What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-08-27 compared with 2020-09-11 · 11 added, 654 removed, 2 unchanged (100% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Capital Market under

the symbol “LTRX.”

The number of holders of record of our common stock as of August 31, 2020 was approximately 29.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Capital Market under the symbol

“LTRX.” The number of holders of record of our common stock as of August 19, 2021 was approximately 37.

Dividend Policy

We have never declared or paid cash dividends on our common

We do not anticipate paying any cash dividends on our common stock in the foreseeable future, and we intend to retain any

future earnings for use in the expansion of our business and for general corporate purposes.

Any future decision to declare or

pay dividends will be made by our board of directors in its sole discretion and will depend upon our financial condition, operating

results, capital requirements and other factors that our board of directors deems appropriate at the time of its decision.

We have never declared or paid cash dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future, and we intend to retain any future earnings

for use in the expansion of our business and for general corporate purposes.

Any future decision to declare or pay dividends will be made

by our board of directors in its sole discretion and will depend upon our financial condition, operating results, capital requirements

and other factors that our board of directors deems appropriate at the time of its decision.

Issuer Repurchases

We did not repurchase any shares of our common stock during

the fourth quarter of fiscal 2020.

SELECTED FINANCIAL DATA

Not required for a “smaller reporting company.”

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in

conjunction with our consolidated financial statements and the accompanying notes thereto included in Part II, Item 8 of this Report.

This discussion and analysis contains forward-looking statements that are based on our management’s current beliefs and assumptions,

which statements are subject to substantial risks and uncertainties.

Our actual results may differ materially from those expressed

or implied by these forward-looking statements as a result of many factors, including those discussed in “Risk Factors”

included in Part I, Item 1A of this Report.

Please also see “Cautionary Note Regarding Forward Looking Statements”

at the beginning of this Report.

Lantronix, Inc., which we refer to herein as the Company, Lantronix,

we, our, or us, is a global provider of software as a service (“SaaS”), engineering services, and hardware for Edge

Computing, the Internet of Things (“IoT”), and Remote Environment Management (“REM”).

Lantronix enables

its customers to provide reliable and secure solutions while accelerating their time to market.

Lantronix’s products and

services dramatically simplify operations through the creation, development, deployment, and management of customer projects at

scale while providing quality, reliability and security.

We conduct our business globally and manage our sales teams

by three geographic regions:

the Americas;

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

and Asia Pacific Japan (“APJ”).

References to “fiscal 2020”

refer to the fiscal

year ended June 30, 2020 and references to “fiscal 2019”

refer to the fiscal year ended June 30, 2019.

Products and Solutions

We organize our products and solutions into three product lines:

IoT, REM, and Other.

Refer to “Products and Solutions”

included in Part I, Item 1 of this Report, which is incorporated

herein by reference, for further discussion.

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 2020 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

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 we 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 our 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.

our manufacturing is performed in Malaysia, Thailand and China.

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

in Thailand and China, although as of the date of this Report we have not been informed of any issues.

Our ability to ship products has also been affected by the impact

that COVID-19 has had and continues to have 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 have occurred and may continue to occur.

We are attempting to mitigate both 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 had to sell into the United States products in inventory that were manufactured

in China for our non-U.S.

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 resurgence of COVID-19 and associated shutdowns 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.

on the severity of any such future shutdowns, we could experience a materially diminished ability to produce products or longer

This would result in delayed or reduced revenue from the affected orders in production and potentially higher operating

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, if needed, could have a negative impact on our financial results, including 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 has negatively affected and may continue to 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 resurgence of COVID-19, would negate our mitigation efforts and lead to a reduction in revenue during the coming

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.

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 or due to any cost containment efforts.

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 have attempted 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

Recent Accounting Pronouncements

Refer to Note 1 of Notes to Consolidated Financial Statements

included in Part II, Item 8 of this Report, which is incorporated herein by reference, for a discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures

in accordance with U.S.

generally accepted accounting principles requires us to make judgments, estimates and assumptions that

affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net

revenue and expenses during the reporting period.

We regularly evaluate our estimates and assumptions related revenue recognition,

sales returns and allowances, allowance for doubtful accounts, inventory valuation, warranty reserves, restructuring charges,

valuation of deferred income taxes, valuation of goodwill and long-lived and intangible assets, share-based compensation, litigation

and other contingencies.

We base our estimates and assumptions on historical experience and on various other factors that we believe

to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of

assets and liabilities that are not readily apparent from other sources.

To the extent there are material differences between

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

We believe the following critical accounting policies require

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

Revenue Recognition

Revenue is recognized upon the transfer of control of promised

products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products

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.

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 performance obligations that may include sales of products, professional

engineering services and other product qualification or certification services.

Determining whether the promises in these

arrangements are considered distinct performance obligations, that should be accounted for separately versus together,

often requires judgment.

We consider performance obligations to be distinct when the customer can benefit from the

promised good or service on its own or by combining it with other resources readily available and when the promised good or

service is separately identifiable from other promised goods or services in the contract.

In these arrangements, we allocate

revenue on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone

selling price for each performance obligation.

Additionally, estimating standalone selling prices for separate performance

obligations within a contract may require significant judgment and consideration of various factors including market

conditions, items contemplated during negotiation of customer arrangements and internally-developed pricing models.

to performance obligations that we identify, or the estimated selling prices pertaining to a contract, could materially

impact the amounts of earned and unearned revenue that we record.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated

losses resulting from the inability of our customers to make required payments.

Our evaluation of the collectability of customer

accounts receivable is based on various factors.

In cases where we are aware of circumstances that may impair a specific customer’s

ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due based

on those particular circumstances.

For all other customers, we estimate an allowance for doubtful accounts based on the length

of time the receivables are past due, our bad debt collection experience and general industry conditions.

If a major customer’s

credit-worthiness deteriorates, or our customers’

actual defaults exceed our estimates, our financial results could be impacted.

Inventory Valuation

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

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

of excess and obsolete inventories.

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

for our products within a specified time horizon, which is generally 12 months.

The estimates we use for demand are also used for

near-term capacity planning and inventory purchasing.

In addition, specific reserves are recorded to cover risks for end-of-life

products, inventory located at our contract manufacturers, deferred inventory in our sales channel and warranty replacement stock.

If actual product demand or market conditions are less favorable than our estimates, additional inventory write-downs could be

required, which would increase our cost of revenue and reduce our gross margins.

Warranty Reserve

The standard warranty periods we provide for our products typically

range from one to five years.

We establish reserves for estimated product warranty costs at the time revenue is recognized based

upon our historical warranty experience, and for any known or anticipated product warranty issues.

Our warranty obligations are

impacted by a number of factors, including historical warranty costs, actual product failure rates, service delivery costs, and

the use of materials.

If our actual results are different from our assumptions, increases or decreases to warranty reserves could

be required, which could impact our cost of revenue and gross margins.

Restructuring Charges

We recognize costs and related liabilities for restructuring

activities when they are incurred.

Our restructuring charges are primarily

comprised of employee separation costs, asset impairments and contract exit costs.

Employee separation costs include one-time

termination benefits that are recognized as a liability at estimated fair value, at the time of communication to employees, unless

future service is required, in which case the costs are recognized ratably over the future service period.

Ongoing termination

benefits are recognized as a liability at estimated fair value when the amount of such benefits are probable and reasonably estimable.

Contract exit costs include contract termination fees and right-of-use asset impairments recognized on the date that we have vacated

the premises or ceased use of the leased facilities.

A liability for contract termination fees is recognized in the period

in which we terminate the contract.

Restructuring accruals are based upon management estimates at the time they are

recorded and can change depending upon changes in facts and circumstances subsequent to the date the original liability is recorded.

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

reverse a portion or existing liabilities.

Valuation of Deferred Income Taxes

We have recorded a valuation allowance to reduce our net deferred

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

taxable income.

We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing

the need for a valuation allowance.

If we determine that it is more likely than not that we will realize a deferred tax asset that

currently has a valuation allowance, we would be required to reverse the valuation allowance, which would be reflected as an income

tax benefit in our consolidated statements of operations at that time.

Business Combinations

We allocate the fair value of the purchase consideration of

a business acquisition to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development

(“IPR&D”), if applicable, based on their estimated fair values.

The excess of the fair value of purchase consideration

over the fair values of these identifiable assets and liabilities is recorded as goodwill.

IPR&D is initially capitalized at

fair value as an intangible asset with an indefinite life and assessed for impairment thereafter.

When an IPR&D project is

completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated

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.

Goodwill Impairment Testing

We evaluate goodwill for impairment on an annual basis in our

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

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

We begin our evaluation of goodwill for impairment by assessing

qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than

its carrying value.

Based on that qualitative assessment, if we conclude that it is more likely than not that the fair value of

our single reporting unit is less than its carrying value, we conduct a quantitative goodwill impairment test, which involves comparing

the estimated fair value of our single reporting unit with its carrying value, including goodwill.

We estimate the fair value of

our single reporting unit using a combination of the income and market approach.

If the carrying value of the reporting unit exceeds

its estimated fair value, we recognize an impairment loss for the difference.

Significant management judgment is required in estimating the

reporting unit’s fair value and in the creation of the forecasts of future operating results that are used in the discounted

cash flow method of valuation, including (i) estimation of future cash flows, which is dependent on internal forecasts, (ii) estimation

of the long-term rate of growth of our business, (iii) estimation of the period during which cash flows will be generated and (iv)

the determination of our weighted-average cost of capital, which is a factor in determining the discount rate.

Our estimate of

the reporting unit’s fair value would also generally include the consideration of a control premium, which is the amount

that a buyer is willing to pay over the current market price of a company as indicated by the traded price per share (i.e., market

capitalization) to acquire a controlling interest.

If our actual financial results are not consistent with our assumptions and

judgments used in estimating the fair value of our reporting unit, we may be exposed to goodwill impairment losses.

During the fourth quarter of fiscal 2020, we made a qualitative

assessment of whether goodwill impairment existed.

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

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

required to perform the quantitative goodwill impairment test.

As of June 30, 2020, the carrying value of our single reporting

unit was $46,520,000, while our market capitalization was $104,737,000.

We concluded that no goodwill impairment existed as of

June 30, 2020.

Long-Lived Assets and Intangible Assets

We assess the impairment of long-lived

assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not

be recoverable.

Circumstances which could trigger a review include, but are not limited to the following:

significant decreases in the market price of the asset;

significant adverse changes in the business climate or legal factors;

accumulation of costs significantly in excess of the amount originally expected for

the acquisition or construction of the asset;

current period cash flow or operating losses combined with a history of losses or

a forecast of continuing losses associated with the use of the asset;

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

significantly before the end of its estimated useful life.

Whenever events or changes in circumstances

suggest that the carrying amount of long-lived assets and intangible assets may not be recoverable, we estimate the future cash

flows expected to be generated by the asset from its use or eventual disposition.

If the sum of the expected future cash flows

is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over

the fair value of the assets.

Significant management judgment is required in the forecasts of future operating results that are

used in the discounted cash flow method of valuation.

These significant judgments may include future expected revenue, expenses,

capital expenditures and other costs, and discount rates.

Share-Based Compensation

We record share-based compensation in our consolidated statements

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

to expense over the requisite service period.

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

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

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

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

The fair value of our performance share units is estimated

as of the grant date based upon the expected achievement of the performance metrics specified in the grant and the closing market

price of our common stock on the date of grant.

To the extent a grant contains a market condition, the grant date fair value is

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

grant date fair value of each award.

The fair value of our common stock options and common stock

purchase rights is generally estimated on the grant date using the Black-Scholes-Merton (“BSM”) option-pricing formula.

While utilizing the BSM model meets established requirements, the estimated fair values generated by the model may not be indicative

of the actual fair values of our share-based awards as the model does not consider certain factors important to those awards to

employees, such as continued employment and periodic vesting requirements as well as limited transferability.

The determination

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

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

The expected term of our stock options

is generally estimated using the simplified method, as permitted by guidance issued by the Securities and Exchange Commission (“SEC”).

We use the simplified method because we believe we are unable to rely on our limited historical exercise data or alternative information

as a reasonable basis upon which to estimate the expected term of these options.

The expected volatility is based on the historical

volatility of our stock price.

The risk-free interest rate assumption is based on the U.S.

Treasury interest rates appropriate

for the expected term of our stock options and common stock purchase rights.

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

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

If there are any modifications or cancellations

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

compensation expense.

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

would impact our operating expenses and gross margins.

Results of Operations - Fiscal Years Ended June 30, 2020

For fiscal 2020, our net revenue increased by approximately

$12,988,000, or 27.7%, as compared to fiscal 2019.

We incurred a net loss for fiscal 2020 of $10,738,000, compared to a net loss

of $408,000 for fiscal 2019, which was driven primarily by a $10,677,000, or 39.9%, increase in operating expenses, partially offset

by a $627,000, or 2.4%, increase in gross profit.

Fiscal 2020 operating expenses included approximately $8,162,000 of costs related

to our acquisitions of Intrinsyc and Maestro and our efforts to integrate and take advantage of synergies of the combined companies.

The following tables present our net revenue

by product lines and by geographic region:

Years Ended June 30,

(In thousands, except percentages)

Years Ended June 30,

(In thousands, except percentages)

Net revenue from our IoT product line increased in fiscal 2020

across all regions compared to fiscal 2019 due to the addition of sales of products and services obtained through the acquisitions

of (i) Maestro Wireless Solutions Limited and its subsidiaries (“Maestro”) on July 5, 2019 and (ii) Intrinsyc Technologies

Corporation (“Intrinsyc”) on January 16, 2020.

Net revenue related to products and services from the acquisitions

contributed approximately 33% to 38% of net sales for fiscal 2020.

We also saw growth in unit sales of our SGX, a newer product

family, primarily in the Americas region.

The overall increase in IoT net revenues 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.

Net revenue from our REM product line for fiscal 2020 decreased

compared to fiscal 2019 due primarily to decreased unit sales of both our SLC8000 product family in the EMEA region and SLB product

family in the Americas region.

In the prior year, we saw stronger demand for both product families partially driven by the timing

of sales to certain large customers.

During the current fiscal year, we saw moderate growth in unit sales of our SLS product family

and EMG, a new product family.

Net revenue from our Other products, which are comprised of

non-focus and end-of-life product families, continues to decline as expected.

Gross profit represents net revenue less cost of revenue.

of revenue consists primarily of the cost of raw material components, subcontract labor assembly by contract manufacturers, freight

costs, personnel-related expenses, manufacturing overhead, inventory reserves for excess and obsolete products or raw materials,

warranty costs, royalties and share-based compensation.

The following table presents our gross

Years Ended June 30,

(In thousands, except percentages)

Gross margin for fiscal 2020 decreased compared to fiscal 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 fiscal 2020 was also negatively impacted by

the amortization of unrealized profit in acquired inventory in the amount of approximately $255,000, along with additional charges

in fiscal 2020 for inventory reserves.

Selling, General and Administrative

Selling, general and administrative expenses consisted of personnel-related

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

marketing expenses and professional legal and accounting fees.

The following table presents our selling, general and administrative

Years Ended June 30,

(In thousands, except percentages)

Personnel-related expenses

Professional fees and outside services

Marketing and advertising

Facilities and insurance

Share-based compensation

Selling, general and administrative

Selling, general and administrative expenses increased in fiscal

2020 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, (iii) higher facilities and insurance costs resulting from additional facility space

obtained through the acquisitions of Maestro and Intrinsyc, and (iv) increased personnel-related expenses resulting from increases

in headcount from acquisitions.

Research and Development

Research and development expenses consisted of personnel-related

expenses, share-based compensation, and expenditures to third-party vendors for research and development activities and product

certification costs.

Our costs from period-to-period related to outside services and product certifications vary depending on our

level and timing of development activities.

The following table presents our research and development expenses:

Years Ended June 30,

(In thousands, except percentages)

Personnel-related expenses

Outside services

Product certifications

Share-based compensation

Research and development

Research and development expenses increased in fiscal 2020 primarily

due to increases in (i) personnel-related expenses resulting from an increase in headcount from the acquisitions of Maestro and

Intrinsyc, (ii) product certification costs related to new product development projects and (iii) 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

During fiscal 2020, 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 $3,844,000 in

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.

During fiscal 2019, we executed several plans to realign certain

personnel resources to better meet our business needs, for which we recorded a total of approximately $1,146,000 in severance-related

In connection with these actions, we also recorded approximately $271,000 in share-based compensation expense, which is

categorized in the applicable functional line items in our consolidated statement of operations for fiscal 2019.

Acquisition-Related Costs

During fiscal 2020, we incurred approximately $2,284,000 of

acquisition-related costs in connection with the acquisitions of Maestro and Intrinsyc.

During fiscal 2019, we incurred approximately

$410,000 of acquisition-related costs in connection with the acquisition of Maestro.

These costs are mainly comprised of banking,

legal, accounting and other professional fees.

Amortization of Purchased Intangible Assets

We acquired certain intangible assets through our fiscal 2020

acquisitions, which we recorded at fair-value as of the acquisition dates.

These assets are generally amortized on a straight-line

basis over their estimated useful lives, and resulted in charges of $2,037,000 during fiscal 2020.

Interest Income (Expense), Net

For fiscal 2020, we incurred net interest expense as a result

of interest incurred on borrowings on our term loan.

We also earn interest on our domestic cash balances.

Other Expense, Net

Other expense, net, is comprised primarily of foreign currency

remeasurement and transaction adjustments related to our foreign subsidiaries whose functional currency is the U.S.

Provision for Income Taxes

The following table presents our provision for income taxes:

Years Ended June 30,

(In thousands, except percentages)

Provision for income taxes

The following table presents our effective tax rate based upon

our provision for income taxes:

Years Ended June 30,

Effective tax rate

We utilize the liability method of accounting for income taxes.

The difference between our effective tax rate and the federal statutory rate resulted primarily from the effect of our domestic

losses recorded without a tax benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory

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

assets are more likely than not to be realized.

As a result of our cumulative losses and uncertainty of generating future taxable

income, we provided a full valuation allowance against our net deferred tax assets for fiscal 2020 and fiscal 2019.

Due to the “change of ownership”

provision of the

Tax Reform Act of 1986, utilization of our NOL carryforwards and tax credit carryforwards may be subject to an annual limitation

against taxable income in future periods.

Due to the annual limitation, a portion of these carryforwards may expire before ultimately

becoming available to reduce future income tax liabilities.

The following table presents our NOLs:

June 30, 2020

(In thousands)

For federal income tax purposes, our NOL carryovers generated

for tax years beginning before July 1, 2018 will begin to expire in the fiscal year ending June 30, 2021.

Of our federal NOLs as

of June 30, 2020 in the table above, approximately $51,900,000 will expire by June 30, 2023.

For state income tax purposes, our

NOLs began to expire in the fiscal year ended June 30, 2013.

Pursuant to the Tax Cuts and Jobs Act enacted by the U.S.

government in December 2017, for federal income tax purposes, NOL carryovers generated for our tax years beginning after June 30,

2018 can be carried forward indefinitely, but will be subject to a taxable income limitation.

Liquidity and Capital Resources

The following table presents our working capital and cash and

cash equivalents:

(In thousands)

Working capital

Cash and cash equivalents

In fiscal 2020, we made cash payments of $13,402,000 for the

acquisitions of Intrinsyc and Maestro.

In addition, direct costs related to these acquisitions were a primary contributor to our

use of cash in operating activities for fiscal 2020.

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;

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 or downturn may lead to significant declines in billings and cash collection

and result in an unfavorable impact on our financial results.

See above under “Impact of COVID-19”

for additional information.

While we do have a Revolving Facility (as defined below), financial covenants associated with the Revolving Facility 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

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”).

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.

The Revolving Facility matures on November 12, 2021.

There were no borrowings on the Revolving Facility at June 30, 2020.

The Term Loan Facility is repayable over a 48 month period

commencing January 1, 2020.

Refer to Note 6 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of

this Report, which is incorporated herein by reference, for additional information regarding our Revolving Facility and Term Loan

The following table presents the major components of the consolidated

statements of cash flows:

Years Ended June 30,

(In thousands)

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Operating Activities

Cash used from operating activities during fiscal 2020 increased

compared to fiscal 2019 as a result of an increase in our net loss, which was impacted during fiscal 2020 by an increase in operating

expenses and acquisition-related costs for the acquisitions of Maestro and Intrinsyc.

Our net loss included $6,733,000 of non-cash

charges and the changes in operating assets and liabilities provided net cash of $1,484,000.

Investing Activities

Net cash used in investing activities during fiscal 2020 was

driven by the acquisitions of Maestro and Intrinsyc, which used net cash of $5,073,000 and $8,329,000, respectively.

cash for the purchase of property and equipment, primarily related to various tooling and test equipment.

Financing Activities

For fiscal 2020, financing activities provided cash from the

issuance of the Term Loan Facility for $6,000,000 with SVB as well as stock option exercises by employees.

These inflows were partially

offset by (i) repayments on the Term Loan Facility and (ii) withholding taxes paid related to the vesting of restricted stock units.

Net cash provided by financing activities during fiscal 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.

Off-Balance Sheet Arrangements

As of June 30, 2020, we did not have any relationships with

unconsolidated organizations or financial partnerships, including structured finance or special purpose entities, that have been

established for the purpose of facilitating off-balance sheet arrangements or for other purposes.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for a “smaller reporting company.”

We did not repurchase any shares of our common stock during the fourth

quarter of fiscal 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity