Item 1. Business
ITEM 1.
BUSINESS
Overview
Lantronix, Inc. is a global provider of software as a service (“SaaS”),
engineering services, and hardware for Edge Computing, the Internet of Things (“IoT”), and Remote Environment Management (“REM”).
We enable our customers to provide reliable and secure solutions while accelerating their time to market. Our products and services dramatically
simplify operations through the creation, development, deployment and management of customer projects at scale while providing quality,
reliability and security.
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.
With three decades of proven experience in creating robust industry
and customer specific solutions, we are an innovator in enabling our customers to build new business models, leverage greater efficiencies
and realize the possibilities of the IoT and REM. Lantronix’s solutions are deployed inside millions of machines at data centers,
offices, and remote sites serving a wide range of industries, including energy, agriculture, medical, security, manufacturing, distribution,
transportation, retail, financial, environmental, infrastructure and government.
We were incorporated in California in 1989 and reincorporated in Delaware
in 2000.
References in this Report to “fiscal 2021” refer to the
fiscal year ended June 30, 2021 and references to “fiscal 2020” refer to the fiscal year ended June 30, 2020. 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 create new business models. The growth in
the IoT and REM markets are being driven by the growing importance of data, being able to act on that data, and the rapidly falling cost
of sensors, connectivity, compute, and storage. While the promise is great, designing and deploying these projects is complex, costly
and time-consuming. Our offerings are designed to help companies increase speed and reduce friction for their deployments through reduced
complexity, decreased development costs, and increased ease of management for web-scale applications and real-world solutions; thus, driving
customer value and success. We plan to address the market opportunity by offering our customers turnkey solutions by leveraging the layers
of the IoT Stack, such as Collect, Connect, Compute, Control and Comprehend, through a combination of services, hardware and software
solutions, accessible and manageable through our SaaS platform.
We are executing a growth strategy that includes continuous innovation
complemented by strategic acquisitions to expand our ability to offer complete IoT and REM solutions with the intent of increasing our
scale and broadening our scope so that we can increase our value proposition to our customers. 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 solutions.
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Recent Acquisitions
On July 5, 2019 we acquired Maestro Wireless Solutions Limited and
its subsidiaries (together, “Maestro”). This acquisition added to our Connect and Collect solutions by providing additional
and complementary cellular connectivity, LPWAN, and telematic technologies and devices to our portfolio.
On January 16, 2020 we acquired Intrinsyc Technologies Corporation
(“Intrinsyc”). This acquisition provided additional and complementary edge computing with embedded product design and application
development capabilities, crucial to the development of intelligent Compute functionality for advanced customer implementations.
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.
The above three acquisitions allow us to offer more value to our customers
and substantially increase the markets that we serve.
Products and Solutions
We organize our products and solutions into three product lines: IoT,
REM and Other.
IoT
IoT Connectivity
Our IoT connectivity products typically connect to one or more existing
machines or are built into new industrial devices to provide network connectivity. Our products are designed to enhance the value and
utility of machines by making the data from the machines available to users, systems and processes or by controlling their properties
and features over the network. Our IoT connectivity products may be embedded into new designs or attached to existing machines. These
products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing
secure network connectivity, 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. Many of our products allow network operators to transmit
voice and data across networks as well as provide connectivity and power in security and surveillance, smart building, smart city and
intelligent transportation applications. Many of the products are offered with software tools intended to further accelerate our customer’s
time-to-market and increase their value add. Most of our IoT connectivity products are pre-certified in a number of countries thereby
significantly reducing our original equipment manufacturer (“OEM”) customers’ regulatory certification costs and accelerating
their time to market. Our growing 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. 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. 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.
IoT Compute
Our IoT compute products typically are embedded into a customer product,
enabling advanced application functionality at the edge. Our products are designed to deliver advanced functionality and reduce time to
market by leveraging our engineering expertise, engineering services, manufacturing experience, and strategic System on Chip (“SoC”)
partners. Our compute products are normally embedded into new designs. These products include application processing that delivers compute
to meet customer needs for data transformation, computer vision, machine learning, augmented / virtual reality, audio / video aggregation
and distribution, 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 compute products are pre-certified in a number of countries
thereby significantly reducing our OEM customers’ regulatory certification costs and accelerating their time to market.
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IoT Telematics
Our IoT telematics products are typically integrated into an OEM’s
or System Integrator’s (“SI”) products. Our smart tracking devices are designed to deliver robust data logging and positional
tracking functionality and reliability for supply chain and logistics solutions. Our telematics devices are designed to be flexible in
the field and offer a variety of connectivity options to suit the customers’ needs across 2G, 3G, 4G, and LTE cellular networks.
These power efficient products are designed to support communications across interfaces and industrial protocols for vehicle, fleet, and
asset tracking and management. Many of the products are offered with software tools intended to further accelerate our 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.
Engineering Services
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.
Software as a Service
Our SaaS platform provides single pane of glass management for IoT
deployments. Our platform enables customers to easily deploy, monitor, manage, and automate across their global deployments, all from
a single platform login. OEMs and SIs can leverage 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.
The following product families are included in our IoT product line:
EDS, EDS-MD, PremierWave® EN, PremierWave® XC, SGX™, UDS, WiPort®, xDirect®, xPico®, xPico® Wi-Fi,
xPress™, XPort®, XPort® Pro, MicroM110, E210, E220, Bolero45, FOX3-2G, FOX3-3G, FOX3-4G, S40, and D2Sphere. In addition,
we offer Network Switches, Media Converters. Power over Ethernet, NICS and Optical SFPs, System on Module (“SoM”), Single
Board Computer (“SBC”), and Development Kits. We also offer services for mechanical, hardware, and software engineering for
camera, audio, and artificial intelligence / machine learning development.
REM
Today, organizations are managing an ever-increasing number of devices
and data on enterprise networks where 24/7 reliability is mission critical. REM allows for full comprehension and control of an IT deployment,
across a range of sensors data (temperature, humidity, light, acceleration, open / close, etc.) providing status and alerting, automation,
and remote control of devices and end stations. REM designs may be part of an out of band (“OOB”) or in band network design.
OOB is a technique that uses a dedicated management network to access critical infrastructure components to ensure production independent
management connectivity. REM allows organizations to effectively monitor, manage, and control their enterprise IT equipment and facilities
(environments), either in or out of band, optimizing their IT support resources.
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Our SaaS platform provides single pane of glass management for REM
(and IoT) deployments. Our platform enables customers to easily deploy, monitor, manage, and automate across their global deployments,
all from a single platform login, virtually connected as though directly on each device. Our platform eliminates the need to have 24/7
personnel on site, and makes it easy to see and drill into an issue quickly, even in large scale deployments.
Our REM product line includes out-of-band management, console management,
power management, and IP connected keyboard-video-mouse (commonly referred to as “IPKVM”) products that provide remote access
to IT and networking infrastructure deployed in test labs, data centers, branch offices, remote sites, and server rooms.
The following product families are included in our REM product line:
SLB ™ , SLC ™ 8000, Spider ™ , ConsoleFlow, and EMG ™ .
Other
We categorize products that are non-focus or end-of-life as Other.
Our Other product category includes non-focus products such as the xPrintServer ® . In addition, this product category includes
end-of-life versions of our MatchPort ® , SLC ™ , SLP ™ , xPress Pro, xSenso ® ,
PremierWave ® XN, and WiBox product families.
Net Revenue by Product Line
We have one operating and reportable business segment. A summary of
our net revenue by product line is found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in Part II, Item 7 of this Report, which is incorporated herein by reference. A discussion of factors potentially affecting our
net revenue and other operating results is set forth in “Risk Factors” included in Part I, Item 1A of this Report, which is
incorporated herein by reference.
Sales Cycle
Our embedded IoT solutions are typically used by OEMs, original design
manufacturers (“ODMs”) and contract manufacturers. OEMs design and sell products under their own brand that are either manufactured
by the OEM in-house or by third-party contract manufacturers. ODMs design and manufacture products for third parties, which then sell
those products under the third parties’ brands. The design cycles using our embedded solutions typically range from nine to 24 months
and can generate revenue for the entire life cycle of an end user’s product.
Our REM product line and external IoT solutions are typically sold
to end users through value added resellers (“VARs”) systems integrators, distributors, online retailers and, to a lesser extent,
OEMs. The design cycles for these products 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.
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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 two third-party
contract manufacturers. We currently utilize Hana Microelectronics, primarily located in
Thailand and China, and Honortone, primarily located 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.
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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, 2021, we had 312 total employees and 299 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
51
President and Chief Executive Officer
Jeremy R. Whitaker
51
Chief Financial Officer
Mohammed F. Hakam
53
Vice President of Engineering
Roger Holliday
62
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.
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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.