Item 1. Business
ITEM 1.
BUSINESS
Overview
Lantronix, Inc. is a global Industrial and Enterprise internet of things
(“IoT”) provider of solutions that target high growth applications in specific verticals such as Smart Grid, Intelligent Transportation,
Smart Cities, and AI Data Centers. Building on a long history of Networking and video processing competence, target applications include
Intelligent Substations infrastructure, Infotainment systems, and Video Surveillance, supplemented with a comprehensive Out of Band Management
(“OOB”) products offering for Cloud and Edge Computing.
We organize our portfolio of services into the following product lines:
Embedded IoT Modules, IoT Systems Solutions, and Software and Services.
We were incorporated in California in 1989 and reincorporated in Delaware
in 2000.
References in this Report to “fiscal 2023” refer to the fiscal
year ended June 30, 2023 and references to “fiscal 2022” refer to the fiscal year ended June 30, 2022. 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 Operational Technology (“OT”) Infrastructure equipment to the Internet, manage it remotely, and reduce costs. The growth
in the IoT and OOB markets is being driven by the growing importance of data analytics, and the rapidly falling cost of sensors, connectivity,
compute, and storage. Designing and deploying these projects is complex, costly and time-consuming. Our products are
designed to help companies increase speed and reduce the complexity of their deployments by offering our customers customizable solutions,
that address each layer of the IoT Stack, such as Collect, Connect, Compute, Control and Comprehend.
We are executing on a growth strategy that includes continuous innovation
supplemented by strategic acquisitions with the intent of increasing our scale and broadening our scope so that we can increase our value
proposition to customers. We believe this strategy will allow us to address a larger portion of our customers’ operational needs
and engage with them as a strategic partner. This strategy is starting to bear fruits as we continue to strengthen our position in the
market and more customers come to us for a wider variety of applications.
Products and Solutions
Embedded IoT Modules
This portfolio of embedded products provides a variety of options including
Compute System-on-Module (“SOM”) or System-in-Package (“SIP”) solutions supplemented with wired and wireless network
Connectivity products. 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 new product
design, enabling advanced application functionality at the edge. 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 original equipment manufacturer (“OEM”) customers’ regulatory certification costs
and accelerating their time-to-market.
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The following product families are included in our Embedded IoT Solutions
product line: Open-Q SOMs and SIPs, XPort®, XPort® Pro, WiPort®, Development Kits, 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 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 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.
As Edge Computing deployment accelerates, OOB Management allows for
full comprehension and control of a remote IT infrastructure, across a range of sensors (e.g., temperature, humidity, light,
acceleration, open / close, etc.) providing status and alerting, enabling automation, and remote control of devices, servers, and
end stations. OOB is a technique that uses a dedicated management network to access critical infrastructure components and ensure
production independent connectivity. Remote Management allows organizations to effectively monitor and control their enterprise IT
equipment and facilities (environments), either in or out of band, optimizing their IT support resources.
Our AOOB (“Advanced OOB”) product line includes 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 PoE 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.
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OEMs and System Integrators (“SI”) 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™, Control Center and Level Services.
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 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.
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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 five third-party
contract manufacturers. We currently utilize Hana Microelectronics, primarily located in Thailand and China, Honortone, primarily located
in China, Ruby Tech and Info-Tek in Taiwan, and Tailyn in China as our contract manufacturers for most of our products. In addition, we
use Marvell Technology Inc., to manage the manufacture of our large-scale integration chips in Taiwan. 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 18, 2023, we had 370 total employees including 357 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
Jeremy R. Whitaker
53
Interim Chief Executive Officer and Chief Financial Officer
Eric Bass
56
Vice President of Engineering
Roger Holliday
64
Vice President of Worldwide Sales
JEREMY R. WHITAKER has served as our interim Chief Executive Officer
since June 2023 and our Chief Financial Officer since September 2011. Mr. Whitaker returned to Lantronix after serving as Vice President,
Corporate Controller at Mindspeed, a supplier of semiconductor solutions for network infrastructure, 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.
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ERIC BASS has served as our Vice President
of Engineering since January 2023. Prior to joining Lantronix, Mr. Bass held the position of Director of Strategic Programs at Intrinsix
Corp., a provider of electronics and custom integrated circuit design engineering solutions and services, from January 2019 to January
2023. Previously, Mr. Bass served in multiple roles at Microsemi Corporation, a provider of semiconductor solutions differentiated by
power, security, reliability and performance, from November 2011 to August 2018, culminating with his role as Vice President of Research
& Development Voice Circuit and Power-over-Ethernet Divisions from August 2017 to August 2018, and at Zarlink Semiconductor, a provider
of mixed-signal chip technologies for a broad range of communications and medical applications, from January 2001 until Zarlink was acquired
by Microsemi in November 2011.
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, a manufacturer of standard linear and mixed signal integrated circuits, until Linfinity’s acquisition
by Microsemi in 1999.