What changed in this filing

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Item 9A. Controls and Procedures

2023-09-12 compared with 2022-08-29 · 1011 added, 913 removed, 711 unchanged (73% of the section changed)

2 unchanged sentences

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e)

and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports under the Exchange

Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that this

information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,

to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management

recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving

the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible

controls and procedures.

Our management, with the participation of our Chief Executive Officer

and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022.

evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded

that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that

information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the

time periods specified in the SEC’s rules and forms and that this information is accumulated and communicated to management, including

our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter

how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required

to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive

Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023.

on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures

were not effective as of June 30, 2023 due to the material weaknesses identified and described below.

In light of the material weaknesses described below, management performed

additional analysis and other procedures to ensure that our interim and annual Consolidated Financial Statements were prepared in accordance

generally accepted accounting principles (“GAAP”).

Accordingly, management believes that the Consolidated Financial

Statements included in this Report fairly present, in all material respects, our financial position, results of operations, and cash flows

as of and for the periods presented, in accordance with U.S.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate

“internal control over financial reporting,” as defined in Rule 13a-15(f) under the Exchange Act.

Our management conducted

an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2022 based on the criteria set forth

in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the assessment, our management has concluded that our internal control over financial reporting was effective as of June 30,

Exemption from Attestation Report of Independent Registered Public

Accounting Firm

This Report does not include an attestation report of our independent

registered public accounting firm regarding internal control over financial reporting.

Management’s report was not subject to attestation

by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only Management’s

Report because we are a non-accelerated filer.

Our management is responsible for establishing

and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability

of financial reporting and the preparation of Consolidated Financial Statements for external reporting purposes in accordance with U.S.

Our internal control over financial reporting includes those policies and procedures that:

· pertain to the maintenance of records that, in

reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

· provide reasonable assurance that transactions

are recorded properly to allow for the preparation of financial statements in accordance with U.S.

GAAP and that our receipts and expenditures

are being made only in accordance with authorizations of our management and directors;

· provide reasonable assurance regarding prevention

or timely detection of unauthorized acquisitions, use, or disposition of our assets that could have a material effect on the Consolidated

Financial Statements.

Because of its inherent limitations, a system

of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.

because of changing conditions, effectiveness of internal control over financial reporting may vary over time.

Under the supervision and with the participation of our management,

including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control

over financial reporting as of June 30, 2023 based on the guidelines established in the Internal Control—Integrated Framework (2013

framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We excluded Uplogix, Inc.

from our assessment of internal control over financial reporting as of June 30, 2023 because it was acquired in a business purchase acquisition

during the fiscal year ended June 30, 2023.

The total revenue excluded represented approximately 4% of our consolidated fiscal 2023 net

Based on its assessment, management concluded that the Company’s internal control over financial reporting was not effective

as of June 30, 2023 due to material weakness in our control environment whereby the Company did not maintain adequate information

technology (“IT”) general controls related to user access to the Company’s information systems that are relevant to

the preparation of financial statements to ensure appropriate segregation of duties and to adequately restrict access to financial applications

Notwithstanding that we did not identify any material misstatements to the consolidated financial statements and there were

no changes to previously released financial results as a result of the material weakness, the control deficiencies created a reasonable

possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.

As a result, management believes that, as of June 30, 2023, our internal control over financial reporting was not effective.

Baker Tilly US, LLP, the independent registered public accounting

firm that audited the financial statements included in this Annual Report on Form 10-K, has provided an attestation report on Lantronix’s

internal control over financial reporting.

As a result of the material weaknesses described below, such report includes an adverse audit

report on the effectiveness of internal control over financial reporting as of June 30, 2023.

Material Weakness in Internal Control Over Financial

In connection with the evaluation of the Company’s

internal control over financial reporting as described above, management has identified a deficiency constituting a material weakness

related to the design and implementation of information technology general controls related to the Company’s information systems

that are relevant to the preparation of consolidated financial statements.

Specifically, we did not design and maintain user access controls

to adequately restrict user access to the financial application and data to appropriate Company personnel.

Notwithstanding we did not identify any material

misstatements to the consolidated financial statements and there were no changes to previously released financial results as a result

of this material weakness, the control deficiencies created a reasonable possibility that a material misstatement to the consolidated

financial statements would not be prevented or detected on a timely basis.

Remediation Efforts to Address the Material

Weaknesses Existing in the Current Period

Management has initiated a remediation plan

to enhance the design of information technology general controls related to user access by implementing controls over user access including

monitoring controls and enforcing proper segregation of duties within IT environments based on roles and responsibilities.

weakness will not be considered remediated until the controls have operated effectively, as evidenced through testing, for a sufficient

number of instances.

Changes in Internal Controls over Financial Reporting

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OTHER INFORMATION

On December 2, 2021, we entered into a change in control agreement

with Jeremy Whitaker, our Chief Financial Officer (the “Agreement”), providing for certain severance benefits in the event

of a change in control of Lantronix.

Under the Agreement, if Mr.

Whitaker’s employment is terminated by us without Cause or by him

for Good Reason within 60 days prior to or 12 months following a Change in Control (as defined in the Agreement) and such a termination

of his employment occurs on or prior to May 31, 2024, (i) all of his outstanding equity awards will accelerate and become fully vested;

(ii) he will receive a cash severance payment in a lump sum (in lieu of the cash severance benefit described above, if applicable) equal

to 6 months of his base salary plus an amount equal to 100% of the amount of bonuses (if any) paid to Mr.

Whitaker during the 12 months

preceding termination (or 12 months of his base salary plus an amount equal to 100% of his target bonus if the consideration paid to Lantronix’s

stockholders in the transaction is $5.00 or more per share);

and (iii) he and his eligible dependents will be entitled to continued participation

in Lantronix’s group health, dental and vision insurance plans on the same terms as existed at the time of his termination for up

to 6 months thereafter (or up to 12 months if the consideration paid to Lantronix’s stockholders in the transaction is $5.00 or

more per share).

Whitaker’s right to receive the severance benefits described

above is subject to his executing and not revoking a general release of claims in favor of Lantronix and his resignation from any Lantronix-affiliated

board positions.

Cash severance payments would be made on the 53 rd day following Mr.

Whitaker’s employment termination

date or such later date as required by Section 409A of the Code.

Should benefits payable to Mr.

Whitaker trigger excise taxes under Section

4999 of the Code, Mr.

Whitaker will either be entitled to the full amount of his benefits or, if a cut-back in the benefits would result

in greater net (after-tax) benefit to Mr.

Whitaker, the benefits will be cut-back to the extent necessary to avoid such excise taxes.

The foregoing description of the Agreement is qualified in its entirety

by the Agreement, a copy of which is filed as Exhibit 10.19 to this Annual Report on Form 10-K and is incorporated herein by reference.

On September 11, 2023, Heidi Nguyen and Paul Folino notified the Company

of their decision not to stand for re-election at the Company’s 2023 annual meeting of stockholders (the “Annual Meeting”).

Their decision was not as a result of any disagreement with the Company on any matter relating to the Company’s operations, policies

or practices.

The Company has selected Bernhard Bruscha as a nominee for election by stockholders at the Annual Meeting, and the size

of the board of directors has been reduced to five members, effective as of the Annual Meeting.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Portions of our definitive Proxy Statement on Schedule 14A relating

to our 2022 annual meeting of stockholders (“Proxy Statement”), which will be filed with the SEC within 120 days after the

end of the fiscal year covered by this Report, are incorporated by reference into Part III of this Report, as indicated below.

Portions of our definitive Proxy Statement on Schedule 14A relating to

our 2023 annual meeting of stockholders (“Proxy Statement”), which will be filed with the SEC within 120 days after the end

of the fiscal year covered by this Report, are incorporated by reference into Part III of this Report, as indicated below.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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Item 1 of this Report, which is incorporated herein by reference.

We have adopted a code of business conduct and ethics that applies

to all employees, including employees of our subsidiaries, as well as each member of our Board of Directors.

The code of business conduct

and ethics is available at our website at www.lantronix.com under the Investor Relations-Corporate Governance section.

We have adopted a code of business conduct and ethics that applies to all

employees, including employees of our subsidiaries, as well as each member of our board of directors.

The code of business conduct and

ethics is available at our website at www.lantronix.com under the Investor Relations-Corporate Governance section.

We intend to satisfy

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EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference

to our Proxy Statement.

The information required by this Item is incorporated by reference to our

Proxy Statement.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference

to our Proxy Statement.

The information required by this Item is incorporated by reference to our

Proxy Statement.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference

to our Proxy Statement.

The information required by this Item is incorporated by reference to our

Proxy Statement.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference

to our Proxy Statement.

The information required by this Item is incorporated by reference to our

Proxy Statement.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements

The following consolidated financial statements and related Report

of Independent Registered Public Accounting Firm are filed as part of this Report.

Report of Independent Registered Public Accounting Firm

The following consolidated financial statements and related Report of Independent

Registered Public Accounting Firm are filed as part of this Report.

Report of Independent Registered Public Accounting Firm (PCAOB ID 23)

Consolidated Balance Sheets as of June 30, 2023 and 2022

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Amended and Restated 2010 Stock Incentive Plan

Lantronix, Inc.

2020 Performance Incentive Plan

2020 Performance Incentive Plan, as amended and restated

Form of Director Stock Option Agreement under the Lantronix, Inc.

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Annual Bonus Program

Letter Agreement dated August 31, 2016 between Lantronix, Inc.

and Jeremy Whitaker

Form of Executive Officer Retention Letter Agreement

Change in Control Agreement between Lantronix, Inc.

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Lantronix, Inc.

2013 Employee Stock Purchase Plan, as amended on November 13, 2018

2013 Employee Stock Purchase Plan, as amended and restated

Offer Letter dated March 23, 2019 between Lantronix, Inc.

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and Transition Networks, Inc.

Third Amendment to Third Amended and Restated Loan and Security Agreement dated September 7, 2022 among Lantronix, Inc., Lantronix Holding Company, Lantronix Canada ULC and Lantronix Canada (Taiwan) Ltd., Transition Networks, Inc.

and Silicon Valley Bank

Offer Letter dated July 30, 2018 between Lantronix, Inc.

and Fathi Hakam

Change in Control Agreement between Lantronix, Inc.

and Fathi Hakam dated April 25, 2021

Offer Letter dated December 12, 2022 and countersigned January 24, 2023 between Lantronix, Inc.

and Eric Bass

Letter Agreement dated April 3, 2023, by and between Silicon Valley Bank, a Division of First-Citizens Bank & Trust Company (successor by purchase to the Federal Deposit Insurance Corporation as receiver for Silicon Valley Bank, N.A.

(as successor to Silicon Valley Bank), Lantronix, Inc., Lantronix Holding Company, Lantronix Technologies Canada (Taiwan) Ltd., Lantronix Canada ULC, Transition Networks, Inc.

and Uplogix, Inc.

Subsidiaries of Lantronix, Inc.

Consent of Independent

Registered Public Accounting Firm, Baker Tilly US, LLP

Consent of Independent Registered Public Accounting Firm, Baker Tilly US, LLP

Power of Attorney (included on the signature page)

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LANTRONIX, INC.

/s/ PAUL PICKLE

President, Chief Executive Officer and Director

August 25, 2022

(Principal Executive Officer)

/s/ JEREMY WHITAKER

Jeremy Whitaker

Interim Chief Executive Officer and Chief Financial Officer

September 12, 2023

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each individual

whose signature appears below hereby constitutes and appoints Paul Pickle and Jeremy Whitaker, and each or either of them, acting individually,

as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her and in his

or her name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all

exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, and each of

them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith,

as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact

and agent, or any of them, or their or his or her substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities

Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities

whose signature appears below hereby constitutes and appoints Jeremy Whitaker, acting individually, as his or her true and lawful attorney-in-fact

and agent, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities,

to sign any and all amendments to this Report, and to file the same, with all exhibits thereto and other documents in connection therewith,

with the SEC, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every

act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or

could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their or his or her substitutes, may

lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange

Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities

and on the dates indicated:

/s/ PAUL PICKLE

President, Chief Executive Officer and Director

August 25, 2022

(Principal Executive Officer)

/s/ JEREMY WHITAKER

Chief Financial Officer

August 25, 2022

Interim Chief Executive Officer and Chief Financial Officer

September 12, 2023

Jeremy Whitaker

(Principal Financial and Accounting Officer)

(Principal Executive, Financial and Accounting Officer)

/s/ PAUL FOLINO

Chairman of the Board

August 25, 2022

/s/ MARGARET EVASHENK

August 25, 2022

Margaret Evashenk

September 12, 2023

/s/ PHILIP BRACE

September 12, 2023

/s/ JASON COHENOUR

September 12, 2023

Jason Cohenour

/s/ PHU HOANG

September 12, 2023

/s/ HEIDI NGUYEN

August 25, 2022

September 12, 2023

/s/ HOSHI PRINTER

August 25, 2022

September 12, 2023

Hoshi Printer

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To the Shareholders and the Board of Directors of Lantronix, Inc.:

Opinion on the Financial Statements

Irvine, California

Opinions on the Financial Statements and Internal Control over Financial

We have audited the accompanying consolidated balance sheets of Lantronix,

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equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company

as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended June

30, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the

Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and

are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules

and regulations of the Securities and Exchange Commission and the PCAOB.

We also have audited the Company’s internal control over financial reporting as of June 30, 2023, based on criteria established

in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission

In our opinion, the consolidated financial statements present fairly,

in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its

cash flows for each of the years in the two-year period ended June 30, 2023 in conformity with accounting principles generally accepted

in the United States of America.

Also in our opinion, because of the effect of the material weakness described below on the achievement

of the objective of the control criteria, the Company has not maintained effective internal control over financial reporting as of June

30, 2023, based on the COSO criteria.

A material weakness is a deficiency, or a combination of deficiencies,

in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s

annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weakness has been identified

and included in management’s assessment.

Management has identified a material weakness associated with ineffective information technology

general controls (ITGCs) in the areas of user access controls over the information technology (IT) systems that supports the Company’s

financial reporting processes.

Automated and manual business process controls that are dependent on the affected ITGCs were also deemed

ineffective because they could have been adversely impacted to the extent that they rely upon information from the affected IT systems.

The material weakness referred to above is described in Management’s

Annual Report on Internal Control Over Financial Reporting included in Item 9A of this Annual Report on Form 10-K.

This material weakness

was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements,

and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion

on those consolidated financial statements.

Basis for Opinions

The Company’s management is responsible for these consolidated

financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness

of internal control over financial reporting, included in Item 9A of this Annual Report on Form 10-K.

Our responsibility is to express

an opinion on the Company's consolidated financial statements and an opinion on the Company’s internal control over financial reporting

based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements

are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform,

an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal

control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control

over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material

misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as

evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements

are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained

in all material respects.

Our audits of the financial statements included performing procedures

to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the

consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit of internal control

over financial reporting included obtaining an understanding of internal

control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating

effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered

necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process

designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements

for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting

includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly

reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded

as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts

and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's

assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial

reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject

to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance

with the policies or procedures may deteriorate.

Critical Audit Matters

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on the critical audit matters or on the accounts or disclosures to which they relate.

INVENTORY – EXCESS AND OBSOLETE RESERVE

INVENTORIES – EXCESS AND OBSOLETE RESERVE

Critical Audit Matter Description

As discussed in Note 1 and Note 4 to the consolidated financial

statements, inventories are stated at the lower of cost or net realizable value and the Company’s consolidated inventory balance

As described in Note 1 and 4 to the consolidated financial

statements, inventories are stated at the lower of cost or net realizable value and the Company’s consolidated inventories balance

was approximately $49.7 million at June 30, 2023, net of reserves.

4 unchanged sentences

cost or net realizable value determination for excess or obsolete inventories as a critical audit matter.

Auditing management’s

lower of cost or net realizable value determination for excess or obsolete inventories was especially challenging and highly judgmental

because of the uncertainties in determining demand for aging inventory and future market conditions.

Inherent estimation uncertainty was

primarily attributed to assumptions used by management in the inventory reserve model which involved a high degree of subjectivity.

procedures to audit management’s lower of cost or net realizable value determination for excess or obsolete inventories was especially

challenging and highly judgmental because of (i) Inherent estimation uncertainty relating to assumptions used by management in

the inventory reserve model which involved a high degree of subjectivity.

(ii) the uncertainties

in determining demand for aging inventory and (iii) future market conditions .

How We Addressed the Matter in Our Audit

1 unchanged sentence

audit matter included:

§ Obtaining an understanding and evaluating the design of the controls over the determination of the lower of cost or net realizable

value for excess and obsolete inventories.

§ Obtaining an understanding and evaluating the design of the controls over the determination

of the lower of cost or net realizable value for excess and obsolete inventories .

§ Reviewing manufacturer contracts for contractual supplier protection provisions .

§ Testing the completeness and accuracy of the underlying data used in management’s reserve calculation.

§ Evaluating the reasonableness of management’s assumptions relating to future demand of products by performing a retrospective

review of the prior year assumptions to actual activity.

§ Evaluating the appropriateness and consistency of management’s methods and assumptions used in developing estimates around forecasted

sales and expected stock rotation privileges.

VALUATION OF INTANGIBLE ASSETS IN TRANSITION NETWORKS AND NET2EDGE

BUSINESSES OF COMMUNICATION SYSTEMS, INC.

§ Testing the completeness and accuracy of the underlying data used in management’s reserve

calculation .

§ Evaluating the reasonableness of management’s assumptions relating to future demand of

products by performing a retrospective review of the prior year assumptions to actual activity.

§ Evaluating the appropriateness and consistency of management’s methods and assumptions

used in developing estimates around forecasted sales and expected stock rotation privileges .

VALUATION OF INTANGIBLE ASSETS IN ACQUISITION OF UPLOGIX, INC.

Critical Audit Matter Description

As discussed in Note 3 to the consolidated financial statements,

on August 2, 2021, the Company acquired the Transition Networks and Net2Edge businesses of Communication Systems, Inc.

The transactions

were accounted for as business combinations and the assets acquired and liabilities assumed have been recorded based on the final assessment

of fair value.

The acquired intangible assets included approximately $7.5 million in customer relationships and approximately $1.9 million

in acquired technology.

The significant assumptions used to estimate the fair value of these intangible assets included revenue growth

rates, customer attrition rates and discount rates.

These significant assumptions are forward-looking and could be affected by future

economic and market conditions.

The procedures used to audit the valuation of the acquired

technology and customer relationship assets acquired include (i) a high degree of auditor judgment and subjectivity in applying procedures

relating to the fair value measurement of intangible assets acquired due to the significant amount of judgment by management when developing

the estimate;

(ii) significant audit effort in evaluating the significant assumptions relating to the estimate, such as revenue growth

rates, the customer attrition rate, and discount rates;

and (iii) the use of professionals with specialized skill and knowledge to assist

in performing these procedures and evaluating the audit evidence.

As described in Note 3 to the consolidated financial statements,

on September 12, 2022, the Company acquired Uplogix, Inc.

The transaction was accounted for as business

combination and the assets acquired and liabilities assumed have been recorded based on the final assessment of fair value.

intangible assets included approximately $1.0 million in customer relationships and approximately $0.6 million in acquired technology.

The significant assumptions used to estimate the fair value of these intangible assets included revenue growth rates, customer attrition

rates and discount rates.

These significant assumptions are forward-looking and could be affected by future economic and market conditions .

We identified auditing of management’s valuation of

intangible assets in the acquisition of Uplogix, Inc.

as a critical audit matter.

The procedures

used to audit the valuation of the acquired technology and customer relationship assets acquired include (i) a high degree of auditor

judgment and subjectivity in applying procedures relating to the fair value measurement of intangible assets acquired due to the significant

amount of judgment by management when developing the estimate;

(ii) significant audit effort in evaluating the significant assumptions

relating to the estimate, such as revenue growth rates, the customer attrition rate, and discount rates;

and (iii) the use of professionals

with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence .

How We Addressed the Matter in Our Audit

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audit matter included:

§ Obtained an understanding and evaluated the design and implementation of the Company's controls over its estimation process supporting

the recognition and measurement of the customer and technology intangible assets, including controls over management’s evaluation

of the methodology and underlying assumptions used in determining the fair value.

§ Evaluated the Company's selection of the valuation methodology and significant assumptions used by the Company in the valuation of

the intangible assets, and the reasonableness of significant assumptions and estimates.

For example, we performed analyses to evaluate

the sensitivity of changes in assumptions to the fair value of the customer relationships intangible asset and compared the significant

assumptions to current industry and market and economic trends.

§ Evaluated the competency and objectivity of third-party specialists engaged by the Company to assist in developing management’s

§ Involved firm employed valuation specialists to assist with our evaluation of the methodologies used by the Company and significant

assumptions included in the fair value estimates.

§ Tested the mathematical accuracy of the models used to determine the fair values of assets acquired.

§ Obtaining an understanding and evaluating the design and implementation of the Company's controls

over its estimation process supporting the recognition and measurement of the customer and technology intangible assets, including controls

over management’s evaluation of the methodology and underlying assumptions used in determining the fair value .

§ Evaluating the Company's selection of the valuation methodology and testing significant assumptions

and inputs used by the Company in the valuation of the intangible assets by evaluating the sensitivity of changes in assumptions to the

fair value of the intangible assets and comparing the significant assumptions to current industry and market and economic trends .

§ Evaluating the competency and objectivity of third-party specialists engaged by the Company

to assist in developing management’s assumptions .

§ Involving firm employed valuation specialists to assist with our evaluation of the methodology

and significant underlying assumptions used by management in determining the fair value estimates .

§ Testing the mathematical accuracy of the models used to determine the fair values of assets

/s/ Baker Tilly US, LLP

We have served as the Company’s auditors

We have served as the Company’s auditors since

Irvine, California

August 29, 2022

September 12, 2023

LANTRONIX, INC.

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Cash and cash equivalents

Accounts receivable (net of allowance for doubtful accounts of

$ 340 and $ 321 at

June 30, 2022 and 2021, respectively)

Accounts receivable, net

Inventories, net

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Total liabilities and stockholders' equity

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

LANTRONIX, INC.

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Weighted-average common shares - basic and diluted

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

LANTRONIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Accumulated Other

Comprehensive

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$ ( 204,163 )

Shares issued pursuant to stock awards, net

Tax withholding paid on behalf of employees for restricted shares

Shares issued pursuant to equity

offering, net

Shares issued pursuant to stock

Tax withholding paid on behalf

of employees for restricted shares

Fair value of warrants to purchase

common stock issued with bank credit facility

Share-based compensation

Balance at June 30, 2022

Shares issued pursuant to equity offering, net

Shares issued pursuant to stock awards, net

Tax withholding paid on behalf of employees for restricted shares

Fair value of warrants to purchase common stock issued with bank credit facility

$ ( 209,525 )

Shares issued pursuant to stock

Tax withholding paid on behalf

of employees for restricted shares

Share-based compensation

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$ ( 218,505 )

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

LANTRONIX, INC.

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Other liabilities

Net cash (used in) provided by operating activities

Net cash provided by (used in) operating activities

Investing activities

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Payment of lease liabilities

Net cash provided by (used in) financing activities

Increase in cash and cash equivalents

Net cash provided by financing activities

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

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Income taxes paid

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

LANTRONIX, INC.

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Company and Significant Accounting Policies

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

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.

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”).

We were incorporated in California in 1989 and

re-incorporated in Delaware in 2000.

on a long history of connectivity and video processing competence, our target applications include Smart Cities infrastructure, Infotainment

systems and Video Surveillance all supplemented with a comprehensive Out of Band Management products offering for Cloud and Edge Computing.

We were incorporated in California in 1989 and re-incorporated

in Delaware in 2000.

Basis of Presentation

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The industry in which we operate is characterized by rapid technological

As a result, estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, revenue

recognition, business combinations, inventory valuation, goodwill valuation, deferred income tax asset valuation allowances, share-based

As a result, estimates made in preparing the consolidated financial statements include revenue recognition, the allowance for

doubtful accounts, business combinations, inventory valuation, goodwill valuation, deferred income tax asset valuation allowances, share-based

compensation, restructuring charges and warranty reserves.

To the extent there are material differences between our estimates and actual

results, future results of operations will be affected.

Impact of COVID-19

The spread of the COVID-19 virus has caused an

economic downturn on a global scale, as well as significant volatility in the financial markets.

The extent to which the COVID-19 pandemic

impacts our business, operations and financial results continues to depend on numerous evolving factors that we may not be able to accurately

predict and which may cause the actual results to differ from the estimates and assumptions we are required to make in the preparation

of financial statements according to U.S.

In order to protect our employee population and

comply with local directives, most of our employees transitioned to remote working arrangements commencing in March 2020, and many continue

to primarily work remotely as of the date hereof.

To facilitate the increased data traffic associated with remote access, we have upgraded

some of our information technology systems.

We have also made changes relating to videoconferencing by providing most of our employees

with a new videoconferencing and collaboration platform to accommodate better remote collaboration and communication.

To date, remote

working has not had an adverse impact on our financial results or our operations, including financial reporting and disclosure controls

and procedures.

Reclassifications

Certain reclassifications have been made to the

prior fiscal year financial information to conform to the current fiscal year presentation.

In the macroeconomic environment affected by COVID-19, our estimates could

require increased judgement and carry a higher degree of variability volatility.

To the extent there are material differences between

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

Revenue Recognition

Refer to Note 2 below for a discussion

of our significant accounting policy over revenue recognition.

Refer to Note 2 below for a discussion of our significant accounting

policy over revenue recognition.

Accounts Receivable and Allowance for Doubtful

Accounts receivable are stated at the amount we

expect to collect, which is net of 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, including

the length of time the receivables are past due, our history of bad debts and general industry conditions.

Accounts that are deemed uncollectible

are written off against the allowance for doubtful accounts.

Accounts receivable are stated at the amount we expect to collect, which

is net of 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 various considerations, including the length of time the receivables are past due and our historical bad debt collection experience.

We also consider our understanding of current economic and industry conditions that may affect the collectability of customer receivables.

Accounts that are deemed uncollectible are written off against the allowance for doubtful accounts.

Concentration of Credit Risk

Our accounts receivable are primarily derived

from revenue earned from customers located throughout North America, Europe and Asia.

We perform periodic credit evaluations of our customers’

financial condition and maintain allowances for potential credit losses.

Our accounts receivable are primarily derived from revenue earned from

customers located throughout North America, Europe and Asia.

We perform periodic credit evaluations of our customers’ financial

condition and maintain allowances for potential credit losses.

Credit losses have historically been within our expectations.

We generally do not require collateral or other security from our customers.

do not require collateral or other security from our customers.

Fair Value of Financial Instruments

Our financial instruments consist primarily of

cash and cash equivalents, accounts receivable, contract manufacturers’ receivable, accounts payable, and accrued liabilities.

fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly

transaction between unaffiliated market participants.

Assets and liabilities measured at fair value are categorized based on whether or

not the inputs are observable in the market and the degree to which the inputs are observable.

The categorization of financial instruments

within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The hierarchy

is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Our financial instruments consist primarily of cash and cash equivalents,

accounts receivable, contract manufacturers’ receivable, accounts payable, and accrued liabilities.

The fair value of a financial

instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated

market participants.

Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in

the market and the degree to which the inputs are observable.

The categorization of financial instruments within the valuation hierarchy

is based upon the lowest level of input that is significant to the fair value measurement.

The hierarchy is prioritized into three levels

(with Level 3 being the lowest) defined as follows:

are based on quoted market prices for identical assets and liabilities in active markets at the measurement date.

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The inputs are unobservable in the market and significant to the instrument’s valuation.

The hierarchy noted above requires us to minimize

the use of unobservable inputs and to use observable market data, if available, when determining fair value.

Other than earnout consideration

liabilities (see Note 3), during the fiscal years ended June 30, 2022 and 2021 we did not have any assets or liabilities that were measured

at fair value on a non-recurring basis.

As of June 30, 2022 we do not have any assets or liabilities that were measured at fair value

on a recurring basis,

We believe all of our financial instruments’

recorded values approximate their current fair values because of the nature and short duration of these instruments.

The hierarchy noted above requires us to minimize the use of unobservable

inputs and to use observable market data, if available, when determining fair value.

Other than earnout consideration liabilities (see

Note 3 ), during the fiscal years ended June 30, 2023 and 2022 we did not have any assets or liabilities that were measured at fair

value on a recurring basis.

As of June 30, 2023 we do not have any assets or liabilities that were measured at fair value on a non-recurring

We believe all of our financial instruments’ recorded values approximate

their current fair values because of the nature and short duration of these instruments.

Foreign Currency Remeasurement

The functional currency for all our foreign subsidiaries

is currently the U.S.

The functional currency for all our foreign subsidiaries is currently the

Non-monetary and monetary foreign currency assets and liabilities are valued in U.S.

dollars at historical

and end-of-period exchange rates, respectively.

Exchange gains and losses from foreign currency transactions and remeasurements are recognized

in the consolidated statements of operations.

Translation adjustments for foreign subsidiaries whose functional currencies were previously

their respective local currencies are suspended in accumulated other comprehensive income.

dollars at historical and end-of-period

exchange rates, respectively.

Exchange gains and losses from foreign currency transactions and remeasurements are recognized in the consolidated

statements of operations.

Translation adjustments for foreign subsidiaries whose functional currencies were previously their respective

local currencies are suspended in accumulated other comprehensive income.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income is composed

of accumulated translation adjustments as of June 30, 2022 and 2021.

We did not have any other comprehensive income or losses during the

fiscal years ended June 30, 2022 or 2021.

Accumulated other comprehensive income is composed of accumulated translation

adjustments as of June 30, 2023 and 2022.

We did not have any other comprehensive income or losses during the fiscal years ended June

30, 2023 or 2022.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and

short-term investments, with original maturities of 90 days or less.

Inventories are stated at the lower of cost (on

a first-in, first-out basis) or net realizable value.

We provide reserves for excess and obsolete inventories determined primarily based

upon estimates of future demand for our products.

Shipping and handling costs are classified as a component of cost of revenue in the

consolidated statements of operations.

Inventory Sale and Purchase Transactions with

Contract Manufacturers

Under certain circumstances, we sell raw materials

to our contract manufacturers and subsequently repurchase finished goods from the contract manufacturers which contain such raw materials.

Net sales of raw materials to the contract manufacturers are recorded on the consolidated balance sheets as contract manufacturers’

receivables and are eliminated from net revenue as we intend to repurchase the raw materials from the contract manufacturers in the form

of finished goods.

We have contractual arrangements with certain

of our contract manufacturers that require us to purchase unused inventory that the contract manufacturer has purchased to fulfill our

forecasted manufacturing demand.

To the extent that inventory on-hand at one or more of these contract manufacturers exceeds our contractually

reported forecasts, we record the amount we may be required to purchase as part of other current liabilities and inventories on the consolidated

balance sheets.

Cash and cash equivalents consist of cash and short-term

investments, with original maturities of 90 days or less.

Inventories are stated at the lower of cost (on a first-in, first-out basis)

or net realizable value.

We provide reserves for excess and obsolete inventories determined primarily based upon estimates of future demand

for our products.

Shipping and handling costs are classified as a component of cost of revenue in the consolidated statements of operations.

Inventory Sale and Purchase Transactions with Contract Manufacturers

Under certain circumstances, we sell raw materials to our contract manufacturers

and subsequently repurchase finished goods from the contract manufacturers which contain such raw materials.

Net sales of raw materials

to the contract manufacturers are recorded on the consolidated balance sheets as contract manufacturers’ receivables and are eliminated

from net revenue as we intend to repurchase the raw materials from the contract manufacturers in the form of finished goods.

We have contractual arrangements with certain of our contract manufacturers

that require us to purchase unused inventory that the contract manufacturer has purchased to fulfill our forecasted manufacturing demand.

To the extent that inventory on-hand at one or more of these contract manufacturers exceeds our contractually reported forecasts, we record

the amount we may be required to purchase as part of other current liabilities and inventories on the consolidated balance sheets.

Property and Equipment

Property and equipment are carried at cost.

is provided using the straight-line method over the assets’ estimated useful lives, generally ranging from three to five years.

Depreciation and amortization of leasehold improvements are computed using the shorter of the remaining lease term or five years.

renewals and betterments are capitalized, while replacements, maintenance and repairs, which do not improve or extend the estimated useful

lives of the respective assets, are expensed as incurred.

Depreciation is provided using

the straight-line method over the assets’ estimated useful lives, generally ranging from three to five years.

Depreciation and amortization

of leasehold improvements are computed using the shorter of the remaining lease term or five years.

Major renewals and betterments are

capitalized, while replacements, maintenance and repairs, which do not improve or extend the estimated useful lives of the respective

assets, are expensed as incurred.

Business Combinations

We allocate the fair value of the purchase consideration

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

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

The excess of the fair value of purchase consideration over the fair

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

IPR&D is initially capitalized at fair value as an intangible

asset with an indefinite life and assessed for impairment thereafter.

When an IPR&D project is completed, the IPR&D is reclassified

as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life.

Acquisition-related expenses

and related restructuring costs are recognized separately from the business combination and are expensed as incurred.

Goodwill is recorded as the difference, if any,

between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets acquired.

We evaluate goodwill for impairment on an annual basis in our fiscal fourth 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 by assessing

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

carrying value.

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

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

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

We estimate the fair value of our single reporting

unit using a combination of the income and market approach.

If the carrying value of the reporting unit exceeds its estimated fair value,

we recognize an impairment loss for the difference.

During the fourth quarter of the fiscal year ended

June 30, 2022, we performed a qualitative assessment of whether goodwill impairment existed and did not determine that it was more likely

than not that the fair value of our single reporting unit was less than its carrying amount.

We allocate the fair value of the purchase consideration of a business

acquisition to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”),

based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable

assets and liabilities is recorded as goodwill.

IPR&D is initially capitalized at fair value as an intangible asset with an indefinite

life and assessed for impairment thereafter.

When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased

intangible asset and amortized over the asset’s estimated useful life.

Acquisition-related expenses and related restructuring costs

are recognized separately from the business combination and are expensed as incurred.

Goodwill is recorded as the difference, if any, between the aggregate consideration

paid for an acquisition and the fair value of the acquired net tangible and intangible assets acquired.

We evaluate goodwill for impairment

on an annual basis in our fiscal fourth 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 by assessing qualitative factors to determine

whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value.

Based on that qualitative

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

value, we conduct a quantitative goodwill impairment test, which involves comparing the estimated fair value of our single reporting unit

with its carrying value, including goodwill.

We estimate the fair value of our single reporting unit using a combination of the income

and market approach.

If the carrying value of the reporting unit exceeds its estimated fair value, we recognize an impairment loss for

the difference.

During the fourth quarter of the fiscal year ended June 30, 2023, we performed

a qualitative assessment of whether goodwill impairment existed and did not determine that it was more likely than not that the fair value

of our single reporting unit was less than its carrying amount.

Purchased Intangible Assets

Included within "purchased intangible assets,

net" at June 30, 2022 are customer lists, developed technology, tradenames, and other intangible assets acquired in connection with

various business combinations.

Included within "purchased intangible assets, net" at June 30,

2023 are customer lists, developed technology, tradenames, and other intangible assets acquired in connection with various business combinations.

Such capitalized costs and intangible assets are being amortized over a period of one to five years.

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 amount of long-lived assets may not be recoverable.

We estimate the future cash flows, undiscounted and without interest charges, expected to be generated by the assets from its use or eventual

If the sum of the expected undiscounted 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.

Income taxes are computed under the liability

This method requires the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting

basis and the tax basis of our assets and liabilities.

The impact on deferred taxes of changes in tax rates and laws, if any, are applied

to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements

in the period of enactment.

A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will

not be realized.

Financial statement effects of a tax position

are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination

by a taxing authority.

A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured

as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing

We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.

We assess the impairment of long-lived assets and intangible assets whenever

events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable.

We estimate the future

cash flows, undiscounted and without interest charges, expected to be generated by the assets from its use or eventual disposition.

the sum of the expected undiscounted 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.

Income taxes are computed under the liability method.

This method requires

the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis

of our assets and liabilities.

The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during

which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment.

A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

Financial statement effects of a tax position are initially recognized

when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority.

A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount

of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority.

potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.

Share-Based Compensation

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the estimated grant date fair value of our shared-based awards ratably over the requisite service period.

We recognize the impact of forfeitures on our

share-based compensation expense as such forfeitures occur.

Previously recognized expense is reversed for the portion of awards forfeited

prior to vesting.

We recognize the impact of forfeitures on our share-based

compensation expense as such forfeitures occur.

Previously recognized expense is reversed for the portion of awards forfeited prior to

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated

by dividing net income (loss) by the weighted-average number of common shares outstanding during the fiscal year.

Diluted net income (loss)

per share is calculated by adjusting the weighted-average number of common shares outstanding, assuming any dilutive effects of outstanding

share-based awards using the treasury stock method.

Basic net income (loss) per share is calculated by dividing net income

(loss) by the weighted-average number of common shares outstanding during the fiscal year.

Diluted net income (loss) per share is calculated

by adjusting the weighted-average number of common shares outstanding, assuming any dilutive effects of outstanding share-based awards

using the treasury stock method.

Research and Development Costs

Costs incurred in the research and development

of new products and enhancements to existing products are expensed as incurred.

Development costs of computer software to be sold, leased

or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and

ending when a product is available for general release to customers.

In most instances, we believe our current process for developing

products is essentially completed concurrently with the establishment of technological feasibility and thus, software development costs

have been expensed as incurred.

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.

Costs incurred in the research and development of new products and enhancements

to existing products are expensed as incurred.

Development costs of computer software to be sold, leased or otherwise marketed are subject

to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available

for general release to customers.

In most instances, we believe our current process for developing products is essentially completed concurrently

with the establishment of technological feasibility and thus, software development costs have been expensed as incurred.

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.

Restructuring Charges

We recognize costs and related liabilities for

restructuring activities when they are incurred.

Our restructuring charges are primarily comprised of employee separation costs, asset

impairments and contract exit costs.

Employee separation costs include one-time termination benefits that are recognized as a liability

at estimated fair value, at the time of communication to employees, unless future service is required, in which case the costs are recognized

ratably over the future service period.

Ongoing termination benefits are recognized as a liability at estimated fair value when the amount

of such benefits are probable and reasonably estimable.

Contract exit costs include contract termination fees and right-of-use asset impairments

recognized on the date that we have vacated the premises or ceased use of the leased facilities.

A liability for contract termination

fees is recognized in the period in which we terminate the contract.

We determine if an arrangement is a lease, or

contains a lease, at the inception of the arrangement and evaluate whether the lease is an operating lease or a finance lease at the commencement

We recognize right-of-use (“ROU”) assets and lease liabilities for operating and finance leases with terms greater than

ROU assets represent our right to use an asset for the lease term, while lease liabilities represent our obligation to make

lease payments.

To the extent a lease includes a renewal option, we include such options in the calculation of the ROU asset and lease

liability if it is reasonably assured that we will exercise the option.

Operating and finance lease ROU assets and liabilities are recognized

based on the present value of lease payments over the lease term at the lease commencement date.

To determine the present value of lease

payments, we use the implicit interest rate, if it is readily determinable or estimable.

To the extent that we are unable to utilize an

interest rate implicit in the lease, we generally use our collateralized incremental borrowing rate based on the information available

at the lease commencement date, including lease term, in determining the present value of lease payments.

Operating and finance lease

ROU assets are recognized net of any lease prepayments and incentives.

Operating lease expense is recognized on a straight-line basis

over the lease term.

We recognize costs and related liabilities for restructuring activities

when they are incurred.

Our restructuring charges are primarily comprised of employee separation costs, asset impairments and contract

Employee separation costs include one-time termination benefits that are recognized as a liability at estimated fair value,

at the time of communication to employees, unless future service is required, in which case the costs are recognized ratably over the

future service period.

Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits

are probable and reasonably estimable.

Contract exit costs include contract termination fees and right-of-use asset impairments recognized

on the date that we have vacated the premises or ceased use of the leased facilities.

A liability for contract termination fees is recognized

in the period in which we terminate the contract.

We determine if an arrangement is a lease, or contains a lease, at the

inception of the arrangement and evaluate whether the lease is an operating lease or a finance lease at the commencement date.

right-of-use (“ROU”) assets and lease liabilities for operating and finance leases with terms greater than 12 months.

assets represent our right to use an asset for the lease term, while lease liabilities represent our obligation to make lease payments.

To the extent a lease includes a renewal option, we include such options in the calculation of the ROU asset and lease liability if it

is reasonably assured that we will exercise the option.

Operating and finance lease ROU assets and liabilities are recognized based on

the present value of lease payments over the lease term at the lease commencement date.

To determine the present value of lease payments,

we use the implicit interest rate, if it is readily determinable or estimable.

To the extent that we are unable to utilize an interest

rate implicit in the lease, we generally use our collateralized incremental borrowing rate based on the information available at the lease

commencement date, including lease term, in determining the present value of lease payments.

Operating and finance lease ROU assets are

recognized net of any lease prepayments and incentives.

Operating lease expense is recognized on a straight-line basis over the lease

Finance lease expense is recognized based on the effective-interest method over the lease term.

For leases that we acquire in acquisition transactions,

we generally elect not to recognize assets or liabilities at the acquisition date for leases that, at the acquisition date, have a remaining

lease term of 12 months or less.

This includes not recognizing an intangible asset if the terms of an operating lease are favorable relative

to the market terms or a liability if the terms are unfavorable relative to the market terms.

Refer to Note 9 below for additional information

regarding our leases.

For leases that we acquire in acquisition transactions, we generally elect

not to recognize assets or liabilities at the acquisition date for leases that, at the acquisition date, have a remaining lease term of

12 months or less.

This includes not recognizing an intangible asset if the terms of an operating lease are favorable relative to the

market terms or a liability if the terms are unfavorable relative to the market terms.

Refer to Note 9 below for additional information regarding our leases.

Advertising Expenses

Advertising expenses are recorded in the period

incurred and totaled $ 253,000 and $ 231,000

for the fiscal years ended June 30, 2022 and 2021, respectively.

Advertising expenses are recorded in the period incurred and totaled $ 262,000

and $ 253,000 for the fiscal years ended June 30, 2023 and 2022, respectively.

The costs are included in selling, general and administrative

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Segment Information

We have one operating and reportable business

We have one operating and reportable business segment.

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.

The ASU is effective for Lantronix beginning in the first quarter

of fiscal year 2024, however early adoption is permitted.

The adoption of this guidance may have a material effect on our consolidated

financial statements.

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 ended 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.

Current Expected Credit Losses

In June 2016, the FASB issued a new standard 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 standard eliminates the threshold for initial recognition in current U.S.

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.

is effective beginning in the first quarter of our fiscal year 2024.

The adoption of this guidance is not expected to have a material

effect on our consolidated financial statements.

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.

Revenue is recognized upon the transfer of control

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from customers, which are subsequently remitted to governmental authorities and (ii) shipping and handling costs collected from customers.

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.

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

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are included in other current liabilities in the accompanying consolidated balance sheets.

Revenues from our extended warranty and services

are generally recognized ratably over the applicable service period.

Revenues from our extended warranty and services are

generally recognized ratably over the applicable service period.

Revenues from sales of our software-as-a-service (“SaaS”)

products are recognized ratably over the applicable service period as well.

Revenues from professional engineering services are generally

recognized as services are performed.

We derive a portion of our revenues from engineering

and related consulting service contracts with customers.

These contracts generally include performance obligations in which control is

transferred over time because the customer either simultaneously receives and consumes the benefits provided or our performance on the

contract creates or enhances an asset that the customer controls.

We prepay sales commissions related to certain of these contracts, which

are incremental costs of obtaining the contract.

We capitalize these costs and expense them ratably on a straight-line basis over the

life of the contract.

At June 30, 2023, prepaid sales commissions included in prepaid expenses and other current assets totaled $ 150,000

and included in other assets totaled $ 58,000 .

Engineering Services

We derive a portion of our revenues from engineering and related consulting

service contracts with customers.

Revenues from professional engineering services are generally recognized as services are performed.

These contracts generally include performance obligations in which control is transferred over time because the customer either simultaneously

receives and consumes the benefits provided or our performance on the contract creates or enhances an asset that the customer controls.

These contracts typically provide services on the following basis:

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Fixed Price – arrangements to render specific consulting and software modification services which tend to be more complex.

Performance obligations for T&M contracts

qualify for the "Right to Invoice" practical expedient within the revenue guidance.

Under this practical expedient, we may recognize

revenue, over time, in the amount to which we have a right to invoice.

In addition, we are not required to estimate variable consideration

upon inception of the contract and reassess the estimate each reporting period.

We determined that this method best represents the transfer

of services as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to

the customer of our performance completed to date.

We recognize revenue on fixed price contracts,

over time, using 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.

Performance obligations for T&M contracts qualify for the "Right

to Invoice" practical expedient within the revenue guidance.

Under this practical expedient, we may recognize revenue, over time,

in the amount to which we have a right to invoice.

In addition, we are not required to estimate variable consideration upon inception

of the contract and reassess the estimate each reporting period.

We determined that this method best represents the transfer of services

as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to the customer

of our performance completed to date.

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

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

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 into three product lines:

Embedded IoT Solutions,

IoT System Solutions, and Software & Services.

Until this recent change, we had 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.

We conduct our business globally and manage our

sales teams by three geographic regions:

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

promises to transfer multiple deliverables that may include sales of products, professional engineering services and other product qualification

or certification services.

Determining whether the deliverables in such arrangements are considered distinct performance obligations that

should be accounted for separately versus together often requires judgment.

We consider performance obligations to be distinct when the

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

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

In such arrangements, we allocate

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

for each performance obligation.

Net Revenue by Product Line and Geographic Region

We organize our products and solutions into three product lines:

IoT Solutions, IoT System Solutions, and Software & Services.

Our Embedded IoT products are normally embedded into new designs.

products include application processing that delivers compute to meet customer needs for data transformation, computer vision, machine

learning, augmented / virtual reality, audio / video aggregation and distribution, and custom applications at the edge.

Our IoT System

products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing

secure network connectivity, power for IoT end devices through Power over Ethernet (PoE), application hosting, protocol conversion, media

conversion, secure access for distributed IoT deployments and many other functions.

Our Software & Services products can be classified

as either (i) our SaaS platform, which enables customers to easily deploy, monitor, manage, and automate across their global deployments,

all from a single platform login, virtually connected as though directly on each device, (ii) engineering services, which is a flexible

business model that allows customers to select from turnkey product development or team augmentation for accelerating complex areas of

product development or (iii) extended warranty, support and maintenance.

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

the Americas;

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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

The following tables present our net revenue by product line and by geographic

Net revenues by geographic region are generally based on the “bill-to” location of our customers:

Schedule of net revenue by product lines

Years Ended June 30,

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Software & Services

Net revenue by geographic region

Years Ended June 30,

(In thousands)

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 above, going forward we do not plan to disclose our net revenue by these categorizations.

Net revenue by product lines

Schedule of net revenue by geographic region

Years Ended June 30,

(In thousands)

The following table presents product revenues and service revenues

as a percentage of our total net revenue:

The following table presents product revenues and service revenues as

a percentage of our total net revenue:

Schedule of percentage total net revenues

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Service revenues

Service revenue is comprised primarily of professional

services, software license subscriptions, and extended warranties.

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.

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 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 consolidated balance sheets.

The following table presents the changes in our

deferred revenue balance for the year ended June 30, 2022 (in thousands):

Changes in deferred revenue

Deferred revenue is primarily comprised of unearned revenue related to

our extended warranty services and certain software services.

These services are generally invoiced at the beginning of the contract period

and revenue is recognized ratably over the service period.

Current and non-current deferred revenue balances represent revenue allocated

to the remaining unsatisfied performance obligations at the end of a reporting period and are respectively included in other current liabilities

and other non-current liabilities in the accompanying consolidated balance sheets.

The following table presents the changes in our deferred revenue balance

for the year ended June 30, 2023 (in thousands):

Schedule of changes in deferred revenue

Balance, July 1, 2022

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Current portion, June 30, 2023

We expect to recognize substantially all of the non-current portion

of deferred revenue over the next 2 to 4 years.

On April 28, 2021, we entered into a Securities Purchase Agreement

(the “Purchase Agreement”) with Communications Systems, Inc., a Minnesota corporation (“CSI”), pursuant to which

we agreed to purchase from CSI the Transition Networks (“TNI”) and Net2Edge businesses of CSI (the “Transaction”).

The Transaction closed on August 2, 2021 (the “Closing Date”), with Lantronix acquiring all outstanding shares of the common

stock of TNI and all of the outstanding ordinary shares of Transition Networks Europe Limited (such entity, together with TNI, the “TN

Companies”) for an aggregate purchase price of up to approximately $ 32,028,000 consisting of (i) $ 25,028,000 in cash paid on the

Closing Date, plus (ii) earnout payments of up to $ 7,000,000 , payable following two successive 180-day intervals after the Closing Date

based on revenue targets for the business of the TN Companies as specified in the Purchase Agreement, subject to certain adjustments and

allocations as further described in the Purchase Agreement.

Based on preliminary working capital estimates of the TN Companies at the

Closing Date, we paid $24,160,000 in cash consideration on the Closing Date.

In September 2021, pursuant to working capital adjustments

as outlined in the Purchase Agreement, the net cash consideration paid as of the Closing Date was adjusted to approximately $ 23,651,000 .

Concurrently with the closing of the Transaction, CSI and Lantronix

entered in a Transition Services Agreement under which CSI performed administrative and IT services, and lease office, warehouse and production

space to Lantronix for the TN Companies for a period of up to twelve months.

The acquisition of the TN Companies provides Lantronix with complementary

IoT connectivity products and capabilities, including switching, power over ethernet and media conversion and adapter products.

A summary of the purchase consideration for the TN Companies is as

follows (in thousands):

Summary of purchase consideration

Cash consideration paid to CSI

Estimated fair value of earnout consideration

We expect to recognize substantially all of the non-current portion of

deferred revenue over the next 2 to 5 years.

Acquisition of Uplogix

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.

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 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):

Schedule of purchase consideration

Cash paid, including initial working capital adjustments

Preliminary estimated fair value of earnout consideration

Total purchase consideration

We recorded the TN Companies’ 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

Subsequent to the Closing Date, we made certain

measurement period adjustments to the preliminary purchase price allocation, based on clarification of information utilized in our

analysis and estimates to determine the fair value of assets acquired and liabilities assumed.

These adjustments resulted in a net

increase to goodwill of $ 2,498,000 ,

and were driven by the following:

an increase in deferred income tax liabilities of $ 2,036,000 related to the finalization of our conclusions regarding non-tax-deductible

intangible assets acquired,

an increase in the estimated fair value of earnout consideration of $ 47,000 ,

a decrease in amortizable intangible assets of $ 440,000 ,

an increase in acquired net accounts receivable of $ 121,000 , and

a decrease in acquired net inventories of $ 96,000

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.

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.

As of June 30, 2023, the measurement period is complete.

During the fiscal year ended June 30, 2023, based on additional analysis

and refinements to our estimates, we adjusted the preliminary purchase price allocation as of the Closing Date to (i) decrease the estimated

fair value of intangible assets acquired by $ 660,000 , (ii) increase the fair value of other current liabilities by a net amount of $ 12,000 .

These adjustments resulted in an increase to goodwill of $ 672,000 .

The final purchase price allocation is as follows (in thousands):

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Prepaid expense and other current assets

Property and equipment, net

Lease right-of-use asset

Other non-current assets

Amortizable intangible assets

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Accrued payroll

Deferred tax liability

Deferred revenue

Other current liabilities

Notes payable

Other noncurrent liabilities

Total consideration

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

$ 4,104,000 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 the Transaction 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.

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

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We have determined that goodwill and identifiable intangible assets

related to the Transaction are not 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:

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

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Developed technology

Order backlog

Trademarks and trade names

The intangible assets are amortized on a straight-line basis over the

estimated weighted-average useful lives.

The intangible assets are amortized on a straight-line basis over the estimated

weighted-average useful lives.

Valuation Methodology

The customer relationships and order backlog 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.

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

Order backlog was estimated to be substantially fulfilled within a year of the Closing Date.

Developed technology and trademarks 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:

Developed technology and trades names were valued using the relief-from-royalty

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

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Remeasurement of Earnout Consideration

During the fiscal year ended June 30, 2022, we remeasured the estimated

fair value of the earnout consideration to a total of $ 1,500,000 based on the achievement of certain revenue targets for the business

of the TN Companies during the earnout period.

As compared to the originally recorded estimated value of $ 393,000 ,

the remeasurement of the earnout consideration resulted in an upward adjustment of $ 1,107,000 that was recorded within our operating expenses

in the accompanying consolidated statement of operations for the year ended June 30, 2022.

During the year ended June 30, 2023, we remeasured the estimated fair value

of the earnout consideration based on our updated expectations of achieving the revenue targets for the business of Uplogix.

The following table presents the change in the earnout consideration liability

(in thousands):

Schedule of change in the earnout consideration liability

Preliminary estimated fair value of earnout consideration

Remeasurement estimates

Balance at June 30, 2023

The remeasurement of the earnout consideration liability was recorded within

our operating expenses in the accompanying consolidated statement of operations for the fiscal year ended June 30, 2023.

The balance of

this liability is recorded in other current liabilities on the accompanying consolidated balance sheet at June 30, 2023.

Supplemental Pro Forma Information (Unaudited)

The following supplemental pro forma data summarizes our results

of operations for the periods presented, as if we completed the acquisition of the TN Companies as of the first day of our

fiscal year ended June 30, 2021.

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 twelve months ended June 30, 2021 supplemental pro forma data (i) cost of goods sold from manufacturing profit in acquired

inventory of $ 380,000 ,

(ii) acquisition related restructuring costs of $ 508,000

and (iii) acquisition-related costs of $ 629,000 ,

with a corresponding reduction in the year ended June 30, 2022 supplemental pro forma data.

Additionally, we recorded $ 3,675,000

of amortization expense in the year ended June 30, 2021 supplemental pro forma data, and a reduction to amortization expense of

in the year ended June 30, 2022 supplemental pro forma data to represent amortization for the full fiscal year period.

Net sales related to products from the acquisition of the TN Companies

contributed approximately 28% of our total net sales for the year ended June 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 net sales and earnings on a standalone basis.

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.

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

In accordance with the pro forma acquisition date, we recorded in the year ended June 30, 2022 supplemental pro forma data (i)

cost of goods sold from manufacturing profit in acquired inventory of $ 225,000 , (ii) acquisition related restructuring costs of $ 315,000

and (iii) acquisition-related costs of $ 315,000 , with a corresponding reduction in the year ended June 30, 2023 supplemental pro forma

Additionally, we recorded $ 506,000 of amortization expense in the year ended June 30, 2022 supplemental pro forma data, and a reduction

of amortization expense of $ 79,000 in the year ended June 30, 2023 supplemental pro forma data to represent amortization for the full

fiscal year period.

Net revenue related to products and services from the acquisition of Uplogix

contributed just under 4% of our total net revenue for the year ended June 30, 2023.

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.

Supplemental pro forma data is as follows:

Schedule of supplemental pro forma data

Year Ended June 30,

Years ended June 30,

(In thousands, except per share amounts)

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Basic and Diluted

Acquisition of Transition Networks

April 28, 2021, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Communications Systems, Inc.,

a Minnesota corporation (“CSI”), pursuant to which we agreed to purchase from CSI the Transition Networks (“TNI”)

and Net2Edge businesses of CSI (the “Transaction”).

The Transaction closed on August 2, 2021 (the “Closing Date”),

with Lantronix acquiring all outstanding shares of the common stock of TNI and all of the outstanding ordinary shares of Transition Networks

Europe Limited (such entity, together with TNI, the “TN Companies”) for an aggregate purchase price of up to approximately

$ 32,028 ,000 consisting of (i) $ 25,028,000

in cash paid on the Closing Date, plus (ii) earnout payments of up to $ 7,000,000 ,

payable following two successive 180-day intervals after the Closing Date based on revenue targets for the business of the TN Companies

as specified in the Purchase Agreement, subject to certain adjustments and allocations as further described in the Purchase Agreement.

Based on preliminary working capital estimates of the TN Companies at the Closing Date, we paid $24,160,000 in cash consideration on

the Closing Date.

In September 2021, pursuant to working capital adjustments as outlined in the Purchase Agreement, the net cash consideration

paid as of the Closing Date was adjusted to approximately $23,651,000.

The acquisition of the TN Companies provided Lantronix with complementary

IoT connectivity products and capabilities, including switching, power over ethernet and media conversion and adapter products.

A summary of the purchase consideration for the TN Companies is as follows

(in thousands):

Schedule of purchase consideration

Cash consideration paid to CSI

Estimated fair value of earnout consideration

Total purchase consideration

We recorded the TN Companies’ 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

The final purchase price allocation is as follows (in thousands):

Schedule of purchase price allocation

Cash and cash equivalents

Accounts receivable, net

Inventories, net

Prepaid expense and other current assets

Property and equipment, net

Amortizable intangible assets

Accounts payable

Accrued payroll

Deferred tax liability

Other current liabilities

Total consideration

The factors that contributed to a purchase price resulting in the recognition

of goodwill include our belief that the Transaction 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 determined that goodwill and identifiable intangible assets related to the

Transaction are not 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)

Customer relationships

Developed technology

Order backlog

Trademarks and trade names

The intangible assets are amortized on a straight-line basis over the estimated

weighted-average useful lives.

Supplemental Financial Information

Accounts Receivable

The following table presents details of our accounts

Schedule of accounts

(In thousands)

Accounts receivable

Allowance for doubtful accounts

Accounts receivable, net

The following table presents details of our inventories:

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and equipment:

Schedule of property

and equipment

Schedule of property and equipment

(In thousands)

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Developed technology

Customer relationship

Customer relationships

Order backlog

8 unchanged sentences

(In thousands)

Total amortization expense

Total amortization

The following table presents details of our goodwill

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Balance at June 30, 2022

Acquisition of TN Companies

Acquisition of Uplogix

Balance at June 30, 2023

22 unchanged sentences

Lease liability

Deferred tax liability

Deferred revenue

2 unchanged sentences

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

Schedule of Computation of Net Income (Loss) per Share

Schedule of computation of net loss per Share

Years Ended June 30,

2 unchanged sentences

Net loss per share - basic and diluted

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.

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

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Severance and Related Charges

The following table presents details of the liability we recorded

related to restructuring, severance and related activities during the current fiscal year:

The following table presents details of the liability we recorded related

to restructuring, severance and related activities during the current fiscal year:

Schedule of severance and related charges

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Acquisition of property through operating leases

Acquisition of property through financing leases

Accrued property and equipment paid for in the subsequent period

2 unchanged sentences

Bank Loan Agreements

In connection with the Transaction on the Closing Date (refer to Note

3 ), we entered into (i) a Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank (“SVB”), pursuant

to which SVB made a term loan of $ 17,500,000 on the Closing Date and made available a revolving credit facility of up to $2,500,000 (the

term loan facility and the revolving credit facility, the “Senior Credit Facilities”) and (ii) Mezzanine Loan and Security

Agreement with SVB Innovation Credit Fund VIII, L.P.

(“Lender”), pursuant to which Lender funded on the Closing Date a $ 12,000,000

term loan facility (the “Mezzanine Credit Facility”).

As part of the Mezzanine Credit Facility, we issued the Lender two warrants,

each to purchase approximately 64,000 shares of our common stock at a price per share of $4.695.

The estimated fair value of the warrants

was recorded to stockholders’ equity with the offset recorded as a discount against the Mezzanine Credit Facility debt balance.

Substantially all of our tangible and intangible assets are pledged as collateral against these credit facilities.

The proceeds of the Senior Credit Facilities were used to refinance

our outstanding obligations owing to SVB under our prior Second Amended and Restated Loan and Security Agreement with SVB, and the remaining

proceeds of the Senior Credit Facilities and the proceeds from the Mezzanine Credit Facility were used to fund the purchase price of the

TN Companies, to pay related fees and expenses, and also separately for working capital and general corporate purposes.

The Senior Credit Facilities mature on August 2, 2025 and the

Mezzanine Credit Facility matures on February

Advances under the Senior Credit Facilities bore interest at the London interbank offered rate (“LIBOR”) or the Prime

Rate, at the option of Lantronix, plus a margin that ranged from 3.00% to 4.00% in the case of LIBOR and 1.50% to 2.50% in the case

of the Prime Rate, depending on our total leverage with a LIBOR floor of 0.50% and a Prime Rate floor of 3.25%.

Advances under the

Mezzanine Credit Facility bore interest at LIBOR or the Prime Rate, at the option of Lantronix, plus a margin of 9.00% with a floor

of 1.00% in the case of LIBOR and a margin of 7.50% with a floor of 3.50% in the case of the Prime Rate.

We are also obligated to

pay other customary facility fees for credit facilities of similar size and type.

In January 2022, we terminated the Mezzanine Credit Facility with the

Lender, for which we repaid a total of $ 12,152,500 to pay off the Mezzanine Credit Facility in full.

There was no requirement to pay a

termination fee.

Pursuant to the applicable accounting guidance, we recognized a non-cash loss on the extinguishment of this debt of $ 764,000 ,

representing the write-off of unamortized deferred financing costs.

This was recorded in Loss on extinguishment of debt in the accompanying

consolidated statements of operations for the fiscal year ended June 30, 2022.

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

Facilities 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 Secured Overnight Financing Rate (“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.

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

The Senior Credit Facilities bears interest at Term Secured Overnight

Financing Rate (“ SOFR”) or the Prime Rate, at the option of Lantronix, plus a margin that ranges from 3.10% to

4.10% in the case of Term SOFR and 1.50% to 2.50% in the case of the Prime Rate, depending on our total leverage with a Term SOFR

floor of 1.50% and a Prime Rate floor of 3.25%.

The Amendment 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

The Senior Credit Facilities mature on August

The Senior Credit Facilities are secured by substantially all of our assets.

On September 7, 2022, we borrowed $ 2,000,000

on our revolving credit facility.

We subsequently paid this amount back to the bank in full in February 2023.

On April 3, 2023, we entered into a Letter Agreement

(the “Letter Agreement”) with SVB, which, among other matters, amended the Loan Agreement to reduce the former requirement

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

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

The following table summarizes our outstanding debt:

Summary of outstanding debt

Schedule of outstanding debt

(In thousands)

Outstanding borrowings on Term Loan Facility

Outstanding borrowings on Senior Credit Facilities

Unamortized debt issuance costs

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Non-current portion

During the year ended June 30, 2022, we recognized

of interest expense in the accompanying consolidated statement of operations related to interest and amortization of debt issuance

associated with the borrowings under the Senior Credit Facilities and Mezzanine Credit Facility.

During the year ended June 30, 2023, we recognized $ 1,610,000 of interest

expense in the accompanying consolidated statement of operations related to interest and amortization of debt issuance associated with

the borrowings under the Senior Credit Facilities.

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 entered into an agreement with the FDIC to

purchase all of the assets and liabilities of Silicon Valley Bridge Bank.

We currently have full control of our cash and cash equivalents

balance at SVB and our other banking institutions.

We frequently monitor the third-party depository institutions that hold our cash and

cash equivalents.

Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds.

Financial Covenants

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The Senior Credit Facilities require that we maintain a minimum liquidity

of $5,000,000 and $3,000,000, respectively, at SVB, as measured at the end of each month.

of $4,000,000 at SVB, as measured at the end of each month.

Maximum leverage ratio

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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,

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

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Stockholders’ Equity

Public 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 our 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.

In addition, 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 .

Stock Incentive Plans

We have stock incentive plans in effect under

which non-qualified and incentive stock options to purchase shares of Lantronix common stock (“stock options”) have been granted

to employees, non-employees and board members.

In addition, we have previously granted restricted common stock awards (“non-vested

shares”) to employees and board members under these plans.

In November 2020, our stockholders voted to approve the 2020 Performance

Incentive Plan (the “2020 Plan”), replacing our Amended and Restated 2010 Stock Incentive Plan (the “2010 Plan”),

which expired in September 2020.

At the 2010 Plan’s expiration date, approximately 1,097,000 shares of our common stock that remained

available for award grants under the 2010 Plan became available for award grants under the 2020 Plan.

An additional 2,500,000 shares our

common stock are also available for award grants under the 2020 Plan.

In addition, any shares of common stock subject to outstanding awards

under the 2010 Plan that expire, are cancelled, or otherwise terminate after the expiration date of the 2010 Plan will be available for

award grant purposes under the 2020 Plan.

The 2020 Plan authorizes awards of stock options (both non-qualified and incentive), stock appreciation

rights, non-vested shares, restricted stock units (“RSUs”) and performance shares (“PSUs”).

New shares are issued

to satisfy stock option exercises and share issuances.

At June 30, 2022, approximately 2,088,000 shares remain available for issuance

under the 2020 Plan.

We have stock incentive plans in effect under which non-qualified and incentive

stock options to purchase shares of Lantronix common stock (“stock options”) have been granted to employees, non-employees

and board members.

In addition, we have previously granted restricted common stock awards (“non-vested shares”) to employees

and board members under these plans.

In November 2020, our stockholders voted to approve the 2020 Performance Incentive Plan (the “2020

Plan”), replacing our Amended and Restated 2010 Stock Incentive Plan (the “2010 Plan”), which expired in September 2020.

At the 2010 Plan’s expiration date, approximately 1,097,000 shares of our common stock that remained available for award grants

under the 2010 Plan became available for award grants under the 2020 Plan.

An additional 2,500,000 shares our common stock are also available

for award grants under the 2020 Plan.

In addition, any shares of common stock subject to outstanding awards under the 2010 Plan that expire,

are cancelled, or otherwise terminate after the expiration date of the 2010 Plan will be available for award grant purposes under the

The 2020 Plan authorizes awards of stock options (both non-qualified and incentive), stock appreciation rights, non-vested

shares, restricted stock units (“RSUs”) and performance shares (“PSUs”).

New shares are issued to satisfy stock

option exercises and share issuances.

At June 30, 2023, approximately 2,465,000 shares remain available for issuance under the 2020 Plan.

We have also granted stock options and RSUs under individual inducement award agreements.

The Compensation Committee of our board of directors

determines eligibility, vesting schedules and exercise prices for stock options and shares granted under the plans.

Stock options are

generally granted with an exercise price equal to the market price of our common stock on the grant date.

Stock options generally have

a contractual term of seven to ten years.

The Compensation Committee of our board of directors determines eligibility,

vesting schedules and exercise prices for stock options and shares granted under the plans.

Stock options are generally granted with an

exercise price equal to the market price of our common stock on the grant date.

Stock options generally have a contractual term of seven

to ten years.

Share-based awards generally vest and become exercisable over a one to four-year service period.

As of June 30, 2022, no stock appreciation rights or non-vested stock was outstanding.

No income tax benefit was realized from activity

in the share-based plans during the fiscal years ended June 30, 2022 and 2021.

As of June 30, 2023, no

stock appreciation rights or non-vested stock was outstanding.

No income tax benefit was realized from activity in the share-based plans

during the fiscal years ended June 30, 2023 and 2022.

Stock Option Awards

The fair value of each stock option grant is estimated

on the grant date using the Black-Scholes-Merton option-pricing formula.

Expected volatilities are based on the historical volatility

of our stock price.

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.

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

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

Treasury interest rates appropriate for the expected

term of our stock options.

The following weighted-average assumptions were used to estimate the

fair value of all of our stock option grants:

Schedule of weighted-average assumptions

The fair value of each stock option grant is estimated on the grant

date using the Black-Scholes-Merton option-pricing formula.

The expected term of stock options granted is based on our recent historical

exercise data.

Expected volatilities are 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.

The following weighted-average assumptions were used to estimate the fair

value of all of our stock option grants:

Schedule of Valuation Assumptions

Years Ended June 30,

3 unchanged sentences

Dividend yield

The following table presents a summary of activity for all of our

stock options:

The following table presents a summary of activity for all of our stock

Schedule of option activity

3 unchanged sentences

Balance of options outstanding at June 30, 2022

Options granted

Options forfeited

Options expired

Options exercised

Balance of options outstanding at June 30, 2023

Options exercisable at June 30, 2023

The following table presents a summary of grant date fair value and

intrinsic value information for all of our stock options:

The following table presents a summary of grant date fair value and intrinsic

value information for all of our stock options:

Summary of option grant-date fair value and intrinsic value information

Years Ended June 30,

(In thousands,

except per share data)

(In thousands, except per share data)

Weighted-average grant date fair value per share

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Restricted Stock Units

The fair value of our RSUs is based on the closing market price of

our common stock on the grant date.

The following table presents a summary of activity with respect to

Summary of other-than-option activity

The fair value of our RSUs is based on the closing market price of our

common stock on the grant date.

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

Summary of other than option

Number of Shares

4 unchanged sentences

Performance Shares

The following table presents a summary of activity

with respect to our PSUs:

Summary of other-than-option activity

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

Summary of other than option

Number of Shares

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Employee Stock Purchase Plan

Our 2013 Employee Stock Purchase Plan (“ESPP”)

is intended to provide employees with an opportunity to purchase our common stock through accumulated payroll deductions at the end of

a specified purchase period.

Each of our employees (including officers) is eligible to participate in our ESPP, subject to certain limitations

as set forth in our ESPP.

The ESPP currently operates with six month offering

periods commencing on the first trading day on or after May 16 and November 16 of each year (an “Offering Period”).

stock may be purchased under the ESPP at the end of each six-month Offering Period unless the participant withdraws or terminates employment

Shares of the Company’s common stock may be purchased under the ESPP at a price not less than 85% of the lesser of the

fair market value of our common stock on the first or last trading day of each Offering Period.

The per share fair value of stock purchase rights

granted under the ESPP was estimated using the following weighted-average assumptions:

Our 2013 Employee Stock Purchase Plan (“ESPP”) is intended

to provide employees with an opportunity to purchase our common stock through accumulated payroll deductions at the end of a specified

purchase period.

Each of our employees (including officers) is eligible to participate in our ESPP, subject to certain limitations as

set forth in our ESPP.

The ESPP currently operates with six month offering periods commencing

on the first trading day on or after May 16 and November 16 of each year (an “Offering Period”).

Common stock may be purchased

under the ESPP at the end of each six-month Offering Period unless the participant withdraws or terminates employment earlier.

of the Company’s common stock may be purchased under the ESPP at a price not less than 85% of the lesser of the fair market value

of our common stock on the first or last trading day of each Offering Period.

The per share fair value of stock purchase rights granted under the ESPP

was estimated using the following weighted-average assumptions:

Schedule of Valuation Assumptions

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Shares available for issuance at June 30, 2022

Shares reserved for issuance

Shares issued

3 unchanged sentences

Share-Based Compensation Expense

The following table presents a summary of share-based compensation

expense included in each applicable functional line item on our consolidated statements of operations:

The following table presents a summary of share-based compensation expense

included in each applicable functional line item on our consolidated statements of operations:

Schedule of share-based compensation expense by functional line item

5 unchanged sentences

Total share-based compensation expense

The following table presents a summary of the

remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of June 30, 2022:

The following table presents a summary of the remaining unrecognized share-based

compensation expense related to our outstanding share-based awards as of June 30, 2023:

Schedule of unrecognized share-based compensation expense

4 unchanged sentences

Common stock purchase rights under ESPP

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

Future share-based compensation expense and unearned share-based compensation expense will increase to the extent that we grant

additional share-based awards.

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 expense will increase to the extent that we grant additional share-based awards.

Retirement Plan

We have a retirement savings plan (the “Plan”)

to which eligible employees may elect to make contributions through salary deferrals up to 100% of their base pay, subject to limitations.

We made approximately $ 373,000 and $ 280,000 in matching contributions to participants in the Plan during the fiscal years ended June 30,

2022 and 2021, respectively.

In addition, we may make discretionary profit-sharing

contributions, subject to limitations.

We have a retirement savings plan (the “Plan”) to which eligible

employees may elect to make contributions through salary deferrals up to 100% of their base pay, subject to limitations.

We made approximately

$ 411,000 and $ 373,000 in matching contributions to participants in the Plan during the fiscal years ended June 30, 2023 and 2022, respectively.

In addition, we may make discretionary profit-sharing contributions, subject

to limitations.

During the fiscal years ended June 30, 2023 and 2022, we made no such contributions to the Plan.

The provision (benefit) for income taxes consists

of the following components:

The provision (benefit) for income taxes consists of the following components:

Schedule of Components of Income Tax Expense

4 unchanged sentences

The following table presents U.S.

and foreign income (loss) before

income taxes:

and foreign income (loss) before income

Schedule of Income before Income Tax, Domestic and Foreign

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Loss before income taxes

The tax effects of temporary differences that

give rise to deferred tax assets and liabilities are as follows:

The tax effects of temporary differences that give rise to deferred tax

assets and liabilities are as follows:

Schedule of Deferred Tax Assets and Liabilities

4 unchanged sentences

Reserves not currently deductible

Capitalized research and development expenses*

Deferred compensation

2 unchanged sentences

Depreciation and amortization

Identified intangibles

Gross deferred tax assets

4 unchanged sentences

Identified intangibles

Depreciation and amortization

Deferred tax liabilities

Net deferred tax assets (liabilities)

Realization of deferred tax assets is dependent upon the generation

of future taxable income.

As required by ASC 740, we have evaluated the positive and negative evidence bearing upon our ability to realize

the deferred tax assets as of June 30, 2022.

We have determined that it was more likely than not that Lantronix would not realize

the deferred tax assets due to our cumulative losses and uncertainty of generating future taxable income.

As a result of the acquisition of the TN Companies (refer to Note

3 ), we recorded U.S.

deferred tax liabilities in the 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.

Pursuant to ASC 805, the impact on our existing deferred tax assets and liabilities caused by an acquisition should

be recorded in the consolidated financial statements outside of acquisition accounting.

Accordingly, we recorded an income tax benefit

during the year ended June 30, 2022 of $ 2,036,000 for the partial release of the valuation allowance as a result of such purchase accounting

considerations.

The following table presents a reconciliation of the provision

(benefit) for income taxes to taxes computed at the U.S.

As required by the 2017 Tax Cuts and Jobs Act (the “2017 Act”),

research and experimental (“R&E”) expenses under Internal Revenue Code Section 174 are required to be capitalized

beginning in our fiscal year ended June 30, 2023.

R&E expenses are required to be amortized over five years for domestic

expenses and 15 years for foreign expenses.

Our net deferred tax liability of $ 146,000

at June 30, 2023 represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax

assets, and is recorded in other non-current liabilities on the accompanying consolidated balance sheet at June 30, 2023.

Realization of deferred tax assets is dependent upon the generation of future taxable income.

As required by ASC 740, we have

evaluated the positive and negative evidence bearing upon our ability to realize the deferred tax assets as of

June 30, 2023.

We have determined that it was more likely than not that Lantronix would not realize the deferred tax

assets due to our cumulative losses and uncertainty of generating future taxable income.

As a result of the acquisition of the TN Companies during the fiscal year

ended June 30, 2022, we recorded U.S.

deferred tax liabilities in the 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.

Pursuant to ASC 805, the impact on our existing deferred tax assets and liabilities caused by an

acquisition should be recorded in the consolidated financial statements outside of acquisition accounting.

Accordingly, we recorded an

income tax benefit during the fiscal year ended June 30, 2022 of $ 2,036,000 for the partial release of the valuation allowance as a result

of such purchase accounting considerations.

The following table presents a reconciliation of the provision (benefit)

for income taxes to taxes computed at the U.S.

federal statutory rate:

7 unchanged sentences

Change in valuation allowance

Foreign tax credit

Global intangible low-tax income inclusion

2 unchanged sentences

Provision (benefit) for income taxes

Due to the “change of ownership” provision

of the Tax Reform Act of 1986, utilization of our net operating loss (“NOL”) carryforwards and tax credit carryforwards may

be subject to an annual limitation against taxable income in future periods.

Due to the annual limitation, a portion of these carryforwards

may expire before ultimately becoming available to reduce future income tax liabilities.

The following table presents our NOLs:

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

Act of 1986, utilization of our net operating loss (“NOL”) carryforwards and tax credit carryforwards may be subject to an

annual limitation against taxable income in future periods.

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

before ultimately becoming available to reduce future income tax liabilities.

The following table presents our NOL carryforwards:

Summary of Operating Income (Loss) Carryforwards

(In thousands)

For federal income tax purposes, our NOL carryovers

generated for tax years beginning before July 1, 2018 began to expire in the fiscal year ended June 30, 2021.

Of our federal NOLs as of

June 30, 2022 in the table above, approximately $ 26,500,000 will expire by June 30, 2023 .

Pursuant to the Tax Cuts and Jobs Act (the “2017

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 limitation.

income tax purposes, our NOLs began to expire in the fiscal year ended June 30, 2013.

We continue to assert that our foreign earnings

are indefinitely reinvested in our overseas operations and as such, deferred income taxes were not provided on undistributed earnings

of certain foreign subsidiaries.

The 2017 Act created a requirement that certain income earned by foreign subsidiaries, known as global

intangible low-tax income (“GILTI”), must be included in the gross income of their U.S.

The FASB allows an accounting

policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing

such taxes as a current-period expense when incurred.

During the fiscal years ended June 30, 2022 and 2021, we elected to treat the tax

effect of GILTI as a current-period expense when incurred.

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 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.

We continue to assert that our foreign earnings are indefinitely reinvested

in our overseas operations and as such, deferred income taxes were not provided on undistributed earnings of certain foreign subsidiaries.

The 2017 Act created a requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (“GILTI”),

must be included in the gross income of their U.S.

The FASB allows an accounting policy election of either recognizing deferred

taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when

During the fiscal years ended June 30, 2023 and 2022, we elected to treat the tax effect of GILTI as a current-period expense

when incurred.

Unrecognized Tax Benefits

8 unchanged sentences

At June 30, 2023, we had $ 4,813,000

of gross unrecognized tax benefits which was recorded as a reduction to deferred tax assets, and a corresponding reduction in our

valuation allowance of $ 5,652,000 .

The balance decreased from the prior year due to the expiration of certain federal research and development tax credit

carryforwards.

To the extent such portion of unrecognized tax benefits is recognized at a time such valuation allowance no longer

exists, the recognition would reduce the effective tax rate.

Our continuing practice is to recognize interest and penalties related

to income tax matters in income tax expense.

During the fiscal years ended June 30, 2022 and 2021, we recorded an immaterial expense

for interest and penalties related to income tax matters in the provision for income taxes.

of gross unrecognized tax benefits which was recorded as a reduction to deferred tax assets, and a corresponding reduction in

our valuation allowance of $ 4,813,000 .

The balance decreased from the prior year due to the expiration of certain federal research and development tax credit carryforwards.

To the extent such portion of unrecognized tax benefits is recognized at a time such valuation allowance no longer exists, the recognition

would reduce the effective tax rate.

Our continuing practice is to recognize interest and penalties related to income tax matters in

income tax expense.

During the fiscal years ended June 30, 2023 and 2022, we recorded an immaterial expense for interest and penalties

related to income tax matters in the provision for income taxes.

At June 30, 2023, we had approximately $ 303,000

of accrued interest and penalties related to uncertain tax positions.

At June 30, 2022, our fiscal years ended June

30, 2019 through 2022 remain open to examination by the federal taxing jurisdiction and our fiscal years ended June 30, 2017 through 2021

remain open to examination by the state taxing jurisdictions.

However, we have NOLs beginning in the fiscal year ended June 30, 2001 which

would cause the statute of limitations to remain open for the year in which the NOL was incurred.

Our fiscal years ended June 30, 2014

through 2021 remain open to examination by foreign taxing authorities.

We currently do not anticipate that the amount of unrecognized

tax benefits as of June 30, 2022 will significantly increase or decrease within the next 12 months.

At June 30, 2023, our fiscal years ended June 30, 2020 through 2023 remain

open to examination by the federal taxing jurisdiction and our fiscal years ended June 30, 2019 through 2023 remain open to examination

by the state taxing jurisdictions.

However, we have NOLs beginning in the fiscal year ended June 30, 2001 which would cause the statute

of limitations to remain open for the year in which the NOL was incurred.

Our fiscal years ended June 30, 2015 through 2023 remain open

to examination by foreign taxing authorities.

We currently do not anticipate that the amount of unrecognized tax benefits as of June 30,

2023 will significantly increase or decrease within the next 12 months.

In general, our leases include office buildings for various facilities

3 unchanged sentences

Components of lease expense

(In thousands)

Components of lease expense

Operating lease cost

Financing lease cost

Financing lease interest expense

Supplemental cash flow information

2 unchanged sentences

Right-of-use assets obtained in exchange for lease obligation

The weighted-average remaining lease term is 4.76

The weighted-average discount rate is 4.2

Maturities of lease liabilities as of June 30, 2022 were

The weighted-average remaining lease term is 3.76 years.

The weighted-average

discount rate is 4.6 percent.

Maturities of lease liabilities as of June 30, 2023 were as follows:

Maturities of lease liabilities

7 unchanged sentences

California Corporate Headquarters Lease

In November 2021, we entered into a building lease agreement pursuant

to which we will lease approximately 13,767 square feet of office space for our corporate headquarters in Irvine, California.

commenced in July 2022 when we took possession of the premises.

During the fiscal quarter ending September 30, 2022, we will account for

this lease as an operating lease in accordance with ASC 842.

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

In July 2022, we commenced the lease of approximately 14,000 square

feet of office space for our corporate headquarters in Irvine, California.

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.

6 unchanged sentences

irrevocable stand-by letter of credit in the amount of $50,000 as security in the case of default.

Minnesota Facility Lease

On January 20, 2022, we entered into a lease agreement (the “Lease”)

to lease approximately 66,000 square feet in a building in Plymouth, Minnesota (the “Premises”) to house the operations of

the TN Companies purchased from CSI in August 2021 and to serve as a central warehouse and shipping hub for all USA-based business of

We took possession of the Premises commencing on the date of the Lease.

Beginning on May 1, 2022 (the “Rent Commencement Date”), the initial basic rent payable under the Lease is $46,738 per month

(with the first three months of rent abated), subject to annualized rent increases of 3% over the period of the Lease.

The initial term

of the Lease (the “Initial Term”) commences on the date of the Lease and ends on July 31, 2032.

The aggregate basic rent payable

under the Lease during the Initial Term is approximately $6,500,000.

We are also obligated to pay as additional rent for our proportionate

share of operating expenses, including property taxes.

The Lease contains an option to extend the lease for one 60-month extension

period at the net rent rate for the last year of the Initial Term or the then-market net rent, as determined pursuant to the Lease, as

well as a right of first offer for Lantronix on any space adjacent to the Premises during the Initial Term.

We also have the right to

terminate the Lease at the end of the 87th full calendar month after the Rent Commencement Date (the “Early Termination Date”)

by delivery of a written notice at least six months prior to the Early Termination Date and payment of a termination fee.

the landlord will reimburse Lantronix for its actual out-of-pocket costs for certain tenant improvements to the Premises, with an allowance

of up to $1,500,000 to be paid in three installments in accordance with the Lease.

We have accounted for this lease as an operating lease in accordance

with ASC 842.

We recorded a right-of-use asset of $6,954,000 and lease liability of $6,954,000 at the inception of the lease based upon

a discount rate of 3.9% over a term of 10.5 years.

We accounted for this lease as an operating lease in accordance with ASC

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.

Commitments and Contingencies

From time to time, we are subject to legal proceedings

and claims in the ordinary course of business.

We are currently not aware of any such legal proceedings or claims that we believe will

have, individually or in the aggregate, a material adverse effect on our business, prospects, financial position, operating results or

From time to time, we are subject to legal proceedings and claims in the

ordinary course of business.

We are currently not aware of any such legal proceedings or claims that we believe will have, individually

or in the aggregate, a material adverse effect on our business, prospects, financial position, operating results or cash flows.

Significant Geographic, Customer and Supplier Information

The following table presents our sales within

geographic regions as a percentage of net revenue, which is based on the “bill-to” location of our customers:

The following table presents our sales within geographic regions as a

percentage of net revenue, which is generally based on the “bill-to” location of our customers:

Schedule of revenue by geographic area

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Asia Pacific Japan

The following table presents sales to significant

countries as a percentage of net revenue, which is based on the “bill-to” location of our customers:

Years Ended June 30,

Long-lived assets, which consists of property

and equipment, net, lease right-of-use assets, purchased intangible assets, net, and goodwill by geographic area are as follows:

Long-lived assets, which consists of property and equipment, net, lease

right-of-use assets, purchased intangible assets, net, and goodwill by geographic area are as follows:

Long-lived Assets by Geographic Areas

1 unchanged sentence

Rest of world

The following table presents sales to our significant

customers as a percentage of net revenue:

The following table presents sales to our significant customers as a percentage

of net revenue:

Schedule of Revenue by Major Customers

1 unchanged sentence

Top five customers (1)

Includes Ingram Micro in the fiscal years ended June 30, 2022 and 2021 and Amtran in the fiscal year ended June 30, 2021.

Includes Ingram Micro and Amtran in the fiscal years ended June 30, 2023 and 2022.

Less than 10%

No other customer represented more than 10% of our annual net revenue

during these fiscal years.

No other customer represented more than 10% of our annual net revenue during

these fiscal years.

Related Party Transactions

We had no net revenue from related parties for the fiscal years ended

June 30, 2022 and 2021.

We had no net revenue from related parties for the fiscal years ended June

30, 2023 and 2022.

We do not own or operate a manufacturing facility.

All of our products are manufactured by third-party contract manufacturers and foundries primarily located in Thailand, Taiwan and China.

We have several single-sourced supplier relationships, either because alternative sources are not available or because the relationship

is advantageous to us.

If these suppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing

delays that could adversely affect our consolidated results of operations.

All of our products

are manufactured by third-party contract manufacturers and foundries primarily located in Thailand, Taiwan and China.

We have several

single-sourced supplier relationships, either because alternative sources are not available or because the relationship is advantageous

If these suppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing delays that

could adversely affect our consolidated results of operations.

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

What changed 10-K

Item 9A. Controls and Procedures