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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.
48 Discovery, Suite 250 Board of Directors Bernhard BruschaChairman of the Board of Lantronix, Inc.Paul PicklePresident & Chief Executive Officer of Lantronix, Inc.Margaret EvashenkFormer Chief Executive Officer, Kazan NetworksPaul FolinoFormer Executive Chairman, Emulex CorporationHoshi PrinterBoard Advisor and Member for various private companiesPaul PicklePresident & Chief Executive Officer Jeremy WhitakerChief Financial OfficerMichael FinkVice President, OperationsDavid GorenVice President, Human Resources, Legal & Business Affairs; SecretaryFathi HakamVice President, EngineeringVice President, Worldwide Sales Jacques Issa Vice President, Marketing Stockholder InformationCorporate HeadquartersLantronix, Inc.Irvine, CA 92618 949.453.3990 www.lantronix.comStock ListingThe Company’s common stock trades on The Nasdaq Stock Market LLC under the symbol LTRX.Annual Stockholder MeetingThe Annual Meeting of Stockholders for Lantronix, Inc. will be held on November 9, 2021, at the Company’s corporate headquarters.Independent AuditorsBaker Tilly US, LLP Newport Beach, CA 92660Transfer Agent and RegistrarComputershare250 Royall StreetCanton, MA 02021 877.854.4580 www.computershare.comInvestor RelationsJeremy WhitakerChief Financial Officer investors@lantronix.com 949.450.7241Management Team Roger HollidayThis Annual Report contains forward-looking statements, including statements concerning our projected operating and financial performance for fiscal 2023, 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.September 29, 2022 Dear Fellow Shareholders, Fiscal 2022 was a watershed year for us here at Lantronix, and I am pleased to provide you with a short recap of our results. Revenues in Fiscal 2022 totaled $129.7 million, up a record setting 81 percent year-over-year. In part, the record revenue growth in Fiscal 2022 was driven by the acquisition of Transition Networks early in the fiscal year with 31 percent of our total revenue growth coming organically from our pre-existing business. This organic growth is extremely important to us because it underscores the ability of the company to grow without the benefit of future acquisitions. While we intend to continue to use acquisitions as a tool to more rapidly build out our capabilities, increase our scale and profitability and deliver on the high-growth IoT opportunity, we believe the ability to grow organically is critical to our long-term success. As we turn our focus to Fiscal 2023 our outlook is for more of the same. On our recent Fourth Quarter Fiscal 2022 earnings press release, we guided for 15–25 percent year-over-year revenue growth in Fiscal 2023. We have some key design wins that are scheduled to enter production over the next few quarters that will drive much of this growth, and we continue to be confident in our projections. While organic growth will go a long way towards getting us where we want to be, we will also continue to target smart acquisitions that will improve our scale, complement our existing technologies and enable us to deliver system solutions to our customers. To that end, on September 12, Lantronix announced its acquisition of Uplogix, an Out-of-Band (OOB) data center remote management solutions supplier. This acquisition includes a high-end product offering to complement our existing OOB solutions, a number of high-quality federal customers, such as the Social Security and Veterans’ Administrations, and a talented design team. A long-time player in OOB ourselves, Lantronix can immediately plug this product portfolio into our worldwide sales team and drive it to new markets. Furthermore, we will approach our new customers with the full depth of Lantronix solutions that can help them meet their future needs. Uplogix is already profitable, but together, we have an opportunity to deliver revenue growth, economies of scale and improved profitability.While Fiscal 2023 has just begun, we have great plans for the future, and we are hard at work to deliver for our shareholders. As always, there will be challenges. Although we have seen some improvement, supply chain disruptions and shortages continue, and prices remain inflated while concerns around the economy are growing. Looking at our backlog and the volume production of key programs commencing shortly, we believe we are more than prepared to deliver in Fiscal 2023. I look forward to sharing our successes with you over the course of the coming year. Sincerely, Paul PicklePresident and Chief Executive Officer [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, 2022
☐☐ 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.)
48 Discovery, Suite 250 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 ☒☒
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, 2021, the last trading day of the registrant’s second fiscal
quarter, was approximately $214,675,000. The determination of affiliate status for this purpose shall not be a conclusive determination
for any other purpose.
As of August 25, 2022, there were 35,136,540 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 2022 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.
LANTRONIX, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2022
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
PART I
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 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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
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* Not required for a “smaller reporting company.”
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended June 30, 2022, 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.
ii
ITEM 1.
BUSINESS
Overview
PART I
Lantronix, Inc. is a global Industrial and Enterprise IoT provider of solutions that target diversified verticals ranging from Smart
Cities, Utilities and Healthcare to Enterprise, Intelligent Transportation, and Industrial Automation. Building on a long history of
connectivity and video processing competence, target applications include Video Surveillance, Traffic management, Infotainment
systems, Robotics, Edge Computing and Remote Environment Management (“REM”).
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.
We organize our portfolio services and products into the following product lines: Embedded IoT Modules, IoT Systems Solutions, and
Software and Engineering Services.
We were incorporated in California in 1989 and reincorporated in Delaware in 2000.
References in this Report to “fiscal 2022” refer to the fiscal year ended June 30, 2022 and references to “fiscal 2021” refer to the fiscal
year ended June 30, 2021. 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 reduce costs. 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 are addressing
the market opportunity by offering our customers turnkey solutions, leveraging the layers of the IoT Stack, such as Collect, Connect,
Compute, Control and Comprehend, through a combination of services, hardware and software enablement, 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 applications.
Recent Acquisitions
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.
These acquisitions allow us to offer more value to our customers and substantially increase the markets that we serve.
Products and Solutions
Embedded IoT Modules
This portfolio of embedded products provides a variety of solutions including Compute System-on-Module (SOM) or System-in-
Package (SIP) solutions supplemented with wired and wireless network Connectivity options. As the level of silicon integration
1
continues to grow, the compute modules also provide the ability to Collect digital information (Video, Audio or Sensors) and
analyze/comprehend the data streams based on specific AI/ML algorithms. The new implementations of SIP devices can process
multiple media streams with CV (Computer Vision) technology and the modules can be Controlled remotely via ConsoleFlow™,
Lantronix’s Cloud SaaS platform. Our IoT compute products typically are embedded into a customer product, enabling advanced
application functionality at the edge. 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
embedded products are pre-certified in a number of countries thereby significantly reducing our OEM customers’ regulatory
certification costs and accelerating their time to market
The following product families are included in our Embedded IoT Solutions product line: XPort®, XPort® Pro, WiPort®, System on
Module (“SoM”), Single Board Computer (“SBC”), Development Kits, MicroM110, xPico®, xPico® Wi-Fi, NICS, Optical SFPs,
PremierWave® EN, and PremierWave® XC.
IoT System Solutions
The IoT Systems Solutions portfolio consists of fully functional standalone systems that provider routing, switching or gateway
functionalities as well as Telematics and media conversion. 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. Most of our IoT System 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 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. 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. 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.
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 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.
As Edge Computing deployment accelerates, REM allows for full comprehension and control of a remote IT infrastructure, across a
range of sensors (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.
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 IoT System Solutions product line: EDS, EDS-MD, xPress™, xDirect®, E21x, E22x,
G52x, X30x, Bolero4x, FOX3-4G, FOX4, SGX™, SLB™, SLC™8000, Spider™, UDS, EMG™. S40 and Power over Ethernet
Switches. In addition, we offer non-PoE Network Switches and Media Converters.
Software and Engineering Services
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
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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.
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.
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. We also offer services for mechanical, hardware, and software engineering for camera, audio, and
artificial intelligence / machine learning development.
The following product families are included in our Software & Services product line: Engineering Services, ConsoleFlow™, Level
Services and J-Integra.
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 designed into products 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 IoT System 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.
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
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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 four third-party contract manufacturers. We currently utilize Hana
Microelectronics, primarily located in Thailand and China, Honortone, primarily located in China, Ruby Tech in Taiwan, and Tailyn
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.
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, 2022, we had 348 total employees including 335 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
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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
52
52
54
63
Position
President and Chief Executive Officer
Chief Financial Officer
Vice President of Engineering
Vice President of Worldwide Sales
PAUL H. PICKLE has served as our President and Chief Executive Officer, and as a member of our Board, since April 2019. Before
joining Lantronix, 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 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.
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
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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 ongoing COVID-19 pandemic, and the periodic measures intended to reduce its spread imposed by governments and other
authorities around the world, including restrictions on freedom of movement and business operations such as travel bans, border
closings, business limitations and closures, quarantines and shelter-in-place orders, have had, and may continue to have, an adverse
impact on the economy generally, our business and the businesses of our suppliers, and our results of operations and financial
condition. 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, which may ultimately result in lower work efficiency and productivity, and in turn
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 has negatively affected our sales since the beginning of the outbreak. While most 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 ongoing 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:
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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 has limited and could further 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 long-term effects 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 have experienced and may in the future 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 in the past and may in the future be subject to market shortages and substantial price fluctuations, whether due to the COVID-19
pandemic, the war between Ukraine and Russia, recent tensions between China and Taiwan or otherwise. 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
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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.
Future operating results depend upon our ability to timely obtain components in sufficient quantities and on acceptable terms.
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:
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reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
lack of guaranteed production capacity or product supply;
reliance on these manufacturers to maintain competitive manufacturing technologies;
unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
reduced protection for intellectual property rights in some countries;
differing labor regulations;
disruptions to the business, financial stability or operations, including due to strikes, labor disputes or other disruptions to
the workforce, of these manufacturers;
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 or geopolitical conflicts 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.
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
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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 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.
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 forecast our manufacturing and inventory requirements.
We use forecasts based on anticipated product orders to manage our manufacturing and inventory levels and other aspects of our
business. However, several factors contribute to a lack of visibility with respect to future orders, including:
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the lengthy and unpredictable sales cycle for our products that can extend from six to 24 months or longer;
the project-driven nature of many of our customers’ requirements;
we primarily sell our products indirectly through distributors;
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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.
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 44% of our net revenue in fiscal 2022. 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
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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.
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.
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.
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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.
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.
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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:
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laws and contractual restrictions might not be sufficient to prevent misappropriation of our technology or deter others from
developing similar technologies;
other companies might claim intellectual property rights based upon prior use that negatively impacts our ability to enforce
our trademarks and patents; 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.
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.
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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, but not limited to:
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to fund working capital requirements;
to update, enhance or expand the range of products we offer;
to refinance existing indebtedness;
to increase our sales and marketing activities; or
to respond to competitive pressures or perceived opportunities, such as investment, acquisition and international expansion
activities.
We may seek additional capital from public or private offerings of our capital stock, borrowings under our existing or future credit
lines or other sources. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution,
and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In
addition, if we raise additional funds through collaborations, licensing, joint ventures, or other similar arrangements, it may be
necessary to relinquish valuable rights to our potential future products or proprietary technologies, or grant licenses on terms that are
not favorable to us. There can be no assurance that we will be able to raise any 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 Senior Credit Facilities may restrict our financial and operational flexibility and, in certain cases, our ability to
operate.
The terms of our Senior Credit Facilities restrict, among other things, our 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.
Further, we are currently and may in the future be required to maintain specified financial ratios, including pursuant to a maximum
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,
SVB.
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, Brexit in
Europe, and the current war between Ukraine and Russia. 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, the potential for
increased trade barriers between the U.K. and the European Union, and export controls or other retaliatory actions against, or
restrictions on doing business with Russia, as well as any resulting disruption, instability or volatility in the global markets and
industries resulting from such conflict. 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.
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
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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.
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 U.K. 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.
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In particular, litigation regarding intellectual property rights occurs frequently in our industry. The results of litigation are inherently
uncertain, and adverse outcomes are possible. Adverse outcomes may have a material adverse effect on our business, financial
condition or results of operations.
There is a risk that other third parties could claim that our products, or our customers’ products, infringe on their intellectual property
rights or that we have misappropriated their intellectual property. In addition, software, business processes and other property rights in
our industry might be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality
of products in different industry segments overlaps. Other parties might currently have, or might eventually be issued, patents that
pertain to the proprietary rights we use. Any of these third parties might make a claim of infringement against us. The results of
litigation are inherently uncertain, and adverse outcomes are possible.
Responding to any infringement claim, regardless of its validity, could:
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be time-consuming, costly and/or result in litigation;
divert management’s time and attention from developing our business;
require us to pay monetary damages, including treble damages if we are held to have willfully infringed;
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.
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;
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• mergers and acquisitions; and
•
sales of common stock by our stockholders or us or repurchases of common stock by us.
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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.
ITEM 2.
PROPERTIES
The following table presents details regarding our leased facilities:
Locations
Irvine, California, U.S.A.
Primary Use
Corporate headquarters; sales and marketing, research and development,
operations and administration
Plymouth, Minnesota, U.S.A.
Vancouver, British Columbia, Canada
Hyderabad, India
Illmenau, Germany
Taiwan
Shanghai, China
Operations and warehousing, engineering, sales and marketing
Engineering
Engineering
Engineering, sales and marketing
Engineering, sales and marketing
Sales and marketing
Approximate
Square
Footage
14,000
66,000
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
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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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 25, 2022 was approximately 29.
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 2022.
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 Industrial and Enterprise internet of things (“IoT”) provider of solutions that target diversified verticals
ranging from Smart Cities, Utilities and Healthcare to Enterprise, Intelligent Transportation, and Industrial Automation. Building on a
long history of connectivity and video processing competence, target applications include Video Surveillance, Traffic management,
Infotainment systems, Robotics, Edge Computing and Remote Environment Management (“REM”).
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”).
References to “fiscal 2022” refer to the fiscal year ended June 30, 2022 and references to “fiscal 2021” refer to the fiscal year ended
June 30, 2021.
Products and Solutions
To more closely align the categorization of our product lines with how we position them in the marketplace, we have re-organized our
products and solutions. We now organize our products and solutions into three product lines: Embedded IoT Solutions, IoT System
Solutions, and Software & Services. Until this recent change, we had organized our products and solutions into three different product
lines: IoT, REM and Other. Going forward, we do not plan to disclose our net revenue by the old categorizations. 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
Acquisition
On August 2, 2021 we acquired the Transition Networks and Net2Edge businesses (the “TN Companies”) from Communication
Systems, Inc. (“CSI”) for an aggregate purchase price of approximately $30,651,000, which includes earnout payments of up to
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$7,000,000 depending on the achievement of certain revenue targets for the TN Companies. The TN Companies provide us with
complementary IoT connectivity products and capabilities, including switching, Power over Ethernet (“PoE”) 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. In January 2022, we repaid the $12,000,000 second term loan.
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.
Underwritten Offering
On November 18, 2021, we entered into an underwriting agreement (the “Underwriting Agreement”) with TL Investment GmbH (“TL
Investment”) and Canaccord Genuity LLC, as representative of the several underwriters named therein (together, the “Underwriters”),
relating to the Company’s offer and sale of 4,700,000 shares (the “Firm Shares”) of our common stock at an initial price to the public
of $7.50 per share. In addition, TL Investment granted the Underwriters a 30-day option to purchase up to an additional 705,000
shares (the “Option Shares”) of our common stock held by TL Investment at the public offering price, less the underwriting discounts.
On November 18, 2021, the Underwriters exercised their option to purchase the Option Shares from TL Investment in full. On
November 22, 2021, we issued and delivered the Firm Shares and TL Investment delivered the Option Shares.
Net proceeds to Lantronix from the offering of the Firm Shares, after deducting the underwriting discount and offering expenses, were
approximately $32,600,000.
COVID-19 Update
Since the outbreak of the COVID-19 pandemic, we have taken measures to protect the health and safety of our employees and comply
with applicable 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
on our business, as well as our customers’ and suppliers’ businesses, including the emergence of new strains of the virus, current or
future government-imposed shutdowns, and the impact of ongoing vaccination efforts.
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
experienced an increase in costs of components for certain products as well as increased freight and logistics costs and we expect these
cost increases to continue. 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, including the emergence of new,
highly-contagious variants, our ability to predict the impact of the COVID-19 pandemic on our business in future periods remains
limited. The full 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.
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.
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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.
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,
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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. In addition, specific reserve estimates are recorded to cover risks for end-of-life products, inventory located at our contract
manufacturers and warranty replacement stock. The estimates we use for demand are also used for near-term capacity planning and
inventory purchasing. Demand for our products can fluctuate significantly from period to period. A significant decrease in demand
could result in an increase in the amount of excess inventory on hand. In addition, our industry is characterized by rapid technological
change, frequent new product development and product obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Additionally, our estimates of future product demand and judgement to determine excess inventory may
prove to be inaccurate, in which case we may have understated or overstated the reduction to the total carrying value of our inventory
for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize
such costs in our cost of goods sold, resulting in a reduction in our gross margins, at the time of such determination. Although we
make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand
or technological developments could have a significant impact on the value of our inventory and our results of operations.
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 our estimates. Estimates associated with the accounting for acquisitions
20
may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related
expenses and related restructuring costs are recognized separately from the business combination and are expensed as incurred.
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. Some factors that we consider important in the qualitative
assessment which could trigger a goodwill impairment review include:
•
•
•
•
•
significant underperformance relative to historical or projected future operating results;
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
significant negative industry or economic trends;
a significant decline in our stock price for a sustained period; and
a significant change in our market capitalization relative to our book value.
Based on our 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 2022, 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,
2022, the carrying value of our single reporting unit was $79,900,000, while our market capitalization was $189,000,000. We
concluded that no goodwill impairment existed as of June 30, 2022.
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.
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.
21
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 stock options granted has historically been estimated using the simplified method,
as permitted by guidance issued by the Securities and Exchange Commission (“SEC”). We have used the simplified method because
we were generally 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. For new stock options granted beginning in the fiscal year ended June 30, 2022, we
estimated the expected term based on our recent historical exercise data. 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, 2022 and 2021
Summary
For fiscal 2022, our net revenue increased by $58,178,000, or 81.4%, compared to fiscal 2021. The increase in net revenue was driven
by a 144.0% increase in net revenue in our IoT System Solutions product line, as well as an increase of 60.0% in net revenues in our
Embedded IoT Solutions product line. We had a net loss of $5,362,000 for fiscal 2022 compared to a net loss of $4,044,000 for fiscal
2021. The increase in net loss was driven primarily by costs related to the TN acquisition as both SG&A and R&D expenses as a
percent of net revenue were lower in fiscal 2022 than fiscal 2021, largely because of our business integration efforts and capture of
significant cost synergies during fiscal 2022.
Net Revenue
The following tables present our net revenue by product lines and by geographic region:
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
2021
Change
$
%
Embedded IoT Solutions
IoT System Solutions
Software & Services
$
$
61,773
59,019
8,863
129,655
(In thousands, except percentages)
54.0% $
33.8%
12.2%
100.0% $
38,611
24,189
8,677
71,477
47.6% $
45.5%
6.9%
100.0% $
23,162
34,830
186
58,178
60.0%
144.0%
2.1%
81.4%
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
2021
Change
$
%
Americas
$
77,799
(In thousands, except percentages)
54.1% $
38,638
60.0% $
39,161
101.4%
22
EMEA
APJ
Embedded IoT Solutions
22,542
29,314
129,655
17.4%
22.6%
100.0% $
17,186
15,653
71,477
24.0%
21.9%
100.0% $
5,356
13,661
58,178
$
31.2%
87.3%
81.4%
Net revenue from our Embedded IoT Solutions product line increased in fiscal 2022 compared to fiscal 2021 primarily due to organic
growth in our compute modules and embedded ethernet connectivity products. In addition, the acquisition of the TN Companies
contributed approximately $7,200,000 in fiscal 2022 primarily in the Americas region.
IoT System Solutions
Net revenue from our IoT System Solutions product line increased in fiscal 2022 compared to fiscal 2021 primarily due to product
sales of our network switches and media converter products from the TN Companies acquisition, mostly in the Americas region. We
also experienced organic growth in our pre-acquisition business driven by (i) our out of band (“OOB”) products in the Americas, and
to a lesser extent, EMEA and APJ, and (ii) our device server products in the Americas and APJ regions. The overall increase in net
revenues was partially offset by a decrease in unit sales in our WiFi gateway products in the Americas and EMEA regions.
Software & Services
Net revenue from our Software & Services product line in fiscal 2022 was flat when compared to fiscal 2021. In fiscal 2022, we
experienced an increase in engineering consulting services revenue when compared to fiscal 2021. This increase was largely offset by
lower revenues from some of our software offerings compared to fiscal 2021 during which we had a large software license sale.
For comparative purposes, the following tables present our product line categorizations prior to our decision to reorganize how we
present this information during the fourth quarter of fiscal 2022. As discussed at Part I, Item 1 of this Report, going forward we do not
plan to disclose our net revenue by these categorizations.
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
2021
Change
$
%
IoT
REM
Other
Gross Profit
$
$
112,492
16,585
578
129,655
(In thousands, except percentages)
82.8% $
16.6%
0.6%
100.0% $
59,167
11,843
467
71,477
86.8% $
12.8%
0.4%
100.0% $
53,325
4,742
111
58,178
90.1%
40.0%
23.8%
81.4%
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.
The following table presents our gross profit:
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
2021
Change
$
%
Gross profit
$
55,586
(In thousands, except percentages)
46.2% $
33,025
42.9% $
22,561
68.3%
Gross profit as a percent of revenue (referred to as “gross margin”) for fiscal 2022 decreased compared to fiscal 2021 due primarily to
our revenue mix. We saw significant growth in unit sales of our compute modules and growth in our engineering services revenues,
which typically carry lower gross margins than many of our products. Gross margin for fiscal 2022 was also negatively impacted by
(i) higher supply chain and logistics costs and (ii) the amortization of unrealized profit in acquired inventory from the TN Companies
in the amount of approximately $380,000. The overall decrease in our gross margins in the current year period was partially offset by
growth in unit sales of our higher-margin OOB products, along with the margin contribution from the products acquired from the TN
Companies.
Selling, General and Administrative
23
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:
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
2021
Change
$
%
Personnel-related expenses
$
Professional fees and outside services
Advertising and marketing
Facilities and insurance
Share-based compensation
Other
Selling, general and administrative $
19,368
5,833
1,893
1,476
4,862
1,097
34,529
(In thousands, except percentages)
$
$
12,927
2,464
712
1,415
2,719
571
20,808
6,441
3,369
1,181
61
2,143
526
13,721
49.8%
136.7%
165.9%
4.3%
78.8%
92.1%
65.9%
26.6% $
29.1% $
Selling, general and administrative expenses increased in fiscal 2022 when compared to fiscal 2021 primarily (i) higher personnel-
related expenses as we added headcount from the acquisition of the TN Companies and also recorded higher variable compensation
expenses, (ii) increased professional fees and outside services costs for legal and other services, as well as transition services fees paid
to the seller for the acquisition of the TN Companies, (iii) increased share-based compensation expense due to additional grants of
performance stock units and other stock awards with higher fair values compared to the prior year and (iv) higher marketing spending,
including on various events and trade shows that were largely halted in the prior year due to the COVID-19 pandemic.
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:
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
2021
Change
$
%
$
Personnel-related expenses
Facilities
Outside services
Product certifications
Share-based compensation
Other
Research and development
$
11,408
2,351
1,158
817
1,015
938
17,687
7,954
1,335
209
531
584
500
11,113
13.6% $
15.5% $
(In thousands, except percentages)
$
$
3,454
1,016
949
286
431
438
6,574
43.4%
76.1%
454.1%
53.9%
73.8%
87.6%
59.2%
Research and development expenses increased in fiscal 2022 when compared to fiscal 2021 primarily due to (i) an increase in
personnel-related costs driven by additions to headcount from both the TN Companies acquisition and internal growth, (ii) higher
facility-related costs as we opened our new facility in Germany and expanded our engineering teams, (iii) increased outside services
costs primarily related to the timing of product development projects requiring outsourced engineering resources, and (iv) increased
share-based compensation expense due to additional grants of performance stock units and other stock awards with higher fair values
compared to the prior year.
Restructuring, Severance and Related Charges
Fiscal 2022
During fiscal 2022, we incurred charges of approximately $795,000 related to headcount reductions and restructuring of non-essential
operations, including certain functions determined redundant related to the acquisition of the TN Companies. 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.
24
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.
Acquisition-Related Costs
During fiscal 2022 and fiscal 2021, we incurred approximately $889,000 and $841,000 of acquisition-related costs, respectively,
mostly comprised of banking and legal fees related to the acquisition of the TN Companies and our exploration of other acquisition
targets.
Amortization of Purchased Intangible Assets
We acquired certain intangible assets through our recent 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 $5,590,000 and
$3,094,000 during fiscal 2022 and 2021, respectively.
Interest Income (Expense), Net
For fiscal 2022 and 2021, we incurred net interest expense from interest incurred on borrowings on our Credit Facilities. We also earn
interest on our domestic cash balances.
Loss on Extinguishment of Debt
For fiscal 2022, we recognized a non-cash loss on the extinguishment of our mezzanine term loan facility of $764,000, representing
the write-off of unamortized deferred financing costs.
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 on
disposal of certain property and equipment.
Provision for Income Taxes
The following table presents our provision for income taxes:
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
2021
Change
$
%
Provision (benefit) for income taxes $
(1,832 )
(In thousands, except percentages)
0.3% $
195
(1.4% ) $
(2,027 )
(1039.5% )
The following table presents our effective tax rate based upon our provision for income taxes:
Effective tax rate
Years Ended June 30,
2022
2021
25.5%
(5.1% )
We utilize the liability method of accounting for income taxes. In fiscal 2022 the tax benefit was the result of us recording a U.S.
deferred tax liability in the TN Companies acquisition purchase accounting related to non-tax-deductible intangible assets recognized
in our consolidated financial statements. The acquired deferred tax liabilities are a source of income to support recognition of our
existing deferred tax assets. The differences between our effective tax rate and the federal statutory rate in fiscal 2022 and fiscal 2021
were also impacted by 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 2022 and fiscal 2021.
25
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, 2022
(In thousands)
70,456
14,861
$
$
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, 2022 in the table above, approximately $26,500,000 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,
2022
2021
Change
$
$
54,512 $
17,221 $
(In thousands)
20,289 $
9,739 $
34,223
7,482
In November 2021, we sold 4,700,000 shares of our common stock in an underwritten public offering. We received net cash proceeds
from the offering of approximately $32,600,000. Refer to Note 6 of Notes to Unaudited Condensed Consolidated Financial
Statements, included in Part I, Item 1 of this Report for additional information.
In January 2022, we terminated our $12,000,000 mezzanine term loan facility that was originated in August 2021. In connection with
this termination, we paid a total of $12,152,500 to pay off the facility in full.
In February 2022, we entered into an amendment to our Senior Credit Facilities (as defined in Note 5 of Notes to Unaudited
Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report) which (i) increased the amount available
under the revolving credit facility from $2,500,000 to $7,500,000, (ii) removed and replaced LIBOR benchmark provisions with Term
SOFR benchmark provisions and (iii) provided that advances under the Senior Credit Facilities bear interest at Term SOFR or the
Prime Rate, at the option of Lantronix, plus a margin that ranges from 3.10% to 4.10% in the case of Term SOFR and 1.50% to 2.50%
in the case of the Prime Rate, depending on our total leverage with a Term SOFR floor of 0.00% and a Prime Rate floor of 3.25%. We
paid a nonrefundable fee of $25,000 in connection with this amendment to our Senior Credit Facilities. As of June 30, 2022, we had
$16,188,000 million in borrowings outstanding under our term loan facility.
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 and
beyond. 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.
26
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. 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.
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:
Net cash (used in) provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Operating Activities
Years Ended June 30,
2021
2022
(In thousands)
(Decrease)
Increase
$
(9,416 ) $
(25,747 )
42,645
4,304 $
(783 )
(1,473 )
(13,720 )
24,964
44,118
We used cash in operating activities during fiscal 2022 compared to operations providing cash in fiscal 2021 mainly due to the
increase in our net loss, which was driven by an increase in operating expenses. For fiscal 2022, our net loss included $15,380,000 of
non-cash charges, and the changes in operating assets and liabilities used cash of $19,434,000.
Our net inventories increased by $22,620,000, or 150.2%, from June 30, 2021 to June 30, 2022. Of this increase, $7,734,000 of net
inventories were acquired in the TN Companies acquisition. The remainder of the increase was a combination of increases in revenue,
increased lead times required for certain customers, and supply chain constraints issues.
Accounts receivable increased by $12,747,000, or 94.3%, from June 30, 2021 to June 30, 2022, of which $5,277,000 was acquired in
the TN Companies acquisition. The remainder of the increase is primarily due to the increase and timing of our sales and related
payments from customers.
Accounts payable increased by $11,522,000, or 126.3%, from June 30, 2021 to June 30, 2022, of which $1,872,000 was acquired in
the TN Companies acquisition. The remainder of the increase is primarily due to the increase and timing of our inventory purchases
and related payments to our vendors.
Investing Activities
Net cash used in investing activities during fiscal 2022 was driven by the acquisition of the TN Companies, which used net cash of
$23,629,000. We also used cash for the purchase of property and equipment, primarily related to various tooling, test and office
equipment.
Financing Activities
Net cash provided by financing activities during fiscal 2022 resulted primarily from (i) net proceeds from our public offering of
$32,600,000 and (ii) $29,500,000 in gross proceeds received from our credit facilities with SVB, partially offset by the repayment of
our previous term loan in the amount of $3,750,000 and the mezzanine credit facility in the amount of $12,000,000. We also used cash
of $1,811,000 for tax withholdings paid on behalf of employees for restricted shares and paid earnout consideration of $1,500,000 for
the TN Companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for a “smaller reporting company.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
27
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.
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, 2022. Based on the evaluation of our disclosure controls and procedures as of
June 30, 2022, 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, 2022 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, 2022.
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, 2022 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On December 2, 2021, we entered into a change in control agreement with Jeremy Whitaker, our Chief Financial Officer (the
“Agreement”), providing for certain severance benefits in the event of a change in control of Lantronix. Under the Agreement, if Mr.
Whitaker’s employment is terminated by us without Cause or by him for Good Reason within 60 days prior to or 12 months following
a Change in Control (as defined in the Agreement) and such a termination of his employment occurs on or prior to May 31, 2024, (i)
all of his outstanding equity awards will accelerate and become fully vested; (ii) he will receive a cash severance payment in a lump
sum (in lieu of the cash severance benefit described above, if applicable) equal to 6 months of his base salary plus an amount equal to
100% of the amount of bonuses (if any) paid to Mr. Whitaker during the 12 months preceding termination (or 12 months of his base
salary plus an amount equal to 100% of his target bonus if the consideration paid to Lantronix’s stockholders in the transaction is
$5.00 or more per share); and (iii) he and his eligible dependents will be entitled to continued participation in Lantronix’s group
health, dental and vision insurance plans on the same terms as existed at the time of his termination for up to 6 months thereafter (or
up to 12 months if the consideration paid to Lantronix’s stockholders in the transaction is $5.00 or more per share).
28
Mr. Whitaker’s right to receive the severance benefits described above is subject to his executing and not revoking a general release of
claims in favor of Lantronix and his resignation from any Lantronix-affiliated board positions. Cash severance payments would be
made on the 53rd day following Mr. Whitaker’s employment termination date or such later date as required by Section 409A of the
Code. Should benefits payable to Mr. Whitaker trigger excise taxes under Section 4999 of the Code, Mr. Whitaker will either be
entitled to the full amount of his benefits or, if a cut-back in the benefits would result in greater net (after-tax) benefit to Mr. Whitaker,
the benefits will be cut-back to the extent necessary to avoid such excise taxes.
The foregoing description of the Agreement is qualified in its entirety by the Agreement, a copy of which is filed as Exhibit 10.19 to
this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
29
PART III
Portions of our definitive Proxy Statement on Schedule 14A relating to our 2022 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.
30
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 25, 2022
LANTRONIX, INC.
By:
/s/ PAUL PICKLE
Paul Pickle
President, Chief Executive Officer and
Director
(Principal Executive Officer)
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of 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,
2022 and 2021, the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended, and the
related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its
operations and its cash flows for each of the two years in the period ended June 30, 2022, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's consolidated 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 consolidated 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 consolidated 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 consolidated 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
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
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 matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
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 $37.7 million at June 30, 2022, net of
reserves. 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.
32
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 relating to future demand of products 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.
VALUATION OF INTANGIBLE ASSETS IN TRANSITION NETWORKS AND NET2EDGE BUSINESSES OF
COMMUNICATION SYSTEMS, INC.
Critical Audit Matter Description
As discussed in Note 3 to the consolidated financial statements, on August 2, 2021, the Company acquired the Transition
Networks and Net2Edge businesses of Communication Systems, Inc. The transactions were accounted for as business
combinations and the assets acquired and liabilities assumed have been recorded based on the final assessment of fair value.
The acquired intangible assets included approximately $7.5 million in customer relationships and approximately $1.9 million
in acquired technology. The significant assumptions used to estimate the fair value of these intangible assets included
revenue growth rates, customer attrition rates and discount rates. These significant assumptions are forward-looking and
could be affected by future economic and market conditions.
The procedures used to audit the valuation of the acquired technology and customer relationship assets acquired include (i) a
high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of intangible
assets acquired due to the significant amount of judgment by management when developing the estimate; (ii) significant audit
effort in evaluating the significant assumptions relating to the estimate, such as revenue growth rates, the customer attrition
rate, and discount rates; and (iii) the use of professionals with specialized skill and knowledge to assist in performing these
procedures and evaluating the audit evidence.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
▪ Obtained an understanding and evaluated the design and implementation of the Company's controls over its
estimation process supporting the recognition and measurement of the customer and technology intangible assets,
including controls over management’s evaluation of the methodology and underlying assumptions used in
determining the fair value.
▪ Evaluated the Company's selection of the valuation methodology and significant assumptions used by the Company
in the valuation of the intangible assets, and the reasonableness of significant assumptions and estimates. For
example, we performed analyses to evaluate the sensitivity of changes in assumptions to the fair value of the
customer relationships intangible asset and compared the significant assumptions to current industry and market and
economic trends.
▪ Evaluated the competency and objectivity of third-party specialists engaged by the Company to assist in developing
▪
management’s assumptions.
Involved firm employed valuation specialists to assist with our evaluation of the methodologies used by the
Company and significant assumptions included in the fair value estimates.
▪ Tested the mathematical accuracy of the models used to determine the fair values of assets acquired.
/s/ Baker Tilly US, LLP
We have served as the Company’s auditors since 2011.
Irvine, California
August 29, 2022
33
LANTRONIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)
Assets
Current Assets:
Cash and cash equivalents
Accounts receivable (net of allowance for doubtful accounts of $340 and $321 at June
$
30, 2022 and 2021, 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
Current portion of long-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; 35,129,301 and
29,087,714 shares issued and outstanding at June 30, 2022 and 2021, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
June 30,
2022
June 30,
2021
17,221 $
26,262
37,679
3,454
5,417
90,033
3,652
20,768
14,559
8,037
325
137,374 $
20,644 $
4,729
1,671
8,477
35,521
14,274
7,683
57,478
9,739
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
–
–
4
289,046
(209,525 )
371
79,896
137,374 $
3
249,885
(204,163 )
371
46,096
72,566
See accompanying notes to consolidated financial statements.
34
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
Fair value remeasurement of earnout consideration
Amortization of purchased intangible assets
Total operating expenses
Loss from operations
Interest expense, net
Loss on extinguishment of debt
Other income (expense), net
Loss before income taxes
Provision (benefit) for income taxes
Net loss and comprehensive loss
Net loss per share - basic and diluted
Years Ended June 30,
2022
2021
129,655 $
74,069
55,586
34,529
17,687
795
889
1,107
5,590
60,597
(5,011 )
(1,472 )
(764 )
53
(7,194 )
(1,832 )
(5,362 ) $
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 )
(0.16 ) $
(0.14 )
$
$
$
Weighted-average common shares - basic and diluted
32,671
28,708
See accompanying notes to consolidated financial statements.
35
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
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
Shares issued pursuant to equity offering,
net
Shares issued pursuant to stock awards,
Tax withholding paid on behalf of
employees for restricted shares
Fair value of warrants to purchase
common stock issued with bank credit
facility
Share-based compensation
Net loss
Balance at June 30, 2022
Additional
Paid-In Accumulated Comprehensive Stockholders'
Total
Accumulated
Other
Common Stock
Shares
Amount Capital Deficit
3 $ 246,265 $
(200,119 ) $
28,231 $
Income
Equity
371 $
46,520
857
–
913
–
–
913
–
–
–
29,088
(877 )
–
3,584
–
–
–
3 249,885
–
–
(4,044 )
(204,163 )
4,700
1
32,593
–
–
(1,811 )
–
–
–
35,129 $
–
500
–
6,246
–
–
4 $ 289,046 $
–
–
(5,362 )
(209,525 ) $
–
–
–
–
–
–
371 $
–
–
–
–
–
–
371 $
(877 )
3,584
(4,044 )
46,096
32,594
1,633
(1,811 )
500
6,246
(5,362 )
79,896
net
1,341
–
1,633
See accompanying notes to consolidated financial statements.
36
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
Fair value remeasurement of earnout consideration
Loss on extinguishment of debt
Changes in operating assets and liabilities, net of assets and liabilities acquired:
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 (used in) provided by 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
Earnout consideration paid
Net proceeds from issuance of debt
Payment of borrowings on term loan
Net proceeds from borrowing on line of credit
Payment of borrowings on line of credit
Payment of lease liabilities
Net cash provided by (used in) financing activities
Increase 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,
2022
2021
$
(5,362 ) $
(4,044 )
6,246
5,590
1,028
380
4
261
1,107
764
(7,470 )
(15,266 )
(1,494 )
(2,183 )
1,564
(85 )
8,782
(222 )
(3,060 )
(9,416 )
(2,118 )
(23,629 )
(25,747 )
34,227
(1,811 )
(1,500 )
28,800
(17,062 )
2,500
(2,500 )
(9 )
42,645
7,482
9,739
17,221 $
1,494 $
215 $
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
$
$
$
See accompanying notes to consolidated financial statements.
37
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
1. Company and Significant Accounting Policies
Company
Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global Industrial and Enterprise internet of
things (“IoT”) provider of solutions that target diversified verticals ranging from Smart Cities, Utilities and Healthcare to Enterprise,
Intelligent Transportation, and Industrial Automation. Building on a long history of connectivity and video processing competence,
target applications include Video Surveillance, Traffic management, Infotainment systems, Robotics, Edge Computing and Remote
Environment Management (“REM”).
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.
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
38
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. Other than earnout consideration liabilities (see Note 3), during the fiscal years ended June 30, 2022 and 2021
we did not have any assets or liabilities that were measured at fair value on a non-recurring basis. As of June 30, 2022 we do not have
any assets or liabilities that were measured at fair value on a recurring basis,
We believe all of our financial instruments’ recorded values approximate their current fair values because of the nature and short duration
of these instruments.
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, 2022 and 2021. We did
not have any other comprehensive income or losses during the fiscal years ended June 30, 2022 or 2021.
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
39
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.
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, 2022, 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, 2022 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.
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
40
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.
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 or
estimable. To the extent that we are unable to utilize an interest rate implicit in the lease, 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.
41
Advertising Expenses
Advertising expenses are recorded in the period incurred and totaled $253,000 and $231,000 for the fiscal years ended June 30, 2022
and 2021, respectively. The costs are included in selling, general and administrative expenses in the consolidated statements of
operations.
Segment Information
We have one operating and reportable business segment.
Recent Accounting Pronouncements
Revenue Contracts
In October 2021, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to improve the
accounting for acquired revenue contracts with customers in a business combination by addressing diversity and inconsistency related
to (i) recognition of an acquired contract liability and (ii) payment terms and their effect on subsequent revenue recognized by the
acquirer. The amendments in this ASU require that an entity (acquirer) recognize and measure contract assets and contract liabilities
acquired in a business combination in accordance with existing revenue recognition guidance under Accounting Standard Codification
Topic (“ASC”) 606. At the acquisition date, an acquirer would assess how the acquiree applied ASC 606 to determine what to record
for the acquired revenue contracts. Generally, this would result in an acquirer recognizing and measuring the acquired contract assets
and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements. The ASU is
effective for Lantronix beginning in the first quarter of fiscal year 2024, however early adoption is permitted. The adoption of this
guidance may have a material effect on our consolidated financial statements.
Current Expected Credit Losses
In June 2016, the 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.
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.
42
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.
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
To more closely align the categorization of our product lines with how we position them in the marketplace, we have re-organized our
products and solutions into three product lines: Embedded IoT Solutions, IoT System Solutions, and Software & Services. Until this
recent change, we had organized our products and solutions into three different product lines: IoT, REM and Other. Going forward,
we do not plan to disclose our net revenue by the old categorizations.
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:
Embedded IoT Solutions
IoT System Solutions
Software & Services
Years Ended June 30,
2022
2021
(In thousands)
61,773 $
59,019
8,863
129,655 $
38,611
24,189
8,677
71,477
$
$
43
Americas
EMEA
APJ
Years Ended June 30,
2022
2021
(In thousands)
77,799 $
22,542
29,314
129,655 $
38,638
17,186
15,653
71,477
$
$
For comparative purposes, the following tables present our product line categorizations prior to our decision to reorganize how we
present this information during the fourth quarter of fiscal 2022. As discussed above, going forward we do not plan to disclose our net
revenue by these categorizations.
IoT
REM
Other
Years Ended June 30,
2022
2021
(In thousands)
$
$
112,492 $
16,585
578
129,655 $
59,167
11,843
467
71,477
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,
2022
2021
94%
6%
91%
9%
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, 2022 (in thousands):
Balance, July 1, 2021
New performance obligations
Performance obligations acquired from acquisitions
Recognition of revenue as a result of satisfying performance obligations
Balance, June 30, 2022
Less: non-current portion of deferred revenue
Current portion, June 30, 2022
$
$
$
1,091
1,518
42
(1,309 )
1,342
(373 )
969
We expect to recognize substantially all of the non-current portion of deferred revenue over the next 2 to 4 years.
3.
Acquisition
44
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 in cash paid on the Closing Date, plus (ii) 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 as specified in the Purchase
Agreement, subject to certain adjustments and allocations as further described in the Purchase Agreement. Based on preliminary
working capital estimates of the TN Companies at the Closing Date, we paid $24,160,000 in cash consideration on the Closing Date.
In September 2021, pursuant to working capital adjustments as outlined in the Purchase Agreement, the net cash consideration paid as
of the Closing Date was adjusted to approximately $23,651,000.
Concurrently with the closing of the Transaction, CSI and Lantronix entered in a Transition Services Agreement under which CSI
performed 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.
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.
A summary of the purchase consideration for the TN Companies is as follows (in thousands):
Cash consideration paid to CSI
Estimated fair value of earnout consideration
Total purchase consideration
$
$
23,651
393
24,044
We recorded the TN Companies’ tangible and intangible assets and liabilities based on their estimated fair values as of the Closing
Date and allocated the remaining purchase consideration to goodwill. Our valuation assumptions of acquired assets and assumed
liabilities require significant estimates, especially with respect to intangible assets.
Subsequent to the Closing Date, we made certain measurement period adjustments to the preliminary purchase price allocation, based
on clarification of information utilized in our analysis and estimates to determine the fair value of assets acquired and liabilities
assumed. These adjustments resulted in a net increase to goodwill of $2,498,000, and were driven by the following:
i.
an increase in deferred income tax liabilities of $2,036,000 related to the finalization of our conclusions regarding non-tax-
deductible intangible assets acquired,
ii. an increase in the estimated fair value of earnout consideration of $47,000,
iii. a decrease in amortizable intangible assets of $440,000,
iv. an increase in acquired net accounts receivable of $121,000, and
v. a decrease in acquired net inventories of $96,000
As of June 30, 2022, the measurement period is complete.
The final purchase price allocation is as follows (in thousands):
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expense and other current assets
Property and equipment, net
Goodwill
Amortizable intangible assets
Accounts payable
Accrued payroll
Deferred tax liability
Other current liabilities
Total consideration
$
$
22
5,277
7,734
355
121
4,958
10,794
(1,872 )
(9 )
(2,036 )
(1,300 )
24,044
The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that the Transaction will
create a more diverse IoT company with respect to product offerings and our belief that we are committed to improving cost structures
in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of
overall efficiencies.
45
Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax
purposes. We have determined that goodwill and identifiable intangible assets related to the Transaction are not deductible.
Acquisition-related costs were expensed in the periods in which the costs were incurred.
The valuation of identifiable intangible assets and their estimated useful lives are as follows:
Customer relationships
Developed technology
Order backlog
Trademarks and trade names
$
Asset Fair Value
(In thousands)
7,467
1,890
567
870
Weighted Average
Useful Life
(In years)
3.5
3.5
1.0
2.0
The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.
Valuation Methodology
The customer relationships and order backlog were valued using the multi-period excess earnings method, which estimates revenues
and cash flows derived from this asset and also considers portions of the cash flows that can be attributed to the use of other
supporting assets. The useful lives of customer relationships are estimated based primarily upon customer turnover data. Order
backlog was estimated to be substantially fulfilled within a year of the Closing Date.
Developed technology and trademarks and trades names were valued using the relief-from-royalty method. This method is an income
approach that estimates the portion of a company’s earnings attributable to an asset based on the royalty rate the company would have
paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue
attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value.
Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:
• Historical performance including sales and profitability
• Business prospects and industry expectations
• Estimated economic life of the asset
• Development of new technologies
• Acquisition of new customers
• Attrition of existing customers
• Obsolescence of technology over time
The fair value of earnout consideration was estimated based on applying a Monte Carlo simulation method to forecast achievement of
the revenue targets. This method involves many possible value outcomes which are evaluated to establish an estimated value. Key
inputs in the valuation include forecasted revenue, revenue volatility and discount rate.
Remeasurement of Earnout Consideration
During the fiscal year ended June 30, 2022, we remeasured the estimated fair value of the earnout consideration to a total of
$1,500,000 based on the achievement of certain revenue targets for the business of the TN Companies during the earnout period.
As compared to the originally recorded estimated value of $393,000, the remeasurement of the earnout consideration resulted in an
upward adjustment of $1,107,000 that was recorded within our operating expenses in the accompanying consolidated statement of
operations for the year ended June 30, 2022.
Supplemental Pro Forma Information (Unaudited)
The following supplemental pro forma data summarizes our results of operations for the periods presented, as if we completed the
acquisition of the TN Companies as of the first day of our fiscal year ended June 30, 2021. The supplemental pro forma data reports
46
actual operating results adjusted to include the pro forma effect and timing of the impact of amortization expense of identified
intangible assets, restructuring costs, the purchase accounting effect on inventories acquired, and transaction costs. In accordance with
the pro forma acquisition date, we recorded in the twelve months ended June 30, 2021 supplemental pro forma data (i) cost of goods
sold from manufacturing profit in acquired inventory of $380,000, (ii) acquisition related restructuring costs of $508,000 and (iii)
acquisition-related costs of $629,000, with a corresponding reduction in the year ended June 30, 2022 supplemental pro forma data.
Additionally, we recorded $3,675,000 of amortization expense in the year ended June 30, 2021 supplemental pro forma data, and a
reduction to amortization expense of $242,000 in the year ended June 30, 2022 supplemental pro forma data to represent amortization
for the full fiscal year period.
Net sales related to products from the acquisition of the TN Companies contributed approximately 28% of our total net sales for the
year ended June 30, 2022. As of the Closing Date, we began to immediately integrate the acquisition into existing operations,
engineering groups, sales distribution networks and management structure, making it generally impracticable to determine the post-
acquisition net sales and earnings on a standalone basis.
Supplemental pro forma data is as follows:
Pro forma net revenue
Pro forma net loss
Pro forma net loss per share:
Basic and Diluted
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
Purchased Intangible Assets
The following table presents details of purchased intangible assets:
47
Year Ended June 30,
2022
2021
(In thousands, except per share
amounts)
132,442 $
(5,751 ) $
106,822
(5,071 )
(0.12 ) $
(0.25 )
June 30,
2022
2021
(In thousands)
16,094 $
21,585
37,679 $
7,738
7,321
15,059
June 30,
2022
2021
(In thousands)
5,370 $
760
5,147
1,612
12,889
(9,237 )
3,652 $
4,338
633
4,707
141
9,819
(8,242 )
1,577
$
$
$
$
$
$
$
Developed technology
Customer relationship
Order backlog
Non-compete agreements
Trademark and trade name
June 30, 2022
June 30, 2021
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
$
$
5,731 $
16,498
1,406
400
1,245
25,280 $
(2,493 ) $
(5,700 )
(1,356 )
(400 )
(772 )
(10,721 ) $
(In thousands)
3,238 $
10,798
50
–
473
14,559 $
3,841 $
9,030
840
400
375
14,486 $
(1,249 ) $
(2,267 )
(840 )
(400 )
(375 )
(5,131 ) $
2,592
6,763
–
–
–
9,355
We do not currently have any purchased intangible assets with indefinite useful lives.
As of June 30, 2022, future estimated amortization expense is as follows:
Years Ending June 30,
(In thousands)
2023
2024
2025
2026
Total amortization expense
Goodwill
The following table presents details of our goodwill balance:
Balance at June 30, 2021
Acquisition of TN Companies
Balance at June 30, 2022
Warranty Reserve
The following table presents details of our warranty reserve:
Beginning balance
Warranty reserve assumed from acquisition of the TN Companies
Charged to cost of revenues
Usage
Ending balance
Other Liabilities
The following table presents details of our other liabilities:
Current
Accrued variable consideration
48
$
$
5,400
4,952
3,358
849
14,559
Year Ended
June 30, 2022
(In thousands)
$
$
15,810
4,958
20,768
Years Ended June 30,
2022
2021
(In thousands)
$
$
197 $
483
202
(288 )
594 $
181
–
226
(210 )
197
June 30,
2022
2021
(In thousands)
$
1,905 $
1,347
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:
922
132
969
978
371
594
2,606
8,477 $
7,310 $
373
7,683 $
1,133
176
850
1,174
388
197
2,063
7,328
1,155
241
1,396
$
$
$
Years Ended June 30,
2022
2021
(In thousands, except per share data)
$
(5,362 ) $
(4,044 )
Weighted-average shares outstanding - basic and diluted
32,671
28,708
Net loss per share - basic and diluted
$
(0.16 ) $
(0.14 )
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
Severance and Related Charges
Years Ended June 30,
2022
2021
(In thousands)
1,069
823
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,
2022
(In thousands)
88
$
795
(849 )
34
$
The ending balance is recorded in accrued payroll and related expenses on the accompanying consolidated balance sheet at June 30,
2022.
Supplemental Cash Flow Information
The following table presents non-cash investing and financing transactions excluded from the consolidated statements of cash flows:
Years Ended June 30,
2022
2021
49
Acquisition of property through operating leases
Accrued property and equipment paid for in the subsequent period
Warrants to purchase common stock issued with bank credit facility
Fair value adjustment of earnout consideration for TN companies at acquisition date
$
$
$
$
(In thousands)
7,170 $
868 $
500 $
393 $
613
217
–
–
5.
Bank Loan Agreements
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 Silicon Valley Bank (“SVB”), pursuant to which SVB made a term loan of $17,500,000 on the Closing Date
and made 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”). As part of the
Mezzanine Credit Facility, we issued the Lender two warrants, each to purchase approximately 64,000 shares of our common stock at
a price per share of $4.695. The estimated fair value of the warrants was recorded to stockholders’ equity with the offset recorded as a
discount against the Mezzanine Credit Facility debt balance. Substantially all of our tangible and intangible assets are pledged as
collateral against these credit facilities.
The proceeds of the Senior Credit Facilities were used to refinance our outstanding obligations owing to SVB under our prior Second
Amended and Restated Loan and Security Agreement with SVB, and the remaining proceeds of the Senior Credit Facilities and the
proceeds from the Mezzanine Credit Facility were used to fund the purchase price of the TN Companies, to pay related fees and
expenses, and also separately for working capital and general corporate purposes.
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 bore interest at the London interbank offered rate (“LIBOR”) or the Prime Rate, at the option of
Lantronix, plus a margin that ranged 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 our total leverage with a LIBOR floor of 0.50% and a Prime Rate floor of 3.25%. Advances under the Mezzanine Credit
Facility bore 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 similar size and type.
In January 2022, we terminated the Mezzanine Credit Facility with the Lender, for which we repaid a total of $12,152,500 to pay off
the Mezzanine Credit Facility in full. There was no requirement to pay a termination fee. Pursuant to the applicable accounting
guidance, we recognized a non-cash loss on the extinguishment of this debt of $764,000, representing the write-off of unamortized
deferred financing costs. This was recorded in Loss on extinguishment of debt in the accompanying consolidated statements of
operations for the fiscal year ended June 30, 2022.
In February 2022, we entered into an amendment to our Senior Credit Facilities which (i) increased the amount available under the
revolving credit facility from $2,500,000 to $7,500,000, (ii) removed and replaced LIBOR benchmark provisions with Term Secured
Overnight Financing Rate (“SOFR”) benchmark provisions and (iii) provided that advances under the Senior Credit Facilities bear
interest at Term SOFR or the Prime Rate, at the option of Lantronix, plus a margin that ranges from 3.10% to 4.10% in the case of
Term SOFR and 1.50% to 2.50% in the case of the Prime Rate, depending on our total leverage with a Term SOFR floor of 0.00% and
a Prime Rate floor of 3.25%. We paid a nonrefundable fee of $25,000 in connection with this amendment to our Senior Credit
Facilities.
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,
2022
2021
(In thousands)
16,188 $
(243 )
15,945
(1,671 )
14,274 $
3,750
(68 )
3,682
(1,472 )
2,210
$
$
During the year ended June 30, 2022, we recognized $1,493,000 of interest expense in the accompanying consolidated statement of
operations related to interest and amortization of debt issuance associated with the borrowings under the Senior Credit Facilities and
Mezzanine Credit Facility.
Financial Covenants
50
The Senior Credit Facilities require Lantronix to comply with a minimum liquidity test, a maximum leverage ratio and a minimum
fixed charge coverage ratio. We were in compliance with all financial covenants as of June 30, 2022.
Liquidity
The Senior Credit Facilities require that we maintain a minimum liquidity of $5,000,000 and $3,000,000, respectively, at SVB, as
measured at the end of each month.
Maximum leverage ratio
The Senior Credit Facilities require that we maintain 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) 2.50 to 1.00 for each calendar quarter ending June 30, 2021 through and including September 30, 2022, (ii) 2.25 to 1.00 for each
calendar quarter ending December 31, 2022 through and including September 30, 2023, and (iii) 2.00 to 1.00 for the calendar quarter
December 31, 2023 and each calendar quarter thereafter.
Minimum fixed charge coverage ratio
The Senior Credit Facilities require that we maintain a minimum fixed charge coverage ratio, calculated as the ratio of consolidated
trailing 12 month earnings before interest, taxes, depreciation and amortization, and certain other allowable exclusions, less capital
expenditures and taxes paid, to the trailing twelve month principal and interest payments on all funded debt of 1.25 to 1.00 as
measured at the end of each calendar quarter.
In addition, the Senior Credit Facilities 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 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 may become due and payable
immediately.
6.
Stockholders’ Equity
Public Offering
On November 18, 2021, we entered into an underwriting agreement (the “Underwriting Agreement”) with TL Investment GmbH (“TL
Investment”) and Canaccord Genuity LLC, as representative of the several underwriters named therein (together, the “Underwriters”),
relating to our offer and sale of 4,700,000 shares (the “Firm Shares”) of our common stock at an initial price to the public of $7.50 per
share. In addition, TL Investment granted the Underwriters a 30-day option to purchase up to an additional 705,000 shares (the
“Option Shares”) of our common stock held by TL Investment at the public offering price, less the underwriting discounts. On
November 18, 2021, the Underwriters exercised their option to purchase the Option Shares from TL Investment in full. On November
22, 2021, we issued and delivered the Firm Shares and TL Investment delivered the Option Shares.
Net proceeds to Lantronix from the offering of the Firm Shares, after deducting the underwriting discount and offering expenses, were
approximately $32,600,000.
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
(“PSUs”). New shares are issued to satisfy stock option exercises and share issuances. At June 30, 2022, approximately 2,088,000 shares
51
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, 2022, 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, 2022 and
2021.
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 has historically been
estimated using the simplified method, as permitted by guidance issued by the Securities and Exchange Commission. We have used the
simplified method because we were generally 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. For new stock options granted beginning in the fiscal year
ended June 30, 2022, we estimated the expected term based on our recent historical exercise data. The risk-free interest rate assumption
is based on the U.S. Treasury interest rates appropriate for the expected term of our stock options.
The following weighted-average assumptions were used to estimate the fair value of all of our stock option grants:
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend yield
Years Ended June 30,
2022
2021
4.7
63%
0.82%
0.00%
7.0
69%
0.59%
0.00%
The following table presents a summary of activity for all of our stock options:
Weighted-Average
Balance of options outstanding at June 30, 2021
Options granted
Options forfeited
Options expired
Options exercised
Balance of options outstanding at June 30, 2022
Options exercisable at June 30, 2022
Number of
Exercise
Price
Per Share
Shares
(In thousands)
1,697 $
111
(1 )
(16 )
(408 )
1,383 $
1,050 $
Remaining
Contractual
Term
(In years)
Aggregate
Intrinsic
Value
(In thousands)
2.98
5.65
3.13
2.17
2.29
3.40
3.09
3.6 $
3.3 $
2,763
2,414
The following table presents a summary of grant date fair value and intrinsic value information for all of our stock options:
Weighted-average grant date fair value per share
Intrinsic value of options exercised
Restricted Stock Units
Years Ended June 30,
2022
2021
(In thousands,
except per share data)
$
$
2.94 $
1,506 $
2.84
1,110
The fair value of our RSUs is based on the closing market price of our common stock on the grant date.
The following table presents a summary of activity with respect to our RSUs:
52
Balance of RSUs outstanding at June 30, 2021
Granted
Forfeited
Vested
Balance of RSUs outstanding at June 30, 2022
Performance Shares
The following table presents a summary of activity with respect to our PSUs:
Balance of PSUs outstanding at June 30, 2021
Granted
Vested
Balance of PSUs outstanding at June 30, 2022
Employee Stock Purchase Plan
Weighted-Average
Grant Date Fair
Value per Share
Number of Shares
(In thousands)
918 $
701
(52 )
(452 )
1,115 $
4.14
6.59
4.81
4.45
5.50
Number of Shares
(In thousands)
1,084
575
(629 )
1,030
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
The following table presents a summary of activity under our ESPP:
Shares available for issuance at June 30, 2021
Shares issued
Shares available for issuance at June 30, 2022
Weighted-average purchase price per share
Intrinsic value of ESPP shares on purchase date
Share-Based Compensation Expense
53
Years Ended June 30,
2022
2021
0.5
59%
0.92%
0.00%
0.5
62%
0.08%
0.00%
Year Ended
June 30, 2022
(In thousands,
except per share
data)
250
(165 )
85
4.62
378
$
$
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,
2022
2021
(In thousands)
369 $
4,862
1,015
6,246 $
281
2,719
584
3,584
$
$
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, 2022:
Stock options
RSUs
PSUs
Common stock purchase rights under ESPP
Remaining
Unrecognized
Compensation
Expense
(In thousands)
Remaining
Weighted-Average
Years to
Recognize
$
$
650
5,267
1,077
129
7,123
1.6
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 $373,000 and $280,000 in matching contributions to
participants in the Plan during the fiscal years ended June 30, 2022 and 2021, respectively.
In addition, we may make discretionary profit-sharing contributions, subject to limitations. During the fiscal years ended June 30, 2022
and 2021, we made no such contributions to the Plan.
8.
Income Taxes
The provision (benefit) for income taxes consists of the following components:
Current:
Federal
State
Foreign
Total Current taxes
Deferred:
Federal
State
Foreign
Provision (benefit) for income taxes
The following table presents U.S. and foreign income (loss) before income taxes:
Years Ended June 30,
2022
2021
(In thousands)
$
$
$
– $
11
254
265 $
(1,805 )
(292 )
–
(1,832 ) $
8
5
182
195
–
–
–
195
Years Ended June 30,
2022
2021
(In thousands)
54
United States
Foreign
Loss before income taxes
$
$
(7,829 ) $
635
(7,194 ) $
(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
Identified intangibles
Deferred tax liabilities
Net deferred tax assets (liabilities)
Years Ended June 30,
2022
2021
(In thousands)
$
$
15,310 $
1,881
1,858
1,508
2,260
130
333
23,280
(20,173 )
3,107
(404 )
(2,240 )
(463 )
(3,107 )
– $
20,281
1,537
1,579
748
459
1,572
285
26,461
(25,588 )
873
(388 )
(485 )
–
(873 )
–
Realization of deferred tax assets is dependent upon the generation of future taxable income. As required by ASC 740, we have
evaluated the positive and negative evidence bearing upon our ability to realize the deferred tax assets as of June 30, 2022. We have
determined that it was more likely than not that Lantronix would not realize the deferred tax assets due to our cumulative losses and
uncertainty of generating future taxable income.
As a result of the acquisition of the TN Companies (refer to Note 3), we recorded U.S. deferred tax liabilities in the purchase
accounting related to non-tax-deductible intangible assets recognized in our consolidated financial statements. The acquired deferred
tax liabilities are a source of income to support recognition of our existing deferred tax assets. Pursuant to ASC 805, the impact on our
existing deferred tax assets and liabilities caused by an acquisition should be recorded in the consolidated financial statements outside
of acquisition accounting. Accordingly, we recorded an income tax benefit during the year ended June 30, 2022 of $2,036,000 for the
partial release of the valuation allowance as a result of such purchase accounting considerations.
The following table presents a reconciliation of the provision (benefit) 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
Foreign tax rate variances
Acquisition costs
Other
Provision (benefit) for income taxes
Years Ended June 30,
2022
2021
$
(In thousands)
(1,510 ) $
(588 )
(54 )
(1,829 )
–
4
120
395
1,630
(1,832 ) $
$
(809 )
(320 )
(9 )
1,285
(84 )
82
299
53
(302 )
195
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.
55
The following table presents our NOLs:
Federal
State
June 30,
2022
(In thousands)
$
$
70,456
14,861
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, 2022 in the table above, approximately $26,500,000 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, 2022 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, 2022:
Balance as of June 30, 2021
Change in balances related to uncertain tax positions
Balance as of June 30, 2022
Year Ended
June 30, 2022
(In thousands)
$
$
6,639
(987 )
5,652
At June 30, 2022, we had $5,652,000 of gross unrecognized tax benefits which was recorded as a reduction to deferred tax assets, and
a corresponding reduction in our valuation allowance of $5,652,000. The balance decreased from the prior year due to the expiration of
certain federal research and development tax credit carryforwards. 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, 2022 and
2021, we recorded an immaterial expense for interest and penalties related to income tax matters in the provision for income taxes. At
June 30, 2022, we had approximately $288,000 of accrued interest and penalties related to uncertain tax positions.
At June 30, 2022, our fiscal years ended June 30, 2019 through 2022 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, 2022 will significantly increase or decrease
within the next 12 months.
9.
Leases
In general, 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
56
Year Ended
June 30,
2022
(In thousands)
$
$
2,313
9
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
$
$
$
1,202
9
7,170
The weighted-average remaining lease term is 4.76 years. The weighted-average discount rate is 4.2 percent.
Maturities of lease liabilities as of June 30, 2022 were as follows:
Years ending June 30,
2023
2024
2025
2026
2027
Thereafter
Total remaining lease payments
less: imputed interest
Lease liability
Reported as:
Current liabilities
Non-current liabilities
California Corporate Headquarters Lease
Operating
Financing
(In thousands)
1,309 $
1,171
982
919
849
4,728
9,958
(1,682 )
8,276 $
969 $
7,307 $
9
3
–
–
–
–
12
–
12
9
3
$
$
$
$
In November 2021, we entered into a building lease agreement pursuant to which we will lease approximately 13,767 square feet of
office space for our corporate headquarters in Irvine, California. This lease commenced in July 2022 when we took possession of the
premises. During the fiscal quarter ending September 30, 2022, we will account for this lease as an operating lease in accordance with
ASC 842.
The term of the lease is 84 months from the commencement date, with an option to extend the lease for one 60-month extension
period at a basic rent to be agreed upon by the parties or determined pursuant to the lease. The initial basic rent payable is $28,900 per
month and is subject to customary annual rent increases. The aggregate basic rent payable under the lease during the 84-month term is
approximately $2,700,000. We are also obligated to pay as additional rent our proportionate share of operating expenses, including
property taxes. Additionally, the lease required us to deliver to the landlord an irrevocable stand-by letter of credit in the amount of
$50,000 as security in the case of default.
Minnesota Facility Lease
On January 20, 2022, we entered into a lease agreement (the “Lease”) to lease approximately 66,000 square feet in a building in
Plymouth, Minnesota (the “Premises”) to house the operations of the TN Companies purchased from CSI in August 2021 and to serve
as a central warehouse and shipping hub for all USA-based business of Lantronix.
We took possession of the Premises commencing on the date of the Lease. Beginning on May 1, 2022 (the “Rent Commencement
Date”), the initial basic rent payable under the Lease is $46,738 per month (with the first three months of rent abated), subject to
annualized rent increases of 3% over the period of the Lease. The initial term of the Lease (the “Initial Term”) commences on the date
of the Lease and ends on July 31, 2032. The aggregate basic rent payable under the Lease during the Initial Term is approximately
$6,500,000. We are also obligated to pay as additional rent for our proportionate share of operating expenses, including property taxes.
The Lease contains an option to extend the lease for one 60-month extension period at the net rent rate for the last year of the Initial
Term or the then-market net rent, as determined pursuant to the Lease, as well as a right of first offer for Lantronix on any space
adjacent to the Premises during the Initial Term. We also have the right to terminate the Lease at the end of the 87th full calendar
month after the Rent Commencement Date (the “Early Termination Date”) by delivery of a written notice at least six months prior to
the Early Termination Date and payment of a termination fee. In addition, the landlord will reimburse Lantronix for its actual out-of-
pocket costs for certain tenant improvements to the Premises, with an allowance of up to $1,500,000 to be paid in three installments in
accordance with the Lease.
We have accounted for this lease as an operating lease in accordance with ASC 842. We recorded a right-of-use asset of $6,954,000
and lease liability of $6,954,000 at the inception of the lease based upon a discount rate of 3.9% over a term of 10.5 years.
57
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,
2022
2021
60%
17%
23%
100%
54%
24%
22%
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
Taiwan
Germany
Japan
Years Ended June 30,
2022
2021
59%
11%
8%
5%
53%
6%
10%
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
Customers
June 30,
2022
2021
(in thousands)
36,037 $
10,158
821
47,016 $
15,737
12,619
817
29,173
$
$
The following table presents sales to our significant customers as a percentage of net revenue:
Top five customers (1)
Ingram Micro
Amtran
Years Ended June 30,
2022
2021
44%
14%
10%
37%
15%
*
(1) Includes Ingram Micro in the fiscal years ended June 30, 2022 and 2021 and Amtran in the fiscal year ended June 30, 2021.
* Less than 10%
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, 2022 and 2021.
Suppliers
58
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.
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48 Discovery, Suite 250 Board of Directors Bernhard BruschaChairman of the Board of Lantronix, Inc.Paul PicklePresident & Chief Executive Officer of Lantronix, Inc.Margaret EvashenkFormer Chief Executive Officer, Kazan NetworksPaul FolinoFormer Executive Chairman, Emulex CorporationHoshi PrinterBoard Advisor and Member for various private companiesPaul PicklePresident & Chief Executive Officer Jeremy WhitakerChief Financial OfficerMichael FinkVice President, OperationsDavid GorenVice President, Human Resources, Legal & Business Affairs; SecretaryFathi HakamVice President, EngineeringVice President, Worldwide Sales Jacques Issa Vice President, Marketing Stockholder InformationCorporate HeadquartersLantronix, Inc.Irvine, CA 92618 949.453.3990 www.lantronix.comStock ListingThe Company’s common stock trades on The Nasdaq Stock Market LLC under the symbol LTRX.Annual Stockholder MeetingThe Annual Meeting of Stockholders for Lantronix, Inc. will be held on November 9, 2021, at the Company’s corporate headquarters.Independent AuditorsBaker Tilly US, LLP Newport Beach, CA 92660Transfer Agent and RegistrarComputershare250 Royall StreetCanton, MA 02021 877.854.4580 www.computershare.comInvestor RelationsJeremy WhitakerChief Financial Officer investors@lantronix.com 949.450.7241Management Team Roger HollidayThis Annual Report contains forward-looking statements, including statements concerning our projected operating and financial performance for fiscal 2023, 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.This Annual Report contains forward-looking statements, including statements concerning our projected operating and financial performance for Fiscal 2023, our ability to grow organically and the resulting benefits for our long-term success, the expected timing and contributions of certain key design wins to our revenue growth in Fiscal 2023, our efforts to identify and complete suitable acquisitions to increase our capabilities, our expectations concerning the benefits of our recently completed acquisition of Uplogix, and our ability to deliver successful performance in Fiscal 2023 in the face of continuing and potential future economic and supply chain issues. These forward-looking statements are based on our 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: our ability to integrate Uplogix successfully and achieve the anticipated benefits, and risks relating to any unforeseen liabilities of the acquired business; the effects of negative or worsening regional and worldwide economic conditions or market instability on our business; 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, on our business, employees, supply and distribution chains and the global economy; our ability to successfully convert our backlog and current demand; constraints or delays in the supply of certain materials or components; difficulties associated with our contract manufacturers or suppliers; difficulties and risks associated with potential global recession, including impairment of our customers’ ability to pay; difficulties associated with our debt and fluctuations in interest rates; 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.Stockholder InformationCorporate HeadquartersLantronix, Inc.48 Discovery, Suite 250Irvine, CA 92618 949.453.3990 www.lantronix.comStock ListingThe Company’s common stock trades on the Nasdaq Stock Market, LLC under the symbol LTRXAnnual Stockholder MeetingThe Annual Meeting of Stockholders for Lantronix, Inc. will be held on November 8, 2022, at the Company’s corporate headquarters.Independent AuditorsBaker Tilly US, LLPNewport Beach, CA 92660Transfer Agent and RegistrarComputershare250 Royall StreetCanton, MA 02021 877.854.4580 www.computershare.comInvestor RelationsRobert AdamsHead of Corporate Development and Investor Relations Investors@lantronix.com 949.453.3990Management TeamPaul PicklePresident and Chief Executive OfficerJeremy WhitakerChief Financial OfficerDavid GorenVice President, Human Resources, Legal & Business Affairs, SecretaryRobert AdamsHead of Corporate Development and Investor RelationsFathi HakamVice President, EngineeringRoger HollidayVice President, Worldwide SalesJacques IssaVice President, MarketingAnita KumarVice President, Business OperationsBoard of DirectorsPaul FolinoChairman of the Board of Lantronix, Inc.Former Chief Executive Officer, Emulex CorporationMargie EvashenkFormer Chief Executive Officer, Kazan NetworksHeidi NguyenDirectorVice President and Director, TL Investment GmbHPaul PicklePresident and Chief Executive Officer of Lantronix, Inc.Hoshi PrinterBoard Advisor and Member for various private companies