Item 1. Business
ITEM 1.
BUSINESS
Overview
Lantronix, Inc. is a global Industrial and Enterprise IoT provider
of solutions that target diversified verticals ranging from Smart Cities, Utilities and Healthcare to Enterprise, Intelligent Transportation,
and Industrial Automation. Building on a long history of connectivity and video processing competence, target applications include Video
Surveillance, Traffic management, Infotainment systems, Robotics, Edge Computing and Remote Environment Management (“REM”).
Our portfolio of services and products address each layer of the IoT
Stack including Collect, Connect, Compute, Control and Comprehend, enabling our customers to deploy successful IoT and REM solutions.
Our services and products deliver a holistic approach, addressing our customers’ needs by integrating a SaaS management platform
with custom application development layered on top of external and embedded hardware, enabling intelligent edge computing, secure communications
(wired, Wi-Fi, and cellular), location and positional tracking, and environmental sensing and reporting.
We organize our portfolio services and products into the following
product lines: Embedded IoT Modules, IoT Systems Solutions, and Software and Engineering Services.
We were incorporated in California in 1989 and reincorporated in Delaware
in 2000.
References in this Report to “fiscal 2022” refer to the
fiscal year ended June 30, 2022 and references to “fiscal 2021” refer to the fiscal year ended June 30, 2021. In addition,
unless the context suggests otherwise, all reference in this Report to the “Company,” “we,” and “us,”
refer to Lantronix, Inc. together with its subsidiaries.
Our Strategy
Today, more businesses are seeking to streamline their operations by
connecting their machines and electronic devices to the Internet, manage them remotely, and reduce costs. The growth in the IoT and REM
markets are being driven by the growing importance of data, being able to act on that data, and the rapidly falling cost of sensors, connectivity,
compute, and storage. While the promise is great, designing and deploying these projects is complex, costly and time-consuming. Our offerings
are designed to help companies increase speed and reduce friction for their deployments through reduced complexity, decreased development
costs, and increased ease of management for web-scale applications and real-world solutions; thus, driving customer value and success.
We are addressing the market opportunity by offering our customers turnkey solutions, leveraging the layers of the IoT Stack, such as
Collect, Connect, Compute, Control and Comprehend, through a combination of services, hardware and software enablement, accessible and
manageable through our SaaS platform.
We are executing a growth strategy that includes continuous innovation
complemented by strategic acquisitions to expand our ability to offer complete IoT and REM solutions with the intent of increasing our
scale and broadening our scope so that we can increase our value proposition to our customers. We believe this strategy will allow us
to address a larger portion of our customers’ operational needs and engage with customers as a strategic "total solution"
partner. We believe this will strengthen our position in the market as our customers come to us for a wider variety of applications.
Recent Acquisitions
On January 16, 2020 we acquired Intrinsyc Technologies Corporation
(“Intrinsyc”). This acquisition provided additional and complementary edge computing with embedded product design and application
development capabilities, crucial to the development of intelligent Compute functionality for advanced customer implementations.
1
On August 2, 2021 we acquired the Transition Networks and Net2 Edge
businesses (the “TN Companies”) from Communication Systems, Inc. The TN Companies provide us with complementary IoT connectivity
products and capabilities, including switching, power over ethernet and media conversion and adapter products.
These acquisitions allow us to offer more value to our customers and
substantially increase the markets that we serve.
Products and Solutions
Embedded IoT Modules
This portfolio of embedded products provides a variety of solutions
including Compute System-on-Module (SOM) or System-in-Package (SIP) solutions supplemented with wired and wireless network Connectivity
options. As the level of silicon integration continues to grow, the compute modules also provide the ability to Collect digital information
(Video, Audio or Sensors) and analyze/comprehend the data streams based on specific AI/ML algorithms. The new implementations of SIP devices
can process multiple media streams with CV (Computer Vision) technology and the modules can be Controlled remotely via ConsoleFlow™,
Lantronix’s Cloud SaaS platform. Our IoT compute products typically are embedded into a customer product, enabling advanced application
functionality at the edge. Our compute products are normally embedded into new designs. These products include application processing
that delivers compute to meet customer needs for data transformation, computer vision, machine learning, augmented / virtual reality,
audio / video aggregation and distribution, and custom applications at the edge. Many of the products are offered with software tools
intended to further accelerate our customers’ time-to-market and increase their value add. Most of our IoT embedded products are
pre-certified in a number of countries thereby significantly reducing our OEM customers’ regulatory certification costs and accelerating
their time to market
The following product families are included in our Embedded IoT Solutions
product line: XPort®, XPort® Pro, WiPort®, System on Module (“SoM”), Single Board Computer (“SBC”),
Development Kits, MicroM110, xPico®, xPico® Wi-Fi, NICS, Optical SFPs, PremierWave® EN, and PremierWave® XC.
IoT System Solutions
The IoT Systems Solutions portfolio consists of fully functional standalone
systems that provider routing, switching or gateway functionalities as well as Telematics and media conversion. These products include
wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network
connectivity, power for IoT end devices through Power over Ethernet (PoE), application hosting, protocol conversion, media conversion,
secure access for distributed IoT deployments and many other functions. Most of our IoT System products are pre-certified in a number
of countries thereby significantly reducing our original equipment manufacturer (“OEM”) customers’ regulatory certification
costs and accelerating their time to market.
Our PoE products support remote devices such as cameras and wireless
access points by passing electrical power along with data on Ethernet cabling, eliminating the need for traditional AC/DC electrical power
in hard-to-reach locations. As more cities move to implement smart city technology, a major component will be solutions designed to protect
and provide services to citizens, such as intelligent transportation and surveillance networks. Our switches deliver the necessary connectivity,
bandwidth and power to enable these solutions. Many of our products incorporate features to perform advanced levels of fault management
and diagnostics to troubleshoot networks and proactively fix problems. Our media converters and other customer premise equipment (“CPE”)
assist customers in resolving challenges in the areas of bandwidth constraints, security risks, and distance limitations as networks extend
from local area to wide area networks and adapt to ever increasing end-user demands.
Our smart tracking devices are designed to deliver robust data logging
and positional tracking functionality and reliability for supply chain and logistics solutions. Our telematics devices are designed to
be flexible in the field and offer a variety of connectivity options to suit the customers’ needs across 3G, 4G, and LTE cellular
networks. These power efficient products are designed to support communications across interfaces and industrial protocols for vehicle,
fleet, and asset tracking and management. Many of the products are offered with software tools intended to further accelerate our customers’
time-to-market and increase their value add. Most of our IoT Telematics products are pre-certified in a number of countries thereby significantly
reducing our OEM customers’ regulatory certification costs and accelerating their time to market.
2
As Edge Computing deployment accelerates, REM allows for full comprehension
and control of a remote IT infrastructure, across a range of sensors (temperature, humidity, light, acceleration, open / close, etc.)
providing status and alerting, automation, and remote control of devices and end stations. REM designs may be part of an out of band (“OOB”)
or in band network design. OOB is a technique that uses a dedicated management network to access critical infrastructure components to
ensure production independent management connectivity. REM allows organizations to effectively monitor, manage, and control their enterprise
IT equipment and facilities (environments), either in or out of band, optimizing their IT support resources.
Our REM product line includes out-of-band management, console management,
power management, and IP connected keyboard-video-mouse (commonly referred to as “IPKVM”) products that provide remote access
to IT and networking infrastructure deployed in test labs, data centers, branch offices, remote sites, and server rooms.
The
following product families are included in IoT System Solutions product line: EDS, EDS-MD, xPress™, xDirect®, E21x, E22x, G52x,
X30x, Bolero4x, FOX3-4G, FOX4, SGX™, SLB ™ , SLC ™ 8000, Spider ™ , UDS, EMG ™ .
S40 and Power over Ethernet Switches. In addition, we offer
non-PoE Network Switches and Media Converters.
Software and Engineering Services
Our SaaS platform provides single pane of glass management for REM
and IoT deployments. Our platform enables customers to easily deploy, monitor, manage, and automate across their global deployments, all
from a single platform login, virtually connected as though directly on each device. Our platform eliminates the need to have 24/7 personnel
on site, and makes it easy to see and drill into an issue quickly, even in large scale deployments.
OEMs and SIs can leverage our platform multitenancy functionality for
supporting a wide customer base while ensuring customer separation. Over the Air (“OTA”) updates make it easy to ensure the
latest security patches, firmware, and configurations are deployed and functional.
We leverage our engineering expertise and product development best
practices to deliver high quality, innovative products, cost-effectively and on time.
Our engineering services flexible business model allows for choosing
turnkey product development or team augmentation for accelerating complex areas of product development such as; camera development and
tuning, voice control, machine learning, artificial intelligence, computer vision, augmented / virtual reality, mechanical and radio-frequency
design, thermal and power optimization, or in any specific area a customer needs assistance.
In addition to our production-ready edge computing solutions, we offer
experienced multidisciplinary engineering services across complete aspects of IoT product development, including hardware engineering,
software engineering, mechanical engineering, rapid prototyping, and quality assurance. We also offer services for mechanical, hardware,
and software engineering for camera, audio, and artificial intelligence / machine learning development.
The following product families are included in our Software & Services
product line: Engineering Services, ConsoleFlow™, Level Services and J-Integra.
Net Revenue by Product Line
We have one operating and reportable business segment. A summary of
our net revenue by product line is found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in Part II, Item 7 of this Report, which is incorporated herein by reference. A discussion of factors potentially affecting our
net revenue and other operating results is set forth in “Risk Factors” included in Part I, Item 1A of this Report, which is
incorporated herein by reference.
3
Sales Cycle
Our embedded IoT solutions are typically designed into products by
OEMs, original design manufacturers (“ODMs”) and contract manufacturers. OEMs design and sell products under their own brand
that are either manufactured by the OEM in-house or by third-party contract manufacturers. ODMs design and manufacture products for third
parties, which then sell those products under the third parties’ brands. The design cycles using our embedded solutions typically
range from nine to 24 months and can generate revenue for the entire life cycle of an end user’s product.
Our IoT System Solutions are typically sold to end users through value
added resellers (“VARs”) systems integrators, distributors, online retailers and, to a lesser extent, OEMs. The design cycles
for these products typically range from three to 18 months and are often project-based.
Sales Channels
Distributors
A majority of our sales are made through distributors. Distributors
resell our products to a wide variety of resellers and end customers including OEMs, ODMs, value-added resellers (“VARs”),
systems integrators, consumers, online retailers, IT resellers, corporate customers and government entities.
Resellers
Our products are sold by industry-specific system integrators and VARs,
who often obtain our products from our distributors. Additionally, our products are sold by direct market resellers such as CDW, ProVantage,
and Amazon.com.
Direct Sales
To a lesser extent, we sell products directly to larger OEMs and end
users. We also maintain an ecommerce site for direct sales.
Sales and Marketing
We sell our products primarily through an internal sales force, which
includes regional sales managers, inside sales personnel and field applications engineers in major regions throughout the world. This
team manages our relationships with our partners and end users, identifies and develops new sales opportunities and increases penetration
at existing accounts. We implement marketing programs, tools and services, including displaying our products at industry-specific events,
to generate sales leads and increase demand for our products.
Manufacturing
Our manufacturing operations are primarily conducted through four third-party
contract manufacturers. We currently utilize Hana Microelectronics, primarily located in Thailand and China, Honortone, primarily located
in China, Ruby Tech in Taiwan, and Tailyn in China as our contract manufacturers for most of our products. In addition, we use Inphi Corporation
to manage Taiwan Semiconductor Manufacturing Company, Ltd., a third-party foundry located in Taiwan, which manufactures our large-scale
integration chips. We manufacture certain products with final assembly in the U.S. to meet trade compliance requirements.
Our contract manufacturers source raw materials, components
and integrated circuits, in accordance with our specifications and forecasts, and perform printed circuit board assembly, final assembly,
functional testing and quality control. Our products are manufactured and tested to our specifications with standard and custom components.
Many of these components are available from multiple vendors. However, we have several single-sourced supplier relationships, either because
alternative sources are not available or because the relationship is advantageous to us.
4
Research and Development
Our research and development efforts are focused on the development
of hardware and software technology to differentiate our products and enhance our competitive position in the markets we serve. Product
research and development is primarily performed in-house and supplemented with outsourced resources.
Competition
Our industry is highly competitive and characterized by rapid technological
advances and evolving industry standards. The market can be affected significantly by new product introductions and marketing activities
of industry participants. We believe that we compete for customers based on product features, software capabilities, company reputation,
brand recognition, technical support, relationships with partners, quality, reliability, product development capabilities, price and availability.
A discussion of factors potentially affecting our ability to compete in the markets in which we operate is set forth in “Risk Factors”
included in Part I, Item 1A of this Report, which is incorporated herein by reference.
Intellectual Property Rights
We believe that a considerable portion of our value resides in our
intellectual property. We have developed proprietary methodologies, tools, processes and software in connection with delivering our products
and services. We protect our intellectual property through a combination of patents, copyrights, trademarks, trade secrets, licenses,
non-disclosure agreements and contractual provisions. We enter into a non-disclosure and confidentiality agreement with each of our employees,
consultants and third parties that have access to our proprietary technology. Pursuant to assignment of inventions agreements, all of
our employees and consultants assign to us all intellectual property rights for the relevant inventions created in connection with their
employment or contract with us. We currently hold U.S. and international patents covering various aspects of our products, with additional
patent applications pending.
U.S. and Foreign Government Regulation
Many of our products are subject to certain mandatory regulatory approvals
in the regions in which our products are deployed. In particular, wireless products must be approved by the relevant government authority
prior to these products being offered for sale. In addition, certain jurisdictions have regulations requiring products to use environmentally
friendly components. Some of our products employ security technology, which is subject to various U.S. export restrictions.
Employees
As of August 16, 2022, we had 348 total employees including 335 full
time employees, none of whom is represented by a labor union. We have not experienced any labor problems resulting in a work stoppage
and believe we have good relationships with our employees.
Customer and Geographic Concentrations
We conduct our business globally and manage our sales teams by three
geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”). A
discussion of sales to our significant customers and related parties, sales within geographic regions as a percentage of net revenue and
sales to significant countries as a percentage of net revenue is set forth in Note 11 of Notes to Consolidated Financial Statements included
in Part II, Item 8 of this Report, which is incorporated herein by reference. A discussion of factors potentially affecting our customer
and geographic concentrations is set forth in “Risk Factors” included in Part I, Item 1A of this Report, which is incorporated
herein by reference.
5
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, Proxy Statements on Schedule 14A and other reports and information that we file or furnish pursuant to the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge on our website at www.lantronix.com as
soon as reasonably practicable after filing or furnishing such reports with the SEC. The SEC also maintains a website at www.sec.gov that
contains reports, proxy and information statements, and other information regarding issuers that file electronically. The contents of
our website are not incorporated by reference into this Report. References to our website address in this Report are inactive textual
references only.
Information About Our Executive Officers
Executive officers serve at the discretion of our board of directors.
There are no family relationships between any of our directors or executive officers. The following table presents the names, ages, and
positions held by our executive officers as of the date of this Report:
Name
Age
Position
Paul H. Pickle
52
President and Chief Executive Officer
Jeremy R. Whitaker
52
Chief Financial Officer
Mohammed F. Hakam
54
Vice President of Engineering
Roger Holliday
63
Vice President of Worldwide Sales
PAUL H. PICKLE has served as our President and Chief Executive Officer,
and as a member of our Board, since April 2019. Before joining Lantronix, Mr. Pickle served as President and Chief Operating Officer of
Microsemi Corporation, a leading provider of semiconductor and system solutions, from November 2013 until Microsemi was acquired by Microchip
Technology Inc. in May 2018. Prior to his position as President and Chief Operating Officer, he served Microsemi as Executive Vice President,
leading business operations of the company’s Integrated Circuits group, where he played an integral role in the planning, developing,
and execution of Microsemi’s leading edge IC solutions for communications, industrial, aerospace, and defense/security markets.
JEREMY R. WHITAKER has served as our Chief Financial Officer since
September 2011. Mr. Whitaker returned to Lantronix after serving as Vice President, Corporate Controller at Mindspeed from January 2011
to September 2011. Mr. Whitaker previously served as our Vice President of Finance and Accounting from September 2010 to January 2011,
where he was responsible for managing all worldwide finance and accounting functions. Mr. Whitaker also served as our Senior Director
of Finance and Accounting from February 2006 to September 2010 and our Director of Finance and Accounting from August 2005 to February
2006. Prior to August 2005, Mr. Whitaker held vice president and director level finance and accounting positions with two publicly-traded
companies and worked in the assurance practice at Ernst & Young LLP for six years.
MOHAMMED F. HAKAM joined Lantronix in August of 2018 and serves as
our Vice President of Engineering. Prior to joining Lantronix, Mr. Hakam served as the interim Senior Vice President of International
Operations at Viewstream, Inc., a provider of videos and marketing content to technology companies, from September 2016 to July 2018,
where he was instrumental in planning and expanding the company’s global media strategy. Before joining Viewstream, Mr. Hakam was
founder and Senior Vice President of Engineering and Product Management of SwitchRay Inc., a global provider of communication service
platforms for global telecom carriers, from 2012 until its acquisition by 46 Labs in September 2016. He previously spent 20+ years at
a number of large companies such as Motorola and Kyocera Wireless in various engineering leadership roles, and has also been the founder
of two technology companies (including SwitchRay Inc.) in the networking and telecom segment. Mr. Hakam has been a professor at National
University in San Diego, teaching undergraduate and graduate courses in program and project management, international management, six
sigma and statistical process control.
ROGER HOLLIDAY joined Lantronix in January 2020 and serves as our Vice
President of Worldwide Sales. Prior to joining Lantronix, Mr. Holliday served in various positions at Microsemi Corporation since 1999,
serving most recently as Executive Vice President and General Manager from 2013 until Microsemi was acquired by Microchip Technology Inc.
in May 2018. Prior to his time at Microsemi, Mr. Holliday served in various product marketing, applications and sales management roles
at Linfinity Microelectronics until its acquisition by Microsemi in 1999.
6