LANTRONIX, INC. Form 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

☐ 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.)

48 Discovery, Suite 250, 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 ☒ No ☐

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 ☒ No ☐

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 ☐		Accelerated filer ☒
Non-accelerated filer ☐		Smaller reporting company ☒
Emerging Growth Company ☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 25, 2024, there were 37,580,182 shares of the registrant’s common stock outstanding.

LANTRONIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

MARCH 31, 2024

INDEX

		Page

	CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	3

PART I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements	4

	Unaudited Condensed Consolidated Balance Sheets at March 31, 2024 and June 30, 2023	4

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2024 and 2023	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended March 31, 2024 and 2023	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2024 and 2023	7

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION	33

Item 1.	Legal Proceedings	33

Item 1A	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	49

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the three months ended March 31, 2024 (the “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. Additionally, statements concerning future matters such as our expected earnings, revenues, expenses and financial condition, our expectations with respect to the development of new products, expectations regarding the impact of the COVID-19 pandemic or similar outbreaks and other statements regarding matters that are not historical are forward-looking statements.

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, those set forth under “Risk Factors” in Item 1A of Part II of this Report, as such factors may be updated, amended or superseded from time to time by subsequent public filings with the Securities and Exchange Commission. 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, 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.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	March 31,			June 30,
	2024			2023
Assets
Current assets:
Cash and cash equivalents	$	24,642		$	13,452
Accounts receivable, net		28,542			27,682
Inventories, net		40,552			49,736
Contract manufacturers' receivables		1,562			3,019
Prepaid expenses and other current assets		2,586			2,662
Total current assets		97,884			96,551
Property and equipment, net		4,409			4,629
Goodwill		27,824			27,824
Intangible assets, net		6,561			10,565
Lease right-of-use assets		10,128			11,583
Other assets		586			472
Total assets	$	147,392		$	151,624

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	13,845		$	12,401
Accrued payroll and related expenses		4,539			2,431
Current portion of long-term debt, net		3,002			2,743
Other current liabilities		22,188			28,813
Total current liabilities		43,574			46,388
Long-term debt, net		13,970			16,221
Other non-current liabilities		11,763			11,459
Total liabilities		69,307			74,068

Commitments and contingencies (Note 9)		-			-

Stockholders' equity:
Common stock		4			4
Additional paid-in capital		301,117			295,686
Accumulated deficit		(223,407	)		(218,505	)
Accumulated other comprehensive income		371			371
Total stockholders' equity		78,085			77,556
Total liabilities and stockholders' equity	$	147,392		$	151,624

See accompanying notes to unaudited condensed consolidated financial statements.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2024			2023			2024			2023
Net revenue	$	41,183		$	32,964		$	111,252		$	96,265
Cost of revenue		24,679			18,328			65,620			53,799
Gross profit		16,504			14,636			45,632			42,466
Operating expenses:
Selling, general and administrative		9,753			9,946			29,147			28,916
Research and development		5,186			5,067			15,017			14,677
Restructuring, severance and related charges		350			490			900			664
Acquisition-related costs		–			–			–			315
Fair value remeasurement of earnout consideration		–			140			(9	)		(533	)
Amortization of intangible assets		1,310			1,424			4,004			4,340
Total operating expenses		16,599			17,067			49,059			48,379
Loss from operations		(95	)		(2,431	)		(3,427	)		(5,913	)
Interest expense, net		(171	)		(465	)		(741	)		(1,081	)
Other income (expense), net		2			(29	)		(2	)		(21	)
Loss before income taxes		(264	)		(2,925	)		(4,170	)		(7,015	)
Provision for income taxes		159			140			732			312
Net loss	$	(423	)	$	(3,065	)	$	(4,902	)	$	(7,327	)

Net loss per share - basic and diluted	$	(0.01	)	$	(0.08	)	$	(0.13	)	$	(0.20	)

Weighted-average common shares - basic and diluted		37,509			36,548			37,283			36,105

See accompanying notes to unaudited condensed consolidated financial statements.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)


	Three Months Ended March 31, 2024
											Accumulated
					Additional						Other		Total
	Common Stock				Paid-In			Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital			Deficit			Income		Equity
Balance at December 31, 2023		37,476	$	4	$	299,385		$	(222,984	)	$	371	$	76,776
Shares issued pursuant to stock awards, net		103		–		22			–			–		22
Tax withholding paid on behalf of employees for restricted shares		–		–		(162	)		–			–		(162	)
Share-based compensation		–		–		1,872			–			–		1,872
Net loss		–		–		–			(423	)		–		(423	)
Balance at March 31, 2024		37,579	$	4	$	301,117		$	(223,407	)	$	371	$	78,085

	Three Months Ended March 31, 2023
											Accumulated
					Additional						Other		Total
	Common Stock				Paid-In			Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital			Deficit			Income		Equity
Balance at December 31, 2022		36,517	$	4	$	292,930		$	(213,787	)	$	371	$	79,518
Shares issued pursuant to stock awards, net		92		–		23			–			–		23
Tax withholding paid on behalf of employees for restricted shares		–		–		(176	)		–			–		(176	)
Share-based compensation		–		–		1,728			–			–		1,728
Net loss		–		–		–			(3,065	)		–		(3,065	)
Balance at March 31, 2023		36,609	$	4	$	294,505		$	(216,852	)	$	371	$	78,028

	Nine Months Ended March 31, 2024
											Accumulated
					Additional						Other		Total
	Common Stock				Paid-In			Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital			Deficit			Income		Equity
Balance at June 30, 2023		36,875	$	4	$	295,686		$	(218,505	)	$	371	$	77,556
Shares issued pursuant to stock awards, net		704		–		522			–			–		522
Tax withholding paid on behalf of employees for restricted shares		–		–		(881	)		–			–		(881	)
Share-based compensation		–		–		5,790			–			–		5,790
Net loss		–		–		–			(4,902	)		–		(4,902	)
Balance at March 31, 2024		37,579	$	4	$	301,117		$	(223,407	)	$	371	$	78,085

	Nine Months Ended March 31, 2023
											Accumulated
					Additional						Other		Total
	Common Stock				Paid-In			Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital			Deficit			Income		Equity
Balance at June 30, 2022		35,129	$	4	$	289,046		$	(209,525	)	$	371	$	79,896
Shares issued pursuant to stock awards, net		1,480		–		752			–			–		752
Tax withholding paid on behalf of employees for restricted shares		–		–		(674	)		–			–		(674	)
Share-based compensation		–		–		5,381			–			–		5,381
Net loss		–		–		–			(7,327	)		–		(7,327	)
Balance at March 31, 2023		36,609	$	4	$	294,505		$	(216,852	)	$	371	$	78,028

See accompanying notes to unaudited condensed consolidated financial statements.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Nine Months Ended
	March 31,
	2024			2023
Operating activities
Net loss	$	(4,902	)	$	(7,327	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Share-based compensation		5,790			5,381
Depreciation and amortization		1,599			1,223
Amortization of intangible assets		4,004			4,340
Amortization of manufacturing profit in acquired inventory associated with acquisitions		696			181
Loss on disposal of property and equipment		–			(10	)
Amortization of deferred debt issuance costs		83			77
Fair value remeasurement of earnout consideration		(9	)		(533	)
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable		(860	)		2,553
Inventories		8,488			(10,637	)
Contract manufacturers' receivable		1,457			1,139
Prepaid expenses and other current assets		76			2,260
Lease right-of-use assets		1,455			1,332
Other assets		(114	)		(31	)
Accounts payable		1,390			(5,782	)
Accrued payroll and related expenses		2,108			(1,918	)
Other liabilities		(4,913	)		6,796
Net cash provided by (used in) operating activities		16,348			(956	)
Investing activities
Purchases of property and equipment		(1,325	)		(2,325	)
Cash payment for acquisition, net of cash and cash equivalents acquired		–			(4,650	)
Net cash used in investing activities		(1,325	)		(6,975	)
Financing activities
Net proceeds from issuances of common stock		522			752
Tax withholding paid on behalf of employees for restricted shares		(881	)		(674	)
Earnout consideration paid for acquisition		(1,262	)		–
Net proceeds from issuance of debt		–			4,909
Payment of borrowings on term loan		(2,075	)		(1,475	)
Net proceeds from borrowing on line of credit		–			2,000
Payment of borrowings on line of credit		–			(2,000	)
Payment of lease liabilities		(137	)		(7	)
Net cash (used in) provided by financing activities		(3,833	)		3,505
Increase (decrease) in cash and cash equivalents		11,190			(4,426	)
Cash and cash equivalents at beginning of period		13,452			17,221
Cash and cash equivalents at end of period	$	24,642		$	12,795

See accompanying notes to unaudited condensed consolidated financial statements.

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2024

1.	Company and Significant Accounting Policies

Company

Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global industrial and enterprise internet of things (“IoT”) provider of solutions that target diversified verticals ranging from smart cities, utilities and healthcare to enterprise, intelligent transportation, and industrial automation. Building on a long history of connectivity and video processing competence, target applications include video surveillance, traffic management, infotainment systems, robotics, edge computing and remote environment management.

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, 2023, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, which was filed with the SEC on September 12, 2023. 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, 2024, the consolidated results of our operations for the three and nine months ended March 31, 2024 and our consolidated cash flows for the nine months ended March 31, 2024. All intercompany accounts and transactions have been eliminated.

Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. 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, 2024 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

Recent Accounting Pronouncements

Income Tax Disclosures

In December 2023, the Financial Accounting Standards Board (“FASB”) issued a final standard on improvements to income tax disclosures. The new standard requires disaggregated information about a company’s effective tax rate reconciliation and information on income taxes paid. The standard will be effective for Lantronix beginning with our annual financial statements for the fiscal year ending June 30, 2026. We have not yet determined the impact of adopting this guidance on our financial statements.

Segment Disclosures

In November 2023, the FASB issued a new Accounting Standards Update (“ASU”) requiring incremental disclosures related to a public company’s reportable segments. The new guidance was issued primarily to provide financial statement users with more disaggregated expense information about a company’s reportable segments. The guidance does not change the definition of a segment, the method for determining segments, or the criteria for aggregating operating segments into reportable segments. The guidance is effective for Lantronix on a retrospective basis beginning with our annual financial statements for the fiscal year ending June 30, 2025. We have not yet determined the impact of adopting this guidance on our financial statements.

Current Expected Credit Losses

In June 2016, the FASB issued an ASU requiring financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The ASU eliminates the threshold for initial recognition in current U.S. GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The ASU became effective for Lantronix at the beginning of our first quarter of fiscal year 2024. The adoption of this guidance did not have a material effect on our consolidated financial statements.

2.	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 exclusive of (i) any taxes collected from customers, which are subsequently remitted to governmental authorities and (ii) shipping and handling costs collected from customers.

Products

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 unaudited condensed consolidated balance sheets.

Services

Revenues from our extended warranty, technical support and maintenance services are generally recognized ratably over the applicable service period. Although not significant to date, revenues from sales of our software-as-a-service (“SaaS”) solutions are recognized ratably over the applicable service period as well.

We prepay sales commissions related to certain of these contracts, which are incremental costs of obtaining the contract. We capitalize these costs and expense them ratably on a straight-line basis over the life of the contract. At March 31, 2024, prepaid sales commissions included in prepaid expenses and other current assets totaled $171,000 and those included in other assets totaled $172,000.

Engineering Services

We derive a portion of our revenues from engineering and related consulting service contracts with customers. Revenues from professional engineering services are generally recognized as services are performed. 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 have determined that this method best represents the transfer of services as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to the customer of our performance completed to date.

We recognize revenue on fixed price contracts, over time, using an input method based on the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete the contract performance obligation. We have 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: Embedded IoT Solutions, IoT System Solutions, and Software & Services. Our Embedded IoT products are normally embedded into new designs. These products include application processing that delivers compute to meet customer needs for data transformation, computer vision, machine learning, augmented / virtual reality, audio / video aggregation and distribution, and custom applications at the edge. Our IoT System products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, power for IoT end devices through Power over Ethernet (“PoE”), application hosting, protocol conversion, media conversion, secure access for distributed IoT deployments and many other functions. Our Software & Services products can be classified as either (i) our SaaS platform, which enables customers to easily deploy, monitor, manage, and automate across their global deployments, all from a single platform login, virtually connected as though directly on each device, (ii) engineering services, which is a flexible business model that allows customers to select from turnkey product development or team augmentation for accelerating complex areas of product development or (iii) extended warranty, support and maintenance.

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,
	2024		2023		2024		2023
	(In thousands)				(In thousands)
Embedded IoT Solutions	$	12,452	$	16,055	$	35,589	$	44,818
IoT System Solutions		26,789		14,034		68,847		43,568
Software & Services		1,942		2,875		6,816		7,879
	$	41,183	$	32,964	$	111,252	$	96,265


	Three Months Ended March 31,				Nine Months Ended March 31,
	2024		2023		2024		2023
	(In thousands)				(In thousands)
Americas	$	17,543	$	19,095	$	61,077	$	59,713
EMEA		18,354		6,380		37,831		16,486
Asia Pacific Japan		5,286		7,489		12,344		20,066
	$	41,183	$	32,964	$	111,252	$	96,265

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,
	2024		2023		2024		2023

Product revenues		96%		91%		94%		92%
Service revenues		4%		9%		6%		8%

Service revenues are 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.

Deferred Revenue

Deferred revenue is primarily comprised of unearned revenue related to our extended warranty, support and maintenance 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, 2024 (in thousands):

Schedule of changes in deferred revenue
Balance, June 30, 2023	$	3,381
New performance obligations		5,493
Recognition of revenue from satisfying performance obligations		(3,723	)
Balance, March 31, 2024		5,151
Less: non-current portion of deferred revenue		(2,420	)
Current portion, March 31, 2024	$	2,731

We currently expect to recognize substantially all of the non-current portion of deferred revenue over the next 2 to 5 years.

3.	Acquisition

Remeasurement of Earnout Consideration from Uplogix Acquisition

Our September 12, 2022 merger agreement with Uplogix, Inc. (“Uplogix”) provided for the holders of Uplogix note agreements, and certain former Uplogix employees, with the right to receive up to an additional $4,000,000 in the aggregate (the “Earnout Amount”), payable after the closing of the acquisition based on revenue targets for the business of Uplogix as specified in the merger agreement. The Earnout Amount was based on Uplogix achieving revenue of $7,000,000 to $14,000,000 for the period beginning at the September 12, 2022 closing date and ending on September 30, 2023. The earnout liability was paid out in full in December 2023.

The table below presents the change in the earnout consideration liability through March 31, 2024 (in thousands):


Balance at June 30, 2023	$	1,271
Final remeasurement estimate		(9	)
Payments		(1,262	)
Balance at March 31, 2024	$	–

Reclassification of Cash Flows from Operating to Financing Activities

In connection with the preparation of our unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2024, we identified an error in the unaudited condensed consolidated statement of cash flows for our second fiscal quarter ended December 31, 2023 whereby we had incorrectly classified the $1,262,000 earnout payment as part of operating activities. We believe that the impact of the error was not material to the financial statements for the three and six months ended December 31, 2023, based on an evaluation of both quantitative and qualitative factors. As a result, we determined that correcting the prior period financial statements would not require the Form 10-Q for the three and six months ended December 31, 2023 to be amended. We have reclassified the payment in the accompanying unaudited condensed consolidated statement of cash flows for the nine months ended March 31, 2024 to financing activities. This reclassification has no impact on the Company’s results of operations or financial position.

The following table summarizes the impact of reclassifying the earnout payment from operating activities to financing activities:


	Six Months Ended
	December 31, 2023
	As Reported		As Adjusted
	(In thousands)
Net cash provided by operating activities	$	11,490	$	12,752
Net cash used in investing activities		1,189		1,189
Net cash used in financing activities		1,607		2,869

4.	Supplemental Financial Information

Inventories

Schedule of inventories
	March 31,		June 30,
	2024		2023
	(In thousands)
Finished goods	$	22,457	$	25,670
Raw materials		18,095		24,066
Inventories	$	40,552	$	49,736

Other Liabilities

The following table presents details of our other liabilities:

Schedule of other liabilities
	March 31,		June 30,
	2024		2023
	(In thousands)
Current
Accrued variable consideration	$	1,790	$	2,167
Customer deposits and refunds		11,151		16,344
Accrued raw materials purchases		206		267
Deferred revenue		2,731		2,493
Lease liability		1,857		1,859
Taxes payable		774		647
Warranty reserve		708		788
Other accrued operating expenses		2,971		4,248
Total other current liabilities	$	22,188	$	28,813

Non-current
Lease liability	$	8,990	$	10,425
Deferred tax liability		353		146
Deferred revenue		2,420		888
Total other non-current liabilities	$	11,763	$	11,459

The customer deposits and refunds balances in the table above include a significant deposit from a customer as prepayment for expected future shipments under their contract.

Computation of Net Loss per Share

Basic and diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the applicable period.

The following table presents the computation of net loss per share:


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2024			2023			2024			2023
	(In thousands, except per share data)
Numerator:
Net loss	$	(423	)	$	(3,065	)	$	(4,902	)	$	(7,327	)
Denominator:
Weighted-average common shares outstanding - basic and diluted		37,509			36,548			37,283			36,105

Net loss per share - basic and diluted	$	(0.01	)	$	(0.08	)	$	(0.13	)	$	(0.20	)

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.

Schedule of anti dilutive securities
	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2024		2023		2024		2023
	(In thousands)
Common stock equivalents		644		735		579		677

Intangible Assets

The following table presents details of intangible assets:

Schedule of intangible assets
	March 31, 2024							June 30, 2023
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
	(In thousands)
Developed technology	$	6,331	$	(4,940	)	$	1,391	$	6,331	$	(3,881	)	$	2,450
Customer relationships		17,528		(12,358	)		5,170		17,528		(9,487	)		8,041
Trademark and trade name		1,425		(1,425	)		–		1,425		(1,351	)		74
	$	25,284	$	(18,723	)	$	6,561	$	25,284	$	(14,719	)	$	10,565

We do not currently have any intangible assets with indefinite useful lives.

As of March 31, 2024, future estimated amortization expense is as follows:


Years Ending June 30,
(In thousands)
2024 (remainder)	$	1,309
2025		3,685
2026		1,177
2027		326
2028		64
Total future amortization	$	6,561

Restructuring, Severance and Related Charges

The following table presents details of the liability we recorded related to restructuring, severance and related activities:


	Nine Months Ended
	March 31,
	2024
	(In thousands)
Beginning balance	$	97
Charges		900
Payments		(647	)
Ending balance	$	350

These balances are recorded in accrued payroll and related expenses in the accompanying unaudited condensed consolidated balance sheets.

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,
	2024		2023
	(In thousands)
Accrued property and equipment paid for in the subsequent period	$	54	$	49
Fair value of earnout consideration from acquisitions at the closing dates	$	–	$	1,718

5.	Warranty Reserve

The standard warranty periods we provide for our products typically range from one to five years. Certain products carry a limited lifetime warranty, which requires us to repair or replace a defective product or offer a refund of a portion of the purchase price based on a depreciated value at our option. 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.

The following table presents details of our warranty reserve, which is included in other current liabilities in the unaudited condensed consolidated balance sheets:

Schedule of warranty reserve
	Nine Months Ended			Year Ended
	March 31,			June 30,
	2024			2023
	(In thousands)
Beginning balance	$	788		$	594
Charged to cost of revenue		127			352
Usage		(207	)		(158	)
Ending balance	$	708		$	788

6.	Bank Loan Agreements

In September 2022 we entered into a Third Amendment to the Third Amended and Restated Loan and Security Agreement (the “Amendment”) with Silicon Valley Bank (“SVB”), pertaining to our existing term loan and revolving credit facility (together, the “Senior Credit Facilities”), which amends that certain Third Amended and Restated Loan and Security Agreement, dated as of August 2, 2021, as amended by the First Amendment to Third Amended and Restated Loan and Security Agreement, dated as of October 21, 2021, as amended by the Second Amendment to Third Amended and Restated Loan and Security Agreement, dated as of February 15, 2022 by and among Lantronix and SVB (collectively with the Amendment, the “Loan Agreement”).

The Amendment, among other things, provided for an additional term loan in the original principal amount of $5,000,000 that matures on August 2, 2025. The Senior Credit Facilities bears interest at Term Secured Overnight Financing Rate (“SOFR”) or the Prime Rate, at the option of Lantronix, plus a margin that ranges from 3.10% to 4.10% in the case of Term SOFR and 1.50% to 2.50% in the case of the Prime Rate, depending on our total leverage with a Term SOFR floor of 1.50% and a Prime Rate floor of 3.25%. The Amendment reduced the minimum liquidity requirement from $5,000,000 to $4,000,000. As a condition to entering into the Amendment, we were obligated to pay a nonrefundable facility increase fee in the amount of $25,000. The Senior Credit Facilities mature on August 2, 2025. The Senior Credit Facilities are secured by substantially all of our assets.

In April 2023, we entered into a Letter Agreement (the “Letter Agreement”) with SVB, which, among other matters, amended the Loan Agreement to reduce the former requirement to hold 85% of our company-wide cash balances at SVB to 50%, and provided a waiver of any event of default under the Loan Agreement for any failure to comply with this covenant prior to the date of the Letter Agreement.

The following table summarizes our outstanding debt under the Senior Credit Facilities:

Summary of outstanding debt
	March 31,			June 30,
	2024			2023
	(In thousands)
Outstanding borrowings on term loan	$	17,119		$	19,194
Less: Unamortized debt issuance costs		(147	)		(230	)
Net Carrying amount of debt		16,972			18,964
Less: Current portion		(3,002	)		(2,743	)
Non-current portion	$	13,970		$	16,221

Outstanding borrowings on revolving credit facility	$	–		$	–

During the three and nine months ended March 31, 2024, we recognized $416,000 and $1,301,000, respectively, of interest expense in the accompanying unaudited condensed consolidated statements of operations related to interest and amortization of debt issuance associated with the borrowings under the Senior Credit Facilities.

Financial Covenants

The Senior Credit Facilities require Lantronix to comply with a minimum liquidity test, a maximum leverage ratio and a minimum fixed charge coverage ratio. We are currently in compliance with all financial covenants.

Liquidity

The Senior Credit Facilities require that we maintain a minimum liquidity of $4,000,000 at SVB, as measured at the end of each month.

Maximum leverage ratio

The Senior Credit Facilities require that we maintain 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) 2.50 to 1.00 for each calendar quarter ending June 30, 2021 through and including September 30, 2022, (ii) 2.25 to 1.00 for each calendar quarter ending December 31, 2022 through and including September 30, 2023, and (iii) 2.00 to 1.00 for the calendar quarter ending December 31, 2023 and each calendar quarter thereafter.

Minimum fixed charge coverage ratio

The Senior Credit Facilities require that we maintain a minimum fixed charge coverage ratio, calculated as the ratio of consolidated trailing 12 month earnings before interest, taxes, depreciation and amortization, and certain other allowable exclusions, less capital expenditures and taxes paid, to the trailing twelve month principal and interest payments on all funded debt of 1.25 to 1.00 as measured at the end of each calendar quarter.

In addition, the Senior Credit Facilities contain customary representations and warranties, affirmative and negative covenants, including covenants that limit or restrict Lantronix and its subsidiaries’ ability to incur liens, incur indebtedness, dispose of assets, make investments, make certain restricted payments, merge or consolidate and enter into certain speculative hedging arrangements. The Senior Credit Facilities include a number of events of default, including, among other things, non-payment defaults, covenant defaults, cross-defaults to other materials indebtedness, bankruptcy and insolvency defaults and material judgment defaults. If any event of default occurs (subject, in certain instances, to specified grace periods), the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Senior Credit Facilities may become due and payable immediately.

7.	Stockholders’ Equity

Stock Options

The following table presents a summary of activity with respect to our stock options:

Schedule of option activity
				Weighted-
				Average
	Number of			Exercise Price
	Shares			per Share
	(In thousands)
Balance of options outstanding at June 30, 2023		1,325		$	3.65
Expired		(550	)		3.84
Exercised		(152	)		1.76
Balance of options outstanding at March 31, 2024		623		$	3.95

Restricted Stock Units (“RSUs”)

The following table presents a summary of activity with respect to our RSUs:

Schedule of RSU activity
				Weighted-
				Average
				Grant Date
	Number of			Fair Value
	Shares			per Share
	(In thousands)
Balance of RSUs outstanding at June 30, 2023		1,189		$	5.70
Granted		1,317			4.68
Forfeited		(99	)		5.20
Vested		(519	)		5.59
Balance of RSUs outstanding at March 31, 2024		1,888		$	5.05

Performance Stock Units (“PSUs”)

The following table presents a summary of activity with respect to our PSUs:

Schedule of PSU activity
	Number of Shares
	(In thousands)
Balance of PSUs outstanding at June 30, 2023		931
Granted		1,191
Forfeited		(346	)
Vested		(173	)
Balance of PSUs outstanding at March 31, 2024		1,603

Employee Stock Purchase Plan (“ESPP”)

The following table presents a summary of activity under our ESPP:


	Number of
	Shares
	(In thousands)
Shares available for issuance at June 30, 2023		381
Shares issued		(92	)
Shares available for issuance at March 31, 2024		289

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,
	2024		2023		2024		2023
	(In thousands)
Cost of revenue	$	66	$	47	$	171	$	159
Selling, general and administrative		1,337		1,293		4,238		4,132
Research and development		469		388		1,381		1,090
Total share-based compensation expense	$	1,872	$	1,728	$	5,790	$	5,381

The following table presents the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of March 31, 2024:


	Remaining		Remaining
	Unrecognized		Weighted-
	Compensation		Average Years
	Expense		To Recognize
	(In thousands)
Stock options	$	251		2.3
RSUs		8,250		2.1
PSUs		4,592		2.3
Stock purchase rights under ESPP		42		0.1
	$	13,135

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.

8.	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,
	2024		2023		2024		2023
Effective tax rate		60%		5%		18%		4%

The difference between our effective tax rates in the periods presented above and the federal statutory rate is primarily due to (i) a tax benefit from our domestic losses being recorded with a full valuation allowance, (ii) our current estimates of pre-tax profitability for the full fiscal year and (iii) the effect of foreign earnings taxed at rates differing from the federal statutory rate.

We have recorded a net deferred tax liability of $353,000 and $146,000 at March 31, 2024 and June 30, 2023, respectively. This balance represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets and is recorded in other non-current liabilities on the accompanying unaudited condensed consolidated balance sheets.

The realization of deferred tax assets is dependent upon the generation of future taxable income. As required by Accounting Standards Codification Topic 740, we have evaluated the positive and negative evidence bearing upon our ability to realize our deferred tax assets. We have determined that it was more likely than not that Lantronix would not realize the deferred tax assets due to our cumulative losses and uncertainty of generating future taxable income and have therefore provided a full valuation allowance against our deferred tax assets as of March 31, 2024 and June 30, 2023.

9.	Commitments and Contingencies

On February 23, 2024, a purported class action, brought on behalf of a putative class who purchased or otherwise acquired shares of Lantronix between May 11, 2023 and February 8, 2024, was filed in the United States District Court for the Central District of California against the Company, its former chief executive officer, and its chief financial officer. The action, styled Neilsen v. Lantronix, Inc., asserts securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with statements made in the Company’s annual report, quarterly reports and earnings releases during the period of May 11, 2023 through February 8, 2024. The court is in the process of appointing a Lead Plaintiff and Lead Counsel.

On April 11, 2024, a purported stockholder of Lantronix filed a derivative lawsuit styled Jernigan derivatively on behalf of Lantronix, Inc. v. Jason W. Cohenour et al., in the United States District Court for the Central District of California against the Company, as the nominal defendant, former and current directors of the Company, its former chief executive officer, and its chief financial officer, alleging breach of fiduciary duties, mismanagement, waste of corporate assets, unjust enrichment, aiding and abetting, insider trading and violations of Section 14(a) of the Exchange Act in connection with statements made in the Company’s annual and quarterly reports, earnings releases, and proxy statement beginning May 11, 2023. The plaintiff did not make a demand on the Board before instituting the lawsuit and alleged such demand would have been futile.

Because the outcomes of litigation and other legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control, our evaluation of legal matters or proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. While the consequences of any unresolved matters and proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material adverse effect on our business, financial condition, operating results, or cash flows. In addition, 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.

We maintain insurance policies for settlements and judgments, as well as legal defense costs, for lawsuits such as those described above, although the amount of insurance coverage that we maintain may not be adequate to cover all claims or liabilities. In addition, provisions of the Company’s Certificate of Incorporation, Bylaws and indemnification agreements entered into with current and former directors and officers require us, among other things, to indemnify these directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers and to advance expenses to such directors or officers in connection therewith.

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, 2024 (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.

Unless otherwise indicated by the context, all references to the “Company”, “Lantronix”, "we", "us", and "our" in this Quarterly Report on Form 10-Q include Lantronix, Inc. and its consolidated subsidiaries.

Overview

Lantronix, Inc. is a global industrial and enterprise internet of things (“IoT”) provider of solutions that target diversified verticals ranging from smart cities, utilities and healthcare to enterprise, intelligent transportation, and industrial automation. Building on a long history of connectivity and video processing competence, target applications include video surveillance, traffic management, infotainment systems, robotics, edge computing and remote environment management.

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

SEC Form 10-Q filed by Lantronix Inc.