Lantronix Inc 10-Q for FY2020 Q3
Lantronix Inc (LTRX)
About this 10-Q
Lantronix Inc filed this 10-Q on May 15, 2020, covering the quarter ended March 31, 2020 (FY2020 Q3).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $16.51M
- up 33.8% from $12.34M a year earlier
- Net loss
- $5.22M
- compared with net income of $857K a year earlier
- Diluted EPS
- -$0.19
- compared with $0.04 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________.
Commission file number: 1-16027
LANTRONIX, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 33-0362767 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
7535 Irvine Center Drive, Suite 100, Irvine, California
(Address of principal executive offices)
92618
(Zip Code)
(949) 453-3990
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.0001 par value | LTRX | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | |
| Non-accelerated filer x | Smaller reporting company x | |
| Emerging Growth Company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
As of May 7, 2020, there were 27,958,802 shares of the registrant’s common stock outstanding.
LANTRONIX, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
March 31, 2020
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the three months ended March 31, 2020, or this Report, contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to substantial risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report, or incorporated by reference into this Report, are forward-looking statements. Throughout this Report, we have attempted to identify forward-looking statements by using words such as “may,” “believe,” “will,” “could,” “project,” “anticipate,” “expect,” “estimate,” “should,” “continue,” “potential,” “plan,” “forecasts,” “goal,” “seek,” “intend,” other forms of these words or similar words or expressions or the negative thereof.
We have based our forward-looking statements on management’s current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, results of operations or performance to differ materially from our historical results or those expressed or implied in any forward-looking statement contained in this Report. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to: the impact of COVID-19 and the measures to reduce its spread on our employees, supply and distribution chains, the global economy and our financial condition and liquidity; the effects of negative or worsening regional and worldwide economic conditions or market instability on our business, including effects on purchasing decisions by our customers; our ability to continue to generate revenue from products sold into mature markets; our ability to develop, market, and sell new products; our ability to succeed with our new software offerings; fluctuations in our revenue due to the project-based timing of orders from certain customers; unpredictable timing of our revenues due to the lengthy sales cycle for our products and services and potential delays in customer completion of projects; our ability to accurately forecast future demand for our products; delays in qualifying revisions of existing products; constraints or delays in the supply of, or quality control issues with, certain materials or components; difficulties associated with the delivery, quality or cost of our products from our contract manufacturers or suppliers; risks related to the outsourcing of manufacturing and international operations; difficulties associated with our distributors or resellers; intense competition in our industry and resultant downward price pressure; rises in inventory levels and inventory obsolescence; undetected software or hardware errors or defects in our products; cybersecurity risks; our ability to obtain appropriate industry certifications or approvals from governmental regulatory bodies; changes in applicable U.S. and foreign government laws, regulations, and tariffs; environmental or other regulatory claims or litigation; our ability to successfully implement our acquisitions strategy or integrate acquired companies; uncertainty as to the future profitability of acquired businesses, and delays in the realization of, or the failure to realize, any accretion from acquisition transactions; acquiring, managing and integrating new operations, businesses or assets, and the associated diversion of management attention or other related costs or difficulties; our ability to protect patents and other proprietary rights and avoid infringement of others’ proprietary technology rights; the level of our indebtedness, our ability to service our indebtedness and the restrictions in our debt agreements; our ability to attract and retain qualified management; and any additional factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on September 11, 2019, including in the section entitled “Risk Factors” in Item 1A of Part I of such report, as well as in our other public filings with the SEC, including this Quarterly Report on Form 10-Q. In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business.
You should read this Report in its entirety, together with the documents that we file as exhibits to this Report and the documents that we incorporate by reference into this Report, with the understanding that our future results may be materially different from what we currently expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of The Nasdaq Capital Market. If we do update or correct any forward-looking statements, investors should not conclude that we will make additional updates or corrections.
We qualify all of our forward-looking statements by these cautionary statements.
| 3 |
| Item 1. | Financial Statements |
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| March 31, | June 30, | |||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,977 | $ | 18,282 | ||||
| Accounts receivable, net | 11,958 | 7,388 | ||||||
| Inventories, net | 15,246 | 10,509 | ||||||
| Contract manufacturers' receivable | 434 | 1,324 | ||||||
| Prepaid expenses and other current assets | 2,043 | 687 | ||||||
| Total current assets | 36,658 | 38,190 | ||||||
| Property and equipment, net | 1,594 | 1,199 | ||||||
| Goodwill | 15,813 | 9,488 | ||||||
| Purchased intangible assets, net | 13,387 | – | ||||||
| Other assets | 3,225 | 67 | ||||||
| Total assets | $ | 70,677 | $ | 48,944 | ||||
| Liabilities and stockholders' equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 6,164 | $ | 4,716 | ||||
| Accrued payroll and related expenses | 3,519 | 2,060 | ||||||
| Warranty reserve | 209 | 116 | ||||||
| Short-term debt, net | 1,472 | – | ||||||
| Other current liabilities | 6,687 | 4,580 | ||||||
| Total current liabilities | 18,051 | 11,472 | ||||||
| Long-term debt, net | 4,050 | – | ||||||
| Other non-current liabilities | 1,631 | 206 | ||||||
| Total liabilities | 23,732 | 11,678 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders' equity: | ||||||||
| Common stock | 3 | 2 | ||||||
| Additional paid-in capital | 244,989 | 226,274 | ||||||
| Accumulated deficit | (198,418 | ) | (189,381 | ) | ||||
| Accumulated other comprehensive income | 371 | 371 | ||||||
| Total stockholders' equity | 46,945 | 37,266 | ||||||
| Total liabilities and stockholders' equity | $ | 70,677 | $ | 48,944 | ||||
See accompanying notes.
| 4 |
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net revenue | $ | 16,512 | $ | 12,344 | $ | 42,481 | $ | 36,737 | ||||||||
| Cost of revenue | 9,135 | 5,254 | 22,132 | 16,206 | ||||||||||||
| Gross profit | 7,377 | 7,090 | 20,349 | 20,531 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 5,558 | 3,867 | 14,902 | 12,297 | ||||||||||||
| Research and development | 2,724 | 2,385 | 7,681 | 6,879 | ||||||||||||
| Restructuring, severance and related charges | 2,263 | – | 3,366 | 323 | ||||||||||||
| Acquisition-related costs | 1,250 | – | 2,246 | – | ||||||||||||
| Amortization of purchased intangible assets | 801 | – | 1,096 | – | ||||||||||||
| Total operating expenses | 12,596 | 6,252 | 29,291 | 19,499 | ||||||||||||
| Income (loss) from operations | (5,219 | ) | 838 | (8,942 | ) | 1,032 | ||||||||||
| Interest income (expense), net | (83 | ) | 91 | (43 | ) | 147 | ||||||||||
| Other income (expense), net | 129 | (12 | ) | 76 | (14 | ) | ||||||||||
| Income (loss) before income taxes | (5,173 | ) | 917 | (8,909 | ) | 1,165 | ||||||||||
| Provision for income taxes | 43 | 60 | 128 | 114 | ||||||||||||
| Net income (loss) | $ | (5,216 | ) | $ | 857 | $ | (9,037 | ) | $ | 1,051 | ||||||
| Net income (loss) per share - basic | $ | (0.19 | ) | $ | 0.04 | $ | (0.37 | ) | $ | 0.05 | ||||||
| Net income (loss) per share - diluted | $ | (0.19 | ) | $ | 0.04 | $ | (0.37 | ) | $ | 0.05 | ||||||
| Weighted-average common shares - basic | 27,048 | 22,270 | 24,369 | 21,237 | ||||||||||||
| Weighted-average common shares - diluted | 27,048 | 23,304 | 24,369 | 22,632 | ||||||||||||
See accompanying notes.
| 5 |
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| Three Months Ended March 31, 2020 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance at December 31, 2019 | 23,317 | $ | 2 | $ | 228,107 | $ | (193,202 | ) | $ | 371 | $ | 35,278 | ||||||||||||
| Shares issued pursuant to stock awards, net | 273 | – | 237 | – | – | 237 | ||||||||||||||||||
| Tax withholding paid on behalf of employees for restricted shares | – | – | (60 | ) | – | – | (60 | ) | ||||||||||||||||
| Share-based compensation | – | – | 1,132 | – | – | 1,132 | ||||||||||||||||||
| Issuance of shares related to acquisition | 4,279 | 1 | 15,573 | – | – | 15,574 | ||||||||||||||||||
| Net loss | – | – | – | (5,216 | ) | – | (5,216 | ) | ||||||||||||||||
| Balance at March 31, 2020 | 27,869 | $ | 3 | $ | 244,989 | $ | (198,418 | ) | $ | 371 | $ | 46,945 | ||||||||||||
| Three Months Ended March 31, 2019 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance at December 31, 2018 | 22,213 | $ | 2 | $ | 224,422 | $ | (188,779 | ) | $ | 371 | $ | 36,016 | ||||||||||||
| Shares issued pursuant to stock awards, net | 192 | – | 290 | – | – | 290 | ||||||||||||||||||
| Tax withholding paid on behalf of employees for restricted shares | – | – | (19 | ) | – | – | (19 | ) | ||||||||||||||||
| Share-based compensation | – | – | 331 | – | – | 331 | ||||||||||||||||||
| Net income | – | – | – | 857 | – | 857 | ||||||||||||||||||
| Balance at March 31, 2019 | 22,405 | $ | 2 | $ | 225,024 | $ | (187,922 | ) | $ | 371 | $ | 37,475 | ||||||||||||
| 6 |
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(In thousands)
| Nine Months Ended March 31, 2020 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance at June 30, 2019 | 22,812 | $ | 2 | $ | 226,274 | $ | (189,381 | ) | $ | 371 | $ | 37,266 | ||||||||||||
| Shares issued pursuant to stock awards, net | 778 | 717 | – | – | 717 | |||||||||||||||||||
| Tax withholding paid on behalf of employees for restricted shares | – | – | (224 | ) | – | – | (224 | ) | ||||||||||||||||
| Share-based compensation | – | – | 2,649 | – | – | 2,649 | ||||||||||||||||||
| Issuance of shares related to acquisition | 4,279 | 1 | 15,573 | – | – | 15,574 | ||||||||||||||||||
| Net loss | – | – | – | (9,037 | ) | – | (9,037 | ) | ||||||||||||||||
| Balance at March 31, 2020 | 27,869 | $ | 3 | $ | 244,989 | $ | (198,418 | ) | $ | 371 | $ | 46,945 | ||||||||||||
| Nine Months Ended March 31, 2019 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance at June 30, 2018 | 18,908 | $ | 2 | $ | 212,995 | $ | (189,555 | ) | $ | 371 | $ | 23,813 | ||||||||||||
| Cumulative effect of accounting change | – | – | – | 582 | – | 582 | ||||||||||||||||||
| Shares issued pursuant to equity offering, net | 2,700 | – | 9,774 | – | – | 9,774 | ||||||||||||||||||
| Shares issued pursuant to stock awards, net | 797 | – | 1,183 | – | – | 1,183 | ||||||||||||||||||
| Tax withholding paid on behalf of employees for restricted shares | – | – | (188 | ) | – | – | (188 | ) | ||||||||||||||||
| Share-based compensation | – | – | 1,260 | – | – | 1,260 | ||||||||||||||||||
| Net income | – | – | – | 1,051 | – | 1,051 | ||||||||||||||||||
| Balance at March 31, 2019 | 22,405 | $ | 2 | $ | 225,024 | $ | (187,922 | ) | $ | 371 | $ | 37,475 | ||||||||||||
See accompanying notes.
| 7 |
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine Months Ended | ||||||||
| March 31 | ||||||||
| 2020 | 2019 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | (9,037 | ) | $ | 1,051 | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Share-based compensation | 2,649 | 1,260 | ||||||
| Depreciation and amortization | 535 | 341 | ||||||
| Amortization of purchased intangible assets | 1,096 | – | ||||||
| Amortization of manufacturing profit in acquired inventory associated with acquisitions | 204 | – | ||||||
| Loss on disposal of property and equipment | – | 10 | ||||||
| Amortization of deferred debt issuance costs | 4 | – | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 2,274 | (2,930 | ) | |||||
| Inventories | 1,951 | (1,832 | ) | |||||
| Contract manufacturers' receivable | 890 | 143 | ||||||
| Prepaid expenses and other current assets | (327 | ) | (257 | ) | ||||
| Other assets | 679 | (1 | ) | |||||
| Accounts payable | (1,645 | ) | 794 | |||||
| Accrued payroll and related expenses | 1,210 | (1,000 | ) | |||||
| Warranty reserve | (25 | ) | 11 | |||||
| Other liabilities | (3,893 | ) | 813 | |||||
| Net cash used in operating activities | (3,435 | ) | (1,597 | ) | ||||
| Investing activities | ||||||||
| Purchases of property and equipment | (471 | ) | (383 | ) | ||||
| Cash payment for acquisitions, net of cash and cash equivalents acquired | (13,402 | ) | – | |||||
| Net cash used in investing activities | (13,873 | ) | (383 | ) | ||||
| Financing activities | ||||||||
| Net proceeds from issuances of common stock | 717 | 10,860 | ||||||
| Tax withholding paid on behalf of employees for restricted shares | (224 | ) | (188 | ) | ||||
| Net proceeds from issuance of debt | 5,893 | – | ||||||
| Payment of borrowings on term loan | (375 | ) | – | |||||
| Payment of lease liabilities | (8 | ) | (48 | ) | ||||
| Net cash provided by financing activities | 6,003 | 10,624 | ||||||
| Increase (decrease) in cash, cash equivalents, and restricted cash | (11,305 | ) | 8,644 | |||||
| Cash, cash equivalents, and restricted cash at beginning of period | 18,282 | 9,568 | ||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 6,977 | $ | 18,212 | ||||
See accompanying notes.
| 8 |
LANTRONIX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
| 1. | Summary of Significant Accounting Policies |
The Company
Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global provider of secure data access and management solutions for Internet of Things (“IoT”) assets. Our mission is to be the leading supplier of IoT and related Information Technology (“IT”) management solutions that enable companies to dramatically simplify the creation, deployment, and management of IoT projects while providing secure access to data for applications and people.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Lantronix have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2019, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, which was filed with the SEC on September 11, 2019. The unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments that in the opinion of management, are necessary to present fairly the consolidated financial position of Lantronix at March 31, 2020, the consolidated results of our operations for the three and nine months ended March 31, 2020 and our consolidated cash flows for the nine months ended March 31, 2020. All intercompany accounts and transactions have been eliminated. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and nine months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year or any future interim periods.
The spread of the COVID-19 virus during the quarter ended March 31, 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. Government reactions to the public health crisis with mitigation measures have created significant uncertainties in the U.S. and global economies. The extent to which the coronavirus pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict and which may cause the actual results to differ from the estimates and assumptions we are required to make in the preparation of financial statements according to U.S. GAAP.
In order to protect our employee population and comply with local directives, most of our employees transitioned to remote working arrangements commencing in March and still continuing through the date hereof. To facilitate the increased data traffic associated with remote access, we have upgraded some of our information technology systems. We have also made changes relating to videoconferencing by providing most of our employees with a new videoconferencing and collaboration platform to accommodate better remote collaboration and communication. To date, remote working has not had a significant adverse impact on our financial results or our operations, including, financial reporting and disclosure controls and procedures.
Reclassifications
Certain reclassifications have been made to the prior fiscal year financial information to conform with the current fiscal year presentation.
Recent Accounting Pronouncements
Shared-Based Compensation
On July 1, 2019, Lantronix adopted Accounting Standard Update No. 2018-07 that expands the scope of existing share-based compensation guidance for employees. The standard includes share-based payment transactions for acquiring goods and services from nonemployees, whereby share-based payments to nonemployees will be measured and recorded at the fair value of the equity instruments that an entity is obligated to issue on the grant date. The adoption of the standard did not have a material impact on our financial statements.
| 9 |
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02 (“ASU 2016-02” or “Topic 842”) that revises lease accounting guidance. Most prominent among the changes in the standard is the recognition of right-of-use (“ROU”) assets and lease liabilities based on the present value of lease payments over the lease term by lessees for those leases classified as operating leases under the existing guidance.
We adopted Topic 842 on July 1, 2019 using the modified retrospective approach by applying the new standard to leases existing at the date of adoption and not restating comparative prior periods. The adoption did not have a material impact on our results of operations or cash flows. Refer to Note 4 below for additional information.
| 2. | Business Combinations |
Acquisition of Maestro
On July 5, 2019 (the "Acquisition Date"), Lantronix acquired all outstanding shares of Maestro Wireless Solutions Limited, a Hong Kong private company limited by shares (“MWS”), Fargo Telecom Asia Limited, a Hong Kong private company limited by shares (“FTA” and together with MWS and their respective subsidiaries, the “Acquired Companies” or “Maestro”) for $5,355,000 in cash. The acquisition provides complementary cellular connectivity technologies to our portfolio of IoT solutions.
We recorded Maestro’s tangible and intangible assets and liabilities based on their estimated fair values as of the Acquisition
Date and allocated the remaining purchase consideration to goodwill. Our valuation assumptions of acquired assets and assumed liabilities
require significant estimates, especially with respect to intangible assets. The consideration allocation set forth herein is preliminary
and may be revised as additional information becomes available during the measurement period which could be up to 12 months from
the Acquisition Date. During the current quarter we adjusted the preliminary purchase price allocation to reduce certain amounts
allocated to other assets, accounts payable, and other liabilities, with offsetting adjustments to goodwill. Any additional revisions
or changes may be material. The preliminary purchase price allocation is as follows (in thousands):
| July 5, 2019 (provisional) | ||||
| Cash and cash equivalents | $ | 282 | ||
| Accounts receivable | 1,320 | |||
| Inventories, net | 1,611 | |||
| Other assets | 600 | |||
| Purchased intangible assets | 1,910 | |||
| Goodwill | 2,876 | |||
| Accounts payable | (1,536 | ) | ||
| Other liabilities | (1,708 | ) | ||
| Total consideration | $ | 5,355 | ||
The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that the acquisition will create a more diverse IoT company with respect to product offerings and our belief that we are committed to improving cost structures in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of overall efficiencies.
| 10 |
Acquisition-related costs were expensed in the periods in which the costs were incurred.
The valuation of identifiable intangible assets and their estimated useful lives are as follows:
| Asset Fair Value | Weighted-Average Useful Life (years) | |||||||
| (In thousands) | ||||||||
| Developed technology | $ | 1,530 | 5.0 | |||||
| Customer relationship | 100 | 2.0 | ||||||
| Order backlog | 110 | 1.0 | ||||||
| Non-compete agreements | 30 | 2.0 | ||||||
| Trade name | 140 | 1.0 | ||||||
The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.
Acquisition of Intrinsyc
On January 16, 2020 (the “Closing Date”), we completed the previously announced acquisition of Intrinsyc Technologies Corporation (“Intrinsyc”), a company existing under the laws of British Columbia, Canada. Pursuant to the terms of the agreement, dated October 30, 2019 (the “Agreement”), by and between Lantronix and Intrinsyc, all of the outstanding common shares of Intrinsyc were acquired by Lantronix. Under the Agreement, we paid $0.50 and 0.2275 of a share of our common stock for each issued and outstanding common share of Intrinsyc. Pursuant to the Agreement, we paid, in the aggregate, approximately $11,519,000 in cash and issued approximately 4,279,000 shares of Lantronix common stock to Intrinsyc shareholders. Following the acquisition, Intrinsyc shareholders owned just under 16% of the outstanding shares of Lantronix common stock. Pursuant to the Agreement, Lantronix agreed to exchange certain options to purchase Intrinsyc shares and restricted stock units (“RSUs”) for cash payments, Lantronix common stock options or RSUs or a combination thereof, as further outlined in the Agreement.
The acquisition provides us with complementary IoT computing and embedded product development capabilities and expands our IoT market opportunity.
We recorded Intrinsyc’s tangible and intangible assets and liabilities based on their estimated fair values as of the Closing Date and allocated the remaining purchase consideration to goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets. The consideration allocation set forth herein is preliminary and may be revised as additional information becomes available during the measurement period which could be up to 12 months from the Closing Date. Any such revisions or changes may be material.
A summary of the purchase consideration for Intrinsyc is as follows (in thousands):
| Cash consideration to selling shareholders | $ | 11,022 | ||
| Cash consideration for vested equity awards | 497 | |||
| Share consideration | 15,574 | |||
| Total purchase consideration | $ | 27,093 |
| 11 |
The preliminary purchase price allocation is as follows (in thousands):
| January 16, 2020 (provisional) | ||||
| Cash and cash equivalents | $ | 3,190 | ||
| Accounts receivable | 5,524 | |||
| Inventories, net | 5,281 | |||
| Other assets | 2,624 | |||
| Purchased intangible assets | 12,576 | |||
| Goodwill | 3,449 | |||
| Accounts payable | (1,552 | ) | ||
| Other liabilities | (3,999 | ) | ||
| Total Consideration | $ | 27,093 | ||
The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that the acquisition will create a more diverse IoT company with respect to product offerings and our belief that we are committed to improving cost structures in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of overall efficiencies.
Acquisition-related costs were expensed in the periods in which the costs were incurred.
The valuation of identifiable intangible assets and their estimated useful lives are as follows:
| Asset Fair Value | Weighted Average Useful Life (years) | |||||||
| (In thousands) | ||||||||
| Developed technology | $ | 2,311 | 5.0 | |||||
| Customer relationship | 8,930 | 6.0 | ||||||
| Order backlog | 730 | 1.2 | ||||||
| Non-compete agreements | 370 | 1.0 | ||||||
| Trademarks and trade name | 235 | 1.0 | ||||||
The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.
Supplemental Pro Forma Information
The following supplemental pro forma data summarizes the Company’s results of operations for the periods presented, as if we completed the acquisitions of Maestro and Intrinsyc as of the first day of fiscal 2019. The supplemental pro forma data reports actual operating results adjusted to include the pro forma effect and timing of the impact in amortization expense of identified intangible assets, restructuring costs, the purchase accounting effect on inventories acquired, and transaction costs. In accordance with the pro forma acquisition date, we recorded in the fiscal 2019 supplemental pro forma data (i) cost of goods sold from manufacturing profit in acquired inventory of $262,000, (ii) acquisition related restructuring costs of $2,477,000 and (iii) acquisition-related costs of $2,246,000, with a corresponding reduction in the fiscal 2020 supplemental proforma data. Additionally, we recorded $2,947,000 of amortization expense in the fiscal 2019 supplemental pro-forma data, and additional amortization expense of $862,000 in the fiscal 2020 supplemental pro forma data to represent the amount related to assets that would have been fully amortized.
| 12 |
Net sales related to products and services from the acquisitions of Maestro and Intrinsyc contributed approximately 31% to 35% of net sales for the nine months ended March 31, 2020. Post-acquisition net sales and earnings on a standalone basis are generally impracticable to determine, as on the Acquisition Date and Closing Date, we implemented a plan developed prior to the completion of the acquisitions and began to immediately integrate the acquisition into existing operations, engineering groups, sales distribution networks and management structure.
Supplemental pro forma data is as follows:
| Nine Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| (In thousands, except per share amounts) | ||||||||
| Pro forma net revenue | $ | 56,486 | $ | 63,787 | ||||
| Pro forma net loss | $ | (4,752 | ) | $ | (8,207 | ) | ||
| Pro forma net loss per share | ||||||||
| Basic | $ | (0.18 | ) | $ | (0.32 | ) | ||
| Diluted | $ | (0.18 | ) | $ | (0.32 | ) | ||
| 3. | Revenue |
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. On occasion we enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.
Revenue is recognized net of (i) any taxes collected from customers, which are subsequently remitted to governmental authorities and (ii) shipping and handling costs collected from customers.
Product Shipments
Most of our product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that our customer obtains control of the promised products. A smaller portion of our product revenue is recognized when our customer receives delivery of the promised products.
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. We base our estimates for returns and price adjustments primarily on historical experience; however, we also consider contractual allowances, approved pricing adjustments and other known or anticipated returns and price adjustments in a given period. Such estimates are generally made at the time of shipment to the customer and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Our estimates of accrued variable consideration are included in other current liabilities in the accompanying condensed unaudited consolidated balance sheets.
| 13 |
Services
Revenues from our extended warranty and services are generally recognized ratably over the applicable service period. We expect revenues from future sales of our software-as-a-service (“SaaS”) products to be recognized ratably over the applicable service period as well. Revenues from professional engineering services are generally recognized as services are performed.
As a result of our recent acquisition of Intrinsyc (see Note 2), we now derive an increased portion of our revenues 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. |
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 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.
Multiple Performance Obligations
From time to time, we may enter into contracts with customers that include promises to transfer multiple deliverables that may include sales of products, professional engineering services and other product qualification or certification services. Determining whether the deliverables in such 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 such 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.
Net Revenue by Product Line and Geographic Region
We organize our products and solutions into three product lines: IoT, IT Management and Other. Our IoT products typically connect to one or more existing machines or are built into new industrial devices to provide network connectivity. Our IT Management product line includes out-of-band management, console management, power management, and keyboard-video-mouse (commonly referred to as KVM) products that provide remote access to IT and networking infrastructure deployed in test labs, data centers, branch offices and server rooms. We categorize products that are non-focus or end-of-life as Other.
| 14 |
We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”).
The following tables present our net revenue by product line and by geographic region. Net revenues by geographic region are based on the “bill-to” location of our customers:
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| IoT | $ | 13,922 | $ | 8,935 | $ | 35,323 | $ | 26,972 | ||||||||
| IT Management | 2,424 | 3,210 | 6,557 | 9,199 | ||||||||||||
| Other | 166 | 199 | 601 | 566 | ||||||||||||
| $ | 16,512 | $ | 12,344 | $ | 42,481 | $ | 36,737 | |||||||||
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Americas | $ | 10,126 | $ | 6,866 | $ | 21,730 | $ | 19,962 | ||||||||
| EMEA | 3,612 | 3,757 | 12,495 | 11,357 | ||||||||||||
| Asia Pacific Japan | 2,774 | 1,721 | 8,256 | 5,418 | ||||||||||||
| $ | 16,512 | $ | 12,344 | $ | 42,481 | $ | 36,737 | |||||||||
The following table presents product revenues and service revenues as a percentage of our total net revenue:
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Product revenues | 93% | 100% | 97% | 99% | ||||||||||||
| Service revenues | 7% | 0% | 3% | 1% | ||||||||||||
Service revenue is comprised primarily of professional services, software license subscriptions, and extended warranties.
Contract Balances
In certain instances, the timing of revenue recognition may differ from the timing of invoicing to our customers. We record a contract asset receivable when revenue is recognized prior to invoicing, and a contract or deferred revenue liability when revenue is recognized subsequent to invoicing. With respect to product shipments, we expect to fulfill contract obligations within one year and so we have elected not to separately disclose the amount nor the timing of recognition of these remaining performance obligations. For contract balances related to contracts that include services and multiple performance obligations, refer to the deferred revenue discussion below.
| 15 |
Deferred Revenue
Deferred revenue is primarily comprised of unearned revenue related to our extended warranty services and certain software services. These services are generally invoiced at the beginning of the contract period and revenue is recognized ratably over the service period. Current and non-current deferred revenue balances represent revenue allocated to the remaining unsatisfied performance obligations at the end of a reporting period and are respectively included in other current liabilities and other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets.
The following table presents the changes in our deferred revenue balance for the nine months ended March 31, 2020 (in thousands):
| Balance, July 1, 2019 | $ | 486 | ||
| New performance obligations | 238 | |||
| Performance obligations assumed from acquisitions | 738 | |||
| Recognition of revenue as a result of satisfying performance obligations | (579 | ) | ||
| Balance, March 31, 2020 | $ | 883 | ||
| Less: non-current portion of deferred revenue | (158 | ) | ||
| Current portion, March 31, 2020 | $ | 725 |
We expect to recognize substantially all of the non-current portion of deferred revenue over the next two to four years.
| 4. | Leases |
On July 1, 2019, we adopted Topic 842 and elected the available practical expedient to recognize the cumulative effect of initially adopting the standard as an adjustment to the opening balance sheet of the period of adoption (i.e., July 1, 2019). We also elected other available practical expedients and will not separate lease components from non-lease components for office leases, or reassess historical lease classification, whether existing or expired contracts are or contain leases, or the initial direct costs for existing leases as of July 1, 2019. The unaudited condensed consolidated balance sheets and results from operations for reporting periods beginning after July 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under Topic 840.
Adoption of the standard resulted in the recording of net operating and financing lease ROU assets and corresponding operating and financing lease liabilities of $984,000 and $1,114,000, respectively, on July 1, 2019. The adoption of the standard did not materially affect the unaudited condensed consolidated statements of operations and had no impact on cash flows.
Our leases include office buildings for facilities worldwide and car leases in Germany, which are all classified as operating leases. We also have financing leases related to office equipment in the United States. On October 1, 2019 we entered into a lease agreement for an office in Hyderabad, India, which replaced and expanded our existing office space there.
In May 2020 we entered into an extension to our office lease for our corporate headquarters in Irvine, California. The amendment extends the term of the lease by 13 months through January 2022.
We determine if an arrangement is a lease at inception. Certain leases include renewal options that are under the Company's sole discretion. The renewal options were included in the ROU asset and lease liability calculation if it is reasonably assured that we will exercise the option. As our leases generally do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Lease expense for these leases is recognized on a straight-line basis over the lease term.
| 16 |
Components of lease expense and supplemental cash flow information:
| Nine months ended | ||||
| March 31, 2020 | ||||
| Components of lease expense | (In thousands) | |||
| Operating lease cost | $ | 1,127 | ||
| Financing lease cost | $ | 10 | ||
| Supplemental cash flow information | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 871 | ||
| Cash paid for amounts included in the measurement of financing lease liabilities | $ | 8 | ||
| Right-of-use assets obtained in exchange for lease obligation | $ | 1,119 | ||
The weighted-average remaining lease term is 1.5 years. The weighted-average discount rate is 6.03 percent.
Maturities of lease liabilities as of March 31, 2020 were as follows:
| Years ending June 30, | Operating | Financing | |||||||
| (In thousands) | |||||||||
| 2020 | $ | 368 | $ | 2 | |||||
| 2021 | 1,077 | 9 | |||||||
| 2022 | 674 | 9 | |||||||
| 2023 | 376 | 9 | |||||||
| 2024 | 274 | 4 | |||||||
| Thereafter | 65 | – | |||||||
| Total remaining lease payments | 2,834 | 33 | |||||||
| less: imputed interest | (243 | ) | – | ||||||
| Lease liability | $ | 2,591 | $ | 33 | |||||
| Reported as: | |||||||||
| Current liabilities | $ | (1,142 | ) | $ | (9 | ) | |||
| Non-current liabilities | $ | (1,449 | ) | $ | (24 | ) | |||
The lease liabilities and ROU assets as of March 31, 2020 include leases assumed in the acquisitions of Maestro and Intrinsyc if the remaining lease term at the acquisition date was determined to exceed one year. Refer to Note 2 above for further information on the acquisitions. As of March 31, 2020, the ROU assets totaled $2,982,000 and were recorded in other assets in the unaudited condensed consolidated balance sheet.
| 17 |
| 5. | Supplemental Financial Information |
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and consist of the following:
| March 31, | June 30, | |||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Finished goods | $ | 8,651 | $ | 6,084 | ||||
| Raw materials | 6,595 | 4,425 | ||||||
| Inventories, net | $ | 15,246 | $ | 10,509 | ||||
Other Liabilities
The following table presents details of our other liabilities:
| March 31, | June 30, | |||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Current | ||||||||
| Accrued variable consideration | $ | 1,383 | $ | 1,313 | ||||
| Customer deposits and refunds | 250 | 168 | ||||||
| Accrued raw materials purchases | 681 | 1,155 | ||||||
| Deferred revenue | 725 | 328 | ||||||
| Lease liability | 1,151 | 4 | ||||||
| Taxes payable | 407 | 322 | ||||||
| Accrued operating expenses | 2,090 | 1,290 | ||||||
| Total other current liabilities | $ | 6,687 | $ | 4,580 | ||||
| Non-current | ||||||||
| Lease liability | $ | 1,473 | $ | 48 | ||||
| Deferred revenue | 158 | 158 | ||||||
| Total other non-current liabilities | $ | 1,631 | $ | 206 | ||||
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Computation of Net Income (Loss) per Share
Basic and diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the applicable period.
The following table presents the computation of net income (loss) per share:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | (5,216 | ) | $ | 857 | $ | (9,037 | ) | $ | 1,051 | ||||||
| Denominator: | ||||||||||||||||
| Weighted-average common shares outstanding - basic | 27,048 | 22,270 | 24,369 | 21,237 | ||||||||||||
| Effect of dilutive securities: | – | 1,034 | – | 1,395 | ||||||||||||
| Denominator for net income (loss) per share - diluted | 27,048 | 23,304 | 24,369 | 22,632 | ||||||||||||
| Net income (loss) per share - basic | $ | (0.19 | ) | $ | 0.04 | $ | (0.37 | ) | $ | 0.05 | ||||||
| Net income (loss) per share - diluted | $ | (0.19 | ) | $ | 0.04 | $ | (0.37 | ) | $ | 0.05 | ||||||
The following table presents the common stock equivalents excluded from the diluted net loss per share calculation, because they were anti-dilutive for the periods presented. These excluded common stock equivalents could be dilutive in the future.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Common stock equivalents | 1,487 | 153 | 1,640 | 66 | ||||||||||||
Severance and Related Charges
Current Fiscal Year
During the nine months ended March 31, 2020, we continued a plan to realign certain personnel resources to better fit our current business needs, which includes identifying cost savings and synergies to be gained from the acquisitions of Maestro and Intrinsyc. Additionally, the current year charges include costs incurred pursuant to change-in-control agreements for certain employees of Intrinsyc.
| 19 |
The following table presents details of the liability we recorded related to these activities:
| Nine Months Ended | ||||
| March 31, | ||||
| 2020 | ||||
| (In thousands) | ||||
| Beginning balance | $ | 651 | ||
| Charges | 3,365 | |||
| Payments | (2,786 | ) | ||
| Ending balance | $ | 1,230 | ||
The ending balance is recorded in accrued payroll and related expenses on the accompanying unaudited condensed consolidated balance sheet at March 31, 2020.
Prior Fiscal Year
During the nine months ended March 31, 2019, we incurred charges totaling approximately $323,000 in severance-related costs in connection with a plan to realign certain personnel and cost structure needs.
Supplemental Cash Flow Information
The following table presents non-cash investing transactions excluded from the accompanying unaudited condensed consolidated statements of cash flows:
| Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Share consideration for acquisition of Intrinsyc | $ | 15,574 | $ | – | ||||
| Accrued property and equipment paid for in the subsequent period | $ | 5 | $ | 276 | ||||
| Accrued stock option exercise proceeds | $ | – | $ | 97 | ||||
| 6. | 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.
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The following table presents details of our warranty reserve:
| Nine Months Ended | Year Ended | |||||||
| March 31, | June 30, | |||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Beginning balance | $ | 116 | $ | 99 | ||||
| Warranty reserve assumed from acquisition of Intrinsyc | 118 | – | ||||||
| Charged to cost of revenue | 63 | 96 | ||||||
| Usage | (88 | ) | (79 | ) | ||||
| Ending balance | $ | 209 | $ | 116 | ||||
| 7. | Bank Loan Agreements |
On November 12, 2019, we entered into a Second Amended and Restated Loan and Security Agreement (“Amended Agreement”) with Silicon Valley Bank (“SVB”), which amended, restated and superseded our previous agreement with SVB in its entirety.
Pursuant to the Amended Agreement, SVB made available to us a senior secured revolving line of credit of up to $6,000,000 (“Revolving Facility”) and a senior secured term loan of $6,000,000 (“Term Loan Facility”). Advances under the Revolving Facility may be borrowed from time to time prior to November 12, 2021, subject to the satisfaction of certain conditions, and may be used to fund our working capital and general business requirements. The $6,000,000 proceeds of the Term Loan Facility were drawn in full in November 2019 and were used to fund our acquisition of Intrinsyc, which occurred in January 2020 (refer to Note 2 above). The Revolving Facility matures on November 12, 2021. There were no borrowings on the Revolving Facility at March 31, 2020. The Term Loan Facility is repayable over a 48 month period commencing January 1, 2020.
The interest rate on the Revolving Facility floats at a rate per annum equal to the greater of the prime rate and 5.00 percent. The interest rate on the Term Loan Facility floats at a rate per annum equal to the greater of 1.00 percent above the prime rate and 6.00 percent. We may elect to repay and reborrow the amounts outstanding under the Revolving Facility at any time prior to the maturity date of the Revolving Facility without premium or penalty. We may elect to repay the Term Loan Facility at any time without premium or penalty in minimum amounts equal to at least $1,000,000. A commitment fee in the amount of $60,000 was paid to SVB on the closing date and a $10,000 anniversary fee is payable to SVB on the earliest to occur of the one year anniversary of the effective date, the termination of the Amended Agreement or the Revolving Facility, or the occurrence of an event of default.
The following table summarizes our outstanding debt:
| March 31, | June 30, | |||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Outstanding borrowings on Term Loan Facility | $ | 5,625 | $ | – | ||||
| Less: Unamortized debt issuance costs | (103 | ) | – | |||||
| Net Carrying amount of debt | 5,522 | – | ||||||
| Less: Current portion | (1,472 | ) | – | |||||
| Non-current portion | $ | 4,050 | $ | – | ||||
| 21 |
During the three and nine months ended March 31, 2020 we recognized $94,000 and $140,000, respectively of interest expense in our unaudited condensed consolidated statements of operations related to interest and amortization of debt issuance associated with the outstanding Term Loan Facility.
The Amended Agreement includes a financial covenant that requires that we maintain a minimum cash balance of $3,000,000 at SVB, as measured at the end of each month. The Amended Agreement also requires that we do not exceed a maximum leverage ratio, calculated as the ratio of funded debt to the consolidated trailing 12 month earnings before interest, taxes, depreciation and amortization, and certain other allowable exclusions of (i) 3.0 to 1.0 for each calendar quarter ending December 31, 2019 through and including December 31, 2020, (ii) 2.5 to 1.0 for each calendar quarter ending March 31, 2021 through and including December 31, 2021, and (iii) 2.0 to 1.0 for each calendar quarter ending after January 1, 2022. We are currently in compliance with all covenants.
| 8. | Stockholders’ Equity |
Stock Incentive Plans
Our stock incentive plans permit the granting of stock options (both incentive and nonqualified stock options), RSUs, stock appreciation rights, non-vested stock, and performance shares to certain employees, directors and consultants. As of March 31, 2020, no stock appreciation rights or non-vested stock was outstanding.
Stock Options
The following table presents a summary of activity during the nine months ended March 31, 2020 with respect to our stock options:
| Weighted- | |||||||||
| Average | |||||||||
| Number of | Exercise Price | ||||||||
| Shares | per Share | ||||||||
| (In thousands) | |||||||||
| Balance of options outstanding at June 30, 2019 | 3,147 | $ | 2.29 | ||||||
| Granted | 248 | 3.33 | |||||||
| Forfeited | (179 | ) | 2.35 | ||||||
| Expired | (76 | ) | 2.21 | ||||||
| Exercised | (834 | ) | 1.76 | ||||||
| Balance of options outstanding at March 31, 2020 | 2,306 | $ | 2.58 | ||||||
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Restricted Stock Units
The following table presents a summary of activity during the nine months ended March 31, 2020 with respect to our RSUs:
| Weighted- | |||||||||
| Average | |||||||||
| Grant Date | |||||||||
| Number of | Fair Value | ||||||||
| Shares | per Share | ||||||||
| (In thousands) | |||||||||
| Balance of RSUs outstanding at June 30, 2019 | 866 | $ | 4.24 | ||||||
| Granted | 431 | 3.32 | |||||||
| Vested | (203 | ) | 4.68 | ||||||
| Forfeited | (109 | ) | 3.76 | ||||||
| Balance of RSUs outstanding at March 31, 2020 | 985 | $ | 3.80 | ||||||
Performance Stock Units
In October 2019, we granted 975,000 RSUs with performance-based vesting requirements (“performance stock units” or “PSUs”) to certain executive employees. In February 2020, we granted an additional 70,000 RSUs with performance-based vesting requirements and vesting schedule identical to those granted in October 2019. One third of the PSUs will be eligible to vest in each of the three years beginning in fiscal 2020 if certain earnings per share, revenue targets and market conditions are met. The estimate of the grant date fair value and related share-based compensation expense included the use of a Monte Carlo simulation which incorporates estimates of the potential outcomes of the market condition of these awards.
Employee Stock Purchase Plan
Our 2013 Employee Stock Purchase Plan (“ESPP”) is intended to provide employees with an opportunity to purchase our common stock through accumulated payroll deductions at the end of a specified purchase period. Each of our employees (including officers) is eligible to participate in our ESPP, subject to certain limitations as set forth in our ESPP.
The following table presents a summary of activity under our ESPP during the nine months ended March 31, 2020:
| Number of | |||||
| Shares | |||||
| (In thousands) | |||||
| Shares available for issuance at June 30, 2019 | 517 | ||||
| Shares issued | (64 | ) | |||
| Shares available for issuance at March 31, 2020 | 453 | ||||
| 23 |
Share-Based Compensation Expense
The following table presents a summary of share-based compensation expense included in each functional line item on our accompanying unaudited condensed consolidated statements of operations:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Cost of revenue | $ | 70 | $ | 22 | $ | 142 | $ | 62 | ||||||||
| Selling, general and administrative | 939 | 213 | 2,176 | 950 | ||||||||||||
| Research and development | 123 | 96 | 331 | 248 | ||||||||||||
| Total share-based compensation expense | $ | 1,132 | $ | 331 | $ | 2,649 | $ | 1,260 | ||||||||
The following table presents the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of March 31, 2020:
| Remaining | Remaining | |||||||
| Unrecognized | Weighted- | |||||||
| Compensation | Average Years | |||||||
| Expense | To Recognize | |||||||
| (In thousands) | ||||||||
| Stock options | $ | 1,494 | 2.6 | |||||
| RSUs | 3,309 | 3.2 | ||||||
| PSUs | 1,205 | 2.3 | ||||||
| Stock purchase rights under ESPP | 13 | 0.1 | ||||||
| $ | 6,021 | |||||||
If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to accelerate, increase or cancel remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional share-based awards.
| 9. | Income Taxes |
We utilize the liability method of accounting for income taxes. The following table presents our effective tax rates based upon our provision for income taxes for the periods shown:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Effective tax rate | 1% | 7% | 1% | 10% | ||||||||||||
| 24 |
The difference between our effective tax rates in the periods presented above and the federal statutory rate is primarily due to a tax benefit from our domestic losses being recorded with a full valuation allowance, 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 it is more likely than not that these assets will be realized. Due to our cumulative losses and uncertainty of generating future taxable income, we have provided a full valuation allowance against our net deferred tax assets as of March 31, 2020 and June 30, 2019.
| 10. | Commitments and Contingencies |
From time to time, we are involved in various legal proceedings and claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other factors.
| 11. | Subsequent Event |
Small Business Administration Loan
In April 2020, we executed a promissory note (the “Note”) in the principal amount of approximately $2,438,000 as part of the Paycheck Protection Program (the “PPP Loan”) administered by the Small Business Administration (the “SBA”) and authorized under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan was made through Silicon Valley Bank. On May 6, 2020, we repaid the Note in full.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the three months ended March 31, 2020, or this Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. See the section of this Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information. These statements involve numerous 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 set forth in “Risk Factors” in Part II, Item 1A of this Report.
Overview
Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global provider of secure data access and management solutions for Internet of Things (“IoT”) assets. Our mission is to be the leading supplier of IoT and related Information Technology (“IT”) management solutions that enable companies to dramatically simplify the creation, deployment, and management of IoT projects while providing secure access to data for applications and people.
We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”).
Products and Solutions Overview
We organize our products and solutions into three product lines: IoT, IT Management and Other.
IoT
Our IoT products typically connect to one or more existing machines or are built into new industrial devices to provide network connectivity. Our products are designed to enhance the value and utility of machines by making the data from the machines available to users, systems and processes or by controlling their properties and features over the network.
Our IoT products currently consist of IoT Gateways and IoT Building Blocks. IoT Gateways are designed to provide secure connectivity and the ability to add integrated device management and advanced data access features. IoT Building Blocks provide basic secure machine connectivity and unmanaged data access.
Our IoT products may be embedded into new designs or attached to existing machines. Our IoT products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, application hosting, protocol conversion, secure access for distributed IoT deployments and many other functions. Many of the products are offered with software tools intended to further accelerate our customer’s time-to-market and increase their value add.
Most of our IoT products are pre-certified in a number of countries thereby significantly reducing our original equipment manufacturer customers’ regulatory certification costs and accelerating their time to market.
The following product families are included in our IoT product line: EDS, EDS-MD, PremierWave® EN, PremierWave® XC, SGX™, UDS, WiPort®, xDirect®, xPico®, xPico® Wi-Fi, xPico® 200, xPress™, XPort®, XPort® Pro, XPort® Edge, Micro, and MACH10® Global Device Manager.
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On July 5, 2019 we acquired Maestro Wireless Solutions Limited and its subsidiaries (together, “Maestro”). The acquisition provides additional and complementary cellular connectivity, LPWAN, and telematic technologies and devices to our portfolio of IoT solutions. The following product families are now included in our IoT product line as a result of the acquisition: M110, E210, E220, Bolero45, FOX3-2G, FOX3-3G, FOX3-4G, S40, and D2Sphere.
On January 16, 2020 we acquired Intrinsyc Technologies Corporation (“Intrinsyc”). The acquisition provides additional and complementary IoT computing and embedded product development capabilities and expands our IoT market opportunity. Additionally, we acquired edge computing and design capabilities crucial to the development of intelligent IoT solutions. As a result of the acquisition, we now offer the following in our IoT product line: System on Module (SoM), Single Board Computer (SBC), and Development Kits. We also offer services for mechanical, hardware, and software engineering for camera, audio, and artificial intelligence / machine learning development.
IT Management
Today, organizations are managing an ever-increasing number of devices and data on enterprise networks where 24/7 reliability is mission critical. Out-of-band management is a technique that uses a dedicated management network to access critical network devices to ensure management connectivity (including the ability to determine the status of any network component) independent of the status of other in-band network components. Remote out-of-band access allows organizations to effectively manage their enterprise IT resources and at the same time, optimize their IT support resources. Our vSLM™, a virtualized central management software solution, simplifies secure administration of our IT Management products and the equipment attached to them through a standard web browser.
Our IT Management product line includes out-of-band management, console management, power management, and keyboard-video-mouse (commonly referred to as KVM) products that provide remote access to IT and networking infrastructure deployed in test labs, data centers, branch offices and server rooms.
The following product families are included in our IT Management product line: SLB™, SLC™8000, Spider™, ConsoleFlow and vSLM™.
Other
We categorize products that are non-focus or end-of-life as Other. Our Other product line includes non-focus products such as the xPrintServer®. In addition, this product line includes end-of-life versions of our MatchPort®, SLC™, SLP™, xPress Pro, xSenso®, PremierWave® XN, and WiBox product families.
Recent Developments
Refer to Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of our acquisitions of Maestro and Intrinsyc.
Following their acquisitions, Maestro and Intrinsyc have contributed significant revenue to the Company. We also saw a corresponding increase in operational expenses, which will remain consistent until we realize expected cost synergies. Furthermore, we expect that the combined entity will have better economies of scale driven by our plan to reduce redundant costs which we believe will result in improved operational effectiveness and greater earnings potential.
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Impact of COVID-19
In order to protect our employee population and comply with local directives, most of our employees transitioned to remote working arrangements commencing in March and still continuing through the date hereof. To facilitate the increased data traffic associated with remote access, we have upgraded some of our information technology systems. We have also made changes relating to videoconferencing by providing most of our employees with a new videoconferencing and collaboration platform to accommodate better remote collaboration and communication. To date, remote working has not had a significant adverse impact on our financial results or our operations, including, financial reporting and disclosure controls and procedures. We do not believe that our productivity has been substantially affected by working remotely. However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, encouragement and support is normally generated by being present at a physical location and believe that prolonged remote working may have a negative impact over time on our business and on employee productivity. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.
Supply Chain and Shipping
The COVID-19 epidemic continues to challenge our supply chain, and if prolonged may have an adverse impact on our ability to produce and ship products. In early January 2020, we began to anticipate some supply chain issues. To mitigate, we built-up our inventory position. This increased inventory helped alleviate some, but not all, of the impact of subsequent shutdowns that occurred in China during the period. However, there were instances where we were unable to fulfill orders, resulting in revenue decline and causing us to miss our initial revenue target.
Our supply chain still faces significant challenges. Most of our manufacturing is done in Malaysia, China and Thailand. Our major contract manufacturer in Malaysia is not at full capacity because of temporary local stay-at-home orders, and we expect to experience supply constraints if the partial shutdown of this contract manufacturer is prolonged or expanded. Similar issues could arise with either one or both of our major contract manufacturers one in Thailand and the other in China, although at the present time we have not been informed of any current issues.
Our ability to ship products has also been affected by the impact that COVID-19 has had on air travel. Most of our products are shipped via air freight. With the reduction of air travel, shipping costs have increased, and shipping delays may have occurred and may continue to occur.
We are attempting to mitigate both the production and shipping risks by asking our contract manufacturers to expedite orders where possible, and otherwise taking and shipping products from our contract manufacturers as soon as they are available. We have also been forced to sell into the United States products in inventory that were manufactured in China for our non-US markets, thus incurring tariffs in the United States and negatively impacting our profits.
Our ability to manufacture products is also dependent on the availability of certain raw materials and components that our contract manufacturers purchase in China, and our sales are subject to demand for certain of our products that are purchased by our customers for assembly in China into our customers’ end-products. If a second wave of COVID-19 and associated shutdown were to occur in China, this would likely have an adverse impact on our ability to manufacture and sell our products due to related shortages of materials and components and delays in customer orders. Depending on the severity of such future shutdowns, we could experience a materially diminished ability to produce products or longer lead times. This would result in delayed or reduced revenue from the affected orders in production and potentially higher operating costs. Because COVID-19 is a global pandemic, it may be difficult or impossible to move our manufacturing capability in a timely manner as needed, or to put in place any additional mitigation actions other than to pull and ship products as fast as our manufacturers can manufacture them. These mitigation efforts may also have a negative impact on our financial results by increasing inventory levels.
Sales and Marketing
Our sales and marketing efforts have been impacted by COVID-19 in a variety of ways. On the positive side, we saw an increase in orders for videoconferencing-related and medical-related products and services. But this increase has been offset primarily by a reduction in other product sales caused by global shutdowns and overall uncertainty arising as a result of COVID-19.
Many of our leads are generated through industry events, trade shows and business travel necessary to support customer engagement. With the recent sudden cessation of all trade shows and business travel, our lead pipeline has been negatively impacted, which may negatively affect our sales in the coming quarters. We are attempting to mitigate this risk by using this time to focus our sales and marketing teams on greater customer engagement, particularly with anchor customers. However, prolonged shutdowns, or additional future shutdowns as a result of a second wave of COVID-19, would negate our mitigation efforts and lead to a reduction in revenue during the coming quarters. In addition, to mitigate the potential declines, we are also changing our go-to-market approach by adding more distributors and value-added resellers, who are closer to the customers and end-customers.
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Research and Development
Our research and development efforts have not been impacted in any material respect as a result of our transition to a remote working arrangement. However, if the shutdowns persist, we may experience project delays because of lack of access for our engineers to use testing and other equipment that is situated in our office labs. We will attempt to mitigate any such prolonged impact by enabling engineers to have limited access to our office labs while imposing procedures that ensure that only a few people are in the office at any given time, social distancing and other guidelines are observed, and appropriate disinfection is taking place. Prolonged shutdowns at third-party partners, especially relating to product certifications, may also delay our sales and shipments. In the event of prolonged shutdowns, we believe we can mitigate by putting in place, where possible, agreements with our customers covering the sale of non-certified products.
Recent Accounting Pronouncements
Refer to Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of recent accounting pronouncements.
Critical Accounting Policies and Estimates
The accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to revenue recognition, allowance for doubtful accounts, inventory valuation, warranty reserves, valuation of deferred income taxes, goodwill and business combinations. Other than the policies regarding revenue recognition and business combinations, which we have updated and added below, respectively, these policies are described in further detail in the Form 10-K and have not changed significantly during the nine months ended March 31, 2020 as compared to what was previously disclosed in the Form 10-K.
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. |
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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 recognize revenue on fixed price contracts, over time, using 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 deliverables that may include sales of products, professional engineering services and other product qualification or certification services. Determining whether the deliverables 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.
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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Results of Operations – Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019
Summary
In the three months ended March 31, 2020, our net revenue increased by $4,168,000, or 33.8%, compared to the three months ended March 31, 2019. The increase in net revenue was driven by a 55.8% increase in net revenue in our IoT product line partially offset by a decline in revenue of 24.5% in our IT Management product line. We had a net loss of $5,216,000 for the three months ended March 31, 2020 compared to net income of $857,000 for the three months ended March 31, 2019. The decrease in net income was driven by a 12.8% decrease in gross margin percentage and a 101.5% increase in operating expenses.
Net Revenue
The following tables present our net revenue by product line and by geographic region:
| Three Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| IoT | $ | 13,922 | 84.3% | $ | 8,935 | 72.4% | $ | 4,987 | 55.8% | |||||||||||||||
| IT Management | 2,424 | 14.7% | 3,210 | 26.0% | (786 | ) | (24.5% | ) | ||||||||||||||||
| Other | 166 | 1.0% | 199 | 1.6% | (33 | ) | (16.6% | ) | ||||||||||||||||
| $ | 16,512 | 100.0% | $ | 12,344 | 100.0% | $ | 4,168 | 33.8% | ||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Americas | $ | 10,126 | 61.3% | $ | 6,866 | 55.6% | $ | 3,260 | 47.5% | |||||||||||||||
| EMEA | 3,612 | 21.9% | $ | 3,757 | 30.4% | (145 | ) | (3.9% | ) | |||||||||||||||
| Asia Pacific Japan | 2,774 | 16.8% | $ | 1,721 | 14.0% | 1,053 | 61.2% | |||||||||||||||||
| $ | 16,512 | 100.0% | $ | 12,344 | 100.0% | $ | 4,168 | 33.8% | ||||||||||||||||
IoT
Net revenue from our IoT product line for the three months ended March 31, 2020 increased in the APJ and Americas regions when compared to the three months ended March 31, 2019 due primarily to the addition of sales of products and services obtained through the acquisitions of Maestro and Intrinsyc. We also saw moderate growth in our newer SGX product family, mostly in the Americas region. The overall increase in net revenues was partially offset primarily by decreases in unit sales of (i) our XPort, Premierwave EN, and XPort Pro product families in all regions and (ii) our UDS product family in the Americas and EMEA regions.
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IT Management
Net revenue from our IT Management product line for the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019 due primarily to decreased unit sales of (i) our SLC8000 product family across all regions and (ii) our SLB product family in the Americas region.
Other
Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, declined slightly in APJ and EMEA.
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 from contract manufacturers, 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:
| Three Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Gross profit | $ | 7,377 | 44.7% | $ | 7,090 | 57.4% | $ | 287 | 4.0% | |||||||||||||||
Gross profit as a percent of revenue (referred to as “gross margin”) for the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019 due primarily to sales of products obtained through the acquisitions of Maestro and Intrinsyc, which typically have lower margins than the Lantronix products that existed prior to the acquisitions.
Selling, General and Administrative
Selling, general and administrative expenses consist of personnel-related expenses, including salaries and commissions, share-based compensation, facility expenses, information technology, trade show expenses, advertising, and legal and accounting fees.
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The following table presents our selling, general and administrative expenses:
| Three Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Personnel-related expenses | $ | 3,254 | $ | 2,858 | $ | 396 | 13.9% | |||||||||||||||||
| Professional fees and outside services | 512 | 222 | 290 | 130.6% | ||||||||||||||||||||
| Advertising and marketing | 227 | 225 | 2 | 0.9% | ||||||||||||||||||||
| Facilities and insurance | 393 | 186 | 207 | 111.3% | ||||||||||||||||||||
| Share-based compensation | 939 | 213 | 726 | 340.8% | ||||||||||||||||||||
| Depreciation | 72 | 50 | 22 | 44.0% | ||||||||||||||||||||
| Other | 161 | 113 | 48 | 42.5% | ||||||||||||||||||||
| Selling, general and administrative | $ | 5,558 | 33.7% | $ | 3,867 | 31.3% | $ | 1,691 | 43.7% | |||||||||||||||
Selling, general and administrative expenses increased primarily due to (i) increased share-based compensation primarily due to the issuance of equity awards to certain executive and other employees, including employees brought on from our acquisitions, (ii) higher personnel-related costs resulting from the increased headcount assumed in the acquisitions of Intrinsyc and Maestro, (iii) higher professional fees and outside services resulting from increased legal and accounting costs, and (iv) higher facilities and insurance costs resulting from additional facility space gained through the acquisitions of Maestro and Intrinsyc.
Research and Development
Research and development expenses consist of personnel-related expenses, including share-based compensation, as well as expenditures to third-party vendors for research and development activities and product certification costs. Our quarterly costs related to outside services and product certifications vary from period to period depending on our level of development activities.
The following table presents our research and development expenses:
| Three Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Personnel-related expenses | $ | 1,863 | $ | 1,727 | $ | 136 | 7.9% | |||||||||||||||||
| Facilities | 304 | 223 | 81 | 36.3% | ||||||||||||||||||||
| Outside services | 121 | 220 | (99 | ) | (45.0% | ) | ||||||||||||||||||
| Product certifications | 204 | 7 | 197 | 2814.3% | ||||||||||||||||||||
| Share-based compensation | 123 | 96 | 27 | 28.1% | ||||||||||||||||||||
| Other | 109 | 112 | (3 | ) | (2.7% | ) | ||||||||||||||||||
| Research and development | $ | 2,724 | 16.5% | $ | 2,385 | 19.3% | $ | 339 | 14.2% | |||||||||||||||
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Research and development expenses for the three months ended March 31, 2020 increased when compared to the three months ended March 31, 2019 primarily due to (i) higher product certification costs related to the timing of various new product development projects and (ii) higher facilities costs and personnel-related expenses, resulting from an increase in facility space and headcount resulting from the acquisitions of Maestro and Intrinsyc as well as the addition of our new facility lease in India. These increases were slightly offset by a decrease in outside services expenses as we lowered our spending on certain outside headcount resources.
Results of Operations – Nine Months Ended March 31, 2020 Compared to the Nine Months Ended March 31, 2019
Summary
In the nine months ended March 31, 2020 our net revenue increased by $5,744,000, or 15.6%, compared to the nine months ended March 31, 2019. The increase in net revenue was driven by a 31.0% increase in net revenue in our IoT product line partially offset by a decline in revenue of 28.7% in our IT Management product line. We had a net loss of $9,037,000 for the nine months ended March 31, 2020 compared to net income of $1,051,000 for the nine months ended March 31, 2019. The decrease in net income was driven by an 8.0% decrease in gross margin percentage and a 50.2% increase in operating expenses.
Net Revenue
The following tables present our net revenue by product line and by geographic region:
| Nine Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| IoT | $ | 35,323 | 83.2% | $ | 26,972 | 73.4% | $ | 8,351 | 31.0% | |||||||||||||||
| IT Management | 6,557 | 15.4% | 9,199 | 25.0% | (2,642 | ) | (28.7% | ) | ||||||||||||||||
| Other | 601 | 1.4% | 566 | 1.6% | 35 | 6.2% | ||||||||||||||||||
| $ | 42,481 | 100.0% | $ | 36,737 | 100.0% | $ | 5,744 | 15.6% | ||||||||||||||||
| Nine Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Americas | $ | 21,730 | 51.2% | $ | 19,962 | 54.3% | $ | 1,768 | 8.9% | |||||||||||||||
| EMEA | 12,495 | 29.4% | 11,357 | 30.9% | 1,138 | 10.0% | ||||||||||||||||||
| Asia Pacific Japan | 8,256 | 19.4% | 5,418 | 14.8% | 2,838 | 52.4% | ||||||||||||||||||
| $ | 42,481 | 100.0% | $ | 36,737 | 100.0% | $ | 5,744 | 15.6% | ||||||||||||||||
IoT
Net revenue from our IoT product line for the nine months ended March 31, 2020 increased across all regions when compared to the nine months ended March 31, 2019 due to the addition of sales of products and services obtained through the acquisitions of Maestro and Intrinsyc. The overall increase was partially offset by decreases in unit sales of (i) our XPort, UDS, and Premierwave EN product families across all regions, (ii) our XPort Pro family, mostly in the Americas and (iii) our large-scale integration chips in the EMEA region.
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IT Management
Net revenue from our IT Management product line for the nine months ended March 31, 2020 decreased compared to the nine months ended March 31, 2019 due primarily to decreased unit sales of our SLC8000 and SLB product families in the Americas and EMEA regions. In the prior year, we saw stronger demand for both product families partially driven by the timing of sales to certain large customers.
Other
Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, increased slightly across all regions.
Gross Profit
The following table presents our gross profit:
| Nine Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Gross profit | $ | 20,349 | 47.9% | $ | 20,531 | 55.9% | $ | (182 | ) | (0.9% | ) | |||||||||||||
Gross margin for the nine months ended March 31, 2020 decreased compared to the nine months ended March 31, 2019 due primarily to sales of products obtained through the acquisitions of Maestro and Intrinsyc, which typically have lower margins than the Lantronix products that existed prior to the acquisitions. Gross margin in the current year period was also negatively impacted by the amortization of unrealized profit in acquired inventory in the amount of approximately $204,000.
Selling, General and Administrative
The following table presents our selling, general and administrative expenses:
| Nine Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Personnel-related expenses | $ | 8,790 | $ | 8,764 | $ | 26 | 0.3% | |||||||||||||||||
| Professional fees and outside services | 1,542 | 904 | 638 | 70.6% | ||||||||||||||||||||
| Advertising and marketing | 652 | 543 | 109 | 20.1% | ||||||||||||||||||||
| Facilities and insurance | 1,018 | 647 | 371 | 57.3% | ||||||||||||||||||||
| Share-based compensation | 2,176 | 950 | 1,226 | 129.1% | ||||||||||||||||||||
| Depreciation | 179 | 144 | 35 | 24.3% | ||||||||||||||||||||
| Other | 545 | 345 | 200 | 58.0% | ||||||||||||||||||||
| Selling, general and administrative | $ | 14,902 | 35.1% | $ | 12,297 | 33.5% | $ | 2,605 | 21.2% | |||||||||||||||
| 35 |
Selling, general and administrative expenses increased primarily due to (i) higher share-based compensation primarily due to the issuance of equity awards to certain executive and other employees, including employees brought on from our acquisitions, (ii) higher professional fees and outside services resulting from increased legal and accounting fees, and (iii) higher facilities and insurance costs resulting from additional facility space obtained through the acquisitions of Maestro and Intrinsyc. These increases were partially offset by a decrease in personnel-related expenses from reduced variable compensation and certain headcount reductions in the current year period, which were largely offset by headcount increases from the acquisitions of Maestro and Intrinsyc.
Research and Development
The following table presents our research and development expenses:
| Nine Months Ended March 31, | ||||||||||||||||||||||||
| % of Net | % of Net | Change | ||||||||||||||||||||||
| 2020 | Revenue | 2019 | Revenue | $ | % | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Personnel-related expenses | $ | 5,180 | $ | 5,060 | $ | 120 | 2.4% | |||||||||||||||||
| Facilities | 909 | 688 | 221 | 32.1% | ||||||||||||||||||||
| Outside services | 472 | 492 | (20 | ) | (4.1% | ) | ||||||||||||||||||
| Product certifications | 473 | 99 | 374 | 377.8% | ||||||||||||||||||||
| Share-based compensation | 331 | 248 | 83 | 33.5% | ||||||||||||||||||||
| Other | 316 | 292 | 24 | 8.2% | ||||||||||||||||||||
| Research and development | $ | 7,681 | 18.1% | $ | 6,879 | 18.7% | $ | 802 | 11.7% | |||||||||||||||
Research and development expenses increased primarily due to higher (i) product certification costs related to new product development projects and (ii) higher facilities costs, resulting from our new facility lease in India and additional facility space gained through the acquisitions of Maestro and Intrinsyc.
Restructuring, Severance and Related Charges
Current Fiscal Year
During the current year, we continued a plan to realign certain personnel resources to better fit our current business needs, particularly as it relates to identifying cost savings and synergies to be gained from the acquisitions of Maestro and Intrinsyc. These activities resulted in total charges of approximately $2,263,000 and $3,366,000 for the three and nine months ended March 31, 2020, respectively. 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.
Prior Fiscal Year
During the nine months ended March 31, 2019, we executed a plan to realign certain personnel resources to better fit our business needs. These activities resulted in a total charge of approximately $323,000.
| 36 |
Acquisition-Related Costs
During the three and nine months ended March 31, 2020, we incurred approximately $1,250,000 and $2,246,000 of acquisition-related costs, respectively, in connection with the acquisitions of Maestro and Intrinsyc. These costs are mainly comprised of banking, legal and other professional fees.
Amortization of Purchased Intangible Assets
We acquired certain intangible assets through our acquisitions in the current year period, which we recorded at fair-value as of the acquisition dates. These assets are amortized on a straight-line basis over their estimated useful lives, which resulted in charges of $801,000 and $1,096,000 for the three and nine months ended March 31, 2020, respectively.
Interest Income (Expense), Net
We earn interest on our domestic cash balance. For the three and nine months ended March 31, 2020, we incurred net interest expense as a result of interest incurred on borrowings on our term loan.
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.
Provision for Income Taxes
Refer to Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion regarding our provision for income taxes.
Liquidity and Capital Resources
Liquidity
The following table presents details of our working capital and cash and cash equivalents:
| March 31, | June 30, | |||||||||||
| 2020 | 2019 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Working capital | $ | 18,607 | $ | 26,718 | $ | (8,112 | ) | |||||
| Cash, cash equivalents, and restricted cash | $ | 6,977 | $ | 18,282 | $ | (11,305 | ) | |||||
| 37 |
In July 2019, we acquired Maestro, which reduced our net cash balance by $5,073,000. In January 2020, our acquisition of Intrinsyc used approximately $8,329,000 in net cash. Additionally, the net loss incurred during the nine months ended March 31, 2020 resulted in our using cash in operating activities of $3,435,000.
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.
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. 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.
Impact of COVID-19
We have not experienced any material delays or payment defaults by our customers. However, a prolonged economic shutdown may lead to significant declines in billings and cash collection and result in an unfavorable impact on our financial results. 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.
In April 2020, we executed a promissory note with Silicon Valley Bank in the principal amount of approximately $2,438,000 as part of the Paycheck Protection Program administered by the Small Business Administration and authorized under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. On May 6, 2020, we repaid the promissory note in full.
Bank Loan Agreements
Refer to Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 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 unaudited condensed consolidated statements of cash flows:
| Nine Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Net cash used in operating activities | $ | (3,435 | ) | $ | (1,597 | ) | $ | (1,838 | ) | |||
| Net cash used in investing activities | (13,873 | ) | (383 | ) | (13,490 | ) | ||||||
| Net cash provided by financing activities | 6,003 | 10,624 | (4,621 | ) | ||||||||
| 38 |
Operating Activities
Cash used from operating activities during the nine months ended March 31, 2020 increased compared to the prior year period as a result of an increase in our net loss, which was impacted during the nine months ended March 31, 2020 by an increase in operating expenses and acquisition-related costs for the acquisitions of Maestro and Intrinsyc. Our net loss included $4,488,000 of non-cash charges and the changes in operating assets and liabilities provided net cash of $1,114,000.
Investing Activities
Net cash used in investing activities during the nine months ended March 31, 2020 was driven by the acquisitions of Maestro and Intrinsyc, which used net cash of $5,073,000 and $8,329,000, respectively. We also used cash for the purchase of property and equipment, primarily related to tooling and test equipment.
Financing Activities
Net cash provided by financing activities during the nine months ended March 31, 2019 resulted primarily from the public offering of 2,700,000 shares of common stock, which resulted in us receiving proceeds net of underwriting discounts and expenses of approximately $9,774,000. For the nine months ended March 31, 2020, financing activities provided cash from the issuance of a term loan for $6,000,000 with Silicon Valley Bank as well as stock option exercises by employees. These inflows were partially offset by (i) repayments on the term loan and (ii) withholding taxes paid related to the vesting of restricted stock units.
Off-Balance Sheet Arrangements
As of March 31, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, including structured finance or special purpose entities, that have been established to facilitate off-balance sheet arrangements or for other purposes.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
As a smaller reporting company, we are not required to provide the information required by this Item 3.
| Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2020 at the reasonable assurance level.
| 39 |
(b) Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Inherent Limitation on Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
| 40 |
| Item 1. | Legal Proceedings |
From time to time, we are involved in various legal proceedings and claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other factors.
| Item 1A. | Risk Factors |
An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all of the information in this Report, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Report, and the unaudited condensed consolidated financial statements and related notes thereto in Part I, Item 1 of this Report. In addition, you should carefully consider the risks and uncertainties described in the section entitled “Risk Factors” in the Form 10-K, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects. Other than as noted below, our risk factors have not changed significantly from those disclosed in the Form 10-K.
The effect of COVID-19 and other possible pandemics and similar outbreaks could result in material adverse effects on our business, financial position, results of operations and cash flows.
The COVID-19 pandemic, and the various governmental, industry and consumer actions related thereto, are having and could continue to have negative impacts on our business and have created or could create conditions in our other risk factors noted above. These impacts include potential significant volatility or decreases in the demand for our products, changes in customer behavior and preferences, disruptions in or closures of our manufacturing operations or those of our customers and suppliers, disruptions within our supply chain, limitations on our employees’ ability to work and travel, potential financial difficulties of customers and suppliers, significant changes in economic or political conditions, and related financial and commodity volatility, including volatility in raw material and other input costs. It is uncertain what the impact of various legislation and other responses being taken in the U.S. and other countries will have on the economy, international trade, our industries, our businesses and the businesses of our customers and suppliers. Despite our efforts to manage the impacts, the degree to which COVID-19 and related actions ultimately impact our business, financial position, results of operations and cash flows will depend on factors beyond our control including the duration, spread and severity of the outbreak, the actions taken to contain COVID-19 and mitigate its public health effects, the impact on the U.S. and global economies and demand for our products, and how quickly and to what extent normal economic and operating conditions resume.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| 41 |
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
_________________
| * | Portions of this Exhibit, including certain schedules and exhibits to this Exhibit, have been omitted in accordance with Item 601(b) of Regulation S-K. A copy of any omitted information, schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request. |
| ** | Furnished, not filed. |
| 42 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LANTRONIX, INC. | ||
| Date: May 15, 2020 | By: | /s/ PAUL PICKLE |
| Paul Pickle | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 15, 2020 | By: | /s/ JEREMY WHITAKER |
| Jeremy Whitaker Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 43 |
Exhibit 10.1
AMENDED AND RESTATED INCENTIVE STOCK OPTION PLAN
| 1. | PURPOSE OF THE PLAN |
| This Amended and Restated Incentive Stock Option Plan has been established by the Company for directors, officers and Service Providers (as defined below) of the Company and its subsidiaries (collectively, the "Eligible Persons"). The purpose of this Plan is to provide long term incentives to attract, motivate and retain directors and key employees of the Company and its affiliates who, in the judgement of the Board, will be largely responsible for its future growth and success. | |
| 2. | DEFINITIONS |
| In this Plan, the following terms have the following meanings: | |
| 2.1 | "Applicable Laws" means the legal requirements relating to stock option plans, if any, pursuant to the Securities Acts and the regulations thereunder of each of the provinces of Canada, U.S. state corporate laws, U.S. federal and state and securities laws, the Code and the rules of any applicable Exchanges. |
| 2.2 | "Associate" means an associate as defined in the Securities Act. |
| 2.3 | "Board" means the Board of Directors of the Company. |
| 2.4 | "Business Day" means any day other than a Saturday, Sunday or a statutory holiday observed in the Province of British Columbia. |
| 2.5 | "Change of Control" means: |
| (a) | any Person, or combination of Persons acting jointly or in concert, acquiring or becoming the beneficial owner of, directly or indirectly, more than 50% of the voting securities of the Company, whether through the acquisition of previously issued and outstanding voting securities of the Company or of voting securities of the Company that have not been previously issued, or any combination thereof or any other transaction having a similar effect; and |
| (b) | amalgamation, merger or arrangement of the Company with or into another entity where the holders of Shares immediately prior to the transaction will hold less than 51% of the voting securities of the resulting entity upon completion of the transaction. |
| 2.6 | "Code" means the United States Internal Revenue Code of 1986, as amended. |
| 2.7 | "Company" means Intrinsyc Technologies Corporation, its successors and assigns, and any reference in the Plan to action by the Company means action by or under the authority of the Board or any person or committee that has been designated for the purpose by the Company including, without limitation, the Human Resources/ Compensation Committee. |
| 2.8 | "Disability" means any disability with respect to an Optionee which the Board, in its sole and unfettered discretion, considers likely to prevent permanently the Optionee from: |
| (a) | being employed or engaged by the Company, its subsidiaries or another employer, in a position the same as or similar to that in which he was last employed or engaged by the Company or its subsidiaries; or |
| 1 |
| (b) | acting as a director or officer of the Company or its subsidiaries. |
| 2.9 | "Exchanges" means The Toronto Stock Exchange and any other stock exchange on which the Shares are listed. |
| 2.10 | "Expiry Date" means the date set by the Board under subsection 4.1 of the Plan, as the last date on which an Option may be exercised subject to section 5.1. |
| 2.11 | "Grant Date" means the date specified in an Option Agreement as the date on which an Option is granted. |
| 2.12 | "Human Resources/Compensation Committee" means the committee, as constituted from time to time, which may be appointed by the Board to, among other things, interpret, administer and implement the Plan, and includes any successor committee appointed by the Board for such purposes. |
| 2.13 | "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of section 422 of the Code, as designated in the applicable Option Agreement. |
| 2.14 | "Insider" means an insider as defined in the Securities Act, as amended from time to time. |
| 2.15 | "Joint Actor" means a person acting jointly or in concert with an offeror, as such term is defined in the Securities Act. |
| 2.16 | "Market Price" means, as of any date, the value of the Shares, determined as follows: |
| (a) | if the Shares are listed on the TSX Venture Exchange, the Market Price shall be the closing sales price for the Shares (or the closing bid, if no sales were reported) as quoted on such exchange for the market trading day immediately prior to the date of determination less any discount permitted by the Canadian Venture Exchange; |
| (b) | if the Shares are listed on The Toronto Stock Exchange, the Market Price shall be the closing price per Share on The Toronto Stock Exchange for the last market trading day prior to the time of determination or, for the last market trading day the Shares were traded prior to the date of determination; |
| (c) | if the Shares are listed on an exchange other than the Canadian Venture Exchange or The Toronto Stock Exchange, the Market Price shall be the closing sales price of the Shares (or the closing bid, if no sales were reported) as quoted on such exchange for the last market trading day prior to the time of determination; and |
| (d) | if the Shares are not listed on an exchange, the Market Price shall be determined in good faith by the Board. |
| 2.17 | "Non-Qualified Stock Option" means an Option not intended to qualify as an Incentive Stock Option, as designated in the applicable Option Agreement. |
| 2.18 | "Option" means an option to purchase Shares granted pursuant to this Plan. |
| 2 |
| 2.19 | "Option Agreement" means an agreement, in the form attached hereto as Schedule "A", whereby the Company grants to an Optionee an Option, or an agreement, in the form attached hereto as Schedule "B", whereby the Company grants to a U.S. Optionee an Option, as the case may be. |
| 2.20 | "Optionee" means each of the directors, officers and Service Providers granted an Option pursuant to this PIan and their heirs, executors and administrators and, subject to the policies of the Exchange, an Optionee may also be a corporation wholly owned by an individual eligible for an Option grant pursuant to this Plan. |
| 2.21 | "Option Price" means the price per Share specified in an Option Agreement, adjusted from time to time in accordance with the provisions of section 6. |
| 2.22 | "Option Shares" means the aggregate number of Shares which an Optionee may purchase under an Option. |
| 2.23 | "Person" has the meaning ascribed thereto in the Securities Act, as amended from time to time. |
| 2.24 | "Plan" means this Amended and Restated Incentive Stock Option Plan. |
| 2.25 | "Shares" means the common shares in the capital of the Company as constituted on the date of this agreement provided that, in the event of any adjustment pursuant to section 5, "Shares" shall thereafter mean the shares or other property resulting from the events giving rise to the adjustment. |
| 2.26 | "Securities Act" means the Securities Act, R.S.B.C., c.418, as amended. |
| 2.27 | "Service Provider" means: |
| (a) | an employee or Insider of the Company or any of its subsidiaries; | |
| (b) | any other person or company engaged to provide ongoing management or consulting services for the Company or for any entity controlled by the Company; and | |
| (c) | any person who is providing ongoing management or consulting services to the Company or to any entity controlled by the Company indirectly through a company that is a Service Provider under subsection 2.27(b). |
| 2.28 | "Share Bonus Plan" means the Share Bonus Plan established pursuant to Part 7 hereof |
| 2.29 | "Stock Option Plan" means the Stock Option Plan established pursuant to Part 4 hereof. |
| 2.30 | "U.S. Optionee" means an Optionee who is a United States citizen or resident within the meaning of the Code. |
| 2.31 | "U.S. Subsidiary" means a subsidiary of the Company within the meaning of section 424(f) of the Code or any successor provision. |
| 3 |
| 2.32 | "Unissued Option Shares" means the number of Shares, at a particular time, which have been allotted for issuance upon the exercise of an Option but which have not been issued, as adjusted from time to time in accordance with the provisions of section 6, such adjustments to be cumulative. |
| 2.33 | "Unvested Option" means an Option that has not become exercisable in respect of a number of Option Shares by the Optionee pursuant to the terms of the Option Agreement. |
| 2.34 | "Vested Option" means an Option that has become exercisable in respect of a number of Option Shares by the Optionee pursuant to the terms of the Option Agreement. |
| 3. | ADMINISTRATION OF THE PLAN |
| 3.1 | The Plan shall be administered by the Board, or if the Board constitutes a Human Resources/Compensation Committee, by the Human Resources/Compensation Committee. |
| 3.2 | The Board, or if the Board constitutes a Human Resources/Compensation Committee, such committee of the Board, shall have the power, where consistent with the general purposes and intent of the Plan and subject to the specific provisions of the Plan and the policies of the Exchange from time to time in effect: |
| (a) | to establish policies and procedures for carrying out the purposes, provisions and administration of the Plan; | |
| (b) | to interpret and construe the Plan and to determine all questions arising out of the Plan and any Option granted pursuant to the Plan, and any such interpretation, construction or termination made by the Board shall be final, binding and conclusive for all purposes; | |
| (c) | to determine which eligible Persons are granted Options and to grant Options; | |
| (d) | to determine the number of Shares covered by each Option; | |
| (e) | to determine the Option Price; | |
| (f) | to determine the time or times when Options will be granted, vest and be exercisable; | |
| (g) | to determine if the Shares that are subject to an option will be subject to any restrictions upon the exercise of such Option; and | |
| (h) | to prescribe the form of the instruments relating to the grant, exercise and other terms of options. |
| 3.3 | A director of the Company to whom an Option may be granted shall not participate in the decision of the Board to grant such Option. |
| 4 |
| 4. | STOCK OPTION PLAN |
| 4.1 | Option Terms |
| The Board may from time to time authorize the issue of Options to directors, officers and Service Providers of the Company and its subsidiaries. The Option Price under each Option shall be not less than the Market Price. The Expiry Date for each Option shall be set by the Board at the time of issue of the Option; provided, however, that if at any time the Expiry Date of an Option should be determined to occur either during a period in which the trading of Shares by the Optionee is restricted under the insider trading policy or other policy of the Company or within ten business days following such a period, such Expiry Date shall be deemed to be the date which is the tenth business day following the date of such expiry of such restriction. Subject to the forgoing, the Expiry Date shall not be more than 10 years after the Grant Date. Options shall not be assignable (or transferable) by the Optionee. | |
| 4.2 | Limits on Shares Issuable on Exercise of Options |
| Subject to adjustment as provided below and in Section 6, the maximum number of Shares which may be issued pursuant to the Plan shall be the lower of (a) a rolling number equal to 10% less one Share of the total issued and outstanding Shares from time to time and (b) 3,750,000 Shares. For purposes of the foregoing, any Shares issued upon exercise of Options shall not reduce the percentage of Shares which may be issuable pursuant to Options granted under the Plan. If any Option is terminated, cancelled or has expired without being fully exercised, any un-issued Shares which have been reserved to be issued upon the exercise of the Options shall become available to be issued upon the exercise of Options subsequently granted under the Plan. | |
|
In addition, the maximum number of Shares which may be issuable pursuant to the Stock Option Plan and the Share Bonus Plan together with all of the Company's established or proposed share compensation arrangements other than those share compensation arrangements which do not require shareholder approval and the Company’s Restricted Share Unit Plan dated May 16, 2017 (collectively, the "Incentive Plans") shall not exceed a rolling number equal to 10% less one Share of the total issued and outstanding Shares from time to time, or such additional amount as may be approved from time to time by the shareholders of the Company.
Notwithstanding the foregoing, the following additional limitations apply: |
| (a) | the number of Shares issuable to any one Optionee under the Incentive Plans shall not exceed 5% of the total number of issued and outstanding Shares on a non-diluted basis; | |
| (b) | the number of Shares which may be issuable under the Incentive Plans within a one year period to any one Optionee who is an Insider and any Associate of such Insider, shall not exceed 5% of the total number of issued and outstanding Shares on a non-diluted basis; | |
| (c) | the number of Shares reserved for issuance to Insiders at any time, and the number of Shares issued to all Insiders within any one year period under the Incentive Plans, shall not exceed 10% less one Share of the total number of issued and outstanding Shares on a non-diluted basis; and | |
| (d) | the number of Shares reserved for issuance to non-employee directors under the Plan at any time shall not exceed 1% of the total number of issued and outstanding Shares on a non-diluted basis, and the aggregate value of any grant under this Plan to any one non-employee director in any calendar year shall not exceed $100,000. |
| 5 |
| 4.3 | Option Agreement |
| Each Option shall be confirmed by the execution of an Option Agreement. Each Optionee shall have the option to purchase from the Company the Option Shares at the time and in the manner set out in the Plan and in the Option Agreement applicable to that Optionee. The execution of an Option Agreement shall constitute conclusive evidence that it has been completed in compliance with this Plan. | |
| 5. | EXERCISE OF OPTION |
| 5.1 | When Options May be Exercised |
| Subject to subsections 5.3 and 5.4, an Option may be exercised to purchase any number of Shares up to the number of Vested Unissued Option Shares at any time after the Grant Date up to 5:00 p.m. Vancouver time on the Expiry Date and shall not be exercisable thereafter; provided, however, that if at any time the Expiry Date should be determined to occur either during a period in which the trading of Shares by the Optionee is restricted under the insider trading policy or other policy of the Company or within 10 business days following such a period, such date shall be deemed to be the date that is the 10th business day following the date of expiry of such restriction. | |
| 5.2 | Manner of Exercise |
| The Option shall be exercisable by delivering to the Company a notice specifying the number of Shares in respect of which the Option is exercised together with payment in full of the Option Price for each such Share. Upon notice and payment there will be a binding contract for the issue of the Shares in respect of which the Option is exercised, upon and subject to the provisions of the Plan. Delivery of the Optionee's cheque payable to the Company in the amount of the Option Price shall constitute payment of the Option Price unless the cheque is not honoured upon presentation in which case the Option shall not have been validly exercised. | |
| 5.3 | Vesting Option Shares |
| The Board or the Human Resources/Compensation Committee may determine, in its sole discretion, the vesting schedule applicable to each Option, which vesting schedule will be set out in the Option Agreement. The Board or the Human Resources/Compensation Committee may, in its sole discretion, and in certain circumstances, amend, abridge, or otherwise eliminate any vesting schedule as it applies to any Option issued to directors, officers or Service Providers pursuant to the Plan, so that any such Option, whether Vested or Unvested, may have an amended vesting schedule or may immediately vest and become exercisable. | |
| 5.4 | Termination of Employment |
| If an Optionee ceases to be a director, officer or Service Provider of the Company or one of the Company's subsidiaries, his or her Option shall be exercisable as follows: |
| (a) | Death, Disability or Retirement | |
| If the Optionee ceases to be a director, officer or Service Provider of the Company or subsidiary of the Company, due to his or her death, Disability or retirement in accordance with the Company's retirement policy in force from time to time, or, in the case of an Optionee that is a company, the death, Disability or retirement of the person who provides management or consulting services to the Company or to any entity controlled by the Company, the Option then held by the Optionee shall be exercisable to acquire Vested Unissued Option Shares at any time up to but not after the earlier of: |
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| (i) | 365 days after the date of death, Disability or retirement; and | |
| (ii) | the Expiry Date. |
| (b) | Termination for Cause | |
| If the Optionee, or in the case of an Option granted to an Optionee who falls under the definition of Service Provider set out in subsection 2.27(c), the Optionee's employer, ceases to be a director, officer or Service Provider of the Company or a subsidiary of the Company as a result of termination for cause, as that term is interpreted by the courts of the jurisdiction in which the Optionee, or, in the case of the Optionee who satisfies the definition of Service Provider set out in subsection 2.27(c) of the Optionee's employer, is employed or engaged; any outstanding Option held by such Optionee on the date of such termination, whether in respect of Option Shares that are Vested or not, shall be cancelled as of that date. | ||
| (c) | Early Retirement, Voluntary Resignation or Termination Other than For Cause
| |
If the Optionee, or in the case of an Option granted to an Optionee who falls under the definition of Service Provider set out in subsection 2.27, the Optionee's employer, ceases to be a director, officer or Service Provider of the Company or a subsidiary of the Company due to his or her retirement at the request of his or her employer earlier than the normal retirement date under the Company's retirement policy then in force or due to his or her termination by the Company other than for cause, or due to his or her voluntary resignation, the Option then held by the Optionee as of the date of such retirement or resignation or date that the Optionee is notified or becomes aware of such termination shall be exercisable to acquire Vested Unissued Option Shares at any time prior to the earlier of the Expiry Date and the date which is 30 days from the date on which the Optionee or, in the case of an Option granted to an Optionee who falls under the definition of Service Provider set out in subsection 2.27, the Optionee's employer, ceases to be a director, officer or Service Provider of the Company or subsidiary of the Company; provided, however, if the end of such 30 day period occurs either during a period in which the trading of Shares by the Optionee is restricted under the insider trading policy or other policy of the Company or within 10 business days following such a period, the date determined under this subsection 5.4(c)(ii) shall be the date which is the 10th business day following the date of the expiry of such restriction.
For greater certainty, an Option that had not become Vested in respect of certain Unissued Option Shares at the time that the relevant event referred to in this subsection 5.4 occurred, shall not be or become exercisable in respect to such Unissued Option Shares and shall be cancelled. |
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| 5.5 | Effect of a Take Over Bid |
| If a bona fide offer (the "Offer") for Shares is made to the Optionee or to shareholders of the Company generally or to a class of shareholders which includes the Optionee, which Offer, if accepted in whole or in part, would result in the offeror becoming a control person of the Company, within the meaning of the Securities Act, the Company shall, immediately upon receipt of notice of the Offer, notify each Optionee of full particulars of the Offer. The Board, or if applicable, the Human Resources/Compensation Committee will have the sole discretion to amend, abridge or otherwise eliminate any vesting schedule so that Option Shares subject to such Option will become Vested whereupon the Option may be exercised in whole or in part by the Optionee so as to permit the Optionee to tender the Option Shares received upon such exercise pursuant to the Offer. However, if: |
| (a) | the Offer is not completed within the time specified therein; or | |
| (b) | all of the Option Shares tendered by the Optionee pursuant to the Offer are not taken up or paid for by the offeror in respect thereof, |
| then the Option Shares received upon such exercise, or in the case of clause (b) above the Option Shares that are not taken up and paid for, shall be returned by the Optionee to the Company and reinstated as authorized but Unissued and, if applicable, Unvested Option Shares and with respect to such returned Option Shares, the Option shall be reinstated as if it had not been exercised on the terms for such Option Shares becoming Vested shall be reinstated pursuant to subsection 5.3. If any Option Shares are returned to the Company under this subsection 5.5, the Company shall immediately refund the exercise price to the Optionee for such Option Shares. | |
| 5.6 | Acceleration of Expiry Date |
| If at any time when an Option granted under the Plan remains unexercised with respect to any Unissued Option Shares, an Offer is made by an offeror, the Board may, upon notifying each Optionee of full particulars of the Offer, declare all Option Shares issuable upon the exercise of Options granted under the Plan Vested and accelerate the Expiry Date for the exercise of all unexercised Options granted under the Plan so that all Options will either be exercised or expire prior to the date upon which Shares must be tendered pursuant to the Offer. | |
| 5.7 | Effect of a Change of Control |
| If a Change of Control occurs, the Board, or if applicable, the Human Resources/ Compensation Committee will have the sole discretion to amend, abridge or otherwise eliminate any vesting schedule so that Option Shares subject to each outstanding Option will become Vested, whereupon such Option may be exercised in whole or in part by the Optionee. | |
| 5.8 | Exclusion From Severance Allowance Retirement Allowance or Termination Settlement |
| If the Optionee, or in the case of an Option granted to an Optionee who falls under the definition of Service Provider set out in subsection 2.27(c), the Optionee's employer, retires, resigns or is terminated from employment or engagement with the Company or any subsidiary of the Company, the loss or limitation, if any, pursuant to the Option Agreement with respect to the right to purchase Option Shares which were not Vested at that time or which, if Vested, were cancelled, shall not give rise to any right to damages and shall not be included in the calculation of nor from any part of any severance allowance, retiring allowance or termination settlement of any kind whatsoever in respect of such Optionee. |
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| 5.9 | Financial Assistance |
| Subject to the provisions of the Canada Business Corporations Act and, if required, subject to prior acceptance of the Exchanges, the Board may at any time or from time to time authorize the Company to provide financial assistance to an Optionee, on such terms and conditions as the Board may determine, to assist such Optionee in exercising his or her Options. Any financial assistance so provided will be repayable with full recourse. | |
| 5.10 | Shares Not Acquired |
| Any Unissued Option Shares not acquired by an Optionee under an Option which has expired may be made the subject of a further Option pursuant to the provisions of the Plan. | |
| 6. | ADJUSTMENT OF OPTION PRICE AND NUMBER OF OPTION SHARES |
| 6.1 | Share Reorganization |
| Whenever the Company issues Shares to all or substantially all holders of Shares by way of a stock dividend or other distribution, or subdivides all outstanding Shares into a greater number of Shares, or combines or consolidates all outstanding Shares into a lesser number of Shares (each of such events being herein called a “Shares Reorganization”) then effective immediately after the record date for such dividend or other distribution or the effective date of such subdivision, combination or consolidation, for each Option: |
| (a) | the Option Price will be adjusted to a price per Share which is the product of |
| (i) | the Option Price in effect immediately before that effective date or record; and |
| (ii) | a fraction the numerator of which is the total number of Shares outstanding on that effective date or record date before giving effect to the Share Reorganization, and the denominator of which is the total number of Shares that are or would be outstanding immediately after such effective date or record date after giving effect to the Share Reorganization; and |
| (b) | the number of Unissued Option Shares will be adjusted by multiplying (i) the number of Unissued Option Shares immediately before such effective date or record date by (ii) a fraction which is the reciprocal of the fraction described in subsection (a)(ii). |
| 6.2 | Special Distribution |
| Subject to the prior approval of the Exchanges, whenever the Company issues by way of a dividend or otherwise distributes to all or substantially all holders of the Shares: |
| (a) | shares of the Company, other than the Shares; |
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| (b) | evidences of indebtedness; | |
| (c) | any cash or other assets, excluding cash dividends (other than cash dividends which the board of directors of the Company has determined to be outside the normal course); or | |
| (d) | rights, options or warrants; |
| then to the extent that such dividend or distribution does not constitute a Share Reorganization (any of such non excluded events being herein called a “Special Distribution”), and effective immediately after the record date at which holders of Shares are determined for purposes of the Special Distribution, for each Option the Option Price will be reduced, and the number of Unissued Option Shares will be correspondingly increased, by such amount, if any, as is determined by the Board in its sole and unfettered discretion to be appropriate in order to properly reflect any diminution in value of the Shares as a result of such Special Distribution. | |
| 6.3 | Corporate Reorganization |
| Whenever there is: |
| (a) | a reclassification of outstanding Shares, a change of Shares into other shares or securities, or any other capital reorganization of the Company, other than as described in subsections 6.1 or 6.2; |
| (b) | a consolidation, merger or amalgamation of the Company with or into another corporation resulting in a reclassification of outstanding Shares into other shares or securities or a change of Shares into other share or securities; or |
| (c) | a transaction whereby all or substantially all of the Company's undertaking and assets become the property of another corporation; |
| (any such event being herein called a "Corporate Reorganization") the Optionee will have an option to purchase (at the times, and subject to the terms and conditions set out in the Plan) and will accept on the exercise of such option, in lieu of the Unissued Option Shares which he would otherwise have been entitled to purchase, the kind and amount of shares or other securities or property that he would have been entitled to receive as a result of the Corporate Reorganization if, on the effective date thereof, he had been the holder of all Unissued Option Shares or if appropriate, as otherwise determined by the Board. | |
| 6.4 | Determination of Option Price and Number of Unissued Option Shares |
| If any questions arise at any time with respect to the Option Price or number of Unissued Option Shares deliverable upon exercise of an Option following a Shares Reorganization, Special Distribution or Corporate Reorganization, such questions shall be conclusively determined by the Company's auditors, or, if they decline to so act, any other firm of Chartered Professional Accountants in Vancouver, British Columbia, that the Board may designate and who will have access to all appropriate records and such determination will be binding upon the Company and all Optionees. |
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| 6.5 | Regulatory Approval |
| Any adjustment to the Option Price or the number of unissued Option Shares purchasable under the Plan pursuant to the operation of any one of subsections 6.1, 6.2 or 6.3 is subject to the approval of the Exchanges and any other governmental authority having jurisdiction. | |
| 7. | SHARE BONUS PLAN |
| 7.1 | Participants |
| The Board shall have the right, subject to subsection 7.2, to issue or reserve for issuance, for no cash consideration, to any senior officer or employee of the Company or an affiliate of the Company or to an issuer, all of the voting securities of which are held by a director, senior officer or employee of the Company or an affiliate of the Company, any number of Shares as a discretionary bonus subject to such provisos and restrictions as the Board may determine. The price at which such Shares are issued shall be equal to (i) the Market Price or (ii) the Market Price less the applicable discount under the private placement rules of the Exchange, provided that if a discount is applied the Shares issued shall be subject to a 12 or 14 month hold period, whichever is applicable, as if the transaction had been structured as a private placement. | |
| 7.2 | Number of Shares |
| Shares reserved for issuance and issued under the Share Bonus Plan shall be subject to the limitations set out in subsection 4.2. In addition to those limitations, (a) the number of Shares issuable under the Share Bonus Plan to any one Optionee that is employed by the Company in an investor relations capacity shall not exceed 2% of the total number of issued and outstanding Shares on a non-diluted basis, and (b) Shares may not be issued to non-employee directors under the Share Bonus Plan. The aggregate maximum number of Shares issued under the Share Bonus Plan in each calendar quarter shall not exceed the lesser of 18,750 and such number of Shares as has an aggregate value of not more than $50,000 based on the Market Price as at the end of that quarter provided that the aggregate maximum number of Shares issued under the Share Bonus Plan shall not exceed 31,250 Shares. | |
| 7.3 | Necessary Approvals |
| The obligation of the Company to issue and deliver any Shares pursuant to an award made under the Share Bonus Plan will be subject to all necessary approvals of any securities regulatory authority having jurisdiction over the Shares. | |
| 8. | AMENDMENT AND TERMINATION OF THE PLAN |
| 8.1 | The Board shall have the power to, at any time and from time to time and without shareholder approval, either prospectively or retrospectively, amend, suspend or terminate the Plan or any Option granted under the Plan, including, without limiting the generality of the foregoing, changes of a clerical or grammatical nature, changes regarding the persons eligible to participate in the Plan, changes regarding the right to exercise Options after termination in accordance with Section 5.4 and changes regarding the vesting of Options; provided however that: |
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| (a) | such amendment, suspension or termination is in accordance with Applicable Laws; | |
| (b) | no such amendment, suspension or termination shall be made at any time to the extent such action would materially adversely affect the existing rights of an Optionee with respect to any then outstanding Option, as determined by the Board, without his or her consent in writing; | |
| (c) | the Board shall obtain shareholder approval of: |
| (i) | any amendment to the maximum number of Shares specified in subsection 4.2 in respect of which Options may be granted under the Plan (other than pursuant to section 6); | |
| (ii) | any amendment that would reduce the exercise price of an outstanding Option (other than pursuant to section 6); | |
| (iii) | any amendment that would extend the term of any Option granted under the Plan beyond the Expiry Date; | |
| (iv) | any cancellation and re-issue of Options; | |
| (v) | any amendments to eligible participants that may permit the introduction or re-introduction of non-employee directors on a discretionary basis or amendments that increase limits previously imposed on non-employee director participation; | |
| (vi) | any amendment which would permit Options granted under the Plan to be transferable or assignable other than for normal estate settlement purposes; and | |
| (vii) | any amendment to this Section 8.1. |
| 8.2 | If the Plan is terminated, the provisions of the Plan and any administrative guidelines and other rules and regulations adopted by the Board and in force on the date of termination will continue in effect as long as any Option or any rights pursuant thereto remain outstanding and, notwithstanding the termination of the Plan, the Board shall remain able to make such amendments to the Plan or the Options as they would have been entitled to make if the Plan were still in effect. |
| 9. | ADDITIONAL PROVISIONS CONCERNING U.S. OPTIONEES |
| 9.1 | Options granted to a U.S. Optionee will generally be Incentive Stock Options, provided however, that the Board may, at its discretion, at the time of the grant of the Options, make a determination as to whether the Options will be deemed Incentive Stock Options or Non-Qualified Stock Options. |
| 9.2 | Options granted to an Optionee who is a United States citizen or resident within the meaning of the Code and who is not an employee of the Company or a U.S. Subsidiary will not be Incentive Stock Options. Any Option Agreement with such an Optionee for a grant of Options under the Plan will state that the Options granted thereunder are Non-Qualified Stock Options for U.S. income tax purposes. |
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| 9.3 | In addition to the terms and conditions of Options granted under the Plan referred to in the preceding sections, Options granted to a U.S. Optionee that are granted by the Board as Incentive Stock Options will be subject to the following terms and conditions: |
| (a) | Options will be designated in the written Option Agreement, attached hereto as Schedule "B", between the Company and the U.S. Optionee as either Incentive Stock Options or Non-Qualified Stock Options; |
| (b) | If the U.S. Optionee is directly or indirectly the beneficial owner of more than 10% of the combined voting power of all classes of shares in the capital of the Company or a Subsidiary at the time an Option is granted to the U.S. Optionee, the exercise price of such Option will be equal to at least 110% of the Market Price of the shares, as defined in section 2, and the term of the Option shall be five years from the date of grant thereof or such shorter term as may be provided in the Option Agreement; |
| (c) | Options may not be transferred, assigned or pledged in any manner other than by will or applicable laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by the Optionee; |
| (d) | No Options may be granted after the date immediately preceding the tenth anniversary of the earlier of the date this Plan was adopted or was approved by the Company's shareholders, except that if an amendment and restatement of this Plan has subsequently been approved by the Company's shareholders, no Options may be granted after the date immediately preceding the tenth anniversary of the date of such subsequent approval; and |
| (e) | notwithstanding any other provision of this Plan, such Option by its terms must not be exercisable after the expiry of 10 years from the date the Option is granted. |
| 9.4 | If a U.S. Optionee is granted Options under the Plan, the Option Agreement with the U.S. Employee will contain acknowledgements by the U.S. Employee that: |
| (a) | notwithstanding a designation of Options granted to a U.S. Optionee as Incentive Stock Options, to the extent that the aggregate fair market value, determined as of the date such Options were granted, of the Shares issuable on exercise of Options which are exercisable for the first time by any U.S. Optionee during any calendar year exceeds U.S. $100,000, such excess Options shall not be treated as Incentive Stock Options; and |
| (b) | in order for Options granted under the Plan to be treated as Incentive Stock Options: |
| (i) | Shares purchased on the exercise of an Option must not be sold or otherwise disposed of within 2 years from the date the Option was granted, or within 1 year from the date the Option was exercised; |
| (ii) | if a U.S. Optionee's employment with the Company terminates for any reason other than total disability or death as provided in (iii) or (iv), the U.S. Optionee must maintain his status as an employee of the Company or Subsidiary at all times during the period beginning on the date the Option is granted and ending 3 months before the date an Option is exercised; |
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| (iii) | if a U.S. Optionee's employment with the Company terminates because of "total disability," his or her Option must be exercised before the date 12 months after the date of termination. The term "total disability" means a medically determinable mental or physical impairment that is expected to result in death or has lasted or is expected to last for a continuous period of 12 months or more and that, in the opinion of the Company and two independent physicians, causes the Optionee to be unable to perform his or her duties as an employee, director, officer or consultant of the Employer and unable to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after two independent physicians have furnished their written opinion of total disability to the Company and the Company has reached an opinion of total disability; and |
| (iv) | if a U.S. Optionee dies while employed with the Company, his or her Option must be exercised within one year after the date of death. |
| (c) | The acknowledgement of the U.S. Optionee in (b)(ii) above does not confer upon the U.S. Optionee any right with respect to continuation of his employment relationship with the Company, nor will it interfere in any way with the Company's right to terminate his employment relationship at any time, with or without cause. |
| 9.5 | Unless and until Shares issuable upon the exercise of Options are registered under the United States Securities Act of 1933, Shares issued under this Plan to an Optionee who is a resident of the United States of America will contain the following legend, as amended or supplemented by applicable laws: |
| THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED OR ASSIGNED EXCEPT (A) TO THE COMPANY, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, IF AVAILABLE, OR (C) INSIDE THE UNITED STATES (1) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR (2) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS, AND, IN CONNECTION WITH ANY TRANSFERS PURSUANT TO (C)(1) OR (C)(2) ABOVE, THE SELLER HAS FURNISHED TO THE COMPANY AN OPINION OF COUNSEL OF RECOGNIZED STANDING, REASONABLY SATISFACTORY TO THE COMPANY, TO THAT EFFECT. | |
| 9.6 | Unless otherwise determined by the Board, if a U.S. Employee of the Company or any parent or subsidiary of the Company is a non-exempt employee subject to the overtime compensation provisions of Section 7 of the United States Fair Labor Standards Act (the "FLSA"), any option granted to that employee shall be subject to the following restrictions: (i) the option price shall be at least 85 percent of the Market Price of the Common Stock subject to the option on the date it is granted; and (ii) the option shall not be exercisable until at least six months after the date it is granted; provided, however, that this six month restriction on exercisability will cease to apply if the employee dies, becomes disabled or retires, there is a change in ownership of the Company, or in other circumstances permitted by regulation, all as prescribed in Section 7(e)(8)(B) of the FLSA. |
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| 9.7 | Notwithstanding this section 9, the Company does not assume responsibility for the income or other tax consequences for Optionees or U.S. Optionees under the Plan and they are advised to consult their own tax advisors. |
| 10. | MISCELLANEOUS |
| 10.1 | Right to Employment |
| Neither this Plan nor any of the provisions hereof shall confer upon any Optionee any right with respect to employment or continued employment with the Company or any subsidiary of the Company or interfere in any way with the right of the Company or any subsidiary of the Company to terminate such employment. | |
| 10.2 | Necessary Approval |
| The Plan shall be effective only upon the approval of the shareholders of the Company given by way of an ordinary resolution. Any Options granted under this Plan prior to such approval shall only be exercised upon the receipt of such approval. The obligation of the Company to sell and deliver Shares in accordance with the Plan is subject to the approval of the Exchanges and any governmental authority having jurisdiction. If any shares cannot be issued to any Optionee for any reason, including, without limitation, the failure to obtain such approval, then the obligation of the Company to issue such Shares shall terminate and any Option Price paid by the Optionee to the Company shall be immediately refunded to the Optionee by the Company. | |
| 10.3 | Administration of the Plan |
| The Board shall, without limitation, have full and final authority in their discretion, but subject to the express provisions of the Plan, to interpret the Plan and to make all other determinations deemed necessary or advisable in respect of the Plan. Except as set forth in subsection 6.4, the interpretation and construction of any provision of the Plan by the Directors shall be final and conclusive. Administration of the Plan shall be the responsibility of the appropriate officers of the Company and all costs in respect thereof shall be paid by the Company. | |
| 10.4 | Income Taxes |
| As a condition of and prior to participation in the Plan any Optionee shall on request authorize the Company in writing to withhold from any remuneration otherwise payable to him or her any amounts required by any taxing authority to be withheld for taxes of any kind as a consequence of his or her participation in the Plan. If additional withholding is or becomes required (as a result of exercise of an option or as a result of disposition of shares acquired pursuant to exercise of an option) beyond any amount deposited before delivery of the certificates, the Optionee shall pay such amount, in cash or by check, to the Company on demand. If the Optionee fails to pay the amount demanded, the Company or the Employer may withhold that amount from other amounts payable to the Optionee, including salary, subject to applicable law. |
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| 10.5 | Form of Notice |
| A notice given to the Company shall be in writing, signed by the Optionee and delivered to the Secretary of the Company. | |
| 10.6 | No representation or Warranty |
| The Company makes nor representation or warranty as to the future market value of any Shares issued in accordance with the provisions of the Plan. | |
| 10.7 | Compliance with Applicable Law |
| If any provision of the Plan or any Option Agreement contravenes any law or any order, policy, by law or regulation of any regulatory body or Exchange having authority over the Company or the Plan, then such provision shall be deemed to be amended to the extent required to bring such provision into compliance therewith. | |
| 10.8 | No Assignment |
| No Optionee may assign any of his or her rights under the Plan. |
* * *
Approved on April 4, 1997, amended on December 31, 1997, March 30, 1998, December 6, 2000, April 5, 2001, December 6, 2001, December 4, 2002, December 5, 2002, December 13, 2006, December 13, 2007, June 28, 2010, June 26, 2013, May 18, 2016, May 16, 2017 and May 14, 2019.
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Exhibit 10.2
INTRINSYC TECHNOLOGIES CORPORATION
RESTRICTED SHARE UNIT PLAN
ARTICLE 1
PURPOSE
1.1 Purpose
The purpose of this Restricted Share Unit Plan is to provide directors, officers, employees and consultants of the Company and its Subsidiaries with Restricted Share Units as incentive compensation in order to allow them to participate in the long-term success of the Company and to promote a greater alignment of their interests with the interests of the Company’s shareholders.
ARTICLE 2
INTERPRETATION
2.1 Definitions
As used in the Plan, the following terms have the respective meanings:
| (a) | “Account” means a bookkeeping account maintained for each Participant on the books of the Company which will be credited with Restricted Share Units in accordance with the terms of the Plan; |
| (b) | “Applicable Withholding Taxes” is defined in Section 3.11; |
| (c) | “Associate” has the meaning ascribed to that term in the Securities Act (Ontario); |
| (d) | “Award” means an award of RSUs granted in accordance with Section 3.2; |
| (e) | “Award Agreement” means a written agreement between the Company and a Participant in a form approved by the Plan Administrator, evidencing the terms and conditions on which an Award has been granted under this Plan; |
| (f) | “Blackout Period” is defined in Section 3.9(d); |
| (g) | “Board” means the board of directors of the Company; |
| (h) | “Cause” means “cause” as defined in the Participant’s employment agreement with the Company or a Subsidiary, and if there is no such meaning given or agreement, has the meaning as defined by applicable law or, if not so defined, such term shall refer to circumstances where an employer can terminate an individual’s employment without notice; provided, however, that for U.S. Taxpayers, such circumstances shall be limited to those following the Participant’s engagement in any misconduct, dishonesty, insubordination or other act adversely affecting the goodwill of the Company or a Subsidiary, or adversely affecting the Company’s or a Subsidiary’s relationships with their customers or employees, including without limitation, the Participant’s conviction of a felony or crime of moral turpitude; |
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| (i) | “Change of Control” means: |
| (i) | the completion of a transaction the result of which is that a Person, or any group of two or more Persons acting jointly or in concert, acquires or becomes the holder of securities of the Company representing 50% or more of the aggregate voting power of all of the Company’s then issued and outstanding securities; or |
| (ii) | the consummation of an amalgamation, arrangement, merger or other transaction or series of related transactions resulting in the combination of the Company with or into another entity, where the shareholders of the Company immediately prior to such transaction or series of related transactions, directly or indirectly do not continue to hold securities representing 50% or more of the aggregate voting power of the securities of the continuing or surviving entity immediately following such transaction or series of related transactions; |
| (iii) | a sale, transfer or other disposition or series of related sales, transfers
or other dispositions, of all or substantially all of the Company’s assets (other than a sale, transfer or other disposition to a wholly-owned Subsidiary), including an exclusive irrevocable licensing of all or substantially all of the Company’s intellectual property to a third party that would otherwise qualify as a sale of all or substantially all of the assets of the Company under applicable law (other than licensing to a wholly-owned subsidiary of the Company); |
| (iv) | any declaration or payment of any dividend or any other distribution (including return of capital) on any of the Company’s capital stock or other equity securities or series of such declarations or payments involving all or substantially all of the assets the Company held prior to the declaration or payment or series of declarations or payments; |
provided that, unless otherwise determined by the Board, a “Change of Control” shall not include (i) an amalgamation, merger or consolidation of the Company with or into a Subsidiary; (ii) a transaction undertaken solely for the purpose of changing the Company’s place of domicile or jurisdiction of incorporation; or (iii) a bona fide equity financing of the Company;
| (j) | “Code” means the United States Internal Revenue Code of 1986, as amended; |
| (k) | “Committee” means the Compensation and Corporate Governance Committee of the Board or such other committee or persons as may be designated by the Board; |
| (l) | “Company” means Intrinsyc Technologies Corporation, a corporation governed by the federal laws of Canada, and any successor; |
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| (m) | “Controlled” means, in relation to an entity that is controlled by a Person, if: |
| (i) | in the case of an entity which is a corporation, the Person holds voting securities of the entity carrying more than 50% of the votes for the election of directors are held, directly or indirectly, otherwise than by way of security only, by or for the benefit of the Person and the votes carried by the securities are entitled, if exercised, to elect a majority of the directors of the entity; |
| (ii) | in the case of an entity which is a partnership, other than a limited partnership, the Person holds more than 50% of the interests in the partnership; or |
| (iii) | in the case of an entity which is a limited partnership, the Person is a general partner of the entity; |
| (n) | “Disability” or “Disabled” means a physical or mental impairment sufficient to make the individual unable to perform his or her duties with the Company or a Subsidiary as adjudicated by a third party such as, but not limited to, the Company’s insurance carrier(s) or WorkSafe BC or equivalent entity in other jurisdictions; |
| (o) | “Distribution Date” is defined in Section 3.9(a); |
| (p) | “Final Date” is defined in Section 3.6; |
| (q) | “Incentive Plan” means share option, share option plan, employee stock purchase plan or any other compensation or incentive mechanism involving the issuance or potential issuance of Shares to directors, officers, employees or consultants of the Company; |
| (r) | “Insider” has the meaning ascribed thereto in the TSX Company Manual; |
| (s) | “Multiplier” means a percentage rate (rounded to two decimal points) calculated in the manner set out in the Award Agreement, to be applied upon the achievement of Performance Criteria set out in the Award Agreement; |
| (t) | “Participant” means any Person who (i) is eligible to participate in the Plan in accordance with Section 3.1, and (ii) has an RSU which has not yet been paid; |
| (u) | “Payment Shares” is defined in Section 3.9(a); |
| (v) | “Performance Criteria” means such financial and/or personal performance criteria as may be set out in the Award Notice, which may be applied to the Company as a whole, any Subsidiary or any business unit of the Company or a Subsidiary, either individually, alternatively or in any combination, and measured either in total, incrementally or cumulatively over a specified performance period on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group; |
| (w) | “Person” includes an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, and a natural person in his or her capacity as trustee, executor, administrator or other legal representative; |
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| (x) | “Plan” means this Restricted Share Unit Plan, as amended from time to time; |
| (y) | “Plan Administrator” means the Board, the Committee or any Person to whom the Board or Committee has delegated authority for plan administration pursuant to Section 6.2; |
| (z) | “Restricted Share Unit” or “RSU” means a bookkeeping entry equivalent in value to a Share, credited to a Participant’s Account in accordance with Section 3.2; |
| (aa) | “Retirement” means termination of employment of a Participant from active employment with the Company and its Subsidiaries (other than for Cause) where the Participant: |
| (i) | in the case of the Chief Executive Officer (“CEO”) and the CEO’s direct reports, the retirement has been approved by the Board and the Participant complies with such conditions as the Board may require in connection with its approval; or in the case of all other Participants, the Participant has attained (i) age sixty-five (65) or reaches age fifty-five (55) with at least (ten) 10 years of service, or (ii) at or after such lesser age and/or service thresholds as the Plan Administrator may determine; |
| (ii) | has given the Company or its Subsidiary employing the Participant formal notice of their intention to retire at least six months in advance, or such lesser advance notice as the Plan Administrator may approve in its discretion; |
| (iii) | is paid no cash severance payment or retiring allowance or equivalent; and |
| (iv) | has complied with such transitional activities as may be reasonably required by the Company or its Subsidiary employing the Participant during the period from the date notice of the Participant’s intention to retire has been given until the date the Participant ceases active employment with the Company and its Subsidiaries. |
| (bb) | “Section 409A” means section 409A of the Code, including any authority and guidance issued thereunder; |
| (cc) | “Share” means a common share of the Company or, in the event of an adjustment contemplated by Section 5.2, such other number or type of securities as the Board or the Committee may determine; |
| (dd) | “Subsidiary” means any entity directly or indirectly Controlled by the Company; |
| (ee) | “Termination Date” means the date designated by the Participant and the Company or a Subsidiary in a written employment agreement, or other written agreement between the Participant and Company or a Subsidiary, or if no written employment agreement exists, the date designated by the Company or a Subsidiary, as the case may be, on which a Participant ceases to be a Participant of the Company or the Subsidiary, as the case may be, provided that, in the case of termination of employment by voluntary resignation by the Participant, such date shall not be earlier than the date notice of resignation was given, and “Termination Date” specifically does not mean the date of termination of any period of reasonable notice that the Company or the Subsidiary (as the case may be) may be required by law to provide to the Participant; |
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| (ff) | “U.S. Taxpayer” means a Participant who is a U.S. citizen, U.S. permanent resident or U.S. tax resident for the purposes of the Code or a Participant for whom the Award of Restricted Share Units under this Plan would otherwise be subject to U.S. taxation under the Code; and |
| (gg) | “Vesting Date” means the date on which an RSU awarded to a Participant vests, as specified in the applicable Award Agreement; provided that, for greater certainty, in no case shall the Vesting Date for any RSU occur after the Final Date applicable to the RSU. |
2.2 Certain Rules of Interpretation
| (a) | Whenever the Plan Administrator exercises discretion in the administration of this Plan, the term “discretion” means the sole and absolute discretion of the Board, Committee or Plan Administrator, as the case may be. |
| (b) | As used herein, the terms “Article”, “Section”, “Subsection” and “clause” mean and refer to the specified Article, Section, Subsection and clause of this Plan, respectively. |
| (c) | Words importing the singular include the plural and vice versa and words importing any gender include any other gender. |
| (d) | Unless otherwise specified, time periods within or following which any payment is to be made or act is to be done shall be calculated by excluding the day on which the period begins, including the day on which the period ends, and abridging the period to the immediately preceding business day in the event that the last day of the period is not a business day. In the event an action is required to be taken or a payment is required to be made on a day which is not a business day such action shall be taken or such payment shall be made by the immediately preceding business day. |
| (e) | Unless otherwise specified, all references to money amounts are to Canadian currency. |
| (f) | The headings used herein are for convenience only and are not to affect the interpretation of this Plan. |
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ARTICLE 3
AWARDS
3.1 Eligibility
All employees, directors, officers or consultants of the Company or a Subsidiary are eligible to receive RSUs under the Plan. The Board or the Committee reserves the right to restrict eligibility or otherwise limit the number or categories of Persons eligible for participation in the Plan at any time.
3.2 Awarding of Restricted Share Units
The Plan Administrator shall specify the number or the manner of determining the number of Restricted Share Units awarded to each Participant and any other conditions relating to the Restricted Share Units that the Plan Administrator deems appropriate. Restricted Share Units may be granted to any eligible individuals at any time, and need not be made to eligible individuals, at the same time. RSUs allocated to Participants are awarded in respect of services rendered by the Participant following the date of the Award. In no event may RSUs be allocated to Participants for, or in respect of, services rendered in any period prior to the commencement of the calendar year in which the RSUs are allocated.
3.3 Compliance with Securities Laws
Any Restricted Share Units granted under this Plan shall be subject to the requirement that, if at any time the Company shall determine that the listing, registration or qualification of the Shares issuable pursuant to settlement of such RSUs upon any securities exchange or under any securities laws of any jurisdiction, or the consent or approval of a stock exchange, including the Toronto Stock Exchange, and any securities commissions or similar securities regulatory bodies having jurisdiction over the Company is necessary as a condition of, or in connection with, the grant or exercise of such RSUs or the issuance of Shares thereunder, such Shares may not be issued pursuant to such Restricted Share Units unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Plan Administrator. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration, qualification, consent or approval. Participants shall, to the extent applicable, cooperate with the Company in complying with such legislation, rules, regulations and policies.
3.4 Total Shares Subject to Restricted Share Units
| (a) | Subject to adjustment as provided for in Section 5.2 and any subsequent amendment to the Plan, the aggregate number of Shares reserved for issuance pursuant to Restricted Share Units granted under the Plan shall not exceed 500,000 Shares. |
| (b) | To the extent any Restricted Share Units (or portion(s) thereof) under the Plan terminate or are cancelled for any reason prior to settlement in full, or are surrendered to the Company by the Participant, except surrenders relating to the tax withholding obligations related to any such Award, the Shares subject to such Awards (or portion(s) thereof) will again become available for issuance pursuant to Restricted Share Units granted under this Plan. |
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| (c) | Notwithstanding anything in this Plan, but subject to Section 3.4(a), the following limitations apply: |
| (i) | the number of Shares issuable to any one Participant under the Incentive Plans shall not exceed 5% of the total number of issued and outstanding Shares on a non-diluted basis; |
| (ii) | the number of Shares which may be issuable under the Incentive Plans within a one year period to any one Participant who is an Insider and any Associate of such Insider, shall not exceed 5% of the total number of issued and outstanding Shares on a non-diluted basis; |
| (iii) | the number of Shares issuable to Insiders at any time, and the number of Shares issued to all Insiders within any one year period under the Incentive Plans, shall not exceed 10% less one Share of the total number of issued and outstanding Shares on a non-diluted basis; and |
| (iv) | the number of Shares reserved for issuance to non-employee directors under the Plan at any time shall not exceed 1% of the total number of issued and outstanding Shares on a non-diluted basis, and the aggregate value of any grant under this Plan to any one non-employee director in any calendar year shall not exceed $100,000 (based on the grant date fair value of the Shares underlying the Restricted Share Units). |
3.5 Award Agreements
Each grant of Restricted Share Units granted under this Plan will be evidenced by an Award Agreement substantially in the form of the agreement set out in Schedule “A”. Each Award Agreement will contain such provisions as are required by this Plan and any other provisions that the Committee may direct. Each Award Agreement will be subject to the applicable provisions of this Plan except to the extent that the Committee, in its discretion, determines to vary the terms of this Plan in the Award Agreement and the Award Agreement identifies which terms of the Plan are being varied. Any one officer of the Company is authorized and empowered to execute and deliver, for and on behalf of the Company, an Award Agreement to each Participant granted an Award pursuant to this Plan (other than to himself or herself), except that an Award Agreement for the Chief Executive Officer shall be signed by the Chair of the Board or the Chair of the Committee. Award Agreements need not be identical between different Participants or with respect to different Restricted Share Unit grants to the same Participant.
3.6 Vesting
A grant of Restricted Share Units may provide that the Restricted Share Units to be credited to a Participant’s Account shall be subject to vesting over a period of time and/or meeting certain Performance Criteria. Any vesting requirements applicable to all or any portion of an Award shall be set forth in the Award Agreement; provided that any Restricted Share Units that remain unvested on December 31st of the third calendar year following the year in which the Award occurred (the “Final Date”) shall expire and be cancelled. Except as otherwise provided in the Plan, each vested RSU will be payable in accordance with Sections 3.9 and 3.10.
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3.7 Performance Restricted Share Units
An Award Agreement may provide that the number of Restricted Share Units credited to a Participant’s Account or the cash payment to be made in respect of such Restricted Share Units shall be subject to adjustment pursuant to a Multiplier based on the achievement of Performance Criteria as specified in the Award Agreement.
3.8 Adjustments to Performance Criteria and Multiplier
The Committee may in its discretion at any time after Restricted Share Units have been granted and prior to the issue of Shares pursuant to such Restricted Share Units, make such adjustments as it deems appropriate to any of the Performance Criteria and/or the methodology for calculating the Multiplier where:
| (a) | a relevant measure included in the Performance Criteria no longer exists, has materially changed or is no longer relevant to the Company’s business; |
| (b) | a company included in any peer group for purposes of assessing relative performance has ceased to be publicly traded; or |
| (c) | the Committee determines an adjustment should be made to reflect extraordinary circumstances that were not anticipated at the time the RSUs were granted. |
3.9 Form of Payment
| (a) | As soon as practicable after the Vested Date, and subject to Section 3.9(c), the Company shall, at its sole election and option, either (i) issue to the Participant or to the Participant’s estate a number of fully paid and non-assessable Shares equal to the number of Restricted Share Units in the Participant’s Account that became payable on the Vesting Date (the “Payment Shares”); or (ii) pay to the Participant or the Participant’s estate a lump sum payment in cash equal to the number of Restricted Share Units in the Participant’s Account that became payable on the Vesting Date multiplied by the price as of the close of trading for the Shares on such Vesting Date, in each case less Applicable Withholding Taxes. As of the date of such distribution or payment (the “Distribution Date”), the Restricted Share Units in respect of which such Shares are distributed or cash payment in lieu of Shares is made shall be cancelled and no further payments shall be made to the Participant under the Plan in relation to such Restricted Share Units. |
| (b) | Notwithstanding Section 3.9(a): |
| (i) | as a condition to the distribution of cash in payment of any Restricted Share Units, the Company may, at its sole discretion, (A) require the Participant to first pay to the Company or (B) require the Company to deduct from such cash amount, Applicable Withholding Taxes; and |
| (ii) | as a condition to the issuance of Shares in payment of any Restricted Share Units, the Company may, at its sole discretion, (A) require the Participant to first pay to the Company in cash, or (B) require the Company to reduce the number of Shares to be distributed to such Participant by, an amount equal in value (based on the price as of the close of trading for the Shares as of the Distribution Date) to the Applicable Withholding Taxes; and |
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| (iii) | the Company shall advise the Participant in writing of any Applicable Withholding Taxes required in connection with the settlement of the RSUs. |
| (c) | Notwithstanding anything to the contrary in this Section 3.9, the Distribution Date shall not be later than the Final Date applicable to the particular RSU. |
| (d) | If the Distribution Date falls within a trading blackout period imposed by or on the Company for securities law purposes (the “Blackout Period”), the Company shall, subject to Section 3.9(c), automatically extend such Distribution Date to the second business day after the end of the Blackout Period. |
3.10 Change of Control
Subject to Sections 3.6 and 3.9, in the event of a Change of Control transaction:
| (a) | all outstanding unvested RSUs may, at the discretion of the Plan Administrator, be accelerated and be fully vested; |
| (b) | immediately prior to a Change of Control and subject to section to Section 3.10(a), the Company may, at its sole election and option, settle any vested RSUs by issuance of Payment Shares or payment of cash in lieu of Payment Shares; |
| (c) | each Participant shall consent to, vote for and raise no objections against, and waive all dissent and appraisal rights (if any) with respect to, the Change of Control transaction; and |
| (d) | if the Change of Control transaction is structured as a sale of Shares, and the Participants are issued Payment Shares pursuant to Section 3.10(b), each Participant shall agree to sell and shall be permitted to sell all of the Shares held by such Participant, including Shares issued pursuant to RSUs, on the terms and conditions approved by the Board and subject to the provision of customary representations, warranties and indemnities. |
3.11 Taxes and Other Withholdings
It is a condition of each grant of Restricted Share Units that the Participant pays, or makes adequate arrangements satisfactory to the Company or a Subsidiary to satisfy, when due, any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding and any and all other amounts as it may be required by law to withhold (the “Applicable Withholding Taxes”) related to the Restricted Share Units. The Company and its Subsidiary, as applicable, are authorized to deduct from wages or other cash compensation payable to the Participant and from amounts payable to the Participant in connection with the Restricted Share Units in such manner as the Company or the Subsidiary may determine in its discretion to satisfy any or all such Applicable Withholding Taxes. Regardless of any action that the Company or a Subsidiary takes with respect to Applicable Withholding Taxes, the Participant remains responsible for satisfying the Participant’s tax obligations with respect to the granting, vesting and payment of Restricted Share Units. The Participant further acknowledges that the Company (a) makes no representations or undertakings regarding the income tax, social insurance, payroll tax, or other tax treatment of any aspect of the Restricted Share Units, including the grant, vesting or payment of the Restricted Share Units; and (b) does not commit to structure the terms of the Restricted Share Units or any aspect of the Restricted Share Units to reduce or eliminate Participant’s liability for income tax, social insurance, payroll tax, or other taxes or to achieve any particular tax result.
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3.12 Dividend Equivalent
In the event a cash dividend is paid to shareholders of the Company on the Shares while a Restricted Share Unit is outstanding, the Plan Administrator may, in its sole discretion, elect to credit each Participant with additional Restricted Share Units. In such case, the number of additional Restricted Share Units will be equal to the aggregate amount of dividends that would have been paid to the Participant if the Restricted Share Units in the Participant’s Account on the record date had been Shares divided by the closing price of a Share on the date on which dividends were paid by the Company. If the foregoing shall result in a fractional Restricted Share Unit, the fraction shall be disregarded.
ARTICLE 4
TERMINATION OF EMPLOYMENT; FORFEITURE
4.1 Death or Disability
Unless otherwise determined by the Plan Administrator and set forth in an Award Agreement, if a Participant dies or becomes Disabled while employed by the Company or a Subsidiary:
| (a) | a portion of the next instalment of any Restricted Share Units due to vest shall immediately vest such portion to equal to the number of Restricted Share Units next due to vest multiplied by a fraction, the numerator of which is the number of days elapsed since the date of vesting of the last instalment of the Restricted Share Units (or if none have vested, the date of grant of the RSUs) to the date of Disability or death and the denominator of which is the number of days between the date of vesting of the last instalment of the Restricted Share Units (or if none have vested, the date of grant of the RSUs) and the date of vesting of the next instalment of the Restricted Share Units; |
| (b) | any Performance Criteria assigned to any Restricted Share Units shall be deemed to have been met at 100% of the specified target level of performance for such Performance Criteria; |
| (c) | subject to Subsections 4.1(a) and 4.1(b), the date of Disability of a Participant shall be deemed to be the Vested Date of such Participant’s Restricted Share Units, and any Restricted Share Units held by the Participant that are not yet vested at the date of Disability or death shall be forfeited to the Company 30 days after the date of Disability or death; |
| (d) | such Participant’s eligibility to receive further grants of Restricted Share Units under the Plan ceases as of the date of Disability or death; and |
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| (e) | Notwithstanding Subsections 4.1(a), 4.1(b) and 4.1(c), the Plan Administrator may accelerate the vesting of all Restricted Share Units in the event of death. |
4.2 Termination of Employment
Subject to Section 4.3, unless otherwise specified by the Plan Administrator in the Award Agreement:
| (a) | where a Participant’s employment is terminated by the Company or a Subsidiary without Cause (whether such termination occurs with or without any or adequate reasonable notice, or with or without any or adequate compensation in lieu of such reasonable notice), then any RSU held by the Participant that has not vested as of the Termination Date is immediately forfeited and cancelled as of the Termination Date; |
| (b) | where a Participant’s employment terminates by reason of voluntary resignation by the Participant other than pursuant to Retirement, then any RSU held by the Participant that has not vested as of the Termination Date is immediately forfeited and cancelled as of the Termination Date; |
| (c) | where a Participant’s employment terminates by reason of Retirement, then any RSU held by the Participant that has not vested as of the Termination Date is immediately forfeited and cancelled as of the date of Retirement; |
| (d) | where a Participant’s employment terminates by reason of termination by the Company or a Subsidiary for Cause, then any RSUs held by the Participant, whether or not they have vested as of the Termination Date, are immediately forfeited and cancelled as of the Termination Date; |
| (e) | a Participant’s eligibility to receive further grants of Restricted Share Units under this Plan ceases as of the date that the Company or a Subsidiary, as the case may be, provides the Participant with written notification that the Participant’s employment is terminated in the circumstances contemplated by this Section 4.2, notwithstanding that such date may be prior to the Termination Date; and |
| (f) | notwithstanding Subsections 4.2(a) and 4.2(b), unless the Plan Administrator, in its discretion, otherwise determines, at any time and from time to time, Restricted Share Units are not affected by a change of employment or office within or among the Company or a Subsidiary for so long as the Participant continues to be an employee or officer of the Company or a Subsidiary. |
4.3 Participants’ Entitlement
Except as otherwise provided in this Plan, Restricted Share Units previously granted under this Plan are not affected by any change in the relationship between, or ownership of, the Company and an Subsidiary of the Company. For greater certainty, all grants of Restricted Share Units remain outstanding and are not affected by reason only that, at any time, a Subsidiary of the Company ceases to be a Subsidiary of the Company.
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4.4 Clawback Terms
In the event any quarterly or annual financial statements of the Company are restated at any time, whether or not the Participant had knowledge of the basis for such restatement, the following adjustments shall be made to the Participant’s entitlement under the Plan if the Participant held the office of Vice-President or a more senior office of the Company at any time during the period covered by the restated financial statement:
| (a) | if no Shares have been issued pursuant to the RSUs, the Multiplier (based on the applicable Performance Criteria) shall be calculated or recalculated after taking into account such restatement of the Company’s financial statements and the Participant’s entitlement hereunder shall otherwise remain unchanged; |
| (b) | if Shares have been issued pursuant to the RSUs and the restatement takes place not more than three years after such Shares were issued, the Multiplier shall be recalculated after taking into account such restatement of the Company’s financial statements and the Participant shall be obligated to pay to the Company an amount equal to the excess, if any, of the value the Participant received hereunder over the value the Participant would have received under such recalculation; |
| (c) | any payment required to be made pursuant to Section 4.4(b) shall be made within 30 days of the date on which the Company advises the Participant of the Multiplier, as recalculated, and the resulting adjustment amount; and |
| (d) | the Plan Administrator may in its discretion reduce in whole or in part any reduction in the Multiplier determined in accordance with this Section 4.4. |
ARTICLE 5
REORGANIZATION
5.1 Reorganization of the Company
The existence of any Restricted Share Units shall not affect in any way the right or power of the Company or its shareholders to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, or any amalgamation, combination, merger or consolidation involving the Company or to create or issue any bonds, debentures, shares or other securities of the Company or the rights and conditions attaching thereto or to affect the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise.
5.2 Adjustments and Reorganizations
In the event of any alteration in the number or class of or change in the Shares of the Company resulting from any stock dividend, subdivision, consolidation or reclassification of, or other change in, the Shares or the amalgamation, consolidation or merger of the Company, or other relevant changes in the capital of the Company, such proportionate adjustments, if any, as are appropriate to reflect such a change shall be made with respect to the number of Restricted Share Units credited to each Account and/or the number and type of securities which shall constitute “Shares” under the Plan. In the event the Company is not the surviving company of a merger, consolidation, amalgamation or plan of arrangement or other corporate restructuring with another company or in the event of a liquidation, dissolution or reorganization and in the absence of any surviving corporation’s assumption of the Company’s obligations with respect to Accounts, the Committee or its successor will determine in its discretion appropriate settlements of Accounts.
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5.3 Discretion to Permit Vesting and Payment
Notwithstanding the provisions of Sections 5.2 and Article 4, the Plan Administrator may, in its discretion, at any time prior to or following the events contemplated in such Sections and Article 4, permit (a) the vesting of any or all Restricted Share Units held by a Participant, and (b) except with respect to any Participant who is a U.S. Taxpayer, and whose Award of Restricted Share Units is subject to Section 409A, the payment of such Restricted Share Units, in each case in the manner and on the terms authorized by the Plan Administrator.
5.4 Issue by Company of Additional Shares
Neither the issue by the Company of shares of any class or securities convertible into or exchangeable for shares of any class, nor the conversion or exchange of such shares or securities, affects, and no adjustment by reason thereof is to be made with respect to, the number of Shares that may be acquired as a result of a grant of Restricted Share Units, except as expressly provided in this Article 5.
5.5 Fractions
No fractional Shares will be issued pursuant to any Restricted Share Units. Accordingly, if, as a result of any adjustment under this Article 5, a Participant would become entitled to a fractional Share, the Participant has the right to acquire only the adjusted number of full Shares and no payment or other adjustment will be made with respect to the fractional Shares, which shall be disregarded.
ARTICLE 6
ADMINISTRATION
6.1 Authority of the Plan Administrator
The Plan Administrator has discretion to:
| (a) | determine from time to time which directors, officers, employees and consultants of the Company or any Subsidiary shall be eligible to receive Restricted Share Units; |
| (b) | make grants of Restricted Share Units under the Plan in such amounts, to such Persons and, subject to the provisions of this Plan, on such terms and conditions as it determines including without limitation: |
| (i) | the time or times at which Restricted Share Units may be granted; |
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| (ii) | the conditions under which Restricted Share Units may be granted to Participants or may be forfeited to the Company, including any conditions relating to the attainment of specified Performance Criteria; |
| (iii) | whether restrictions or limitations are to be imposed on the Shares issuable pursuant to RSU grants, and the nature of such restrictions or limitations, if any; and |
| (iv) | any acceleration of vesting, or waiver of termination regarding any grant of RSUs, based on such factors as the Plan Administrator may determine; |
| (c) | establish the form or forms of Award Agreements; |
| (d) | cancel, amend, adjust or otherwise change any grant of RSUs under such circumstances as the Plan Administrator may consider appropriate in accordance with the provisions of this Plan; |
| (e) | make determinations with respect to the level of performance achieved with respect to any Performance Criteria; |
| (f) | establish the Multiplier, including the Multiplier to be calculated or recalculated pursuant to Section 4.4 together with the resulting adjustment, and make any determination referred to in Section 4.4; and |
| (g) | amend the Plan pursuant to Section 6.5 or determine the funded status of the Plan pursuant to Section 7.6. |
6.2 Administration
Except to the extent (i) the Plan expressly states that authority with respect to a matter has been reserved to the Board under this Plan (and such authority has not been delegated by the Board), (ii) the Board has made a determination pursuant to Section 6.1 or (iii) the Committee has delegated its authority as Plan Administrator pursuant to Section 6.3, this Plan will be administered by the Committee and the Committee has sole and complete authority, in its discretion, to exercise the authority set out in Sections 6.1(a), 6.1(b), 6.1(c), 6.1(d), 6.1(e) and 6.1(f) and, as Plan Administrator, to:
| (a) | construe and interpret this Plan and all Award Agreements; |
| (b) | establish, amend, prescribe and rescind administrative guidelines and other rules and regulations relating to this Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws or for qualifying for favourable tax treatment under applicable foreign laws; and |
| (c) | make all other determinations and take all other actions necessary or advisable for the implementation and administration of this Plan. |
6.3 Plan Administrator
| (a) | The initial Plan Administrator shall be the Committee; and |
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| (b) | The Committee may, from time to time, delegate to any specified officer(s) of the Company or its Subsidiaries all or any of the powers conferred on the Committee as Plan Administrator pursuant to this Plan, including the power to sub-delegate to other employees of the Company or its Subsidiaries. In such event, the delegate or any sub-delegate will exercise the powers delegated to it in the manner and on the terms authorized by the delegating party. |
6.4 Determinations Binding
Any decision made or action taken by the Board, the Committee or any officers or employees to whom authority has been delegated pursuant to Section 6.3(b) arising out of or in connection with the administration or interpretation of this Plan is final, conclusive and binding on the Company, the affected Participant(s), their legal and personal representatives and all other Persons. Any such determination need not be uniform and may be made selectively among persons who receive or are eligible to receive Restricted Share Units under the Plan (whether or not such persons are similarly situated).
6.5 Plan Amendment
The Plan Administrator may from time to time, without notice and without approval of the holders of voting shares in the capital of the Company, amend, modify, change, suspend or terminate the Plan or any Restricted Share Units granted pursuant to the Plan as it, in its discretion determines appropriate, provided, however, that:
| (a) | no such amendment, modification, change, suspension or termination of the Plan or any Restricted Share Units granted hereunder may materially impair any rights of a Participant or materially increase any obligations of a Participant under the Plan without the consent of the Participant, unless the Plan Administrator determines such adjustment is required or desirable in order to comply with any applicable securities laws or stock exchange requirements; |
| (b) | approval of the holders of voting shares in the capital of the Company (in accordance with the rules of the exchange upon which the Common Shares may be listed) shall be required for any amendment, modification or change that: |
| (i) | increases the number of Shares reserved for issuance under the Plan, except pursuant to the provisions in the Plan which permit the Plan Administrator to make equitable adjustments in the event of transactions affecting the Company or its capital; |
| (ii) | permit Restricted Share Units to be transferred other than for normal estate settlement purposes; |
| (iii) | change the Insider participation limits set forth in Section 3.4(c); and |
| (iv) | deletes or reduces the range of amendments which require approval of the holders of voting shares in the capital of the Company under this Section 6.5(b). |
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6.6 Plan Termination
The Board may decide to discontinue granting Awards under the Plan at any time, in which case no further Restricted Share Units shall be awarded or credited under Section 3.2. Any Restricted Share Units which remain outstanding in a Participant’s Account at that time shall continue to be dealt with subject to the terms of the Plan. Any purported termination of the Plan shall have no effect on Restricted Share Units made prior to the date of such purported termination. The Plan shall terminate when all payments owing under the Plan have been made and all Restricted Share Units have been cancelled in all Participants’ Accounts.
6.7 Costs
The Company shall pay all costs of administering the Plan.
6.8 U.S. Taxpayers/Section 409A
For greater certainty and notwithstanding anything to the contrary contained in the Plan or any Award Agreement:
| (a) | the Plan is intended be exempt from Section 409A and if not so exempt, to comply with Section 409A and shall be interpreted accordingly, |
| (b) | no provision of the Plan or amendment to the Plan or adjustment or conversion of Restricted Share Units to alternate arrangement shall permit the acceleration of payments under the Plan to U.S. Taxpayers contrary to the provisions of Section 409A, including, for avoidance of doubt, following the termination of the plan and acceleration of payment regulations upon a “change in ownership” or “change in control” as such terms are defined in Section 409A; and |
| (c) | for the sake of clarity, termination of employment and other similar terms used in this Plan shall be construed in light of the definition of “separation from service” within the meaning of Section 409A. Furthermore, to the extent applicable, specified employees as defined under Section 409A will be subject to a six-month delay in payment on Restricted Share Units payable upon a “separation of service”, if any, unless the payment of the Award is exempt from the requirements of Section 409A, or is otherwise structured in a manner that does not require a delay in payment. |
ARTICLE 7
GENERAL
7.1 Governing Provisions
The terms and conditions of each Award are set out in the Plan and the applicable Award Agreement. Except as specified in the Plan, in the event of a conflict between the terms and conditions of an Award and the terms and conditions of an employment agreement between the Participant and the Company or a Subsidiary, the terms and conditions of the Award shall govern.
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7.2 Participation is Voluntary; No Additional Rights to Employment
Participation of any Participant in the Plan is entirely voluntary and not obligatory and shall not be interpreted as conferring upon such Participant any rights or privileges other than those rights and privileges expressly provided in the Plan. Participation in the Plan shall not be construed to give any Participant a right to be retained or to continue to be retained in the employment of the Company or a Subsidiary. Nothing in the Plan shall be construed to provide the Participant with any rights whatsoever to participate or to continue participation in this Plan, or to compensation or damages in lieu of participation, whether upon termination of the Participant’s employment or otherwise. Without limiting the foregoing, the Participant agrees that:
| (a) | Restricted Share Units are granted voluntarily by the Company, are discretionary in nature, and subject to Sections 6.5 and 6.6, may be modified, suspended, or terminated by the Company at any time and do not create any contractual or other right to receive future grants or cash or benefits in lieu thereof, even if such grants have been made repeatedly in the past; |
| (b) | the grant of RSUs does not constitute compensation of any kind for services of any kind rendered to the Company or to the Participant’s employer which are outside the scope of the Participant’s employment contract, if any, and employment; |
| (c) | the grant of RSUs is not part of normal or expected compensation or salary for purposes of calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments, bonuses, long-service awards, pension or retirement benefits or welfare benefits or similar benefits or any other entitlements. |
| (d) | in consideration of the grant of RSUs, no claim or entitlement to compensation or damages arises from forfeiture of the Restricted Share Units resulting from the Participant’s termination of employment and the Participant irrevocably releases the Company from any such claim that may arise; and if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by accepting this Award, the Participant shall be deemed irrevocably to have waived his or her entitlement to pursue and enforce such claim. |
7.3 Value of Restricted Share Units Not Guaranteed
The value of a Restricted Share Unit is based on the price of a Share and is thus not guaranteed. The value of a Restricted Share Unit at the time it becomes payable may be higher or lower than the value at the time it was credited to a Participant’s Account under the Plan. No amount will be paid to, or in respect of, a Participant under the Plan to compensate for a downward fluctuation in the price of Shares, nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose. No amount will be paid to compensate a Participant in respect of (i) any change in the value of a Share from the date an RSU is granted to the date the RSU vests, the date of any Change of Control or the date Shares are actually issued pursuant to the RSU, (ii) any change in currency exchange rates, or (iii) interest in respect of the period from the date of a Change of Control to the date the Award is paid. The Company makes no representations or warranties to Participants with respect to the Plan or the Shares whatsoever. In seeking the benefits of participation in the Plan, a Participant agrees to accept all risks associated with a decline in the market price of Shares.
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7.4 No Shareholder Rights
Under no circumstances shall Restricted Share Units be considered Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Participant be considered the owner of Shares by virtue of the Award of Restricted Share Units.
7.5 Tax Matters
Participants subject to income tax in jurisdictions other than the country where they are employed according to the Company’s records may be subject to other tax consequences based on the tax laws of those local jurisdictions relating to their participating in the Plan. Neither the Company nor any Subsidiary is providing any tax advice regarding the Restricted Share Units. None of the Company and the Subsidiaries, and none of their respective directors, officers, employees and advisers, shall be liable to any Participant (or any other individual claiming a benefit through the Participant) for any tax, interest, or penalties the Participant might owe as a result of participation in the Plan. Participants are advised to confirm the consequences of participating in the Plan with their own tax advisors.
7.6 Unfunded Plan
Unless otherwise determined by the Board, the Plan shall be unfunded and any obligation to make a payment in the future upon redemption of Restricted Share Units will remain an unfunded liability recorded on the books of the Company. To the extent any Participant or his or her estate holds any rights with respect to any RSUs, such rights (unless otherwise determined by the Board) shall be no greater than the rights of an unsecured creditor of the Company.
7.7 Participant Information
Each Participant shall provide the Company with all information (including personal information) required by the Company in order to administer the Plan. Each Participant acknowledges that information required by the Company in order to administer the Plan may be disclosed to any custodian appointed in respect of the Plan and other third parties, and may be disclosed to such persons (including persons located in jurisdictions other than the Participant’s jurisdiction of residence), in connection with the administration of the Plan. Each Participant consents to such disclosure and authorizes the Company to make such disclosure on the Participant’s behalf.
7.8 Successors and Assigns
The Plan shall be binding on all successors and permitted assigns of the Company and a Participant who has received an Award under the Plan, including without limitation, the estate of such Participant and the legal representative of such estate, or any receiver or trustee in bankruptcy or representative of the Company or Participant.
7.9 General Restrictions and Assignment
The rights of a Participant under the Plan are not capable of being assigned or transferred, and immediately upon any assignment or transfer, or any attempt to do so, such Restricted Share Units will terminate and be of no further force or effect. The rights of a Participant under the Plan are not capable of being alienated, sold, encumbered, pledged, mortgaged or charged and are not capable of being subject to attachment or legal process for the payment of any debts or obligations of the Participant.
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7.10 Governing Law
| (a) | The validity, construction and effect of the Plan and any actions taken or relating to the Plan shall be governed by the laws of the Province of British Columbia and the federal laws of Canada applicable therein. |
| (b) | The Company and each Participant irrevocably submits to the exclusive jurisdiction of the courts of competent jurisdiction in the Province of British Columbia in respect of any action or proceeding relating in any way to the Plan, including with respect to the grant of Restricted Share Units and any issuance of Shares made in accordance with the Plan. |
7.11 Severability
The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision and any invalid or unenforceable provision shall be severed from the Plan.
7.12 Notices
All notices or communications under this Plan shall be delivered in writing, personally or by registered mail, postage prepaid, or e-mail. All notices to the Company or Plan Administrator shall be addressed to the Company’s Chief Financial Officer, at the registered offices of the Company or via e-mail at greznik@intrinsyc.com. All notices to Participants shall be addressed to the last address for such person maintained in the records of the Company. Either the Participant or Intrinsyc may designate a different address by written notice to the other. Any notice given by either the Participant or Intrinsyc is not binding on the recipient thereof until received.
7.13 Electronic Delivery
The Company or the Plan Administrator may from time to time establish procedures for (i) the electronic delivery of any documents that the Company may elect to deliver (including, but not limited to, plan documents, Award Agreements, and all other forms of communications) in connection with any Award made under the Plan, (ii) the receipt of electronic instructions from Participants and/or (iii) an electronic signature system for delivery and acceptance of any such documents. Compliance with such procedures shall satisfy any requirement to provide documents in writing and/or for a document to be signed or executed.
7.14 Country Specific Provisions
| (a) | Notwithstanding any provisions in this Plan, the Restricted Share Units shall be subject to any special terms and conditions set forth in all applicable exhibits to this Plan for the applicable country. Moreover, if the Participant relocates to one of the countries included in any exhibit as applicable, the special terms and conditions for such country will apply to the Participant to the extent that the Company determines that the application of such terms and conditions is necessary or advisable in order to comply with local law or facilitate the administration of the Restricted Share Units. |
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| (b) | If the Participant moves to any other country, additional terms and conditions may apply to the Participant’s Restricted Share Units. The Company reserves the right to impose other requirements on the Restricted Share Units to the extent the Company determines it is necessary or advisable in order to comply with local law or facilitate the administration of the Restricted Share Units and to require the Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing. |
7.15 Effective Date
The Plan became effective on May 16, 2017.
INTRINSYC TECHNOLOGIES CORPORATION
| By: | /s/ George Reznik | |
| Name: George Reznik | ||
| Title: CFO |
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SCHEDULE A
INTRINSYC TECHNOLOGIES CORPORATION
FORM OF RESTRICTED SHARE UNIT AWARD AGREEMENT
Intrinsyc Technologies Corporation (“Intrinsyc”) hereby grants the following Restricted Share Unit(s) to you subject to the terms and conditions of this Award Agreement, together with the provisions of Restricted Share Unit (the “Plan”) in which you become a “Participant”, all the terms of which Plan are hereby incorporated into this Award Agreement:
Name and Address of Participant: __________________________________________________________________________
Date of Grant:__________________________________________________________________________________________
Total Number Granted:___________________________________________________________________________________
Vesting Conditions: _____________________________________________________________________________________
| 1. | The terms and conditions of the Plan are hereby incorporated by reference as terms and conditions of this Award Agreement and all capitalized terms used herein, unless expressly defined in a different manner, have the meanings ascribed thereto in the Plan. |
| 2. | All notices or communications under this Plan shall be delivered in writing, personally or by registered mail, postage prepaid, or e-mail. All notices to the Company or Plan Administrator shall be addressed to Intrinsyc’s Chief Financial Officer, at the registered offices of Intrinsyc or via e-mail at greznik@intrinsyc.com. All notices to the Participant will be addressed to your last address for maintained in the records of Intrinsyc. |
| 3. | Nothing in the Plan, in this Award Agreement, or as a result of the grant of an Award to you, will affect any right of Intrinsyc, or of any Affiliate, to terminate your employment at any time for any reason whatsoever. Upon such termination, your rights to exercise Award will be subject to restrictions and time limits, complete details of which are set out in the Plan. |
INTRINSYC TECHNOLOGIES CORPORATION
________________________________________________________________________
Authorized Signatory
I have read the foregoing Award Agreement and hereby accept the Award in accordance with and subject to the terms and conditions of the Award Agreement and the Plan. I agree to be bound by the terms and conditions of the Plan governing the Award.
| Date Accepted | Signature |
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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul Pickle, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of Lantronix, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended, Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Securities Exchange Act of 1934, as amended, Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 15, 2020 | /s/ Paul Pickle |
|
Paul Pickle President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeremy Whitaker, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Lantronix, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended, Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Securities Exchange Act of 1934, as amended, Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 15, 2020 |
/s/ Jeremy Whitaker |
|
Jeremy Whitaker Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certifications are being furnished solely to accompany the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (the “Report”) pursuant to U.S.C. Section 1350, and pursuant to SEC Release No. 33-8238 are being “furnished” to the Securities and Exchange Commission rather than “filed” either as part of the Report or as a separate disclosure statement, and are not to be incorporated by reference into the Report or any other filing of Lantronix, Inc. (the “Company”), whether made before or after the date hereof, regardless of any general incorporation language in such filing. The following certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section.
Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of the Company hereby certifies, to such officer’s knowledge, that:
(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results operations of the Company as of, and for, the periods presented in such Report.
| Date: May 15, 2020 | /s/ Paul Pickle |
|
Paul Pickle President and Chief Executive Officer (Principal Executive Officer) |
Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of the Company hereby certifies, to such officer’s knowledge, that:
(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results operations of the Company as of, and for, the periods presented in such Report.
| Date: May 15, 2020 | /s/ Jeremy Whitaker |
|
Jeremy Whitaker Chief Financial Officer (Principal Financial and Accounting Officer) |