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, 2022
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-16027
LANTRONIX, INC.
(Exact name of registrant as specified in its
charter)
(Address of principal executive offices) (Zip Code)
(949)453-3990
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class 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, 2021, the last trading day of the registrant’s second fiscal quarter, was approximately $214,675,000. The determination
of affiliate status for this purpose shall not be a conclusive determination for any other purpose.
As of August 25, 2022, there were 35,136,540 shares
of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement
on Schedule 14A relating to the registrant's 2022 annual meeting of stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
LANTRONIX, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2022
TABLE OF CONTENTS
Page
PART I
Cautionary Note Regarding Forward-Looking Statements ii
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 19
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Mine Safety Disclosures 19
PART II
Item 6. Reserved 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk * 33
Item 8. Financial Statements and Supplementary Data 33
Item 9A. Controls and Procedures 33
Item 9B. Other Information 34
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 34
PART III
Item 10. Directors, Executive Officers and Corporate Governance 35
Item 11. Executive Compensation 35
Item 14. Principal Accountant Fees and Services 35
PART IV
Item 15. Exhibits and Financial Statement Schedules 36
* 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,
2022, or this Report, contains forward-looking statements within the meaning of the federal securities laws, which statements are subject
to substantial risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report,
or incorporated by reference into this Report, are forward-looking statements. Throughout this Report, we have attempted to identify forward-looking
statements by using words such as “may,” “believe,” “will,” “could,” “project,”
“anticipate,” “expect,” “estimate,” “should,” “continue,” “potential,”
“plan,” “forecasts,” “goal,” “seek,” “intend,” other forms of these words
or similar words or expressions or the negative thereof. Additionally, statements concerning future matters such as our expected
earnings, revenues, expenses and financial condition, our expectations with respect to the development of new products, expectations regarding
the impact of the COVID-19 pandemic and other statements regarding matters that are not historical are forward-looking statements.
We have based our forward-looking statements on management’s
current expectations and projections about trends affecting our business and industry and other future events. Although we do not make
forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Forward-looking
statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, results of operations
or performance to differ materially from our historical results or those expressed or implied in any forward-looking statement contained
in this Report. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual
results to differ materially from our expectations include, but are not limited to, those set forth under “Risk Factors” in
Item 1A of Part I of this Report, as such factors may be updated, amended or superseded from time to time by subsequent quarterly reports
on Form 10-Q or current reports on Form 8-K. In addition, actual results may differ as a result of additional risks and uncertainties
of which we are currently unaware or which we do not currently view as material to our business.
You should read this Report in its entirety, together with the documents
that we file as exhibits to this Report, with the understanding that our future results may be materially different from what we currently
expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation
to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions
or expectations, except as required by applicable law or the rules of The Nasdaq Capital Market. If we do update or correct any forward-looking
statements, investors should not conclude that we will make additional updates or corrections.
We qualify all of our forward-looking statements by these cautionary
statements.
ii
PART I
ITEM 1. BUSINESS
Overview
Lantronix, Inc. is a global Industrial and Enterprise IoT provider
of solutions that target diversified verticals ranging from Smart Cities, Utilities and Healthcare to Enterprise, Intelligent Transportation,
and Industrial Automation. Building on a long history of connectivity and video processing competence, target applications include Video
Surveillance, Traffic management, Infotainment systems, Robotics, Edge Computing and Remote Environment Management (“REM”).
Our portfolio of services and products address each layer of the IoT
Stack including Collect, Connect, Compute, Control and Comprehend, enabling our customers to deploy successful IoT and REM solutions.
Our services and products deliver a holistic approach, addressing our customers’ needs by integrating a SaaS management platform
with custom application development layered on top of external and embedded hardware, enabling intelligent edge computing, secure communications
(wired, Wi-Fi, and cellular), location and positional tracking, and environmental sensing and reporting.
We organize our portfolio services and products into the following
product lines: Embedded IoT Modules, IoT Systems Solutions, and Software and Engineering Services.
We were incorporated in California in 1989 and reincorporated in Delaware
in 2000.
References in this Report to “fiscal 2022” refer to the
fiscal year ended June 30, 2022 and references to “fiscal 2021” refer to the fiscal year ended June 30, 2021. In addition,
unless the context suggests otherwise, all reference in this Report to the “Company,” “we,” and “us,”
refer to Lantronix, Inc. together with its subsidiaries.
Our Strategy
Today, more businesses are seeking to streamline their operations by
connecting their machines and electronic devices to the Internet, manage them remotely, and reduce costs. The growth in the IoT and REM
markets are being driven by the growing importance of data, being able to act on that data, and the rapidly falling cost of sensors, connectivity,
compute, and storage. While the promise is great, designing and deploying these projects is complex, costly and time-consuming. Our offerings
are designed to help companies increase speed and reduce friction for their deployments through reduced complexity, decreased development
costs, and increased ease of management for web-scale applications and real-world solutions; thus, driving customer value and success.
We are addressing the market opportunity by offering our customers turnkey solutions, leveraging the layers of the IoT Stack, such as
Collect, Connect, Compute, Control and Comprehend, through a combination of services, hardware and software enablement, accessible and
manageable through our SaaS platform.
We are executing a growth strategy that includes continuous innovation
complemented by strategic acquisitions to expand our ability to offer complete IoT and REM solutions with the intent of increasing our
scale and broadening our scope so that we can increase our value proposition to our customers. We believe this strategy will allow us
to address a larger portion of our customers’ operational needs and engage with customers as a strategic "total solution"
partner. We believe this will strengthen our position in the market as our customers come to us for a wider variety of applications.
Recent Acquisitions
On January 16, 2020 we acquired Intrinsyc Technologies Corporation
(“Intrinsyc”). This acquisition provided additional and complementary edge computing with embedded product design and application
development capabilities, crucial to the development of intelligent Compute functionality for advanced customer implementations.
On August 2, 2021 we acquired the Transition Networks and Net2 Edge
businesses (the “TN Companies”) from Communication Systems, Inc. The TN Companies provide us with complementary IoT connectivity
products and capabilities, including switching, power over ethernet and media conversion and adapter products.
These acquisitions allow us to offer more value to our customers and
substantially increase the markets that we serve.
Products and Solutions
Embedded IoT Modules
This portfolio of embedded products provides a variety of solutions
including Compute System-on-Module (SOM) or System-in-Package (SIP) solutions supplemented with wired and wireless network Connectivity
options. As the level of silicon integration continues to grow, the compute modules also provide the ability to Collect digital information
(Video, Audio or Sensors) and analyze/comprehend the data streams based on specific AI/ML algorithms. The new implementations of SIP devices
can process multiple media streams with CV (Computer Vision) technology and the modules can be Controlled remotely via ConsoleFlowTM,
Lantronix’s Cloud SaaS platform. Our IoT compute products typically are embedded into a customer product, enabling advanced application
functionality at the edge. Our compute products are normally embedded into new designs. These products include application processing
that delivers compute to meet customer needs for data transformation, computer vision, machine learning, augmented / virtual reality,
audio / video aggregation and distribution, and custom applications at the edge. Many of the products are offered with software tools
intended to further accelerate our customers’ time-to-market and increase their value add. Most of our IoT embedded products are
pre-certified in a number of countries thereby significantly reducing our OEM customers’ regulatory certification costs and accelerating
their time to market
The following product families are included in our Embedded IoT Solutions
product line: XPort®, XPort® Pro, WiPort®, System on Module (“SoM”), Single Board Computer (“SBC”),
Development Kits, MicroM110, xPico®, xPico® Wi-Fi, NICS, Optical SFPs, PremierWave® EN, and PremierWave® XC.
IoT System Solutions
The IoT Systems Solutions portfolio consists of fully functional standalone
systems that provider routing, switching or gateway functionalities as well as Telematics and media conversion. These products include
wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network
connectivity, power for IoT end devices through Power over Ethernet (PoE), application hosting, protocol conversion, media conversion,
secure access for distributed IoT deployments and many other functions. Most of our IoT System products are pre-certified in a number
of countries thereby significantly reducing our original equipment manufacturer (“OEM”) customers’ regulatory certification
costs and accelerating their time to market.
Our PoE products support remote devices such as cameras and wireless
access points by passing electrical power along with data on Ethernet cabling, eliminating the need for traditional AC/DC electrical power
in hard-to-reach locations. As more cities move to implement smart city technology, a major component will be solutions designed to protect
and provide services to citizens, such as intelligent transportation and surveillance networks. Our switches deliver the necessary connectivity,
bandwidth and power to enable these solutions. Many of our products incorporate features to perform advanced levels of fault management
and diagnostics to troubleshoot networks and proactively fix problems. Our media converters and other customer premise equipment (“CPE”)
assist customers in resolving challenges in the areas of bandwidth constraints, security risks, and distance limitations as networks extend
from local area to wide area networks and adapt to ever increasing end-user demands.
Our smart tracking devices are designed to deliver robust data logging
and positional tracking functionality and reliability for supply chain and logistics solutions. Our telematics devices are designed to
be flexible in the field and offer a variety of connectivity options to suit the customers’ needs across 3G, 4G, and LTE cellular
networks. These power efficient products are designed to support communications across interfaces and industrial protocols for vehicle,
fleet, and asset tracking and management. Many of the products are offered with software tools intended to further accelerate our customers’
time-to-market and increase their value add. Most of our IoT Telematics products are pre-certified in a number of countries thereby significantly
reducing our OEM customers’ regulatory certification costs and accelerating their time to market.
As Edge Computing deployment accelerates, REM allows for full comprehension
and control of a remote IT infrastructure, across a range of sensors (temperature, humidity, light, acceleration, open / close, etc.)
providing status and alerting, automation, and remote control of devices and end stations. REM designs may be part of an out of band (“OOB”)
or in band network design. OOB is a technique that uses a dedicated management network to access critical infrastructure components to
ensure production independent management connectivity. REM allows organizations to effectively monitor, manage, and control their enterprise
IT equipment and facilities (environments), either in or out of band, optimizing their IT support resources.
Our REM product line includes out-of-band management, console management,
power management, and IP connected keyboard-video-mouse (commonly referred to as “IPKVM”) products that provide remote access
to IT and networking infrastructure deployed in test labs, data centers, branch offices, remote sites, and server rooms.
The
following product families are included in IoT System Solutions product line: EDS, EDS-MD, xPressTM, xDirect®, E21x, E22x, G52x,
X30x, Bolero4x, FOX3-4G, FOX4, SGXTM, SLBTM, SLCTM8000, SpiderTM, UDS, EMGTM.
S40 and Power over Ethernet Switches. In addition, we offer
non-PoE Network Switches and Media Converters.
Software and Engineering Services
Our SaaS platform provides single pane of glass management for REM
and IoT deployments. Our platform enables customers to easily deploy, monitor, manage, and automate across their global deployments, all
from a single platform login, virtually connected as though directly on each device. Our platform eliminates the need to have 24/7 personnel
on site, and makes it easy to see and drill into an issue quickly, even in large scale deployments.
OEMs and SIs can leverage our platform multitenancy functionality for
supporting a wide customer base while ensuring customer separation. Over the Air (“OTA”) updates make it easy to ensure the
latest security patches, firmware, and configurations are deployed and functional.
We leverage our engineering expertise and product development best
practices to deliver high quality, innovative products, cost-effectively and on time.
Our engineering services flexible business model allows for choosing
turnkey product development or team augmentation for accelerating complex areas of product development such as; camera development and
tuning, voice control, machine learning, artificial intelligence, computer vision, augmented / virtual reality, mechanical and radio-frequency
design, thermal and power optimization, or in any specific area a customer needs assistance.
In addition to our production-ready edge computing solutions, we offer
experienced multidisciplinary engineering services across complete aspects of IoT product development, including hardware engineering,
software engineering, mechanical engineering, rapid prototyping, and quality assurance. We also offer services for mechanical, hardware,
and software engineering for camera, audio, and artificial intelligence / machine learning development.
The following product families are included in our Software & Services
product line: Engineering Services, ConsoleFlowTM, Level Services and J-Integra.
Net Revenue by Product Line
We have one operating and reportable business segment. A summary of
our net revenue by product line is found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in Part II, Item 7 of this Report, which is incorporated herein by reference. A discussion of factors potentially affecting our
net revenue and other operating results is set forth in “Risk Factors” included in Part I, Item 1A of this Report, which is
incorporated herein by reference.
Sales Cycle
Our embedded IoT solutions are typically designed into products by
OEMs, original design manufacturers (“ODMs”) and contract manufacturers. OEMs design and sell products under their own brand
that are either manufactured by the OEM in-house or by third-party contract manufacturers. ODMs design and manufacture products for third
parties, which then sell those products under the third parties’ brands. The design cycles using our embedded solutions typically
range from nine to 24 months and can generate revenue for the entire life cycle of an end user’s product.
Our IoT System Solutions are typically sold to end users through value
added resellers (“VARs”) systems integrators, distributors, online retailers and, to a lesser extent, OEMs. The design cycles
for these products typically range from three to 18 months and are often project-based.
Sales Channels
Distributors
A majority of our sales are made through distributors. Distributors
resell our products to a wide variety of resellers and end customers including OEMs, ODMs, value-added resellers (“VARs”),
systems integrators, consumers, online retailers, IT resellers, corporate customers and government entities.
Resellers
Our products are sold by industry-specific system integrators and VARs,
who often obtain our products from our distributors. Additionally, our products are sold by direct market resellers such as CDW, ProVantage,
and Amazon.com.
Direct Sales
To a lesser extent, we sell products directly to larger OEMs and end
users. We also maintain an ecommerce site for direct sales.
Sales and Marketing
We sell our products primarily through an internal sales force, which
includes regional sales managers, inside sales personnel and field applications engineers in major regions throughout the world. This
team manages our relationships with our partners and end users, identifies and develops new sales opportunities and increases penetration
at existing accounts. We implement marketing programs, tools and services, including displaying our products at industry-specific events,
to generate sales leads and increase demand for our products.
Manufacturing
Our manufacturing operations are primarily conducted through four third-party
contract manufacturers. We currently utilize Hana Microelectronics, primarily located in Thailand and China, Honortone, primarily located
in China, Ruby Tech in Taiwan, and Tailyn in China as our contract manufacturers for most of our products. In addition, we use Inphi Corporation
to manage Taiwan Semiconductor Manufacturing Company, Ltd., a third-party foundry located in Taiwan, which manufactures our large-scale
integration chips. We manufacture certain products with final assembly in the U.S. to meet trade compliance requirements.
Our contract manufacturers source raw materials, components
and integrated circuits, in accordance with our specifications and forecasts, and perform printed circuit board assembly, final assembly,
functional testing and quality control. Our products are manufactured and tested to our specifications with standard and custom components.
Many of these components are available from multiple vendors. However, we have several single-sourced supplier relationships, either because
alternative sources are not available or because the relationship is advantageous to us.
Research and Development
Our research and development efforts are focused on the development
of hardware and software technology to differentiate our products and enhance our competitive position in the markets we serve. Product
research and development is primarily performed in-house and supplemented with outsourced resources.
Competition
Our industry is highly competitive and characterized by rapid technological
advances and evolving industry standards. The market can be affected significantly by new product introductions and marketing activities
of industry participants. We believe that we compete for customers based on product features, software capabilities, company reputation,
brand recognition, technical support, relationships with partners, quality, reliability, product development capabilities, price and availability.
A discussion of factors potentially affecting our ability to compete in the markets in which we operate is set forth in “Risk Factors”
included in Part I, Item 1A of this Report, which is incorporated herein by reference.
Intellectual Property Rights
We believe that a considerable portion of our value resides in our
intellectual property. We have developed proprietary methodologies, tools, processes and software in connection with delivering our products
and services. We protect our intellectual property through a combination of patents, copyrights, trademarks, trade secrets, licenses,
non-disclosure agreements and contractual provisions. We enter into a non-disclosure and confidentiality agreement with each of our employees,
consultants and third parties that have access to our proprietary technology. Pursuant to assignment of inventions agreements, all of
our employees and consultants assign to us all intellectual property rights for the relevant inventions created in connection with their
employment or contract with us. We currently hold U.S. and international patents covering various aspects of our products, with additional
patent applications pending.
U.S. and Foreign Government Regulation
Many of our products are subject to certain mandatory regulatory approvals
in the regions in which our products are deployed. In particular, wireless products must be approved by the relevant government authority
prior to these products being offered for sale. In addition, certain jurisdictions have regulations requiring products to use environmentally
friendly components. Some of our products employ security technology, which is subject to various U.S. export restrictions.
Employees
As of August 16, 2022, we had 348 total employees including 335 full
time employees, none of whom is represented by a labor union. We have not experienced any labor problems resulting in a work stoppage
and believe we have good relationships with our employees.
Customer and Geographic Concentrations
We conduct our business globally and manage our sales teams by three
geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”). A
discussion of sales to our significant customers and related parties, sales within 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 52 President and Chief Executive Officer
Jeremy R. Whitaker 52 Chief Financial Officer
Mohammed F. Hakam 54 Vice President of Engineering
Roger Holliday 63 Vice President of Worldwide Sales
PAUL H. PICKLE has served as our President and Chief Executive Officer,
and as a member of our Board, since April 2019. Before joining Lantronix, Mr. Pickle served as President and Chief Operating Officer of
Microsemi Corporation, a leading provider of semiconductor and system solutions, from November 2013 until Microsemi was acquired by Microchip
Technology Inc. in May 2018. Prior to his position as President and Chief Operating Officer, he served Microsemi as Executive Vice President,
leading business operations of the company’s Integrated Circuits group, where he played an integral role in the planning, developing,
and execution of Microsemi’s leading edge IC solutions for communications, industrial, aerospace, and defense/security markets.
JEREMY R. WHITAKER has served as our Chief Financial Officer since
September 2011. Mr. Whitaker returned to Lantronix after serving as Vice President, Corporate Controller at Mindspeed from January 2011
to September 2011. Mr. Whitaker previously served as our Vice President of Finance and Accounting from September 2010 to January 2011,
where he was responsible for managing all worldwide finance and accounting functions. Mr. Whitaker also served as our Senior Director
of Finance and Accounting from February 2006 to September 2010 and our Director of Finance and Accounting from August 2005 to February
2006. Prior to August 2005, Mr. Whitaker held vice president and director level finance and accounting positions with two publicly-traded
companies and worked in the assurance practice at Ernst & Young LLP for six years.
MOHAMMED F. HAKAM joined Lantronix in August of 2018 and serves as
our Vice President of Engineering. Prior to joining Lantronix, Mr. Hakam served as the interim Senior Vice President of International
Operations at Viewstream, Inc., a provider of videos and marketing content to technology companies, from September 2016 to July 2018,
where he was instrumental in planning and expanding the company’s global media strategy. Before joining Viewstream, Mr. Hakam was
founder and Senior Vice President of Engineering and Product Management of SwitchRay Inc., a global provider of communication service
platforms for global telecom carriers, from 2012 until its acquisition by 46 Labs in September 2016. He previously spent 20+ years at
a number of large companies such as Motorola and Kyocera Wireless in various engineering leadership roles, and has also been the founder
of two technology companies (including SwitchRay Inc.) in the networking and telecom segment. Mr. Hakam has been a professor at National
University in San Diego, teaching undergraduate and graduate courses in program and project management, international management, six
sigma and statistical process control.
ROGER HOLLIDAY joined Lantronix in January 2020 and serves as our Vice
President of Worldwide Sales. Prior to joining Lantronix, Mr. Holliday served in various positions at Microsemi Corporation since 1999,
serving most recently as Executive Vice President and General Manager from 2013 until Microsemi was acquired by Microchip Technology Inc.
in May 2018. Prior to his time at Microsemi, Mr. Holliday served in various product marketing, applications and sales management roles
at Linfinity Microelectronics until its acquisition by Microsemi in 1999.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves numerous
risks and uncertainties. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described
in this section, as well as other information contained in this Report and in our other filings with the SEC. This section should be read
in conjunction with the consolidated financial statements and accompanying notes thereto included in Item 8 of this Report, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Report. If any of these risks
or uncertainties actually occurs, our business, financial condition, results of operations or prospects could be materially harmed. In
that event, the market price for our common stock could decline and you could lose all or part of your investment. In addition, risks
and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business.
Risks Related to Our Operations and Industry
The effect of COVID-19 and other possible
pandemics and similar outbreaks could result in material adverse effects on our business, financial position, results of operations and
cash flows.
The ongoing COVID-19 pandemic, and the periodic measures intended to
reduce its spread imposed by governments and other authorities around the world, including restrictions on freedom of movement and business
operations such as travel bans, border closings, business limitations and closures, quarantines and shelter-in-place orders, have had,
and may continue to have, an adverse impact on the economy generally, our business and the businesses of our suppliers, and our results
of operations and financial condition. Most of our employees transitioned to remote working arrangements commencing in March 2020, and
many continue to primarily work remotely as of the date hereof, which may ultimately result in lower work efficiency and productivity,
and in turn adversely affect our business. In addition, the COVID-19 pandemic resulted in industry events, trade shows and business travel
being suspended, cancelled and/or significantly curtailed. The cessation of trade shows and business travel resulted in our lead pipeline
being negatively impacted, which has negatively affected our sales since the beginning of the outbreak. While most industry events, trade
shows and business travel have resumed, if these activities are suspended, cancelled and/or significantly curtailed in the future, whether
due to surges of COVID-19 or otherwise related to the pandemic, our sales may continue to be negatively impacted in the future.
In addition, the ongoing impact of the COVID-19 pandemic and measures
to prevent its spread subject us to various risks and uncertainties that could materially adversely affect our business, results
of operations and financial condition, including the following:
The duration and extent of the COVID-19 pandemic’s effect on
our operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted at this
time, including new information which may emerge concerning the long-term effects of COVID-19, actions taken to contain COVID-19, additional
surges of COVID-19 infections due to the rate of public acceptance and efficacy of COVID-19 vaccines or due to new and more contagious
and/or vaccine resistant variants, and how quickly and to what extent normal economic and operating conditions can resume. Even after
the COVID-19 pandemic has subsided, we may experience adverse impacts to our business, financial condition, results of operations, and
prospects as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the
future. The adverse impact of the COVID-19 pandemic on our business, results of operations and financial condition could be material.
We have experienced and may in the future experience constraints
in the supply of certain materials and components that could affect our operating results.
Some of our integrated circuits are only available from a single source
and in some cases, are no longer being manufactured. From time to time, integrated circuits, and potentially other components used in
our products, will be phased out of production by the manufacturer. When this happens, we attempt to purchase sufficient inventory to
meet our needs until a substitute component can be incorporated into our products. Nonetheless, we may be unable to purchase sufficient
components to meet our demands, or we may incorrectly forecast our demands, and purchase too many or too few components. In addition,
our products use components that have been in the past and may in the future be subject to market shortages and substantial price fluctuations,
whether due to the COVID-19 pandemic, the war between Ukraine and Russia, recent tensions between China and Taiwan or otherwise. From
time to time, we have been unable to meet customer orders because we were unable to purchase necessary components for our products. We
do not have long-term supply arrangements with most of our vendors to obtain necessary components, including semiconductor chips, or technology
for our products and instead purchase components on a purchase order basis. If we are unable to purchase components from these suppliers,
our product shipments could be prevented or delayed, which could result in a loss of sales. If we are unable to meet existing orders or
to enter into new orders because of a shortage in components, we will likely lose net revenue, risk losing customers and risk harm to
our reputation in the marketplace, which could adversely affect our business, financial condition or results of operations. For instance,
we have recently experienced increased delays in shipments of semiconductor chips. As a result, we have sought alternate sources of certain
components, which have been at a higher cost. Because semiconductor chips continue to be subject to an ongoing significant shortage, our
ability to source components that use semiconductor chips has been adversely affected. These supply interruptions have resulted in increased
component delivery lead times and increased costs to obtain components with available semiconductor chips. To the extent this semiconductor
chip shortage or other shortages continue, the production of our products may be impacted.
Future operating results depend upon our ability to timely obtain
components in sufficient quantities and on acceptable terms.
We and our contract manufacturers are responsible for procuring raw
materials for our products. Our products incorporate some components and technologies that are only available from single or limited sources
of supply. Depending on a limited number of suppliers exposes us to risks, including limited control over pricing, availability, quality
and delivery schedules. Moreover, due to our limited sales, we may not be able to convince suppliers to continue to make components available
to us unless there is demand for these components from their other customers. If any one or more of our suppliers cease to provide us
with sufficient quantities of components in a timely manner or on terms acceptable to us, we would have to seek alternative sources of
supply and we may have difficulty identifying additional or replacement suppliers for some of our components.
We outsource substantially all of our manufacturing to contract
manufacturers in Asia. If our contract manufacturers are unable or unwilling to manufacture our products at the quality and quantity we
request, our business could be harmed.
We use contract manufacturers based in Asia to manufacture substantially
all of our products. Generally, we do not have guaranteed supply agreements with our contract manufacturers or suppliers. If any of these
subcontractors or suppliers were to cease doing business with us, we might not be able to obtain alternative sources in a timely or cost-effective
manner. Our reliance on third-party manufacturers, especially in countries outside of the U.S., exposes us to a number of significant
risks, including:
· 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 or geopolitical conflicts abroad;
· greater difficulty in staffing and managing foreign operations; and
· increased financial accounting and reporting burdens and complexities.
Any problems that we may encounter with the delivery, quality or cost
of our products from our contract manufacturers or suppliers could cause us to lose net revenue, damage our customer relationships and
harm our reputation in the marketplace, each of which could materially and adversely affect our business, financial condition or results
of operations.
From time to time, we may transition the manufacturing of certain products
from one contract manufacturer to another. When we do this, we may incur substantial expenses, risk material delays or encounter other
unexpected issues.
Certain of our products are sold into mature markets, which could
limit our ability to continue to generate revenue from these products. Our ability to sustain and grow our business depends on our ability
to develop, market, and sell new products.
Certain of our products are sold into mature markets that are characterized
by a trend of declining demand. As the overall market for these products decreases due to the adoption of new technologies, we expect
that our revenues from these products will continue to decline. As a result, our future prospects will depend on our ability to develop
and successfully market new products that address new and growing markets. Our failure to develop new products or failure to achieve widespread
customer acceptance of any new products could cause us to lose market share and cause our revenues to decline. There can be no assurance
that we will not experience difficulties that could delay or prevent the successful development, introduction, marketing and sale of new
products or product enhancements. Factors that could cause delays include regulatory and/or industry approvals, product design cycle and
failure to identify products or features that customers demand. In addition, the introduction and sale of new products often involves
a significant technical evaluation, and we often face delays because of our customers’ internal procedures for evaluating, approving
and deploying new technologies. For these and other reasons, the sales cycle associated with new products is typically lengthy, often
lasting six to 24 months and sometimes longer. Therefore, there can be no assurance that our introduction or announcement of new product
offerings will achieve any significant or sustainable degree of market acceptance or result in increased revenue in the near term.
Our software offerings are subject to risks that differ from
those facing our hardware products.
We continue to dedicate significant engineering resources to our management
software platform, applications, and SaaS offerings, including ConsoleFlowTM. These product and service offerings are subject to
significant additional risks that are not necessarily related to our hardware products. Our ability to succeed with these offerings will
depend in large part on our ability to provide customers with software products and services that offer features and functionality that
address the needs of particular businesses. We may face challenges and delays in the development of this product line as the marketplace
for products and services evolves to meet the needs and desires of customers. We cannot provide assurances that we will be successful
in operating and growing this product line.
In light of these risks and uncertainties, we may not be able to establish
or maintain market share for our software and SaaS offerings. As we develop new product lines, we must adapt to market conditions that
are unfamiliar to us, such as competitors and distribution channels that are different from those we have known in the past. We have and
will encounter competition from other solutions providers, many of whom may have more significant resources than us with which to compete.
There can be no assurance that we will recover our investments in this product line, that we will receive meaningful revenue from or realize
a profit from this new product line or that diverting our management’s attention to this product line will not have a material adverse
effect on our existing business, and in turn on our results of operations, financial condition and prospects.
We may experience significant fluctuation in our revenue because
the timing of large orders placed by some of our customers is often project-based.
Our operating results fluctuate because we often receive large orders
from customers that coincide with the timing of the customer’s project. Sales of our products and services may be delayed if customers
delay approval or commencement of projects due to budgetary constraints, internal acceptance review procedures, timing of budget cycles
or timing of competitive evaluation processes. In addition, sometimes our customers make significant one-time hardware purchases for projects
which are not repeated. We sell primarily on a purchase order basis rather than pursuant to long-term contracts, and we expect fluctuations
in our revenues as a result of one-time project-based purchases to continue in the future. In addition, our sales may be subject to significant
fluctuations based on the acceleration, delay or cancellation of customer projects, or our failure to complete one or a series of significant
potential sales. Because a significant portion of our operating expenses are fixed, even a single order can have a disproportionate effect
on our quarterly revenues and operating results. As a result of the factors discussed above, and due to the complexities of the industry
in which we operate, it is difficult for us to forecast demand for our current or future products with any degree of certainty, which
means it is difficult for us to forecast our sales. If our quarterly or annual operating results fall below the expectations of investors
or securities analysts, the price of our common stock could decline substantially.
The lengthy sales cycle for our products and services, along
with delays in customer completion of projects, make the timing of our revenues difficult to predict.
We have a lengthy sales cycle for many of our products that generally
extends between six and 24 months and sometimes longer due to a lengthy customer evaluation and approval process. The length of this process
can be affected by factors over which we have little or no control, including the customer’s budgetary constraints, timing of the
customer’s budget cycles, and concerns by the customer about the introduction of new products by us or by our competitors. As a
result, sales cycles for customer orders vary substantially among different customers. The lengthy sales cycle is one of the factors that
has caused, and may continue to cause, our revenues and operating results to vary significantly from quarter to quarter. In addition,
we may incur substantial expenses and devote significant management effort and expense to develop potential relationships that do not
result in agreements or revenues, which may prevent us from pursuing other opportunities. Accordingly, excessive delays in sales could
be material and adversely affect our business, financial condition or results of operations.
The nature of our products, customer base and sales channels
causes us to lack visibility into future demand for our products, which makes it difficult for us to forecast our manufacturing and inventory
requirements.
We use forecasts based on anticipated product orders to manage our
manufacturing and inventory levels and other aspects of our business. However, several factors contribute to a lack of visibility with
respect to future orders, including:
· 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.
Delays in qualifying revisions of existing products for certain
of our customers could result in the delay or loss of sales to those customers, which could negatively impact our business and financial
results.
Our industry is characterized by intense competition, rapidly evolving
technology and continually changing customer preferences and requirements. As a result, we frequently develop and introduce new versions
of our existing products, which we refer to as revisions.
Prior to purchasing our products, some of our customers require that
products undergo a qualification process, which may involve testing of the products in the customer’s system. A subsequent revision
to a product’s hardware or firmware, changes in the manufacturing process or our selection of a new supplier may require a new qualification
process, which may result in delays in sales to customers, loss of sales, or us holding excess or obsolete inventory.
After products are qualified, it can take additional time before the
customer commences volume production of components or devices that incorporate our products. If we are unsuccessful or delayed in qualifying
any new or revised products with a customer, that failure or delay would preclude or delay sales of these products to the customer, and
could negatively impact our financial results. In addition, new revisions to our products could cause our customers to alter the timing
of their purchases, by either accelerating or delaying purchases, which could result in fluctuations of our net revenue from quarter to
quarter.
We depend on distributors for a majority of our sales and to
complete order fulfillment.
We depend on the resale of products through distributor accounts for
a substantial majority of our worldwide net revenue. In addition, sales through our top five distributors accounted for approximately
44% of our net revenue in fiscal 2022. A significant reduction of effort by one or more distributors to sell our products or a material
change in our relationship with one or more distributors may reduce our access to certain end customers and adversely affect our ability
to sell our products. Furthermore, if a key distributor materially defaults on a contract or otherwise fails to perform, our business
and financial results would suffer.
In addition, the financial health of our distributors and our continuing
relationships with them are important to our success. Our business could be harmed if the financial health of these distributors impairs
their performance and we are unable to secure alternate distributors.
Our ability to sustain and grow our business depends in part
on the success of our distributors and resellers.
A substantial part of our revenues is generated through sales by distributors
and resellers. To the extent they are unsuccessful in selling our products, or if we are unable to obtain and retain a sufficient number
of high-quality distributors and resellers, our operating results could be materially and adversely affected. In addition, our distributors
and resellers may devote more resources to marketing, selling and supporting products and services that are competitive with ours, than
to our products. They also may have incentives to promote our competitors' products over our products, particularly for our competitors
with larger volumes of orders, more diverse product offerings and a longer relationship with our distributors and resellers. In these
cases, one or more of our important distributors or resellers may stop selling our products completely or may significantly decrease the
volume of products they sell on our behalf. This sales structure also could subject us to lawsuits, potential liability and reputational
harm if, for example, any of our distributors or resellers misrepresents the functionality of our products or services to customers, violates
laws or our corporate policies. If we fail to effectively manage our existing or future distributors and resellers effectively, our business
and operating results could be materially and adversely affected.
Changes to the average selling prices of our products could affect
our net revenue and gross margins and adversely affect results of operations.
In the past, we have experienced reductions in the average selling
prices and gross margins of our products. We expect competition to continue to increase, and we anticipate this could result in additional
downward pressure on our pricing. Our average selling prices for our products might also decline as a result of other reasons, including
promotional programs introduced by us or our competitors and customers who negotiate price concessions. To the extent we are able to increase
prices, we may experience a decline in sales volumes if customers decide to purchase competitive products. If any of these were to occur,
our gross margins could decline and we might not be able to reduce the cost to manufacture our products enough or at all to keep up with
the decline in prices.
If we are unable to sell our inventory in a timely manner, it
could become obsolete, which could require us to write-down or write off obsolete inventory, which could harm our operating results.
At any time, competitive products may be introduced with more attractive
features or at lower prices than ours. If this occurs, and for other reasons, we may not be able to accurately forecast demand for our
products and our inventory levels may increase. There is a risk that we may be unable to sell our inventory in a timely manner to avoid
it becoming obsolete. If we are required to substantially discount our inventory or are unable to sell our inventory in a timely manner,
we would be required to increase our inventory reserves or write off obsolete inventory and our operating results could be substantially
harmed.
Our failure to compete successfully in our highly competitive
market could result in reduced prices and loss of market share.
The market in which we operate is intensely competitive, subject to
rapid technological advances and highly sensitive to evolving industry standards. The market can also be affected significantly by new
product and technology introductions and marketing and pricing activities of industry participants. Our products compete directly with
products produced by a number of our competitors. Many of our competitors and potential competitors have greater financial and human resources
for marketing and product development, more experience conducting research and development activities, greater experience obtaining regulatory
approval for new products, larger distribution and customer networks, more established relationships with contract manufacturers and suppliers,
and more established reputations and name recognition. For these and other reasons, we may not be able to compete successfully against
our current or potential future competitors. In addition, the amount of competition we face in the marketplace may change and grow as
the market for IoT and M2M networking solutions grows and new companies enter the marketplace. Present and future competitors may be able
to identify new markets, adapt new technologies, develop and commercialize products more quickly and gain market acceptance of products
with greater success. As a result of these competitive factors, we may fail to meet our business objectives and our business, financial
condition and operating results could be materially and adversely affected.
Acquisitions, strategic partnerships, joint ventures or investments
may impair our capital and equity resources, divert our management’s attention or otherwise negatively impact our operating results.