LANTRONIX, INC. 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. OverviewLantronix, 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 conduct our business globally and manage our sales teams by three geographic
regions: the
22
References to "fiscal 2021" refer to the fiscal year ended
Products and Solutions
We organize our products and solutions into three product lines: IoT, REM, and Other. Refer to "Products and Solutions" included in Part I, Item 1 of this Report, which is incorporated herein by reference, for further discussion.
Recent Developments OnAugust 2, 2021 we acquired the Transition Networks and Net2Edge businesses (the "TN Companies") fromCommunication 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 withSilicon 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 theAugust 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 inMarch 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
performed in
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 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.
23
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in accordance withU.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 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 revenues from software
modification, consulting implementation, training and integration
services. These services are set forth separately in the contractual
arrangements such that the total price of the customer arrangement is
expected to vary depending on the actual time and materials incurred based
on the customer's needs.
· Fixed Price - arrangements to render specific consulting and software
modification services which tend to be more complex.
24
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 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. 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.
Allowance for Doubtful Accounts
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. 25 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 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 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 combinationand are expensed as incurred. 26 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 ofJune 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 ofJune 30, 2021 .
Long-Lived Assets and Intangible Assets
We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Circumstances which could trigger a review include, but are not limited to the following:
· significant decreases in the market price of the asset;
· significant adverse changes in the business climate or legal factors;
· accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset;
· current period cash flow or operating losses combined with a history of
losses or a forecast of continuing losses associated with the use of the
asset; or
· current expectation that the asset will more likely than not be sold or
disposed of significantly before the end of its estimated useful life.
27
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 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 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.
Results of Operations - Fiscal Years Ended
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. 28 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 ofIntrinsyc inJanuary 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 andAmericas regions, (ii) our XPort product family in theAmericas 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 andAmericas 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 theAmericas and APJ regions, and (iii) our SLB product family in theAmericas region. Other
Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, declined 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. 29
The following table presents our gross profit:
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
Selling, general and administrative expenses consisted 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 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 theIntrinsyc 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. 30 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 presents 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 theIntrinsyc 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 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 on plans to realign certain personnel resources
to better fit our business needs, particularly related to identifying cost
savings and synergies from the acquisitions of Maestro and
Acquisition-Related Costs
During fiscal 2021, we incurred approximately
31 During fiscal 2020, we incurred approximately$2,284,000 of acquisition-related costs in connection with the acquisitions of Maestro andIntrinsyc . 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 (Expense), Net
For fiscal 2021 and 2020, we incurred net interest expense from interest incurred on borrowings on our term loan. We also earn interest on our domestic 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 theU.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 presents 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.
32
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 beforeJuly 1, 2018 began to expire in fiscal 2021. Of our federal NOLs as ofJune 30, 2021 in the table above, approximately$51,861,000 will expire byJune 30, 2023 . For state income tax purposes, our NOLs began to expire in the fiscal year endedJune 30, 2013 . Pursuant to the Tax Cuts and Jobs Act enacted by theU.S. federal government inDecember 2017 , for federal income tax purposes, NOL carryovers generated for our tax years beginning afterJune 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.
33
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 mitigateour liquidity risk. 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.
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 )
34
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%, fromJune 30, 2020 toJune 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 fromJune 30, 2020 toJune 30, 2021 due to accrued variable compensation costs. Accounts and contract manufacturers' receivables increased, in total, by$3,727,000 , or 31.7%, fromJune 30, 2020 toJune 30, 2021 due to the growth and linearity of our sales during the fourth quarter of fiscal 2021 as well as the timing of materials shipments to our contract manufacturers.
Inventories increased
Investing Activities
We used significantly less cash in investing activities during fiscal 2021 than in fiscal 2020 due to the acquisitions of Maestro andIntrinsyc 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.
© Edgar Online, source
