LANTRONIX INC - FORM 10-Q

Attached files

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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - LANTRONIX INC	lantronix_ex3201.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - LANTRONIX INC	lantronix_ex3102.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - LANTRONIX INC	lantronix_ex3101.htm
EX-10.2 - RESTRICTED SHARE UNIT PLAN - LANTRONIX INC	lantronix_ex1002.htm
EX-10.1 - AMENDED AND RESTATED INCENTIVE STOCK OPTION PLAN - LANTRONIX INC	lantronix_ex1001.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________.

Commission file number: 1-16027

LANTRONIX, INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0362767
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7535 Irvine Center Drive, Suite 100, Irvine, California

(Address of principal executive offices)

92618

(Zip Code)

(949) 453-3990

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	LTRX	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o
Non-accelerated filer x		Smaller reporting company x
Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

As of May 7, 2020, there were 27,958,802 shares of the registrant’s common stock outstanding.

LANTRONIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31, 2020

INDEX

		Page

	CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	3

PART I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements	4

	Unaudited Condensed Consolidated Balance Sheets at March 31, 2020 and June 30, 2019	4

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2020 and 2019	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended March 31, 2020 and 2019	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and 2019	8

	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION	40

Item 1.	Legal Proceedings	40

Item 1A	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	41

Item 4.	Mine Safety Disclosures	41

Item 5.	Other Information	41

Item 6.	Exhibits	41

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the three months ended March 31, 2020, or this Report, contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to substantial risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report, or incorporated by reference into this Report, are forward-looking statements. Throughout this Report, we have attempted to identify forward-looking statements by using words such as “may,” “believe,” “will,” “could,” “project,” “anticipate,” “expect,” “estimate,” “should,” “continue,” “potential,” “plan,” “forecasts,” “goal,” “seek,” “intend,” other forms of these words or similar words or expressions or the negative thereof.

We have based our forward-looking statements on management’s current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, results of operations or performance to differ materially from our historical results or those expressed or implied in any forward-looking statement contained in this Report. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to: the impact of COVID-19 and the measures to reduce its spread on our employees, supply and distribution chains, the global economy and our financial condition and liquidity; the effects of negative or worsening regional and worldwide economic conditions or market instability on our business, including effects on purchasing decisions by our customers; our ability to continue to generate revenue from products sold into mature markets; our ability to develop, market, and sell new products; our ability to succeed with our new software offerings; fluctuations in our revenue due to the project-based timing of orders from certain customers; unpredictable timing of our revenues due to the lengthy sales cycle for our products and services and potential delays in customer completion of projects; our ability to accurately forecast future demand for our products; delays in qualifying revisions of existing products; constraints or delays in the supply of, or quality control issues with, certain materials or components; difficulties associated with the delivery, quality or cost of our products from our contract manufacturers or suppliers; risks related to the outsourcing of manufacturing and international operations; difficulties associated with our distributors or resellers; intense competition in our industry and resultant downward price pressure; rises in inventory levels and inventory obsolescence; undetected software or hardware errors or defects in our products; cybersecurity risks; our ability to obtain appropriate industry certifications or approvals from governmental regulatory bodies; changes in applicable U.S. and foreign government laws, regulations, and tariffs; environmental or other regulatory claims or litigation; our ability to successfully implement our acquisitions strategy or integrate acquired companies; uncertainty as to the future profitability of acquired businesses, and delays in the realization of, or the failure to realize, any accretion from acquisition transactions; acquiring, managing and integrating new operations, businesses or assets, and the associated diversion of management attention or other related costs or difficulties; our ability to protect patents and other proprietary rights and avoid infringement of others’ proprietary technology rights; the level of our indebtedness, our ability to service our indebtedness and the restrictions in our debt agreements; our ability to attract and retain qualified management; and any additional factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on September 11, 2019, including in the section entitled “Risk Factors” in Item 1A of Part I of such report, as well as in our other public filings with the SEC, including this Quarterly Report on Form 10-Q. In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business.

You should read this Report in its entirety, together with the documents that we file as exhibits to this Report and the documents that we incorporate by reference into this Report, with the understanding that our future results may be materially different from what we currently expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of The Nasdaq Capital Market. If we do update or correct any forward-looking statements, investors should not conclude that we will make additional updates or corrections.

We qualify all of our forward-looking statements by these cautionary statements.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	March 31,			June 30,
	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	6,977		$	18,282
Accounts receivable, net		11,958			7,388
Inventories, net		15,246			10,509
Contract manufacturers' receivable		434			1,324
Prepaid expenses and other current assets		2,043			687
Total current assets		36,658			38,190
Property and equipment, net		1,594			1,199
Goodwill		15,813			9,488
Purchased intangible assets, net		13,387			–
Other assets		3,225			67
Total assets	$	70,677		$	48,944

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	6,164		$	4,716
Accrued payroll and related expenses		3,519			2,060
Warranty reserve		209			116
Short-term debt, net		1,472			–
Other current liabilities		6,687			4,580
Total current liabilities		18,051			11,472
Long-term debt, net		4,050			–
Other non-current liabilities		1,631			206
Total liabilities		23,732			11,678

Commitments and contingencies (Note 10)

Stockholders' equity:
Common stock		3			2
Additional paid-in capital		244,989			226,274
Accumulated deficit		(198,418	)		(189,381	)
Accumulated other comprehensive income		371			371
Total stockholders' equity		46,945			37,266
Total liabilities and stockholders' equity	$	70,677		$	48,944

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
Net revenue	$	16,512		$	12,344		$	42,481		$	36,737
Cost of revenue		9,135			5,254			22,132			16,206
Gross profit		7,377			7,090			20,349			20,531
Operating expenses:
Selling, general and administrative		5,558			3,867			14,902			12,297
Research and development		2,724			2,385			7,681			6,879
Restructuring, severance and related charges		2,263			–			3,366			323
Acquisition-related costs		1,250			–			2,246			–
Amortization of purchased intangible assets		801			–			1,096			–
Total operating expenses		12,596			6,252			29,291			19,499
Income (loss) from operations		(5,219	)		838			(8,942	)		1,032
Interest income (expense), net		(83	)		91			(43	)		147
Other income (expense), net		129			(12	)		76			(14	)
Income (loss) before income taxes		(5,173	)		917			(8,909	)		1,165
Provision for income taxes		43			60			128			114
Net income (loss)	$	(5,216	)	$	857		$	(9,037	)	$	1,051

Net income (loss) per share - basic	$	(0.19	)	$	0.04		$	(0.37	)	$	0.05
Net income (loss) per share - diluted	$	(0.19	)	$	0.04		$	(0.37	)	$	0.05

Weighted-average common shares - basic		27,048			22,270			24,369			21,237
Weighted-average common shares - diluted		27,048			23,304			24,369			22,632

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

	Three Months Ended March 31, 2020
											Accumulated
					Additional						Other		Total
	Common Stock				Paid-In			Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital			Deficit			Income		Equity
Balance at December 31, 2019		23,317	$	2	$	228,107		$	(193,202	)	$	371	$	35,278
Shares issued pursuant to stock awards, net		273		–		237			–			–		237
Tax withholding paid on behalf of employees for restricted shares		–		–		(60	)		–			–		(60	)
Share-based compensation		–		–		1,132			–			–		1,132
Issuance of shares related to acquisition		4,279		1		15,573			–			–		15,574
Net loss		–		–		–			(5,216	)		–		(5,216	)
Balance at March 31, 2020		27,869	$	3	$	244,989		$	(198,418	)	$	371	$	46,945

		Three Months Ended March 31, 2019
												Accumulated
						Additional						Other		Total
		Common Stock				Paid-In			Accumulated			Comprehensive		Stockholders'
		Shares		Amount		Capital			Deficit			Income		Equity
Balance at December 31, 2018		22,213	$	2	$	224,422		$	(188,779	)	$	371	$	36,016
Shares issued pursuant to stock awards, net		192		–		290			–			–		290
Tax withholding paid on behalf of employees for restricted shares		–		–		(19	)		–			–		(19	)
Share-based compensation		–		–		331			–			–		331
Net income		–		–		–			857			–		857
Balance at March 31, 2019		22,405	$	2	$	225,024		$	(187,922	)	$	371	$	37,475

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(In thousands)

	Nine Months Ended March 31, 2020
											Accumulated
					Additional						Other		Total
	Common Stock				Paid-In			Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital			Deficit			Income		Equity
Balance at June 30, 2019	22,812	$	2	$	226,274		$	(189,381	)	$	371	$	37,266
Shares issued pursuant to stock awards, net	778				717			–			–		717
Tax withholding paid on behalf of employees for restricted shares	–		–		(224	)		–			–		(224	)
Share-based compensation	–		–		2,649			–			–		2,649
Issuance of shares related to acquisition	4,279		1		15,573			–			–		15,574
Net loss	–		–		–			(9,037	)		–		(9,037	)
Balance at March 31, 2020	27,869	$	3	$	244,989		$	(198,418	)	$	371	$	46,945


	Nine Months Ended March 31, 2019
											Accumulated
					Additional						Other		Total
	Common Stock				Paid-In			Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital			Deficit			Income		Equity
Balance at June 30, 2018	18,908	$	2	$	212,995		$	(189,555	)	$	371	$	23,813
Cumulative effect of accounting change	–		–		–			582			–		582
Shares issued pursuant to equity offering, net	2,700		–		9,774			–			–		9,774
Shares issued pursuant to stock awards, net	797		–		1,183			–			–		1,183
Tax withholding paid on behalf of employees for restricted shares	–		–		(188	)		–			–		(188	)
Share-based compensation	–		–		1,260			–			–		1,260
Net income	–		–		–			1,051			–		1,051
Balance at March 31, 2019	22,405	$	2	$	225,024		$	(187,922	)	$	371	$	37,475

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	March 31
	2020			2019
Operating activities
Net income (loss)	$	(9,037	)	$	1,051
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Share-based compensation		2,649			1,260
Depreciation and amortization		535			341
Amortization of purchased intangible assets		1,096			–
Amortization of manufacturing profit in acquired inventory associated with acquisitions		204			–
Loss on disposal of property and equipment		–			10
Amortization of deferred debt issuance costs		4			–
Changes in operating assets and liabilities:
Accounts receivable		2,274			(2,930	)
Inventories		1,951			(1,832	)
Contract manufacturers' receivable		890			143
Prepaid expenses and other current assets		(327	)		(257	)
Other assets		679			(1	)
Accounts payable		(1,645	)		794
Accrued payroll and related expenses		1,210			(1,000	)
Warranty reserve		(25	)		11
Other liabilities		(3,893	)		813
Net cash used in operating activities		(3,435	)		(1,597	)
Investing activities
Purchases of property and equipment		(471	)		(383	)
Cash payment for acquisitions, net of cash and cash equivalents acquired		(13,402	)		–
Net cash used in investing activities		(13,873	)		(383	)
Financing activities
Net proceeds from issuances of common stock		717			10,860
Tax withholding paid on behalf of employees for restricted shares		(224	)		(188	)
Net proceeds from issuance of debt		5,893			–
Payment of borrowings on term loan		(375	)		–
Payment of lease liabilities		(8	)		(48	)
Net cash provided by financing activities		6,003			10,624
Increase (decrease) in cash, cash equivalents, and restricted cash		(11,305	)		8,644
Cash, cash equivalents, and restricted cash at beginning of period		18,282			9,568
Cash, cash equivalents, and restricted cash at end of period	$	6,977		$	18,212

See accompanying notes.

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

1.	Summary of Significant Accounting Policies

The Company

Lantronix, Inc., which we refer to herein as the Company, Lantronix, we, our, or us, is a global provider of secure data access and management solutions for Internet of Things (“IoT”) assets. Our mission is to be the leading supplier of IoT and related Information Technology (“IT”) management solutions that enable companies to dramatically simplify the creation, deployment, and management of IoT projects while providing secure access to data for applications and people.

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, 2019, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, which was filed with the SEC on September 11, 2019. 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, 2020, the consolidated results of our operations for the three and nine months ended March 31, 2020 and our consolidated cash flows for the nine months ended March 31, 2020. All intercompany accounts and transactions have been eliminated. 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, 2020 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

The spread of the COVID-19 virus during the quarter ended March 31, 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. Government reactions to the public health crisis with mitigation measures have created significant uncertainties in the U.S. and global economies. The extent to which the coronavirus pandemic impacts our business, operations and financial results will 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. GAAP.

Reclassifications

Certain reclassifications have been made to the prior fiscal year financial information to conform with the current fiscal year presentation.

Recent Accounting Pronouncements

Shared-Based Compensation

On July 1, 2019, Lantronix adopted Accounting Standard Update No. 2018-07 that expands the scope of existing share-based compensation guidance for employees. The standard includes share-based payment transactions for acquiring goods and services from nonemployees, whereby share-based payments to nonemployees will be measured and recorded at the fair value of the equity instruments that an entity is obligated to issue on the grant date. The adoption of the standard did not have a material impact on our financial statements.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02 (“ASU 2016-02” or “Topic 842”) that revises lease accounting guidance. Most prominent among the changes in the standard is the recognition of right-of-use (“ROU”) assets and lease liabilities based on the present value of lease payments over the lease term by lessees for those leases classified as operating leases under the existing guidance.

We adopted Topic 842 on July 1, 2019 using the modified retrospective approach by applying the new standard to leases existing at the date of adoption and not restating comparative prior periods. The adoption did not have a material impact on our results of operations or cash flows. Refer to Note 4 below for additional information.

2.	Business Combinations

Acquisition of Maestro

On July 5, 2019 (the "Acquisition Date"), Lantronix acquired all outstanding shares of Maestro Wireless Solutions Limited, a Hong Kong private company limited by shares (“MWS”), Fargo Telecom Asia Limited, a Hong Kong private company limited by shares (“FTA” and together with MWS and their respective subsidiaries, the “Acquired Companies” or “Maestro”) for $5,355,000 in cash. The acquisition provides complementary cellular connectivity technologies to our portfolio of IoT solutions.

We recorded Maestro’s tangible and intangible assets and liabilities based on their estimated fair values as of the Acquisition 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. The consideration allocation set forth herein is preliminary and may be revised as additional information becomes available during the measurement period which could be up to 12 months from the Acquisition Date. During the current quarter we adjusted the preliminary purchase price allocation to reduce certain amounts allocated to other assets, accounts payable, and other liabilities, with offsetting adjustments to goodwill. Any additional revisions or changes may be material. The preliminary purchase price allocation is as follows (in thousands):

	July 5, 2019 (provisional)
Cash and cash equivalents	$	282
Accounts receivable		1,320
Inventories, net		1,611
Other assets		600
Purchased intangible assets		1,910
Goodwill		2,876
Accounts payable		(1,536	)
Other liabilities		(1,708	)
Total consideration	$	5,355

The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that the 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.

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:

	Asset Fair Value		Weighted-Average Useful Life (years)
	(In thousands)
Developed technology	$	1,530		5.0
Customer relationship		100		2.0
Order backlog		110		1.0
Non-compete agreements		30		2.0
Trade name		140		1.0

The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.

Acquisition of Intrinsyc

On January 16, 2020 (the “Closing Date”), we completed the previously announced acquisition of Intrinsyc Technologies Corporation (“Intrinsyc”), a company existing under the laws of British Columbia, Canada. Pursuant to the terms of the agreement, dated October 30, 2019 (the “Agreement”), by and between Lantronix and Intrinsyc, all of the outstanding common shares of Intrinsyc were acquired by Lantronix. Under the Agreement, we paid $0.50 and 0.2275 of a share of our common stock for each issued and outstanding common share of Intrinsyc. Pursuant to the Agreement, we paid, in the aggregate, approximately $11,519,000 in cash and issued approximately 4,279,000 shares of Lantronix common stock to Intrinsyc shareholders. Following the acquisition, Intrinsyc shareholders owned just under 16% of the outstanding shares of Lantronix common stock. Pursuant to the Agreement, Lantronix agreed to exchange certain options to purchase Intrinsyc shares and restricted stock units (“RSUs”) for cash payments, Lantronix common stock options or RSUs or a combination thereof, as further outlined in the Agreement.

The acquisition provides us with complementary IoT computing and embedded product development capabilities and expands our IoT market opportunity.

We recorded Intrinsyc’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. The consideration allocation set forth herein is preliminary and may be revised as additional information becomes available during the measurement period which could be up to 12 months from the Closing Date. Any such revisions or changes may be material.

A summary of the purchase consideration for Intrinsyc is as follows (in thousands):

Cash consideration to selling shareholders	$	11,022
Cash consideration for vested equity awards		497
Share consideration		15,574
Total purchase consideration	$	27,093

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

	January 16, 2020 (provisional)
Cash and cash equivalents	$	3,190
Accounts receivable		5,524
Inventories, net		5,281
Other assets		2,624
Purchased intangible assets		12,576
Goodwill		3,449
Accounts payable		(1,552	)
Other liabilities		(3,999	)
Total Consideration	$	27,093

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:

	Asset Fair Value		Weighted Average Useful Life (years)
	(In thousands)
Developed technology	$	2,311		5.0
Customer relationship		8,930		6.0
Order backlog		730		1.2
Non-compete agreements		370		1.0
Trademarks and trade name		235		1.0

The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.

Supplemental Pro Forma Information

The following supplemental pro forma data summarizes the Company’s results of operations for the periods presented, as if we completed the acquisitions of Maestro and Intrinsyc as of the first day of fiscal 2019. The supplemental pro forma data reports actual operating results adjusted to include the pro forma effect and timing of the impact in 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 fiscal 2019 supplemental pro forma data (i) cost of goods sold from manufacturing profit in acquired inventory of $262,000, (ii) acquisition related restructuring costs of $2,477,000 and (iii) acquisition-related costs of $2,246,000, with a corresponding reduction in the fiscal 2020 supplemental proforma data. Additionally, we recorded $2,947,000 of amortization expense in the fiscal 2019 supplemental pro-forma data, and additional amortization expense of $862,000 in the fiscal 2020 supplemental pro forma data to represent the amount related to assets that would have been fully amortized.

Net sales related to products and services from the acquisitions of Maestro and Intrinsyc contributed approximately 31% to 35% of net sales for the nine months ended March 31, 2020. Post-acquisition net sales and earnings on a standalone basis are generally impracticable to determine, as on the Acquisition Date and Closing Date, we implemented a plan developed prior to the completion of the acquisitions and began to immediately integrate the acquisition into existing operations, engineering groups, sales distribution networks and management structure.

Supplemental pro forma data is as follows:

	Nine Months Ended March 31,
	2020			2019
		(In thousands, except per share amounts)
Pro forma net revenue	$	56,486		$	63,787
Pro forma net loss	$	(4,752	)	$	(8,207	)

Pro forma net loss per share
Basic	$	(0.18	)	$	(0.32	)
Diluted	$	(0.18	)	$	(0.32	)

3.	Revenue

Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We apply the following five-step approach in determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied. On occasion we enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

Revenue is recognized net of (i) any taxes collected from customers, which are subsequently remitted to governmental authorities and (ii) shipping and handling costs collected from customers.

Product Shipments

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 condensed unaudited consolidated balance sheets.

Services

Revenues from our extended warranty and services are generally recognized ratably over the applicable service period. We expect revenues from future sales of our software-as-a-service (“SaaS”) products to be recognized ratably over the applicable service period as well. Revenues from professional engineering services are generally recognized as services are performed.

As a result of our recent acquisition of Intrinsyc (see Note 2), we now derive an increased 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. 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 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 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

Net Revenue by Product Line and Geographic Region

We organize our products and solutions into three product lines: IoT, IT Management and Other. Our IoT products typically connect to one or more existing machines or are built into new industrial devices to provide network connectivity. Our IT Management product line includes out-of-band management, console management, power management, and keyboard-video-mouse (commonly referred to as KVM) products that provide remote access to IT and networking infrastructure deployed in test labs, data centers, branch offices and server rooms. We categorize products that are non-focus or end-of-life as Other.

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:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
	(In thousands)				(In thousands)
IoT	$	13,922	$	8,935	$	35,323	$	26,972
IT Management		2,424		3,210		6,557		9,199
Other		166		199		601		566
	$	16,512	$	12,344	$	42,481	$	36,737


	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
	(In thousands)				(In thousands)
Americas	$	10,126	$	6,866	$	21,730	$	19,962
EMEA		3,612		3,757		12,495		11,357
Asia Pacific Japan		2,774		1,721		8,256		5,418
	$	16,512	$	12,344	$	42,481	$	36,737

The following table presents product revenues and service revenues as a percentage of our total net revenue:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019

Product revenues		93%		100%		97%		99%
Service revenues		7%		0%		3%		1%

Service revenue is comprised primarily of professional services, software license subscriptions, and extended warranties.

Contract Balances

In certain instances, the timing of revenue recognition may differ from the timing of invoicing to our customers. We record a contract asset receivable when revenue is recognized prior to invoicing, and a contract or deferred revenue liability when revenue is recognized subsequent to invoicing. With respect to product shipments, we expect to fulfill contract obligations within one year and so we have elected not to separately disclose the amount nor the timing of recognition of these remaining performance obligations. For contract balances related to contracts that include services and multiple performance obligations, refer to the deferred revenue discussion below.

Deferred Revenue

Deferred revenue is primarily comprised of unearned revenue related to our extended warranty 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, 2020 (in thousands):

Balance, July 1, 2019	$	486
New performance obligations		238
Performance obligations assumed from acquisitions		738
Recognition of revenue as a result of satisfying performance obligations		(579	)
Balance, March 31, 2020	$	883
Less: non-current portion of deferred revenue		(158	)
Current portion, March 31, 2020	$	725

We expect to recognize substantially all of the non-current portion of deferred revenue over the next two to four years.

4.	Leases

On July 1, 2019, we adopted Topic 842 and elected the available practical expedient to recognize the cumulative effect of initially adopting the standard as an adjustment to the opening balance sheet of the period of adoption (i.e., July 1, 2019). We also elected other available practical expedients and will not separate lease components from non-lease components for office leases, or reassess historical lease classification, whether existing or expired contracts are or contain leases, or the initial direct costs for existing leases as of July 1, 2019. The unaudited condensed consolidated balance sheets and results from operations for reporting periods beginning after July 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under Topic 840.

Adoption of the standard resulted in the recording of net operating and financing lease ROU assets and corresponding operating and financing lease liabilities of $984,000 and $1,114,000, respectively, on July 1, 2019. The adoption of the standard did not materially affect the unaudited condensed consolidated statements of operations and had no impact on cash flows.

Our leases include office buildings for facilities worldwide and car leases in Germany, which are all classified as operating leases. We also have financing leases related to office equipment in the United States. On October 1, 2019 we entered into a lease agreement for an office in Hyderabad, India, which replaced and expanded our existing office space there.

In May 2020 we entered into an extension to our office lease for our corporate headquarters in Irvine, California. The amendment extends the term of the lease by 13 months through January 2022.

We determine if an arrangement is a lease at inception. Certain leases include renewal options that are under the Company's sole discretion. The renewal options were included in the ROU asset and lease liability calculation if it is reasonably assured that we will exercise the option. As our leases generally do not provide an implicit rate, we 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. Lease expense for these leases is recognized on a straight-line basis over the lease term.

Components of lease expense and supplemental cash flow information:

	Nine months ended
	March 31, 2020
Components of lease expense		(In thousands)
Operating lease cost	$	1,127
Financing lease cost	$	10

Supplemental cash flow information
Cash paid for amounts included in the measurement of operating lease liabilities	$	871
Cash paid for amounts included in the measurement of financing lease liabilities	$	8

Right-of-use assets obtained in exchange for lease obligation	$	1,119

The weighted-average remaining lease term is 1.5 years. The weighted-average discount rate is 6.03 percent.

Maturities of lease liabilities as of March 31, 2020 were as follows:

Years ending June 30,	Operating			Financing
	(In thousands)
2020	$	368		$	2
2021		1,077			9
2022		674			9
2023		376			9
2024		274			4
Thereafter		65			–
Total remaining lease payments		2,834			33
less: imputed interest		(243	)		–
Lease liability	$	2,591		$	33
Reported as:
Current liabilities	$	(1,142	)	$	(9	)
Non-current liabilities	$	(1,449	)	$	(24	)

The lease liabilities and ROU assets as of March 31, 2020 include leases assumed in the acquisitions of Maestro and Intrinsyc if the remaining lease term at the acquisition date was determined to exceed one year. Refer to Note 2 above for further information on the acquisitions. As of March 31, 2020, the ROU assets totaled $2,982,000 and were recorded in other assets in the unaudited condensed consolidated balance sheet.

5.	Supplemental Financial Information

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and consist of the following:

	March 31,		June 30,
	2020		2019
	(In thousands)
Finished goods	$	8,651	$	6,084
Raw materials		6,595		4,425
Inventories, net	$	15,246	$	10,509

Other Liabilities

The following table presents details of our other liabilities:

	March 31,		June 30,
	2020		2019
	(In thousands)
Current
Accrued variable consideration	$	1,383	$	1,313
Customer deposits and refunds		250		168
Accrued raw materials purchases		681		1,155
Deferred revenue		725		328
Lease liability		1,151		4
Taxes payable		407		322
Accrued operating expenses		2,090		1,290
Total other current liabilities	$	6,687	$	4,580

Non-current
Lease liability	$	1,473	$	48
Deferred revenue		158		158
Total other non-current liabilities	$	1,631	$	206

Computation of Net Income (Loss) per Share

Basic and diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the applicable period.

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

	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2020			2019		2020			2019
	(In thousands, except per share data)
Numerator:
Net income (loss)	$	(5,216	)	$	857	$	(9,037	)	$	1,051
Denominator:
Weighted-average common shares outstanding - basic		27,048			22,270		24,369			21,237
Effect of dilutive securities:		–			1,034		–			1,395
Denominator for net income (loss) per share - diluted		27,048			23,304		24,369			22,632

Net income (loss) per share - basic	$	(0.19	)	$	0.04	$	(0.37	)	$	0.05
Net income (loss) per share - diluted	$	(0.19	)	$	0.04	$	(0.37	)	$	0.05

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.

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2020		2019		2020		2019
	(In thousands)

Common stock equivalents		1,487		153		1,640		66

Severance and Related Charges

Current Fiscal Year

During the nine months ended March 31, 2020, we continued a plan to realign certain personnel resources to better fit our current business needs, which includes identifying cost savings and synergies to be gained from the acquisitions of Maestro and Intrinsyc. Additionally, the current year charges include costs incurred pursuant to change-in-control agreements for certain employees of Intrinsyc.

The following table presents details of the liability we recorded related to these activities:

	Nine Months Ended
	March 31,
	2020
		(In thousands)
Beginning balance	$	651
Charges		3,365
Payments		(2,786	)
Ending balance	$	1,230

The ending balance is recorded in accrued payroll and related expenses on the accompanying unaudited condensed consolidated balance sheet at March 31, 2020.

Prior Fiscal Year

During the nine months ended March 31, 2019, we incurred charges totaling approximately $323,000 in severance-related costs in connection with a plan to realign certain personnel and cost structure needs.

Supplemental Cash Flow Information

The following table presents non-cash investing transactions excluded from the accompanying unaudited condensed consolidated statements of cash flows:

	Nine Months Ended
	March 31,
	2020		2019
	(In thousands)
Share consideration for acquisition of Intrinsyc	$	15,574	$	–
Accrued property and equipment paid for in the subsequent period	$	5	$	276
Accrued stock option exercise proceeds	$	–	$	97

6.	Warranty Reserve

The standard warranty periods we provide for our products typically range from one to five years. We establish reserves for estimated product warranty costs at the time revenue is recognized based upon our historical warranty experience, and for any known or anticipated product warranty issues.

The following table presents details of our warranty reserve:

	Nine Months Ended			Year Ended
	March 31,			June 30,
	2020			2019
	(In thousands)
Beginning balance	$	116		$	99
Warranty reserve assumed from acquisition of Intrinsyc		118			–
Charged to cost of revenue		63			96
Usage		(88	)		(79	)
Ending balance	$	209		$	116

7.	Bank Loan Agreements

On November 12, 2019, we entered into a Second Amended and Restated Loan and Security Agreement (“Amended Agreement”) with Silicon Valley Bank (“SVB”), which amended, restated and superseded our previous agreement with SVB in its entirety.

Pursuant to the Amended Agreement, SVB made available to us a senior secured revolving line of credit of up to $6,000,000 (“Revolving Facility”) and a senior secured term loan of $6,000,000 (“Term Loan Facility”). Advances under the Revolving Facility may be borrowed from time to time prior to November 12, 2021, subject to the satisfaction of certain conditions, and may be used to fund our working capital and general business requirements. The $6,000,000 proceeds of the Term Loan Facility were drawn in full in November 2019 and were used to fund our acquisition of Intrinsyc, which occurred in January 2020 (refer to Note 2 above). The Revolving Facility matures on November 12, 2021. There were no borrowings on the Revolving Facility at March 31, 2020. The Term Loan Facility is repayable over a 48 month period commencing January 1, 2020.

The interest rate on the Revolving Facility floats at a rate per annum equal to the greater of the prime rate and 5.00 percent. The interest rate on the Term Loan Facility floats at a rate per annum equal to the greater of 1.00 percent above the prime rate and 6.00 percent. We may elect to repay and reborrow the amounts outstanding under the Revolving Facility at any time prior to the maturity date of the Revolving Facility without premium or penalty. We may elect to repay the Term Loan Facility at any time without premium or penalty in minimum amounts equal to at least $1,000,000. A commitment fee in the amount of $60,000 was paid to SVB on the closing date and a $10,000 anniversary fee is payable to SVB on the earliest to occur of the one year anniversary of the effective date, the termination of the Amended Agreement or the Revolving Facility, or the occurrence of an event of default.

The following table summarizes our outstanding debt:

	March 31,			June 30,
	2020			2019
	(In thousands)
Outstanding borrowings on Term Loan Facility	$	5,625		$	–
Less: Unamortized debt issuance costs		(103	)		–
Net Carrying amount of debt		5,522			–
Less: Current portion		(1,472	)		–
Non-current portion	$	4,050		$	–

During the three and nine months ended March 31, 2020 we recognized $94,000 and $140,000, respectively of interest expense in our unaudited condensed consolidated statements of operations related to interest and amortization of debt issuance associated with the outstanding Term Loan Facility.

The Amended Agreement includes a financial covenant that requires that we maintain a minimum cash balance of $3,000,000 at SVB, as measured at the end of each month. The Amended Agreement also requires that we do not exceed 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) 3.0 to 1.0 for each calendar quarter ending December 31, 2019 through and including December 31, 2020, (ii) 2.5 to 1.0 for each calendar quarter ending March 31, 2021 through and including December 31, 2021, and (iii) 2.0 to 1.0 for each calendar quarter ending after January 1, 2022. We are currently in compliance with all covenants.

8.	Stockholders’ Equity

Stock Incentive Plans

Our stock incentive plans permit the granting of stock options (both incentive and nonqualified stock options), RSUs, stock appreciation rights, non-vested stock, and performance shares to certain employees, directors and consultants. As of March 31, 2020, no stock appreciation rights or non-vested stock was outstanding.

Stock Options

The following table presents a summary of activity during the nine months ended March 31, 2020 with respect to our stock options:

				Weighted-
				Average
	Number of			Exercise Price
	Shares			per Share
		(In thousands)
Balance of options outstanding at June 30, 2019		3,147		$	2.29
Granted		248			3.33
Forfeited		(179	)		2.35
Expired		(76	)		2.21
Exercised		(834	)		1.76
Balance of options outstanding at March 31, 2020		2,306		$	2.58

Restricted Stock Units

The following table presents a summary of activity during the nine months ended March 31, 2020 with respect to our RSUs:

				Weighted-
				Average
				Grant Date
	Number of			Fair Value
	Shares			per Share
		(In thousands)
Balance of RSUs outstanding at June 30, 2019		866		$	4.24
Granted		431			3.32
Vested		(203	)		4.68
Forfeited		(109	)		3.76
Balance of RSUs outstanding at March 31, 2020		985		$	3.80

Performance Stock Units

In October 2019, we granted 975,000 RSUs with performance-based vesting requirements (“performance stock units” or “PSUs”) to certain executive employees. In February 2020, we granted an additional 70,000 RSUs with performance-based vesting requirements and vesting schedule identical to those granted in October 2019. One third of the PSUs will be eligible to vest in each of the three years beginning in fiscal 2020 if certain earnings per share, revenue targets and market conditions are met. The estimate of the grant date fair value and related share-based compensation expense included the use of a Monte Carlo simulation which incorporates estimates of the potential outcomes of the market condition of these awards.

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 following table presents a summary of activity under our ESPP during the nine months ended March 31, 2020:

	Number of
	Shares
		(In thousands)
Shares available for issuance at June 30, 2019		517
Shares issued		(64	)
Shares available for issuance at March 31, 2020		453

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:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2020		2019		2020		2019
	(In thousands)
Cost of revenue	$	70	$	22	$	142	$	62
Selling, general and administrative		939		213		2,176		950
Research and development		123		96		331		248
Total share-based compensation expense	$	1,132	$	331	$	2,649	$	1,260

The following table presents the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of March 31, 2020:

	Remaining		Remaining
	Unrecognized		Weighted-
	Compensation		Average Years
	Expense		To Recognize
		(In thousands)
Stock options	$	1,494		2.6
RSUs		3,309		3.2
PSUs		1,205		2.3
Stock purchase rights under ESPP		13		0.1
	$	6,021

If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to accelerate, increase or cancel remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional share-based awards.

9.	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:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2020		2019		2020		2019
Effective tax rate		1%		7%		1%		10%

The difference between our effective tax rates in the periods presented above and the federal statutory rate is primarily due to a tax benefit from our domestic losses being recorded with a full valuation allowance, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate.

We record net deferred tax assets to the extent we believe it is more likely than not that these assets will be realized. Due to our cumulative losses and uncertainty of generating future taxable income, we have provided a full valuation allowance against our net deferred tax assets as of March 31, 2020 and June 30, 2019.

10.

Commitments and Contingencies

From time to time, we are involved in various legal proceedings and claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other factors.

11.

Subsequent Event

Small Business Administration Loan

In April 2020, we executed a promissory note (the “Note”) in the principal amount of approximately $2,438,000 as part of the Paycheck Protection Program (the “PPP Loan”) administered by the Small Business Administration (the “SBA”) and authorized under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan was made through Silicon Valley Bank. On May 6, 2020, we repaid the Note in full.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the three months ended March 31, 2020, or this Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. See the section of this Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in “Risk Factors” in Part II, Item 1A of this Report.

Overview

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”).

Products and Solutions Overview

We organize our products and solutions into three product lines: IoT, IT Management and Other.

IoT

Our IoT products typically connect to one or more existing machines or are built into new industrial devices to provide network connectivity. Our products are designed to enhance the value and utility of machines by making the data from the machines available to users, systems and processes or by controlling their properties and features over the network.

Our IoT products currently consist of IoT Gateways and IoT Building Blocks. IoT Gateways are designed to provide secure connectivity and the ability to add integrated device management and advanced data access features. IoT Building Blocks provide basic secure machine connectivity and unmanaged data access.

Our IoT products may be embedded into new designs or attached to existing machines. Our IoT products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, application hosting, protocol conversion, secure access for distributed IoT deployments and many other functions. Many of the products are offered with software tools intended to further accelerate our customer’s time-to-market and increase their value add.

Most of our IoT products are pre-certified in a number of countries thereby significantly reducing our original equipment manufacturer customers’ regulatory certification costs and accelerating their time to market.

The following product families are included in our IoT product line: EDS, EDS-MD, PremierWave^® EN, PremierWave^® XC, SGX^™, UDS, WiPort^®, xDirect^®, xPico^®, xPico^®Wi-Fi, xPico^® 200, xPress^™, XPort^®, XPort^® Pro, XPort^® Edge, Micro, and MACH10^® Global Device Manager.

On July 5, 2019 we acquired Maestro Wireless Solutions Limited and its subsidiaries (together, “Maestro”). The acquisition provides additional and complementary cellular connectivity, LPWAN, and telematic technologies and devices to our portfolio of IoT solutions. The following product families are now included in our IoT product line as a result of the acquisition: M110, E210, E220, Bolero45, FOX3-2G, FOX3-3G, FOX3-4G, S40, and D2Sphere.

On January 16, 2020 we acquired Intrinsyc Technologies Corporation (“Intrinsyc”). The acquisition provides additional and complementary IoT computing and embedded product development capabilities and expands our IoT market opportunity. Additionally, we acquired edge computing and design capabilities crucial to the development of intelligent IoT solutions. As a result of the acquisition, we now offer the following in our IoT product line: System on Module (SoM), Single Board Computer (SBC), and Development Kits. We also offer services for mechanical, hardware, and software engineering for camera, audio, and artificial intelligence / machine learning development.

IT Management

Today, organizations are managing an ever-increasing number of devices and data on enterprise networks where 24/7 reliability is mission critical. Out-of-band management is a technique that uses a dedicated management network to access critical network devices to ensure management connectivity (including the ability to determine the status of any network component) independent of the status of other in-band network components. Remote out-of-band access allows organizations to effectively manage their enterprise IT resources and at the same time, optimize their IT support resources. Our vSLM™, a virtualized central management software solution, simplifies secure administration of our IT Management products and the equipment attached to them through a standard web browser.

Our IT Management product line includes out-of-band management, console management, power management, and keyboard-video-mouse (commonly referred to as KVM) products that provide remote access to IT and networking infrastructure deployed in test labs, data centers, branch offices and server rooms.

The following product families are included in our IT Management product line: SLB^™, SLC^™8000, Spider^™, ConsoleFlow and vSLM™.

Other

We categorize products that are non-focus or end-of-life as Other. Our Other product line includes non-focus products such as the xPrintServer^®. In addition, this product line includes end-of-life versions of our MatchPort^®, SLC^™, SLP^™, xPress Pro, xSenso^®, PremierWave^®XN, and WiBox product families.

Recent Developments

Refer to Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of our acquisitions of Maestro and Intrinsyc.

Following their acquisitions, Maestro and Intrinsyc have contributed significant revenue to the Company. We also saw a corresponding increase in operational expenses, which will remain consistent until we realize expected cost synergies. Furthermore, we expect that the combined entity will have better economies of scale driven by our plan to reduce redundant costs which we believe will result in improved operational effectiveness and greater earnings potential.

Impact of COVID-19

In order to protect our employee population and comply with local directives, most of our employees transitioned to remote working arrangements commencing in March and still continuing through 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 a significant adverse impact on our financial results or our operations, including, financial reporting and disclosure controls and procedures. We do not believe that our productivity has been substantially affected by working remotely. However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, encouragement and support is normally generated by being present at a physical location and believe that prolonged remote working may have a negative impact over time on our business and on employee productivity. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

Supply Chain and Shipping

The COVID-19 epidemic continues to challenge our supply chain, and if prolonged may have an adverse impact on our ability to produce and ship products. In early January 2020, we began to anticipate some supply chain issues. To mitigate, we built-up our inventory position. This increased inventory helped alleviate some, but not all, of the impact of subsequent shutdowns that occurred in China during the period. However, there were instances where we were unable to fulfill orders, resulting in revenue decline and causing us to miss our initial revenue target.

Our supply chain still faces significant challenges. Most of our manufacturing is done in Malaysia, China and Thailand. Our major contract manufacturer in Malaysia is not at full capacity because of temporary local stay-at-home orders, and we expect to experience supply constraints if the partial shutdown of this contract manufacturer is prolonged or expanded. Similar issues could arise with either one or both of our major contract manufacturers one in Thailand and the other in China, although at the present time we have not been informed of any current issues.

Our ability to ship products has also been affected by the impact that COVID-19 has had on air travel. Most of our products are shipped via air freight. With the reduction of air travel, shipping costs have increased, and shipping delays may have occurred and may continue to occur.

We are attempting to mitigate both the production and shipping risks by asking our contract manufacturers to expedite orders where possible, and otherwise taking and shipping products from our contract manufacturers as soon as they are available. We have also been forced to sell into the United States products in inventory that were manufactured in China for our non-US markets, thus incurring tariffs in the United States and negatively impacting our profits.

Our ability to manufacture products is also dependent on the availability of certain raw materials and components that our contract manufacturers purchase in China, and our sales are subject to demand for certain of our products that are purchased by our customers for assembly in China into our customers’ end-products. If a second wave of COVID-19 and associated shutdown were to occur in China, this would likely have an adverse impact on our ability to manufacture and sell our products due to related shortages of materials and components and delays in customer orders. Depending on the severity of such future shutdowns, we could experience a materially diminished ability to produce products or longer lead times. This would result in delayed or reduced revenue from the affected orders in production and potentially higher operating costs. Because COVID-19 is a global pandemic, it may be difficult or impossible to move our manufacturing capability in a timely manner as needed, or to put in place any additional mitigation actions other than to pull and ship products as fast as our manufacturers can manufacture them. These mitigation efforts may also have a negative impact on our financial results by increasing inventory levels.

Sales and Marketing

Our sales and marketing efforts have been impacted by COVID-19 in a variety of ways. On the positive side, we saw an increase in orders for videoconferencing-related and medical-related products and services. But this increase has been offset primarily by a reduction in other product sales caused by global shutdowns and overall uncertainty arising as a result of COVID-19.

Many of our leads are generated through industry events, trade shows and business travel necessary to support customer engagement. With the recent sudden cessation of all trade shows and business travel, our lead pipeline has been negatively impacted, which may negatively affect our sales in the coming quarters. We are attempting to mitigate this risk by using this time to focus our sales and marketing teams on greater customer engagement, particularly with anchor customers. However, prolonged shutdowns, or additional future shutdowns as a result of a second wave of COVID-19, would negate our mitigation efforts and lead to a reduction in revenue during the coming quarters. In addition, to mitigate the potential declines, we are also changing our go-to-market approach by adding more distributors and value-added resellers, who are closer to the customers and end-customers.

Research and Development

Our research and development efforts have not been impacted in any material respect as a result of our transition to a remote working arrangement. However, if the shutdowns persist, we may experience project delays because of lack of access for our engineers to use testing and other equipment that is situated in our office labs. We will attempt to mitigate any such prolonged impact by enabling engineers to have limited access to our office labs while imposing procedures that ensure that only a few people are in the office at any given time, social distancing and other guidelines are observed, and appropriate disinfection is taking place. Prolonged shutdowns at third-party partners, especially relating to product certifications, may also delay our sales and shipments. In the event of prolonged shutdowns, we believe we can mitigate by putting in place, where possible, agreements with our customers covering the sale of non-certified products.

Recent Accounting Pronouncements

Refer to Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

The accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to revenue recognition, allowance for doubtful accounts, inventory valuation, warranty reserves, valuation of deferred income taxes, goodwill and business combinations. Other than the policies regarding revenue recognition and business combinations, which we have updated and added below, respectively, these policies are described in further detail in the Form 10-K and have not changed significantly during the nine months ended March 31, 2020 as compared to what was previously disclosed in the Form 10-K.

Revenue Recognition

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. Establishing accruals for product returns and pricing adjustments requires the use of judgment and estimates that impact the amount and timing of revenue recognition. When product revenue is recognized, we establish an estimated allowance for future product returns based primarily on historical returns experience and other known or anticipated returns. We also record reductions of revenue for pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recognized, based primarily on approved pricing adjustments and our historical experience. Actual product returns or pricing adjustments that differ from our estimates could result in increases or decreases to our net revenue.

A portion of our revenues are derived from engineering and related consulting service contracts with customers. These contracts generally include performance obligations in which control is transferred over time because the customer either simultaneously receives and consumes the benefits provided or our performance on the contract creates or enhances an asset that the customer controls. These contracts typically provide services on the following basis:

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

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 these arrangements are considered distinct performance obligations that should be accounted for separately versus together often requires judgment. We consider performance obligations to be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily available and when the promised good or service is separately identifiable from other promised goods or services in the contract. In these 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. Additionally, estimating standalone selling prices for separate performance obligations within a contract may require significant judgment and consideration of various factors including market conditions, items contemplated during negotiation of customer arrangements and internally-developed pricing models. Changes to performance obligations that we identify, or the estimated selling prices pertaining to a contract, could materially impact the amounts of earned and unearned revenue that we record.

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”), if applicable, 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. The valuation of acquired assets and assumed liabilities requires significant judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs, and discount rates. We estimate the fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed as incurred.

Results of Operations – Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Summary

In the three months ended March 31, 2020, our net revenue increased by $4,168,000, or 33.8%, compared to the three months ended March 31, 2019. The increase in net revenue was driven by a 55.8% increase in net revenue in our IoT product line partially offset by a decline in revenue of 24.5% in our IT Management product line. We had a net loss of $5,216,000 for the three months ended March 31, 2020 compared to net income of $857,000 for the three months ended March 31, 2019. The decrease in net income was driven by a 12.8% decrease in gross margin percentage and a 101.5% increase in operating expenses.

Net Revenue

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

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$			%
	(In thousands, except percentages)
IoT	$	13,922		84.3%	$	8,935		72.4%	$	4,987			55.8%
IT Management		2,424		14.7%		3,210		26.0%		(786	)		(24.5%	)
Other		166		1.0%		199		1.6%		(33	)		(16.6%	)
	$	16,512		100.0%	$	12,344		100.0%	$	4,168			33.8%

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$			%
	(In thousands, except percentages)
Americas	$	10,126		61.3%	$	6,866		55.6%	$	3,260			47.5%
EMEA		3,612		21.9%	$	3,757		30.4%		(145	)		(3.9%	)
Asia Pacific Japan		2,774		16.8%	$	1,721		14.0%		1,053			61.2%
	$	16,512		100.0%	$	12,344		100.0%	$	4,168			33.8%

IoT

Net revenue from our IoT product line for the three months ended March 31, 2020 increased in the APJ and Americas regions when compared to the three months ended March 31, 2019 due primarily to the addition of sales of products and services obtained through the acquisitions of Maestro and Intrinsyc. We also saw moderate growth in our newer SGX product family, mostly in the Americas region. The overall increase in net revenues was partially offset primarily by decreases in unit sales of (i) our XPort, Premierwave EN, and XPort Pro product families in all regions and (ii) our UDS product family in the Americas and EMEA regions.

IT Management

Net revenue from our IT Management product line for the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019 due primarily to decreased unit sales of (i) our SLC8000 product family across all regions and (ii) our SLB product family in the Americas region.

Other

Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, declined slightly in APJ and EMEA.

Gross Profit

Gross profit represents net revenue less cost of revenue. Cost of revenue consists primarily of the cost of raw material components, subcontract labor assembly from contract manufacturers, manufacturing overhead, inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties and share-based compensation.

The following table presents our gross profit:

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$		%
	(In thousands, except percentages)
Gross profit	$	7,377		44.7%	$	7,090		57.4%	$	287		4.0%

Gross profit as a percent of revenue (referred to as “gross margin”) for the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019 due primarily to sales of products obtained through the acquisitions of Maestro and Intrinsyc, which typically have lower margins than the Lantronix products that existed prior to the acquisitions.

Selling, General and Administrative

Selling, general and administrative expenses consist of personnel-related expenses, including salaries and commissions, share-based compensation, facility expenses, information technology, trade show expenses, advertising, and legal and accounting fees.

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

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$		%
	(In thousands, except percentages)
Personnel-related expenses	$	3,254			$	2,858			$	396		13.9%
Professional fees and outside services		512				222				290		130.6%
Advertising and marketing		227				225				2		0.9%
Facilities and insurance		393				186				207		111.3%
Share-based compensation		939				213				726		340.8%
Depreciation		72				50				22		44.0%
Other		161				113				48		42.5%
Selling, general and administrative	$	5,558		33.7%	$	3,867		31.3%	$	1,691		43.7%

Selling, general and administrative expenses increased primarily due to (i) increased share-based compensation primarily due to the issuance of equity awards to certain executive and other employees, including employees brought on from our acquisitions, (ii) higher personnel-related costs resulting from the increased headcount assumed in the acquisitions of Intrinsyc and Maestro, (iii) higher professional fees and outside services resulting from increased legal and accounting costs, and (iv) higher facilities and insurance costs resulting from additional facility space gained through the acquisitions of Maestro and Intrinsyc.

Research and Development

Research and development expenses consist of personnel-related expenses, including share-based compensation, as well as expenditures to third-party vendors for research and development activities and product certification costs. Our quarterly costs related to outside services and product certifications vary from period to period depending on our level of development activities.

The following table presents our research and development expenses:

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$			%
	(In thousands, except percentages)
Personnel-related expenses	$	1,863			$	1,727			$	136			7.9%
Facilities		304				223				81			36.3%
Outside services		121				220				(99	)		(45.0%	)
Product certifications		204				7				197			2814.3%
Share-based compensation		123				96				27			28.1%
Other		109				112				(3	)		(2.7%	)
Research and development	$	2,724		16.5%	$	2,385		19.3%	$	339			14.2%

Research and development expenses for the three months ended March 31, 2020 increased when compared to the three months ended March 31, 2019 primarily due to (i) higher product certification costs related to the timing of various new product development projects and (ii) higher facilities costs and personnel-related expenses, resulting from an increase in facility space and headcount resulting from the acquisitions of Maestro and Intrinsyc as well as the addition of our new facility lease in India. These increases were slightly offset by a decrease in outside services expenses as we lowered our spending on certain outside headcount resources.

Results of Operations – Nine Months Ended March 31, 2020 Compared to the Nine Months Ended March 31, 2019

Summary

In the nine months ended March 31, 2020 our net revenue increased by $5,744,000, or 15.6%, compared to the nine months ended March 31, 2019. The increase in net revenue was driven by a 31.0% increase in net revenue in our IoT product line partially offset by a decline in revenue of 28.7% in our IT Management product line. We had a net loss of $9,037,000 for the nine months ended March 31, 2020 compared to net income of $1,051,000 for the nine months ended March 31, 2019. The decrease in net income was driven by an 8.0% decrease in gross margin percentage and a 50.2% increase in operating expenses.

Net Revenue

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

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$			%
	(In thousands, except percentages)
IoT	$	35,323		83.2%	$	26,972		73.4%	$	8,351			31.0%
IT Management		6,557		15.4%		9,199		25.0%		(2,642	)		(28.7%	)
Other		601		1.4%		566		1.6%		35			6.2%
	$	42,481		100.0%	$	36,737		100.0%	$	5,744			15.6%

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$		%
	(In thousands, except percentages)
Americas	$	21,730		51.2%	$	19,962		54.3%	$	1,768		8.9%
EMEA		12,495		29.4%		11,357		30.9%		1,138		10.0%
Asia Pacific Japan		8,256		19.4%		5,418		14.8%		2,838		52.4%
	$	42,481		100.0%	$	36,737		100.0%	$	5,744		15.6%

IoT

Net revenue from our IoT product line for the nine months ended March 31, 2020 increased across all regions when compared to the nine months ended March 31, 2019 due to the addition of sales of products and services obtained through the acquisitions of Maestro and Intrinsyc. The overall increase was partially offset by decreases in unit sales of (i) our XPort, UDS, and Premierwave EN product families across all regions, (ii) our XPort Pro family, mostly in the Americas and (iii) our large-scale integration chips in the EMEA region.

IT Management

Net revenue from our IT Management product line for the nine months ended March 31, 2020 decreased compared to the nine months ended March 31, 2019 due primarily to decreased unit sales of our SLC8000 and SLB product families in the Americas and EMEA regions. In the prior year, we saw stronger demand for both product families partially driven by the timing of sales to certain large customers.

Other

Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, increased slightly across all regions.

Gross Profit

The following table presents our gross profit:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$			%
	(In thousands, except percentages)
Gross profit	$	20,349		47.9%	$	20,531		55.9%	$	(182	)		(0.9%	)

Gross margin for the nine months ended March 31, 2020 decreased compared to the nine months ended March 31, 2019 due primarily to sales of products obtained through the acquisitions of Maestro and Intrinsyc, which typically have lower margins than the Lantronix products that existed prior to the acquisitions. Gross margin in the current year period was also negatively impacted by the amortization of unrealized profit in acquired inventory in the amount of approximately $204,000.

Selling, General and Administrative

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

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$		%
	(In thousands, except percentages)
Personnel-related expenses	$	8,790			$	8,764			$	26		0.3%
Professional fees and outside services		1,542				904				638		70.6%
Advertising and marketing		652				543				109		20.1%
Facilities and insurance		1,018				647				371		57.3%
Share-based compensation		2,176				950				1,226		129.1%
Depreciation		179				144				35		24.3%
Other		545				345				200		58.0%
Selling, general and administrative	$	14,902		35.1%	$	12,297		33.5%	$	2,605		21.2%

Selling, general and administrative expenses increased primarily due to (i) higher share-based compensation primarily due to the issuance of equity awards to certain executive and other employees, including employees brought on from our acquisitions, (ii) higher professional fees and outside services resulting from increased legal and accounting fees, and (iii) higher facilities and insurance costs resulting from additional facility space obtained through the acquisitions of Maestro and Intrinsyc. These increases were partially offset by a decrease in personnel-related expenses from reduced variable compensation and certain headcount reductions in the current year period, which were largely offset by headcount increases from the acquisitions of Maestro and Intrinsyc.

Research and Development

The following table presents our research and development expenses:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2020		Revenue		2019		Revenue		$			%
	(In thousands, except percentages)
Personnel-related expenses	$	5,180			$	5,060			$	120			2.4%
Facilities		909				688				221			32.1%
Outside services		472				492				(20	)		(4.1%	)
Product certifications		473				99				374			377.8%
Share-based compensation		331				248				83			33.5%
Other		316				292				24			8.2%
Research and development	$	7,681		18.1%	$	6,879		18.7%	$	802			11.7%

Research and development expenses increased primarily due to higher (i) product certification costs related to new product development projects and (ii) higher facilities costs, resulting from our new facility lease in India and additional facility space gained through the acquisitions of Maestro and Intrinsyc.

Restructuring, Severance and Related Charges

Current Fiscal Year

During the current year, we continued a plan to realign certain personnel resources to better fit our current business needs, particularly as it relates to identifying cost savings and synergies to be gained from the acquisitions of Maestro and Intrinsyc. These activities resulted in total charges of approximately $2,263,000 and $3,366,000 for the three and nine months ended March 31, 2020, respectively. We may incur additional restructuring, severance and related charges in future periods as we continue to identify cost savings and synergies resulting from our acquisitions.

Prior Fiscal Year

During the nine months ended March 31, 2019, we executed a plan to realign certain personnel resources to better fit our business needs. These activities resulted in a total charge of approximately $323,000.

Acquisition-Related Costs

During the three and nine months ended March 31, 2020, we incurred approximately $1,250,000 and $2,246,000 of acquisition-related costs, respectively, in connection with the acquisitions of Maestro and Intrinsyc. These costs are mainly comprised of banking, legal and other professional fees.

Amortization of Purchased Intangible Assets

We acquired certain intangible assets through our acquisitions in the current year period, which we recorded at fair-value as of the acquisition dates. These assets are amortized on a straight-line basis over their estimated useful lives, which resulted in charges of $801,000 and $1,096,000 for the three and nine months ended March 31, 2020, respectively.

Interest Income (Expense), Net

We earn interest on our domestic cash balance. For the three and nine months ended March 31, 2020, we incurred net interest expense as a result of interest incurred on borrowings on our term loan.

Other Expense, Net

Other expense, net, is comprised primarily of foreign currency remeasurement and transaction adjustments related to our foreign subsidiaries whose functional currency is the U.S. dollar.

Provision for Income Taxes

Refer to Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion regarding our provision for income taxes.

Liquidity and Capital Resources

Liquidity

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

	March 31,		June 30,
	2020		2019		Change
	(In thousands)
Working capital	$	18,607	$	26,718	$	(8,112	)
Cash, cash equivalents, and restricted cash	$	6,977	$	18,282	$	(11,305	)

In July 2019, we acquired Maestro, which reduced our net cash balance by $5,073,000. In January 2020, our acquisition of Intrinsyc used approximately $8,329,000 in net cash. Additionally, the net loss incurred during the nine months ended March 31, 2020 resulted in our using cash in operating activities of $3,435,000.

Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts available under our loan agreement with our bank, and cash generated from operations. We believe that these sources will be sufficient to fund our current requirements for working capital, capital expenditures and other financial commitments for at least the next 12 months. We anticipate that the primary factors affecting our cash and liquidity are net revenue, working capital requirements and capital expenditures.

Management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. We maintain cash and cash equivalents balances at certain financial institutions in excess of amounts insured by federal agencies. Management does not believe this concentration subjects us to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We frequently monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds.

Our future working capital requirements will depend on many factors, including the following: timing and amount of our net revenue; our product mix and the resulting gross margins; research and development expenses; selling, general and administrative expenses; and expenses associated with any strategic partnerships, acquisitions or infrastructure investments.

From time to time, we may seek additional capital from public or private offerings of our capital stock, borrowings under our existing or future credit lines or other sources in order to (i) develop or enhance our products, (ii) take advantage of strategic opportunities, (iii) respond to competition or (iv) continue to operate our business. We currently have a Form S-3 shelf registration statement on file with the SEC. If we issue equity securities to raise additional funds, our existing stockholders may experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of our existing stockholders. If we issue debt securities to raise additional funds, we may incur debt service obligations, become subject to additional restrictions that limit or restrict our ability to operate our business, or be required to further encumber our assets. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all.

Impact of COVID-19

We have not experienced any material delays or payment defaults by our customers. However, a prolonged economic shutdown may lead to significant declines in billings and cash collection and result in an unfavorable impact on our financial results. While we do have a credit line available, financial covenants associated with the credit line may not enable us to draw down funds as needed. We have in place a contingency plan that significantly reduces operating costs in the event that we experience liquidity issues in order to help mitigate our liquidity risk.

In April 2020, we executed a promissory note with Silicon Valley Bank in the principal amount of approximately $2,438,000 as part of the Paycheck Protection Program administered by the Small Business Administration and authorized under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. On May 6, 2020, we repaid the promissory note in full.

Bank Loan Agreements

Refer to Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of our loan agreements.

Cash Flows

The following table presents the major components of the unaudited condensed consolidated statements of cash flows:

	Nine Months Ended
	March 31,
	2020			2019			Change
	(In thousands)
Net cash used in operating activities	$	(3,435	)	$	(1,597	)	$	(1,838	)
Net cash used in investing activities		(13,873	)		(383	)		(13,490	)
Net cash provided by financing activities		6,003			10,624			(4,621	)

Operating Activities

Cash used from operating activities during the nine months ended March 31, 2020 increased compared to the prior year period as a result of an increase in our net loss, which was impacted during the nine months ended March 31, 2020 by an increase in operating expenses and acquisition-related costs for the acquisitions of Maestro and Intrinsyc. Our net loss included $4,488,000 of non-cash charges and the changes in operating assets and liabilities provided net cash of $1,114,000.

Investing Activities

Net cash used in investing activities during the nine months ended March 31, 2020 was driven by the acquisitions of Maestro and Intrinsyc, which used net cash of $5,073,000 and $8,329,000, respectively. We also used cash for the purchase of property and equipment, primarily related to tooling and test equipment.

Financing Activities

Net cash provided by financing activities during the nine months ended March 31, 2019 resulted primarily from the public offering of 2,700,000 shares of common stock, which resulted in us receiving proceeds net of underwriting discounts and expenses of approximately $9,774,000. For the nine months ended March 31, 2020, financing activities provided cash from the issuance of a term loan for $6,000,000 with Silicon Valley Bank as well as stock option exercises by employees. These inflows were partially offset by (i) repayments on the term loan and (ii) withholding taxes paid related to the vesting of restricted stock units.

Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, including structured finance or special purpose entities, that have been established to facilitate off-balance sheet arrangements or for other purposes.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item 3.

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is 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 by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2020 at the reasonable assurance level.

(b) Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Inherent Limitation on Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all of the information in this Report, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Report, and the unaudited condensed consolidated financial statements and related notes thereto in Part I, Item 1 of this Report. In addition, you should carefully consider the risks and uncertainties described in the section entitled “Risk Factors” in the Form 10-K, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects. Other than as noted below, our risk factors have not changed significantly from those disclosed in the Form 10-K.

The effect of COVID-19 and other possible pandemics and similar outbreaks could result in material adverse effects on our business, financial position, results of operations and cash flows.

The COVID-19 pandemic, and the various governmental, industry and consumer actions related thereto, are having and could continue to have negative impacts on our business and have created or could create conditions in our other risk factors noted above. These impacts include potential significant volatility or decreases in the demand for our products, changes in customer behavior and preferences, disruptions in or closures of our manufacturing operations or those of our customers and suppliers, disruptions within our supply chain, limitations on our employees’ ability to work and travel, potential financial difficulties of customers and suppliers, significant changes in economic or political conditions, and related financial and commodity volatility, including volatility in raw material and other input costs. It is uncertain what the impact of various legislation and other responses being taken in the U.S. and other countries will have on the economy, international trade, our industries, our businesses and the businesses of our customers and suppliers. Despite our efforts to manage the impacts, the degree to which COVID-19 and related actions ultimately impact our business, financial position, results of operations and cash flows will depend on factors beyond our control including the duration, spread and severity of the outbreak, the actions taken to contain COVID-19 and mitigate its public health effects, the impact on the U.S. and global economies and demand for our products, and how quickly and to what extent normal economic and operating conditions resume.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

			Incorporated by Reference
Exhibit Number	Description	Provided Herewith	Form	Exhibit	Filing Date

2.1*	Share Purchase Agreement, dated July 5, 2019, by and among Lantronix Holding Company, Maestro Wireless Solutions Limited, Fargo Telecom Asia Limited and Maestro & FALCOM Holdings Limited		8-K	2.1	7/10/2019

2.2*	Arrangement Agreement, dated October 30, 2019, by and between Lantronix and Intrinsyc		8-K	2.1	11/1/2019

10.1	Intrinsyc Technologies Corporation Amended and Restated Incentive Stock Option Plan	X

10.2	Intrinsyc Technologies Corporation Restricted Share Unit Plan	X

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X

32.1**	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

101.INS	XBRL Instance Document	X
101.SCH	XBRL Taxonomy Extension Schema Document	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

_________________

*	Portions of this Exhibit, including certain schedules and exhibits to this Exhibit, have been omitted in accordance with Item 601(b) of Regulation S-K. A copy of any omitted information, schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.
**	Furnished, not filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LANTRONIX, INC.


Date: May 15, 2020	By:	/s/ PAUL PICKLE
		Paul Pickle
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: May 15, 2020	By:	/s/ JEREMY WHITAKER
		Jeremy Whitaker Chief Financial Officer
		(Principal Financial and Accounting Officer)

LANTRONIX INC - FORM 10-Q - May 15, 2020

Attached files

LANTRONIX INC Reports