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
products completely or may significantly decrease the volume of products they sell on our behalf. This sales structure also could
subject us to lawsuits, potential liability and reputational harm if, for example, any of our distributors or resellers misrepresents
the functionality of our products or services to customers, violates laws or our corporate policies. If we fail to effectively
manage our existing or future distributors and resellers effectively, our business and operating results could be materially and
adversely affected.
Changes to the average
selling prices of our products could affect our net revenue and gross margins and adversely affect results of operations.
In the past, we have experienced
reductions in the average selling prices and gross margins of our products. We expect competition to continue to increase, and
we anticipate this could result in additional downward pressure on our pricing. Our average selling prices for our products might
also decline as a result of other reasons, including promotional programs introduced by us or our competitors and customers who
negotiate price concessions. To the extent we are able to increase prices, we may experience a decline in sales volumes if customers
decide to purchase competitive products. If any of these were to occur, our gross margins could decline and we might not be able
to reduce the cost to manufacture our products enough or at all to keep up with the decline in prices.
If we are unable
to sell our inventory in a timely manner, it could become obsolete, which could require us to write-down or write off obsolete
inventory, which could harm our operating results.
At any time, competitive
products may be introduced with more attractive features or at lower prices than ours. If this occurs, and for other reasons, we
may not be able to accurately forecast demand for our products and our inventory levels may increase. There is a risk that we may
be unable to sell our inventory in a timely manner to avoid it becoming obsolete. If we are required to substantially discount
our inventory or are unable to sell our inventory in a timely manner, we would be required to increase our inventory reserves or
write off obsolete inventory and our operating results could be substantially harmed.
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.
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.
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.
If software that
we incorporate into our products were to become unavailable or no longer available on commercially reasonable terms, it could adversely
affect sales of our products, which could disrupt our business and harm our financial results.
Certain of our products
contain software developed and maintained by third-party software vendors or which are available through the “open source”
software community. We also expect that we may incorporate software from third-party vendors and open source software in our future
products. Our business would be disrupted if this software, or functional equivalents of this software, were either no longer available
to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to either redesign our
products to function with alternate third-party software or open source software, or develop these components ourselves, which
would result in increased costs and could result in delays in our product shipments. Furthermore, we might be forced to limit the
features available in our current or future product offerings.
We face risks associated
with our international operations that could impair our ability to grow our revenues abroad as well as our overall financial condition.
We believe that our future
growth is dependent in part upon our ability to increase sales in international markets. These sales are subject to a variety of
risks, including geopolitical events, fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers,
unexpected changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences,
and export license requirements. In addition, we are subject to the risks inherent in conducting business internationally, including
political and economic instability and unexpected changes in diplomatic and trade relationships. In many markets where we operate,
business and cultural norms are different than those in the 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.
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 recent U.S.-initiated renegotiation of the North America Free Trade Agreement, and Brexit in
Europe. This uncertainty includes the possibility of imposing tariffs or penalties on products manufactured outside the U.S., including
the US government’s institution of a 25% tariff on a range of products from China and subsequent tariffs imposed by the U.S.
as well as tariffs imposed by trading partners on U.S. goods, and the potential for increased trade barriers between the UK and
the European Union. The institution of trade tariffs both globally and between the U.S. and China specifically, carries the risk
of negatively affecting the overall economic conditions of both China and the U.S., which could have a negative impact on
us.
We cannot predict
whether, and to what extent, there may be changes to international trade agreements or whether quotas, duties, tariffs, exchange
controls or other restrictions on our products will be changed or imposed. If we are unable to source our products from the countries
where we wish to purchase them, either because of regulatory changes or for any other reason, or if the cost of doing so increases,
it could have a material adverse effect on our business, financial condition and results of operations. Furthermore, imposition
of tariffs may result in local sourcing initiatives, or other developments that make it more difficult to sell our products in
foreign countries, which would negatively impact our business and operating results.
Our failure to comply
effectively with regulatory laws pertaining to our foreign operations could have a material adverse effect on our revenues and
profitability.
We are required to comply
with U.S. government export regulations in the sale of our products to foreign customers, including requirements to properly classify
and screen our products against a denied parties list prior to shipment. We are also required to comply with the provisions of
the FCPA and all other anti-corruption laws, such as the UK Anti-Bribery Act, of all other countries in which we do business, directly
or indirectly, including compliance with the anti-bribery prohibitions and the accounting and recordkeeping requirements of these
laws. Violations of the FCPA or other similar laws could trigger sanctions, including ineligibility for U.S. government insurance
and financing, as well as large fines. Failure to comply with the aforementioned regulations could also affect our decision to
sell our products in international jurisdictions, which could have a material adverse effect on our revenues and profitability.
Our failure to comply
effectively with the requirements of applicable environmental legislation and regulation could have a material adverse effect on
our revenues and profitability.
Certain states and countries
have passed regulations relating to chemical substances in electronic products and requiring electronic products to use environmentally
friendly components. For example, the European Union has the Waste Electrical and Electronic Equipment Directive, the Restrictions
of Hazardous Substances Directive, and the Regulation on Registration, Evaluation, Authorization and Restriction of Chemicals.
In the future, China and other countries including the U.S. are expected to adopt further environmental compliance programs. In
order to comply with these regulations, we may need to redesign our products to use different components, which may be more expensive,
if they are available at all. If we fail to comply with these regulations, we may not be able to sell our products in jurisdictions
where these regulations apply, which could have a material adverse effect on our revenues and profitability.
Foreign currency
exchange rates may adversely affect our results.
We are exposed to market risk primarily related to foreign currencies
and interest rates. In particular, we are exposed to changes in the value of the U.S. dollar versus the local currency in which
our products are sold and our services are purchased, including devaluation and revaluation of local currencies. Accordingly, fluctuations
in foreign currency rates could adversely affect our revenues.
In particular, the uncertainty with respect to the ability of
certain European countries to continue to service their sovereign debt obligations and the related European financial restructuring
efforts may cause the value of the Euro and other European currencies to fluctuate. If the
value of European currencies, including the Euro, deteriorates, thus reducing the purchasing power of European customers,
our sales could be adversely affected.
Current or future
litigation could adversely affect us.
We are subject to a wide
range of claims and lawsuits in the course of our business. Any lawsuit may involve complex questions of fact and law and may require
the expenditure of significant funds and the diversion of other resources. The results of litigation are inherently uncertain,
and adverse outcomes are possible.
In particular, litigation
regarding intellectual property rights occurs frequently in our industry. The results of litigation are inherently uncertain, and
adverse outcomes are possible. Adverse outcomes may have a material adverse effect on our business, financial condition or results
of operations.
There is a risk that other
third parties could claim that our products, or our customers’ products, infringe on their intellectual property rights or
that we have misappropriated their intellectual property. In addition, software, business processes and other property rights in
our industry might be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality
of products in different industry segments overlaps. Other parties might currently have, or might eventually be issued, patents
that pertain to the proprietary rights we use. Any of these third parties might make a claim of infringement against us. The results
of litigation are inherently uncertain, and adverse outcomes are possible.
Responding to any infringement
claim, regardless of its validity, could:
· be time-consuming, costly and/or result in litigation;
· divert management’s time and attention from developing our business;
· require us to stop selling or to redesign certain of our products; or
· require us to satisfy indemnification obligations to our customers.
If any of these occur,
our business, financial condition or results of operations could be adversely affected.
We may not be able
to adequately protect or enforce our intellectual property rights, which could harm our competitive position or require us to incur
significant expenses to enforce our rights.
We rely primarily on a
combination of laws, such as patent, copyright, trademark and trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. Despite any precautions that we have taken:
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, Information Technology (“IT”) systems failure, terrorist attacks and other events beyond our control. A substantial
portion of our facilities, including our corporate headquarters and other critical business operations, are located near major
earthquake faults and, therefore, may be more susceptible to damage if an earthquake occurs. We do not carry earthquake insurance
for direct earthquake-related losses. If a business interruption occurs, whether due to a natural disaster or otherwise, our business
could be materially and adversely affected.
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 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.
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.
The secure processing, maintenance and transmission of this information is critical to our operations. 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 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.
Some of our new software offerings may be subject to various
cybersecurity risks, which are particularly acute in the cloud-based technologies operated by us and other third parties that form
a part of our solutions.
In connection with certain implementations of our management
software platform, application, and SaaS offering, ConsoleFlow, we expect to store, convey and potentially process data produced
by devices. This data may include confidential or proprietary information, intellectual property or personally identifiable information
of our customers or other third parties with whom they do business. It is important for us to maintain solutions and related infrastructure
that are perceived by our customers and other parties with whom we do business to provide a reasonable level of reliability and
security. Despite available security measures and other precautions, the infrastructure and transmission methods used by our products
and services may be vulnerable to interception, attack or other disruptive problems.
If a cyberattack or other security incident were to allow unauthorized
access to or modification of our customers’ data or our own data, whether due to a failure with our systems or related systems
operated by third parties, we could suffer damage to our brand and reputation. The costs we would incur to address and fix these
incidents could significantly increase our expenses. These types of security incidents could also lead to lawsuits, regulatory
investigations and increased legal liability, including in some cases contractual costs related to customer notification and fraud
monitoring. Further, as regulatory focus on privacy and data security issues continues to increase and worldwide laws and regulations
concerning the protection of information become more complex, the potential risks and costs of compliance to our business will
intensify.
Acquisitions, strategic
partnerships, joint ventures or investments may impair our capital and equity resources, divert our management’s attention
or otherwise negatively impact our operating results.
We may pursue acquisitions,
strategic partnerships and joint ventures that we believe would allow us to complement our growth strategy, increase market share
in our current markets and expand into adjacent markets, broaden our technology and intellectual property and strengthen our relationships
with distributors, OEMs and ODMs. Any future acquisition, partnership, joint venture or investment may require that we pay significant
cash, issue equity or incur substantial debt. Acquisitions, partnerships or joint ventures may also result in the loss of key personnel
and the dilution of existing stockholders to the extent we are required to issue equity securities. In addition, acquisitions,
partnerships or joint ventures require significant managerial attention, which may be diverted from our other operations. These
capital, equity and managerial commitments may impair the operation of our business. Furthermore, acquired businesses may not be
effectively integrated, may be unable to maintain key pre-acquisition business relationships, may not result in an increase in
revenues or earnings or the delivery of new products, may contribute to increased fixed costs, and may expose us to unanticipated
liabilities. If any of these occur, we may fail to meet our business objectives and our business, financial condition and operating
results could be materially and adversely affected.
If we are unable
to attract, retain or motivate key senior management and technical personnel, it could seriously harm our business.
Our financial performance
depends substantially on the performance of our executive officers and of key engineers, marketing and sales employees. We are
particularly dependent upon our technical personnel, due to the specialized technical nature of our business. If we were to lose
the services of our executive officers or any of our key personnel and were not able to find replacements in a timely manner, our
business could be disrupted, other key personnel might decide to leave, and we might incur increased operating expenses associated
with finding and compensating replacements.
We may experience
difficulties associated with utilizing third-party logistics providers.
A majority of our physical
inventory management process, as well as the shipping and receiving of our inventory, is performed by third-party logistics providers
in Los Angeles, California and Hong Kong. There is a possibility that these third-party logistics providers will not perform as
expected and we could experience delays in our ability to ship, receive, and process the related data in a timely manner. This