10-K
1
lantronix_10k-063020.htm
FORM 10-K
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
☐ 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)
7535 Irvine Center Drive, Suite 100,
Irvine, California 92618
(Address of principal executive offices)
(949) 453-3990
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.0001 par value LTRX The Nasdaq Stock Market LLC
Securities registered pursuant to Section
12(g) of the Act: None.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”,
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Emerging growth company ☐
If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s
common stock held by non-affiliates based upon the closing sales price of the common stock as reported by the Nasdaq Capital Market
on December 31, 2019, the last trading day of the registrant’s second fiscal quarter, was approximately $43,842,000. The
determination of affiliate status for this purpose shall not be a conclusive determination for any other purpose.
As of August 31, 2020, there were 28,292,841
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 2020 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, 2020
TABLE OF CONTENTS
Page
PART I
Cautionary Note Regarding Forward-Looking Statements ii
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 20
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Mine Safety Disclosures 20
PART II
Item 6. Selected Financial Data * 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk * 34
Item 8. Financial Statements and Supplementary Data 34
Item 9A. Controls and Procedures 35
Item 9B. Other Information 35
PART III
Item 10. Directors, Executive Officers and Corporate Governance 36
Item 11. Executive Compensation 36
Item 14. Principal Accountant Fees and Services 36
PART IV
Item 15. Exhibits and Financial Statement Schedules 37
* Not required for a “smaller reporting company.”
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended June
30, 2020, 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.
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 and the documents that we incorporate by reference
into this Report, with the understanding that our future results may be materially different from what we currently expect. The
forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation
to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our
opinions or expectations, except as required by applicable law or the rules of The Nasdaq 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
PART I
ITEM 1. BUSINESS
Overview
Lantronix, Inc. is a global provider of software as a service
(“SaaS”), engineering services, and hardware for Edge Computing, the Internet of Things (“IoT”), and Remote
Environment Management (“REM”). Lantronix enables its customers to provide reliable and secure solutions while accelerating
their time to market. Lantronix’s products and services dramatically simplify operations through the creation, development,
deployment, and management of customer projects at scale while providing quality, reliability and security.
Lantronix’s portfolio of services and products address
each layer of the IoT Stack including Collect, Connect, Compute, Control and Comprehend, enabling its customers to deploy successful
IoT and REM solutions. Lantronix’s
services and products deliver a holistic approach, addressing its customers’ needs by integrating a SaaS management platform
with custom application development layered on top of external and embedded hardware, enabling intelligent edge computing, secure
communications (wired, Wi-Fi, and cellular), location and positional tracking, and environmental sensing and reporting.
With three decades of proven experience in creating robust
industry and customer specific solutions, Lantronix is an innovator in enabling its customers to build new business models, leverage
greater efficiencies and realize the possibilities of the IoT and REM. Lantronix’s solutions are deployed inside millions
of machines at data centers, offices, and remote sites serving a wide range of industries, including energy, agriculture, medical,
security, manufacturing, distribution, transportation, retail, financial, environmental, infrastructure and government.
We were incorporated in California in 1989 and reincorporated
in Delaware in 2000.
References in this Report to “fiscal 2020” refer
to the fiscal year ended June 30, 2020 and references to “fiscal 2019” refer to the fiscal year ended June 30, 2019.
Our Strategy
Today, more and more businesses are seeking to streamline their
operations by connecting their machines and electronic devices to the Internet, manage them remotely, and create new business models.
The growth in the IoT and REM markets are being driven by the growing importance of data, being able to act on that data, and the
rapidly falling cost of sensors, connectivity, compute, and storage. While the promise is great, designing and deploying these
projects is complex, costly and time-consuming. Our offerings are designed to help companies increase speed and reduce friction
for their deployments through reduced complexity, decreased development costs, and increased ease of management for web-scale applications
and real-world solutions; thus, driving customer value and success. We plan to address the market opportunity by offering our customers
turnkey solutions by leveraging the layers of the IoT Stack, such as Collect, Connect, Compute, Control and Comprehend, through
a combination of services, hardware and software solutions, accessible and manageable through our SaaS platform.
We are executing a growth strategy that includes continuous
innovation complemented by strategic acquisitions to expand our ability to offer complete IoT and REM solutions with the intent
of increasing our scale and broadening our scope so that we can increase our value proposition to our customers. This strategy
will allow us to address a larger portion of our customers’ operational needs, and engage with customers as a strategic "total
solution" partner. We believe this will strengthen our position in the market as our customers come to us for a wider variety
of solutions. For example, on July 5, 2019 we acquired Maestro Wireless Solutions Limited and its subsidiaries (together, “Maestro”).
This acquisition added to our Connect and Collect solutions by providing additional and complementary cellular connectivity, LPWAN,
and telematic technologies and devices to our portfolio. On January 16, 2020 we acquired Intrinsyc Technologies Corporation (“Intrinsyc”).
This acquisition provided additional and complementary edge computing with embedded product design and application development
capabilities, crucial to the development of intelligent Compute functionality for advanced customer implementations. These two
acquisitions allow us to offer more value to our customers and substantially increased the markets that we serve.
Products and Solutions
We organize our products and solutions into three product lines:
IoT, REM and Other.
IoT
IoT Connectivity
Our IoT connectivity products typically connect to one or more
existing machines or are built into new industrial devices to provide network connectivity. Our products are designed to enhance
the value and utility of machines by making the data from the machines available to users, systems and processes or by controlling
their properties and features over the network. Our IoT connectivity products may be embedded into new designs or attached to existing
machines. These products include wired and wireless connections that enhance the value and utility of modern electronic systems
and equipment by providing secure network connectivity, application hosting, protocol conversion, secure access for distributed
IoT deployments and many other functions. Many of the products are offered with software tools intended to further accelerate our
customer’s time-to-market and increase their value add. Most of our IoT connectivity products are pre-certified in a number
of countries thereby significantly reducing our original equipment manufacturer (“OEM”) customers’ regulatory
certification costs and accelerating their time to market.
IoT Compute
Our IoT compute products typically are embedded into a customer
product, enabling advanced application functionality at the edge. Our products are designed to deliver advanced functionality
and reduce time to market by leveraging our engineering expertise, engineering services, manufacturing experience, and strategic
System on Chip (“SoC”) partners. Our compute products are normally embedded into new designs. These products include
application processing that delivers compute to meet customer needs for data transformation, computer vision, machine learning,
augmented / virtual reality, audio / video aggregation and distribution, custom applications at the edge. Many of the products
are offered with software tools intended to further accelerate our customer’s time-to-market and increase their value add.
Most of our IoT compute products are pre-certified in a number of countries thereby significantly reducing our OEM customers’
regulatory certification costs and accelerating their time to market.
IoT Telematics
Our IoT telematics products are typically integrated into an
OEM’s or System Integrator’s (“SI”) products. Our smart tracking devices are designed to deliver robust
data logging and positional tracking functionality and reliability for supply chain and logistics solutions. Our telematics devices
are designed to be flexible in the field and offer a variety of connectivity options to suit the customers’ needs across
2G, 3G, 4G, and LTE cellular networks. These power efficient products are designed to support communications across interfaces
and industrial protocols for vehicle, fleet, and asset tracking and management. Many of the products are offered with software
tools intended to further accelerate our customer’s time-to-market and increase their value add. Most of our IoT Telematics
products are pre-certified in a number of countries thereby significantly reducing our OEM customers’ regulatory certification
costs and accelerating their time to market.
Engineering Services
We leverage our unparalleled engineering
expertise and product development best practices to deliver high quality, innovative products, cost-effectively and on time. With
over 1,400 projects successfully delivered to leading global brand companies, customers trust Lantronix to deliver timely and quality
results, accelerating time to market.
Our engineering services flexible business
model allows for choosing turnkey product development or team augmentation for accelerating complex areas of product development
such as; camera development and tuning, voice control, machine learning, artificial intelligence, computer vision, augmented /
virtual reality, mechanical and radio-frequency design, thermal and power optimization, or in any specific area a customer needs
assistance.
In addition to our production-ready
edge computing solutions, we offer experienced multidisciplinary engineering services across complete aspects of IoT product development,
including: hardware engineering, software engineering, mechanical engineering, rapid prototyping, and quality assurance.
Software as a Service
Our SaaS platform provides single pane of glass management
for IoT deployments. Our platform enables customers to easily deploy, monitor, manage, and automate across their global deployments,
all from a single platform login. OEMs and SIs can leverage its multitenancy functionality for supporting a wide customer base
while ensuring customer separation. Over the Air (“OTA”) updates make it easy to ensure the latest security patches,
firmware, and configurations are deployed and functional.
The following product families are included in our IoT product
line: EDS, EDS-MD, PremierWave® EN, PremierWave® XC, SGXTM, UDS, WiPort®, xDirect®, xPico®, xPico®
Wi-Fi, xPressTM, XPort®, XPort® Pro, MicroM110, E210, E220, Bolero45, FOX3-2G, FOX3-3G, FOX3-4G, S40, and D2Sphere.
In addition, we offer System on Module (“SoM”), Single Board Computer (“SBC”),
and Development Kits. We also offer services for mechanical, hardware, and software engineering for camera, audio, and
artificial intelligence / machine learning development.
REM
Today, organizations are managing an ever-increasing number
of devices and data on enterprise networks where 24/7 reliability is mission critical. Remote environment management allows for
full comprehension and control of an IT deployment, across a range of sensors data (temperature, humidity, light, acceleration,
open / close, etc.) providing status and alerting, automation, and remote control of devices and end stations. REM designs may
be part of an out of band (“OOB”) or in band network design. OOB is a technique that uses a dedicated management network
to access critical infrastructure components to ensure production independent management connectivity. REM allows organizations
to effectively monitor, manage, and control their enterprise IT equipment and facilities (environments), either in or out of band,
optimizing their IT support resources.
Our SaaS platform provides single pane of glass management for
REM (and IoT) deployments. Our platform enables customers to easily deploy, monitor, manage, and automate across their global deployments,
all from a single platform login, virtually connected as though directly on each device. Our platform eliminates the need to have
24/7 personnel on site, and makes it easy to see and drill into an issue quickly, even in large scale deployments.
Our REM product line includes out-of-band management, console
management, power management, and IP connected keyboard-video-mouse (commonly referred to as “IPKVM”) products that
provide remote access to IT and networking infrastructure deployed in test labs, data centers, branch offices, remote sites, and
server rooms.
The following product families are included in our REM product
line: SLBTM, SLCTM8000, SpiderTM, ConsoleFlow, and EMGTM 8500.
Other
We categorize products that are non-focus or end-of-life as
Other. Our Other product line includes non-focus products such as the xPrintServer®. In addition, this product line
includes end-of-life versions of our MatchPort®, SLCTM, SLPTM, xPress Pro, xSenso®,
PremierWave® XN, and WiBox product families.
Net Revenue by Product Line
We have one operating and reportable business segment. A summary
of our net revenue by product line is found in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” included in Part II, Item 7 of this Report, which is incorporated herein by reference. A discussion of factors
potentially affecting our net revenue and other operating results is set forth in “Risk Factors” included in Part I,
Item 1A of this Report, which is incorporated herein by reference.
Sales Cycle
Our embedded IoT solutions are typically used by OEMs, original
design manufacturers (“ODMs”) and contract manufacturers. OEMs design and sell products under their own brand that
are either manufactured by the OEM in-house or by third-party contract manufacturers. ODMs design and manufacture products for
third parties, which then sell those products under the third parties’ brands. The design cycles using our embedded solutions
typically range from nine to 24 months and can generate revenue for the entire life cycle of an end user’s product.
Our REM product line and external IoT solutions are typically
sold to end users through value added resellers (“VARs”) systems integrators, distributors, online retailers and, to
a lesser extent, OEMs. The design cycles for these products generally ranges 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, 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
three third-party contract manufacturers. We currently utilize Plexus, primarily located
in Malaysia, Hana Microelectronics, primarily located in Thailand, and Honortone, primarily located in China, as our contract
manufacturers for most of our products. In addition, we use eSilicon Corporation to manage
Taiwan Semiconductor Manufacturing Company, Ltd., a third-party foundry located in Taiwan, which manufactures our large-scale integration
chips. We manufacture certain products with final assembly in the U.S. to meet trade compliance requirements.
Our contract manufacturers source raw materials, components
and integrated circuits, in accordance with our specifications and forecasts, and perform printed circuit board assembly,
final assembly, functional testing and quality control. Our products are manufactured and tested to our specifications with standard
and custom components. Many of these components are available from multiple vendors. However, we have several single-sourced supplier
relationships, either because alternative sources are not available or because the relationship is advantageous to us.
Research and Development
Our research and development efforts are focused on the development
of hardware and software technology to differentiate our products and enhance our competitive position in the markets we serve.
Product research and development is primarily performed in-house and supplemented with outsourced resources.
Competition
Our industry is highly competitive and characterized by rapid
technological advances and evolving industry standards. The market can be affected significantly by new product introductions and
marketing activities of industry participants. We believe that we compete for customers based on product features, software capabilities,
company reputation, brand recognition, technical support, relationships with partners, quality, reliability, product development
capabilities, price and availability. A discussion of factors potentially affecting our ability to compete in the markets in which
we operate is set forth in “Risk Factors” included in Part I, Item 1A of this Report, which is incorporated herein
by reference.
Intellectual Property Rights
We believe that a considerable portion of our value resides
in our intellectual property. We have developed proprietary methodologies, tools, processes and software in connection with delivering
our products and services. We protect our intellectual property through a combination of patents, copyrights, trademarks, trade
secrets, licenses, non-disclosure agreements and contractual provisions. We enter into a non-disclosure and confidentiality agreement
with each of our employees, consultants and third parties that have access to our proprietary technology. Pursuant to assignment
of inventions agreements, all of our employees and consultants assign to us all intellectual property rights for the relevant inventions
created in connection with their employment or contract with us. We currently hold U.S. and international patents covering various
aspects of our products, with additional patent applications pending.
U.S. and Foreign Government Regulation
Many of our products are subject to certain mandatory regulatory
approvals in the regions in which our products are deployed. In particular, wireless products must be approved by the relevant
government authority prior to these products being offered for sale. In addition, certain
jurisdictions have regulations requiring products to use environmentally friendly components. Some of our products employ
security technology, which is subject to various U.S. export restrictions.
Employees
As of August 12, 2020, we had 242 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 Age Position
Paul H. Pickle 50 President and Chief Executive Officer
Jeremy R. Whitaker 50 Chief Financial Officer
Mohammed F. Hakam 52 Vice President of Engineering
Roger Holliday 61 Vice President of Worldwide Sales
PAUL H. PICKLE joined Lantronix as its President and Chief Executive
Officer and as a member of its Board of Directors in April 2019. Most recently, Mr. Pickle served as President and Chief Operating
Officer of Microsemi Corporation, a leading provider of semiconductor and system solutions, from November 2013 until Microsemi
was acquired by Microchip Technology Inc. in May 2018. Prior to his position as President and Chief Operating Officer, he served
at Microsemi as Executive Vice President, leading business operations of the company’s Integrated Circuits group, where he
played an integral role in the planning, developing, and execution of Microsemi’s leading edge IC solutions for communications,
industrial, aerospace, and defense/security markets.
JEREMY R. WHITAKER has served as our Chief Financial Officer
since September 2011. Mr. Whitaker returned to Lantronix after serving as Vice President, Corporate Controller at Mindspeed from
January 2011 to September 2011. Mr. Whitaker previously served as our Vice President of Finance and Accounting from September 2010
to January 2011, where he was responsible for managing all worldwide finance and accounting functions. Mr. Whitaker also served
as our Senior Director of Finance and Accounting from February 2006 to September 2010 and our Director of Finance and Accounting
from August 2005 to February 2006. Prior to August 2005, Mr. Whitaker held vice president and director level finance and accounting
positions with two publicly-traded companies and worked in the assurance practice at Ernst & Young LLP for six years.
MOHAMMED F. HAKAM joined Lantronix in August of 2018 and serves
as our Vice President of Engineering. Prior to joining Lantronix, Mr. Hakam served as the interim Senior Vice President of International
Operations at Viewstream, Inc., a provider of videos and marketing content to technology companies, from September 2016 to July
2018, where he was instrumental in planning and expanding the company’s global media strategy. Before joining Viewstream,
Mr. Hakam was founder and Senior Vice President of Engineering and Product Management of SwitchRay Inc., a global provider of communication
service platforms for global telecom carriers, from 2012 until its acquisition by 46 Labs in September 2016. He previously spent
20+ years at a number of large companies such as Motorola and Kyocera Wireless in various engineering leadership roles, and has
also been the founder of two technology companies (including SwitchRay Inc.) in the networking and telecom segment. Mr. Hakam has
been a professor at National University in San Diego, instructing undergraduate and graduate courses in program and project management,
international management, six sigma and statistical process control.
ROGER HOLLIDAY joined Lantronix in January 2020 and serves as
our Vice President of Worldwide Sales. Prior to joining Lantronix, Mr. Holliday served in various positions at Microsemi Corporation
since 1999, serving most recently as Executive Vice President and General Manager from 2013 until Microsemi was acquired by Microchip
Technology Inc. in May 2018. Prior to his time at Microsemi, Mr. Holliday served in various product marketing, applications and
sales management roles at Linfinity Microelectronics until its acquisition by Microsemi in 1999..
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves
numerous risks and uncertainties. Before deciding to purchase, hold or sell our common stock, you should carefully consider the
risks described in this section, as well as other information contained in this Report and in our other filings with the SEC. This
section should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in Item
8 of this Report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7 of this Report. If any of these risks or uncertainties actually occurs, our business, financial condition, results
of operations or prospects could be materially harmed. In that event, the market price for our common stock could decline and you
could lose all or part of your investment. In addition, risks and uncertainties not presently known to us or that we currently
deem immaterial may also adversely affect our business.
The effect of COVID-19 and other
possible pandemics and similar outbreaks could result in material adverse effects on our business, financial position, results
of operations and cash flows.
The COVID-19 outbreak has spread globally and has led governments
and other authorities around the world, including federal, state and local authorities in the United States and abroad, to impose
measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans,
border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines
and shelter-in-place orders. Although many of these governmental restrictions have since been lifted or scaled back, a recent surge
of COVID-19 resulted in the reimposition of certain restrictions and may lead to other restrictions being implemented in response
to efforts to reduce the spread of COVID-19. Given the dynamic nature of these circumstances and the related adverse impact these
restrictions have had, and may continue to have, on the economy generally, our business and the business of our suppliers, our
results of operations and financial condition may be adversely impacted by the COVID-19 pandemic.
Beginning in March 2020, most of our employees transitioned
to remote working arrangements, which are continuing through the date of this Report. While remote working has not had a significant
adverse impact on our financial results or our operations to date, there can be no assurance that these arrangements will not ultimately
result in lower work efficiency and productivity, which in turn may adversely affect our business. In addition, the COVID-19 pandemic
has resulted in industry events, trade shows and business travel being suspended, cancelled and/or significantly curtailed. The
cessation of trade shows and business travel has resulted in and could continue to result in our lead pipeline being negatively
impacted, which has negatively affected and may continue to negatively affect our sales during fiscal 2020 and beyond.
In addition, the impact of the COVID-19 pandemic and measures
to prevent its spread subject us to various risks and uncertainties that could materially adversely affect our business, results
of operations and financial condition, including the following:
The duration and extent of the COVID-19
pandemic’s effect on our operations and financial condition will depend on future developments, which are highly uncertain
and cannot be predicted at this time, including new information which may emerge concerning the severity of COVID-19, actions taken
to contain COVID-19, any future resurgence of COVID-19 that may occur after the initial outbreak subsidies, and how quickly and
to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience
adverse impacts to our business, financial condition, results of operations, and prospects as a result of its global economic impact,
including any economic downturn or recession that has occurred or may occur in the future. The adverse impact of the COVID-19 pandemic
on our business, results of operations and financial condition could be material.
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 new software
offerings represent a new product line for us and are subject to the risks faced by a new business.
During the fiscal year
ended June 30, 2020, we continued to dedicate significant engineering resources to our management software platform, applications,
and SaaS offerings, including ConsoleFlowTM. Our management has limited experience in this marketplace. These product and
service offerings will be subject to significant additional risks that are not necessarily related to our hardware products. Our
ability to succeed with these offerings will depend in large part on our ability to provide customers with software products and
services that offer features and functionality that address the needs of particular businesses. We may face challenges and delays
in the development of this product line as the marketplace for products and services evolves to meet the needs and desires of customers.
We cannot provide assurances that we will be successful in operating and growing this product line.
In light of these risks
and uncertainties, we may not be able to establish or maintain market share for our software and SaaS offerings. As we develop
new product lines, we must adapt to market conditions that are unfamiliar to us, such as competitors and distribution channels
that are different from those we have known in the past. We have and will encounter competition from other solutions providers,
many of whom may have more significant resources than us with which to compete. There can be no assurance that we will recover
our investments in this new product line, that we will receive meaningful revenue from or realize a profit from this new product
line or that diverting our management’s attention to this new product line will not have a material adverse effect on our
existing business, and in turn on our results of operations, financial condition and prospects.
We may experience
significant fluctuation in our revenue because the timing of large orders placed by some of our customers is often project-based.
Our operating results
fluctuate because we often receive large orders from customers that coincide with the timing of the customer’s project. Sales
of our products and services may be delayed if customers delay approval or commencement of projects due to budgetary constraints,
internal acceptance review procedures, timing of budget cycles or timing of competitive evaluation processes. In addition, sometimes
our customers make significant one-time hardware purchases for projects which are not repeated. We sell primarily on a purchase
order basis rather than pursuant to long-term contracts, and we expect fluctuations in our revenues as a result of one-time project-based
purchases to continue in the future. In addition, our sales may be subject to significant fluctuations based on the acceleration,
delay or cancellation of customer projects, or our failure to complete one or a series of significant potential sales. Because
a significant portion of our operating expenses are fixed, even a single order can have a disproportionate effect on our quarterly
revenues and operating results. As a result of the factors discussed above, and due to the complexities of the industry
in which we operate, it is difficult for us to forecast demand for our current or future products with any degree of certainty,
which means it is difficult for us to forecast our sales. If our quarterly or annual operating results fall below the expectations
of investors or securities analysts, the price of our common stock could decline substantially.
The lengthy sales
cycle for our products and services, along with delays in customer completion of projects, make the timing of our revenues difficult
to predict.
We have a lengthy sales
cycle for many of our products that generally extends between six and 24 months and sometimes longer due to a lengthy customer
evaluation and approval process. The length of this process can be affected by factors over which we have little or no control,
including the customer’s budgetary constraints, timing of the customer’s budget cycles, and concerns by the customer
about the introduction of new products by us or by our competitors. As a result, sales cycles for customer orders vary substantially
among different customers. The lengthy sales cycle is one of the factors that has caused, and may continue to cause, our revenues
and operating results to vary significantly from quarter to quarter. In addition, we may incur substantial expenses and devote
significant management effort and expense to develop potential relationships that do not result in agreements or revenues, which
may prevent us from pursuing other opportunities. Accordingly, excessive delays in sales could be material and adversely affect
our business, financial condition or results of operations.
The nature of our
products, customer base and sales channels causes us to lack visibility into future demand for our products, which makes it difficult
for us to predict our revenues or operating results.
We use forecasts based
on anticipated product orders to manage our manufacturing and inventory levels and other aspects of our business. However, several
factors contribute to a lack of visibility with respect to future orders, including:
· the project-driven nature of many of our customers’ requirements;
· we primarily sell our products indirectly through distributors;
· the lack of long-term contracts with our customers;
· 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.
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.
Delays in qualifying revisions of existing products for
certain of our customers could result in the delay or loss of sales to those customers, which could negatively impact our
business and financial results.
Our industry is characterized by intense competition, rapidly
evolving technology and continually changing customer preferences and requirements. As a result, we frequently develop and introduce
new versions of our existing products, which we refer to as revisions.
Prior to purchasing our products, some of our customers require
that products undergo a qualification process, which may involve testing of the products in the customer’s system. A subsequent
revision to a product’s hardware or firmware, changes in the manufacturing process or our selection of a new supplier may
require a new qualification process, which may result in delays in sales to customers, loss of sales, or us holding excess or obsolete
inventory.
After products are qualified, it can take additional time before
the customer commences volume production of components or devices that incorporate our products. If we are unsuccessful or delayed
in qualifying any new or revised products with a customer, that failure or delay would preclude or delay sales of these products
to the customer, and could negatively impact our financial results. In addition, new revisions to our products could cause our
customers to alter the timing of their purchases, by either accelerating or delaying purchases, which could result in fluctuations
of our net revenue from quarter to quarter.
Delays in deliveries
or quality control problems with our component suppliers could damage our reputation and could cause our net revenue to decline
and harm our results of operations.
We and our contract manufacturers
are responsible for procuring raw materials for our products. Our products incorporate some components and technologies that are
only available from single or limited sources of supply. Depending on a limited number of suppliers exposes us to risks,
including limited control over pricing, availability, quality and delivery schedules. Moreover, due to our limited sales, we may
not be able to convince suppliers to continue to make components available to us unless there is demand for these components from
their other customers. If any one or more of our suppliers cease to provide us with sufficient quantities of components in a timely
manner or on terms acceptable to us, we would have to seek alternative sources of supply and we may have difficulty identifying
additional or replacement suppliers for some of our components.
We may experience
constraints in the supply of certain materials and components that could affect our operating results.
Some of our integrated
circuits are only available from a single source and in some cases, are no longer being manufactured. From time to time, integrated
circuits, and potentially other components used in our products, will be phased out of production by the manufacturer. When this
happens, we attempt to purchase sufficient inventory to meet our needs until a substitute component can be incorporated into our
products. Nonetheless, we may be unable to purchase sufficient components to meet our demands, or we may incorrectly forecast our
demands, and purchase too many or too few components. In addition, our products use components that have been subject to market
shortages and substantial price fluctuations in the past. From time to time, we have been unable to meet customer orders because
we were unable to purchase necessary components for our products. We do not have long-term supply arrangements with most of our
vendors to obtain necessary components 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.
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:
· lack of guaranteed production capacity or product supply;
· unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
· reduced protection for intellectual property rights in some countries;
· differing labor regulations;
· compliance with a wide variety of complex regulatory requirements;
· fluctuations in currency exchange rates;
· changes in a country’s or region’s political or economic conditions;
· effects of terrorist attacks abroad;
· greater difficulty in staffing and managing foreign operations; and
· increased financial accounting and reporting burdens and complexities.
Any problems that we may
encounter with the delivery, quality or cost of our products from our contract manufacturers or suppliers could cause us to lose
net revenue, damage our customer relationships and harm our reputation in the marketplace, each of which could materially and adversely
affect our business, financial condition or results of operations.
From time to time, we
may transition the manufacturing of certain products from one contract manufacturer to another. When we do this, we may incur substantial
expenses, risk material delays or encounter other unexpected issues.
We depend on distributors
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
36% of our net revenue in fiscal 2020. 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