K 10-K 10–Q 3.2 4.1 11/15/2012 09/11/2019 10.2 11/08/2010 2.1 2.2 3.1 3.2 4.1 2021 Annual Report - signed copy 7.pdf 46 9/30/21 3:54 PM 38 10.2* Form of Stock Option Agreement under the Lantronix, Inc. 2010 Inducement Equity Incentive Plan 10–Q 10.3 11/08/2010 10.3* Lantronix, Inc. Amended and Restated 2010 Stock Incentive Plan, as Amended on November 14, 2017 10.4* Form of Stock Option Agreement under the Lantronix, Inc. Amended and Restated 2010 Stock Incentive Plan 10.5* Form of Restricted Stock Award Agreement under the Lantronix, Inc. Amended and Restated 2010 Stock Incentive Plan 8-K 99.1 11/15/2017 S-8 S-8 4.3 05/09/2013 4.4 05/09/2013 10.6* Lantronix, Inc. 2020 Performance Incentive Plan 8-K 10.1 11/04/2020 10.7*+ Form of Director Stock Option Agreement under the Lantronix, Inc. 2020 Performance Incentive Plan 10.8*+ Form of Restricted Stock Unit Award Agreement under the Lantronix, Inc. 2020 Performance Incentive Plan 10.9*+ Form of Director Restricted Stock Unit Award Agreement under the Lantronix, Inc. 2020 Performance Incentive Plan 10.10*+ Form of Nonqualified Stock Option Agreement under the Lantronix, Inc. 2020 Performance Incentive Plan 10.11*+ Form of Incentive Stock Option Agreement under the Lantronix, Inc. 2020 Performance Incentive Plan 10.12*+ Form of Performance Stock Unit Award Agreement under the Lantronix, Inc. 2020 Performance Incentive Plan X X X X X X 10.13* Letter Agreement dated September 8, 2011 between Lantronix, Inc. and 8–K 10.1 09/26/2011 Jeremy Whitaker 10.14* Amendment to Offer Letter between Lantronix, Inc. and Jeremy Whitaker, dated as of November 13, 2012 10.15* Form of Indemnification Agreement entered into between Lantronix, Inc. with its directors and certain of its executive officers 10.16* Summary of Lantronix, Inc. Annual Bonus Program 10.17* Lantronix, Inc. Non-Employee Director Compensation Policy, as revised 8-K 8-K 8-K 8-K 99.2 11/15/2012 10.2 06/20/2016 99.1 99.3 09/08/2015 09/08/2015 2021 Annual Report - signed copy 7.pdf 47 9/30/21 3:54 PM 39 10.18* Form of Inducement Stock Option Agreement by and between Lantronix, S–8 4.5 04/28/2016 Inc. and Kevin Yoder 10.19* Offer Letter dated January 22, 2016 between Lantronix, Inc. and Kevin 10-K 10.30 08/24/2016 Yoder 10.20* Transition and Separation Agreement, dated as of January 17, 2020, by and between Lantronix, Inc. and Kevin Yoder. 10.21* Letter Agreement dated August 31, 2016 between Lantronix, Inc. and Jeremy Whitaker 10.22* Lantronix, Inc. 2013 Employee Stock Purchase Plan, as amended on November 13, 2018 10.23* Offer Letter dated March 23, 2019 between Lantronix, Inc. and Paul H. Pickle 10.24* Inducement Stock Option Agreement, dated April 22, 2019, between Lantronix, Inc. and Paul H. Pickle 10.25* Inducement Restricted Stock Unit Agreement, effective as of May 1, 2019, between Lantronix, Inc. and Paul H. Pickle 8-K 8-K 8-K 8-K S–8 S–8 10.1 01/22/2020 10.1 09/02/2016 99.1 11/15/2018 99.1 03/27/2019 4.1 04/26/2019 4.2 04/26/2019 10.26* Offer Letter dated January 4, 2020, between Lantronix, Inc. and Roger 10-K 10.22 09/11/2020 Holliday 10.27* Form of Inducement Stock Option Agreement 10.28* Form of Inducement Restricted Stock Unit Agreement 10.29* Intrinsyc Technologies Corporation Amended and Restated Incentive Stock Option Plan 10.30* Intrinsyc Technologies Corporation Restricted Share Unit Plan 10.31 Lease dated January 9, 2015 between Lantronix, Inc. and The Irvine Company, LLC 10.32 First Amendment to Lease Agreement dated May 7, 2020 between Lantronix, Inc. and The Irvine Company, LLC 10.33 Second Amended and Restated Loan and Security Agreement dated as of November 12, 2019, by and among Lantronix, Inc., Lantronix Holding Company and Silicon Valley Bank S-8 S-8 4.1 4.2 09/04/2020 09/04/2020 10-Q 10.1 05/15/2020 10-Q 8–K 8-K 8-K 10.2 99.1 05/15/2020 01/20/2015 10.1 05/12/2020 10.1 11/14/2019 10.34 First Lien Commitment Letter, dated April 28, 2021, between Lantronix, inc. and Silicon Valley Bank. 8-K 10.1 04/29/2021 2021 Annual Report - signed copy 7.pdf 48 9/30/21 3:54 PM 40 10.35 Second Lien Commitment Letter, dated April 28, 2021, between Lantronix, inc. and SVB Innovation Credit Fund VIII, L.P. 10.36 Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank, dated August 2, 2021, by and between Lantronix, Inc., Lantronix Holding Company, Lantronix Canada ULC and Lantronix Technologies Canada (Taiwan) Ltd. and Transition Networks, Inc. 8-K 8-K 10.2 04/29/2021 10.1 08/02/2021 10.37 Mezzanine Loan and Security Agreement, dated August 2, 2021, by and 8-K 10.2 08/02/2021 between Lantronix, Inc. and SVB Innovation Credit Fund VIII, L.P. 21.1+ Subsidiaries of Lantronix, Inc. 23.1+ Consent of Independent Registered Public Accounting Firm, Squar Milner LLP 24.1+ Power of Attorney (included on the signature page) 31.1+ Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2+ Certification of Principal 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 Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) __________ * + ++ Indicates management contract or compensatory plan, contract or arrangement. Filed herewith Furnished herewith. ITEM 16. FORM 10-K SUMMARY None. 2021 Annual Report - signed copy 7.pdf 49 9/30/21 3:54 PM 41 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: August 27, 2021 LANTRONIX, INC. By: /s/ PAUL PICKLE Paul Pickle President, Chief Executive Officer and Director (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Paul Pickle and Jeremy Whitaker, and each or either of them, acting individually, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or any of them, or their or his or her substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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 /s/ PAUL PICKLE Paul Pickle /s/ JEREMY WHITAKER Jeremy Whitaker /s/ BERNHARD BRUSCHA Bernhard Bruscha /s/ MARGARET EVASHENK Margaret Evashenk /s/ PAUL FOLINO Paul Folino /s/ HOSHI PRINTER Hoshi Printer Title President, Chief Executive Officer and Director (Principal Executive Officer) Chief Financial Officer (Principal Financial and Accounting Officer) Date August 27, 2021 August 27, 2021 Chairman of the Board August 27, 2021 Director Director Director August 27, 2021 August 27, 2021 August 27, 2021 2021 Annual Report - signed copy 7.pdf 50 9/30/21 3:54 PM 42 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Lantronix, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lantronix, Inc. and its subsidiaries (the Company) as of June 30, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting 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. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 2021 Annual Report - signed copy 7.pdf 51 9/30/21 3:54 PM F-1 INVENTORY – EXCESS AND OBSOLETE RESERVE Critical Audit Matter Description As discussed in Note 1 and Note 4 to the consolidated financial statements, inventories are stated at the lower of cost or net realizable value and the Company’s consolidated inventory balance was approximately $15 million at June 30, 2021, net of reserve. The Company provides for reserves for excess and obsolete inventories primarily based upon estimates of future demand of products, the age of the inventory, and considering contractual supplier protection provisions and distributor stock rotation privileges. We identified the auditing of management’s lower of cost or net realizable value determination for excess or obsolete inventories as a critical audit matter. Auditing management’s lower of cost or net realizable value determination for excess or obsolete inventories was especially challenging and highly judgmental because of the uncertainties in determining demand for aging inventory and future market conditions. Inherent estimation uncertainty was primarily attributed to assumptions used by management in the inventory reserve model which involved a high degree of subjectivity. How We Addressed the Matter in Our Audit The primary procedures we performed to address this critical audit matter included: Obtaining an understanding and evaluating the design of the controls over the determination of the lower of cost or net realizable value for excess and obsolete inventories. Reviewing manufacturer contracts for contractual supplier protection provisions. Testing the completeness and accuracy of the underlying data used in management’s reserve calculation. Evaluating the reasonableness of management’s assumptions by performing a retrospective review of the prior year assumptions to actual activity. Evaluating the appropriateness and consistency of management’s methods and assumptions used in developing estimates around forecasted sales and expected stock rotation privileges. /s/ Baker Tilly US, LLP We have served as the Company’s auditors since 2011. Irvine, California August 27, 2021 2021 Annual Report - signed copy 7.pdf 52 9/30/21 3:54 PM F-2 LANTRONIX, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and par value data) June 30, 2021 June 30, 2020 Assets Current Assets: Cash and cash equivalents Accounts receivable (net of allowance for doubtful accounts of $321 and $460 at June 30, 2021 $ 9,739 $ and 2020, respectively) Inventories, net Contract manufacturers' receivable Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill Purchased intangible assets, net Lease right-of-use assets Other assets Total assets Liabilities and stockholders' equity Current Liabilities: Accounts payable Accrued payroll and related expenses Short-term debt, net Other current liabilities Total current liabilities Long-term debt, net Other non-current liabilities Total liabilities Commitments and contingencies (Note 10) Stockholders' equity: 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; 29,087,714 and 28,231,054 shares issued and outstanding at June 30, 2021 and 2020, respectively Additional paid-in capital Accumulated deficit Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity 13,515 15,059 1,960 2,880 43,153 1,577 15,810 9,355 2,431 240 72,566 9,122 4,942 1,472 7,328 22,864 2,210 1,396 26,470 – 3 249,885 (204,163) 371 46,096 72,566 $ $ $ $ $ $ See accompanying notes to consolidated financial statements. 7,691 11,411 13,781 337 1,290 34,510 1,587 15,810 12,449 3,345 232 67,933 5,331 2,658 1,472 6,308 15,769 3,682 1,962 21,413 – 3 246,265 (200,119) 371 46,520 67,933 2021 Annual Report - signed copy 7.pdf 53 9/30/21 3:54 PM F-3 LANTRONIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Net revenue Cost of revenue Gross profit Operating expenses: Selling, general and administrative Research and development Restructuring, severance and related charges Acquisition-related costs Amortization of purchased intangible assets Total operating expenses Loss from operations Interest income (expense), net Other expense, net Loss before income taxes Provision for income taxes Net loss and comprehensive loss Net loss per share - basic and diluted Weighted-average common shares - basic and diluted $ $ $ Years Ended June 30, 2021 2020 $ $ $ 71,477 38,452 33,025 20,808 11,113 506 841 3,094 36,362 (3,337) (315) (197) (3,849) 195 (4,044) (0.14) 28,708 59,878 32,978 26,900 19,582 9,691 3,844 2,284 2,037 37,438 (10,538) (133) 77 (10,594) 144 (10,738) (0.42) 25,281 See accompanying notes to consolidated financial statements. 2021 Annual Report - signed copy 7.pdf 54 9/30/21 3:54 PM F-4 LANTRONIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Balance at June 30, 2019 Shares issued pursuant to stock awards, net Tax withholding paid on behalf of employees for restricted shares Share-based compensation Issuance of shares related to acquisition Net loss Balance at June 30, 2020 Shares issued pursuant to stock awards, net Tax withholding paid on behalf of employees for restricted shares Share-based compensation Net loss Balance at June 30, 2021 Common Stock Shares Amount 22,812 1,140 $ – – 4,279 – 28,231 857 – – – 29,088 $ Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Stockholders' Equity 2 – – – 1 – 3 – – – – 3 $ $ 226,274 1,158 (379) 3,639 15,573 – 246,265 913 (877) 3,584 – 249,885 $ (189,381) $ – – – – (10,738) (200,119) – – – (4,044) (204,163) $ $ 371 – – – – – 371 – – – – 371 $ $ 37,266 1,158 (379) 3,639 15,574 (10,738) 46,520 913 (877) 3,584 (4,044) 46,096 See accompanying notes to consolidated financial statements. 2021 Annual Report - signed copy 7.pdf 55 9/30/21 3:54 PM F-5 LANTRONIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Operating activities Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Share-based compensation Amortization of purchased intangible assets Depreciation and amortization Amortization of manufacturing profit in acquired inventory associated with acquisitions Loss on disposal of property and equipment Amortization of deferred debt issuance costs Changes in operating assets and liabilities: Accounts receivable Inventories Contract manufacturers' receivable Prepaid expenses and other current assets Lease right-of-use assets Other assets Accounts payable Accrued payroll and related expenses Other liabilities Net cash provided by (used in) operating activities Investing activities Purchases of property and equipment Cash payment for acquisitions, net of cash and cash equivalents acquired Net cash used in investing activities Financing activities Net proceeds from issuances of common stock Tax withholding paid on behalf of employees for restricted shares Net proceeds from issuance of debt Payment of borrowings on term loan Payment of lease liabilities Net cash (used in) 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 Supplemental disclosure of cash flow information Interest paid Income taxes paid Years Ended June 30, 2021 2020 $ (4,044) $ (10,738) 3,584 3,094 817 7 193 28 (2,104) (1,285) (1,623) (1,590) 1,527 (8) 3,574 2,284 (150) 4,304 (783) – (783) 913 (877) – (1,500) (9) (1,473) 2,048 7,691 9,739 297 200 $ $ $ 3,639 2,037 768 255 16 18 2,809 3,365 987 366 1,172 (107) (2,599) 349 (4,858) (2,521) (572) (13,402) (13,974) 1,158 (379) 5,886 (750) (11) 5,904 (10,591) 18,282 7,691 218 101 $ $ $ See accompanying notes to consolidated financial statements. 2021 Annual Report - signed copy 7.pdf 56 9/30/21 3:54 PM F-6 LANTRONIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2021 1. Summary of Significant Accounting Policies The Company Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global provider of software as a service (“SaaS”), engineering services, and hardware for Edge Computing, the Internet of Things (“IoT”), and Remote Environment Management (“REM”). Lantronix enables its customers to provide reliable and secure solutions while accelerating their time to market. Lantronix’s products and services dramatically simplify operations through the creation, development, deployment and management of customer projects at scale while providing quality, reliability and security. 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. 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, revenue recognition, business combinations, inventory valuation, goodwill valuation, deferred income tax asset valuation allowances, share-based compensation, restructuring charges and warranty reserves. To the extent there are material differences between our estimates and actual results, future results of operations will be affected. Impact of COVID-19 The spread of the COVID-19 virus has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. The extent to which the COVID-19 pandemic impacts our business, operations and financial results continues to depend on numerous evolving factors that we may not be able to accurately predict and which may cause the actual results to differ from the estimates and assumptions we are required to make in the preparation of financial statements according to U.S. GAAP. In order to protect our employee population and comply with local directives, most of our employees transitioned to remote working arrangements commencing in March 2020, and many continue to primarily work remotely as of the date hereof. To facilitate the increased data traffic associated with remote access, we have upgraded some of our information technology systems. We have also made changes relating to videoconferencing by providing most of our employees with a new videoconferencing and collaboration platform to accommodate better remote collaboration and communication. To date, remote working has not had an adverse impact on our financial results or our operations, including financial reporting and disclosure controls and procedures. 2021 Annual Report - signed copy 7.pdf 57 9/30/21 3:54 PM F-7 Reclassifications Certain reclassifications have been made to the prior fiscal year financial information to conform to the current fiscal year presentation. Revenue Recognition Refer to Note 2 below for a discussion of our significant accounting policy over revenue recognition. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at the amount we expect to collect, which is net of 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 primarily of cash and cash equivalents, accounts receivable, contract manufacturers’ receivable, accounts payable, and accrued liabilities. 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 fiscal years ended June 30, 2021 and 2020 we did not have any assets or liabilities that were measured at fair value on a non-recurring basis. 2021 Annual Report - signed copy 7.pdf 58 9/30/21 3:54 PM F-8 We believe all of our financial instruments’ recorded values approximate their current fair values because of the nature and short duration of these instruments. 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 currencies were previously their respective local currencies are suspended in accumulated other comprehensive income. Accumulated Other Comprehensive Income Accumulated other comprehensive income is composed of accumulated translation adjustments as of June 30, 2021 and 2020. We did not have any other comprehensive income or losses during the fiscal years ended June 30, 2021 or 2020. 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 net realizable value. 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. 2021 Annual Report - signed copy 7.pdf 59 9/30/21 3:54 PM F-9 Business Combinations We allocate the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life. Acquisition-related expenses and related restructuring costs are recognized separately from the business combination and are expensed as incurred. 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 our single reporting unit is less than its carrying value, we conduct a quantitative goodwill impairment test, which involves comparing the estimated fair value of our single reporting unit with its carrying value, including goodwill. We estimate the fair value of our single 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 recognize an impairment loss for the difference. During the fourth quarter of the fiscal year ended June 30, 2021, we performed a qualitative assessment of whether goodwill impairment existed and did not determine that it was more likely than not that the fair value of our single reporting unit was less than its carrying amount. Purchased Intangible Assets Included within "purchased intangible assets, net" at June 30, 2021 are customer lists, developed technology, tradenames, and other intangible assets acquired in connection with various business combinations. Such capitalized costs and intangible assets are being amortized over a period of one to five years. Long-Lived Assets and Intangible Assets We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. We estimate the future cash flows, undiscounted and without interest charges, expected to be generated by the assets from its use or eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. 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 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. 2021 Annual Report - signed copy 7.pdf 60 9/30/21 3:54 PM F-10 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 by a taxing authority. 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 ratably over the requisite service period. We recognize the impact of forfeitures on our share-based compensation expense as such forfeitures occur. Previously recognized expense is reversed for the portion of awards forfeited prior to vesting. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the fiscal year. Diluted net income (loss) per share 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 thus, software development costs have been expensed as incurred. Warranty The standard warranty periods we provide 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 for any known or anticipated product warranty issues. Restructuring Charges We recognize costs and related liabilities for restructuring activities when they are incurred. Our restructuring charges are primarily comprised of employee separation costs, asset impairments and contract exit costs. Employee separation costs include one-time termination benefits that are recognized as a liability at estimated fair value, at the time of communication to employees, unless future service is required, in which case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits are probable and reasonably estimable. Contract exit costs include contract termination fees and right-of-use asset impairments recognized on the date that we have vacated the premises or ceased use of the leased facilities. A liability for contract termination fees is recognized in the period in which we terminate the contract. 2021 Annual Report - signed copy 7.pdf 61 9/30/21 3:54 PM F-11 Leases We determine if an arrangement is a lease, or contains a lease, at the inception of the arrangement and evaluate whether the lease is an operating lease or a finance lease at the commencement date. We recognize right-of-use (“ROU”) assets and lease liabilities for operating and finance leases with terms greater than 12 months. ROU assets represent our right to use an asset for the lease term, while lease liabilities represent our obligation to make lease payments. To the extent a lease includes a renewal option, we include such options in the calculation of the ROU asset and lease liability if it is reasonably assured that we will exercise the option. Operating and finance lease ROU assets and liabilities are recognized based on the present value of lease payments over the lease term at the lease commencement date. To determine the present value of lease payments, we use the implicit interest rate, if it is readily determinable. Many of our leases do not provide an implicit rate, and therefore we generally use our collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Operating and finance lease ROU assets are recognized net of any lease prepayments and incentives. Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense is recognized based on the effective-interest method over the lease term. For leases that we acquire in acquisition transactions, we generally elect not to recognize assets or liabilities at the acquisition date for leases that, at the acquisition date, have a remaining lease term of 12 months or less. This includes not recognizing an intangible asset if the terms of an operating lease are favorable relative to the market terms or a liability if the terms are unfavorable relative to the market terms. Refer to Note 9 below for additional information regarding our leases. Advertising Expenses Advertising expenses are recorded in the period incurred and totaled $231,000 and $185,000 for the fiscal years ended June 30, 2021 and 2020, respectively. Segment Information We have one operating and reportable business segment. Recent Accounting Pronouncements Current Expected Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard requiring financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard eliminates the threshold for initial recognition in current U.S. GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The standard is effective beginning in the first quarter of our fiscal year 2024. The adoption of this guidance is not expected to have a material effect on our consolidated financial statements. 2. Revenue Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We apply the following five-step approach in determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied. On occasion we enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. 2021 Annual Report - signed copy 7.pdf 62 9/30/21 3:54 PM F-12 Revenue is recognized net of (i) any taxes collected from customers, which are subsequently remitted to governmental authorities and (ii) shipping and handling costs collected from customers. Products Most of our product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that our customer obtains control of the promised products. A smaller portion of our product revenue is recognized when our customer receives delivery of the promised products. A significant portion of our products are sold to distributors under agreements which contain (i) limited rights to return unsold products and (ii) price adjustment provisions, both of which are accounted for as variable consideration when estimating the amount of revenue to recognize. We base our estimates for returns and price adjustments primarily on historical experience; however, we also consider contractual allowances, approved pricing adjustments and other known or anticipated returns and price adjustments in a given period. Such estimates are generally made at the time of shipment to the customer and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Our estimates of accrued variable consideration are included in other current liabilities in the accompanying consolidated balance sheets. Services Revenues from our extended warranty and services are generally recognized ratably over the applicable service period. Revenues from sales of our software-as-a-service (“SaaS”) products are recognized ratably over the applicable service period as well. Revenues from professional engineering services are generally recognized as services are performed. We derive a portion of our revenues from engineering and related consulting service contracts with customers. These contracts generally include performance obligations in which control is transferred over time because the customer either simultaneously receives and consumes the benefits provided or our performance on the contract creates or enhances an asset that the customer controls. These contracts typically provide services on the following basis: Time & Materials (“T&M”) – services consist of revenues from software modification, consulting implementation, training and integration services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary depending on the actual time and materials incurred based on the customer’s needs. Fixed Price – arrangements to render specific consulting and software modification services which tend to be more complex. Performance obligations for T&M contracts qualify for the "Right to Invoice" practical expedient within the revenue guidance. Under this practical expedient, we may recognize revenue, over time, in the amount to which we have a right to invoice. In addition, we are not required to estimate variable consideration upon inception of the contract and reassess the estimate each reporting period. We determined that this method best represents the transfer of services as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to the customer of our performance completed to date. We recognize revenue on fixed price contracts, over time, using an input method based on the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete the contract performance obligation. We determined that this method best represents the transfer of services as the proportion closely depicts the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation. 2021 Annual Report - signed copy 7.pdf 63 9/30/21 3:54 PM F-13 Multiple Performance Obligations From time to time, we may enter into contracts with customers that include promises to transfer multiple deliverables that may include sales of products, professional engineering services and other product qualification or certification services. Determining whether the deliverables in such arrangements are considered distinct performance obligations that should be accounted for separately versus together often requires judgment. We consider performance obligations to be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily available and when the promised good or service is separately identifiable from other promised goods or services in the contract. In such arrangements, we allocate revenue on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation. Net Revenue by Product Line and Geographic Region We organize our products and solutions into three product lines: IoT, REM and Other. Our IoT products typically connect to one or more existing machines or are built into new industrial devices to provide network connectivity. Our REM product line includes out-of-band management, console management, power management, and IP connected keyboard-video-mouse (commonly referred to as “IPKVM”) products that provide remote access to Information Technology (“IT”) and networking infrastructure deployed in test labs, data centers, branch offices and server rooms. We categorize products that are non-focus or end-of-life as Other. We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”). The following tables present our net revenue by product line and by geographic region. Net revenues by geographic region are based on the “bill-to” location of our customers: IoT REM Other Americas EMEA APJ Years Ended June 30, 2021 2020 (In thousands) 59,167 11,843 467 71,477 $ $ Years Ended June 30, 2021 2020 (In thousands) 38,638 17,186 15,653 71,477 $ $ 49,911 9,228 739 59,878 33,279 15,588 11,011 59,878 $ $ $ $ 2021 Annual Report - signed copy 7.pdf 64 9/30/21 3:54 PM F-14 The following table presents product revenues and service revenues as a percentage of our total net revenue: Product revenues Service revenues Year Ended June 30, 2021 2020 91% 9% 96% 4% Service revenue is comprised primarily of professional services, software license subscriptions, and extended warranties. Contract Balances In certain instances, the timing of revenue recognition may differ from the timing of invoicing to our customers. We record a contract asset receivable when revenue is recognized prior to invoicing, and a contract or deferred revenue liability when revenue is recognized subsequent to invoicing. With respect to product shipments, we expect to fulfill contract obligations within one year and so we have elected not to separately disclose the amount nor the timing of recognition of these remaining performance obligations. For contract balances related to contracts that include services and multiple performance obligations, refer to the deferred revenue discussion below. Deferred Revenue Deferred revenue is primarily comprised of unearned revenue related to our extended warranty services and certain software services. These services are generally invoiced at the beginning of the contract period and revenue is recognized ratably over the service period. Current and non- current deferred revenue balances represent revenue allocated to the remaining unsatisfied performance obligations at the end of a reporting period and are respectively included in other current liabilities and other non-current liabilities in the accompanying consolidated balance sheets. The following table presents the changes in our deferred revenue balance for the year ended June 30, 2021 (in thousands): Balance, July 1, 2020 New performance obligations Recognition of revenue as a result of satisfying performance obligations Balance, June 30, 2021 Less: non-current portion of deferred revenue Current portion, June 30, 2021 $ $ $ 824 778 (511) 1,091 (241) 850 We expect to recognize substantially all of the non-current portion of deferred revenue over the next 2 to 4 years. 3. Acquisition On April 28, 2021, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Communications Systems, Inc., a Minnesota corporation (“CSI”), pursuant to which we agreed to purchase from CSI the Transition Networks (“TNI”) and Net2Edge businesses of CSI (the “Transaction”). The Transaction closed on August 2, 2021 (the “Closing Date”), with Lantronix acquiring all outstanding shares of the common stock of TNI and all of the outstanding ordinary shares of Transition Networks Europe Limited (such entity, together with TNI, the “TN Companies”) for an aggregate purchase price of up to approximately $32,028,000 consisting of (i) $25,028,000 paid in cash on the Closing Date, plus (ii) earnout payments of up to $7.0 million, payable following two successive 180-day intervals after the Closing Date based on revenue targets for the business of the TN Companies as specified in the Purchase Agreement, subject to certain adjustments and allocations as further described in the Purchase Agreement. Concurrently with the closing of the Purchase Agreement, CSI and Lantronix entered in a Transition Services Agreement under which CSI will perform administrative and IT services, and lease office, warehouse and production space to Lantronix for the TN Companies for a period of up to twelve months. 2021 Annual Report - signed copy 7.pdf 65 9/30/21 3:54 PM F-15 The acquisition of the TN Companies provides Lantronix with complementary IoT connectivity products and capabilities, including switching, power over ethernet and media conversion and adapter products. We are currently evaluating the fair value of acquired assets and liabilities, including any identifiable intangible assets. We have not yet completed the initial accounting related to the Transaction as we are compiling and evaluating all of the necessary information. We expect to present a preliminary allocation of the fair value of the acquired assets and liabilities and pro forma disclosure in our Form 10-Q filing for the quarter ending September 30, 2021. 4. Supplemental Financial Information Inventories The following table presents details of our inventories: Finished goods Raw materials 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, 2021 2020 (In thousands) 7,738 7,321 15,059 $ $ June 30, 2021 2020 $ (In thousands) 4,338 633 4,707 141 9,819 (8,242) 1,577 $ 7,522 6,259 13,781 3,992 511 4,777 – 9,280 (7,693) 1,587 2021 Annual Report - signed copy 7.pdf 66 9/30/21 3:54 PM F-16 Purchased Intangible Assets The following table presents details of purchased intangible assets: June 30, 2021 June 30, 2020 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value Developed technology Customer relationship Order backlog Non-compete agreements Trademark and trade name $ $ 3,841 9,030 840 400 375 14,486 $ $ (1,249) $ (2,267) (840) (400) (375) (5,131) $ $ (In thousands) 2,592 6,763 – – – 9,355 $ 3,841 9,030 840 400 375 14,486 $ $ (497) $ (726) (384) (184) (246) (2,037) $ 3,344 8,304 456 216 129 12,449 We do not currently have any purchased intangible assets with indefinite useful lives. As of June 30, 2021, future estimated amortization expense is as follows: Years Ending June 30, (In thousands) 2022 2023 2024 2025 2026 Total amortization expense Goodwill 2,240 2,240 2,240 1,785 850 9,355 $ Our goodwill balance at June 30, 2021 and 2020 was $15,810,000. Warranty Reserve The following table presents details of our warranty reserve: Beginning balance Warranty reserve assumed from acquisition of Intrinsyc Charged to cost of revenues Usage Ending balance $ $ Years Ended June 30, 2021 2020 (In thousands) 181 – 226 (210) 197 $ $ 116 118 181 (234) 181 2021 Annual Report - signed copy 7.pdf 67 9/30/21 3:54 PM F-17 Other Liabilities The following table presents details of our other liabilities: June 30, 2021 2020 Accrued variable consideration Customer deposits and refunds Accrued raw materials purchases Deferred revenue Lease liability Taxes payable Warranty reserve Accrued operating expenses Total other current liabilities Non-current Lease liability Deferred revenue Total other non-current liabilities Computation of Net Loss per Share The following table presents the computation of net loss per share: Numerator: Net loss Denominator: Weighted-average shares outstanding - basic and diluted Net loss per share - basic and diluted $ $ $ $ $ $ $ (In thousands) 1,347 1,133 176 850 1,174 388 197 2,063 7,328 $ 1,155 241 1,396 $ $ 1,462 628 272 658 1,273 395 181 1,439 6,308 1,796 166 1,962 Years Ended June 30, 2021 2020 (In thousands, except per share data) (4,044) $ (10,738) 28,708 (0.14) $ 25,281 (0.42) 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 Years Ended June 30, 2021 2020 (In thousands) 823 1,675 2021 Annual Report - signed copy 7.pdf 68 9/30/21 3:54 PM F-18 Severance and Related Charges The following table presents details of the liability we recorded related to restructuring, severance and related activities during the current fiscal year: Beginning balance Charges Payments Ending balance Year Ended June 30, 2021 (In thousands) $ $ 615 506 (1,033) 88 The ending balance is recorded in accrued payroll and related expenses on the accompanying consolidated balance sheet at June 30, 2021. Supplemental Cash Flow Information The following table presents non-cash investing and financing transactions excluded from the consolidated statements of cash flows: Share consideration for acquisition of Intrinsyc Accrued property and equipment paid for in the subsequent period $ $ 5. Bank Loan Agreements Years Ended June 30, 2021 2020 (In thousands) – 217 $ $ 15,574 149 On November 12, 2019, we entered into a Second Amended and Restated Loan and Security Agreement (“Amended Agreement”) with Silicon Valley Bank (“SVB”), which amended, restated and superseded our previous agreement with SVB in its entirety. Pursuant to the Amended Agreement, SVB made available to us a senior secured revolving line of credit of up to $6,000,000 (“Revolving Facility”) and a senior secured term loan of $6,000,000 (“Term Loan Facility”). Advances under the Revolving Facility could be borrowed from time to time prior to November 12, 2021, subject to the satisfaction of certain conditions, and could be used to fund our working capital and general business requirements. The $6,000,000 proceeds of the Term Loan Facility were drawn in full in November 2019 and were used to fund our acquisition of Intrinsyc, which occurred in January 2020. The Revolving Facility was scheduled to mature on November 12, 2021. There were no borrowings on the Revolving Facility at June 30, 2021. The Term Loan Facility was repayable over a 48 month period commencing January 1, 2020. The interest rate on the Revolving Facility floats at a rate per annum equal to the greater of the prime rate and 5.00 percent. The interest rate on the Term Loan Facility floats at a rate per annum equal to the greater of 1.00 percent above the prime rate and 6.00 percent. We could elect to repay and reborrow the amounts outstanding under the Revolving Facility at any time prior to the maturity date of the Revolving Facility without premium or penalty. We could elect to repay the Term Loan Facility at any time without premium or penalty in minimum amounts equal to at least $1,000,000. 2021 Annual Report - signed copy 7.pdf 69 9/30/21 3:54 PM F-19 The following table summarizes our outstanding debt: Outstanding borrowings on Term Loan Facility Less: Unamortized debt issuance costs Net Carrying amount of debt Less: Current portion Non-current portion $ $ June 30, 2021 2020 $ (In thousands) 3,750 (68) 3,682 (1,472) 2,210 $ 5,250 (96) 5,154 (1,472) 3,682 During the year ended June 30, 2021 we recognized $278,000 of interest expense in our consolidated statements of operations related to interest and amortization of debt issuance associated with the outstanding Term Loan Facility. As discussed further below in the section entitled “New Financing Arrangements” the balance of the Term Loan Facility was fully paid off in August 2021. The Amended Agreement included a financial covenant that required that we maintain a minimum cash balance of $3,000,000 at SVB, as measured at the end of each month. The Amended Agreement also required that we did not exceed a maximum leverage ratio, calculated as the ratio of funded debt to the consolidated trailing 12 month earnings before interest, taxes, depreciation and amortization, and certain other allowable exclusions of (i) 3.0 to 1.0 for each calendar quarter ending December 31, 2019 through and including December 31, 2020, (ii) 2.5 to 1.0 for each calendar quarter ending March 31, 2021 through and including December 31, 2021, and (iii) 2.0 to 1.0 for each calendar quarter ending after January 1, 2022. We were in compliance with all covenants under the Amended Agreement as of June 30, 2021. The following table presents certain information with respect to the Revolving Facility: Outstanding borrowings on the line of credit Available borrowing capacity on the line of credit Outstanding letters of credit June 30, 2021 2020 (In thousands) – 6,000 51 $ $ $ – 5,602 51 $ $ $ Our outstanding letters of credit at June 30, 2021 and 2020 were used as security deposits. New Financing Arrangements In connection with the Transaction on the Closing Date (refer to Note 3), we entered into (i) a Third Amended and Restated Loan and Security Agreement with SVB, pursuant to which SVB made a term loan of $17,500,000 on the Closing Date and will make available a revolving credit facility of up to $2,500,000 (the term loan facility and the revolving credit facility, the “Senior Credit Facilities”) and (ii) Mezzanine Loan and Security Agreement with SVB Innovation Credit Fund VIII, L.P. (“Lender”), pursuant to which Lender funded on the Closing Date a $12,000,000 term loan facility (the “Mezzanine Credit Facility”). The proceeds of the Senior Credit Facilities were used to refinance our outstanding obligations owing to SVB under our existing Amended Agreement discussed above, and the remaining proceeds of the Senior Credit Facility and the proceeds from the Mezzanine Facilities were used to fund the purchase price of the TN Companies, to pay related fees and expenses, and will be available for working capital and general corporate purposes. 2021 Annual Report - signed copy 7.pdf 70 9/30/21 3:54 PM F-20 The Senior Credit Facilities mature on August 2, 2025 and the Mezzanine Credit Facility matures on February 2, 2026. Advances under the Senior Credit Facilities bear interest at LIBOR or the Prime Rate, at the option of Lantronix, plus a margin that ranges from 3.00% to 4.00% in the case of LIBOR and 1.50% to 2.50% in the case of the Prime Rate, depending on the total leverage of the Borrowers and their subsidiaries with a LIBOR floor of 0.50% and a Prime Rate floor of 3.25%. Advances under the Mezzanine Credit Facility bear interest at LIBOR or the Prime Rate, at the option of Lantronix, plus a margin of 9.00% with a floor of 1.00% in the case of LIBOR and a margin of 7.50% with a floor of 3.50% in the case of the Prime Rate. We are also obligated to pay other customary facility fees for credit facilities of the similar size and type. The Senior Credit Facilities and Mezzanine Credit Facility require Lantronix and its subsidiaries, on a consolidated basis, to comply with a maximum senior leverage ratio, a minimum fixed charge coverage ratio and a minimum liquidity test. In addition, the Senior Credit Facilities and the Mezzanine Credit Facility contain customary representations and warranties, affirmative and negative covenants, including covenants that limit or restrict Lantronix and its subsidiaries’ ability to incur liens, incur indebtedness, dispose of assets, make investments, make certain restricted payments, merge or consolidate and enter into certain speculative hedging arrangements. The Senior Credit Facilities and Mezzanine Credit Facility include a number of events of default, including, among other things, non-payment defaults, covenant defaults, cross-defaults to other materials indebtedness, bankruptcy and insolvency defaults and material judgment defaults. If any event of default occurs (subject, in certain instances, to specified grace periods), the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Senior Credit Facilities and Mezzanine Credit Facility may become due and payable immediately. 6. Stockholders’ Equity 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. In November 2020, our stockholders voted to approve the 2020 Performance Incentive Plan (the “2020 Plan”), replacing our Amended and Restated 2010 Stock Incentive Plan (the “2010 Plan”), which expired in September 2020. At the 2010 Plan’s expiration date, approximately 1,097,000 shares of our common stock that remained available for award grants under the 2010 Plan became available for award grants under the 2020 Plan. An additional 2,500,000 shares our common stock are also available for award grants under the 2020 Plan. In addition, any shares of common stock subject to outstanding awards under the 2010 Plan that expire, are cancelled, or otherwise terminate after the expiration date of the 2010 Plan will be available for award grant purposes under the 2020 Plan. The 2020 Plan authorizes awards of stock options (both non-qualified and incentive), 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. At June 30, 2021, approximately 2,995,000 shares remain available for issuance under the 2020 Plan. We have also granted stock options and RSUs under individual inducement award agreements. The Compensation Committee of our board of directors determines eligibility, vesting schedules and exercise prices for stock options and shares granted under the plans. Stock options are generally granted with an exercise price equal to the market price of our common stock on the grant date. Stock options 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, 2021, no stock appreciation rights or non-vested stock was outstanding. No income tax benefit was realized from activity in the share-based plans during the fiscal years ended June 30, 2021 and 2020. Stock Option Awards The fair value of each stock option grant is estimated on the grant date using the Black-Scholes-Merton option-pricing formula. Expected volatilities are based on the historical volatility of our stock price. The expected term of stock 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. 2021 Annual Report - signed copy 7.pdf 71 9/30/21 3:54 PM F-21 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 Years Ended June 30, 2021 2020 7.0 69% 0.59% 0.00% 4.3 65% 1.56% 0.00% The following table presents a summary of activity for all of our stock options: Number of Shares (In thousands) Weighted-Average Exercise Price Per Share Remaining Contractual Term (In years) Aggregate Intrinsic Value (In thousands) Balance of options outstanding at June 30, 2020 Options granted Options forfeited Options expired Options exercised Balance of options outstanding at June 30, 2021 Options exercisable at June 30, 2021 2,055 50 (38) (18) (352) 1,697 1,278 $ $ $ 2.72 4.41 1.81 2.20 1.79 2.98 2.71 3.9 3.5 $ $ 3,699 3,123 The following table presents a summary of grant date fair value and intrinsic value information for all of our stock options: Years Ended June 30, 2021 2020 (In thousands, except per share data) Weighted-average grant date fair value per share Intrinsic value of options exercised $ $ 2.84 1,110 $ $ 1.90 1,850 Restricted Stock Units The fair value of our RSUs is based on the closing market price of our common stock on the grant date. 2021 Annual Report - signed copy 7.pdf 72 9/30/21 3:54 PM F-22 The following table presents a summary of activity with respect to our RSUs during the fiscal year ended June 30, 2021: Weighted-Average Grant Date Fair Value per Share Number of Shares (In thousands) 927 400 (45) (364) 918 $ $ 3.93 4.69 3.00 3.77 4.14 Balance of RSUs outstanding at June 30, 2020 Granted Forfeited Vested Balance of RSUs outstanding at June 30, 2021 Performance Stock Units Fiscal 2021 Grant In November 2020, we granted 415,000 RSUs with performance-based vesting requirements (“performance stock units” or “PSUs”) to certain executive employees. One third of the PSUs are eligible to vest in each of the three years beginning with the fiscal year ended June 30, 2021 if certain earnings per share and revenue targets are met. Fiscal 2020 Grants In October 2019, we granted 975,000 PSUs to certain executive employees. In February 2020, we granted an additional 70,000 PSUs with performance-based vesting requirements and vesting schedule identical to those granted in October 2019. One third of the PSUs are eligible to vest in each of the three years beginning in fiscal 2020 if certain earnings per share, revenue targets and market conditions are met. The estimate of the grant date fair value and related share-based compensation expense of these awards included the use of a Monte Carlo simulation. The Monte Carlo simulation incorporates estimates of the potential outcomes of the market condition of these awards, which is based on the relative total shareholder return of the Company as compared to that of the Russell Microcap Index. The following table presents a summary of activity with respect to our PSUs during the fiscal year ended June 30, 2021: Balance of PSUs outstanding at June 30, 2020 Granted Forfeited Vested Balance of PSUs outstanding at June 30, 2021 Number of Shares (In thousands) 985 415 (115) (201) 1,084 2021 Annual Report - signed copy 7.pdf 73 9/30/21 3:54 PM F-23 Employee Stock Purchase Plan Our 2013 Employee Stock Purchase Plan (“ESPP”) is intended to provide employees with an opportunity to purchase our common stock through accumulated payroll deductions at the end of a specified purchase period. Each of our employees (including officers) is eligible to participate in our ESPP, subject to certain limitations as set forth in our ESPP. The ESPP currently operates with six month offering periods commencing on the first trading day on or after May 16 and November 16 of each year (an “Offering Period”). Common stock may be purchased under the ESPP at the end of each six-month Offering Period unless the participant withdraws or terminates employment earlier. Shares of the Company’s common stock may be purchased under the ESPP at a price not less than 85% of the lesser of the fair market value of our common stock on the first or last trading day of each Offering Period. The per share fair value of stock purchase rights granted under the ESPP was estimated using the following weighted-average assumptions: Expected term (in years) Expected volatility Risk-free interest rate Dividend yield Years Ended June 30, 2021 2020 0.5 62% 0.08% 0.00% 0.5 61% 1.00% 0.00% The following table presents a summary of activity under our ESPP during the fiscal year ended June 30, 2021: Shares available for issuance at June 30, 2020 Shares issued Shares available for issuance at June 30, 2021 Weighted-average purchase price per share Intrinsic value of ESPP shares on purchase date Share-Based Compensation Expense Year Ended June 30, 2021 (In thousands, except per share data) 404 (154) 250 3.36 225 $ $ The following table presents a summary of share-based compensation expense included in each applicable 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, 2021 2020 (In thousands) $ $ 281 2,719 584 3,584 $ $ 227 2,959 453 3,639 2021 Annual Report - signed copy 7.pdf 74 9/30/21 3:54 PM F-24 The following table presents a summary of the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of June 30, 2021: Stock options RSUs PSUs Common stock purchase rights under ESPP Remaining Unrecognized Compensation Expense (In thousands) $ 864 3,404 958 86 Remaining Weighted-Average Years to Recognize 1.7 2.6 1.5 0.4 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 expense will increase to the extent that we grant additional share-based awards. 7. Retirement Plan We have a retirement savings plan (the “Plan”) to which eligible employees may elect to make contributions through salary deferrals up to 100% of their base pay, subject to limitations. We made approximately $280,000 and $219,000 in matching contributions to participants in the Plan during the fiscal years ended June 30, 2021 and 2020, respectively. In addition, we may make discretionary profit-sharing contributions, subject to limitations. During the fiscal years ended June 30, 2021 and 2020, we made no such contributions to the Plan. 8. Income Taxes The provision for income taxes consists of the following components: Current: Federal State Foreign Total Current taxes Deferred: Federal State Foreign Provision for income taxes Years Ended June 30, 2021 2020 (In thousands) $ $ 8 5 182 195 – – – 195 $ $ (2) 4 142 144 – – – 144 2021 Annual Report - signed copy 7.pdf 75 9/30/21 3:54 PM F-25 The following table presents U.S. and foreign income (loss) before income taxes: Years Ended June 30, 2021 2020 United States Foreign Loss before income taxes $ $ (In thousands) (3,294) (555) (3,849) $ $ 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 Lease liabilities Depreciation and amortization Other Gross deferred tax assets Valuation allowance Deferred tax assets, net Deferred tax liabilities: State taxes Right-of-use assets Deferred tax liabilities Net deferred tax assets (liabilities) Years Ended June 30, 2021 2020 (In thousands) $ $ 20,281 1,537 1,579 748 459 1,572 285 26,461 (25,588) 873 (388) (485) (873) – $ $ (7,048) (3,546) (10,594) 20,640 1,205 986 631 458 790 130 24,840 (24,056) 784 (343) (441) (784) – We have recorded a valuation allowance against our deferred tax assets, due to uncertainties surrounding the realization of the deferred tax assets. The following table presents a reconciliation of the provision for income taxes to taxes computed at the U.S. federal statutory rate: Statutory federal provision (benefit) for income taxes Increase (decrease) resulting from: Stock options Other permanent differences Change in valuation allowance Foreign tax credit Global intangible low-tax income inclusion Controlled foreign corporation inclusion Foreign tax rate variances Acquisition costs Other Provision for income taxes $ $ Years Ended June 30, 2021 2020 (In thousands) (809) $ (320) (9) 1,285 (84) 82 – 299 53 (302) 195 $ (2,224) (121) 10 1,467 (67) 86 4 886 – 103 144 2021 Annual Report - signed copy 7.pdf 76 9/30/21 3:54 PM F-26 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. Due to 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, 2021 (In thousands) $ $ 91,974 11,038 For federal income tax purposes, our NOL carryovers generated for tax years beginning before July 1, 2018 began to expire in the fiscal year ended June 30, 2021. Of our federal NOLs as of June 30, 2021 in the table above, approximately $51,862,000 will expire by June 30, 2023. Pursuant to the Tax Cuts and Jobs Act (the “2017 Act”) enacted by the U.S. federal government in December 2017, for federal income tax purposes, NOL carryovers generated for our tax years beginning after June 30, 2018 can be carried forward indefinitely but will be subject to a taxable income limitation. For state income tax purposes, our NOLs began to expire in the fiscal year ended June 30, 2013. We continue to assert that our foreign earnings are indefinitely reinvested in our overseas operations and as such, deferred income taxes were not provided on undistributed earnings of certain foreign subsidiaries. The 2017 Act created a requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (“GILTI”), must be included in the gross income of their U.S. shareholder. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. During the fiscal years ended June 30, 2021 and 2021, we elected to treat the tax effect of GILTI as a current-period expense when incurred. Unrecognized Tax Benefits The following table summarizes our liability for uncertain tax positions for the fiscal year ended June 30, 2021: Balance as of June 30, 2020 Change in balances related to uncertain tax positions Balance as of June 30, 2021 Year Ended June 30, 2021 (In thousands) $ $ 6,600 – 6,600 At June 30, 2021, we had $6,600,000 of gross unrecognized tax benefits which was recorded as a reduction to deferred tax assets, and a corresponding reduction in our valuation allowance of $6,600,000. 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, 2021 and 2020, we recorded an immaterial expense for interest and penalties related to income tax matters in the provision for income taxes. At June 30, 2021, we had approximately $265,000 of accrued interest and penalties related to uncertain tax positions. 2021 Annual Report - signed copy 7.pdf 77 9/30/21 3:54 PM F-27 At June 30, 2021, our fiscal years ended June 30, 2018 through 2021 remain open to examination by the federal taxing jurisdiction and our fiscal years ended June 30, 2017 through 2021 remain open to 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. Our fiscal years ended June 30, 2014 through 2021 remain open to examination by foreign taxing authorities. We currently do not anticipate that the amount of unrecognized tax benefits as of June 30, 2021 will significantly increase or decrease within the next 12 months. 9. Leases Our leases include office buildings for various facilities worldwide which are all classified as operating leases. We also have financing leases related to some office equipment in the United States. Components of lease expense and supplemental cash flow information: Components of lease expense Operating lease cost Financing lease cost Supplemental cash flow information Cash paid for amounts included in the measurement of operating lease liabilities Cash paid for amounts included in the measurement of financing lease liabilities Right-of-use assets obtained in exchange for lease obligation Year Ended June 30, 2021 (In thousands) 1,805 9 1,344 9 613 $ $ $ $ The weighted-average remaining lease term is 1.3 years. The weighted-average discount rate is 6.11 percent. Maturities of lease liabilities as of June 30, 2021 were as follows: Years ending June 30, Operating Financing 2022 2023 2024 2025 2026 Total remaining lease payments less: imputed interest Lease liability Reported as: Current liabilities Non-current liabilities $ $ $ $ (In thousands) 1,278 530 402 198 107 2,515 (207) 2,308 $ 1,165 1,143 $ 9 9 3 – – 21 – 21 9 12 2021 Annual Report - signed copy 7.pdf 78 9/30/21 3:54 PM F-28 10. Commitments and Contingencies From time to time, we are subject to 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. 11. Significant Geographic, Customer and Supplier Information The following table presents our sales within geographic regions as a percentage of net revenue, which is based on the “bill-to” location of our customers: Americas Europe, Middle East, and Africa Asia Pacific Japan Total Years Ended June 30, 2021 2020 54% 24% 22% 100% 56% 26% 18% 100% The following table presents sales to significant countries as a percentage of net revenue, which is based on the “bill-to” location of our customers: U.S. and Canada Germany Taiwan Japan Hong Kong * Less than 5% Years Ended June 30, 2021 2020 53% 10% 6% 6% –* 48% 18% –* 5% 6% Long-lived assets, which consists of property and equipment, net, lease right-of-use assets, purchased intangible assets, net, and goodwill by geographic area are as follows: U.S. Canada Rest of world June 30, 2021 2020 (in thousands) 15,737 12,619 817 29,173 $ $ 16,891 15,973 327 33,191 $ $ 2021 Annual Report - signed copy 7.pdf 79 9/30/21 3:54 PM F-29 Customers The following table presents sales to our significant customers as a percentage of net revenue: Top five customers (1) Ingram Micro Years Ended June 30, 2021 2020 37% 15% 36% 16% (1) Includes Ingram Micro the fiscal years ended June 30, 2021 and 2020. No other customer represented more than 10% of our annual net revenue during these fiscal years. Related Party Transactions We had no net revenue from related parties for the fiscal years ended June 30, 2021 and 2020. Suppliers We do not own or operate a manufacturing facility. All of our products are manufactured by third-party contract manufacturers and foundries primarily located in Thailand, Taiwan and China. 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. 2021 Annual Report - signed copy 7.pdf 80 9/30/21 3:54 PM F-30 2021 Annual Report - signed copy 6.pdf 79 9/30/21 3:29 PM 2021 Annual Report - signed copy 6.pdf 79 9/30/21 3:29 PM Board of Directors Management Team Stockholder Information Bernhard Bruscha Chairman of the Board of Lantronix, Inc. Paul Pickle President & Chief Executive Officer of Lantronix, Inc. Margaret Evashenk Former Chief Executive Officer, Kazan Networks Paul Folino Former Executive Chairman, Emulex Corporation Hoshi Printer Board Advisor and Member for various private companies Paul Pickle President & Chief Executive Officer Jeremy Whitaker Chief Financial Officer Michael Fink Vice President, Operations David Goren Vice President, Human Resources, Legal & Business Affairs; Secretary Fathi Hakam Vice President, Engineering Roger Holliday Vice President, Worldwide Sales Jacques Issa Vice President, Marketing 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 Stock Market LLC under the symbol LTRX. Annual Stockholder Meeting The Annual Meeting of Stockholders for Lantronix, Inc. will be held on November 9, 2021, at the Company’s corporate headquarters. Independent Auditors Baker Tilly US, LLP Newport Beach, CA 92660 Transfer Agent and Registrar Computershare 250 Royall Street Canton, MA 02021 877.854.4580 www.computershare.com Investor Relations Jeremy Whitaker Chief Financial Officer investors@lantronix.com 949.450.7241 This Annual Report contains forward-looking statements, including statements concerning our projected operating and financial performance for fiscal 2022, our efforts to integrate our newest acquisitions and our expectations concerning the associated operating synergies and efficiencies of scale, and the short- and long-term impact of COVID-19 and potential variants as well as supply chain disruptions on our business. These forward-looking statements are based on the company’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, including: the impact of the COVID-19 pandemic, including the emergence of new more contagious and/or vaccine-resistant strains of the virus and the impact of vaccination efforts, including the efficacy and public acceptance of vaccinations, on our business, employees, supply and distribution chains and the global economy; the effects of negative or worsening regional and worldwide economic conditions or market instability on our business; constraints or delays in the supply of certain materials or components; difficulties associated with our contract manufacturers or suppliers; difficulties associated with our distributors or resellers; our ability to successfully implement our acquisitions strategy or integrate acquired companies; and other risks and uncertainties listed in this Annual Report. You should not place undue reliance on these forward-looking statements, which speak only as of the date hereof, and the company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances. LAN AnnRep 4p US 9-29 B to 9-30.indd 3 LAN AnnRep 4p US 9-29 B to 9-30.indd 3 9/30/21 4:16 PM 9/30/21 4:16 PM LAN AnnRep 4p US 9-29 B to 9-30.indd 4 LAN AnnRep 4p US 9-29 B to 9-30.indd 4 9/30/21 4:16 PM 9/30/21 4:16 PM