LANTRONIX: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

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You should read the following discussion and analysis in conjunction with our
consolidated financial statements and the accompanying notes thereto included in
Part II, Item 8 of this Report. This discussion and analysis contains
forward-looking statements that are based on our management's current beliefs
and assumptions, which statements are subject to substantial risks and
uncertainties. Our actual results may differ materially from those expressed or
implied by these forward-looking statements as a result of many factors,
including those discussed in "Risk Factors" included in Part I, Item 1A of this
Report. Please also see "Cautionary Note Regarding Forward Looking Statements"
at the beginning of this Report.



Overview



Lantronix, Inc. is a global provider of software as a service ("SaaS"),
engineering services, and hardware for Edge Computing, the Internet of Things
("IoT"), and Remote Environment Management ("REM"). We enable our customers to
provide reliable and secure solutions while accelerating their time to market.
Our products and services dramatically simplify operations through the creation,
development, deployment, and management of customer projects at scale while
providing quality, reliability and security.



We operate globally and manage our sales teams in three geographic regions: Americas; Europe, Middle East, and Africa (“EMEA”); and Asia-Pacific Japan (“APJ”).








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References to “fiscal year 2021” refer to the fiscal year ended June 30, 2021 and references to “fiscal year 2020” refer to the fiscal year ended June 30, 2020.


Products and Solutions


We organize our products and solutions into three product lines: IoT, REM and others. Refer to “Products and Solutions” included in Part I, Section 1 of this report, which is incorporated here by reference, for further discussion.


Recent Developments



On August 2, 2021 we acquired the Transition Networks and Net2Edge 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.



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.



Our efforts to support customer engagement through industry events, trade shows
and business travel also continue to be adversely affected. Prolonged shutdowns,
or additional future shutdowns and other restrictions instituted by federal,
state and local governments, may lead to a reduction in revenue during the
coming quarters. To mitigate potential revenue declines, we continue to adjust
our go-to-market approach by adding more distributors and value-added resellers,
who are closer to the customers and end-customers.



Our supply chain still faces challenges, as most of our manufacturing is done in Thailand, Taiwan and China. We have recently experienced an increase in component costs for some products as well as an increase in freight costs. These and other factors have contributed to recent delays in deliveries 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.



Recent accounting positions

Refer to Note 1 of the Notes to the 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.








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Critical accounting conventions and estimates



The preparation of financial statements and related disclosures in accordance
with U.S. generally accepted accounting principles requires us to make
judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of net revenue and expenses during the reporting period. We regularly evaluate
our estimates and assumptions related to revenue recognition, sales returns and
allowances, allowance for doubtful accounts, inventory valuation, warranty
reserves, 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 that the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:


Revenue Recognition


Revenue is recognized upon the transfer of control of promised products or
services to customers in an amount that reflects the consideration we expect to
receive in exchange for those products or services. We apply the following
five-step approach in determining the amount and timing of revenue to be
recognized: (i) identifying the contract with a customer, (ii) identifying the
performance obligations in the contract, (iii) determining the transaction
price, (iv) allocating the transaction price to the performance obligations in
the contract and (v) recognizing revenue when the performance obligation 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 for as variable consideration
when estimating the amount of revenue to recognize. Establishing accruals for
product returns and pricing adjustments requires the use of judgment and
estimates that impact the amount and timing of revenue recognition. When product
revenue is recognized, we establish an estimated allowance for future product
returns based primarily on historical returns experience and other known or
anticipated returns. We also record reductions of revenue for pricing
adjustments, such as competitive pricing programs and rebates, in the same
period that the related revenue is recognized, based primarily on approved
pricing adjustments and our historical experience. 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. These contracts typically provide services on the following basis:


· Time & Materials (“T&M”) – services consist of software revenues

modification, implementation advice, training and integration

services. These services are defined separately in the contract

arrangements such that the total price of the client arrangement is

should vary based on actual time and materials engaged based on

        on the customer's needs.



Fixed price – arrangements to provide specific advice and software

        modification services which tend to be more complex.










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Performance obligations for T&M contracts qualify for the "Right to Invoice"
practical expedient within the revenue guidance. Under this practical expedient,
we may recognize revenue, over time, in the amount to which we have a right to
invoice. In addition, we are not required to estimate variable consideration
upon inception of the contract and reassess the estimate each reporting period.
We determined that this method best represents the transfer of services as, upon
billing, we have a right to consideration from a customer in an amount that
directly corresponds with the value to the customer of our performance completed
to date.


We account for revenue on fixed price contracts, over time, using an entry method based on the proportion of our actual costs incurred (usually labor hours spent) to the total costs expected to meet the obligation to pay. execution of the contract. We have determined that this method best represents the transfer of services, because the proportion accurately describes the efforts or inputs made towards the satisfaction of an obligation to perform a fixed price contract.

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. In these arrangements, we allocate
revenue on a relative standalone selling price basis by maximizing the use of
observable inputs to determine the standalone selling price for each performance
obligation. Additionally, estimating standalone selling prices for separate
performance obligations within a contract may require significant judgment and
consideration of various factors including market conditions, items contemplated
during negotiation of customer arrangements and internally-developed pricing
models. Changes to performance obligations that we identify, or the estimated
selling prices pertaining to a contract, could materially impact the amounts of
earned and unearned revenue that we record.



Provision for bad debts



We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. Our evaluation of
the collectability of customer accounts receivable is based on various factors.
In cases where we are aware of circumstances that may impair a specific
customer's ability to meet its financial obligations subsequent to the original
sale, we record an allowance against amounts due based on those particular
circumstances. For all other customers, we estimate an allowance for doubtful
accounts based on (i) the length of time the receivables are past due, (ii) our
bad debt collection experience, and (iii) our understanding of general industry
conditions. If a major customer's credit-worthiness deteriorates, or our
customers' actual defaults exceed our estimates, our financial results could be
impacted.



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 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.









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Warranty Reserve



The standard warranty periods we provide for our products typically range from
one to five years. We establish reserves for estimated product warranty costs at
the time revenue is recognized based upon our historical warranty experience,
and for any known or anticipated product warranty issues. Our warranty
obligations are impacted by a number of factors, including historical warranty
costs, actual product failure rates, service delivery costs, and the use of
materials. If our actual results are different from our assumptions, increases
or decreases to warranty reserves could be required, which could impact our cost
of revenue and gross margins.



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 exit costs. 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 is recorded. If
actuals 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 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 allowance. If we determine that it is more likely than not that
we will realize a deferred tax asset that currently has a valuation allowance,
we would be required to reverse the valuation allowance, which would be
reflected as an income tax benefit in our consolidated statements of operations
at that time.



Business Combinations



We allocate the fair value of the purchase consideration of a business
acquisition to the tangible assets, liabilities, and intangible assets acquired,
including in-process research and development ("IPR&D"), if applicable, based on
their estimated fair values. The excess of the fair value of purchase
consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. IPR&D is initially capitalized at fair value as an
intangible asset with an indefinite life and assessed for impairment thereafter.
When an IPR&D project is completed, the IPR&D is reclassified as an amortizable
purchased intangible asset and amortized over the asset's estimated useful life.
The valuation of acquired assets and assumed liabilities requires significant
judgment and estimates, especially with respect to intangible assets. The
valuation of intangible assets, in particular, requires that we use valuation
techniques such as the income approach. The income approach includes the use of
a discounted cash flow model, which includes discounted cash flow scenarios and
requires significant estimates such as future expected revenue, expenses,
capital expenditures and other costs, and discount rates. 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. 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.









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Goodwill Impairment Testing


We evaluate goodwill for impairment on an annual basis in 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 begin our evaluation of goodwill for impairment by assessing qualitative
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.



Significant management judgment is required in estimating the reporting unit's
fair value and in the creation of the forecasts of future operating results that
are used in the discounted cash flow method of valuation. These include (i)
estimation of future cash flows, which is dependent on internal forecasts, (ii)
estimation of the long-term rate of growth of our business, (iii) estimation of
the period during which cash flows will be generated and (iv) the determination
of our weighted-average cost of capital, which is a factor in determining the
discount rate. Our estimate of the reporting unit's fair value would also
generally include the consideration of a control premium, which is the amount
that a buyer is willing to pay over the current market price of a company as
indicated by the traded price per share (i.e., market capitalization) to acquire
a controlling interest. If our actual financial results are not consistent with
our assumptions and judgments used in estimating the fair value of our reporting
unit, we may be exposed to goodwill impairment losses.



During the fourth quarter of fiscal 2021, 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. As of
June 30, 2021, the carrying value of our single reporting unit was $46,096,000,
while our market capitalization was $150,093,000. We concluded that no goodwill
impairment existed as of June 30, 2021.



Long-term assets and intangible assets

We assess long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Circumstances that could trigger a review include, but are not limited to, the following:

· Significant drops in the market price of the asset;

· Material adverse changes in business climate or legal factors;

Accumulation of costs greatly exceeding the initial amount

expected for the acquisition or construction of the asset;

Cash flow or operating losses for the current period combined with a history of

losses or a forecast of continued losses associated with the use of

active; Where

The current expectation that the asset will more likely than not be sold or

        disposed of significantly before the end of its estimated useful life.










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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.



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 price of our common shares on the grant date.

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 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 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.



Operating results – Years ended June 30, 2021 and 2020


Summary



For fiscal 2021, our net revenue increased by $11,599,000, or 19.4%, compared to
fiscal 2020. 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 expenses.









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Net Revenue



The following tables present our net revenue by product lines and by geographic
region:



                      Years Ended June 30,
                     % of Net                   % of Net             Change
          2021        Revenue        2020        Revenue         $            %
                            (In thousands, except percentages)
IoT     $ 59,167         82.8%     $ 49,911         83.4%     $  9,256        18.5%
REM       11,843         16.6%        9,228         15.4%        2,615        28.3%
Other        467          0.6%          739          1.2%         (272 )     (36.8% )
        $ 71,477        100.0%     $ 59,878        100.0%     $ 11,599        19.4%




                         Years Ended June 30,
                        % of Net                   % of Net             Change
             2021        Revenue        2020        Revenue         $            %
                               (In thousands, except percentages)
Americas   $ 38,638         54.1%     $ 33,279         55.6%     $  5,359       16.1%
EMEA         17,186         24.0%       15,588         26.0%        1,598       10.3%
APJ          15,653         21.9%       11,011         18.4%        4,642       42.2%
           $ 71,477        100.0%     $ 59,878        100.0%     $ 11,599       19.4%




IoT



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 regions.



REM


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.



Other


Net sales of our Other Products, which include untargeted and end-of-life product families, decreased slightly in all regions.


Gross Profit



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.









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The following table shows our gross margin:


                              Years Ended June 30,
                             % of Net                    % of Net            Change
                 2021        Revenue         2020        Revenue          $           %
                                   (In thousands, except percentages)
Gross profit   $ 33,025          46.2%     $ 26,900          44.9%     $ 6,125       22.8%




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.


Selling, general and administrative expenses

Selling, general and administrative expenses included expenses related to personnel, including salaries and commissions, stock-based compensation, expenses related to facilities, information technology, advertising and marketing expenses and professional fees. legal and accounting professionals.



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



                                        Years Ended June 30,
                                       % of Net                     % of Net              Change
                          2021         Revenue         2020         Revenue           $             %
                                               (In thousands, except percentages)
Personnel-related
expenses                $  12,927                    $  11,400                    $   1,527         13.4%
Professional fees and
outside services            2,464                        2,137                          327         15.3%
Advertising and
marketing                     712                          828                         (116 )      (14.0% )
Facilities and
insurance                   1,415                        1,384                           31          2.2%
Share-based
compensation                2,719                        2,959                         (240 )       (8.0% )
Other                         571                          874                         (303 )      (34.7% )
Selling, general and
administrative          $  20,808          29.1%     $  19,582          32.7%     $   1,226          6.3%



Selling, general and administrative expenses increased in fiscal 2021 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. In 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.









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Research and Development


Research and development expenses consisted of personnel-related expenses,
share-based compensation, and expenditures to third-party vendors for research
and development activities and product certification costs. Our costs from
period-to-period related to outside services and product certifications vary
depending on our level and timing of development activities.



The following table shows our research and development expenses:


                                             Years Ended June 30,
                                            % of Net                     % of Net              Change
                               2021         Revenue         2020         Revenue           $             %
                                                    (In thousands, except percentages)
Personnel-related expenses   $   7,954                    $   6,750                    $   1,204         17.8%
Facilities                       1,335                        1,189                          146         12.3%
Outside services                   209                          573                         (364 )      (63.5% )
Product certifications             531                          326                          205         62.9%
Share-based compensation           584                          453                          131         28.9%
Other                              500                          400                          100         25.0%
Research and development     $  11,113          15.5%     $   9,691          16.2%     $   1,422         14.7%



Research and development expenses increased in fiscal 2021 when compared to
fiscal 2020 largely due to increased personnel-related expenses driven by
headcount growth and higher variable compensation. 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. This increase was partially
offset by a reduction in outside services costs for engineering consulting fees.



Restructuring, severance pay and related charges


Fiscal 2021



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 redundant. 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.



Fiscal 2020


During fiscal 2020, we executed plans to realign certain personnel resources to better meet our business needs, particularly with respect to identifying cost savings and synergies arising from the acquisitions of Maestro and Intrinsic. These activities resulted in total costs of approximately $ 3,844,000 during fiscal year 2020.



Acquisition-Related Costs



During fiscal year 2021, we committed approximately $ 841,000 acquisition-related costs, primarily banking and legal fees, related to the acquisition of the TN companies and our exploration of other acquisition targets.








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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.



Amortization of purchased intangible assets

We acquired certain intangible assets through our fiscal 2020 acquisitions,
which we recorded at fair-value as of the acquisition dates. These assets are
generally amortized on a straight-line basis over their estimated useful lives,
and resulted in charges of $3,094,000 and $2,037,000 during fiscal 2021 and
2020, respectively.



Interest Income (Expenses), Net

For fiscal years 2021 and 2020, we incurred net interest expense on interest incurred on borrowings on our term loan. We also earn interest on our national cash balances.



Other Expense, Net



Other expense, net, is comprised primarily of foreign currency remeasurement and
transaction adjustments related to our foreign subsidiaries whose functional
currency is the U.S. dollar. During fiscal 2021, we also incurred a loss of
approximately $197,000 the on disposal of certain property and equipment.



Provision for income taxes

The following table shows our provision for income taxes:


                                         Years Ended June 30,
                                        % of Net                 % of Net           Change
                             2021       Revenue       2020       Revenue        $          %
                                             (In thousands, except percentages)
Provision for income taxes   $ 195           0.3%     $ 144           0.2%     $ 51       35.4%




The following table presents our effective tax rate based upon our provision for
income taxes:



                       Years Ended June 30,
                        2021            2020
Effective tax rate         (5.1% )       (1.4% )




We utilize the liability method of accounting for income taxes. The 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.



We record net deferred tax assets to the extent we believe these assets are more
likely than not to be realized. As a result of our cumulative losses and
uncertainty of generating future taxable income, we provided a full valuation
allowance against our net deferred tax assets for fiscal 2021 and fiscal 2020.









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Due to the "change of ownership" provision of the Tax Reform Act of 1986,
utilization of our NOL carryforwards and tax credit carryforwards may be subject
to an annual limitation against taxable income in future periods. Due to the
annual limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce future income tax liabilities. The following table
presents our NOLs:



           June 30, 2021
          (In thousands)
Federal   $        91,974
State     $        11,038



For federal income tax purposes, our NOL carryovers generated for tax years
beginning before July 1, 2018 began to expire in fiscal 2021. Of our federal
NOLs as of June 30, 2021 in the table above, approximately $51,861,000 will
expire by June 30, 2023. For state income tax purposes, our NOLs began to expire
in the fiscal year ended June 30, 2013. Pursuant to the Tax Cuts and Jobs Act
enacted by the U.S. federal government in December 2017, for federal income tax
purposes, NOL carryovers generated for our tax years beginning after June 30,
2018 can be carried forward indefinitely, but will be subject to a taxable
income limitation.



Liquidity and capital resources


Liquidity



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



                                  June 30,
                              2021         2020       Change
                                     (In thousands)
Working capital             $ 20,289     $ 18,741     $ 1,548
Cash and cash equivalents   $  9,739     $  7,691     $ 2,048




Our principal sources of cash and liquidity include our existing cash and cash
equivalents, borrowings and amounts available under our loan agreement with our
bank, and cash generated from operations. We 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.



Management defines 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 federal agencies. Management does not believe this concentration
subjects us to any unusual financial risk beyond the normal risk associated with
commercial banking relationships. We frequently monitor the third-party
depository institutions that hold our cash and cash equivalents. Our emphasis is
primarily on safety of principal and secondarily on maximizing yield on those
funds.



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 expenses; selling, general and
administrative expenses; and expenses associated with any strategic
partnerships, acquisitions or infrastructure investments.









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From time to time, we may seek additional capital from public or private
offerings of our capital stock, borrowings under our existing or future credit
lines or other sources in order to (i) develop or enhance our products, (ii)
take advantage of strategic opportunities, (iii) respond to competition or (iv)
continue to operate our business. We currently have a Form S-3 shelf
registration statement on file with the SEC. If we issue equity securities to
raise additional funds, our existing stockholders may experience dilution, and
the new equity securities may have rights, preferences and privileges senior to
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 our assets. 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. While we do have a credit line available, financial covenants
associated with the credit line may not enable us to draw down funds as needed.
We 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


Refer to Note 5 of the Notes to the 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.


Cash Flows



The following table presents the major components of the consolidated statements
of cash flows:



                                               Years Ended June 30,           (Decrease)
                                              2021              2020           Increase
                                                           (In thousands)
Net cash provided by (used in)
operating activities                      $       4,304     $     (2,521 )   $       6,825
Net cash used in investing activities              (783 )        (13,974 )         (13,191 )
Net cash (used in) provided by
financing activities                             (1,473 )          5,904            (7,377 )










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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.



Accounts payable increased by $3,791,000, or 71.1%, from June 30, 2020 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 have increased $ 1,278,000, or 9.3%, of June 30, 2020 To June 30, 2021
because we have increased our stocks for deadlines and supply constraints, especially due to the COVID-19 pandemic over the past year.


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.



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.

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