LANTRONIX INC

Previous wording

The IoT Systems Solutions portfolio consists of fully functional standalone systems that provide routing, switching or gateway functionalities as well as Telematics and media conversion. These products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, power for IoT end devices through Power over Ethernet (“PoE”), application hosting, protocol conversion, media conversion, secure access for distributed IoT deployments and many other functions. Most of our IoT System products are pre-certified in a number of countries thereby significantly reducing our OEM customers’ regulatory certification costs and accelerating their time-to-market.

Current wording

Our IoT Systems Solutions portfolio offers a wide range of fully functional standalone systems that provide routing, switching or gateway functionalities as well as telematics and media conversion. These products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, power for IoT end devices through Power over Ethernet (“PoE”), application hosting, protocol conversion, media conversion, secure access for distributed IoT deployments and many other functions. By offering pre-certified products across multiple regions, Lantronix significantly reduces original equipment manufacturer customers’ regulatory certification costs and speeds up their time-to-market.

Previous wording

Our SaaS platform provides single pane of glass management for remote environment management 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.

Current wording

Our SaaS platform offers comprehensive single-pane-of-glass management for out-of-band (“OOB”) 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 and seamlessly connected as if located directly on each device. Our platform eliminates the need to have 24/7 personnel on site and makes it easy to observe and address issues quickly, even in large-scale deployments.

Previous wording

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.

Current wording

We leverage our deep engineering expertise and product development best practices to deliver high-quality, innovative products cost-effectively and on schedule. Our engineering services model is flexible, offering either turnkey product development or team augmentation to accelerate complex product development challenges, such as camera tuning, voice control, machine learning, AI, computer vision, augmented/virtual reality, and more.

Previous wording

We also provide extended warranty, support and maintenance services related to our out-of-band (“OOB”) and certain other product families.

Current wording

We also provide extended warranty, support and maintenance services related to our OOB and certain other product families.

Previous wording

The accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to revenue recognition, sales returns and allowances, inventory valuation, restructuring charges, valuation of deferred income taxes, business combinations, valuation of goodwill and long-lived and intangible assets, stock-based compensation, litigation and other contingencies. These policies are described in further detail in our Annual Report on Form 10-K for the year ended June 30, 2023 and filed with the Securities and Exchange Commission (the “SEC”) on September 12, 2023 (the “Form 10-K”) and have not changed significantly during the nine months ended March 31, 2024 as compared to what was previously disclosed in the Form 10-K.

Current wording

The accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to revenue recognition, sales returns and allowances, inventory valuation, restructuring charges, valuation of deferred income taxes, business combinations, valuation of goodwill and long-lived and intangible assets, stock-based compensation, litigation and other contingencies. These policies are described in further detail in our Annual Report on Form 10-K for the year ended June 30, 2024 and filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2024 (the “Form 10-K”) and have not changed significantly during the three months ended September 30, 2024 as compared to what was previously disclosed in the Form 10-K.

Previous wording

In the three months ended March 31, 2024, our net revenue increased by $8,219,000 or 24.9%, compared to the three months ended March 31, 2023. The increase in net revenue was driven by a 90.9% increase in net revenue in our IoT System Solutions product line, partially offset by a 22.4% decrease in net revenue in our Embedded IoT Solutions product line and a 32.5% decrease in our Software & Services product line. We had a net loss of $423,000 for the three months ended March 31, 2024 compared to a net loss of $3,065,000 for the three months ended March 31, 2023. The decrease in net loss was primarily driven by the increase in revenues for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, combined with a decrease in operating expenses of $468,000 related to a decreases in (i) restructuring and severance charges, (ii) amortization, and (iii) charges related to earnout fair value remeasurement. These changes were partially offset by a reduction in gross margin percentage.

Current wording

In the three months ended September 30, 2024, our net revenue increased by $1,392,000 or 4.2%, compared to the three months ended September 30, 2023. The increase in net revenue was driven by a 17.7% increase in net revenue in our Embedded IoT Solutions product line, partially offset by a 13.2% decrease in net revenue in our Software & Services product line and a 1.5% decrease in our IoT System Solutions product line. We had a net loss of $2,502,000 for the three months ended September 30, 2024 compared to a net loss of $1,886,000 for the three months ended September 30, 2023. The increase in net loss was primarily driven by an increase in operating expenses of $932,000 for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, which mostly related to an increase in restructuring and severance charges. These changes were partially offset by the increase in revenue.

Previous wording

Net revenue decreased primarily due to (i) lower unit sales of our embedded compute product line in the Americas and APJ regions and (ii) lower unit sales of our network interface cards and our wireless communication products across all regions.

Current wording

Net revenue increased primarily due to higher unit sales of our embedded compute product line in the APJ and Americas regions. This was partially offset by lower unit sales of our embedded ethernet connectivity products and network interface cards across all regions.

Previous wording

Net revenue increased primarily due to increases in units sales of (i) our custom solutions, as we continued to ramp volume production for a European smart energy grid provider in the current period, (ii) our out-of-band products in the Americas and EMEA regions, and (iii) our converters and radio nodes products in the Americas region. These increases were partially offset by decreases in sales of our network switches in the Americas region.

Current wording

Net revenue decreased primarily due to (i) decreased unit sales of our OOB products in the Americas and EMEA regions and (ii) decreased unit sales of our network switches in the Americas and APJ regions. These reductions were mostly offset by sales of our custom solutions to a European smart energy grid provider that we ramped production for in the second half of the prior fiscal year.

Previous wording

Net revenue decreased primarily due to a decrease in our engineering services revenue in the EMEA region as two of our large design services projects recently transitioned from the design phase to full production.

Current wording

Net revenue decreased primarily due to a decrease in our engineering services revenue in the EMEA region as two of our large design services projects transitioned in the prior year from the design phase to full production.

Previous wording

Gross profit as a percent of revenue (referred to as “gross margin”) decreased due primarily to our (i) product sales mix and (ii) higher freight and logistics costs in the current year period.

Current wording

Gross profit as a percent of revenue (referred to as “gross margin”) decreased slightly due primarily to our product sales mix as embedded compute products contribute to a larger portion of revenues in the current period.

Previous wording

Research and development expenses increased primarily due to an increase in personnel-related expenses for certain variable compensation costs, partially offset by (i) lower costs for outsourced resources and (ii) lower product certification expenses resulting from the timing of costs incurred on various ongoing development projects.

Current wording

Research and development expenses decreased primarily due to lower product certification expenses resulting from the timing of costs incurred on various ongoing development projects.

Previous wording

During the three and nine months ended March 31, 2024, we incurred charges of approximately $350,000 and $900,000, respectively, related to headcount reductions and restructuring of certain non-essential operations. During the three and nine months ended March 31, 2023, we incurred $490,000 and $664,000, respectively, of restructuring, severance and related charges.

Current wording

During the three months ended September 30, 2024, we incurred charges of $900,000 related to headcount reductions. During the three months ended September 30, 2023, we incurred $20,000 of restructuring, severance and related charges.

Previous wording

We may incur additional restructuring, severance and related charges in future periods as we continue to identify cost savings and synergies related to our acquisitions and general business operations.

Current wording

We may incur additional restructuring, severance and related charges in future periods as we continue to identify cost savings and efficiencies related to our business.

Previous wording

For the three and nine months ended March 31, 2024 and March 31, 2023, we incurred net interest expense due to borrowings on our credit facilities. We also earn interest income on our domestic cash balance.

Current wording

For the three months ended September 30, 2024 and September 30, 2023, we incurred net interest expense due to borrowings on our credit facilities. We also earn interest income on our domestic cash balance.

Previous wording

Refer toNote 8of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion regarding our provision for income taxes.

Current wording

Refer toNote 7of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion regarding our provision for income taxes.

Previous wording

Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts available under our existing term loan and revolving credit facility (together, the “Senior Credit Facilities”), and cash generated from operations. We are subject to a variable amount of interest on the principal balance of our Senior Credit Facilities and could be adversely impacted by rising interest rates in the future. We believe that our current cash holdings and net cash flows from operations are sufficient to satisfy our current obligations for the foreseeable future, and, assuming continued access to the undrawn amounts available under our Senior Credit Facilities, these combined sources will be sufficient to fund our material requirements for working capital, capital expenditures and other financial commitments for at least the next 12 months and beyond. We continue to monitor our existing banking relationships and the availability of potential alternate sources of credit based on market conditions and our ongoing capital requirements. There can be no guarantee that we would be able to obtain any needed alternate financing on acceptable terms, or at all, or that such a financing would not result in a default under the Loan Agreement (as defined inNote 6 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report). We anticipate that the primary factors affecting our cash and liquidity are net revenue, working capital requirements and capital expenditures.

Current wording

Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts available under our existing term loan and revolving credit facility (together, the “Senior Credit Facilities”), and cash generated from operations. We are subject to a variable amount of interest on the principal balance of our Senior Credit Facilities and could be adversely impacted by rising interest rates in the future. We believe that our current cash holdings and net cash flows from operations are sufficient to satisfy our current obligations for the foreseeable future, and, assuming continued access to the undrawn amounts available under our Senior Credit Facilities, these combined sources will be sufficient to fund our material requirements for working capital, capital expenditures and other financial commitments for at least the next 12 months and beyond. We continue to monitor our existing banking relationships and the availability of potential alternate sources of credit based on market conditions and our ongoing capital requirements. There can be no guarantee that we would be able to obtain any needed alternate financing on acceptable terms, or at all, or that such a financing would not result in a default under the Loan Agreement (as defined inNote 5 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report). We anticipate that the primary factors affecting our cash and liquidity are net revenue, working capital requirements and capital expenditures.

Previous wording

As of the date of this Report, we have full access to and control of our cash and cash equivalents balance at Silicon Valley Bank (“SVB”) and our other banking institutions. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds. In April 2023, we entered into the Letter Agreement (as defined inNote 6 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report) with SVB, which, among other matters, amended the Loan Agreement to reduce the former requirement to hold 85% of our company-wide cash balances at SVB to 50% and provided a waiver of any event of default under the Loan Agreement for any failure to comply with this covenant prior to the date of the Letter Agreement. As of the date of this Report, we are in compliance with all covenants of the Loan Agreement.

Current wording

As of the date of this Report, we have full access to and control of our cash and cash equivalents balance at Silicon Valley Bank and our other banking institutions. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds. As of the date of this Report, we are in compliance with all covenants of the Loan Agreement.

Previous wording

Refer toNote 6of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of our loan agreements.

Current wording

Refer toNote 5of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of our loan agreements.

Previous wording

Cash provided by operating activities during the nine months ended March 31, 2024 increased compared to the prior year period. We used cash from operations in the prior year due to the build-up of our inventories and decreases in our accounts payable and accrued liabilities. For the nine months ended March 31, 2024, our net loss included $12,163,000 of non-cash charges, while the changes in operating assets and liabilities provided net cash of $9,087,000.

Current wording

Cash provided by operating activities during the three months ended September 30, 2024 decreased compared to the prior year period. Cash from operations increased in the prior year period due to our reduction of inventories and receipt of customer deposits relating to the delivery to our European smart grid provider customer. In the current year period, inventories increased slightly, and we also made payments against previously accrued variable compensation balances, as discussed further below. For the three months ended September 30, 2024, our net loss included $3,418,000 of non-cash charges, while the changes in operating assets and liabilities provided net cash of $1,747,000.

Previous wording

Accrued payroll and related expenses increased by $2,108,000 or 86.7% from June 30, 2023 to March 31, 2024. The increase is primarily due to variable compensation costs incurred during the current year.

Current wording

Accrued payroll and related expenses decreased by $2,396,000 or 41.1% from June 30, 2024 to September 30, 2024. The decrease is primarily due to accrued variable compensation paid out during the current quarter.

Previous wording

Net cash used in investing activities for the nine months ended March 31, 2024 consisted of purchases of equipment amounting to $1,325,000, primarily for research and development and certain business analysis tools. Cash used during the nine months ended March 31, 2023 included the acquisition of Uplogix, which used net cash of $4,650,000, as well as purchases of plant and equipment of $2,325,000 primarily related to building out and furnishing our new lease facilities in California and Minnesota.

Current wording

Net cash used in investing activities for the three months ended September 30, 2024 consisted of purchases of equipment totaling $157,000, primarily for tooling at our contract manufacturers and certain research and development projects. Cash used during the three months ended September 30, 2023 consisted of purchases of plant and equipment of $486,000 primarily for research and development and certain business analysis tools.

Previous wording

Net cash used in financing activities during the nine months ended March 31, 2024 resulted primarily from principal payments on the Senior Credit Facilities as well as tax withholdings paid on behalf of employees for restricted shares. Additionally, we used cash of $1,262,000 to pay the contingent consideration earned related to the Uplogix acquisition. Net cash provided by financing activities during the nine months ended March 31, 2023 resulted primarily from $7,000,000 in gross proceeds received from our Senior Credit Facilities with SVB partially offset by payments on the term loan as well as tax withholdings paid on behalf of employees for restricted shares.

Current wording

Net cash used in financing activities during the three months ended September 30, 2024 and the three months ended September 30, 2023 resulted primarily from tax withholdings paid on behalf of employees for restricted shares as well as principal payments on the Senior Credit Facilities.