What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-29 compared with 2021-08-27 · 244 added, 170 removed, 367 unchanged (53% of the section changed)

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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.

is a global Industrial and Enterprise internet of things

(“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

We conduct our business globally and manage our sales teams by three

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Products and Solutions

We organize our products and solutions into three product lines:

REM, and Other.

Refer to “Products and Solutions” included in Part I, Item 1 of this Report, which is incorporated herein

by reference, for further discussion.

To more closely align the categorization of our product lines with

how we position them in the marketplace, we have re-organized our products and solutions.

We now organize our products and solutions into

three product lines:

Embedded IoT Solutions, IoT System Solutions, and Software & Services.

Until this recent change, we had

organized our products and solutions into three different product lines:

IoT, REM and Other.

Going forward, we do not plan to disclose

our net revenue by the old categorizations.

Refer to “Products and Solutions” included in Part I, Item 1 of this Report, which

is incorporated herein by reference, for further discussion.

Recent Developments

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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.

In connection with the

closing of the acquisition we entered into new loan agreements with Silicon Valley Bank (“SVB”) which included (i) a new term

loan of $17,500,000 with an available revolving credit facility of up to $2,500,000 and (ii) a second term loan of $12,000,000.

Refer to Notes 3 and 5 of Notes to Consolidated Financial Statements

included in Part II, Item 8 of this Report, which are incorporated herein by reference, for additional discussions regarding the August

2021 acquisition of the TN Companies and related financing arrangements, respectively.

(“CSI”) for an aggregate purchase price of approximately

$30,651,000, which includes earnout payments of up to $7,000,000 depending on the achievement of certain revenue targets for the TN Companies.

The TN Companies provide us with complementary IoT connectivity products and capabilities, including switching, Power over Ethernet (“PoE”)

and media conversion and adapter products.

In connection with the closing of the acquisition, we entered into new loan agreements with

Silicon Valley Bank (“SVB”) which included (i) a new term loan of $17,500,000 with an available revolving credit facility

of up to $2,500,000 and (ii) a second term loan of $12,000,000.

In January 2022, we repaid the $12,000,000 second term loan.

Refer to Notes 3 and 5 of Notes to Consolidated Financial

Statements included in Part II, Item 8 of this Report, which are incorporated herein by reference, for additional discussions regarding

the August 2021 acquisition of the TN Companies and related financing arrangements, respectively.

Underwritten Offering

On November 18, 2021, we entered into an underwriting agreement (the

“Underwriting Agreement”) with TL Investment GmbH (“TL Investment”) and Canaccord Genuity LLC, as representative

of the several underwriters named therein (together, the “Underwriters”), relating to the Company’s offer and sale of

4,700,000 shares (the “Firm Shares”) of our common stock at an initial price to the public of $7.50 per share.

TL Investment granted the Underwriters a 30-day option to purchase up to an additional 705,000 shares (the “Option Shares”)

of our common stock held by TL Investment at the public offering price, less the underwriting discounts.

On November 18, 2021, the Underwriters

exercised their option to purchase the Option Shares from TL Investment in full.

On November 22, 2021, we issued and delivered the Firm

Shares and TL Investment delivered the Option Shares.

Net proceeds to Lantronix from the offering of the Firm Shares, after

deducting the underwriting discount and offering expenses, were approximately $32,600,000.

COVID-19 Update

In response to the ongoing COVID-19 pandemic, we have taken measures

to protect the health and safety of our employees and comply with local directives.

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.

We continue to monitor the

implications of the COVID-19 pandemic, including the emergence of new strains of the virus and the impact of ongoing vaccination efforts,

on our business, as well as our customers’ and suppliers’ businesses.

Since the outbreak of the COVID-19 pandemic, we have taken measures

to protect the health and safety of our employees and comply with applicable local directives.

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.

We continue to monitor

the implications of the COVID-19 pandemic on our business, as well as our customers’ and suppliers’ businesses, including

the emergence of new strains of the virus, current or future government-imposed shutdowns, and the impact of ongoing vaccination efforts.

Our efforts to support customer engagement through industry events,

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is performed in Thailand, Taiwan and China.

We have recently experienced an increase in costs of components for certain products as well

as increased freight costs.

These and other factors have contributed to recent delays in shipments to some customers.

We have experienced an increase in costs of components for certain products as well as increased

freight and logistics costs and we expect these cost increases to continue.

These and other factors have contributed to recent delays

in shipments to some customers.

Overall, in light of the changing nature and continuing uncertainty

around the COVID-19 pandemic, our ability to predict the impact of the COVID-19 pandemic on our business in future periods remains limited.

The effects of the pandemic on our business are unlikely to be fully realized, or reflected in our financial results, until future periods.

around the COVID-19 pandemic, including the emergence of new, highly-contagious variants, our ability to predict the impact of the COVID-19

pandemic on our business in future periods remains limited.

The full effects of the pandemic on our business are unlikely to be fully

realized, or reflected in our financial results, until future periods.

Recent Accounting Pronouncements

Refer to Note 1 of Notes to Consolidated Financial Statements included

in Part II, Item 8 of this Report, which is incorporated herein by reference, for a discussion of recent accounting pronouncements.

Refer to Note 1 of Notes to Consolidated Financial Statements

included in Part II, Item 8 of this Report, which is incorporated herein by reference, for a discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

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within a specified time horizon, which is generally 12 months.

The estimates we use for demand are also used for near-term capacity planning

and inventory purchasing.

In addition, specific reserves are recorded to cover risks for end-of-life products, inventory located at our

contract manufacturers, deferred inventory in our sales channel and warranty replacement stock.

If actual product demand or market conditions

are less favorable than our estimates, additional inventory write-downs could be required, which would increase our cost of revenue and

reduce our gross margins.

In addition, specific reserve estimates are recorded to cover risks for

end-of-life products, inventory located at our contract manufacturers and warranty replacement stock.

The estimates we use for demand

are also used for near-term capacity planning and inventory purchasing.

Demand for our products can fluctuate significantly from period

A significant decrease in demand could result in an increase in the amount of excess inventory on hand.

In addition, our industry

is characterized by rapid technological change, frequent new product development and product obsolescence that could result in an increase

in the amount of obsolete inventory quantities on hand.

Additionally, our estimates of future product demand and judgement to determine

excess inventory may prove to be inaccurate, in which case we may have understated or overstated the reduction to the total carrying value

of our inventory for excess and obsolete inventory.

In the future, if our inventory is determined to be overvalued, we would be required

to recognize such costs in our cost of goods sold, resulting in a reduction in our gross margins, at the time of such determination.

we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand

or technological developments could have a significant impact on the value of our inventory and our results of operations.

Warranty Reserve

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We estimate the fair value based upon assumptions we believe

to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and

liabilities assumed.

Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination

and are expensed as incurred.

to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from our estimates.

Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets

acquired and liabilities assumed.

Acquisition-related expenses and related restructuring costs are recognized separately from the business

combination and are expensed as incurred.

Goodwill Impairment Testing

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factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value.

Based on that qualitative assessment, if we conclude that it is more likely than not that the fair value of our single reporting unit

is less than its carrying value, we conduct a quantitative goodwill impairment test, which involves comparing the estimated fair value

of our single reporting unit with its carrying value, including goodwill.

We estimate the fair value of our single reporting unit using

a combination of the income and market approach.

If the carrying value of the reporting unit exceeds its estimated fair value, we recognize

an impairment loss for the difference.

Some factors that we consider important in the qualitative assessment which could trigger a goodwill impairment review include:

· significant underperformance relative to historical or projected future operating

· significant changes in the manner of our use of the acquired assets or the

strategy for our overall business;

· significant negative industry or economic trends;

· a significant decline in our stock price for a sustained period;

· a significant change in our market capitalization relative to our book value.

Based on our qualitative assessment, if we conclude that it is more

likely than not that the fair value of our single reporting unit is less than its carrying value, we conduct a quantitative goodwill impairment

test, which involves comparing the estimated fair value of our single reporting unit with its carrying value, including goodwill.

the fair value of our single reporting unit using a combination of the income and market approach.

If the carrying value of the reporting

unit exceeds its estimated fair value, we recognize an impairment loss for the difference.

Significant management judgment is required in estimating the reporting

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Long-Lived Assets and Intangible Assets

We assess the impairment of long-lived assets

and intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Circumstances which could trigger a review include, but are not limited to the following:

We assess the impairment of long-lived assets and intangible assets

whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Circumstances which

could trigger a review include, but are not limited to the following:

significant decreases in the market price of the asset;

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current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

Whenever events or changes in circumstances

suggest that the carrying amount of long-lived assets and intangible assets may not be recoverable, we estimate the future cash flows

expected to be generated by the asset from its use or eventual disposition.

If the sum of the expected future cash flows is less than

the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of

Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash

flow method of valuation.

These significant judgments may include future expected revenue, expenses, capital expenditures and other costs,

discount rates and whether or not alternative uses are available for impacted long-lived assets.

Whenever events or changes in circumstances suggest that the carrying

amount of long-lived assets and intangible assets may not be recoverable, we estimate the future cash flows expected to be generated by

the asset from its use or eventual disposition.

If the sum of the expected future cash flows is less than the carrying amount of those

assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Significant management

judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation.

significant judgments may include future expected revenue, expenses, capital expenditures and other costs, discount rates and whether

or not alternative uses are available for impacted long-lived assets.

Share-Based Compensation

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expected term, expected volatility, risk-free interest rate and expected dividend yields.

The expected term of our stock options is generally

estimated using the simplified method, as permitted by guidance issued by the Securities and Exchange Commission (“SEC”).

We use the simplified method because we believe we are unable to rely on our limited historical exercise data or alternative information

as a reasonable basis upon which to estimate the expected term of these options.

The expected volatility is based on the historical volatility

of our stock price.

The expected term of stock options granted has

historically been estimated using the simplified method, as permitted by guidance issued by the Securities and Exchange Commission (“SEC”).

We have used the simplified method because we were generally unable to rely on our limited historical exercise data or alternative information

as a reasonable basis upon which to estimate the expected term of such options.

For new stock options granted beginning in the fiscal

year ended June 30, 2022, we estimated the expected term based on our recent historical exercise data.

The expected volatility is based

on the historical volatility of our stock price.

The risk-free interest rate assumption is based on the U.S.

Treasury interest rates appropriate for the expected term

of our stock options and common stock purchase rights.

Treasury interest rates appropriate

for the expected term of our stock options and common stock purchase rights.

If factors change and we employ different assumptions, share-based

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compared to fiscal 2021.

The increase in net revenue was driven by an 18.5% increase in net revenue in our IoT product line, as well as

an increase of 28.3% in net revenues in our REM product line.

We had a net loss of $4,044,000 for fiscal 2021 compared to a net loss of

$10,738,000 for fiscal 2020.

The decrease in net loss was driven by a 22.8% increase in gross profit as well as a 2.9% decrease in operating

The increase in net revenue was driven by a 144.0% increase in net revenue in our IoT System Solutions product

line, as well as an increase of 60.0% in net revenues in our Embedded IoT Solutions product line.

We had a net loss of $5,362,000 for

fiscal 2022 compared to a net loss of $4,044,000 for fiscal 2021.

The increase in net loss was driven primarily by costs related to the

TN acquisition as both SG&A and R&D expenses as a percent of net revenue were lower in fiscal 2022 than fiscal 2021, largely because

of our business integration efforts and capture of significant cost synergies during fiscal 2022.

The following tables present our net revenue by

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(In thousands, except percentages)

Embedded IoT Solutions

IoT System Solutions

Software & Services

Years Ended June 30,

(In thousands, except percentages)

Net revenue from our IoT product line in fiscal 2021 increased across

all regions when compared to fiscal 2020 due primarily to the addition of sales of products and services obtained through the acquisition

of Intrinsyc in January 2020.

In addition to smaller increases in various other product families, we experienced strong growth in unit

sales of (i) our XPico product family in the APJ and Americas regions, (ii) our XPort product family in the Americas and EMEA regions,

and (iii) a last-time shipment of one of our end-of-life PremierWave products in the EMEA region.

The overall increase in net revenues

was partially offset by the exit of a low margin distribution business assumed in the acquisition of Maestro and various decreases in

unit sales of some of our cellular and tracker products, as well as certain legacy product families, particularly in the EMEA and Americas

Net revenue from our REM product line for fiscal 2021 increased compared

to fiscal 2020 due primarily to increased unit sales of (i) our SLC8000 product family across all regions, (ii) our Spider product family

in the Americas and APJ regions, and (iii) our SLB product family in the Americas region.

Net revenue from our Other products, which are comprised of non-focus

and end-of-life product families, declined slightly in all regions.

Embedded IoT Solutions

Net revenue from our Embedded IoT Solutions product line increased

in fiscal 2022 compared to fiscal 2021 primarily due to organic growth in our compute modules and embedded ethernet connectivity products.

In addition, the acquisition of the TN Companies contributed approximately $7,200,000 in fiscal 2022 primarily in the Americas region.

IoT System Solutions

Net revenue from our IoT System Solutions product line increased in

fiscal 2022 compared to fiscal 2021 primarily due to product sales of our network switches and media converter products from the TN Companies

acquisition, mostly in the Americas region.

We also experienced organic growth in our pre-acquisition business driven by (i) our out of

band (“OOB”) products in the Americas, and to a lesser extent, EMEA and APJ, and (ii) our device server products in the Americas

and APJ regions.

The overall increase in net revenues was partially offset by a decrease in unit sales in our WiFi gateway products in

the Americas and EMEA regions.

Software & Services

Net revenue from our Software & Services product line in fiscal

2022 was flat when compared to fiscal 2021.

In fiscal 2022, we experienced an increase in engineering consulting services revenue when

compared to fiscal 2021.

This increase was largely offset by lower revenues from some of our software offerings compared to fiscal 2021

during which we had a large software license sale.

For comparative purposes, the following tables present our product

line categorizations prior to our decision to reorganize how we present this information during the fourth quarter of fiscal 2022.

discussed at Part I, Item 1 of this Report, going forward we do not plan to disclose our net revenue by these categorizations.

Years Ended June 30,

(In thousands, except percentages)

Gross profit represents net revenue less cost of revenue.

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Gross profit as a percent of revenue (referred to as “gross margin”)

for fiscal 2021 increased compared to fiscal 2020 due primarily to our exit in fiscal 2021 of a low margin distribution business assumed

in the acquisition of Maestro, as well as reduced charges in fiscal 2021 for inventory reserves.

These benefits to our gross margin in

fiscal 2021 were partially offset by growth in sales of products and services obtained through the acquisition of Intrinsyc, which typically

have lower margins than the Lantronix products that existed prior to the acquisition.

In addition, our gross margin was negatively impacted

by increased supply chain costs in response to component shortages that resulted from the pandemic.

for fiscal 2022 decreased compared to fiscal 2021 due primarily to our revenue mix.

We saw significant growth in unit sales of our compute

modules and growth in our engineering services revenues, which typically carry lower gross margins than many of our products.

for fiscal 2022 was also negatively impacted by (i) higher supply chain and logistics costs and (ii) the amortization of unrealized profit

in acquired inventory from the TN Companies in the amount of approximately $380,000.

The overall decrease in our gross margins in the

current year period was partially offset by growth in unit sales of our higher-margin OOB products, along with the margin contribution

from the products acquired from the TN Companies.

Selling, General and Administrative

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Selling, general and administrative expenses increased in fiscal 2022

when compared to fiscal 2020 primarily due to (i) higher personnel-related costs in our sales team and an increase in variable compensation

and (ii) higher professional fees and outside services expenses resulting from the timing of certain legal and accounting projects.

addition, fiscal 2021 had personnel costs from the Intrinsyc acquisition for the entire fiscal year whereas fiscal 2020 only had six months

of related personnel costs.

The overall increase was partially offset by (i) lower share-based compensation expenses related to certain

outstanding performance stock units and stock option awards and (ii) lower bad debt and depreciation expenses included in the “Other”

category in the table above.

when compared to fiscal 2021 primarily (i) higher personnel-related expenses as we added headcount from the acquisition of the TN Companies

and also recorded higher variable compensation expenses, (ii) increased professional fees and outside services costs for legal and other

services, as well as transition services fees paid to the seller for the acquisition of the TN Companies, (iii) increased share-based

compensation expense due to additional grants of performance stock units and other stock awards with higher fair values compared to the

prior year and (iv) higher marketing spending, including on various events and trade shows that were largely halted in the prior year

due to the COVID-19 pandemic.

Research and Development

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Research and development expenses increased in fiscal 2022 when compared

to fiscal 2020 largely due to increased personnel-related expenses driven by headcount growth and higher variable compensation.

2021 had personnel costs from the Intrinsyc acquisition for the entire fiscal year whereas fiscal 2020 only had six months of related

personnel costs.

This increase was partially offset by a reduction in outside services costs for engineering consulting fees.

to fiscal 2021 primarily due to (i) an increase in personnel-related costs driven by additions to headcount from both the TN Companies

acquisition and internal growth, (ii) higher facility-related costs as we opened our new facility in Germany and expanded our engineering

teams, (iii) increased outside services costs primarily related to the timing of product development projects requiring outsourced engineering

resources, and (iv) increased share-based compensation expense due to additional grants of performance stock units and other stock awards

with higher fair values compared to the prior year.

Restructuring, Severance and Related Charges

During fiscal 2022, we incurred charges of approximately $795,000 related

to headcount reductions and restructuring of non-essential operations, including certain functions determined redundant related to the

acquisition of the TN Companies.

We may incur additional restructuring, severance and related charges in future periods as we continue

to identify cost savings and synergies resulting from our acquisitions.

During fiscal 2021, we incurred charges of approximately $506,000 related

to headcount reductions and restructuring of non-essential operations, including certain acquisition-related functions we determined were

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

and synergies resulting from our acquisitions.

During fiscal 2020, we executed on plans to realign certain personnel

resources to better fit our business needs, particularly related to identifying cost savings and synergies from the acquisitions of Maestro

and Intrinsyc.

These activities resulted in total charges of approximately $3,844,000 in fiscal 2020.

Acquisition-Related Costs

During fiscal 2021, we incurred approximately $841,000 of acquisition-related

costs, mostly banking and legal fees, related to the acquisition of the TN Companies and our exploration of other acquisition targets.

During fiscal 2020, we incurred approximately $2,284,000 of acquisition-related

costs in connection with the acquisitions of Maestro and Intrinsyc.

These costs are mainly comprised of banking, legal, accounting and

other professional fees.

During fiscal 2022 and fiscal 2021, we incurred approximately $889,000

and $841,000 of acquisition-related costs, respectively, mostly comprised of banking and legal fees related to the acquisition of the

TN Companies and our exploration of other acquisition targets.

Amortization of Purchased Intangible Assets

We acquired certain intangible assets through our fiscal 2020 acquisitions,

We acquired certain intangible assets through our recent acquisitions,

which we recorded at fair-value as of the acquisition dates.

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For fiscal 2022 and 2021, we incurred net interest expense from interest

incurred on borrowings on our term loan.

incurred on borrowings on our Credit Facilities.

We also earn interest on our domestic cash balances.

Loss on Extinguishment of Debt

For fiscal 2022, we recognized a non-cash loss on the extinguishment

of our mezzanine term loan facility of $764,000, representing the write-off of unamortized deferred financing costs.

Other Expense, Net

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During fiscal 2021, we also

incurred a loss of approximately $197,000 the on disposal of certain property and equipment.

incurred a loss of approximately $197,000 on disposal of certain property and equipment.

Provision for Income Taxes

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(In thousands, except percentages)

Provision for income taxes

Provision (benefit) for income taxes

The following table presents our effective tax rate based upon our

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We utilize the liability method of accounting for income taxes.

difference between our effective tax rate and the federal statutory rate resulted primarily from the effect of our domestic losses recorded

without a tax benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate.

fiscal 2022 the tax benefit was the result of us recording a U.S.

deferred tax liability in the TN Companies acquisition purchase accounting

related to non-tax-deductible intangible assets recognized in our consolidated financial statements.

The acquired deferred tax liabilities

are a source of income to support recognition of our existing deferred tax assets.

The differences between our effective tax rate and

the federal statutory rate in fiscal 2022 and fiscal 2021 were also impacted by the effect of our domestic losses recorded without a tax

benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate.

We record net deferred tax assets to the extent we believe these assets

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Cash and cash equivalents

In November 2021, we sold 4,700,000 shares of our common stock in an

underwritten public offering.

We received net cash proceeds from the offering of approximately $32,600,000.

Refer to Note

6 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report for additional

In January 2022, we terminated our $12,000,000 mezzanine term loan

facility that was originated in August 2021.

In connection with this termination, we paid a total of $12,152,500 to pay off the facility

In February 2022, we entered into an amendment to our Senior

Credit Facilities (as defined in Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part

I, Item 1 of this Report) which (i) increased the amount available under the revolving credit facility from $2,500,000 to

$7,500,000, (ii) removed and replaced LIBOR benchmark provisions with Term SOFR benchmark provisions and (iii) provided that

advances under the Senior Credit Facilities bear interest at Term SOFR or the Prime Rate, at the option of Lantronix, plus a margin

that ranges from 3.10% to 4.10% in the case of Term SOFR and 1.50% to 2.50% in the case of the Prime Rate, depending on our total

leverage with a Term SOFR floor of 0.00% and a Prime Rate floor of 3.25%.

We paid a nonrefundable fee of $25,000 in connection with

this amendment to our Senior Credit Facilities.

As of June 30, 2022, we had $16,188,000 million in borrowings outstanding under our

term loan facility.

Our principal sources of cash and liquidity include our existing cash

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believe that these sources will be sufficient to fund our current requirements for working capital, capital expenditures and other financial

commitments for at least the next 12 months.

We anticipate that the primary factors affecting our cash and liquidity are net revenue,

working capital requirements and capital expenditures.

commitments for at least the next 12 months and beyond.

We anticipate that the primary factors affecting our cash and liquidity are net

revenue, working capital requirements and capital expenditures.

Management defines cash and cash equivalents as highly liquid deposits

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those of our existing stockholders.

In addition, if we issue debt securities to raise additional funds, we may incur debt service obligations,

become subject to additional restrictions that limit or restrict our ability to operate our business, or be required to further encumber

If we issue debt securities to raise additional funds, we may incur debt service obligations, become

subject to additional restrictions that limit or restrict our ability to operate our business, or be required to further encumber our

There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all.

Recent Acquisition

On August 2, 2021 (the “Closing Date”) we acquired the

TN Companies from Communication Systems, Inc.

for approximately $25,028,000 in cash paid as of the Closing Date plus earnout payments

of up to $7,000,000 payable following two successive 180-day intervals after the Closing Date based on revenue targets for the business

of the TN Companies.

In connection with the closing of the acquisition we entered into new loan agreements with SVB which included (i)

a new term loan of $17,500,000 with an available revolving credit facility of up to $2,500,000 and (ii) a second term loan of $12,000,000.

COVID-19 Update

We have not experienced any significant payment delays or defaults

by our customers as a result of the COVID-19 pandemic.

However, additional economic shutdowns or a prolonged economic recovery may lead

to declines in billings and cash collections and result in an unfavorable impact on our financial results in future periods.

do have a credit line available, financial covenants associated with the credit line may not enable us to draw down funds as needed.

have in place a contingency plan that significantly reduces operating costs in the event that we experience liquidity issues in order

to help mitigate our liquidity risk.

Bank Loan Agreements

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(In thousands)

Net cash provided by (used in) operating activities

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash (used in) provided by financing activities

Net cash provided by (used in) financing activities

Operating Activities

Cash provided by operating activities during fiscal 2021 increased

compared to fiscal 2020 due mainly to the decrease in our net loss, which was driven by our revenues and gross profit growth, along with

a decrease in our operating expenses.

For fiscal 2021, our net loss included $7,723,000 of non-cash charges, and the changes in operating

assets and liabilities provided cash of $625,000.

We used cash in operating activities during fiscal 2022 compared to

operations providing cash in fiscal 2021 mainly due to the increase in our net loss, which was driven by an increase in operating expenses.

For fiscal 2022, our net loss included $15,380,000 of non-cash charges, and the changes in operating assets and liabilities used cash

of $19,434,000.

Our net inventories increased by $22,620,000, or 150.2%, from June

30, 2021 to June 30, 2022.

Of this increase, $7,734,000 of net inventories were acquired in the TN Companies acquisition.

The remainder

of the increase was a combination of increases in revenue, increased lead times required for certain customers, and supply chain constraints

Accounts receivable increased by $12,747,000, or 94.3%, from June 30,

2021 to June 30, 2022, of which $5,277,000 was acquired in the TN Companies acquisition.

The remainder of the increase is primarily due

to the increase and timing of our sales and related payments from customers.

Accounts payable increased by $11,522,000, or 126.3%, from June 30,

to June 30, 2021 primarily due to the increase and timing of our inventory purchases and related payments to vendors.

Accrued payroll

and related expenses increased by $2,284,000 from June 30, 2020 to June 30, 2021 due to accrued variable compensation costs.

Accounts and contract manufacturers’ receivables increased, in

total, by $3,727,000, or 31.7%, from June 30, 2020 to June 30, 2021 due to the growth and linearity of our sales during the fourth quarter

of fiscal 2021 as well as the timing of materials shipments to our contract manufacturers.

Inventories increased $1,278,000, or 9.3%, from June 30, 2020 to June

30, 2021 as we have increased our stocks for lead time and supply constraints, particularly due to the COVID-19 pandemic over the last

2021 to June 30, 2022, of which $1,872,000 was acquired in the TN Companies acquisition.

The remainder of the increase is primarily due

to the increase and timing of our inventory purchases and related payments to our vendors.

Investing Activities

We used significantly less cash in investing activities during fiscal

2021 than in fiscal 2020 due to the acquisitions of Maestro and Intrinsyc in the prior year.

Cash used during fiscal 2021 was substantially

all for the purchase of certain property and equipment.

Net cash used in investing activities during fiscal 2022 was driven

by the acquisition of the TN Companies, which used net cash of $23,629,000.

We also used cash for the purchase of property and equipment,

primarily related to various tooling, test and office equipment.

Financing Activities

Net cash used in financing activities during fiscal 2021 was primarily

the result of (i) monthly repayments on our term loan and (ii) withholding taxes paid related to the vesting of restricted stock units.

In fiscal 2020 financing activities provided cash from the issuance of a term loan for $6,000,000 with SVB as well as stock option exercises

and stock purchases by employees.

Net cash provided by financing activities during fiscal 2022 resulted

primarily from (i) net proceeds from our public offering of $32,600,000 and (ii) $29,500,000 in gross proceeds received from our credit

facilities with SVB, partially offset by the repayment of our previous term loan in the amount of $3,750,000 and the mezzanine credit

facility in the amount of $12,000,000.

We also used cash of $1,811,000 for tax withholdings paid on behalf of employees for restricted

shares and paid earnout consideration of $1,500,000 for the TN Companies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-K

Item 7. Management’s Discussion and Analysis