Lantronix(LTRX) - 2022 Q4 - Annual Report

Part I Business Lantronix provides global Industrial and Enterprise IoT solutions across three product lines, pursuing growth through innovation and strategic acquisitions - Lantronix provides global Industrial and Enterprise IoT solutions for various applications including Video Surveillance and Robotics[19] - The company's portfolio includes Embedded IoT Modules, IoT Systems Solutions, and Software and Engineering Services[21] - The growth strategy combines continuous innovation with strategic acquisitions, notably Intrinsyc (2020) and Transition Networks (2021), to expand IoT and REM solutions[24][25][26] - Manufacturing is primarily outsourced to third-party contract manufacturers in Asia[48] - A majority of sales are conducted through distributors to various end customers including OEMs and systems integrators[44] - As of August 16, 2022, the company had 348 total employees, with 335 full-time[54] Risk Factors The company faces significant operational, technological, financial, and international risks, including supply chain constraints, cybersecurity threats, historical net losses, and geopolitical factors - The COVID-19 pandemic continues to pose risks, potentially causing demand volatility and supply chain disruptions[63][64] - The company faces ongoing supply constraints for critical components like semiconductor chips, leading to increased costs and delays[65] - Reliance on third-party manufacturers in Asia creates risks related to delivery, quality control, geopolitical instability, and trade law changes[67][68] - Cybersecurity breaches pose a significant threat, potentially compromising data, disrupting operations, and damaging reputation[91][92] - The company has a history of net losses and cannot guarantee future profitability or positive cash flow, potentially requiring additional capital[101][102] - International operations are subject to risks from tariffs, trade barriers, geopolitical events, and foreign currency fluctuations[104][106][108] - A majority of sales are through distributors, with the top five accounting for approximately 44% of net revenue in fiscal 2022, posing a risk if relationships change[81] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[120] Properties Lantronix leases all its facilities, with corporate headquarters in Irvine, California, and other key operations in Minnesota, Canada, India, and Germany Leased Facilities Overview | Locations | Primary Use | Approximate Square Footage | | :--- | :--- | :--- | | Irvine, California, U.S.A. | Corporate headquarters; sales and marketing, research and development, operations and administration | 14,000 | | Plymouth, Minnesota, U.S.A. | Operations and warehousing, engineering, sales and marketing | 66,000 | | Vancouver, British Columbia, Canada | Engineering | 12,000 | | Hyderabad, India | Engineering | 18,000 | | Illmenau, Germany | Engineering, sales and marketing | 7,500 | | Taiwan | Engineering, sales and marketing | 5,500 | | Shanghai, China | Sales and marketing | 1,000 | Legal Proceedings The company reports no material legal proceedings - None[122] Mine Safety Disclosures This item is not applicable to the company - None[123] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Lantronix common stock trades on Nasdaq under LTRX, with no history or current intent to pay cash dividends, and no share repurchases in Q4 FY2022 - The company's common stock trades on the Nasdaq Capital Market with the symbol "LTRX"[125] - Lantronix has never paid cash dividends and does not anticipate paying any in the foreseeable future[126] - No shares of common stock were repurchased during the fourth quarter of fiscal 2022[127] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2022, net revenue grew 81.4% to $129.7 million, driven by acquisitions and organic growth, while gross margin declined to 42.9% and net loss widened to $5.4 million due to increased operating expenses Recent Developments Recent developments include the $30.7 million acquisition of TN Companies, a $32.6 million public offering, and ongoing supply chain challenges due to the COVID-19 pandemic - On August 2, 2021, Lantronix acquired the Transition Networks and Net2Edge businesses (TN Companies) for approximately $30.65 million[132] - In November 2021, the company raised approximately $32.6 million in net proceeds from an underwritten public offering of 4.7 million shares of common stock[134][135] - The company's supply chain continues to face challenges from the COVID-19 pandemic, leading to increased costs and shipment delays[138][139] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in revenue recognition, inventory valuation, deferred income taxes (with a full valuation allowance), business combinations, and annual goodwill impairment testing - Revenue recognition requires significant judgment, especially for distributor sales involving variable consideration from return rights and price adjustments[143] - Inventory is valued at the lower of cost or net realizable value, with estimates for future demand determining reserves for excess and obsolete inventory[149] - A full valuation allowance has been recorded against net deferred tax assets due to historical net operating losses and future taxable income uncertainty[152] - Goodwill is tested for impairment annually, and the qualitative assessment for fiscal 2022 indicated no impairment[154][157] Results of Operations - Fiscal Years Ended June 30, 2022 and 2021 In fiscal 2022, net revenue grew 81.4% to $129.7 million, driven by acquisitions and organic growth, while gross margin declined to 42.9% and net loss widened to $5.4 million due to increased operating expenses Net Revenue by Product Line (FY2022 vs FY2021) | Product Line | FY2022 (in thousands) | FY2021 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Embedded IoT Solutions | $61,773 | $38,611 | $23,162 | 60.0% | | IoT System Solutions | $59,019 | $24,189 | $34,830 | 144.0% | | Software & Services | $8,863 | $8,677 | $186 | 2.1% | | Total Net Revenue | $129,655 | $71,477 | $58,178 | 81.4% | Net Revenue by Geographic Region (FY2022 vs FY2021) | Geographic Region | FY2022 (in thousands) | FY2021 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Americas | $77,799 | $38,638 | $39,161 | 101.4% | | EMEA | $22,542 | $17,186 | $5,356 | 31.2% | | APJ | $29,314 | $15,653 | $13,661 | 87.3% | | Total Net Revenue | $129,655 | $71,477 | $58,178 | 81.4% | Gross Profit (FY2022 vs FY2021) | Metric | FY2022 (in thousands) | FY2021 (in thousands) | | :--- | :--- | :--- | | Gross Profit | $55,586 | $33,025 | | Gross Margin (% of Net Revenue) | 42.9% | 46.2% | Operating Expenses (FY2022 vs FY2021) | Expense Category (in thousands) | FY2022 | FY2021 | | :--- | :--- | :--- | | Selling, general and administrative | $34,529 | $20,808 | | Research and development | $17,687 | $11,113 | | Total Operating Expenses | $60,597 | $36,362 | Net Loss Summary (FY2022 vs FY2021) | Metric | FY2022 (in thousands) | FY2021 (in thousands) | | :--- | :--- | :--- | | Net Loss | $(5,362) | $(4,044) | | Net Loss per Share | $(0.16) | $(0.14) | Liquidity and Capital Resources Liquidity improved in fiscal 2022 with cash and working capital increases, primarily from a $32.6 million public offering, despite negative operating cash flow of $9.4 million driven by net loss and a $22.6 million inventory increase Key Liquidity Metrics (as of June 30) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Working capital | $54,512 | $20,289 | | Cash and cash equivalents | $17,221 | $9,739 | - In November 2021, a public offering of common stock generated net cash proceeds of approximately $32.6 million[191] - In January 2022, the company terminated its $12.0 million mezzanine term loan facility[192] Consolidated Cash Flows Summary (in thousands) | Activity | FY2022 | FY2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(9,416) | $4,304 | | Net cash used in investing activities | $(25,747) | $(783) | | Net cash provided by (used in) financing activities | $42,645 | $(1,473) | - Net inventories increased by $22.6 million (150.2%) during fiscal 2022, partly due to the TN Companies acquisition and supply chain constraints[201] Quantitative and Qualitative Disclosures About Market Risk This section is not required as Lantronix qualifies as a "smaller reporting company" - Not required for a "smaller reporting company"[206] Financial Statements and Supplementary Data This section incorporates consolidated financial statements and the independent auditor's report, highlighting critical audit matters regarding inventory reserve and intangible asset valuation from the TN Companies acquisition - The full consolidated financial statements and the independent registered public accounting firm's report are included in the report, beginning on page F-1[206][229][230] - The independent auditor identified two Critical Audit Matters for fiscal year 2022: Inventory – Excess and Obsolete Reserve and Valuation of Intangible Assets in TN Companies Acquisition[245][246][249] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[207] Controls and Procedures As of June 30, 2022, management concluded that disclosure controls and internal control over financial reporting were effective, with no material changes during Q4 FY2022 - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2022[209] - Management concluded that internal control over financial reporting was effective as of June 30, 2022, based on the COSO 2013 framework[210] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2022[212] Other Information On December 2, 2021, a change in control agreement was executed with CFO Jeremy Whitaker, outlining severance benefits upon specific termination events following a change in control - A change in control agreement was executed with CFO Jeremy Whitaker on December 2, 2021, outlining severance benefits upon specific termination events following a change in control[213] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no information under this item - None[216] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for the 2022 annual meeting of stockholders - Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2022 annual meeting of stockholders[219][222] Executive Compensation The information required for this item concerning executive compensation is incorporated by reference from the company's definitive Proxy Statement for its 2022 annual meeting of stockholders - Information required by this item is incorporated by reference from the company's definitive Proxy Statement[223] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item concerning security ownership is incorporated by reference from the company's definitive Proxy Statement for its 2022 annual meeting of stockholders - Information required by this item is incorporated by reference from the company's definitive Proxy Statement[224] Certain Relationships and Related Transactions and Director Independence The information required for this item concerning related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement for its 2022 annual meeting of stockholders - Information required by this item is incorporated by reference from the company's definitive Proxy Statement[225] Principal Accountant Fees and Services The information required for this item concerning principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement for its 2022 annual meeting of stockholders - Information required by this item is incorporated by reference from the company's definitive Proxy Statement[226] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and exhibits filed as part of the Form 10-K report, including financial statements, corporate governance documents, and various agreements - This section contains the list of consolidated financial statements filed with the report, which begin on page F-1[229][230] - A detailed list of exhibits is provided, including corporate governance documents, material contracts, and SEC-required certifications[230][231][232] Form 10-K Summary The company has not provided a summary for the Form 10-K - None[234]