LANTRONIX INC 10-Q

Item 1. Financial Statements LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) September 30, June 30, 2024 2024 Assets Current assets: Cash and cash equivalents $ 26,395 $ 26,237 Accounts receivable, net 30,801 31,279 Inventories, net 29,533 27,698 Contract manufacturers’ receivables 2,722 1,401 Prepaid expenses and other current assets 3,169 2,335 Total current assets 92,620 88,950 Property and equipment, net 3,642 4,016 Goodwill 27,824 27,824 Intangible assets, net 4,000 5,251 Lease right-of-use assets 9,165 9,567 Other assets 607 600 Total assets $ 137,858 $ 136,208 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 17,149 $ 10,347 Accrued payroll and related expenses 3,440 5,836 Current portion of long-term debt, net 3,057 3,002 Other current liabilities 11,859 10,971 Total current liabilities 35,505 30,156 Long-term debt, net 12,409 13,219 Other non-current liabilities 11,014 11,478 Total liabilities 58,928 54,853 Commitments and contingencies (Note 8) - Stockholders’ equity: Common stock 4 4 Additional paid-in capital 304,078 304,001 Accumulated deficit ( 225,523 ) ( 223,021 ) Accumulated other comprehensive income 371 371 Total stockholders’ equity 78,930 81,355 Total liabilities and stockholders’ equity $ 137,858 $ 136,208 See accompanying notes to unaudited condensed consolidated financial statements. 4 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended September 30, 2024 2023 Net revenue $ 34,423 $ 33,031 Cost of revenue 19,948 18,934 Gross profit 14,475 14,097 Operating expenses: Selling, general and administrative 9,496 9,170 Research and development 4,956 5,106 Restructuring, severance and related charges 900 20 Fair value remeasurement of earnout consideration – ( 9 ) Amortization of intangible assets 1,251 1,384 Total operating expenses 16,603 15,671 Loss from operations ( 2,128 ) ( 1,574 ) Interest expense, net ( 119 ) ( 338 ) Other income (expense), net ( 37 ) 19 Loss before income taxes ( 2,284 ) ( 1,893 ) Provision (benefit) for income taxes 218 ( 7 ) Net loss $ ( 2,502 ) $ ( 1,886 ) Net loss per share - basic and diluted $ ( 0.07 ) $ ( 0.05 ) Weighted-average common shares - basic and diluted 38,024 36,982 See accompanying notes to unaudited condensed consolidated financial statements. 5 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Three Months Ended September 30, 2024 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders’ Shares Amount Capital Deficit Income Equity Balance at June 30, 2024 37,872 $ 4 $ 304,001 $ ( 223,021 ) $ 371 $ 81,355 Shares issued pursuant to stock awards, net 602 – 19 – – 19 Tax withholding paid on behalf of employees for restricted shares – – ( 1,542 ) – – ( 1,542 ) Share-based compensation – – 1,600 – – 1,600 Net loss – – – ( 2,502 ) – ( 2,502 ) Balance at September 30, 2024 38,474 $ 4 $ 304,078 $ ( 225,523 ) $ 371 $ 78,930 Three Months Ended September 30, 2023 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 385 – 93 – – 93 Tax withholding paid on behalf of employees for restricted shares – – ( 514 ) – – ( 514 ) Share-based compensation – – 1,742 – – 1,742 Net loss – – – ( 1,886 ) – ( 1,886 ) Balance at September 30, 2023 37,260 $ 4 $ 297,007 $ ( 220,391 ) $ 371 $ 76,991 See accompanying notes to unaudited condensed consolidated financial statements. 6 LANTRONIX, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended September 30, 2024 2023 Operating activities Net loss $ ( 2,502 ) $ ( 1,886 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Share-based compensation 1,600 1,742 Depreciation and amortization 543 528 Amortization of intangible assets 1,251 1,384 Amortization of manufacturing profit in acquired inventory associated with acquisitions – 317 Amortization of deferred debt issuance costs 24 27 Fair value remeasurement of earnout consideration – ( 9 ) Changes in operating assets and liabilities, net of assets and liabilities acquired: Accounts receivable 478 ( 2,423 ) Inventories ( 1,835 ) 3,623 Contract manufacturers’ receivable ( 1,321 ) 2,389 Prepaid expenses and other current assets ( 834 ) ( 233 ) Lease right-of-use assets 481 481 Other assets ( 7 ) 11 Accounts payable 6,790 ( 3,591 ) Accrued payroll and related expenses ( 2,396 ) 108 Other liabilities 391 5,030 Net cash provided by operating activities 2,663 7,498 Investing activities Purchases of property and equipment ( 157 ) ( 486 ) Net cash used in investing activities ( 157 ) ( 486 ) Financing activities Net proceeds from issuances of common stock 19 93 Tax withholding paid on behalf of employees for restricted shares ( 1,542 ) ( 514 ) Payment of borrowings on term loan ( 779 ) ( 518 ) Payment of lease liabilities ( 46 ) ( 46 ) Net cash used in financing activities ( 2,348 ) ( 985 ) Increase in cash and cash equivalents 158 6,027 Cash and cash equivalents at beginning of period 26,237 13,452 Cash and cash equivalents at end of period $ 26,395 $ 19,479 See accompanying notes to unaudited condensed consolidated financial statements. 7 LANTRONIX, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 leader in compute and connectivity solutions, targeting high-growth industries such as Smart Cities, Automotive, and Enterprise markets. Our products and services empower companies to capitalize on the expanding internet of things (“IoT”) market by delivering customizable solutions that address each layer of the IoT stack. 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, 2024, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024, which was filed with the SEC on September 9, 2024. The unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the consolidated financial position of Lantronix at September 30, 2024, the consolidated results of our operations for the three months ended September 30, 2024 and our consolidated cash flows for the three months ended September 30, 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 months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full year or any future interim periods. Recent Accounting Pronouncements Disaggregated Expenses Disclosures In November 2024, the Financial Accounting Standards Board (“FASB”) issued final guidance requiring public business entities to disclose, on an annual and interim basis, disaggregated information about certain income statement expense line items. The required information includes purchases of inventory, employee compensation, depreciation, intangible asset amortization and depletion. The standard will be effective for Lantronix beginning with our annual financial statements for the fiscal year ending June 30, 2028. We have not yet determined the impact of adopting this guidance on our financial statements. Income Tax Disclosures In December 2023, the 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 are evaluating this guidance and currently do not anticipate its adoption to materially impact our 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. 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 September 30, 2024, prepaid sales commissions included in prepaid expenses and other current assets totaled $ 254,000 and those included in other assets totaled $ 186,000 . 9 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. 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. 10 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. We present net revenues by geographic region generally based on the “ship-to” location of our customers for product sales and the “bill-to” location for services. Schedule of net revenue by product lines Three Months Ended September 30, 2024 2023 (In thousands) Embedded IoT Solutions $ 13,387 $ 11,373 IoT System Solutions 18,759 19,036 Software & Services 2,277 2,622 $ 34,423 $ 33,031 Schedule of net revenue by geographic region Three Months Ended September 30, 2024 2023 (In thousands) Americas $ 17,420 $ 22,933 EMEA 10,484 6,591 Asia Pacific Japan 6,519 3,507 $ 34,423 $ 33,031 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 September 30, 2024 2023 Product revenues 93 % 93 % Service revenues 7 % 7 % Service revenues are 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. 11 Deferred Revenue Deferred revenue is primarily comprised of unearned revenue related to our extended warranty, support and maintenance services and certain software services. These services are generally invoiced at the beginning of the contract period and revenue is recognized ratably over the service period. Current and non-current deferred revenue balances represent revenue allocated to the remaining unsatisfied performance obligations at the end of a reporting period and are respectively included in other current liabilities and other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. The following table presents the changes in our deferred revenue balance for the three months ended September 30, 2024 (in thousands): Schedule of changes in deferred revenue Balance, June 30, 2024 $ 5,753 New performance obligations 878 Recognition of revenue from satisfying performance obligations ( 1,188 ) Balance, September 30, 2024 5,443 Less: non-current portion of deferred revenue ( 2,564 ) Current portion, September 30, 2024 $ 2,879 We currently expect to recognize substantially all of the non-current portion of deferred revenue over the next 2 to 5 years. 3. Supplemental Financial Information Inventories Schedule of inventories September 30, June 30, 2024 2024 (In thousands) Finished goods $ 16,228 $ 14,167 Raw materials 13,305 13,531 Inventories $ 29,533 $ 27,698 12 Other Liabilities The following table presents details of our other liabilities: Schedule of other liabilities September 30, June 30, 2024 2024 (In thousands) Current Accrued variable consideration $ 2,279 $ 1,796 Customer deposits and refunds 264 436 Accrued raw materials purchases 227 126 Deferred revenue 2,879 3,017 Lease liability 1,689 1,767 Taxes payable 667 772 Warranty reserve 848 840 Other accrued operating expenses 3,006 2,217 Total other current liabilities $ 11,859 $ 10,971 Non-current Lease liability $ 8,202 $ 8,563 Deferred tax liability 248 179 Deferred revenue 2,564 2,736 Total other non-current liabilities $ 11,014 $ 11,478 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 September 30, 2024 2023 (In thousands, except per share data) Numerator: Net loss $ ( 2,502 ) $ ( 1,886 ) Denominator: Weighted-average common shares outstanding - basic and diluted 38,024 36,982 Net loss per share - basic and diluted $ ( 0.07 ) $ ( 0.05 ) 13 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 September 30, 2024 2023 (In thousands) Common stock equivalents 621 667 Intangible Assets The following table presents details of intangible assets: Schedule of intangible assets September 30, 2024 June 30, 2024 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value (In thousands) Developed technology $ 6,331 $ ( 5,587 ) $ 744 $ 6,331 $ ( 5,293 ) $ 1,038 Customer relationships 17,528 ( 14,272 ) 3,256 17,528 ( 13,315 ) 4,213 $ 23,859 $ ( 19,859 ) $ 4,000 $ 23,859 $ ( 18,608 ) $ 5,251 We do not currently have any intangible assets with indefinite useful lives. As of September 30, 2024, future estimated amortization expense is as follows: Schedule of future estimated amortization expense Years Ending June 30, (In thousands) 2025 (remainder) $ 2,433 2026 1,177 2027 326 2028 64 Total future amortization $ 4,000 Restructuring, Severance and Related Charges During the three months ended September 30, 2024, we incurred charges of approximately $ 900,000 related to certain headcount reductions in our sales, engineering, and operations groups. We may incur additional charges in future periods as we identify additional cost savings and efficiencies related to our business. The following table presents details of the liability we recorded related to restructuring, severance and related activities: Schedule of severance and related charges Three Months Ended September 30, 2024 (In thousands) Beginning balance $ 253 Charges 900 Payments ( 754 ) Ending balance $ 399 These balances are recorded in accrued payroll and related expenses in the accompanying unaudited condensed consolidated balance sheets. 14 Supplemental Cash Flow Information The following table presents non-cash investing transactions excluded from the accompanying unaudited condensed consolidated statements of cash flows: Schedule of non-cash investing transactions Three Months Ended September 30, 2024 2023 (In thousands) Accrued property and equipment paid for in the subsequent period $ 12 $ 339 4. 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 Three Months Ended Year Ended September 30, June 30, 2024 2024 (In thousands) Beginning balance $ 840 $ 788 Charged to cost of revenue 130 376 Usage ( 122 ) ( 324 ) Ending balance $ 848 $ 840 5. 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 was originally scheduled to mature 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 are secured by substantially all of our assets. 15 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. In September 2024, we entered into a Fourth Amendment to our Loan Agreement, pursuant to which the maturity of our Senior Credit Facilities was extended from August 2, 2025 to August 2, 2026 . The following table summarizes our outstanding debt under the Senior Credit Facilities: Summary of outstanding debt September 30, June 30, 2024 2024 (In thousands) Outstanding borrowings on term loan $ 15,563 $ 16,341 Less: Unamortized debt issuance costs ( 97 ) ( 120 ) Net Carrying amount of debt 15,466 16,221 Less: Current portion ( 3,057 ) ( 3,002 ) Non-current portion $ 12,409 $ 13,219 During the three months ended September 30, 2024, we recognized $ 380,000 of interest expense in the accompanying unaudited condensed consolidated statements of operations related to interest and amortization of debt issuance associated with the borrowings under the Senior Credit Facilities. Financial Covenants The Senior Credit Facilities require Lantronix to comply with a minimum liquidity test, a maximum leverage ratio and a minimum fixed charge coverage ratio. We are currently in compliance with all financial covenants. Liquidity The Senior Credit Facilities require that we maintain a minimum liquidity of $ 4,000,000 at SVB, as measured at the end of each month. Maximum leverage ratio The Senior Credit Facilities require that we maintain a maximum leverage ratio, calculated as the ratio of funded debt to the consolidated trailing 12 month earnings before interest, taxes, depreciation and amortization, and certain other allowable exclusions of (i) 2.50 to 1.00 for each calendar quarter ending June 30, 2021 through and including September 30, 2022, (ii) 2.25 to 1.00 for each calendar quarter ending December 31, 2022 through and including September 30, 2023, and (iii) 2.00 to 1.00 for the calendar quarter ending December 31, 2023 and each calendar quarter thereafter. 16 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. 6. Stockholders’ Equity 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, 2024 1,881 $ 4.89 Granted 464 3.63 Forfeited ( 136 ) 4.42 Vested ( 270 ) 4.91 Balance of RSUs outstanding at September 30, 2024 1,939 $ 4.62 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, 2024 1,669 Granted 539 Forfeited ( 377 ) Vested ( 669 ) Balance of PSUs outstanding at September 30, 2024 1,162 17 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, 2024 567 $ 4.13 Expired ( 11 ) 2.16 Exercised ( 230 ) 3.36 Balance of options outstanding at September 30, 2024 326 $ 4.75 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, 2024 181 Shares issued – Shares available for issuance at September 30, 2024 181 Share-Based Compensation Expense The following table presents a summary of share-based compensation expense included in each applicable functional line item on our accompanying unaudited condensed consolidated statements of operations: Schedule of share-based compensation expense Three Months Ended September 30, 2024 2023 (In thousands) Cost of revenue $ 64 $ 41 Selling, general and administrative 1,126 1,273 Research and development 410 428 Total share-based compensation expense $ 1,600 $ 1,742 18 The following table presents the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of September 30, 2024: Schedule of unrecognized share-based compensation expense Remaining Remaining Unrecognized Weighted- Compensation Average Years Expense To Recognize (In thousands) Stock options $ 188 1.9 RSUs 7,560 2.2 PSUs 4,151 2.4 Stock purchase rights under ESPP 35 0.1 $ 11,934 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. 7. Income Taxes We utilize the liability method of accounting for income taxes. The following table presents our effective tax rates based upon our provision for income taxes for the periods shown: Schedule of effective income tax rate reconciliation Three Months Ended September 30, 2024 2023 Effective tax rate 10 % 0 % 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 a net deferred tax liability of $ 248,000 and $ 179,000 at September 30, 2024 and June 30, 2024, 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 September 30, 2024 and June 30, 2024. 19 8. 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 cash flows. We maintain insurance policies for settlements and judgments, as well as legal defense costs, although the amount of insurance coverage that we maintain may not be adequate to cover all claims or liabilities that may arise. 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. 9. Subsequent Events On November 7, 2024, we signed a definitive agreement to acquire from NetComm Wireless Pty Ltd (“NetComm”), a subsidiary of DZS, Inc., all of the assets of the enterprise IoT business for $6,500,000 in cash together with assumptions of certain liabilities. The closing of the acquisition is subject to certain conditions. The transaction is expected to close during our second fiscal quarter ending December 31, 2024. 20