What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-09-12 compared with 2022-08-29 · 296 added, 349 removed, 262 unchanged (71% of the section changed)

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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.

1A of this Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (“Report”).

Please also see “Cautionary

Note Regarding Forward Looking Statements” at the beginning of this Report.

Lantronix, Inc.

is a global Industrial and Enterprise internet of things

(“IoT”) provider of solutions that target diversified verticals ranging from Smart Cities, Utilities and Healthcare to Enterprise,

Intelligent Transportation, and Industrial Automation.

Building on a long history of connectivity and video processing competence, target

applications include Video Surveillance, Traffic management, Infotainment systems, Robotics, Edge Computing and Remote Environment Management

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

geographic regions:

(“IoT”) provider of solutions that target high growth applications in specific verticals such as Smart Grid, Intelligent Transportation,

Smart Cities, and AI Data Centers.

Building on a long history of Networking and video processing competence, target applications include

Intelligent Substations infrastructure, Infotainment systems, and Video Surveillance, supplemented with a comprehensive Out of Band Management

(“OOB”) products offering for Cloud and Edge Computing.

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

the Americas;

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Products and Solutions

To more closely align the categorization of our product lines with

how we position them in the marketplace, we have re-organized our products and solutions.

To more closely align the categorization of our product lines with how

we position them in the marketplace, we have re-organized our products and solutions.

We now organize our products and solutions into

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organized our products and solutions into three different product lines:

IoT, REM and Other.

Going forward, we do not plan to disclose

our net revenue by the old categorizations.

Refer to “Products and Solutions” included in Part I, Item 1 of this Report, which

is incorporated herein by reference, for further discussion.

IoT, remote environment management (“REM”) and Other.

Going forward, we do not plan to disclose our net revenue by the old categorizations.

Refer to “Products and Solutions” included

in Part I, Item 1 of this Report, which is incorporated herein by reference, for further discussion.

Recent Developments

On August 2, 2021 we acquired the Transition Networks and Net2Edge

businesses (the “TN Companies”) from Communication Systems, Inc.

TN Companies Acquisition

On August 2, 2021 we acquired the Transition Networks and Net2Edge businesses

(the “TN Companies”) from Communication Systems, Inc.

(“CSI”) for an aggregate purchase price of approximately

$30,651,000, which includes earnout payments of up to $7,000,000 depending on the achievement of certain revenue targets for the TN Companies.

$30,651,000, which included earnout payments of up to $7,000,000 depending on the achievement of certain revenue targets for the TN Companies.

The TN Companies provide us with complementary IoT connectivity products and capabilities, including switching, Power over Ethernet (“PoE”)

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In January 2022, we repaid the $12,000,000 second term loan.

Refer to Notes 3 and 5 of Notes to Consolidated Financial

Statements included in Part II, Item 8 of this Report, which are incorporated herein by reference, for additional discussions regarding

the August 2021 acquisition of the TN Companies and related financing arrangements, respectively.

Underwritten Offering

On November 18, 2021, we entered into an underwriting agreement (the

“Underwriting Agreement”) with TL Investment GmbH (“TL Investment”) and Canaccord Genuity LLC, as representative

of the several underwriters named therein (together, the “Underwriters”), relating to the Company’s offer and sale of

4,700,000 shares (the “Firm Shares”) of our common stock at an initial price to the public of $7.50 per share.

TL Investment granted the Underwriters a 30-day option to purchase up to an additional 705,000 shares (the “Option Shares”)

of our common stock held by TL Investment at the public offering price, less the underwriting discounts.

On November 18, 2021, the Underwriters

exercised their option to purchase the Option Shares from TL Investment in full.

On November 22, 2021, we issued and delivered the Firm

Shares and TL Investment delivered the Option Shares.

Net proceeds to Lantronix from the offering of the Firm Shares, after

deducting the underwriting discount and offering expenses, were approximately $32,600,000.

COVID-19 Update

Since the outbreak of the COVID-19 pandemic, we have taken measures

to protect the health and safety of our employees and comply with applicable local directives.

Most of our employees transitioned to remote

working arrangements commencing in March 2020, and many continue to primarily work remotely as of the date hereof.

We continue to monitor

the implications of the COVID-19 pandemic on our business, as well as our customers’ and suppliers’ businesses, including

the emergence of new strains of the virus, current or future government-imposed shutdowns, and the impact of ongoing vaccination efforts.

Our efforts to support customer engagement through industry events,

trade shows and business travel also continue to be adversely affected.

Prolonged shutdowns, or additional future shutdowns and other

restrictions instituted by federal, state and local governments, may lead to a reduction in revenue during the coming quarters.

potential revenue declines, we continue to adjust our go-to-market approach by adding more distributors and value-added resellers, who

are closer to the customers and end-customers.

Our supply chain still faces challenges, as most of our manufacturing

is performed in Thailand, Taiwan and China.

We have experienced an increase in costs of components for certain products as well as increased

freight and logistics costs and we expect these cost increases to continue.

These and other factors have contributed to recent delays

in shipments to some customers.

Overall, in light of the changing nature and continuing uncertainty

around the COVID-19 pandemic, including the emergence of new, highly-contagious variants, our ability to predict the impact of the COVID-19

pandemic on our business in future periods remains limited.

The full effects of the pandemic on our business are unlikely to be fully

realized, or reflected in our financial results, until future periods.

Recent Accounting Pronouncements

Uplogix Acquisition

On September 12, 2022 we acquired Uplogix, Inc.

for an aggregate purchase price of $8,000,000, subject to certain adjustments, plus an earnout up to an additional $4,000,000 depending

on the achievement of certain revenue targets of the business of Uplogix through September 30, 2023.

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.

Refer to Note 3 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.

included in Part II, Item 8 of this Report, which is incorporated herein by reference, for additional discussions regarding these acquisitions.

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 to revenue recognition, sales returns and allowances,

allowance for doubtful accounts, inventory valuation, warranty reserves, restructuring charges, valuation of deferred income taxes, valuation

of goodwill and long-lived and intangible assets, share-based compensation, litigation and other contingencies.

We base our estimates

and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results

of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other

To the extent there are material differences between our estimates and the actual results, our future results of operations will

We believe the following critical accounting policies require us to

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

The preparation of financial statements and related disclosures in accordance

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

We regularly evaluate our estimates and assumptions related to revenue recognition, sales returns and allowances, inventory valuation,

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

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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

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.

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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.

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:

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of our performance completed to date.

We recognize revenue on fixed price contracts, over time, using an

input method based on the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete

the contract performance obligation.

We determined that this method best represents the transfer of services as the proportion closely

depicts the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation.

From time to time, we may enter into contracts with customers that

include promises to transfer multiple performance obligations that may include sales of products, professional engineering services and

other product qualification or certification services.

Determining whether the promises in these arrangements are considered distinct

performance obligations, that should be accounted for separately versus together, often requires judgment.

We consider performance obligations

to be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily

We recognize revenue on fixed price contracts, over time, using an input

method based on the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete the

contract performance obligation.

We determined that this method best represents the transfer of services as the proportion closely depicts

the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation.

From time to time, we may enter into contracts with customers that include

promises to transfer multiple performance obligations that may include sales of products, professional engineering services and other

product qualification or certification services.

Determining whether the promises in these arrangements are considered distinct performance

obligations, that should be accounted for separately versus together, often requires judgment.

We consider performance obligations to

be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily

available and when the promised good or service is separately identifiable from other promised goods or services in the contract.

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that we record.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses

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

Our evaluation of the collectability of customer accounts receivable

is based on various factors.

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

its financial obligations subsequent to the original sale, we record an allowance against amounts due based on those particular circumstances.

For all other customers, we estimate an allowance for doubtful accounts based on (i) the length of time the receivables are past due,

(ii) our bad debt collection experience, and (iii) our understanding of general industry conditions.

If a major customer’s credit-worthiness

deteriorates, or our customers’ actual defaults exceed our estimates, our financial results could be impacted.

Inventory Valuation

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

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

and obsolete inventories.

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

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

In addition, specific reserve estimates are recorded to cover risks for

end-of-life products, inventory located at our contract manufacturers and warranty replacement stock.

The estimates we use for demand

are also used for near-term capacity planning and inventory purchasing.

Demand for our products can fluctuate significantly from period

A significant decrease in demand could result in an increase in the amount of excess inventory on hand.

In addition, our industry

is characterized by rapid technological change, frequent new product development and product obsolescence that could result in an increase

in the amount of obsolete inventory quantities on hand.

Additionally, our estimates of future product demand and judgement to determine

excess inventory may prove to be inaccurate, in which case we may have understated or overstated the reduction to the total carrying value

of our inventory for excess and obsolete inventory.

In the future, if our inventory is determined to be overvalued, we would be required

to recognize such costs in our cost of goods sold, resulting in a reduction in our gross margins, at the time of such determination.

we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand

or technological developments could have a significant impact on the value of our inventory and our results of operations.

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.

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.

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

products, inventory located at our contract manufacturers and warranty replacement stock.

The estimates we use for demand are also used

for near-term capacity planning and inventory purchasing.

Demand for our products can fluctuate significantly from period to period.

significant decrease in demand could result in an increase in the amount of excess inventory on hand.

In addition, our industry is characterized

by rapid technological change, frequent new product development and product obsolescence that could result in an increase in the amount

of obsolete inventory quantities on hand.

Additionally, our estimates of future product demand and judgement to determine excess inventory

may prove to be inaccurate, in which case we may have understated or overstated the reduction to the total carrying value of our inventory

for excess and obsolete inventory.

In the future, if our inventory is determined to be overvalued, we would be required to recognize such

costs in our cost of goods sold, resulting in a reduction in our gross margins, at the time of such determination.

Although we make every

effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological

developments could have a significant impact on the value of our inventory and our results of operations.

Restructuring Charges

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the time they are recorded and can change depending upon changes in facts and circumstances subsequent to the date the original liability

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

If actual 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

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.

consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation

If we determine that it is more likely than not that we will realize a deferred tax asset that currently has a valuation allowance,

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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 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

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Some factors that we consider important in the qualitative assessment which could trigger a goodwill impairment review include:

· significant underperformance relative to historical or projected future operating

· significant changes in the manner of our use of the acquired assets or the

strategy for our overall business;

significant underperformance relative to historical or projected future operating results;

significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

significant negative industry or economic trends;

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a significant change in our market capitalization relative to our book value.

Based on our 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

Based on our 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.

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the quantitative goodwill impairment test.

As of June 30, 2022, the carrying value of our single reporting unit was $79,900,000, while

our market capitalization was $189,000,000.

We concluded that no goodwill impairment existed as of June 30, 2022.

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:

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;

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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.

significant judgments may include future expected revenue, expenses, capital expenditures and other costs, discount rates and whether

or not alternative uses are available for impacted long-lived assets.

Whenever events or changes in circumstances suggest that the carrying amount

of long-lived assets and intangible assets may not be recoverable, we estimate the future cash flows expected to be generated by the asset

from its use or eventual disposition.

If the sum of the expected future cash flows is less than the carrying amount of those assets, we

recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Significant management judgment

is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation.

These significant

judgments may include future expected revenue, expenses, capital expenditures and other costs, discount rates and whether or not alternative

uses are available for impacted long-lived assets.

Share-Based Compensation

We record share-based compensation in our consolidated statements of

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

over the requisite service period.

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

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

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

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

The fair value of our performance stock units is estimated as of the

grant date based upon the expected achievement of the performance metrics specified in the grant and the closing market price of our common

We record share-based compensation in our consolidated statements of operations

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

the requisite service period.

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

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

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

price of our common stock on the date of grant.

The fair value of our performance stock units is estimated as of the grant

date based upon the expected achievement of the performance metrics specified in the grant and the closing market price of our common

stock on the date of grant.

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

The expected term of stock options granted has

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

We have used the simplified method because we were generally unable to rely on our limited historical exercise data or alternative information

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

For new stock options granted beginning in the fiscal

year ended June 30, 2022, we estimated the expected term based on our recent historical exercise data.

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.

The expected term of stock options granted is

based on our recent historical exercise data.

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, 2023 and 2022

For fiscal 2022, our net revenue increased by $58,178,000, or 81.4%,

compared to fiscal 2021.

The increase in net revenue was driven by a 144.0% increase in net revenue in our IoT System Solutions product

line, as well as an increase of 60.0% in net revenues in our Embedded IoT Solutions product line.

We had a net loss of $5,362,000 for

fiscal 2022 compared to a net loss of $4,044,000 for fiscal 2021.

The increase in net loss was driven primarily by costs related to the

TN acquisition as both SG&A and R&D expenses as a percent of net revenue were lower in fiscal 2022 than fiscal 2021, largely because

of our business integration efforts and capture of significant cost synergies during fiscal 2022.

The following tables present our net revenue by

product lines and by geographic region:

For fiscal 2023, our net revenue increased by $1,534,000, or 1.2%, compared

to fiscal 2022.

The increase in net revenue was driven by a 3.0% increase in net revenue in our Embedded IoT Solutions product line, as

well as an increase of 13.5% in net revenues in our Software & Services product line partially offset by a decrease of 2.6% in net

revenues in our IoT System Solutions product line.

We had a net loss of $8,980,000 for fiscal 2023 compared to a net loss of $5,362,000

for fiscal 2022.

The increase in net loss was driven primarily by increased headcount costs related to the Uplogix acquisition as both

selling, general and administrative and research and development expenses as a percent of net revenue were higher in fiscal 2023 than

Additionally, in fiscal 2022 we recorded a tax benefit resulting from a U.S.

deferred tax liability in the TN Companies acquisition

purchase accounting related to non-tax-deductible intangible assets.

The following tables present our net revenue by product

lines and by geographic region:

Years Ended June 30,

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Embedded IoT Solutions

Net revenue from our Embedded IoT Solutions product line increased

in fiscal 2022 compared to fiscal 2021 primarily due to organic growth in our compute modules and embedded ethernet connectivity products.

In addition, the acquisition of the TN Companies contributed approximately $7,200,000 in fiscal 2022 primarily in the Americas region.

Net revenue increased in fiscal 2023 compared

to fiscal 2022 primarily due to organic growth in our compute modules in the APJ and EMEA regions as well as increased sales of our network

interface cards, primarily in the Americas region.

This increase was partially offset by a decrease in revenues from our wireless communications

products and embedded ethernet connectivity products across all regions.

IoT System Solutions

Net revenue from our IoT System Solutions product line increased in

fiscal 2022 compared to fiscal 2021 primarily due to product sales of our network switches and media converter products from the TN Companies

acquisition, mostly in the Americas region.

We also experienced organic growth in our pre-acquisition business driven by (i) our out of

band (“OOB”) products in the Americas, and to a lesser extent, EMEA and APJ, and (ii) our device server products in the Americas

and APJ regions.

The overall increase in net revenues was partially offset by a decrease in unit sales in our WiFi gateway products in

the Americas and EMEA regions.

Net revenue decreased primarily due a decrease

in our out of band (“OOB”) and converter and radio products, partially offset by increases in our gateway and network switch

products, all mostly within the Americas.

Software & Services

Net revenue from our Software & Services product line in fiscal

2022 was flat when compared to fiscal 2021.

In fiscal 2022, we experienced an increase in engineering consulting services revenue when

compared to fiscal 2021.

This increase was largely offset by lower revenues from some of our software offerings compared to fiscal 2021

during which we had a large software license sale.

For comparative purposes, the following tables present our product

line categorizations prior to our decision to reorganize how we present this information during the fourth quarter of fiscal 2022.

discussed at Part I, Item 1 of this Report, going forward we do not plan to disclose our net revenue by these categorizations.

Years Ended June 30,

(In thousands, except percentages)

Net revenue increased primarily due to an increase

in our extended warranty services in the Americas region, mostly as a result of the Uplogix acquisition.

Gross profit represents net revenue less cost of revenue.

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(In thousands, except percentages)

Gross profit as a percent of revenue (referred to as “gross margin”)

for fiscal 2022 decreased compared to fiscal 2021 due primarily to our revenue mix.

We saw significant growth in unit sales of our compute

modules and growth in our engineering services revenues, which typically carry lower gross margins than many of our products.

for fiscal 2022 was also negatively impacted by (i) higher supply chain and logistics costs and (ii) the amortization of unrealized profit

in acquired inventory from the TN Companies in the amount of approximately $380,000.

The overall decrease in our gross margins in the

current year period was partially offset by growth in unit sales of our higher-margin OOB products, along with the margin contribution

from the products acquired from the TN Companies.

Gross profit as a percentage of revenue (“gross margin") in

fiscal 2023 remained consistent with fiscal 2022.

As compared to the prior year period, in the current period we experienced increased

revenue from our high-margin extended warranty services, mostly from the Uplogix acquisition, as well as increased unit sales of some

of our NICs and optics products, which typically carry a higher margin than our other embedded solutions.

This was offset by decreased

unit sales in our OOB products, which also typically carry a high margin, as well as lower margins on our engineering services revenue

during fiscal 2023.

Selling, General and Administrative

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expenses and professional legal and accounting fees.

The following table presents our selling, general and administrative

The following table presents our selling, general and administrative expenses:

Years Ended June 30,

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Selling, general and administrative

Selling, general and administrative expenses increased in fiscal 2022

when compared to fiscal 2021 primarily (i) higher personnel-related expenses as we added headcount from the acquisition of the TN Companies

and also recorded higher variable compensation expenses, (ii) increased professional fees and outside services costs for legal and other

services, as well as transition services fees paid to the seller for the acquisition of the TN Companies, (iii) increased share-based

compensation expense due to additional grants of performance stock units and other stock awards with higher fair values compared to the

prior year and (iv) higher marketing spending, including on various events and trade shows that were largely halted in the prior year

due to the COVID-19 pandemic.

Selling, general and administrative expenses increased in fiscal 2023 when

compared to fiscal 2022 primarily due to (i) increased personnel-related expenses in headcount added from the Uplogix acquisition, (ii)

higher accounting, audit and legal fees primarily related to compliance with Section 404(b) of the Sarbanes-Oxley Act, (iii) higher facilities

and insurance expenses related to our new Minnesota warehouse location, (iv) higher advertising and marketing costs related to increased

trade show activity, (v) higher depreciation related to property and equipment for our new facilities in California and Minnesota and

(vi) higher bad debt expenses included in the “Other” category above.

Research and Development

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Research and development expenses increased in fiscal 2023 when compared

to fiscal 2021 primarily due to (i) an increase in personnel-related costs driven by additions to headcount from both the TN Companies

acquisition and internal growth, (ii) higher facility-related costs as we opened our new facility in Germany and expanded our engineering

teams, (iii) increased outside services costs primarily related to the timing of product development projects requiring outsourced engineering

resources, and (iv) increased share-based compensation expense due to additional grants of performance stock units and other stock awards

with higher fair values compared to the prior year.

to fiscal 2022 primarily due to an increase in personnel-related costs driven by the acquisition of Uplogix and internal growth of our

engineering teams worldwide.

We also experienced increased share-based compensation expenses from certain grants of performance stock

Restructuring, Severance and Related Charges

During fiscal 2022, we incurred charges of approximately $795,000 related

to headcount reductions and restructuring of non-essential operations, including certain functions determined redundant related to the

acquisition of the TN Companies.

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 2021, we incurred charges of approximately $506,000 related

to headcount reductions and restructuring of non-essential operations, including certain acquisition-related functions we determined were

During fiscal 2023 and 2022, we incurred charges

of approximately $693,000 and $795,000, respectively, primarily related to headcount reductions in connection with synergy capture and

the elimination of redundant roles from the acquisitions of Uplogix and the TN Companies.

We may incur additional restructuring, severance

and related charges in future periods as we continue to identify cost savings and synergies related to our acquisitions and general business

Acquisition-Related Costs

During fiscal 2022 and fiscal 2021, we incurred approximately $889,000

and $841,000 of acquisition-related costs, respectively, mostly comprised of banking and legal fees related to the acquisition of the

TN Companies and our exploration of other acquisition targets.

During fiscal 2023 we incurred approximately $315,000 of costs primarily

in connection with the acquisition of Uplogix.

These costs were mainly comprised of legal and other professional fees.

In fiscal 2022 we incurred approximately $889,000 of acquisition-related

costs, mostly comprised of banking and legal fees related to the acquisition of the TN Companies and our exploration of other acquisition

Amortization of Purchased Intangible Assets

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Loss on Extinguishment of Debt

For fiscal 2022, we recognized a non-cash loss on the extinguishment

of our mezzanine term loan facility of $764,000, representing the write-off of unamortized deferred financing costs.

For fiscal 2022, we recognized a non-cash loss on the extinguishment of

our mezzanine term loan facility of $764,000, representing the write-off of unamortized deferred financing costs.

Other Expense, Net

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

During fiscal 2021, we also

incurred a loss of approximately $197,000 on disposal of certain property and equipment.

Provision for Income Taxes

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Provision (benefit) for income taxes

The following table presents our effective tax rate based upon our

provision for income taxes:

The following table presents our effective tax rate based upon our provision

for income taxes:

Years Ended June 30,

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We utilize the liability method of accounting for income taxes.

fiscal 2022 the tax benefit was the result of us recording a U.S.

deferred tax liability in the TN Companies acquisition purchase accounting

related to non-tax-deductible intangible assets recognized in our consolidated financial statements.

The acquired deferred tax liabilities

are a source of income to support recognition of our existing deferred tax assets.

The differences between our effective tax rate and

the federal statutory rate in fiscal 2022 and fiscal 2021 were also impacted by the effect of our domestic losses recorded without a tax

benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate.

The differences

between our effective tax rate and the federal statutory rate in fiscal 2023 and fiscal 2022 were also impacted by the effect of our domestic

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

statutory rate.

In fiscal 2022 we recorded a tax benefit resulting from a U.S.

tax liability in the TN Companies acquisition purchase accounting related to non-tax-deductible intangible assets recognized in our consolidated

financial statements.

The acquired deferred tax liabilities are a source of income to support recognition of our existing deferred tax

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 2022 and fiscal 2021.

Aside from a net deferred tax liability of $146,000 that we recorded as of June 30, 2023, 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 at June 30, 2023 and 2022.

Refer to Note 8 of Notes to Consolidated Financial Statements, included

in Part II, Item 8 of this Report, for additional information.

Due to the “change of ownership” provision of the Tax Reform

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to reduce future income tax liabilities.

The following table presents our NOLs:

The following table presents our NOL carryforwards:

June 30, 2023

(In thousands)

For federal income tax purposes, our NOL carryovers generated for tax

years beginning before July 1, 2018 began to expire in fiscal 2021.

Of our federal NOLs as of June 30, 2022 in the table above, approximately

$26,500,000 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.

federal 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

Our federal NOL carryforwards generated for tax years beginning before

July 1, 2018 began to expire in the fiscal year ended June 30, 2021.

Pursuant to the 2017 Tax Cuts and Jobs Act (the “2017 Act”),

we also have federal NOL carryforwards of $6,788,000 that will not expire but can only be used to offset 80% of future taxable income.

For state income tax purposes, our NOL carryforwards began to expire in the fiscal year ended June 30, 2013.

Liquidity and Capital Resources

The following table presents our working capital and cash and cash

The following table presents our working capital and cash and cash equivalents:

(In thousands)

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Cash and cash equivalents

In November 2021, we sold 4,700,000 shares of our common stock in an

underwritten public offering.

We received net cash proceeds from the offering of approximately $32,600,000.

Refer to Note

6 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report for additional

In January 2022, we terminated our $12,000,000 mezzanine term loan

facility that was originated in August 2021.

In connection with this termination, we paid a total of $12,152,500 to pay off the facility

In February 2022, we entered into an amendment to our Senior

Credit Facilities (as defined in Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part

I, Item 1 of this Report) which (i) increased the amount available under the revolving credit facility from $2,500,000 to

$7,500,000, (ii) removed and replaced LIBOR benchmark provisions with Term SOFR benchmark provisions and (iii) provided that

advances under the Senior Credit Facilities bear interest at Term 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 0.00% and a Prime Rate floor of 3.25%.

We paid a nonrefundable fee of $25,000 in connection with

this amendment to our Senior Credit Facilities.

As of June 30, 2022, we had $16,188,000 million in borrowings outstanding under our

term loan facility.

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.

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 and beyond.

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

Our future working capital requirements will depend on many factors,

including the following:

In September 2022 we entered into an amendment to our Senior Credit Facilities

(as defined in Note 5 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Report) which provide

for an additional term loan in the original principal amount of $5,000,000 that matures on August 2, 2025.

We also borrowed $2,000,000

on our revolving credit facility, which we repaid in February of 2023.

On March 10, 2023, SVB was closed by the California Department of

Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver.

13, 2023, the FDIC announced that it had transferred all insured and uninsured deposits and substantially all assets of SVB to a newly

created, full-service FDIC-operated “bridge bank” called Silicon Valley Bridge Bank, N.A., where depositors would have full

access to their money immediately.

On March 27, 2023, First Citizens Bank announced that it had entered into an agreement with the FDIC

to purchase all of the assets and liabilities of Silicon Valley Bridge Bank, N.A.

We were informed by SVB that the Senior Credit Facilities

remain available on the same terms as set forth in the Loan Agreement (as defined in Note 5 to Consolidated Financial Statements

included in Part II, Item 8 of this Report), notwithstanding the closure of SVB, however there can be no assurances that the closure of

SVB or any related impacts across the financial services industry will not adversely affect our ability to access any additional term

loans that may be available under the Loan Agreement.

Our principal sources of cash and liquidity include our existing cash and

cash equivalents, borrowings and amounts available under the Senior Credit Facilities, and cash generated from operations.

that our current cash holdings and net cash flows from operations are sufficient to satisfy our current obligations for the foreseeable

future, and, assuming continued access to the undrawn amounts available under our Senior Credit Facilities, these combined sources will

be sufficient to fund our material requirements for working capital, capital expenditures and other financial commitments for at least

the next 12 months and beyond.

We continue to monitor the availability of potential alternate sources of credit based on market conditions

and our ongoing capital requirements.

There can be no guarantee that we would be able to obtain any needed alternate financing on acceptable

terms, or at all, or that such a financing would not result in a default under the Loan Agreement.

We anticipate that the primary factors

affecting our cash and liquidity are net revenue, working capital requirements and capital expenditures.

Beginning in Fiscal 2023, the 2017 Act requires that for tax purposes we

capitalize certain research and development expenses and amortize domestic expenses over five years and foreign expenses over 15 years.

We expect this requirement will increase our taxable income in certain state jurisdictions for which our ability to utilize NOL carryforwards

to offset income taxes will be limited.

We define 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 the FDIC.

There can be no assurance that our deposits in excess of the FDIC limits will be backstopped by the U.S.,

or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government

institutions or by acquisition in the event of a failure or liquidity crisis.

As of the date of this Report, we have full access to and control of our

cash and cash equivalents balance at SVB and our other banking institutions.

We continue to monitor the circumstances surrounding SVB

and the other 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.

In light of the status of SVB, we have considered and may consider in the future moving

our bank accounts and cash resources to other financial institutions, which could result in SVB declaring us to be in default under the

Loan Agreement.

In April 2023, we entered into the Letter Agreement (as defined in Note 5 to Consolidated Financial Statements

included in Part II, Item 8 of this Report) with SVB, which, among other matters, amended the Loan Agreement to reduce the former requirement

to hold 85% of our company-wide cash balances at SVB to 50% and provided a waiver of any event of default under the Loan Agreement for

any failure to comply with this covenant prior to the date of the Letter Agreement.

As of the date of this Report, we are in compliance

with all covenants of the Loan Agreement.

Our future working capital requirements will depend on many factors, including

the following:

timing and amount of our net revenue;

our product mix and the resulting gross margins;

research and development

research and development expenses;

selling, general and administrative expenses;

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Bank Loan Agreements

Refer to Note 5 of Notes to Consolidated Financial Statements,

included in Part II, Item 8 of this Report, which is incorporated herein by reference, for a discussion of our loan agreements.

The following table presents the major components of the consolidated

statements of cash flows:

Refer to Note 5 of Notes to Consolidated Financial Statements, included

in Part II, Item 8 of this Report, which is incorporated herein by reference, for a discussion of our loan agreements.

The following table presents the major components of the consolidated statements

of cash flows:

Years Ended June 30,

(In thousands)

Net cash (used in) provided by operating activities

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Operating Activities

We used cash in operating activities during fiscal 2022 compared to

operations providing cash in fiscal 2021 mainly due to the increase in our net loss, which was driven by an increase in operating expenses.

For fiscal 2022, our net loss included $15,380,000 of non-cash charges, and the changes in operating assets and liabilities used cash

of $19,434,000.

Our operations provided cash during fiscal 2023 compared to using cash

in fiscal 2022.

For fiscal 2023, our net loss included $13,644,000 of non-cash charges, and the changes in operating assets and liabilities

used cash of $4,427,000.

Our net inventories increased by $12,057,000, or 32.0%, from June 30, 2022

to June 30, 2023.

Of this increase, $7,734,000 of net inventories were acquired in the TN Companies acquisition.

The remainder

of the increase was a combination of increases in revenue, increased lead times required for certain customers, and supply chain constraints

Accounts receivable increased by $12,747,000, or 94.3%, from June 30,

2021 to June 30, 2022, of which $5,277,000 was acquired in the TN Companies acquisition.

The remainder of the increase is primarily due

to the increase and timing of our sales and related payments from customers.

Accounts payable increased by $11,522,000, or 126.3%, from June 30,

2021 to June 30, 2022, of which $1,872,000 was acquired in the TN Companies acquisition.

The remainder of the increase is primarily due

to the increase and timing of our inventory purchases and related payments to our vendors.

The increase was primarily related to the purchase of components for a supply arrangement that we entered into with

a customer in January 2023 for which we received a deposit of $15,500,000 from said customer to reimburse us for the cost of the component

In addition, we assumed $3,590,000 of net inventories in the Uplogix acquisition.

Accounts payable decreased by $8,243,000, or 39.9%, from June 30, 2022

to June 30, 2023, which was slightly offset by the acquisition of $278,000 of accounts payable from the Uplogix acquisition.

The reduction

is primarily due to the timing of our inventory purchases and related payments to our vendors during the current fiscal year.

Other current liabilities increased by $20,336,000, or 239.9%, from June

30, 2022 to June 30, 2023.

This was mostly driven by increases of approximately (i) $15,500,000 in deposits related to expected future

shipments under a customer contract, (ii) $1,524,000 in deferred revenue, mostly acquired in the Uplogix acquisition, and (iii) $1,271,000

in earnout consideration payable related to the Uplogix acquisition.

Investing Activities

Net cash used in investing activities during fiscal 2022 was driven

by the acquisition of the TN Companies, which used net cash of $23,629,000.

We also used cash for the purchase of property and equipment,

primarily related to various tooling, test and office equipment.

Net cash used in investing activities during fiscal 2023 was driven by

the acquisition of Uplogix, which used net cash of $4,650,000.

We also used $2,673,000 for the purchase of property and equipment, primarily

related to building out and furnishing our new lease facilities in California and Minnesota.

Financing Activities

Net cash provided by financing activities during fiscal 2022 resulted

primarily from (i) net proceeds from our public offering of $32,600,000 and (ii) $29,500,000 in gross proceeds received from our credit

facilities with SVB, partially offset by the repayment of our previous term loan in the amount of $3,750,000 and the mezzanine credit

facility in the amount of $12,000,000.

We also used cash of $1,811,000 for tax withholdings paid on behalf of employees for restricted

shares and paid earnout consideration of $1,500,000 for the TN Companies.

Net cash provided by financing activities during fiscal 2023 resulted primarily

from $7,000,000 in gross proceeds received from our credit facilities with SVB.

The increase in cash was partially offset by principal

payments on the senior credit facility and repayment of the $2,000,000 balance on the revolving credit facility, as well as tax withholdings

paid on behalf of employees for restricted shares.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-K

Item 7. Management’s Discussion and Analysis