Annual
Report
2023
Data
Analysis
Actionable Insight
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Lantronix, Inc.
is a global Industrial and Enterprise Internet of Things (IoT) provider of solutions that target
high-growth applications in specific vertical markets, including Smart Grid, Intelligent
Transportation, Smart Cities and AI Data Centers.
Our Mission
is to empower companies to achieve success in the growing IoT and Out-of-Band (OOB)
markets by delivering customizable solutions that address each layer of the IoT Stack,
including Collect, Connect, Compute, Control and Comprehend.
Our Solution
in the IoT and OOB markets is being driven by the growing importance of data analytics, and
the rapidly falling cost of sensors, connectivity, compute, and storage. Designing and
deploying these projects is complex, and time-consuming. Our products are designed to help
companies increase speed and reduce the complexity of their deployments by offering our
customers customizable solutions.
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September 29, 2023
Dear Fellow Shareholders,
Lantronix is entering its fifth year of transformation, and I am excited to update you on the
progress we have made over the last 12 months as we continue to set the stage for a record
fiscal 2024.
It has been our mission to empower customers to deploy connected devices at the edge of the
network, manage these devices remotely, aggregate the data generated and turn it into
actionable insights that provide increased productivity and a tangible return on investment.
Today, we are starting to deliver various solutions that integrate connectivity, computation,
comprehension and control to harness the power and efficiency of the Industrial Internet of
Things.
Our focus on this mission drove fiscal 2023 and set the table for what we believe will be
breakout growth in fiscal 2024. We grew revenues to $131 million in fiscal 2023 as our design
and operations teams worked closely to move to production the company’s large contract
covering smart grid products. We enter fiscal 2024 with a record backlog due to several
significant design wins that we are ramping into production. We expect to deliver revenues
between $175 million and $185 million in fiscal 2024, up more than 35% at the midpoint of this
guidance, driving substantial earnings leverage.
Importantly, Lantronix continued to fill its opportunity pipeline. Our focus on electrification
applications in Smart Grid, Electric Vehicles and Smart Cities drives our optimism for continued
growth in 2025. Customer-optimized edge compute solutions comprise the majority of our high-
dollar value opportunities, and while we are leading with Compute, we continue to pull through
other standard products from the refresh that we launched three years ago. Customer
evaluation of Industrial IoT solutions can be lengthy, but the advent of Generative Artificial
Intelligence is providing new use cases and accelerating adoption that we expect will continue
strengthening.
The prospects at Lantronix have never been brighter, and we will work tirelessly to deliver for
our shareholders. We are thankful for our talented employees who enable our success and help
make Lantronix a world-class company and for our customers who give us the opportunity to
help them realize their goals. I look forward to sharing our successes with you over the course
of the coming year.
Sincerely,
Jeremy Whitaker
Interim Chief Executive Officer & Chief Financial Officer
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Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(cid:1409) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2023
(cid:1407) 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 (cid:1407) No (cid:1409)
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 (cid:1407) No (cid:1409)
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 (cid:1409) No (cid:1407)
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 (cid:1409) No (cid:1407)
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 (cid:1407)
Accelerated filer (cid:1409)
Non-accelerated filer (cid:1407)
Smaller reporting company (cid:1409)
Emerging growth company (cid:1407)
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. (cid:1407)
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. (cid:1409)
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. (cid:1407)
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-
based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-
1(b). (cid:1407)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:1407) No (cid:1409)
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, 2022, the last trading day of the registrant’s second fiscal
quarter, was approximately $116,199,000. The determination of affiliate status for this purpose shall not be a conclusive determination
for any other purpose.
As of August 31, 2023, there were 36,911,911 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 2023 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, 2023
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
Page
ii
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5
17
17
18
18
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
19
PART II
Item 6.
Reserved
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operation
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
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
* Not required for a “smaller reporting company.”
PART IV
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19
19
29
29
29
29
30
30
31
31
31
31
31
32
35
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended June 30, 2023, 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 or similar outbreaks, 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 internet of things (“IoT”) provider of solutions that target high growth applications
in specific verticals such as Smart Grid, Intelligent Transportation, Smart Cities, and AI Data Centers. Building on a long history of
Networking and video processing competence, target applications include Intelligent Substations infrastructure, Infotainment systems,
and Video Surveillance, supplemented with a comprehensive Out of Band Management (“OOB”) products offering for Cloud and
Edge Computing.
We organize our portfolio of services into the following product lines: Embedded IoT Modules, IoT Systems Solutions, and Software
and Services.
We were incorporated in California in 1989 and reincorporated in Delaware in 2000.
References in this Report to “fiscal 2023” refer to the fiscal year ended June 30, 2023 and references to “fiscal 2022” refer to the fiscal
year ended June 30, 2022. 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 Operational Technology (“OT”) Infrastructure
equipment to the Internet, manage it remotely, and reduce costs. The growth in the IoT and OOB markets is being driven by the
growing importance of data analytics, and the rapidly falling cost of sensors, connectivity, compute, and storage. Designing and
deploying these projects is complex, costly and time-consuming. Our products are designed to help companies increase speed and
reduce the complexity of their deployments by offering our customers customizable solutions, that address each layer of the IoT Stack,
such as Collect, Connect, Compute, Control and Comprehend.
We are executing on a growth strategy that includes continuous innovation supplemented by strategic acquisitions with the intent of
increasing our scale and broadening our scope so that we can increase our value proposition to customers. We believe this strategy
will allow us to address a larger portion of our customers’ operational needs and engage with them as a strategic partner. This strategy
is starting to bear fruits as we continue to strengthen our position in the market and more customers come to us for a wider variety of
applications.
Products and Solutions
Embedded IoT Modules
This portfolio of embedded products provides a variety of options including Compute System-on-Module (“SOM”) or System-in-
Package (“SIP”) solutions supplemented with wired and wireless network Connectivity products. As the level of silicon integration
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 new product design, enabling
advanced application functionality at the edge. 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 original equipment manufacturer (“OEM”) customers’ regulatory certification costs and
accelerating their time-to-market.
The following product families are included in our Embedded IoT Solutions product line: Open-Q SOMs and SIPs, XPort®, XPort®
Pro, WiPort®, Development Kits, 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 provide 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
1 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, OOB Management allows for full comprehension and control of a remote IT
infrastructure, across a range of sensors (e.g., temperature, humidity, light, acceleration, open / close, etc.) providing status and
alerting, enabling automation, and remote control of devices, servers, and end stations. OOB is a technique that uses a dedicated
management network to access critical infrastructure components and ensure production independent connectivity. Remote
Management allows organizations to effectively monitor and control their enterprise IT equipment and facilities (environments), either
in or out of band, optimizing their IT support resources.
Our AOOB (“Advanced OOB”) product line includes 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 PoE 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
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 System Integrators (“SI”) 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™, Control
Center and Level Services.
2 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
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 five third-party contract manufacturers. We currently utilize Hana
Microelectronics, primarily located in Thailand and China, Honortone, primarily located in China, Ruby Tech and Info-Tek in
Taiwan, and Tailyn in China as our contract manufacturers for most of our products. In addition, we use Marvell Technology Inc., to
manage the manufacture of our large-scale integration chips in Taiwan. 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
3 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 18, 2023, we had 370 total employees including 357 full time employees, none of whom is represented by a labor union.
We have not experienced any labor problems resulting in a work stoppage and believe we have good relationships with our
employees.
Customer and Geographic Concentrations
We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and
Africa (“EMEA”); and Asia Pacific Japan (“APJ”). A discussion of sales to our significant customers and related parties, sales within
geographic regions as a percentage of net revenue and sales to significant countries as a percentage of net revenue is set forth in Note
11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Report, which is incorporated herein by reference.
A discussion of factors potentially affecting our customer and geographic concentrations is set forth in “Risk Factors” included in Part
I, Item 1A of this Report, which is incorporated herein by reference.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule
14A and other reports and information that we file or furnish pursuant to the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) are available free of charge on our website at www.lantronix.com as soon as reasonably practicable after filing or
furnishing such reports with the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file electronically. The contents of our website are not incorporated by
reference into this Report. References to our website address in this Report are inactive textual references only.
Information About Our Executive Officers
Executive officers serve at the discretion of our board of directors. There are no family relationships between any of our directors or
executive officers. The following table presents the names, ages, and positions held by our executive officers as of the date of this
Report:
Name
Jeremy R. Whitaker
Age
53
Position
Interim Chief Executive Officer and Chief Financial Officer
4 Eric Bass
Roger Holliday
56
64
Vice President of Engineering
Vice President of Worldwide Sales
JEREMY R. WHITAKER has served as our interim Chief Executive Officer since June 2023 and our Chief Financial Officer since
September 2011. Mr. Whitaker returned to Lantronix after serving as Vice President, Corporate Controller at Mindspeed, a supplier of
semiconductor solutions for network infrastructure, 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.
ERIC BASS has served as our Vice President of Engineering since January 2023. Prior to joining Lantronix, Mr. Bass held the
position of Director of Strategic Programs at Intrinsix Corp., a provider of electronics and custom integrated circuit design
engineering solutions and services, from January 2019 to January 2023. Previously, Mr. Bass served in multiple roles at
Microsemi Corporation, a provider of semiconductor solutions differentiated by power, security, reliability and performance,
from November 2011 to August 2018, culminating with his role as Vice President of Research & Development Voice Circuit and
Power-over-Ethernet Divisions from August 2017 to August 2018, and at Zarlink Semiconductor, a provider of mixed-signal chip
technologies for a broad range of communications and medical applications, from January 2001 until Zarlink was acquired by
Microsemi in November 2011.
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, a manufacturer of standard linear and mixed signal integrated circuits, until Linfinity’s acquisition by Microsemi in
1999.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves numerous risks and uncertainties. Before deciding to purchase, hold or
sell our common stock, you should carefully consider the risks described in this section, as well as other information contained in this
Report and in our other filings with the SEC. This section should be read in conjunction with the consolidated financial statements
and accompanying notes thereto included in Item 8 of this Report, and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in Item 7 of this Report. If any of these risks or uncertainties actually occurs, our
business, financial condition, results of operations or prospects could be materially harmed. In that event, the market price for our
common stock could decline and you could lose all or part of your investment. In addition, risks and uncertainties not presently known
to us or that we currently deem immaterial may also adversely affect our business.
Risks Related to Our Operations and Industry
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
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 continue to experience long lead times and 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
5 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;
effects of terrorist attacks or geopolitical conflicts abroad;
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;
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.
The effect of COVID-19 and other possible pandemics and similar outbreaks could result in material adverse effects on our business,
financial position, results of operations and cash flows.
The COVID-19 pandemic or another pandemic or similar outbreak has 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. In addition,
the COVID-19 pandemic resulted in industry events, trade shows and business travel being suspended, cancelled and/or significantly
6 curtailed. 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 other possible pandemics and similar outbreaks, our
sales may continue to be negatively impacted in the future.
In addition, the impact of the COVID-19 pandemic or other possible pandemics 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;
adverse impacts on our ability to distribute or deliver our products or services, 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 or another 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. The adverse impact of the COVID-19
pandemic or another pandemic or similar outbreak on our business, results of operations and financial condition have been and could
continue to be material.
Certain of our products are sold into mature markets, which could limit our ability to continue to generate revenue from these
products. Our ability to sustain and grow our business depends on our ability to develop, market, and sell new products.
Certain of our products are sold into mature markets that are characterized by a trend of declining demand. As the overall market for
these products decreases due to the adoption of new technologies, we expect that our revenues from these products will continue to
decline. As a result, our future prospects will depend on our ability to develop and successfully market new products that address new
and growing markets. Our failure to develop new products or failure to achieve widespread customer acceptance of any new products
could cause us to lose market share and cause our revenues to decline. There can be no assurance that we will not experience
difficulties that could delay or prevent the successful development, introduction, marketing and sale of new products or product
enhancements. Factors that could cause delays include regulatory and/or industry approvals, product design cycle and failure to
identify products or features that customers demand. In addition, the introduction and sale of new products often involves a significant
technical evaluation, and we often face delays because of our customers’ internal procedures for evaluating, approving and deploying
new technologies. For these and other reasons, the sales cycle associated with new products is typically lengthy, often lasting six to 24
months and sometimes longer. Therefore, there can be no assurance that our introduction or announcement of new product offerings
will achieve any significant or sustainable degree of market acceptance or result in increased revenue in the near term.
Our software offerings are subject to 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 specific needs of 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.
7 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;
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.
8 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 upon a relatively small number of distributor and end-user customers for a large portion of our revenue, and a decline
in sales to these major customers would materially adversely affect our business, financial condition, and results of operations.
Historically, we have relied upon a small number of distributors and end-user customers for a significant portion of our net revenue.
Additionally, we expect an increased customer concentration from end-users in the near future based on existing customer supply
agreements and order backlog. Our customer concentration could fluctuate, depending on future customer requirements, which will
depend on market conditions in the industry segments in which our customers participate. The loss of one or more significant
customers or a decline in sales to our significant customers could result in a material loss of sales and possible increase in excess
inventories which would adversely affect our business, financial condition, and results of operations.
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 35% of our net revenue in fiscal 2023. A significant reduction of
effort by one or more distributors to sell our products or a material change in our relationship with one or more distributors may
reduce our access to certain end customers and adversely affect our ability to sell our products. Furthermore, if a key distributor
materially defaults on a contract or otherwise fails to perform, our business and financial results would suffer.
In addition, the financial health of our distributors and our continuing relationships with them are important to our success. Our
business could be harmed if the financial health of these distributors impairs their performance and we are unable to secure alternate
distributors.
Our ability to sustain and grow our business depends in part on the success of our distributors and resellers.
A substantial part of our revenues is generated through sales by distributors and resellers. To the extent they are unsuccessful in selling
our products, or if we are unable to obtain and retain a sufficient number of high-quality distributors and resellers, our operating
results could be materially and adversely affected. In addition, our distributors and resellers may devote more resources to marketing,
selling and supporting products and services that are competitive with ours, than to our products. They also may have incentives to
promote our competitors' products over our products, particularly for our competitors with larger volumes of orders, more diverse
product offerings and a longer relationship with our distributors and resellers. In these cases, one or more of our important distributors
or resellers may stop selling our products completely or may significantly decrease the volume of products they sell on our behalf.
This sales structure also could subject us to lawsuits, potential liability and reputational harm if, for example, any of our distributors or
resellers misrepresents the functionality of our products or services to customers, violates laws or our corporate policies. If we fail to
effectively manage our existing or future distributors and resellers effectively, our business and operating results could be materially
and adversely affected.
Changes to the average selling prices of our products could affect our net revenue and gross margins and adversely affect results
of operations.
In the past, we have experienced reductions in the average selling prices and gross margins of our products. We expect competition to
continue to increase, and we anticipate this could result in additional downward pressure on our pricing. Our average selling prices for
our products might also decline as a result of other reasons, including promotional programs introduced by us or our competitors and
customers who negotiate price concessions. To the extent we are able to increase prices, we may experience a decline in sales volumes
if customers decide to purchase competitive products. If any of these were to occur, our gross margins could decline and we might not
be able to reduce the cost to manufacture our products enough or at all to keep up with the decline in prices.
If we are unable to sell our inventory in a timely manner, it could become obsolete, which could require us to write-down or write
off obsolete inventory, which could harm our operating results.
9 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, the
Transition Networks and Net2Edge businesses of CSI, and Uplogix in 2019, 2020, 2021 and 2022 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.
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
10 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 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.
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.
11 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, including
the effects of climate change. 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 maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including
bank failures, could adversely affect our liquidity and financial performance.
We regularly maintain domestic cash deposits in the Federal Deposit Insurance Corporation (“FDIC”) insured banks, which exceed
the FDIC insurance limits. Bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments
that affect financial institutions, or concerns or rumors about such events, may lead to widespread demands for customer withdrawals
and liquidity constraints that may result in market-wide liquidity problems. For example, on March 10, 2023, SVB failed and was
taken into receivership by the FDIC. At that time, we maintained deposits amounting to approximately 85% of our total cash at SVB.
On March 12, 2023, federal regulators announced that the FDIC would complete its resolution of SVB in a manner that fully protects
all depositors, and on March 26, 2023, the assets, deposits and loans of SVB were acquired by First Citizens Bank. While we were
able to regain full access to our deposits with SVB and have taken steps to diversify our banking relationships since then, our Loan
Agreement with SVB currently requires us to hold 50% of our company-wide cash balances at SVB, and consequently any future
failure of that bank could simultaneously prevent access to both a substantial portion of our cash holdings and to our credit line for
funds needed to meet our working capital requirements and other financial commitments. Our cash balances are concentrated at a
12 small number of financial institutions. In addition, current macroeconomic conditions have continued to cause turmoil in the banking
sector since the failure of SVB. For example, on March 12, 2023, Signature Bank Corp. and Silvergate Capital Corp. were each swept
into receivership, and on May 1, 2023, the FDIC took control of First Republic Bank and brokered its sale to JPMorgan Chase. Further
bank failures, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain
balances, including disruptions that may cause delays in our ability to transfer funds, make payments, or withdraw funds whether held
with SVB or other banks, could adversely impact our liquidity and financial performance. A failure to timely access our cash on
deposit with SVB or other banks could require the scaling back of our operations and production, negatively affect our credit, and
prevent us from fulfilling contractual obligations. Moreover, there can be no assurance that our deposits in excess of the FDIC or other
comparable insurance limits will be backstopped by the U.S. or any applicable foreign government in the future or that any bank or
financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by
acquisition in the event of a future failure or liquidity crisis, and such uninsured deposits may ultimately be lost. In addition, if any of
the parties with whom we conduct business are unable to access funds due to the status of their financial institution, such parties’
ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be
adversely affected.
We have a history of losses.
We have historically incurred net losses. There can be no assurance that we will generate net profits in future periods. Further, there
can be no assurance that we will be cash flow positive in future periods. In the event that we fail to achieve profitability in future
periods, the value of our common stock may decline. In addition, if we are unable to achieve or maintain positive cash flows, we
would be required to seek additional funding, which may not be available on favorable terms, if at all.
We may need additional capital and it may not be available on acceptable terms, or at all.
To remain competitive, we must continue to make significant investments to operate our business and develop our products. Our
future capital requirements will depend on many factors, including the timing and amount of our net revenue, research and
development expenditures, expenses associated with any strategic partnerships or acquisitions and infrastructure investments, and
expenses related to litigation, each of which could negatively affect our ability to generate additional cash from operations. If cash
generated from operations is insufficient to satisfy our working capital requirements, we may need to raise additional capital. Looking
ahead at long-term needs, we may need to raise additional funds for a number of purposes, including, 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;
to respond to competitive pressures or perceived opportunities, such as investment, acquisition and international expansion
activities; or
to acquire additional businesses
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,
13 SVB. In addition, the Loan Agreement with SVB currently requires us to hold 50% of our company-wide cash balances at SVB,
which may limit our ability to manage our cash holdings effectively and could put a substantial portion of those holdings at risk in the
event of a bank failure.
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 U.S. 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
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 and
operating results.
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.
14 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.
Increasing attention on environmental, social and governance matters may have a negative impact on our business, impose
additional costs on us, and expose us to additional risks.
Increasingly regulators (including the SEC), customers, investors, employees and other stakeholders are focusing on environmental,
social and governance (“ESG”) matters. While we have, or are developing, certain ESG initiatives, there can be no assurance that
regulators, customers, investors, and employees will determine that these programs are sufficiently robust. Actual or perceived
shortcomings with respect to our ESG initiatives and reporting can impact our ability to hire and retain employees, increase our
customer base, or attract and retain certain types of investors. In addition, these parties are increasingly focused on specific disclosures
and frameworks related to ESG matters. Collecting, measuring, and reporting ESG information and metrics can be costly, difficult and
time consuming, is subject to evolving reporting standards, and can present numerous operational, reputational, financial, legal and
other risks, any of which could have a material impact on us, including on our reputation and stock price. Inadequate processes to
collect and review this information prior to disclosure could subject us to potential liability related to such information.
Current or future litigation could adversely affect us.
We are subject to a wide range of claims and lawsuits in the course of our business. Any lawsuit may involve complex questions of
fact and law and may require the expenditure of significant funds and the diversion of other resources. The results of litigation are
inherently uncertain, and adverse outcomes are possible.
In particular, litigation regarding intellectual property rights occurs frequently in our industry. The results of litigation are inherently
uncertain, and adverse outcomes are possible. Adverse outcomes may have a material adverse effect on our business, financial
condition or results of operations.
There is a risk that other third parties could claim that our products, or our customers’ products, infringe on their intellectual property
rights or that we have misappropriated their intellectual property. In addition, software, business processes and other property rights in
our industry might be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality
of products in different industry segments overlaps. Other parties might currently have, or might eventually be issued, patents that
pertain to the proprietary rights we use. Any of these third parties might make a claim of infringement against us. The results of
litigation are inherently uncertain, and adverse outcomes are possible.
Responding to any infringement claim, regardless of its validity, could:
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be time-consuming, costly and/or result in litigation;
divert management’s time and attention from developing our business;
require us to pay monetary damages, including treble damages if we are held to have willfully infringed;
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
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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
Rising interest rates may negatively impact our results of operations and financing costs.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of
various governmental and regulatory agencies. In an effort to combat inflation, a number of central banks around the world, including
the U.S., have raised interest rates and are expected to keep increasing interest rates. Increased interest rates may hinder the economic
growth in markets where we do business, and has and may continue to have negative impacts on the global economy. Rising interest
rates may lead customers to decrease or delay spending on products and projects, including on products that we sell, which may have a
material adverse effect on our business, financial condition and results of operations. In addition, higher interest rates impact the
amount of interest we pay for our debt obligations and leases and continue and sustained increases in interest rates could negatively
impact our financing costs or cash flow.
Risks generally associated with a company-wide implementation of an enterprise resource planning (ERP) system may adversely
affect our business and results of operations or the effectiveness of our internal controls over financial reporting.
In October 2022 we implemented a company-wide ERP system to upgrade certain existing business, operational, and financial
processes, and continue to refine the system on an ongoing basis. Our ERP implementation is a complex and time-consuming project.
This project has required and may continue to require investment of capital and human resources, the re-engineering of processes of
our business, and the attention of many employees who would otherwise be focused on other aspects of our business. Any deficiencies
in the design and implementation of the new ERP system could result in higher costs than we had anticipated and could adversely
affect our ability to develop and launch solutions, provide services, fulfill contractual obligations, file reports with the SEC in a timely
manner, operate our business or otherwise affect our controls environment. Any of these consequences could have an adverse effect
on our results of operations and financial condition. In addition, because the ERP is a new system that we have limited prior
experience with, there is an increased risk that one or more of our financial controls may fail. Any failure to maintain internal control
over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash
flows. If we determine that we have a material weakness in our internal control over financial reporting, we could lose investor
confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we
could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC, or other regulatory authorities. Failure to remedy
any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems
required of public companies, could also restrict our future access to the capital markets.
We identified a material weakness in our internal control related to ineffective information technology general controls which, if not
remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price.
Internal controls related to the operation of technology systems are critical to maintaining adequate internal control over financial
reporting. As disclosed in Part II, Item 9A, during the fourth quarter of fiscal 2023, management identified a material weakness related
to the design and implementation of information technology general controls related to the Company’s information systems that are
relevant to the preparation of consolidated financial statements. Specifically, we did not design and maintain user access controls to
adequately restrict user access to the financial application and data to appropriate Company personnel. As a result, management
concluded that our internal control over financial reporting was not effective as of June 30, 2023. We are implementing remedial
measures and, while there can be no assurance that our efforts will be successful, we plan to remediate the material weakness prior to
the end of fiscal 2024. These measures will result in additional technology and other expenses. If we are unable to remediate the material
weakness, or are otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures,
our ability to record, process and report financial information accurately, and to prepare financial statements within required time
periods, could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment
of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.
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.
16
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:
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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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sales of common stock by our stockholders or us or repurchases of common stock by us.
In addition, the Nasdaq Capital Market often experiences price and volume fluctuations. These fluctuations often have been unrelated
or disproportionate to the operating performance of companies listed on the Nasdaq Capital Market.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The following table presents details regarding our leased facilities:
Locations
Irvine, California, U.S.A.
Plymouth, Minnesota, U.S.A.
Vancouver, British Columbia, Canada
Hyderabad, India
Illmenau, Germany
Taiwan
Primary Use
Corporate headquarters; sales and marketing, research and development,
operations and administration
Operations and warehousing, engineering, sales and marketing
Engineering
Engineering
Engineering, sales and marketing
Engineering, sales and marketing
Approximate
Square
Footage
14,000
66,000
8,500
18,000
7,500
5,500
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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.
18 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 31, 2023 was approximately 28.
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 2023.
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 Annual Report on Form 10-K for the
fiscal year ended June 30, 2023 (“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 high growth applications
in specific verticals such as Smart Grid, Intelligent Transportation, Smart Cities, and AI Data Centers. Building on a long history of
Networking and video processing competence, target applications include Intelligent Substations infrastructure, Infotainment systems,
and Video Surveillance, supplemented with a comprehensive Out of Band Management (“OOB”) products offering for Cloud and
Edge Computing.
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 2023” refer to the fiscal year ended June 30, 2023 and references to “fiscal 2022” refer to the fiscal year ended
June 30, 2022.
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, remote environment management (“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
TN Companies Acquisition
19 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 included earnout payments of up to
$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.
Uplogix Acquisition
On September 12, 2022 we acquired Uplogix, Inc. (“Uplogix”) for an aggregate purchase price of $8,000,000, subject to certain
adjustments, plus an earnout up to an additional $4,000,000 depending on the achievement of certain revenue targets of the business of
Uplogix through September 30, 2023. Uplogix brings immediate scale to our out-of-band remote management solutions, adding a
complementary high-end product offering that includes high-margin maintenance and licensing revenues.
Refer to Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Report, which is incorporated herein
by reference, for additional discussions regarding these acquisitions.
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, inventory valuation, restructuring charges,
valuation of deferred income taxes, valuation of goodwill and long-lived and intangible assets, share-based compensation, litigation
and other contingencies. We base our estimates and assumptions on historical experience and on various other factors that we believe
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. To the extent there are material differences between our estimates and
the actual results, our future results of operations will be affected.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our
consolidated financial statements:
Revenue Recognition
Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the
consideration we expect to receive in exchange for those products or services. We apply the following five-step approach in
determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer, (ii) identifying the
performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance
obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied.
A significant portion of our products are sold to distributors under agreements which contain (i) limited rights to return unsold
products and (ii) price adjustment provisions, both of which are accounted for as variable consideration when estimating the amount of
revenue to recognize. Establishing accruals for product returns and pricing adjustments requires the use of judgment and estimates that
impact the amount and timing of revenue recognition. When product revenue is recognized, we establish an estimated allowance for
future product returns based primarily on historical returns experience and other known or anticipated returns. We also record
reductions of revenue for pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related
revenue is recognized, based primarily on approved pricing adjustments and our historical experience. Actual product returns or
pricing adjustments that differ from our estimates could result in increases or decreases to our net revenue.
A portion of our revenues are derived from engineering and related consulting service contracts with customers. These contracts
generally include performance obligations in which control is transferred over time because the customer either simultaneously
receives and consumes the benefits provided or our performance on the contract creates or enhances an asset that the customer
controls. These contracts typically provide services on the following basis:
20 (cid:120) 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.
(cid:120) 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.
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.
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 actual 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
21 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
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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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 2023, 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.
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:
22 (cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
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 is 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, 2023 and 2022
Summary
For fiscal 2023, our net revenue increased by $1,534,000, or 1.2%, compared to fiscal 2022. The increase in net revenue was driven by
a 3.0% increase in net revenue in our Embedded IoT Solutions product line, as well as an increase of 13.5% in net revenues in our
Software & Services product line partially offset by a decrease of 2.6% in net revenues in our IoT System Solutions product line. We
had a net loss of $8,980,000 for fiscal 2023 compared to a net loss of $5,362,000 for fiscal 2022. The increase in net loss was driven
primarily by increased headcount costs related to the Uplogix acquisition as both selling, general and administrative and research and
development expenses as a percent of net revenue were higher in fiscal 2023 than fiscal 2022. Additionally, in fiscal 2022 we recorded
a tax benefit resulting from a U.S. deferred tax liability in the TN Companies acquisition purchase accounting related to non-tax-
deductible intangible assets.
Net Revenue
The following tables present our net revenue by product lines and by geographic region:
23 Years Ended June 30,
2023
% of Net
Revenue
2022
% of Net
Revenue
Change
$
%
Embedded IoT Solutions
IoT System Solutions
Software & Services
Americas
EMEA
APJ
Embedded IoT Solutions
$
$
63,636
57,496
10,057
131,189
2023
$
$
78,557
23,286
29,346
131,189
(In thousands, except percentages)
$
$
48.5%
43.8%
7.7%
100.0%
$
61,773
59,019
8,863
129,655
47.6%
45.5%
6.9%
100.0%
$
1,863
(1,523 )
1,194
1,534
3.0%
(2.6% )
13.5%
1.2%
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
Change
$
%
(In thousands, except percentages)
$
$
59.9%
17.7%
22.4%
100.0%
$
77,799
22,542
29,314
129,655
60.0%
17.4%
22.6%
100.0%
$
758
744
32
1,534
1.0%
3.3%
0.1%
1.2%
Net revenue increased in fiscal 2023 compared to fiscal 2022 primarily due to organic growth in our compute modules in the APJ and
EMEA regions as well as increased sales of our network interface cards, primarily in the Americas region. This increase was partially
offset by a decrease in revenues from our wireless communications products and embedded ethernet connectivity products across all
regions.
IoT System Solutions
Net revenue decreased primarily due a decrease in our out of band (“OOB”) and converter and radio products, partially offset by
increases in our gateway and network switch products, all mostly within the Americas.
Software & Services
Net revenue increased primarily due to an increase in our extended warranty services in the Americas region, mostly as a result of the
Uplogix acquisition.
Gross Profit
Gross profit represents net revenue less cost of revenue. Cost of revenue consists primarily of the cost of raw material components,
subcontract labor assembly by contract manufacturers, freight costs, personnel-related expenses, manufacturing overhead, inventory
reserves for excess and obsolete products or raw materials, warranty costs, royalties and share-based compensation.
The following table presents our gross profit:
Gross profit
2023
$
56,264
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
(In thousands, except percentages)
42.9% $
55,586
$
42.9%
$
%
678
1.2%
Gross profit as a percentage of revenue (“gross margin") in fiscal 2023 remained consistent with fiscal 2022. As compared to the prior
year period, in the current period we experienced increased revenue from our high-margin extended warranty services, mostly from
the Uplogix acquisition, as well as increased unit sales of some of our NICs and optics products, which typically carry a higher margin
than our other embedded solutions. This was offset by decreased unit sales in our OOB products, which also typically carry a high
margin, as well as lower margins on our engineering services revenue during fiscal 2023.
Selling, General and Administrative
Selling, general and administrative expenses consisted of personnel-related expenses including salaries and commissions, share-based
compensation, facility expenses, information technology, advertising and marketing expenses and professional legal and accounting
fees.
The following table presents our selling, general and administrative expenses:
24 19,368
5,833
1,893
1,476
4,862
288
809
34,529
11,408
2,351
1,158
817
1,015
938
17,687
$
Personnel-related expenses
Professional fees and outside services
Advertising and marketing
Facilities and insurance
Share-based compensation
Depreciation
Other
Selling, general and administrative
$
2023
19,453
6,064
2,136
2,538
4,546
1,022
1,189
36,948
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
Change
$
%
(In thousands, except percentages)
$
$
85
231
243
1,062
(316 )
734
380
2,419
0.4%
4.0%
12.8%
72.0%
(6.5% )
254.9%
47.0%
7.0%
28.2%
$
26.6% $
Selling, general and administrative expenses increased in fiscal 2023 when compared to fiscal 2022 primarily due to (i) increased
personnel-related expenses in headcount added from the Uplogix acquisition, (ii) higher accounting, audit and legal fees primarily
related to compliance with Section 404(b) of the Sarbanes-Oxley Act, (iii) higher facilities and insurance expenses related to our new
Minnesota warehouse location, (iv) higher advertising and marketing costs related to increased trade show activity, (v) higher
depreciation related to property and equipment for our new facilities in California and Minnesota and (vi) higher bad debt expenses
included in the “Other” category above.
Research and Development
Research and development expenses consisted of personnel-related expenses, share-based compensation, and expenditures to third-
party vendors for research and development activities and product certification costs. Our costs from period-to-period related to
outside services and product certifications vary depending on our level and timing of development activities.
The following table presents our research and development expenses:
Personnel-related expenses
Facilities
Outside services
Product certifications
Share-based compensation
Other
Research and development
2023
$
$
12,535
2,664
773
1,067
1,504
1,082
19,625
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
(In thousands, except percentages)
$
$
15.0%
$
13.6% $
$
%
1,127
313
(385 )
250
489
144
1,938
9.9%
13.3%
(33.2% )
30.6%
48.2%
15.4%
11.0%
Research and development expenses increased in fiscal 2023 when compared to fiscal 2022 primarily due to an increase in personnel-
related costs driven by the acquisition of Uplogix and internal growth of our engineering teams worldwide. We also experienced
increased share-based compensation expenses from certain grants of performance stock units.
Restructuring, Severance and Related Charges
During fiscal 2023 and 2022, we incurred charges of approximately $693,000 and $795,000, respectively, primarily related to
headcount reductions in connection with synergy capture and the elimination of redundant roles from the acquisitions of Uplogix and
the TN Companies.
We may incur additional restructuring, severance and related charges in future periods as we continue to identify cost savings and
synergies related to our acquisitions and general business operations.
Acquisition-Related Costs
During fiscal 2023 we incurred approximately $315,000 of costs primarily in connection with the acquisition of Uplogix. These costs
were mainly comprised of legal and other professional fees.
In fiscal 2022 we incurred approximately $889,000 of acquisition-related costs, mostly comprised of banking and legal fees related to
the acquisition of the TN Companies and our exploration of other acquisition targets.
25 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 $5,804,000 and
$5,590,000 during fiscal 2023 and 2022, respectively.
Interest Income (Expense), Net
For fiscal 2023 and 2022, 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.
Provision for Income Taxes
The following table presents our provision for income taxes:
Provision (benefit) for income taxes
$
748
(In thousands, except percentages)
(1.4% ) $
(1,832 )
0.6% $
Years Ended June 30,
% of Net
Revenue
2022
% of Net
Revenue
2023
$
%
2,580
(140.8% )
The following table presents our effective tax rate based upon our provision for income taxes:
Effective tax rate
Years Ended June 30,
2023
2022
(9.1% )
25.5%
We utilize the liability method of accounting for income taxes. The differences between our effective tax rate and the federal statutory
rate in fiscal 2023 and fiscal 2022 were also impacted by the effect of our domestic losses recorded without a tax benefit, as well as
the effect of certain state and foreign earnings taxed at rates differing from the federal statutory rate.
In fiscal 2022 we recorded a tax benefit resulting from 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.
We record net deferred tax assets to the extent we believe these assets are more likely than not to be realized. Aside from a net
deferred tax liability of $146,000 that we recorded as of June 30, 2023, 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 at June 30, 2023 and
2022. Refer to Note 8 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Report, for additional
information.
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 NOL carryforwards:
Federal
State
June 30, 2023
(In thousands)
$
$
43,320
22,589
26 Our federal NOL carryforwards generated for tax years beginning before July 1, 2018 began to expire in the fiscal year ended June 30,
2021. Pursuant to the 2017 Tax Cuts and Jobs Act (the “2017 Act”), we also have federal NOL carryforwards of $6,788,000 that will
not expire but can only be used to offset 80% of future taxable income. For state income tax purposes, our NOL carryforwards began
to expire in the fiscal year ended June 30, 2013.
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,
2023
2022
(In thousands)
Change
$
$
50,163 $
13,452 $
54,512 $
17,221 $
(4,349 )
(3,769 )
In September 2022 we entered into an amendment to our Senior Credit Facilities (as defined in Note 5 of Notes to Consolidated
Financial Statements, included in Part II, Item 8 of this Report) which provide for an additional term loan in the original principal
amount of $5,000,000 that matures on August 2, 2025. We also borrowed $2,000,000 on our revolving credit facility, which we repaid
in February of 2023.
On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the
Federal Deposit Insurance Corporation (“FDIC”) as receiver. On March 13, 2023, the FDIC announced that it had transferred all
insured and uninsured deposits and substantially all assets of SVB to a newly created, full-service FDIC-operated “bridge bank” called
Silicon Valley Bridge Bank, N.A., where depositors would have full access to their money immediately. On March 27, 2023, First
Citizens Bank announced that it had entered into an agreement with the FDIC to purchase all of the assets and liabilities of Silicon
Valley Bridge Bank, N.A. We were informed by SVB that the Senior Credit Facilities remain available on the same terms as set forth
in the Loan Agreement (as defined in Note 5 to Consolidated Financial Statements included in Part II, Item 8 of this Report),
notwithstanding the closure of SVB, however there can be no assurances that the closure of SVB or any related impacts across the
financial services industry will not adversely affect our ability to access any additional term loans that may be available under the
Loan Agreement.
Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts available under
the Senior Credit Facilities, and cash generated from operations. We believe that our current cash holdings and net cash flows from
operations are sufficient to satisfy our current obligations for the foreseeable future, and, assuming continued access to the undrawn
amounts available under our Senior Credit Facilities, these combined sources will be sufficient to fund our material requirements for
working capital, capital expenditures and other financial commitments for at least the next 12 months and beyond. We continue to
monitor the availability of potential alternate sources of credit based on market conditions and our ongoing capital requirements.
There can be no guarantee that we would be able to obtain any needed alternate financing on acceptable terms, or at all, or that such a
financing would not result in a default under the Loan Agreement. We anticipate that the primary factors affecting our cash and
liquidity are net revenue, working capital requirements and capital expenditures.
Beginning in Fiscal 2023, the 2017 Act requires that for tax purposes we capitalize certain research and development expenses and
amortize domestic expenses over five years and foreign expenses over 15 years. We expect this requirement will increase our taxable
income in certain state jurisdictions for which our ability to utilize NOL carryforwards to offset income taxes will be limited.
We define 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 the FDIC. There can be no
assurance that our deposits in excess of the FDIC limits will be backstopped by the U.S., or that any bank or financial institution with
which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event
of a failure or liquidity crisis.
As of the date of this Report, we have full access to and control of our cash and cash equivalents balance at SVB and our other
banking institutions. We continue to monitor the circumstances surrounding SVB and the other 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. In light of the status of SVB, we have considered and may consider in the future moving our bank accounts and cash resources
to other financial institutions, which could result in SVB declaring us to be in default under the Loan Agreement. In April 2023, we
entered into the Letter Agreement (as defined in Note 5 to Consolidated Financial Statements included in Part II, Item 8 of this Report)
with SVB, which, among other matters, amended the Loan Agreement to reduce the former requirement to hold 85% of our company-
wide cash balances at SVB to 50% and provided a waiver of any event of default under the Loan Agreement for any failure to comply
27 with this covenant prior to the date of the Letter Agreement. As of the date of this Report, we are in compliance with all covenants of
the Loan Agreement.
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.
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 provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
Operating Activities
Years Ended June 30,
2023
2022
(In thousands)
(Decrease)
Increase
$
237 $
(7,323 )
3,317
(9,416 ) $
(25,747 )
42,645
9,653
(18,424 )
(39,328 )
Our operations provided cash during fiscal 2023 compared to using cash in fiscal 2022. For fiscal 2023, our net loss included
$13,644,000 of non-cash charges, and the changes in operating assets and liabilities used cash of $4,427,000.
Our net inventories increased by $12,057,000, or 32.0%, from June 30, 2022 to June 30, 2023. The increase was primarily related to
the purchase of components for a supply arrangement that we entered into with a customer in January 2023 for which we received a
deposit of $15,500,000 from said customer to reimburse us for the cost of the component purchases. In addition, we assumed
$3,590,000 of net inventories in the Uplogix acquisition.
Accounts payable decreased by $8,243,000, or 39.9%, from June 30, 2022 to June 30, 2023, which was slightly offset by the
acquisition of $278,000 of accounts payable from the Uplogix acquisition. The reduction is primarily due to the timing of our
inventory purchases and related payments to our vendors during the current fiscal year.
Other current liabilities increased by $20,336,000, or 239.9%, from June 30, 2022 to June 30, 2023. This was mostly driven by
increases of approximately (i) $15,500,000 in deposits related to expected future shipments under a customer contract, (ii) $1,524,000
in deferred revenue, mostly acquired in the Uplogix acquisition, and (iii) $1,271,000 in earnout consideration payable related to the
Uplogix acquisition.
Investing Activities
Net cash used in investing activities during fiscal 2023 was driven by the acquisition of Uplogix, which used net cash of $4,650,000.
We also used $2,673,000 for the purchase of property and equipment, primarily related to building out and furnishing our new lease
facilities in California and Minnesota.
Financing Activities
Net cash provided by financing activities during fiscal 2023 resulted primarily from $7,000,000 in gross proceeds received from our
credit facilities with SVB. The increase in cash was partially offset by principal payments on the senior credit facility and repayment
28 of the $2,000,000 balance on the revolving credit facility, as well as tax withholdings paid on behalf of employees for restricted
shares.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for a “smaller reporting company.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required by this Item 8, including the report of our independent registered public accounting firm, are
included in Part IV, Item 15 of this Report, as set forth beginning on page F-1 of this Report, and are incorporated by reference into
this Item 8.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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 Securities Exchange Act of
1934, as amended (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, 2023. Based on such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2023 due to the material
weaknesses identified and described below.
In light of the material weaknesses described below, management performed additional analysis and other procedures to ensure that
our interim and annual Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”). Accordingly, management believes that the Consolidated Financial Statements included in this Report fairly
present, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented, in
accordance with U.S. GAAP.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting includes policies and procedures that
provide reasonable assurance regarding the reliability of financial reporting and the preparation of Consolidated Financial Statements
for external reporting purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and
procedures that:
(cid:120) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
our assets;
(cid:120) provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in
accordance with U.S. GAAP and that our receipts and expenditures are being made only in accordance with authorizations of
our management and directors; and
(cid:120) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of our
assets that could have a material effect on the Consolidated Financial Statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may
not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting
may vary over time.
29 Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2023 based on
the guidelines established in the Internal Control—Integrated Framework (2013 framework) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). We excluded Uplogix, Inc. from our assessment of internal control over
financial reporting as of June 30, 2023 because it was acquired in a business purchase acquisition during the fiscal year ended June 30,
2023. The total revenue excluded represented approximately 4% of our consolidated fiscal 2023 net revenue. Based on its assessment,
management concluded that the Company’s internal control over financial reporting was not effective as of June 30, 2023 due to
material weakness in our control environment whereby the Company did not maintain adequate information technology (“IT”) general
controls related to user access to the Company’s information systems that are relevant to the preparation of financial statements to
ensure appropriate segregation of duties and to adequately restrict access to financial applications and data. Notwithstanding that we
did not identify any material misstatements to the consolidated financial statements and there were no changes to previously released
financial results as a result of the material weakness, the control deficiencies created a reasonable possibility that a material
misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. As a result, management
believes that, as of June 30, 2023, our internal control over financial reporting was not effective.
Baker Tilly US, LLP, the independent registered public accounting firm that audited the financial statements included in this Annual
Report on Form 10-K, has provided an attestation report on Lantronix’s internal control over financial reporting. As a result of the
material weaknesses described below, such report includes an adverse audit report on the effectiveness of internal control over
financial reporting as of June 30, 2023.
Material Weakness in Internal Control Over Financial Reporting
In connection with the evaluation of the Company’s internal control over financial reporting as described above, management has
identified a deficiency constituting a material weakness related to the design and implementation of information technology general
controls related to the Company’s information systems that are relevant to the preparation of consolidated financial statements.
Specifically, we did not design and maintain user access controls to adequately restrict user access to the financial application and data
to appropriate Company personnel.
Notwithstanding we did not identify any material misstatements to the consolidated financial statements and there were no changes to
previously released financial results as a result of this material weakness, the control deficiencies created a reasonable possibility that
a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.
Remediation Efforts to Address the Material Weaknesses Existing in the Current Period
Management has initiated a remediation plan to enhance the design of information technology general controls related to user access
by implementing controls over user access including monitoring controls and enforcing proper segregation of duties within IT
environments based on roles and responsibilities. The material weakness will not be considered remediated until the controls have
operated effectively, as evidenced through testing, for a sufficient number of instances.
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, 2023 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On September 11, 2023, Heidi Nguyen and Paul Folino notified the Company of their decision not to stand for re-election at the
Company’s 2023 annual meeting of stockholders (the “Annual Meeting”). Their decision was not as a result of any disagreement with
the Company on any matter relating to the Company’s operations, policies or practices. The Company has selected Bernhard Bruscha
as a nominee for election by stockholders at the Annual Meeting, and the size of the board of directors has been reduced to five
members, effective as of the Annual Meeting.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
30 PART III
Portions of our definitive Proxy Statement on Schedule 14A relating to our 2023 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.
31 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Consolidated Financial Statements
PART IV
The following consolidated financial statements and related Report of Independent Registered Public Accounting Firm are filed as
part of this Report.
Report of Independent Registered Public Accounting Firm (PCAOB ID 23)
Consolidated Balance Sheets as of June 30, 2023 and 2022
Consolidated Statements of Operations for the fiscal years ended June 30, 2023 and 2022
Consolidated Statements of Stockholders’ Equity for the fiscal years ended June 30, 2023 and 2022
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2023 and 2022
Notes to Consolidated Financial Statements
Page
F-1
F-4
F-5
F-6
F-7
F-8 – F-37
2. Exhibits
Exhibit
Number
Exhibit Description
Incorporated by Reference
Provided
Herewith
Form
Exhibit
Filing
Date
3.1 Amended and Restated Certificate of Incorporation of Lantronix, Inc., as
10-K
3.1
8/29/2013
amended
3.2 Amended and Restated Bylaws of Lantronix, Inc.
4.1 Description of Lantronix Common Stock
8–K
10-K
3.2
11/15/2012
4.1
9/11/2019
10.1* Lantronix, Inc. 2010 Inducement Equity Incentive Plan
10–Q
10.2
11/08/2010
10.2* Form of Stock Option Agreement under the Lantronix, Inc. 2010
10–Q
10.3
11/08/2010
Inducement Equity Incentive Plan
10.3* Lantronix, Inc. Amended and Restated 2010 Stock Incentive Plan, as
8-K
99.1
11/15/2017
Amended on November 14, 2017
10.4* Form of Stock Option Agreement under the Lantronix, Inc. Amended and
Restated 2010 Stock Incentive Plan
10.5* Form of Restricted Stock Award Agreement under the Lantronix, Inc.
Amended and Restated 2010 Stock Incentive Plan
S-8
S-8
4.3
5/09/2013
4.4
5/09/2013
10.6* Lantronix, Inc. 2020 Performance Incentive Plan, as amended and restated
8-K
10.1
11/09/2022
10.7* Form of Director Stock Option Agreement under the Lantronix, Inc. 2020
10-K
10.7
8/27/2021
Performance Incentive Plan
10.8* Form of Restricted Stock Unit Award Agreement under the Lantronix, Inc.
10-K
10.8
8/27/2021
2020 Performance Incentive Plan
10.9* Form of Director Restricted Stock Unit Award Agreement under the
10-K
10.9
8/27/2021
Lantronix, Inc. 2020 Performance Incentive Plan
10.10* Form of Nonqualified Stock Option Agreement under the Lantronix, Inc.
10-K
10.10
8/27/2021
2020 Performance Incentive Plan
32 10.11* Form of Incentive Stock Option Agreement under the Lantronix, Inc. 2020
10-K
10.11
8/27/2021
Performance Incentive Plan
10.12* Form of Performance Stock Unit Award Agreement under the Lantronix,
10-K
10.12
8/27/2021
Inc. 2020 Performance Incentive Plan
10.13*+ Form of Performance Stock Unit Award Agreement under the Lantronix,
10-K
10.13
8/29/2022
Inc. 2020 Performance Incentive Plan (2022 Grants)
10.14* Letter Agreement dated September 8, 2011 between Lantronix, Inc. and
8–K
10.1
9/26/2011
Jeremy Whitaker
10.15* Amendment to Offer Letter between Lantronix, Inc. and Jeremy Whitaker,
8-K
99.2
11/15/2012
dated as of November 13, 2012
10.16* Form of Indemnification Agreement entered into between Lantronix, Inc.
8-K
10.2
6/20/2016
with its directors and certain of its executive officers
10.17* Summary of Lantronix, Inc. Annual Bonus Program
10.18* Form of Executive Officer Retention Letter Agreement
8-K
8-K
99.1
9/08/2015
10.1
7/05/2023
10.19*+ Change in Control Agreement between Lantronix, Inc. and Jeremy
10-K
10.19
8/29/2022
Whitaker, dated December 2, 2021
10.20* Lantronix, Inc. 2013 Employee Stock Purchase Plan, as amended and
8-K
10.2
11/9/2022
restated
10.21* Offer Letter dated March 23, 2019 between Lantronix, Inc. and Paul H.
8-K
99.1
3/27/2019
Pickle
10.22* Inducement Stock Option Agreement, dated April 22, 2019, between
S–8
4.1
4/26/2019
Lantronix, Inc. and Paul H. Pickle
10.23* Inducement Restricted Stock Unit Agreement, effective as of May 1, 2019,
S–8
4.2
4/26/2019
between Lantronix, Inc. and Paul H. Pickle
10.24* Offer Letter dated January 4, 2020, between Lantronix, Inc. and Roger
10-K
10.22
9/11/2020
Holliday
10.25* Form of Inducement Stock Option Agreement
10.26* Form of Inducement Restricted Stock Unit Agreement
S-8
S-8
4.1
4.2
9/04/2020
9/04/2020
10.27* Intrinsyc Technologies Corporation Amended and Restated Incentive
10-Q
10.1
5/15/2020
Stock Option Plan
10.28* Intrinsyc Technologies Corporation Restricted Share Unit Plan
10-Q
10.2
5/15/2020
10.29 Third Amended and Restated Loan and Security Agreement with Silicon
8-K
10.1
8/02/2021
Valley Bank, dated August 2, 2021, by and between Lantronix, Inc.,
Lantronix Holding Company, Lantronix Canada ULC and Lantronix
Technologies Canada (Taiwan) Ltd. and Transition Networks, Inc.
10.30 Mezzanine Loan and Security Agreement, dated August 2, 2021, by and
8-K
10.2
8/02/2021
between Lantronix, Inc. and SVB Innovation Credit Fund VIII, L.P.
10.31 2020 Non-Employee Director Compensation Policy
10-Q
10.1
11/12/2021
10.32*+ Non-Employee Director Compensation Policy, as revised August 8, 2022
10-K
10.32
8/29/2022
to be effective November 8, 2022
33 10.33 Warrant to Purchase Common Stock issued to SVB Innovation Credit
10-Q
10.2
11/12/2021
Fund VIII, L.P.
10.34+ Warrant to Purchase Common Stock issued to Innovation Credit Fund
10-K
10.34
8/29/2022
VIII-A, L.P.
10.35 Lease dated November 5, 2021 between Lantronix, Inc. and Discovery
8-K
10.1
11/8/2021
Business Center LLC
10.36 Lease dated January 20, 2022 between Lantronix, Inc. and Jet 55 Property
8-K
10.1
1/26/2022
Owner LLC
10.37 First Amendment to Third and Restated Loan Security Agreement dated
February 15, 2022, among Lantronix, Inc., Lantronix Holding Company,
Lantronix Canada, ULC and Lantronix Technologies Canada (Taiwan)
Ltd. and Transition Networks, Inc.
10-Q
10.3
2/11/2022
10.38 Second Amendment to Third and Restated Loan Security Agreement dated
8-K
10.1
2/16/2022
February 15, 2022, among Lantronix, Inc., Lantronix Holding Company,
Lantronix Canada, ULC and Lantronix Technologies Canada (Taiwan)
Ltd. and Transition Networks, Inc.
10.39 Third Amendment to Third Amended and Restated Loan and Security
Agreement dated September 7, 2022 among Lantronix, Inc., Lantronix
Holding Company, Lantronix Canada ULC and Lantronix Canada
(Taiwan) Ltd., Transition Networks, Inc. and Silicon Valley Bank
8-K
10.1
9/12/2022
10.40* Offer Letter dated July 30, 2018 between Lantronix, Inc. and Fathi Hakam
10.41* Change in Control Agreement between Lantronix, Inc. and Fathi Hakam
dated April 25, 2021
10-Q
10-Q
10.2
11/9/2022
10.3
11/9/2022
10.42* Offer Letter dated December 12, 2022 and countersigned January 24, 2023
X
between Lantronix, Inc. and Eric Bass
10.43 Letter Agreement dated April 3, 2023, by and between Silicon Valley
8-K
10.1
4/6/2023
Bank, a Division of First-Citizens Bank & Trust Company (successor by
purchase to the Federal Deposit Insurance Corporation as receiver for
Silicon Valley Bank, N.A. (as successor to Silicon Valley Bank),
Lantronix, Inc., Lantronix Holding Company, Lantronix Technologies
Canada (Taiwan) Ltd., Lantronix Canada ULC, Transition Networks, Inc.
and Uplogix, Inc.
21.1+ Subsidiaries of Lantronix, Inc.
23.1+ Consent of Independent Registered Public Accounting Firm, Baker Tilly
US, LLP
24.1+ Power of Attorney (included on the signature page)
31.1+ Certification of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2+ Certification of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1++ Certification of Chief Executive Officer and Chief Financial Officer
furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
X
X
X
X
X
34 101.INS Inline XBRL Instance Document - the instance document does not appear
in the Interactive Data File because its XBRL tags are embedded within the
Inline XBRL document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as inline XBRL and contained
in Exhibit 101)
__________
*
+
++
Indicates management contract or compensatory plan, contract or arrangement.
Filed herewith
Furnished herewith.
ITEM 16. FORM 10-K SUMMARY
None.
35 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
LANTRONIX, INC.
By:
/s/ JEREMY WHITAKER
Jeremy Whitaker
Interim Chief Executive Officer and Chief
Financial Officer
Date: September 12, 2023
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and
appoints Jeremy Whitaker, acting individually, as his or her true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto
said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite
and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or their or his or her substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
/s/ JEREMY WHITAKER
Jeremy Whitaker
/s/ PAUL FOLINO
Paul Folino
/s/ PHILIP BRACE
Philip Brace
/s/ JASON COHENOUR
Jason Cohenour
/s/ PHU HOANG
Phu Hoang
/s/ HEIDI NGUYEN
Heidi Nguyen
/s/ HOSHI PRINTER
Hoshi Printer
Date
September 12, 2023
Interim Chief Executive Officer and Chief Financial
Officer
(Principal Executive, Financial and Accounting Officer)
Chairman of the Board
September 12, 2023
Director
Director
Director
Director
Director
September 12, 2023
September 12, 2023
September 12, 2023
September 12, 2023
September 12, 2023
36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Lantronix, Inc.:
Irvine, California
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Lantronix, Inc. and its subsidiaries (the Company) as of June 30,
2023 and 2022, 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). We also have audited the Company’s internal control
over financial reporting as of June 30, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30,
2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, because of the
effect of the material weakness described below on the achievement of the objective of the control criteria, the Company has not
maintained effective internal control over financial reporting as of June 30, 2023, based on the COSO criteria.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
Management has identified a material weakness associated with ineffective information technology general controls (ITGCs) in the
areas of user access controls over the information technology (IT) systems that supports the Company’s financial reporting processes.
Automated and manual business process controls that are dependent on the affected ITGCs were also deemed ineffective because they
could have been adversely impacted to the extent that they rely upon information from the affected IT systems.
The material weakness referred to above is described in Management’s Annual Report on Internal Control Over Financial Reporting
included in Item 9A of this Annual Report on Form 10-K. This material weakness was considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and our opinion regarding the effectiveness
of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Item 9A of this
Annual Report on Form 10-K. Our responsibility is to express an opinion on the Company's consolidated financial statements and an
opinion on the Company’s internal control over financial reporting 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 audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements 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. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
37 company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
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.
INVENTORIES – EXCESS AND OBSOLETE RESERVE
Critical Audit Matter Description
As described in Note 1 and 4 to the consolidated financial statements, inventories are stated at the lower of cost or net
realizable value and the Company’s consolidated inventories balance was approximately $49.7 million at June 30, 2023, 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. The procedures to audit management’s lower of cost or net realizable value
determination for excess or obsolete inventories was especially challenging and highly judgmental because of (i) Inherent
estimation uncertainty relating to assumptions used by management in the inventory reserve model which involved a high
degree of subjectivity. (ii) the uncertainties in determining demand for aging inventory and (iii) future market conditions.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
(cid:131) Obtaining an understanding and evaluating the design of the controls over the determination of the lower of cost or
(cid:131)
(cid:131)
(cid:131)
(cid:131)
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 ACQUISITION OF UPLOGIX, INC.
Critical Audit Matter Description
As described in Note 3 to the consolidated financial statements, on September 12, 2022, the Company acquired Uplogix, Inc.
The transaction was accounted for as business combination and the assets acquired and liabilities assumed have been
recorded based on the final assessment of fair value. The acquired intangible assets included approximately $1.0 million in
customer relationships and approximately $0.6 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.
We identified auditing of management’s valuation of intangible assets in the acquisition of Uplogix, Inc. as a critical audit
matter. 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)
38 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:
(cid:131) Obtaining an understanding and evaluating 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.
Evaluating the Company's selection of the valuation methodology and testing significant assumptions and inputs
used by the Company in the valuation of the intangible assets by evaluating the sensitivity of changes in
assumptions to the fair value of the intangible assets and comparing the significant assumptions to current industry
and market and economic trends.
Evaluating the competency and objectivity of third-party specialists engaged by the Company to assist in developing
management’s assumptions.
Involving firm employed valuation specialists to assist with our evaluation of the methodology and significant
underlying assumptions used by management in determining the fair value estimates.
Testing the mathematical accuracy of the models used to determine the fair values of assets acquired.
(cid:131)
(cid:131)
(cid:131)
(cid:131)
/s/ Baker Tilly US, LLP
We have served as the Company’s auditors since 2011.
Irvine, California
September 12, 2023
39 LANTRONIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)
Assets
Current Assets:
Cash and cash equivalents
Accounts receivable, net
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)
$
$
$
June 30,
2023
June 30,
2022
$
$
$
13,452
27,682
49,736
3,019
2,662
96,551
4,629
27,824
10,565
11,583
472
151,624
12,401
2,431
2,743
28,813
46,388
16,221
11,459
74,068
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
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; 36,875,586 and
35,129,301 shares issued and outstanding at June 30, 2023 and 2022, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
–
–
4
295,686
(218,505 )
371
77,556
$
151,624 $
4
289,046
(209,525 )
371
79,896
137,374
See accompanying notes to consolidated financial statements.
40 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
Weighted-average common shares - basic and diluted
$
Years Ended June 30,
2023
2022
$
131,189
74,925
56,264
129,655
74,069
55,586
36,948
19,625
693
315
(447 )
5,804
62,938
(6,674 )
(1,485 )
–
(73 )
(8,232 )
748
(8,980 ) $
34,529
17,687
795
889
1,107
5,590
60,597
(5,011 )
(1,472 )
(764 )
53
(7,194 )
(1,832 )
(5,362 )
(0.25 ) $
(0.16 )
36,257
32,671
$
$
See accompanying notes to consolidated financial statements.
41 LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Accumulated Comprehensive Stockholders'
Income
Equity
Deficit
Total
Balance at June 30, 2021
Shares issued pursuant to equity offering, net
Shares issued pursuant to stock awards, net
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
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, 2023
29,088 $
4,700
1,341
3 $
1
–
249,885 $
32,593
1,633
–
–
(1,811 )
(204,163 ) $
–
–
–
371 $
–
–
46,096
32,594
1,633
–
(1,811 )
–
–
–
35,129 $
1,746
–
–
–
36,875 $
–
–
–
4 $
–
–
–
–
4 $
500
6,246
–
289,046 $
1,253
(821 )
6,208
–
295,686 $
–
–
(5,362 )
(209,525 ) $
–
–
–
(8,980 )
(218,505 ) $
–
–
–
371 $
–
–
–
–
371 $
500
6,246
(5,362 )
79,896
1,253
(821 )
6,208
(8,980 )
77,556
See accompanying notes to consolidated financial statements.
42
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 provided by (used in) operating activities
Investing activities
Purchases of property and equipment
Cash payment for acquisitions, net of cash and cash equivalents acquired
Net cash used in investing activities
Financing activities
Net proceeds from issuances of common stock
Tax withholding paid on behalf of employees for restricted shares
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 financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information
Interest paid
Income taxes paid
Years Ended June 30,
2023
2022
$
(8,980 ) $
(5,362 )
6,208
5,804
1,735
225
15
104
(447 )
–
480
(8,692 )
435
3,043
2,088
(18 )
(8,575 )
(2,560 )
9,372
237
(2,673 )
(4,650 )
(7,323 )
1,253
(821 )
–
4,909
(1,994 )
2,000
(2,000 )
(30 )
3,317
(3,769 )
17,221
13,452 $
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
1,563 $
539 $
1,494
215
$
$
$
See accompanying notes to consolidated financial statements.
43 LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
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,
our target applications include Smart Cities infrastructure, Infotainment systems and Video Surveillance all supplemented with a
comprehensive Out of Band Management products offering for Cloud and Edge Computing.
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 revenue recognition, the allowance for doubtful accounts, business
combinations, inventory valuation, goodwill valuation, deferred income tax asset valuation allowances, share-based compensation,
restructuring charges and warranty reserves. In the macroeconomic environment affected by COVID-19, our estimates could require
increased judgement and carry a higher degree of variability volatility. To the extent there are material differences between our
estimates and actual results, future results of operations will be affected.
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. 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 various considerations,
including the length of time the receivables are past due and our historical bad debt collection experience. We also consider our
understanding of current economic and industry conditions that may affect the collectability of customer receivables. Accounts that
are deemed uncollectible are written off against the allowance for doubtful accounts.
Concentration of Credit Risk
Our accounts receivable are primarily derived from revenue earned from customers located throughout North America, Europe and
Asia. We perform periodic credit evaluations of our customers’ financial condition and maintain allowances for potential credit losses.
Credit losses have historically been within our expectations. We generally do not require collateral or other security from our
customers.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, contract manufacturers’ receivable,
accounts payable, and accrued liabilities. The fair value of a financial instrument is the amount that would be received in an asset sale
or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair
value are categorized based on whether or not the inputs are observable in the market and the degree to which the inputs are
observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is
44 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, 2023 and
2022 we did not have any assets or liabilities that were measured at fair value on a recurring basis. As of June 30, 2023 we do not have
any assets or liabilities that were measured at fair value on a non-recurring basis,
We believe all of our financial instruments’ recorded values approximate their current fair values because of the nature and short
duration of these instruments.
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, 2023 and 2022. We did
not have any other comprehensive income or losses during the fiscal years ended June 30, 2023 or 2022.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments, with original maturities of 90 days or less.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. We provide reserves for excess and
obsolete inventories determined primarily based upon estimates of future demand for our products. Shipping and handling costs are
classified as a component of cost of revenue in the consolidated statements of operations.
Inventory Sale and Purchase Transactions with Contract Manufacturers
Under certain circumstances, we sell raw materials to our contract manufacturers and subsequently repurchase finished goods from the
contract manufacturers which contain such raw materials. Net sales of raw materials to the contract manufacturers are recorded on the
consolidated balance sheets as contract manufacturers’ receivables and are eliminated from net revenue as we intend to repurchase the
raw materials from the contract manufacturers in the form of finished goods.
We have contractual arrangements with certain of our contract manufacturers that require us to purchase unused inventory that the
contract manufacturer has purchased to fulfill our forecasted manufacturing demand. To the extent that inventory on-hand at one or
more of these contract manufacturers exceeds our contractually reported forecasts, we record the amount we may be required to
purchase as part of other current liabilities and inventories on the consolidated balance sheets.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided using the straight-line method over the assets’ estimated useful
lives, generally ranging from three to five years. Depreciation and amortization of leasehold improvements are computed using the
shorter of the remaining lease term or five years. Major renewals and betterments are capitalized, while replacements, maintenance
and repairs, which do not improve or extend the estimated useful lives of the respective assets, are expensed as incurred.
Business Combinations
45 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, 2023, 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, 2023 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
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
46 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.
Advertising Expenses
Advertising expenses are recorded in the period incurred and totaled $262,000 and $253,000 for the fiscal years ended June 30, 2023
and 2022, 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
47 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.
Lantronix adopted this ASU in the first quarter of our fiscal year ended June 30, 2023, and as such, we recorded applicable contract
assets and liabilities acquired in the Uplogix acquisition (see Note 3) in accordance with this ASU.
Current Expected Credit Losses
In June 2016, the FASB issued a new ASU 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 ASU 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 ASU is effective for Lantronix beginning in the first quarter of 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.
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.
We prepay sales commissions related to certain of these contracts, which are incremental costs of obtaining the contract. We capitalize
these costs and expense them ratably on a straight-line basis over the life of the contract. At June 30, 2023, prepaid sales commissions
included in prepaid expenses and other current assets totaled $150,000 and included in other assets totaled $58,000.
Engineering Services
48 We derive a portion of our revenues from engineering and related consulting service contracts with customers. Revenues from
professional engineering services are generally recognized as services are performed. 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:
(cid:120) 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.
(cid:120) 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
We organize our products and solutions into three product lines: Embedded IoT Solutions, IoT System Solutions, and Software &
Services. Our Embedded IoT 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. Our IoT System 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. Our Software & Services products can be classified as either (i) our
SaaS platform, which enables customers to easily deploy, monitor, manage, and automate across their global deployments, all from a
single platform login, virtually connected as though directly on each device, (ii) engineering services, which is a flexible business
model that allows customers to select from turnkey product development or team augmentation for accelerating complex areas of
product development or (iii) extended warranty, support and maintenance.
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
generally based on the “bill-to” location of our customers:
Years Ended June 30,
2023
2022
Embedded IoT Solutions
IoT System Solutions
Software & Services
$
$
$
(In thousands)
63,636
57,496
10,057
131,189
$
61,773
59,019
8,863
129,655
49 Americas
EMEA
APJ
$
$
Years Ended June 30,
2023
2022
$
(In thousands)
78,557
23,286
29,346
131,189
$
77,799
22,542
29,314
129,655
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
93%
7%
94%
6%
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, 2023 (in thousands):
Balance, July 1, 2022
New performance obligations
Performance obligations acquired from acquisitions
Recognition of revenue as a result of satisfying performance obligations
Balance, June 30, 2023
Less: non-current portion of deferred revenue
Current portion, June 30, 2023
$
$
$
1,342
3,183
4,096
(5,240 )
3,381
(888 )
2,493
We expect to recognize substantially all of the non-current portion of deferred revenue over the next 2 to 5 years.
3. Acquisitions
Acquisition of Uplogix
On September 12, 2022 (the “Closing Date”), we entered into a Merger Agreement with Uplogix, Inc. (“Uplogix”) pursuant to which
Uplogix became a wholly-owned subsidiary of Lantronix. Pursuant to the Merger Agreement, all of the issued and outstanding shares
of Uplogix were cancelled and converted into the right to receive an applicable portion of the Consideration Pool Amount (as defined
in the Merger Agreement). In addition, the holders of promissory notes issued by Uplogix entered into note termination agreements
with Uplogix, which provided, among other things, that the issued and outstanding promissory notes were cancelled and terminated
upon the closing of the Merger. Holders of Company Junior-Only Notes (as defined in the Merger Agreement) received, in connection
with their cancellation and termination of such notes, the full payment of principal and interest. Holders of Company Senior Notes (as
defined in the Merger Agreement), including those holders of Company Senior Notes and Company Junior Notes (as defined in the
50 Merger Agreement) (the “Company Senior Noteholders”), received the applicable portions of the Estimated Merger Consideration (as
defined in the Merger Agreement).
The aggregate consideration payable by Lantronix under the Merger Agreement was equal to $8,000,000 (inclusive of payments to
satisfy the Company Junior-Only Notes), subject to certain adjustments, including, without limitation, for cash, debt, transaction
expenses (including the Bonus Amount (as defined below)) and net working capital. Prior to the Closing Date, Uplogix entered into an
amended and restated bonus plan, which provided that certain of its employees would be entitled to receive, in the aggregate, 15% of
the consideration otherwise payable to the holders of Company Senior Notes (the “Bonus Amount”) under the Merger Agreement,
with the terms of such bonus payments (including the amounts per employee and the timing of such payments) as specified in such
bonus plan.
In addition, the Company Senior Noteholders and former Uplogix employees have the right to receive up to an additional $4,000,000
in the aggregate (the “Earnout Amount”), payable after the closing of the Merger based on revenue targets for the business of Uplogix
as specified in the Merger Agreement. The Earnout Amount will be based on Uplogix achieving revenue (subject to certain
adjustments as specified in the Merger Agreement) of $7,000,000 to $14,000,000 for the period beginning at the Closing Date and
ending on September 30, 2023. The Company Senior Noteholders are entitled to an advance of the Earnout Amount if the revenue of
the Uplogix business for the period beginning at the closing of the Merger and ending on March 31, 2023 is between $7,000,000 to
$14,000,000, but in no event will the Earnout Amount, together with any such advance of the Earnout Amount, exceed $4,000,000.
The acquisition of Uplogix brings immediate scale to our out-of-band remote management solutions, adding a complementary high-
end product offering that includes high-margin maintenance and licensing revenues.
A summary of the purchase consideration for the Uplogix acquisition is as follows (in thousands):
Cash paid, including initial working capital adjustments
Preliminary estimated fair value of earnout consideration
Total purchase consideration
$
$
8,754
1,718
10,472
We recorded Uplogix’s 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. Updates to the valuation of certain assets acquired and
liabilities assumed may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill
in subsequent periods. As of June 30, 2023, the measurement period is complete.
During the fiscal year ended June 30, 2023, based on additional analysis and refinements to our estimates, we adjusted the preliminary
purchase price allocation as of the Closing Date to (i) decrease the estimated fair value of intangible assets acquired by $660,000, (ii)
increase the fair value of other current liabilities by a net amount of $12,000. These adjustments resulted in an increase to goodwill of
$672,000.
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
Lease right-of-use asset
Other non-current assets
Amortizable intangible assets
Goodwill
Accounts payable
Accrued payroll
Deferred revenue
Other current liabilities
Notes payable
Other noncurrent liabilities
Total consideration
$
$
4,104
1,900
3,590
288
778
129
1,810
7,056
(278 )
(262 )
(4,096 )
(3,067 )
(900 )
(580 )
10,472
As discussed above, the purchase consideration and resulting purchase price allocation for this acquisition included various
adjustments for transaction expenses, the Bonus Amount, payment of Company Junior-Only Notes and certain other accrued expenses
paid shortly after the Closing Date. Pursuant to the Merger Agreement, substantially all of the $4,104,000 cash acquired was to be
utilized for these items. The purchase price allocation above reflects both this cash acquired and the applicable accrued liabilities and
notes payable that were substantially all disbursed on or shortly after the Closing Date.
51 The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that this acquisition 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.
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 this acquisition are 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
Trademarks and trade names
Asset Fair Value
(In thousands)
$
1,030
600
180
Weighted
Average Useful
Life
(In years)
5.0
5.0
1.0
The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.
Valuation Methodology
The customer relationships 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 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:
(cid:120) Historical performance including sales and profitability
(cid:120) Business prospects and industry expectations
(cid:120) Estimated economic life of the asset
(cid:120) Development of new technologies
(cid:120) Acquisition of new customers
(cid:120) Attrition of existing customers
(cid:120) 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 year ended June 30, 2023, we remeasured the estimated fair value of the earnout consideration based on our updated
expectations of achieving the revenue targets for the business of Uplogix.
The following table presents the change in the earnout consideration liability (in thousands):
52 Preliminary estimated fair value of earnout consideration
Remeasurement estimates
Payments
Balance at June 30, 2023
$
$
1,718
(447 )
–
1,271
The remeasurement of the earnout consideration liability was recorded within our operating expenses in the accompanying
consolidated statement of operations for the fiscal year ended June 30, 2023. The balance of this liability is recorded in other current
liabilities on the accompanying consolidated balance sheet at June 30, 2023.
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 Uplogix as of the first day of our fiscal year ended June 30, 2022. The supplemental pro forma data reports 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 year ended June 30, 2022 supplemental pro forma data (i) cost of goods sold from
manufacturing profit in acquired inventory of $225,000, (ii) acquisition related restructuring costs of $315,000 and (iii) acquisition-
related costs of $315,000, with a corresponding reduction in the year ended June 30, 2023 supplemental pro forma data. Additionally,
we recorded $506,000 of amortization expense in the year ended June 30, 2022 supplemental pro forma data, and a reduction of
amortization expense of $79,000 in the year ended June 30, 2023 supplemental pro forma data to represent amortization for the full
fiscal year period.
Net revenue related to products and services from the acquisition of Uplogix contributed just under 4% of our total net revenue for the
year ended June 30, 2023. 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 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
Acquisition of Transition Networks
Years ended June 30,
2023
2022
(In thousands, except per share
amounts)
133,224 $
(7,545 ) $
138,835
(5,813 )
(0.21 ) $
(0.18 )
$
$
$
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.
The acquisition of the TN Companies provided 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
53 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.
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.
Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax
purposes. We 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.
4.
Supplemental Financial Information
Accounts Receivable
The following table presents details of our accounts receivable:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
Inventories
The following table presents details of our inventories:
June 30,
2023
2022
$
$
(In thousands)
28,204 $
(522 )
27,682 $
26,602
(340 )
26,262
54 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:
$
$
$
$
June 30,
2023
2022
$
(In thousands)
25,670
24,066
49,736
$
16,094
21,585
37,679
June 30,
2023
2022
$
(In thousands)
7,167
3,119
5,443
52
15,781
(11,152 )
4,629
$
5,370
760
5,147
1,612
12,889
(9,237 )
3,652
Developed technology
Customer relationships
Order backlog
Non-compete agreements
Trademark and trade name
June 30, 2023
June 30, 2022
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
$
$
6,331 $
17,528
1,406
400
1,425
27,090 $
(3,881 ) $
(9,487 )
(1,406 )
(400 )
(1,351 )
(16,525 ) $
(In thousands)
2,450 $
8,041
–
–
74
10,565 $
5,731 $
16,498
1,406
400
1,245
25,280 $
(2,493 ) $
(5,700 )
(1,356 )
(400 )
(772 )
(10,721 ) $
3,238
10,798
50
–
473
14,559
We do not currently have any purchased intangible assets with indefinite useful lives.
As of June 30, 2023, future estimated amortization expense is as follows:
Years Ending June 30,
(In thousands)
2024
2025
2026
2027
2028
Total amortization expense
Goodwill
The following table presents details of our goodwill balance:
Balance at June 30, 2022
Acquisition of Uplogix
Balance at June 30, 2023
$
$
5,314
3,684
1,177
326
64
10,565
Year Ended
June 30, 2023
(In thousands)
$
$
20,768
7,056
27,824
55
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
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 tax 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:
Years Ended June 30,
2023
2022
(In thousands)
594
–
352
(158 )
788
$
$
197
483
202
(288 )
594
June 30,
2023
2022
(In thousands)
2,167
16,344
267
2,493
1,859
647
788
4,248
28,813
$
$
10,425
146
888
11,459
$
$
1,905
922
132
969
978
371
594
2,606
8,477
7,310
–
373
7,683
$
$
$
$
$
$
Years Ended June 30,
2023
2022
(In thousands, except per share data)
$
(8,980 ) $
(5,362 )
Weighted-average shares outstanding - basic and diluted
36,257
32,671
Net loss per share - basic and diluted
$
(0.25 ) $
(0.16 )
The following table presents the common stock equivalents excluded from the diluted net loss per share calculation because they were
anti-dilutive for the periods presented. These excluded common stock equivalents could be dilutive in the future.
Common stock equivalents
Years Ended June 30,
2023
2022
(In thousands)
637
1,069
56 Severance and Related Charges
The following table presents details of the liability we recorded related to restructuring, severance and related activities during the
current fiscal year:
Beginning balance
Charges
Payments
Ending balance
Year Ended
June 30,
2023
(In thousands)
$
$
34
693
(630 )
97
The ending balance is recorded in accrued payroll and related expenses on the accompanying consolidated balance sheet at June 30,
2023.
Supplemental Cash Flow Information
The following table presents non-cash investing and financing transactions excluded from the consolidated statements of cash flows:
Acquisition of property through operating leases
Acquisition of property through financing 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
$
$
$
$
$
Years Ended June 30,
2023
2022
(In thousands)
4,320
536
54
$
$
$
– $
– $
7,170
–
868
500
393
5. Bank Loan Agreements
On September 7, 2022 we entered into a Third Amendment to the Third Amended and Restated Loan and Security Agreement (the
“Amendment”) with Silicon Valley Bank (“SVB”), pertaining to our existing term loan and revolving credit facility (together, the
“Senior Credit Facilities”), which amends that certain Third Amended and Restated Loan and Security Agreement, dated as of August
2, 2021, as amended by the First Amendment to Third Amended and Restated Loan and Security Agreement, dated as of October 21,
2021, as amended by the Second Amendment to Third Amended and Restated Loan and Security Agreement, dated as of February 15,
2022 by and among Lantronix and SVB (collectively with the Amendment, the “Loan Agreement”).
The Amendment, among other things, provided for an additional term loan in the original principal amount of $5,000,000 that matures
on August 2, 2025. The Senior Credit Facilities bears interest at Term Secured Overnight Financing Rate (“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 1.50% and a Prime Rate floor of 3.25%. The
Amendment reduces the minimum liquidity requirement from $5,000,000 to $4,000,000. As a condition to entering into the
Amendment, we were obligated to pay a nonrefundable facility increase fee in the amount of $25,000. The Senior Credit Facilities
mature on August 2, 2025. The Senior Credit Facilities are secured by substantially all of our assets.
On September 7, 2022, we borrowed $2,000,000 on our revolving credit facility. We subsequently paid this amount back to the bank in
full in February 2023.
On April 3, 2023, we entered into a Letter Agreement (the “Letter Agreement”) with SVB, which, among other matters, amended the
Loan Agreement to reduce the former requirement to hold 85% of our company-wide cash balances at SVB to 50%, and provided a
waiver of any event of default under the Loan Agreement for any failure to comply with this covenant prior to the date of the Letter
Agreement.
The following table summarizes our outstanding debt:
57 Outstanding borrowings on Senior Credit Facilities
Less: Unamortized debt issuance costs
Net Carrying amount of debt
Less: Current portion
Non-current portion
$
$
June 30,
2023
2022
$
(In thousands)
19,194
(230 )
18,964
(2,743 )
16,221
$
16,188
(243 )
15,945
(1,671 )
14,274
During the year ended June 30, 2023, we recognized $1,610,000 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.
On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the
Federal Deposit Insurance Corporation (“FDIC”) as receiver. On March 13, 2023, the FDIC announced that it had transferred all
insured and uninsured deposits and substantially all assets of SVB to a newly created, full-service FDIC-operated “bridge bank” called
Silicon Valley Bridge Bank, N.A., where depositors would have full access to their money immediately. On March 27, 2023, First
Citizens Bank announced that it entered into an agreement with the FDIC to purchase all of the assets and liabilities of Silicon Valley
Bridge Bank. We currently have full control of our cash and cash equivalents balance at SVB and our other banking institutions. 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.
Financial Covenants
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, 2023.
Liquidity
The Senior Credit Facilities require that we maintain a minimum liquidity of $4,000,000 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
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
58 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, 2023, approximately 2,465,000 shares remain available for issuance under the 2020 Plan. We have also granted stock options and
RSUs under individual inducement award agreements.
The Compensation Committee of our board of directors determines eligibility, vesting schedules and exercise prices for stock options
and shares granted under the plans. Stock options are generally granted with an exercise price equal to the market price of our
common stock on the grant date. Stock options generally have a contractual term of seven to ten years. Share-based awards generally
vest and become exercisable over a one to four-year service period. As of June 30, 2023, 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, 2023 and 2022.
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. The
expected term of stock options granted is based on our recent historical exercise data. Expected volatilities are 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.
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
The following table presents a summary of activity for all of our stock options:
Years Ended June 30,
2023
2022
3.9
62%
3.79%
0.00%
4.7
63%
0.82%
0.00%
Balance of options outstanding at June 30, 2022
Granted
Expired
Exercised
Balance of options outstanding at June 30, 2023
Options exercisable at June 30, 2023
Number of
Shares
(In thousands)
1,383
115
(9 )
(164 )
1,325
1,147
$
$
$
Weighted-Average
Exercise
Price
Per Share
Remaining
Contractual
Term
(In years)
Aggregate
Intrinsic
Value
(In thousands)
3.40
4.96
2.04
2.55
3.65
3.45
2.1 $
1.5 $
987
979
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,
2023
2022
(In thousands, except per share data)
2.94
$
1,506
$
2.44 $
454 $
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:
59 Balance of RSUs outstanding at June 30, 2022
Granted
Forfeited
Vested
Balance of RSUs outstanding at June 30, 2023
Performance Shares
The following table presents a summary of activity with respect to our PSUs:
Balance of PSUs outstanding at June 30, 2022
Granted
Forfeited
Vested
Balance of PSUs outstanding at June 30, 2023
Employee Stock Purchase Plan
Weighted-
Average Grant
Date Fair Value
per Share
Number of
Shares
(In thousands)
1,115
763
(96 )
(593 )
1,189
$
$
5.50
5.59
5.51
5.22
5.70
Number of
Shares
(In thousands)
1,030
1,147
(299 )
(947 )
931
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, 2022
Shares reserved for issuance
Shares issued
Shares available for issuance at June 30, 2023
Weighted-average purchase price per share
Intrinsic value of ESPP shares on purchase date
Years Ended June 30,
2023
2022
0.5
66%
4.88%
0.00%
0.5
59%
0.92%
0.00%
Year Ended
June 30, 2023
(In thousands,
except per share
data)
85
500
(204 )
381
4.26
153
$
$
60 Share-Based Compensation Expense
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,
2023
2022
(In thousands)
$
$
158
4,546
1,504
6,208
$
$
369
4,862
1,015
6,246
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, 2023:
Stock options
RSUs
PSUs
Common stock purchase rights under ESPP
Remaining
Unrecognized
Compensation
Expense
(In thousands)
Remaining
Weighted-
Average Years to
Recognize
$
$
402
5,666
1,650
128
7,846
2.6
2.2
1.9
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 $411,000 and $373,000 in matching contributions to
participants in the Plan during the fiscal years ended June 30, 2023 and 2022, respectively.
In addition, we may make discretionary profit-sharing contributions, subject to limitations. During the fiscal years ended June 30,
2023 and 2022, 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,
2023
2022
(In thousands)
$
$
$
– $
294
308
602
146
–
–
748
$
$
–
11
254
265
(1,805 )
(292 )
–
(1,832 )
61
United States
Foreign
Loss before income taxes
Years Ended June 30,
2023
2022
$
$
(In thousands)
(9,168 ) $
936
(8,232 ) $
(7,829 )
635
(7,194 )
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
Capitalized research and development expenses*
Deferred compensation
Inventory capitalization
Lease liabilities
Depreciation and amortization
Identified intangibles
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets, net
Deferred tax liabilities:
State taxes
Right-of-use assets
Identified intangibles
Depreciation and amortization
Deferred tax liabilities
Net deferred tax assets (liabilities)
Years Ended June 30,
2023
2022
(In thousands)
$
$
9,882
2,054
6,975
1,301
2,390
2,848
–
446
263
26,159
(22,532 )
3,627
(518 )
(2,676 )
–
(579 )
(3,773 )
$
(146 ) $
15,310
1,881
–
1,858
1,508
2,260
130
–
333
23,280
(20,173 )
3,107
(404 )
(2,240 )
(463 )
–
(3,107 )
–
* As required by the 2017 Tax Cuts and Jobs Act (the “2017 Act”), research and experimental (“R&E”) expenses under Internal
Revenue Code Section 174 are required to be capitalized beginning in our fiscal year ended June 30, 2023. R&E expenses are
required to be amortized over five years for domestic expenses and 15 years for foreign expenses.
Our net deferred tax liability of $146,000 at June 30, 2023 represents the excess of our indefinite-lived deferred tax liabilities over our
indefinite-lived deferred tax assets, and is recorded in other non-current liabilities on the accompanying consolidated balance sheet at
June 30, 2023. 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, 2023.
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 during the fiscal year ended June 30, 2022, 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 fiscal
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
Years Ended June 30,
2023
2022
$
(In thousands)
(1,729 ) $
(283 )
30
(1,510 )
(588 )
(54 )
62 Change in valuation allowance
Global intangible low-tax income inclusion
Foreign tax rate variances
Acquisition costs
Other
Provision (benefit) for income taxes
2,222
2
112
–
394
748
$
(1,829 )
4
120
395
1,630
(1,832 )
$
Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of our net operating loss (“NOL”)
carryforwards and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods. Due to the
annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax
liabilities.
The following table presents our NOL carryforwards:
Federal
State
June 30,
2023
(In thousands)
$
$
43,320
22,589
Our federal NOL carryforwards generated for tax years beginning before July 1, 2018 began to expire in the fiscal year ended June 30,
2021. Pursuant to the 2017 Act, we also have federal NOL carryforwards of $6,788,000 that will not expire but can only be used to
offset 80% of future taxable income. For state income tax purposes, our NOL carryforwards 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, 2023 and 2022, 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, 2023:
Balance as of June 30, 2022
Change in balances related to uncertain tax positions
Balance as of June 30, 2023
Year Ended
June 30, 2023
(In thousands)
$
$
5,652
(839 )
4,813
At June 30, 2023, we had $4,813,000 of gross unrecognized tax benefits which was recorded as a reduction to deferred tax assets, and
a corresponding reduction in our valuation allowance of $4,813,000. 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, 2023 and 2022, we recorded an immaterial expense for interest and penalties related to income tax matters in the provision for
income taxes. At June 30, 2023, we had approximately $303,000 of accrued interest and penalties related to uncertain tax positions.
At June 30, 2023, our fiscal years ended June 30, 2020 through 2023 remain open to examination by the federal taxing jurisdiction and
our fiscal years ended June 30, 2019 through 2023 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, 2015 through 2023 remain open to examination by foreign taxing
authorities. We currently do not anticipate that the amount of unrecognized tax benefits as of June 30, 2023 will significantly increase
or decrease within the next 12 months.
9. Leases
63 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
Financing lease interest expense
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
The weighted-average remaining lease term is 3.76 years. The weighted-average discount rate is 4.6 percent.
Maturities of lease liabilities as of June 30, 2023 were as follows:
June 30,
2023
(In thousands)
$
$
$
$
2,583
30
10
1,701
30
4,856
Years ending June 30,
2024
2025
2026
2027
2028
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)
2,272
2,059
1,695
1,648
1,698
4,479
13,851
(2,076 )
11,775
$
1,677
10,098
$
$
222
213
117
22
19
–
593
(84 )
509
182
327
In July 2022, we commenced the lease of approximately 14,000 square feet of office space for our corporate headquarters in Irvine,
California. 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.
We accounted for this lease as an operating lease in accordance with ASC 842. Upon commencement of the lease, we recorded a
right-of-use asset of $2,852,000 and lease liability of $2,852,000 at the inception of the lease based upon a discount rate of 4.6% over
a term of 7 years.
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 generally based on the “bill-
to” location of our customers:
64
Americas
Europe, Middle East, and Africa
Asia Pacific Japan
Total
Years Ended June 30,
2023
2022
60%
18%
22%
100%
60%
17%
23%
100%
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:
June 30,
2023
2022
U.S.
Canada
Rest of world
Customers
$
$
$
(In thousands)
44,757
9,169
675
54,601
$
36,037
10,158
821
47,016
The following table presents sales to our significant customers as a percentage of net revenue:
Top five customers (1)
Ingram Micro
Amtran
(1) Includes Ingram Micro and Amtran in the fiscal years ended June 30, 2023 and 2022.
* 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, 2023 and 2022.
Suppliers
Years Ended June 30,
2023
2022
35%
10%
*
44%
14%
10%
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.
65 Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeremy Whitaker, certify that:
1.
I have reviewed this annual report on Form 10-K of Lantronix, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: September 12, 2023
/s/ JEREMY WHITAKER
Jeremy Whitaker
Interim Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer, Financial and Accounting Officer)
66 Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeremy Whitaker, certify that:
1.
I have reviewed this annual report on Form 10-K of Lantronix, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: September 12, 2023
/s/ JEREMY WHITAKER
Jeremy Whitaker
Interim Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer, Financial and Accounting Officer)
67 Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certifications are being furnished solely to accompany the Annual Report on Form 10-K for the year ended
June 30, 2023 (the “Report”) pursuant to U.S.C. Section 1350, and pursuant to SEC Release No. 33-8238 are being “furnished” to the
SEC rather than “filed” either as part of the Report or as a separate disclosure statement, and are not to be incorporated by reference
into the Report or any other filing of Lantronix, Inc. (the “Company”), whether made before or after the date hereof, regardless of any
general incorporation language in such filing. The following certifications shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section.
Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of
the Company hereby certifies, to such officer’s knowledge, that:
(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results
operations of the Company as of, and for, the periods presented in such Report.
Date: September 12, 2023
By:
/s/ JEREMY WHITAKER
Name: Jeremy Whitaker
Title: Interim Chief Executive Officer and Chief Financial
Officer
(Principal Executive Officer, Financial and Accounting
Officer)
Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of
the Company hereby certifies, to such officer’s knowledge, that:
(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results
operations of the Company as of, and for, the periods presented in such Report.
Date: September 12, 2023
By:
/s/ JEREMY WHITAKER
Name: Jeremy Whitaker
Title: Interim Chief Executive Officer and Chief Financial
Officer
(Principal Executive Officer, Financial and Accounting
Officer)
68 Board of Directors
Management Team
Stockholder Information
Paul Folino
Chairman of the Board of Lantronix, Inc.
Jeremy Whitaker
Interim Chief Executive Officer and Chief
Financial Officer
Philip Brace
Director
Jason W. Cohenour
Director
Phu Hoang
Director
Heidi Nguyen
Director
Hoshi Printer
Director
David Goren
Vice President, Human Resources, Legal &
Business Affairs, Secretary
Robert Adams
Head of Corporate Development and Investor
Relations
Eric Bass
Vice President, Engineering
Roger Holliday
Vice President, Worldwide Sales
Jacques Issa
Vice President, Marketing
Anita Kumar
Vice President, Business Operations
Corporate Headquarters
Lantronix, Inc.
48 Discovery, Suite 250
Irvine, CA 92618
949.453.3990
www.lantronix.com
Stock Listing
The Company’s common stock trades on the NASDAQ
Stock Market, LLC under the symbol LTRX
Annual Stockholder Meeting
The Annual Meeting of Stockholders for Lantronix,
Inc. will be held on November 7, 2023,
at the Company’s corporate headquarters.
Independent Auditors
Baker Tilly US, LLP
Newport Beach, CA 92660
Transfer Agent and Registrar
Computershare
250 Royall Street
Canton, MA 02021
877.854.4580
www.computershare.com
Investor Relations
Robert Adams
Head of Corporate Development and
Investor Relations
Investors@lantronix.com
949.453.3990
This Annual Report contains forward-looking statements, including statements concerning our projected operating and financial
performance for fiscal 2024 and beyond, and our expectations regarding our ability to perform on our significant contracts and convert
our backlog, the future benefits of our intensified focus on electrification and other high-dollar value opportunities, and the successful
completion of our current search for a new Chief Executive Officer. 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: the effects of negative or worsening regional and worldwide economic conditions or market instability on our
business, including effects on purchasing decisions by our customers; our ability to mitigate any disruption in our and our suppliers’ and
vendors’ supply chains due to the COVID-19 pandemic, the war between Ukraine and Russia, recent tensions between China and Taiwan or
other causes; 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 distributors or resellers; our ability
to successfully implement our acquisitions strategy or integrate acquired companies; issues relating to the stability of our financial
and banking institutions and relationships; the level of our indebtedness, our ability to service our indebtedness and the restrictions
in our debt agreements; the impact of rising interest rates; our ability to attract and retain qualified management; 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.
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