LANTRONIX INC 10-Q

Item 1. Financial Statements LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) March 31, June 30, 2024 2023 Assets Current assets: Cash and cash equivalents $ 24,642 $ 13,452 Accounts receivable, net 28,542 27,682 Inventories, net 40,552 49,736 Contract manufacturers' receivables 1,562 3,019 Prepaid expenses and other current assets 2,586 2,662 Total current assets 97,884 96,551 Property and equipment, net 4,409 4,629 Goodwill 27,824 27,824 Intangible assets, net 6,561 10,565 Lease right-of-use assets 10,128 11,583 Other assets 586 472 Total assets $ 147,392 $ 151,624 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 13,845 $ 12,401 Accrued payroll and related expenses 4,539 2,431 Current portion of long-term debt, net 3,002 2,743 Other current liabilities 22,188 28,813 Total current liabilities 43,574 46,388 Long-term debt, net 13,970 16,221 Other non-current liabilities 11,763 11,459 Total liabilities 69,307 74,068 Commitments and contingencies (Note 9) - - Stockholders' equity: Common stock 4 4 Additional paid-in capital 301,117 295,686 Accumulated deficit ( 223,407 ) ( 218,505 ) Accumulated other comprehensive income 371 371 Total stockholders' equity 78,085 77,556 Total liabilities and stockholders' equity $ 147,392 $ 151,624 See accompanying notes to unaudited condensed consolidated financial statements. 4 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended Nine Months Ended March 31, March 31, 2024 2023 2024 2023 Net revenue $ 41,183 $ 32,964 $ 111,252 $ 96,265 Cost of revenue 24,679 18,328 65,620 53,799 Gross profit 16,504 14,636 45,632 42,466 Operating expenses: Selling, general and administrative 9,753 9,946 29,147 28,916 Research and development 5,186 5,067 15,017 14,677 Restructuring, severance and related charges 350 490 900 664 Acquisition-related costs – – – 315 Fair value remeasurement of earnout consideration – 140 ( 9 ) ( 533 ) Amortization of intangible assets 1,310 1,424 4,004 4,340 Total operating expenses 16,599 17,067 49,059 48,379 Loss from operations ( 95 ) ( 2,431 ) ( 3,427 ) ( 5,913 ) Interest expense, net ( 171 ) ( 465 ) ( 741 ) ( 1,081 ) Other income (expense), net 2 ( 29 ) ( 2 ) ( 21 ) Loss before income taxes ( 264 ) ( 2,925 ) ( 4,170 ) ( 7,015 ) Provision for income taxes 159 140 732 312 Net loss $ ( 423 ) $ ( 3,065 ) $ ( 4,902 ) $ ( 7,327 ) Net loss per share - basic and diluted $ ( 0.01 ) $ ( 0.08 ) $ ( 0.13 ) $ ( 0.20 ) Weighted-average common shares - basic and diluted 37,509 36,548 37,283 36,105 See accompanying notes to unaudited condensed consolidated financial statements. 5 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Three Months Ended March 31, 2024 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at December 31, 2023 37,476 $ 4 $ 299,385 $ ( 222,984 ) $ 371 $ 76,776 Shares issued pursuant to stock awards, net 103 – 22 – – 22 Tax withholding paid on behalf of employees for restricted shares – – ( 162 ) – – ( 162 ) Share-based compensation – – 1,872 – – 1,872 Net loss – – – ( 423 ) – ( 423 ) Balance at March 31, 2024 37,579 $ 4 $ 301,117 $ ( 223,407 ) $ 371 $ 78,085 Three Months Ended March 31, 2023 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at December 31, 2022 36,517 $ 4 $ 292,930 $ ( 213,787 ) $ 371 $ 79,518 Shares issued pursuant to stock awards, net 92 – 23 – – 23 Tax withholding paid on behalf of employees for restricted shares – – ( 176 ) – – ( 176 ) Share-based compensation – – 1,728 – – 1,728 Net loss – – – ( 3,065 ) – ( 3,065 ) Balance at March 31, 2023 36,609 $ 4 $ 294,505 $ ( 216,852 ) $ 371 $ 78,028 Nine Months Ended March 31, 2024 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at June 30, 2023 36,875 $ 4 $ 295,686 $ ( 218,505 ) $ 371 $ 77,556 Shares issued pursuant to stock awards, net 704 – 522 – – 522 Tax withholding paid on behalf of employees for restricted shares – – ( 881 ) – – ( 881 ) Share-based compensation – – 5,790 – – 5,790 Net loss – – – ( 4,902 ) – ( 4,902 ) Balance at March 31, 2024 37,579 $ 4 $ 301,117 $ ( 223,407 ) $ 371 $ 78,085 Nine Months Ended March 31, 2023 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at June 30, 2022 35,129 $ 4 $ 289,046 $ ( 209,525 ) $ 371 $ 79,896 Shares issued pursuant to stock awards, net 1,480 – 752 – – 752 Tax withholding paid on behalf of employees for restricted shares – – ( 674 ) – – ( 674 ) Share-based compensation – – 5,381 – – 5,381 Net loss – – – ( 7,327 ) – ( 7,327 ) Balance at March 31, 2023 36,609 $ 4 $ 294,505 $ ( 216,852 ) $ 371 $ 78,028 See accompanying notes to unaudited condensed consolidated financial statements. 6 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended March 31, 2024 2023 Operating activities Net loss $ ( 4,902 ) $ ( 7,327 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Share-based compensation 5,790 5,381 Depreciation and amortization 1,599 1,223 Amortization of intangible assets 4,004 4,340 Amortization of manufacturing profit in acquired inventory associated with acquisitions 696 181 Loss on disposal of property and equipment – ( 10 ) Amortization of deferred debt issuance costs 83 77 Fair value remeasurement of earnout consideration ( 9 ) ( 533 ) Changes in operating assets and liabilities, net of assets and liabilities acquired: Accounts receivable ( 860 ) 2,553 Inventories 8,488 ( 10,637 ) Contract manufacturers' receivable 1,457 1,139 Prepaid expenses and other current assets 76 2,260 Lease right-of-use assets 1,455 1,332 Other assets ( 114 ) ( 31 ) Accounts payable 1,390 ( 5,782 ) Accrued payroll and related expenses 2,108 ( 1,918 ) Other liabilities ( 4,913 ) 6,796 Net cash provided by (used in) operating activities 16,348 ( 956 ) Investing activities Purchases of property and equipment ( 1,325 ) ( 2,325 ) Cash payment for acquisition, net of cash and cash equivalents acquired – ( 4,650 ) Net cash used in investing activities ( 1,325 ) ( 6,975 ) Financing activities Net proceeds from issuances of common stock 522 752 Tax withholding paid on behalf of employees for restricted shares ( 881 ) ( 674 ) Earnout consideration paid for acquisition ( 1,262 ) – Net proceeds from issuance of debt – 4,909 Payment of borrowings on term loan ( 2,075 ) ( 1,475 ) Net proceeds from borrowing on line of credit – 2,000 Payment of borrowings on line of credit – ( 2,000 ) Payment of lease liabilities ( 137 ) ( 7 ) Net cash (used in) provided by financing activities ( 3,833 ) 3,505 Increase (decrease) in cash and cash equivalents 11,190 ( 4,426 ) Cash and cash equivalents at beginning of period 13,452 17,221 Cash and cash equivalents at end of period $ 24,642 $ 12,795 See accompanying notes to unaudited condensed consolidated financial statements. 7 LANTRONIX, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 1. Company and Significant Accounting Policies Company Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global industrial and enterprise internet of things (“IoT”) provider of solutions that target diversified verticals ranging from smart cities, utilities and healthcare to enterprise, intelligent transportation, and industrial automation. Building on a long history of connectivity and video processing competence, target applications include video surveillance, traffic management, infotainment systems, robotics, edge computing and remote environment management. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Lantronix have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2023, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, which was filed with the SEC on September 12, 2023. The unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the consolidated financial position of Lantronix at March 31, 2024, the consolidated results of our operations for the three and nine months ended March 31, 2024 and our consolidated cash flows for the nine months ended March 31, 2024. All intercompany accounts and transactions have been eliminated. Significant Accounting Policies Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and nine months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year or any future interim periods. Recent Accounting Pronouncements Income Tax Disclosures In December 2023, the Financial Accounting Standards Board (“FASB”) issued a final standard on improvements to income tax disclosures. The new standard requires disaggregated information about a company’s effective tax rate reconciliation and information on income taxes paid. The standard will be effective for Lantronix beginning with our annual financial statements for the fiscal year ending June 30, 2026. We have not yet determined the impact of adopting this guidance on our financial statements. 8 Segment Disclosures In November 2023, the FASB issued a new Accounting Standards Update (“ASU”) requiring incremental disclosures related to a public company’s reportable segments. The new guidance was issued primarily to provide financial statement users with more disaggregated expense information about a company’s reportable segments. The guidance does not change the definition of a segment, the method for determining segments, or the criteria for aggregating operating segments into reportable segments. The guidance is effective for Lantronix on a retrospective basis beginning with our annual financial statements for the fiscal year ending June 30, 2025. We have not yet determined the impact of adopting this guidance on our financial statements. Current Expected Credit Losses In June 2016, the FASB issued an ASU requiring financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The ASU eliminates the threshold for initial recognition in current U.S. GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The ASU became effective for Lantronix at the beginning of our first quarter of fiscal year 2024. The adoption of this guidance did not have a material effect on our consolidated financial statements. 2. Revenue Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We apply the following five-step approach in determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied. On occasion we enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized exclusive of (i) any taxes collected from customers, which are subsequently remitted to governmental authorities and (ii) shipping and handling costs collected from customers. Products Most of our product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that our customer obtains control of the promised products. A smaller portion of our product revenue is recognized when our customer receives delivery of the promised products. A significant portion of our products are sold to distributors under agreements which contain (i) limited rights to return unsold products and (ii) price adjustment provisions, both of which are accounted for as variable consideration when estimating the amount of revenue to recognize. We base our estimates for returns and price adjustments primarily on historical experience; however, we also consider contractual allowances, approved pricing adjustments and other known or anticipated returns and price adjustments in a given period. Such estimates are generally made at the time of shipment to the customer and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Our estimates of accrued variable consideration are included in other current liabilities in the accompanying unaudited condensed consolidated balance sheets. 9 Services Revenues from our extended warranty, technical support and maintenance services are generally recognized ratably over the applicable service period. Although not significant to date, revenues from sales of our software-as-a-service (“SaaS”) solutions are recognized ratably over the applicable service period as well. We prepay sales commissions related to certain of these contracts, which are incremental costs of obtaining the contract. We capitalize these costs and expense them ratably on a straight-line basis over the life of the contract. At March 31, 2024, prepaid sales commissions included in prepaid expenses and other current assets totaled $ 171,000 and those included in other assets totaled $ 172,000 . Engineering Services We derive a portion of our revenues from engineering and related consulting service contracts with customers. Revenues from professional engineering services are generally recognized as services are performed. These contracts generally include performance obligations in which control is transferred over time because the customer either simultaneously receives and consumes the benefits provided or our performance on the contract creates or enhances an asset that the customer controls. These contracts typically provide services on the following basis: · Time & Materials (“T&M”) – services consist of revenues from software modification, consulting implementation, training and integration services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary depending on the actual time and materials incurred based on the customer’s needs. · Fixed Price – arrangements to render specific consulting and software modification services which tend to be more complex. Performance obligations for T&M contracts qualify for the "Right to Invoice" practical expedient within the revenue guidance. Under this practical expedient, we may recognize revenue, over time, in the amount to which we have a right to invoice. In addition, we are not required to estimate variable consideration upon inception of the contract and reassess the estimate each reporting period. We have determined that this method best represents the transfer of services as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to the customer of our performance completed to date. We recognize revenue on fixed price contracts, over time, using an input method based on the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete the contract performance obligation. We have determined that this method best represents the transfer of services as the proportion closely depicts the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation. Multiple Performance Obligations From time to time, we may enter into contracts with customers that include promises to transfer multiple deliverables that may include sales of products, professional engineering services and other product qualification or certification services. Determining whether the deliverables in such arrangements are considered distinct performance obligations that should be accounted for separately versus together often requires judgment. We consider performance obligations to be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily available and when the promised good or service is separately identifiable from other promised goods or services in the contract. In such arrangements, we allocate revenue on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation. 10 Net Revenue by Product Line and Geographic Region We organize our products and solutions into three product lines: Embedded IoT Solutions, IoT System Solutions, and Software & Services. Our Embedded IoT products are normally embedded into new designs. These products include application processing that delivers compute to meet customer needs for data transformation, computer vision, machine learning, augmented / virtual reality, audio / video aggregation and distribution, and custom applications at the edge. Our IoT System products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, power for IoT end devices through Power over Ethernet (“PoE”), application hosting, protocol conversion, media conversion, secure access for distributed IoT deployments and many other functions. Our Software & Services products can be classified as either (i) our SaaS platform, which enables customers to easily deploy, monitor, manage, and automate across their global deployments, all from a single platform login, virtually connected as though directly on each device, (ii) engineering services, which is a flexible business model that allows customers to select from turnkey product development or team augmentation for accelerating complex areas of product development or (iii) extended warranty, support and maintenance. We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”). The following tables present our net revenue by product line and by geographic region. Net revenues by geographic region are based on the “bill-to” location of our customers: Schedule of net revenue by product lines Three Months Ended March 31, Nine Months Ended March 31, 2024 2023 2024 2023 (In thousands) (In thousands) Embedded IoT Solutions $ 12,452 $ 16,055 $ 35,589 $ 44,818 IoT System Solutions 26,789 14,034 68,847 43,568 Software & Services 1,942 2,875 6,816 7,879 $ 41,183 $ 32,964 $ 111,252 $ 96,265 Schedule of net revenue by geographic region Three Months Ended March 31, Nine Months Ended March 31, 2024 2023 2024 2023 (In thousands) (In thousands) Americas $ 17,543 $ 19,095 $ 61,077 $ 59,713 EMEA 18,354 6,380 37,831 16,486 Asia Pacific Japan 5,286 7,489 12,344 20,066 $ 41,183 $ 32,964 $ 111,252 $ 96,265 The following table presents product revenues and service revenues as a percentage of our total net revenue: Schedule of percentage of our total net revenues Three Months Ended March 31, Nine Months Ended March 31, 2024 2023 2024 2023 Product revenues 96 % 91 % 94 % 92 % Service revenues 4 % 9 % 6 % 8 % Service revenues are comprised primarily of professional services, software license subscriptions, and extended warranties. 11 Contract Balances In certain instances, the timing of revenue recognition may differ from the timing of invoicing to our customers. We record a contract asset receivable when revenue is recognized prior to invoicing, and a contract or deferred revenue liability when revenue is recognized subsequent to invoicing. With respect to product shipments, we expect to fulfill contract obligations within one year and so we have elected not to separately disclose the amount nor the timing of recognition of these remaining performance obligations. For contract balances related to contracts that include services and multiple performance obligations, refer to the deferred revenue discussion below. Deferred Revenue Deferred revenue is primarily comprised of unearned revenue related to our extended warranty, support and maintenance services and certain software services. These services are generally invoiced at the beginning of the contract period and revenue is recognized ratably over the service period. Current and non-current deferred revenue balances represent revenue allocated to the remaining unsatisfied performance obligations at the end of a reporting period and are respectively included in other current liabilities and other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. The following table presents the changes in our deferred revenue balance for the nine months ended March 31, 2024 (in thousands): Schedule of changes in deferred revenue Balance, June 30, 2023 $ 3,381 New performance obligations 5,493 Recognition of revenue from satisfying performance obligations ( 3,723 ) Balance, March 31, 2024 5,151 Less: non-current portion of deferred revenue ( 2,420 ) Current portion, March 31, 2024 $ 2,731 We currently expect to recognize substantially all of the non-current portion of deferred revenue over the next 2 to 5 years. 3. Acquisition Remeasurement of Earnout Consideration from Uplogix Acquisition Our September 12, 2022 merger agreement with Uplogix, Inc. (“Uplogix”) provided for the holders of Uplogix note agreements, and certain former Uplogix employees, with the right to receive up to an additional $4,000,000 in the aggregate (the “Earnout Amount”), payable after the closing of the acquisition based on revenue targets for the business of Uplogix as specified in the merger agreement. The Earnout Amount was based on Uplogix achieving revenue of $7,000,000 to $14,000,000 for the period beginning at the September 12, 2022 closing date and ending on September 30, 2023. The earnout liability was paid out in full in December 2023. The table below presents the change in the earnout consideration liability through March 31, 2024 (in thousands): Schedule of change in the earnout consideration liability Balance at June 30, 2023 $ 1,271 Final remeasurement estimate ( 9 ) Payments ( 1,262 ) Balance at March 31, 2024 $ – 12 Reclassification of Cash Flows from Operating to Financing Activities In connection with the preparation of our unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2024, we identified an error in the unaudited condensed consolidated statement of cash flows for our second fiscal quarter ended December 31, 2023 whereby we had incorrectly classified the $ 1,262,000 earnout payment as part of operating activities. We believe that the impact of the error was not material to the financial statements for the three and six months ended December 31, 2023, based on an evaluation of both quantitative and qualitative factors. As a result, we determined that correcting the prior period financial statements would not require the Form 10-Q for the three and six months ended December 31, 2023 to be amended. We have reclassified the payment in the accompanying unaudited condensed consolidated statement of cash flows for the nine months ended March 31, 2024 to financing activities. This reclassification has no impact on the Company’s results of operations or financial position. The following table summarizes the impact of reclassifying the earnout payment from operating activities to financing activities: Schedule of earnout payment from operating activities to financing activities Six Months Ended December 31, 2023 As Reported As Adjusted (In thousands) Net cash provided by operating activities $ 11,490 $ 12,752 Net cash used in investing activities 1,189 1,189 Net cash used in financing activities 1,607 2,869 4. Supplemental Financial Information Inventories Schedule of inventories March 31, June 30, 2024 2023 (In thousands) Finished goods $ 22,457 $ 25,670 Raw materials 18,095 24,066 Inventories $ 40,552 $ 49,736 13 Other Liabilities The following table presents details of our other liabilities: Schedule of other liabilities March 31, June 30, 2024 2023 (In thousands) Current Accrued variable consideration $ 1,790 $ 2,167 Customer deposits and refunds 11,151 16,344 Accrued raw materials purchases 206 267 Deferred revenue 2,731 2,493 Lease liability 1,857 1,859 Taxes payable 774 647 Warranty reserve 708 788 Other accrued operating expenses 2,971 4,248 Total other current liabilities $ 22,188 $ 28,813 Non-current Lease liability $ 8,990 $ 10,425 Deferred tax liability 353 146 Deferred revenue 2,420 888 Total other non-current liabilities $ 11,763 $ 11,459 The customer deposits and refunds balances in the table above include a significant deposit from a customer as prepayment for expected future shipments under their contract. Computation of Net Loss per Share Basic and diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the applicable period. The following table presents the computation of net loss per share: Schedule of computation of net per share Three Months Ended Nine Months Ended March 31, March 31, 2024 2023 2024 2023 (In thousands, except per share data) Numerator: Net loss $ ( 423 ) $ ( 3,065 ) $ ( 4,902 ) $ ( 7,327 ) Denominator: Weighted-average common shares outstanding - basic and diluted 37,509 36,548 37,283 36,105 Net loss per share - basic and diluted $ ( 0.01 ) $ ( 0.08 ) $ ( 0.13 ) $ ( 0.20 ) 14 The following table presents the common stock equivalents excluded from the diluted net loss per share calculation, because they were anti-dilutive for the periods presented. These excluded common stock equivalents could be dilutive in the future. Schedule of anti dilutive securities Three Months Ended Nine Months Ended March 31, March 31, 2024 2023 2024 2023 (In thousands) Common stock equivalents 644 735 579 677 Intangible Assets The following table presents details of intangible assets: Schedule of intangible assets March 31, 2024 June 30, 2023 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value (In thousands) Developed technology $ 6,331 $ ( 4,940 ) $ 1,391 $ 6,331 $ ( 3,881 ) $ 2,450 Customer relationships 17,528 ( 12,358 ) 5,170 17,528 ( 9,487 ) 8,041 Trademark and trade name 1,425 ( 1,425 ) – 1,425 ( 1,351 ) 74 $ 25,284 $ ( 18,723 ) $ 6,561 $ 25,284 $ ( 14,719 ) $ 10,565 We do not currently have any intangible assets with indefinite useful lives. As of March 31, 2024, future estimated amortization expense is as follows: Schedule of future estimated amortization expense Years Ending June 30, (In thousands) 2024 (remainder) $ 1,309 2025 3,685 2026 1,177 2027 326 2028 64 Total future amortization $ 6,561 15 Restructuring, Severance and Related Charges The following table presents details of the liability we recorded related to restructuring, severance and related activities: Schedule of severance and related charges Nine Months Ended March 31, 2024 (In thousands) Beginning balance $ 97 Charges 900 Payments ( 647 ) Ending balance $ 350 These balances are recorded in accrued payroll and related expenses in the accompanying unaudited condensed consolidated balance sheets. Supplemental Cash Flow Information The following table presents non-cash investing transactions excluded from the accompanying unaudited condensed consolidated statements of cash flows: Schedule of non-cash investing transactions Nine Months Ended March 31, 2024 2023 (In thousands) Accrued property and equipment paid for in the subsequent period $ 54 $ 49 Fair value of earnout consideration from acquisitions at the closing dates $ – $ 1,718 5. Warranty Reserve The standard warranty periods we provide for our products typically range from one to five years. Certain products carry a limited lifetime warranty, which requires us to repair or replace a defective product or offer a refund of a portion of the purchase price based on a depreciated value at our option. We establish reserves for estimated product warranty costs at the time revenue is recognized based upon our historical warranty experience, and for any known or anticipated product warranty issues. The following table presents details of our warranty reserve, which is included in other current liabilities in the unaudited condensed consolidated balance sheets: Schedule of warranty reserve Nine Months Ended Year Ended March 31, June 30, 2024 2023 (In thousands) Beginning balance $ 788 $ 594 Charged to cost of revenue 127 352 Usage ( 207 ) ( 158 ) Ending balance $ 708 $ 788 16 6. Bank Loan Agreements In September 2022 we entered into a Third Amendment to the Third Amended and Restated Loan and Security Agreement (the “Amendment”) with Silicon Valley Bank (“SVB”), pertaining to our existing term loan and revolving credit facility (together, the “Senior Credit Facilities”), which amends that certain Third Amended and Restated Loan and Security Agreement, dated as of August 2, 2021, as amended by the First Amendment to Third Amended and Restated Loan and Security Agreement, dated as of October 21, 2021, as amended by the Second Amendment to Third Amended and Restated Loan and Security Agreement, dated as of February 15, 2022 by and among Lantronix and SVB (collectively with the Amendment, the “Loan Agreement”). The Amendment, among other things, provided for an additional term loan in the original principal amount of $ 5,000,000 that matures on August 2, 2025 . The Senior Credit Facilities bears interest at Term Secured Overnight Financing Rate (“ SOFR”) or the Prime Rate, at the option of Lantronix, plus a margin that ranges from 3.10% to 4.10% in the case of Term SOFR and 1.50% to 2.50% in the case of the Prime Rate, depending on our total leverage with a Term SOFR floor of 1.50% and a Prime Rate floor of 3.25%. The Amendment reduced the minimum liquidity requirement from $ 5,000,000 to $ 4,000,000 . As a condition to entering into the Amendment, we were obligated to pay a nonrefundable facility increase fee in the amount of $ 25,000 . The Senior Credit Facilities mature on August 2, 2025 . The Senior Credit Facilities are secured by substantially all of our assets. In April 2023, we entered into a Letter Agreement (the “Letter Agreement”) with SVB, which, among other matters, amended the Loan Agreement to reduce the former requirement to hold 85% of our company-wide cash balances at SVB to 50%, and provided a waiver of any event of default under the Loan Agreement for any failure to comply with this covenant prior to the date of the Letter Agreement. The following table summarizes our outstanding debt under the Senior Credit Facilities: Summary of outstanding debt March 31, June 30, 2024 2023 (In thousands) Outstanding borrowings on term loan $ 17,119 $ 19,194 Less: Unamortized debt issuance costs ( 147 ) ( 230 ) Net Carrying amount of debt 16,972 18,964 Less: Current portion ( 3,002 ) ( 2,743 ) Non-current portion $ 13,970 $ 16,221 Outstanding borrowings on revolving credit facility $ – $ – During the three and nine months ended March 31, 2024, we recognized $ 416,000 and $ 1,301,000 , respectively, of interest expense in the accompanying unaudited condensed consolidated statements of operations related to interest and amortization of debt issuance associated with the borrowings under the Senior Credit Facilities. Financial Covenants The Senior Credit Facilities require Lantronix to comply with a minimum liquidity test, a maximum leverage ratio and a minimum fixed charge coverage ratio. We are currently in compliance with all financial covenants. 17 Liquidity The Senior Credit Facilities require that we maintain a minimum liquidity of $4,000,000 at SVB, as measured at the end of each month. Maximum leverage ratio The Senior Credit Facilities require that we maintain a maximum leverage ratio, calculated as the ratio of funded debt to the consolidated trailing 12 month earnings before interest, taxes, depreciation and amortization, and certain other allowable exclusions of (i) 2.50 to 1.00 for each calendar quarter ending June 30, 2021 through and including September 30, 2022, (ii) 2.25 to 1.00 for each calendar quarter ending December 31, 2022 through and including September 30, 2023, and (iii) 2.00 to 1.00 for the calendar quarter ending December 31, 2023 and each calendar quarter thereafter. Minimum fixed charge coverage ratio The Senior Credit Facilities require that we maintain a minimum fixed charge coverage ratio, calculated as the ratio of consolidated trailing 12 month earnings before interest, taxes, depreciation and amortization, and certain other allowable exclusions, less capital expenditures and taxes paid, to the trailing twelve month principal and interest payments on all funded debt of 1.25 to 1.00 as measured at the end of each calendar quarter. In addition, the Senior Credit Facilities contain customary representations and warranties, affirmative and negative covenants, including covenants that limit or restrict Lantronix and its subsidiaries’ ability to incur liens, incur indebtedness, dispose of assets, make investments, make certain restricted payments, merge or consolidate and enter into certain speculative hedging arrangements. The Senior Credit Facilities include a number of events of default, including, among other things, non-payment defaults, covenant defaults, cross-defaults to other materials indebtedness, bankruptcy and insolvency defaults and material judgment defaults. If any event of default occurs (subject, in certain instances, to specified grace periods), the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Senior Credit Facilities may become due and payable immediately. 7. Stockholders’ Equity Stock Options The following table presents a summary of activity with respect to our stock options: Schedule of option activity Weighted- Average Number of Exercise Price Shares per Share (In thousands) Balance of options outstanding at June 30, 2023 1,325 $ 3.65 Expired ( 550 ) 3.84 Exercised ( 152 ) 1.76 Balance of options outstanding at March 31, 2024 623 $ 3.95 18 Restricted Stock Units (“RSUs”) The following table presents a summary of activity with respect to our RSUs: Schedule of RSU activity Weighted- Average Grant Date Number of Fair Value Shares per Share (In thousands) Balance of RSUs outstanding at June 30, 2023 1,189 $ 5.70 Granted 1,317 4.68 Forfeited ( 99 ) 5.20 Vested ( 519 ) 5.59 Balance of RSUs outstanding at March 31, 2024 1,888 $ 5.05 Performance Stock Units (“PSUs”) The following table presents a summary of activity with respect to our PSUs: Schedule of PSU activity Number of Shares (In thousands) Balance of PSUs outstanding at June 30, 2023 931 Granted 1,191 Forfeited ( 346 ) Vested ( 173 ) Balance of PSUs outstanding at March 31, 2024 1,603 Employee Stock Purchase Plan (“ESPP”) The following table presents a summary of activity under our ESPP: Schedule of employee stock purchase plan Number of Shares (In thousands) Shares available for issuance at June 30, 2023 381 Shares issued ( 92 ) Shares available for issuance at March 31, 2024 289 19 Share-Based Compensation Expense The following table presents a summary of share-based compensation expense included in each functional line item on our accompanying unaudited condensed consolidated statements of operations: Schedule of share-based compensation expense Three Months Ended Nine Months Ended March 31, March 31, 2024 2023 2024 2023 (In thousands) Cost of revenue $ 66 $ 47 $ 171 $ 159 Selling, general and administrative 1,337 1,293 4,238 4,132 Research and development 469 388 1,381 1,090 Total share-based compensation expense $ 1,872 $ 1,728 $ 5,790 $ 5,381 The following table presents the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of March 31, 2024: Schedule of unrecognized share-based compensation expense Remaining Remaining Unrecognized Weighted- Compensation Average Years Expense To Recognize (In thousands) Stock options $ 251 2.3 RSUs 8,250 2.1 PSUs 4,592 2.3 Stock purchase rights under ESPP 42 0.1 $ 13,135 If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to accelerate, increase or cancel remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional share-based awards. 8. Income Taxes We utilize the liability method of accounting for income taxes. The following table presents our effective tax rates based upon our provision for income taxes for the periods shown: Schedule of effective income tax rate reconciliation Three Months Ended Nine Months Ended March 31, March 31, 2024 2023 2024 2023 Effective tax rate 60 % 5 % 18 % 4 % 20 The difference between our effective tax rates in the periods presented above and the federal statutory rate is primarily due to (i) a tax benefit from our domestic losses being recorded with a full valuation allowance, (ii) our current estimates of pre-tax profitability for the full fiscal year and (iii) the effect of foreign earnings taxed at rates differing from the federal statutory rate. We have recorded a net deferred tax liability of $ 353,000 and $ 146,000 at March 31, 2024 and June 30, 2023, respectively. This balance represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets and is recorded in other non-current liabilities on the accompanying unaudited condensed consolidated balance sheets. The realization of deferred tax assets is dependent upon the generation of future taxable income. As required by Accounting Standards Codification Topic 740, we have evaluated the positive and negative evidence bearing upon our ability to realize our deferred tax assets. We have determined that it was more likely than not that Lantronix would not realize the deferred tax assets due to our cumulative losses and uncertainty of generating future taxable income and have therefore provided a full valuation allowance against our deferred tax assets as of March 31, 2024 and June 30, 2023. 9. Commitments and Contingencies On February 23, 2024, a purported class action, brought on behalf of a putative class who purchased or otherwise acquired shares of Lantronix between May 11, 2023 and February 8, 2024, was filed in the United States District Court for the Central District of California against the Company, its former chief executive officer, and its chief financial officer. The action, styled Neilsen v. Lantronix, Inc., asserts securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with statements made in the Company’s annual report, quarterly reports and earnings releases during the period of May 11, 2023 through February 8, 2024. The court is in the process of appointing a Lead Plaintiff and Lead Counsel. On April 11, 2024, a purported stockholder of Lantronix filed a derivative lawsuit styled Jernigan derivatively on behalf of Lantronix, Inc. v. Jason W. Cohenour et al., in the United States District Court for the Central District of California against the Company, as the nominal defendant, former and current directors of the Company, its former chief executive officer, and its chief financial officer, alleging breach of fiduciary duties, mismanagement, waste of corporate assets, unjust enrichment, aiding and abetting, insider trading and violations of Section 14(a) of the Exchange Act in connection with statements made in the Company’s annual and quarterly reports, earnings releases, and proxy statement beginning May 11, 2023. The plaintiff did not make a demand on the Board before instituting the lawsuit and alleged such demand would have been futile. Because the outcomes of litigation and other legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control, our evaluation of legal matters or proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. While the consequences of any unresolved matters and proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material adverse effect on our business, financial condition, operating results, or cash flows. In addition, regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other factors. We maintain insurance policies for settlements and judgments, as well as legal defense costs, for lawsuits such as those described above, although the amount of insurance coverage that we maintain may not be adequate to cover all claims or liabilities. In addition, provisions of the Company’s Certificate of Incorporation, Bylaws and indemnification agreements entered into with current and former directors and officers require us, among other things, to indemnify these directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers and to advance expenses to such directors or officers in connection therewith. 21