LANTRONIX INC 10-Q

Item 1. Financial Statements LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) September 30, June 30, 2022 2022 Assets Current assets: Cash and cash equivalents $ 13,125 $ 17,221 Accounts receivable, net 26,669 26,262 Inventories, net 45,260 37,679 Contract manufacturers' receivables 932 3,454 Prepaid expenses and other current assets 4,571 5,417 Total current assets 90,557 90,033 Property and equipment, net 4,858 3,652 Goodwill 27,151 20,768 Purchased intangible assets, net 15,610 14,559 Lease right-of-use assets 11,446 8,037 Other assets 510 325 Total assets $ 150,132 $ 137,374 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 15,378 $ 20,644 Line of credit 2,000 – Accrued payroll and related expenses 4,185 4,729 Current portion of long-term debt, net 1,965 1,671 Other current liabilities 16,713 8,477 Total current liabilities 40,241 35,521 Long-term debt, net 18,473 14,274 Other non-current liabilities 11,680 7,683 Total liabilities 70,394 57,478 Commitments and contingencies (Note 9) – – Stockholders' equity: Common stock 4 4 Additional paid-in capital 290,541 289,046 Accumulated deficit ( 211,178 ) ( 209,525 ) Accumulated other comprehensive income 371 371 Total stockholders' equity 79,738 79,896 Total liabilities and stockholders' equity $ 150,132 $ 137,374 See accompanying notes to unaudited condensed consolidated financial statements. 4 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended September 30, 2022 2021 Net revenue $ 31,795 $ 27,705 Cost of revenue 17,759 15,242 Gross profit 14,036 12,463 Operating expenses: Selling, general and administrative 9,157 7,906 Research and development 4,526 4,041 Restructuring, severance and related charges 92 542 Acquisition-related costs 213 541 Amortization of purchased intangible assets 1,419 1,193 Total operating expenses 15,407 14,223 Loss from operations ( 1,371 ) ( 1,760 ) Interest expense, net ( 262 ) ( 379 ) Other income (expense), net 34 ( 102 ) Loss before income taxes ( 1,599 ) ( 2,241 ) Provision for income taxes 54 42 Net loss $ ( 1,653 ) $ ( 2,283 ) Net loss per share - basic and diluted $ ( 0.05 ) $ ( 0.08 ) Weighted-average common shares - basic and diluted 35,406 29,228 See accompanying notes to unaudited condensed consolidated financial statements. 5 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Three Months Ended September 30, 2022 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 1,110 – 21 – – 21 Tax withholding paid on behalf of employees for restricted shares – – ( 314 ) – – ( 314 ) Share-based compensation – – 1,788 – – 1,788 Net loss – – – ( 1,653 ) – ( 1,653 ) Balance at September 30, 2022 36,239 $ 4 $ 290,541 $ ( 211,178 ) $ 371 $ 79,738 Three Months Ended September 30, 2021 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at June 30, 2021 29,088 $ 3 $ 249,885 $ ( 204,163 ) $ 371 $ 46,096 Shares issued pursuant to stock awards, net 636 – 296 – – 296 Tax withholding paid on behalf of employees for restricted shares – – ( 206 ) – – ( 206 ) Fair value of warrants to purchase common stock issued with bank credit facility – – 250 – – 250 Share-based compensation – – 1,481 – – 1,481 Net loss – – – ( 2,283 ) – ( 2,283 ) Balance at September 30, 2021 29,724 $ 3 $ 251,706 $ ( 206,446 ) $ 371 $ 45,634 See accompanying notes to unaudited condensed consolidated financial statements. 6 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended September 30, 2022 2021 Operating activities Net loss $ ( 1,653 ) $ ( 2,283 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation 1,788 1,481 Depreciation and amortization 349 230 Amortization of purchased intangible assets 1,419 1,193 Amortization of manufacturing profit in acquired inventory associated with acquisitions 24 180 Loss on disposal of property and equipment ( 10 ) – Amortization of deferred debt issuance costs 22 107 Changes in operating assets and liabilities, net of assets and liabilities acquired: Accounts receivable 1,493 ( 3,095 ) Inventories ( 4,015 ) ( 3,848 ) Contract manufacturers' receivable 2,522 811 Prepaid expenses and other current assets 1,134 ( 317 ) Lease right-of-use assets 221 426 Other assets ( 56 ) ( 35 ) Accounts payable ( 6,133 ) 4,421 Accrued payroll and related expenses ( 806 ) ( 1,057 ) Other liabilities ( 965 ) 1,270 Net cash used in operating activities ( 4,666 ) ( 516 ) Investing activities Purchases of property and equipment ( 956 ) ( 117 ) Cash payment for acquisitions, net of cash and cash equivalents acquired ( 4,650 ) ( 23,975 ) Net cash used in investing activities ( 5,606 ) ( 24,092 ) Financing activities Net proceeds from issuances of common stock 21 296 Tax withholding paid on behalf of employees for restricted shares ( 314 ) ( 206 ) Net proceeds from issuance of debt 4,909 28,801 Payment of borrowings on term loan ( 438 ) ( 3,750 ) Net proceeds from borrowing on line of credit 2,000 – Payment of lease liabilities ( 2 ) ( 2 ) Net cash provided by financing activities 6,176 25,139 Increase (decrease) in cash and cash equivalents ( 4,096 ) 531 Cash and cash equivalents at beginning of period 17,221 9,739 Cash and cash equivalents at end of period $ 13,125 $ 10,270 See accompanying notes to unaudited condensed consolidated financial statements. 7 LANTRONIX, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 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 (“REM”). 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, 2022, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, which was filed with the SEC on August 29, 2022. 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 September 30, 2022, the consolidated results of our operations for the three months ended September 30, 2022 and our consolidated cash flows for the three months ended September 30, 2022. 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 months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any future interim periods. Recent Accounting Pronouncements Revenue Contracts In October 2021, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity and inconsistency related to (i) recognition of an acquired contract liability and (ii) payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in this ASU require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with existing revenue recognition guidance under Accounting Standard Codification Topic (“ASC”) 606. At the acquisition date, an acquirer would assess how the acquiree applied ASC 606 to determine what to record for the acquired revenue contracts. Generally, this would result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements. Lantronix adopted this ASU in the first quarter of our fiscal year ending June 30, 2023, and as such, we recorded applicable contract assets and liabilities acquired in the Uplogix acquisition (see Note 3 ) in accordance with this ASU. 8 Current Expected Credit Losses In June 2016, the FASB issued a new 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 is effective for Lantronix beginning in the first quarter of fiscal year 2024. The adoption of this guidance is not expected to 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 net 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, support and maintenance services are generally recognized ratably over the applicable service period. Although not significant to date, revenues from sales of our SaaS solutions are recognized ratably over the applicable service period as well. 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. 9 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 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 or (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. 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: Net revenue by product lines Three Months Ended September 30, 2022 2021 (In thousands) Embedded IoT Solutions $ 15,095 $ 12,376 IoT System Solutions 14,621 13,158 Software & Services 2,079 2,171 $ 31,795 $ 27,705 10 Net revenue by geographic region Three Months Ended September 30, 2022 2021 (In thousands) Americas $ 20,930 $ 18,227 EMEA 5,201 4,659 Asia Pacific Japan 5,664 4,819 $ 31,795 $ 27,705 The following table presents product revenues and service revenues as a percentage of our total net revenue: Schedule of percentage total net revenues Three Months Ended September 30, 2022 2021 Product revenues 94 % 93 % Service revenues 6 % 7 % Service revenue is comprised primarily of professional services, software license subscriptions, and extended warranties. Contract Balances In certain instances, the timing of revenue recognition may differ from the timing of invoicing to our customers. We record a contract asset receivable when revenue is recognized prior to invoicing, and a contract or deferred revenue liability when revenue is recognized subsequent to invoicing. With respect to product shipments, we expect to fulfill contract obligations within one year and so we have elected not to separately disclose the amount nor the timing of recognition of these remaining performance obligations. For contract balances related to contracts that include services and multiple performance obligations, refer to the deferred revenue discussion below. 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 three months ended September 30, 2022 (in thousands): Changes in deferred revenue Balance, June 30, 2022 $ 1,342 New performance obligations 1,038 Performance obligations assumed from acquisition 4,096 Recognition of revenue from satisfying performance obligations ( 949 ) Balance, September 30, 2022 5,527 Less: non-current portion of deferred revenue ( 1,464 ) Current portion, September 30, 2022 $ 4,063 We currently expect to recognize substantially all of the non-current portion of deferred revenue over the next 2 to 5 years. 11 3. Acquisition On September 12, 2022 (the “Closing Date”), we entered into a Merger Agreement with Uplogix, Inc. (“Uplogix”) pursuant to which Uplogix became a wholly-owned subsidiary of Lantronix. Pursuant to the Merger Agreement, all of the issued and outstanding shares of Uplogix were cancelled and converted into the right to receive an applicable portion of the Consideration Pool Amount (as defined in the Merger Agreement). In addition, the holders of promissory notes issued by Uplogix entered into note termination agreements with Uplogix, which provided, among other things, that the issued and outstanding promissory notes were cancelled and terminated upon the closing of the Merger. Holders of Company Junior-Only Notes (as defined in the Merger Agreement) received, in connection with their cancellation and termination of such notes, the full payment of principal and interest. Holders of Company Senior Notes (as defined in the Merger Agreement), including those holders of Company Senior Notes and Company Junior Notes (as defined in the Merger Agreement) (the “Company Senior Noteholders”), received the applicable portions of the Estimated Merger Consideration (as defined in the Merger Agreement). The aggregate consideration payable by Lantronix under the Merger Agreement was equal to $ 8,000,000 (inclusive of payments to satisfy the Company Junior-Only Notes), subject to certain adjustments, including, without limitation, for cash, debt, transaction expenses (including the Bonus Amount (as defined below)) and net working capital. Prior to the Closing Date, Uplogix entered into an amended and restated bonus plan, which provided that certain of its employees would be entitled to receive, in the aggregate, 15% of the consideration otherwise payable to the holders of Company Senior Notes (the “Bonus Amount”) under the Merger Agreement, with the terms of such bonus payments (including the amounts per employee and the timing of such payments) as specified in such bonus plan. In addition, the Company Senior Noteholders and former Uplogix employees have the right to receive up to an additional $4,000,000 in the aggregate (the “Earnout Amount”), payable after the closing of the Merger based on revenue targets for the business of Uplogix as specified in the Merger Agreement. The Earnout Amount will be based on Uplogix achieving revenue (subject to certain adjustments as specified in the Merger Agreement) of $7,000,000 to $14,000,000 for the period beginning at the Closing Date and ending on September 30, 2023. The Company Senior Noteholders are entitled to an advance of the Earnout Amount if the revenue of the Uplogix business for the period beginning at the closing of the Merger and ending on March 31, 2023 is between $7,000,000 to $14,000,000, but in no event will the Earnout Amount, together with any such advance of the Earnout Amount, exceed $4,000,000. The acquisition of the Uplogix brings immediate scale to our out-of-band remote management solutions, adding a complementary high-end product offering that includes high-margin maintenance and licensing revenues. A summary of the purchase consideration for the Uplogix acquisition is as follows (in thousands): Summary of purchase consideration Cash paid, including initial working capital adjustments $ 8,754 Estimated fair value of earnout consideration 1,718 Total purchase consideration $ 10,472 We recorded Uplogix’s tangible and intangible assets and liabilities based on their estimated fair values as of the Closing Date and allocated the remaining purchase consideration to goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets. Updates to the valuation of certain assets acquired and liabilities assumed may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill in subsequent periods. We expect to complete the purchase price allocation within 12 months of the Closing Date. 12 The preliminary purchase price allocation is as follows (in thousands): Schedule of purchase price allocation Cash and cash equivalents $ 4,103 Accounts receivable, net 1,900 Inventories, net 3,590 Prepaid expense and other current assets 288 Lease right-of-use asset 778 Other non-current assets 129 Amortizable intangible assets 2,470 Goodwill 6,384 Accounts payable ( 278 ) Accrued payroll ( 262 ) Deferred revenue ( 4,096 ) Other current liabilities ( 3,054 ) Notes payable ( 900 ) Other noncurrent liabilities ( 580 ) Total consideration $ 10,472 As discussed above, the purchase consideration, and resulting purchase price allocation for this acquisition included various adjustments for transaction expenses, the Bonus Amount, payment of Company Junior-Only Notes and certain other accrued expenses paid shortly after the Closing Date. Pursuant to the Merger Agreement, substantially all of the $ 4,103,000 cash acquired was to be utilized for these items. The purchase price allocation above reflects both this cash acquired and the applicable accrued liabilities and notes payable that were substantially all disbursed on or shortly after the Closing Date. The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that this acquisition will create a more diverse IoT company with respect to product offerings and our belief that we are committed to improving cost structures in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of overall efficiencies. Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. We have preliminarily determined that goodwill and identifiable intangible assets related to this acquisition are deductible. Acquisition-related costs were expensed in the periods in which the costs were incurred. The valuation of identifiable intangible assets and their estimated useful lives are as follows: Schedule of intangible assets of useful lives Asset Fair Value Weighted Average Useful Life (In thousands) (In years) Customer relationships $ 1,690 5.0 Developed technology 600 5.0 Trademarks and trade names 180 1.0 The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives. 13 Valuation Methodology The customer relationships were valued using the multi-period excess earnings method, which estimates revenues and cash flows derived from this asset and also considers portions of the cash flows that can be attributed to the use of other supporting assets. The useful lives of customer relationships are estimated based primarily upon customer turnover data. Order backlog was estimated to be substantially fulfilled within a year of the Closing Date. Developed technology and trades names were valued using the relief-from-royalty method. This method is an income approach that estimates the portion of a company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value. Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following: · Historical performance including sales and profitability · Business prospects and industry expectations · Estimated economic life of the asset · Development of new technologies · Acquisition of new customers · Attrition of existing customers · Obsolescence of technology over time The fair value of earnout consideration was estimated based on applying a Monte Carlo simulation method to forecast achievement of the revenue targets. This method involves many possible value outcomes which are evaluated to establish an estimated value. Key inputs in the valuation include forecasted revenue, revenue volatility and discount rate. Supplemental Pro Forma Information The following supplemental pro forma data summarizes our results of operations for the periods presented, as if we completed the acquisition of Uplogix as of the first day of our fiscal year ended June 30, 2022. The supplemental pro forma data reports actual operating results adjusted to include the pro forma effect and timing of the impact of amortization expense of identified intangible assets, restructuring costs, the purchase accounting effect on inventories acquired, and transaction costs. In accordance with the pro forma acquisition date, we recorded in the three months ended September 30, 2021 supplemental pro forma data (i) cost of goods sold from manufacturing profit in acquired inventory of $ 24,000 , (ii) acquisition related restructuring costs of $ 20,000 and (iii) acquisition-related costs of $ 213,000 , with a corresponding reduction in the three months ended September 30, 2022 supplemental pro forma data. Additionally, we recorded $ 160,000 of amortization expense in the three months ended September 30, 2021 supplemental pro forma data, and additional amortization expense of $ 129,000 in the three months ended September 30, 2022 supplemental pro forma data to represent amortization for the full fiscal year-to-date period. Net revenue related to products and services from the acquisition of Uplogix did not materially contribute to our total net revenue for the three months ended September 30, 2022. As of the Closing Date, we began to immediately integrate the acquisition into existing operations, engineering groups, sales distribution networks and management structure, making it generally impracticable to determine the post-acquisition earnings on a standalone basis. 14 Supplemental pro forma data is as follows: Schedule of supplemental pro forma data Three Months Ended September 30, 2022 2021 (In thousands, except per share amounts) Pro forma net revenue $ 33,830 $ 29,981 Pro forma net loss $ ( 1,023 ) $ ( 2,606 ) Pro forma net loss per share: Basic and Diluted $ ( 0.03 ) $ ( 0.09 ) 4. Supplemental Financial Information Inventories Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and consist of the following: Schedule of Inventory September 30, June 30, 2022 2022 (In thousands) Finished goods $ 16,690 $ 16,094 Raw materials 28,570 21,585 Inventories $ 45,260 $ 37,679 Other Liabilities The following table presents details of our other liabilities: Schedule of Other Liabilities September 30, June 30, 2022 2022 (In thousands) Current Accrued variable consideration $ 2,403 $ 1,905 Customer deposits and refunds 1,822 922 Accrued raw materials purchases 45 132 Deferred revenue 4,063 969 Lease liability 1,688 978 Taxes payable 394 371 Warranty reserve 572 594 Other accrued operating expenses 5,726 2,606 Total other current liabilities $ 16,713 $ 8,477 Non-current Lease liability $ 10,216 $ 7,310 Deferred revenue 1,464 373 Total other non-current liabilities $ 11,680 $ 7,683 15 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: Schedule of Computation of Net Income (Loss) per Share Three Months Ended September 30, 2022 2021 (In thousands, except per share data) Numerator: Net loss $ ( 1,653 ) $ ( 2,283 ) Denominator: Weighted-average common shares outstanding - basic and diluted 35,406 29,228 Net loss per share - basic and diluted $ ( 0.05 ) $ ( 0.08 ) 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 antidilutive securities Three Months Ended September 30, 2022 2021 (In thousands) Common stock equivalents 948 901 Purchased Intangible Assets The following table presents details of purchased intangible assets: Schedule of purchased intangible assets September 30, 2022 June 30, 2022 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value (In thousands) Developed technology $ 6,331 $ ( 2,822 ) $ 3,509 $ 5,731 $ ( 2,493 ) $ 3,238 Customer relationships 18,188 ( 6,622 ) 11,566 16,498 ( 5,700 ) 10,798 Order backlog 1,406 ( 1,406 ) – 1,406 ( 1,356 ) 50 Non-compete agreements 400 ( 400 ) – 400 ( 400 ) – Trademark and trade name 1,425 ( 890 ) 535 1,245 ( 772 ) 473 $ 27,750 $ ( 12,140 ) $ 15,610 $ 25,280 $ ( 10,721 ) $ 14,559 We do not currently have any purchased intangible assets with indefinite useful lives. 16 As of September 30, 2022, future estimated amortization expense is as follows: Schedule of future estimated amortization expense Years Ending June 30, (In thousands) 2023 (remainder) $ 4,490 2024 5,447 2025 3,816 2026 1,309 2027 458 Thereafter 90 Total future amortization $ 15,610 Restructuring, Severance and Related Charges The following table presents details of the liability we recorded related to restructuring, severance and related activities: Schedule of severance and related charges Three Months Ended September 30, 2022 (In thousands) Beginning balance $ 34 Charges 92 Payments ( 100 ) Ending balance $ 26 The ending balance is recorded in accrued payroll and related expenses in the accompanying unaudited condensed consolidated balance sheet at September 30, 2022. Supplemental Cash Flow Information The following table presents non-cash investing transactions excluded from the accompanying unaudited condensed consolidated statements of cash flows: Schedule of non-cash investing transactions Three Months Ended September 30, 2022 2021 (In thousands) Accrued property and equipment paid for in the subsequent period $ 589 $ 185 Fair value of warrant to purchase common stock issued with bank credit facility $ – $ 250 17 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 sheet: Schedule of Warranty Reserve Three Months Ended Year Ended September 30, June 30, 2022 2022 (In thousands) Beginning balance $ 594 $ 197 Warranty reserve assumed from acquisition of TN Companies – 483 Charged to cost of revenue ( 3 ) 202 Usage ( 19 ) ( 288 ) Ending balance $ 572 $ 594 6. Bank Loan Agreements On September 7, 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 additional term loan 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 reduces 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 . On September 7, 2022 we also borrowed $ 2,000,000 on our revolving credit facility. The following table summarizes our outstanding debt under the Senior Credit Facilities: Summary of outstanding debt September 30, June 30, 2022 2022 (In thousands) Outstanding borrowings on term loan $ 20,750 $ 16,188 Less: Unamortized debt issuance costs ( 312 ) ( 243 ) Net Carrying amount of debt 20,438 15,945 Less: Current portion ( 1,965 ) ( 1,671 ) Non-current portion $ 18,473 $ 14,274 Outstanding borrowings on revolving credit facility $ 2,000 $ – 18 During the three months ended September 30, 2022, we recognized $ 290,000 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 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 for all of 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, 2022 1,383 $ 3.40 Expired ( 5 ) 1.35 Exercised ( 32 ) 1.59 Balance of options outstanding at September 30, 2022 1,346 $ 3.45 19 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, 2022 1,115 $ 5.50 Granted 476 6.19 Forfeited ( 5 ) 4.77 Vested ( 186 ) 5.26 Balance of RSUs outstanding at September 30, 2022 1,400 $ 5.77 Performance Stock Units (PSUs) The following table presents a summary of activity with respect to our PSUs: Schedule of other-than-option activity Number of Shares (In thousands) Balance of PSUs outstanding at June 30, 2022 1,030 Granted 1,061 Vested ( 947 ) Balance of PSUs outstanding at September 30, 2022 1,144 Employee Stock Purchase Plan (ESPP) The following table presents a summary of activity under our ESPP: Schedule of other-than-option activity Number of Shares (In thousands) Shares available for issuance at June 30, 2022 85 Shares issued – Shares available for issuance at September 30, 2022 85 20 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: Schedule of share-based compensation expense Three Months Ended September 30, 2022 2021 (In thousands) Cost of revenue $ 51 $ 100 Selling, general and administrative 1,405 1,126 Research and development 332 255 Total share-based compensation expense $ 1,788 $ 1,481 The following table presents the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of September 30, 2022: Schedule of unrecognized share-based compensation expense Remaining Remaining Unrecognized Weighted- Compensation Average Years Expense To Recognize (In thousands) Stock options $ 502 1.5 RSUs 7,385 2.7 PSUs 4,091 2.5 Stock purchase rights under ESPP 43 0.1 $ 12,021 If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to accelerate, increase or cancel remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional share-based awards. 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: Schedule of effective income tax rate reconciliation Three Months Ended September 30, 2022 2021 Effective tax rate 3 % 2 % The difference between our effective tax rates in the periods presented above and the federal statutory rate is primarily due to a tax benefit from our domestic losses being recorded with a full valuation allowance, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate. 21 We record net deferred tax assets to the extent we believe it is more likely than not that these assets will be realized. Due to our cumulative losses and uncertainty of generating future taxable income, we have provided a full valuation allowance against our net deferred tax assets as of September 30, 2022 and June 30, 2022. 9. Commitments and Contingencies From time to time, we are involved in various legal proceedings and claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other factors. California Corporate Headquarters Lease In November 2021, we entered into a building lease agreement to lease approximately 14,000 square feet of office space for our corporate headquarters in Irvine, California. This lease commenced in July 2022 when we took possession of the premises. The term of the lease is 84 months from the commencement date, with an option to extend the lease for one 60-month extension period at a basic rent to be agreed upon by the parties or determined pursuant to the lease. The initial basic rent payable is $28,900 per month and is subject to customary annual rent increases. The aggregate basic rent payable under the lease during the 84-month term is approximately $ 2,700,000 . We are also obligated to pay as additional rent our proportionate share of operating expenses, including property taxes. Additionally, the lease required us to deliver to the landlord an irrevocable stand-by letter of credit in the amount of $ 50,000 as security in the case of default. We have accounted for this lease as an operating lease in accordance with ASC 842. Upon commencement of the lease, we recorded a right-of-use asset of $2,852,000 and lease liability of $2,852,000 at the inception of the lease based upon a discount rate of 4.6% over a term of 7 years. 22