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Item 7. Management’s Discussion and Analysis

2025-08-29 compared with 2024-09-09 · 216 added, 262 removed, 233 unchanged (67% of the section changed)

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Lantronix Inc.

is a global leader in compute

and connectivity solutions, targeting high-growth industries such as Smart Cities, Automotive, and Enterprise markets.

Our products and

services empower companies to capitalize on the expanding internet of things (“IoT”) market by delivering customizable solutions

that address each layer of the IoT stack.

LTRX) is a global leader in Edge AI and Industrial

IoT solutions, delivering intelligent computing, secure connectivity, and remote management for mission-critical applications.

high-growth markets, including smart cities, enterprise IT, and commercial and defense unmanned systems, we enable customers to optimize

operations and accelerate digital transformation.

Our comprehensive portfolio of hardware, software, and services powers applications

from secure video surveillance and intelligent utility infrastructure to resilient out-of-band network management.

By bringing intelligence

to the network edge, we help organizations achieve efficiency, security, and a competitive edge in today’s AI-driven world.

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

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the Americas;

Europe, Middle East, and Africa (“EMEA”);

and Asia Pacific Japan (“APJ”).

References to “fiscal 2025” refer to the fiscal year ended

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Products and Solutions

We organize our portfolio services and products into three product

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

Refer to “Products and Solutions” included

in Part I, Item 1 of this Report, which is incorporated herein by reference, for further discussion.

Our Embedded IoT Solutions product lines include Open-Q System on Modules

and System in Packages, XPort®, XPort® Pro, Development Kits, xPico®, xPico® Wi-Fi, NICS and Optical SFPs.

Our IoT System Solutions product lines include LM83X, LM80, SLC ™ 8000,

Spider ™ , EMG ™ , UDS, EDS, EDS-MD, xPress™, xDirect®, E21x, E22x, G52x, X30x, Bolero4x, FOX3-4G,

FOX4, SGX™ and Power over Ethernet (“PoE”) Switches.

In addition, Lantronix offers non-PoE Network Switches and Media

Our Software and Services product lines include:

Engineering Services,

Percepxion™, ConsoleFlow™, Control Center and Level Services.

We organize our portfolio services and products into the following

product lines:

Embedded IoT Solutions, IoT Systems Solutions, and Software and Engineering Services.

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

In December 2024, we finalized the acquisition

of Netcomm Wireless Pty Ltd (“Netcomm”), a subsidiary of DZS Inc., for $6,458,000 in cash.

Netcomm operated an enterprise

IoT business.

The acquisition complements our focus on Enterprise and Smart City vertical markets and adds products to enhance our connectivity

solutions in areas such as critical infrastructure, asset monitoring and telecommunications.

Refer to Note 3 of Notes to Consolidated

Financial Statements included in Part II, Item 8 of this Report, which is incorporated herein by reference, for additional discussion

regarding the acquisition.

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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We regularly evaluate our estimates and assumptions related to revenue recognition, sales returns

and allowances, inventory valuation, restructuring charges, valuation of deferred income taxes, valuation of goodwill and long-lived and

intangible assets, share-based compensation, litigation and other contingencies.

We base our estimates and assumptions on historical experience

and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making

judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

To the extent there are

material differences between our estimates and the actual results, our future results of operations will be affected.

We believe the following critical accounting policies require us to

make significant judgments and estimates in the preparation of our consolidated financial statements:

and allowances, inventory valuation, valuation of deferred income taxes, valuation of goodwill and long-lived and intangible assets.

base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances,

the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent

from other sources.

To the extent there are material differences between our estimates and the actual results, our future results of operations

will be affected.

We believe the following critical accounting policies require us to make

significant judgments and estimates in the preparation of our consolidated financial statements:

Revenue Recognition

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is satisfied.

A significant portion of our products are sold to distributors

under agreements which contain (i) limited rights to return unsold products and (ii) price adjustment provisions, both of which are accounted

A significant portion of our products are sold to distributors under

agreements which contain (i) limited rights to return unsold products and (ii) price adjustment provisions, both of which are accounted

for as variable consideration when estimating the amount of revenue to recognize.

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Actual product returns or pricing adjustments that differ from our estimates could result in increases or decreases to our net revenue.

A portion of our revenues are derived from engineering and related

consulting service contracts with customers.

These contracts generally include performance obligations in which control is transferred

over time because the customer either simultaneously receives and consumes the benefits provided or our performance on the contract creates

or enhances an asset that the customer controls.

A portion of our revenues are derived from engineering and related consulting

service contracts with customers.

These contracts generally include performance obligations in which control is transferred over time

because the customer either simultaneously receives and consumes the benefits provided or our performance on the contract creates or enhances

an asset that the customer controls.

These contracts typically provide services on the following basis:

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of our performance completed to date.

We recognize revenue on fixed price contracts, over time, using an

input method based on the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete

the contract performance obligation.

We determined that this method best represents the transfer of services as the proportion closely

depicts the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation.

From time to time, we may enter into contracts with customers that

include promises to transfer multiple performance obligations that may include sales of products, professional engineering services and

other product qualification or certification services.

Determining whether the promises in these arrangements are considered distinct

performance obligations, that should be accounted for separately versus together, often requires judgment.

We consider performance obligations

to be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily

We recognize revenue on fixed price contracts, over time, using an input

method based on the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete the

contract performance obligation.

We determined that this method best represents the transfer of services as the proportion closely depicts

the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation.

From time to time, we may enter into contracts with customers that include

promises to transfer multiple performance obligations that may include sales of products, professional engineering services and other

product qualification or certification services.

Determining whether the promises in these arrangements are considered distinct performance

obligations, that should be accounted for separately versus together, often requires judgment.

We consider performance obligations to

be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily

available and when the promised good or service is separately identifiable from other promised goods or services in the contract.

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Inventory Valuation

We value inventories at the lower of cost (on a first-in, first-out

basis) or net realizable value, whereby we make estimates regarding the market value of our inventories, including an assessment of excess

and obsolete inventories.

We determine excess and obsolete inventories based on an estimate of the future sales demand for our products

within a specified time horizon, which is generally 12 to 24 months.

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.

We value inventories at the lower of cost (on a first-in, first-out basis)

or net realizable value, whereby we make estimates regarding the market value of our inventories, including an assessment of excess and

obsolete inventories.

We determine excess and obsolete inventories based on an estimate of the future sales demand for our products within

a specified time horizon, which is generally 12 to 24 months.

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

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

Restructuring Charges

We recognize costs and related liabilities for restructuring activities

when they are incurred.

Our restructuring charges are primarily comprised of employee separation costs, asset impairments and contract

Employee separation costs include one-time termination benefits that are recognized as a liability at estimated fair value,

at the time of communication to employees, unless future service is required, in which case the costs are recognized ratably over the

future service period.

Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such

benefits are probable and reasonably estimable.

Contract exit costs include contract termination fees and right-of-use asset impairments

recognized on the date that we have vacated the premises or ceased use of the leased facilities.

A liability for contract termination

fees is recognized in the period in which we terminate the contract.

Restructuring accruals are based upon management estimates at

the time they are recorded and can change depending upon changes in facts and circumstances subsequent to the date the original liability

If actual results differ, or if management determines revised estimates are necessary, we may record additional liabilities

or reverse a portion or existing liabilities.

Valuation of Deferred Income Taxes

We have recorded a valuation allowance to reduce our net deferred tax

assets to zero, primarily due to historical net operating losses (“NOLs”) and uncertainty of generating future taxable income.

We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation

We have recorded a valuation allowance to reduce our net deferred tax assets

to zero, primarily due to historical net operating losses (“NOLs”) and uncertainty of generating future taxable income.

consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation

If we determine that it is more likely than not that we will realize a deferred tax asset that currently has a valuation allowance,

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Goodwill Impairment Testing

We evaluate goodwill for impairment on an annual basis on the last

day of our fourth fiscal quarter or more frequently if we believe indicators of impairment exist that would more likely than not reduce

the fair value of our single reporting unit below its carrying amount.

We evaluate goodwill for impairment on an annual basis on May 31, or more

frequently if we believe indicators of impairment exist that would more likely than not reduce the fair value of our single reporting

unit below its carrying amount.

We begin our evaluation of goodwill for impairment by assessing qualitative

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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

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.

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unit, we may be exposed to goodwill impairment losses.

During the fourth quarter of fiscal 2024, we made a qualitative assessment

of whether goodwill impairment existed.

Since our assessment of the qualitative factors did not result in a determination that it was

more likely than not that the fair value of our single reporting unit is less than its carrying value, we were not required to perform

the quantitative goodwill impairment test.

We performed our annual goodwill impairment test as of May 31, 2025, using

a quantitative assessment for our single reporting unit.

The fair value of the reporting unit was estimated using a combination of the

income approach (discounted cash flow method) and the market approach (guideline public companies and guideline transactions methods).

Key assumptions included revenue growth, EBITDA margins, a long-term growth rate, and a discount rate.

These assumptions reflect management’s

best estimates of future financial performance, current market conditions, and a market participant perspective.

The results of the impairment

test indicated that the estimated fair value exceeded the carrying amount by approximately 9%.

No impairment of goodwill was recognized

for the year ended June 30, 2025.

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 that

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 that 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 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

We record share-based compensation in our consolidated statements of

operations as an expense, based on the estimated grant date fair value of our share-based awards, with the fair values amortized to expense

over the requisite service period.

Our share-based awards are currently comprised of restricted stock units, performance stock units,

common stock options, and common stock purchase rights granted under our 2013 Employee Stock Purchase Plan (“ESPP”).

The fair value of our restricted stock units is based on the closing

market price of our common stock on the date of grant.

The fair value of our performance stock units is estimated as of the

grant date based upon the expected achievement of the performance metrics specified in the grant and the closing market price of our common

stock on the date of grant.

To the extent a grant of performance share units contains a market condition, the grant date fair value is

estimated using a Monte Carlo simulation, which incorporates estimates of the potential outcomes of the market condition on the grant

date fair value of each award.

The fair value of our common stock options and ESPP common stock purchase

rights is generally estimated on the grant date using the Black-Scholes-Merton (“BSM”) valuation model.

The determination

of the fair value of share-based awards utilizing the BSM model is affected by our stock price and various assumptions, including the

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

The expected term of stock options granted is

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.

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

compensation expense may differ significantly from what we have recorded in the past.

If there are any modifications or cancellations

of the underlying unvested share-based awards, we may be required to accelerate, increase or cancel any remaining unearned share-based

compensation expense.

If these events were to occur, it could increase or decrease our share-based compensation expense, which would impact

our operating expenses and gross margins.

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.

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.

Results of Operations - Fiscal Years Ended June 30, 2025 and 2024

For fiscal 2024, our net revenue increased by $29,138,000, or 22.2%,

compared to fiscal 2023.

The increase in net revenue was driven by an 81.7% increase in net revenue in our IoT System Solutions product

line partially offset by a decrease of 26.2% in net revenues in our Embedded IoT Solutions product line and a decrease of 11.3% in net

revenues in our Software & Services product line.

We had a net loss of $4,516,000 for fiscal 2024 compared to a net loss of $8,980,000

for fiscal 2023.

The decrease in net loss was driven primarily by increased revenues, partially offset by an increase in operating expenses

of 6.8% and a decrease in gross profit as a percentage of revenue from 42.9% in fiscal 2023 to 40.1% in fiscal 2024.

The following tables present our net revenue by

product lines and by geographic region:

For fiscal 2025, our net revenue decreased by $37,404,000, or 23.3%, compared

to fiscal 2024.

The decrease in net revenue was driven by a 34.2% decrease in net revenue in our IoT System Solutions product line, as

well as decreases in net revenue in our Embedded IoT Solutions product line of 1.2% and our Software and Services product line of 12.5%.

We had a net loss of $11,373,000 for fiscal 2025, compared to a net loss of $4,516,000 for fiscal 2024.

The increase in net loss was primarily

driven by the decrease in revenues partially offset by a reduction in operating expenses of $4,516,000 for fiscal 2025 compared to fiscal

The following tables present our net revenue by product

lines and by geographic region:

Years Ended June 30,

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Embedded IoT Solutions

Net revenue decreased primarily due to lower unit sales of our embedded

compute product line in the Americas and APJ regions as a result of two large design wins that reached end-of-life at the end of fiscal

To a lesser extent net revenue was impacted by lower unit sales of our network interface cards across all regions, and some of our

legacy embedded ethernet connectivity products in the Americas and EMEA regions.

Net revenue decreased primarily due to lower unit sales in some of our

legacy embedded ethernet connectivity products across all regions and lower volume sales of our network interface cards in the Americas

and APJ regions.

These decreases were largely offset by higher unit sales of our embedded compute product line driven by a video conferencing

customer in the APJ region.

IoT System Solutions

Net revenue increased primarily due to increases in units sales of

(i) our custom solutions, as we ramped to volume production for a European smart energy grid provider in the current period, (ii) our

out-of-band products across all regions, and (iii) our converters and radio nodes products in the Americas region.

These increases were

partially offset by decreases in sales of our network switches in the Americas region.

The decrease in net revenue was substantially driven by our custom solution to our European smart energy grid customer.

In fiscal 2024,

this customer represented just over 25% of our net revenue.

By comparison, in fiscal 2025, we recognized approximately $11 million from

this customer in the first half of the year.

Separately, compared to the prior year, we experienced (i) decreased unit sales of our network

switches in the Americas region, and (ii) decreased unit sales of our OOB products across all regions, as revenues from these products

can be dependent on project-based capital spending.

These decreases were partially offset by higher unit sales of (i) our gateways, routers,

and modems products, which was largely driven by contributions from our Netcomm acquisition, and (ii) our telematic gateways in the Americas

Software & Services

Net revenue decreased primarily due to a year over year decline in our

engineering services in the EMEA region as two of our large design services projects transitioned from the design phase to full production

during fiscal 2024.

This was partially offset by growth in our extended warranty services across all regions as a result of increased

sales of our out-of-band products.

Net revenue decreased primarily due to lower engineering services revenue

in the EMEA region as two of our large design services projects transitioned in the prior year from the design phase to full production.

We also saw a moderate decrease in our extended warranty services in the Americas region, primarily related to lower service volumes in

our OOB products.

Gross profit represents net revenue less cost of revenue.

Cost of revenue

consists primarily of the cost of raw material components, subcontract labor assembly by contract manufacturers, freight costs, personnel-related

expenses, manufacturing overhead, inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties and

share-based compensation.

consists primarily of the cost of raw material components, subcontract labor assembly from contract manufacturers, direct and indirect

personnel expenses related to professional services, manufacturing overhead, inventory reserves for excess and obsolete products or raw

materials, warranty costs, royalties and share-based compensation.

The following table presents our gross profit:

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(In thousands, except percentages)

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

decreased primarily due to a change in product mix and increased logistics and overhead costs related to our smart grid customer that

grew to 26% of our net revenue during fiscal 2024.

We expect this customer to contribute less revenue during fiscal 2025 which should

lead to an improvement in our product mix and lower logistics and overhead costs as a percentage of revenue for fiscal 2025.

Gross profit as a percentage of revenue (referred

to as “gross margin”) increased primarily as a result of lower overhead costs and our product sales mix.

We currently expect that gross margin will fluctuate in the future, from

period-to-period, based on changes in our product mix, average selling prices, and average manufacturing costs.

Selling, General and Administrative

Selling, general and administrative expenses consists of personnel-related

Selling, general and administrative expenses consist of personnel-related

expenses including salaries and commissions, share-based compensation, facility expenses, information technology, advertising and marketing

expenses and professional legal and accounting fees.

The following table presents our selling, general and administrative

The following table presents our selling, general and administrative expenses:

Years Ended June 30,

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Selling, general and administrative

Selling, general and administrative expenses increased primarily due to

higher personnel-related expenses arising from merit increases and variable and share-based compensation related to the Company’s

improved financial performance in fiscal 2024.

Merit increases and variable and share-based compensation were significantly lower and

in many cases not earned during fiscal 2023.

To a lesser extent, the increase in selling, general and administrative expenses were impacted

by (i) an increase in depreciation expense related to new equipment and certain business analysis tools that we added in the current year,

and (ii) increases in insurance premiums and various facility-related costs.

These increases were partially offset by (i) reductions in

headcount and (ii) lower professional fees and outside services related to audit and accounting compliance costs that were higher in the

prior year as we implemented Section 404(b) of the Sarbanes-Oxley Act.

Selling, general and administrative expenses decreased primarily due

to (i) reduced share-based compensation costs based on the value of new and outstanding awards, (ii) lower spending on various sales conferences,

IT infrastructure and related facilities costs, and (iii) lower personnel-related expenses resulting from less variable compensation and restructuring activities during the current fiscal year.

Research and Development

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Research and development

Research and development expenses increased primarily due to higher personnel-related

costs resulting from merit increases and variable and share-based compensation costs related to our improved financial performance in

These increases were partially offset by (i) a reduction in headcount and (ii) a decrease in product certification expenses

and outsourced development resources.

Research and development expenses decreased primarily due to (i) lower

personnel-related expenses in our engineering groups resulting from restructuring activities during the current fiscal year and (ii) reduced

share-based compensation costs based on the value of new and outstanding awards.

These decreases were partially offset by (i) higher facilities-related

equipment and software costs, (ii) increased costs for third party contract labor, which are included in the “outside services”

category in the table above, and (iii) increased spending on certain prototype and materials costs, which are included in the “other”

category in the table above.

Restructuring, Severance and Related Charges

During fiscal 2024 and 2023, we incurred charges of approximately $1,423,000

and $693,000, respectively, related to headcount reductions and restructuring of certain non-essential operations.

During fiscal 2025 and 2024, we incurred restructuring, severance and

related charges of $3,535,000 and $1,423,000, respectively, due to various headcount reduction efforts during these years.

The most significant

of these actions occurred in January 2025, in which we reduced our headcount by approximately 12% worldwide, primarily in the U.S.

The severance and related charges resulting from this action totaled approximately $1,400,000.

In addition, during fiscal 2025 we downsized the usage of certain sites,

resulting in a charge of approximately $379,000, which is included in the total restructuring charges above.

We may incur additional restructuring, severance and related charges

in future periods as we continue to identify cost savings and synergies related to our acquisitions and general business operations.

in future periods as we continue to identify cost savings and efficiencies related to our business.

Acquisition-Related Costs

During fiscal 2025 we incurred approximately $371,000 of costs primarily

in connection with the acquisition of Uplogix, Inc.

These costs were mainly comprised of banking, legal and other

professional fees.

in connection with the acquisition of Netcomm.

These costs were mainly comprised of banking, legal and other professional fees.

Amortization of Intangible Assets

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(In thousands, except percentages)

Provision for income taxes

The following table presents our effective tax rate based upon our

provision for income taxes:

Provision for (benefit from) income taxes

The following table presents our effective tax rate based upon our provision

for income taxes:

Years Ended June 30,

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We utilize the liability method of accounting for income taxes.

differences between our effective tax rate and the federal statutory rate in fiscal 2024 and fiscal 2023 were also impacted by the effect

of our domestic losses recorded without a tax benefit, as well as the effect of certain state and foreign earnings taxed at rates differing

differences between our effective tax rate and the federal statutory rate in fiscal 2025 and 2024 were also impacted by the effect of

our domestic losses recorded without a tax benefit, as well as the effect of certain state and foreign earnings taxed at rates differing

from the federal statutory rate.

record net deferred tax assets to the extent we believe these assets are more likely than not to be realized.

Aside from a net deferred

tax liability of $179,000 and $146,000 that we recorded as of June 30, 2024 and 2023, respectively, based on our cumulative losses and

uncertainty of generating future taxable income, we provided a full valuation allowance against our net deferred tax assets at June 30,

2024 and 2023.

Refer to Note 8 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Report, for

additional information.

Additionally, in fiscal 2025, we reversed a portion of our liability for uncertain tax positions as a

result of the dissolution of one of our foreign subsidiaries.

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

are more likely than not to be realized.

Aside from a net deferred tax liability of $172,000 and $179,000 that we recorded as of June

30, 2025 and 2024, respectively, based on our cumulative losses and uncertainty of generating future taxable income, we provided a full

valuation allowance against our net deferred tax assets at June 30, 2025 and 2024.

Refer to Note 8 of Notes to Consolidated Financial

Statements, included in Part II, Item 8 of this Report, for additional information.

Liquidity and Capital Resources

The following table presents our working capital and cash and cash

The following table presents our working capital and cash and cash equivalents:

(In thousands)

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Cash and cash equivalents

Our principal sources of cash and liquidity include our existing cash

and cash equivalents, borrowings and amounts available under our existing term loan and revolving credit facility (together, the “Senior

Credit Facilities”), and cash generated from operations.

We are subject to a variable amount of interest on the principal balance

of our Senior Credit Facilities and could be adversely impacted by rising interest rates in the future.

We believe that our current cash

holdings and net cash flows from operations are sufficient to satisfy our current obligations for the foreseeable future, and, assuming

continued access to the undrawn amounts available under our Senior Credit Facilities, these combined sources will be sufficient to fund

our material requirements for working capital, capital expenditures and other financial commitments for at least the next 12 months and

We continue to monitor our existing banking relationships and the availability of potential alternate sources of credit based

on market conditions and our ongoing capital requirements.

There can be no guarantee that we would be able to obtain any needed alternate

financing on acceptable terms, or at all, or that such a financing would not result in a default under the Loan Agreement (as defined

in Note 5 of Notes to Consolidated Financial Statements, including in Part II, Item 8 of this Report).

We anticipate that the primary

factors affecting our cash and liquidity are net revenue, working capital requirements and capital expenditures.

We define cash and cash equivalents as highly liquid deposits with

original maturities of 90 days or less when purchased.

We maintain cash and cash equivalents balances at certain financial institutions

in excess of amounts insured by the Federal Deposit Insurance Corporation (“FDIC”).

There can be no assurance that our deposits

in excess of the FDIC limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will

be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity

Our future working capital requirements will depend on many factors,

including the following:

Our principal sources of cash and liquidity include our existing cash and

cash equivalents, borrowings and amounts available under our existing bank borrowing agreement, and cash generated from operations.

are subject to a variable amount of interest on the principal balance of our borrowings and could be adversely impacted by rising interest

rates in the future.

We believe that our current cash holdings, net cash provided by operating activities, and expected availability under

our bank borrowing agreement will be sufficient to fund our material requirements for working capital, capital expenditures and other

financial commitments for at least the next 12 months and beyond.

We continue to monitor our existing banking relationships and the availability

of potential alternate sources of credit based on market conditions and our ongoing capital requirements.

There can be no guarantee that

we would be able to obtain any needed alternate financing on acceptable terms, or at all, or that such a financing would not result in

a default under the current borrowing agreement.

Refer to Note 5 of Notes to Consolidated Financial Statements, including in Part

II, Item 8 of this Report, for additional information.

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

revenue, working capital requirements and capital expenditures.

We define cash and cash equivalents as highly liquid deposits with original

maturities of 90 days or less when purchased.

We maintain cash and cash equivalents balances at certain financial institutions in excess

of amounts insured by the Federal Deposit Insurance Corporation (“FDIC”).

There can be no assurance that our deposits in excess

of the FDIC limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will be able to

obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.

Our future working capital requirements will depend on many factors, including

the following:

timing and amount of our net revenue;

our product mix and the resulting gross margins;

research and development

research and development expenses;

selling, general and administrative expenses;

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

Bank Loan Agreements

Refer to Note 5 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 our loan agreements.

The following table presents the major components of the consolidated

statements of cash flows:

The following table presents the major components of the consolidated statements

of cash flows:

Years Ended June 30,

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Net cash used in investing activities

Net cash (used in) provided by financing activities

Net cash used in financing activities

Operating Activities

Cash provided by operating activities during fiscal 2024 increased compared

Cash provided by operating activities during fiscal 2025 decreased compared

to fiscal 2024.

In fiscal 2023, we used a significant amount of cash in the build-up of our inventories and decreases in our accounts

payable and accrued liabilities.

Cash from operations increased in the prior fiscal year due to (i) reduction of our inventories and higher net revenues

and (ii) the receipt of customer deposits.

In the current fiscal year, we made payments against previously accrued variable compensation

balances, as discussed further below.

For fiscal 2025, our net loss included $12,306,000 of non-cash charges, while the changes in operating

assets and liabilities provided net cash of $6,352,000.

Our net inventories decreased by $22,038,000, or 44.3%, from June 30, 2023

to June 30, 2024.

The decrease resulted primarily from (i) current year shipments to a smart grid customer for which we had built up our

stock levels and (ii) our efforts to reduce inventory levels that increased during the supply shortages we experienced during the pandemic.

Accounts payable decreased by $2,054,000, or 16.6%, from June 30, 2023

to June 30, 2024.

The reduction is primarily due to the decrease in our inventories and the timing of payments to our vendors.

Accounts receivable increased by $3,597,000, or 13.0%, from June 30,

2023 to June 30, 2024.

The increase is primarily due to the increased sales during the current year coupled with timing of payments received

from our customers.

Accrued payroll and related expenses increased by $3,405,000 or 140.1%

from June 30, 2023 to June 30, 2024.

The increase is primarily due to variable compensation costs incurred during the current year.

Other current liabilities decreased by $17,842,000, or 61.9%, from June

Accounts receivable decreased by $6,187,000, or 19.8%, from June 30, 2024

to June 30, 2025.

This was mostly driven by a reduction in deposits previously received related to shipments under a customer

The decrease was primarily due to lower net revenue levels in the current fiscal year, as well as the timing of payments

from certain customers.

Accounts payable increased by $2,912,000, or 28.1%, from June 30, 2024

to June 30, 2025 primarily due to the timing of inventory receipts and payments made to our vendors.

Accrued payroll and related expenses decreased by $2,365,000 or 40.5% from

June 30, 2024 to June 30, 2025.

The decrease was primarily due to accrued variable compensation paid out during the current fiscal year.

Investing Activities

Net cash used in investing activities for fiscal 2024 consisted of

purchases of equipment amounting to $1,479,000, primarily for research and development and certain business analysis tools.

in investing activities during fiscal 2023 included the acquisition of Uplogix, which used net cash of $4,650,000, as well as purchases

of plant and equipment of $2,673,000 primarily related to building out and furnishing our new lease facilities in California and Minnesota.

Net cash used in investing activities for fiscal 2025 consisted primarily

of the acquisition of Netcomm, which used cash of $6,458,000.

We also paid for property and equipment totaling $505,000, primarily for

tooling at our contract manufacturers as well as certain research and development projects.

Net cash used in investing activities for fiscal 2024 consisted of purchases

of equipment amounting to $1,479,000, primarily for research and development and certain business analysis tools.

Financing Activities

Net cash used in financing activities during fiscal 2025 resulted primarily

from $2,853,000 of principal payments on the Senior Credit Facilities as well as $1,027,000 tax withholdings paid on behalf of employees

for restricted shares.

from principal payments of $4,512,000 on our term debt, as well as tax withholdings paid on behalf of employees for restricted shares

of $2,093,000.

Net cash used in financing activities during fiscal 2024 resulted primarily

from $2,853,000 of principal payments on our term debt as well as $1,027,000 tax withholdings paid on behalf of employees for restricted

Additionally, we used cash of $1,262,000 to pay the contingent consideration earned related to the Uplogix acquisition.

Net cash provided by financing activities during fiscal 2023 resulted primarily from $7,000,000 in gross proceeds received from our Senior

Credit Facilities with SVB partially offset by payments of $3,994,000 on the term loan as well as tax withholdings paid of $821,000 on

behalf of employees for restricted shares.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-K

Item 7. Management’s Discussion and Analysis