Edgar Filing: LANTRONIX INC

Number of

Shares

(In thousands)

Shares available for issuance at June 30, 2017

Shares issued

Shares available for issuance at March 31, 2018

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, 2018

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)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. (Check one):

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		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 April 20, 2018, there were 18,248,268 shares of the registrant’s common stock outstanding.

LANTRONIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

MARCH 31, 2018

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, 2018 and June 30, 2017	4

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2018 and 2017	5

	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2018 and 2017	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	23

PART II.	OTHER INFORMATION	24

Item 1.	Legal Proceedings	24

Item 1A	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Mine Safety Disclosures	24

Item 5.	Other Information	24

Item 6.	Exhibits	24

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the three months ended March 31, 2018, 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. In particular, this Report contains forward-looking statements relating to, among other things:

predictions about our earnings, revenues, margins, expenses or other financial matters;

forecasts of our financial condition, results of operations, liquidity position, or working capital requirements;

	·	our ability to comply with certain financial obligations in our loan agreement;
	·	the impact of changes to our share-based awards and any related changes to our share-based compensation expenses;
	·	the impact of future offerings and sales of our debt or equity securities;

the impact of changes in our relationship with our customers;

plans or expectations with respect to our product development activities, business strategies or restructuring and expansion activities;

demand and growth of the market for our products or for the products of our competitors;

the impact of pending litigation, including outcomes of such litigation;

	·	the impact of our response to and implementation of recent accounting pronouncements and changes in tax laws on our consolidated financial statements and the related disclosures;
	·	sufficiency of our internal controls and procedures;
	·	the success of our plans to realign and reallocate our resources; and

assumptions or estimates underlying any of the foregoing.

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. Some of the risks and uncertainties that may cause actual results to differ from those expressed or implied in the forward-looking statements are described in “Risk Factors” included in Part II, Item 1A of this Report, in “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017, filed with the Securities and Exchange Commission, or the SEC, on August 24, 2017, or the Form 10-K, as well as in our other public filings with the SEC. 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 Stock Market, LLC. 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,
	2018			2017
Assets
Current assets:
Cash and cash equivalents	$	8,955		$	8,073
Accounts receivable, net		3,834			3,432
Inventories, net		7,378			6,959
Contract manufacturers' receivable		721			476
Prepaid expenses and other current assets		508			440
Total current assets		21,396			19,380
Property and equipment, net		1,058			1,218
Goodwill		9,488			9,488
Other assets		73			46
Total assets	$	32,015		$	30,132

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	4,173		$	2,717
Accrued payroll and related expenses		2,125			3,084
Warranty reserve		113			125
Other current liabilities		3,406			3,063
Total current liabilities		9,817			8,989
Long-term capital lease obligations		11			59
Other non-current liabilities		321			396
Total liabilities		10,149			9,444

Commitments and contingencies (Note 7)

Stockholders' equity:
Common stock		2			2
Additional paid-in capital		211,800			210,550
Accumulated deficit		(190,307	)		(190,235	)
Accumulated other comprehensive income		371			371
Total stockholders' equity		21,866			20,688
Total liabilities and stockholders' equity	$	32,015		$	30,132

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,
	2018			2017			2018			2017
Net revenue	$	11,601		$	11,524		$	33,543		$	33,686
Cost of revenue		5,017			5,126			15,051			15,776
Gross profit		6,584			6,398			18,492			17,910
Operating expenses:
Selling, general and administrative		4,241			4,414			12,400			12,129
Research and development		1,964			2,126			6,059			5,944
Total operating expenses		6,205			6,540			18,459			18,073
Income (loss) from operations		379			(142	)		33			(163	)
Interest expense, net		(5	)		(5	)		(14	)		(18	)
Other income (expense), net		(1	)		2			1			3
Income (loss) before income taxes		373			(145	)		20			(178	)
Provision for income taxes		29			17			92			47
Net income (loss)	$	344		$	(162	)	$	(72	)	$	(225	)

Net income (loss) per share (basic)	$	0.02		$	(0.01	)	$	(0.00	)	$	(0.01	)
Net income (loss) per share (diluted)	$	0.02		$	(0.01	)	$	(0.00	)	$	(0.01	)

Weighted-average common shares (basic)		18,210			17,522			18,050			17,374
Weighted-average common shares (diluted)		19,118			17,522			18,050			17,374

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	March 31,
	2018			2017
Operating activities
Net loss	$	(72	)	$	(225	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Share-based compensation		877			645
Depreciation and amortization		336			455
Provision for excess and obsolete inventories		162			74
Changes in operating assets and liabilities:
Accounts receivable		(402	)		337
Inventories		(581	)		(1,154	)
Contract manufacturers' receivable		(245	)		55
Prepaid expenses and other current assets		(68	)		44
Other assets		(32	)		11
Accounts payable		1,456			(19	)
Accrued payroll and related expenses		(959	)		806
Warranty reserve		(12	)		(22	)
Other liabilities		265			457
Net cash provided by operating activities		725			1,464
Investing activities
Purchases of property and equipment		(171	)		(144	)
Net cash used in investing activities		(171	)		(144	)
Financing activities
Tax withholding paid on behalf of employees for restricted shares		(145	)		(144	)
Net proceeds from issuances of common stock		518			300
Payment of capital lease obligations		(45	)		(49	)
Net cash provided by financing activities		328			107
Increase in cash and cash equivalents		882			1,427
Cash and cash equivalents at beginning of period		8,073			5,962
Cash and cash equivalents at end of period	$	8,955		$	7,389

See accompanying notes.

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

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 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, 2017, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017, which was filed with the SEC on August 24, 2017. 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, 2018, the consolidated results of our operations for the three and nine months ended March 31, 2018 and our consolidated cash flows for the nine months ended March 31, 2018. 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, 2018 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

Recent Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard 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 by lessees for those leases classified as operating leases under the existing guidance. The guidance requires entities to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. In November 2017, FASB proposed a practical expedient that would allow entities the option to apply the provisions of the new lease guidance at the effective date of adoption without adjusting the comparative periods presented.

The standard will be effective for Lantronix in the fiscal year beginning July 1, 2019. While we are continuing to assess the potential impacts of this standard, we currently expect the most significant impact on our financial statements will be the recognition of ROU assets and lease liabilities for our operating leases. We have not yet determined which practical expedients we intend to utilize in connection with adopting the new standard, nor have we determined any quantitative impacts on our financial statements.

Revenue from Contracts with Customers

In May 2014, FASB issued an accounting standard which superseded previous revenue recognition guidance under U.S. GAAP. The standard is a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In doing so, among other things, companies will generally need to use more judgment and make more estimates than under the previous guidance.

The standard permits two methods of adoption: (i) retrospectively to each prior reporting period presented (the full retrospective method), or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application (the cumulative catch-up transition method). In previous periods we had disclosed that we expected to adopt the standard using the full retrospective method to restate each prior reporting period presented. As we have progressed with our evaluation of the potential impacts of adoption, we now anticipate adopting the standard using the cumulative catch-up transition method in the fiscal year beginning July 1, 2018. Under this method, prior reporting periods presented will not be restated.

We currently anticipate the standard will have a material impact on our financial statements and disclosures. We believe the most significant impact of adopting the standard relates to our accounting for sales made to distributors under agreements which contain a limited right to return unsold products and price adjustment provisions. Under the previous revenue guidance, we have historically concluded that the price to these distributors is not fixed and determinable at the time we deliver products to them. Accordingly, revenue from sales to these distributors has not historically been recognized until the distributor resells the product. By contrast, under the new standard, we expect to recognize revenue, including estimates for applicable variable consideration, predominantly at the time of shipment to these distributors. In addition, given certain requirements in the new standard regarding the presentation of estimated return assets and refund liabilities, we expect that adoption will result in an increase in our accounts receivable, net and decreases in our inventories, net and other current liabilities.

As we continue to assess other potential impacts of the new standard, finalize our analyses pertaining to adoption, and evaluate changes to our accounting policies, internal controls and footnote disclosures, we may identify additional areas of impact and may revise our preliminary assessments and estimates.

2.	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, 2018		June 30, 2017
	(In thousands)
Finished goods	$	3,917	$	4,191
Raw materials		2,139		1,694
Finished goods held by distributors		1,322		1,074
Inventories, net	$	7,378	$	6,959

Other Liabilities

The following table presents details of our other liabilities:

	March 31, 2018		June 30, 2017
	(In thousands)
Current
Customer deposits and refunds	$	1,277	$	1,119
Accrued raw materials purchases		389		484
Deferred revenue		316		196
Capital lease obligations		64		61
Taxes payable		307		275
Accrued operating expenses		1,053		928
Total other current liabilities	$	3,406	$	3,063

Non-current
Deferred rent	$	164	$	200
Deferred revenue		157		196
Total other non-current liabilities	$	321	$	396

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 March 31,					Nine Months Ended March 31,
	2018		2017			2018			2017

	(In thousands, except per share data)
Numerator:
Net income (loss)	$	344	$	(162	)	$	(72	)	$	(225	)
Denominator:
Weighted-average common shares outstanding (basic)		18,210		17,522			18,050			17,374
Effect of dilutive securities:
Stock awards		908		–			–			–
Denominator for net income (loss) per share (diluted)		19,118		17,522			18,050			17,374

Net income (loss) per share (basic)	$	0.02	$	(0.01	)	$	(0.00	)	$	(0.01	)
Net income (loss) per share (diluted)	$	0.02	$	(0.01	)	$	(0.00	)	$	(0.01	)

The following table presents the common stock equivalents excluded from the diluted net income (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 March 31,				Nine Months Ended March 31,
	2018		2017		2018		2017
	(In thousands)
Common stock equivalents		595		1,062		2,146		1,894

Severance and Related Charges

From July 2017 through September 2017, we realigned certain resources throughout our organization, primarily to optimize our operations and engineering efforts. These activities resulted in total charges of approximately $527,000 recorded during the quarter ended September 30, 2017, which consisted primarily of severance costs, and to a lesser extent, termination costs related to our facility lease in Hong Kong. These charges are included in the applicable functional line items within the accompanying unaudited condensed consolidated statement of operations for the nine months ended March 31, 2018.

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

	Nine Months Ended March 31, 2018
		(In thousands)
Beginning balance	$	–
Charges		527
Payments		(503	)
Other adjustments		(21	)
Ending balance	$	3

During the three months ended March 31, 2018, we reversed approximately $21,000 of the liability for adjustments we made to the total charges previously estimated in the first fiscal quarter of 2018 primarily due to difference in the settlement of our facility lease in Hong Kong. The remaining liability balance is included in accrued payroll and related expenses in the accompanying unaudited condensed consolidated balance sheet at March 31, 2018.

Supplemental Cash Flow Information

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

	Nine Months Ended March 31,
	2018		2017
	(In thousands)
Accrued property and equipment paid for in the subsequent period	$	–	$	17

3.	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 March 31, 2018			Year Ended June 30, 2017
	(In thousands)
Beginning balance	$	125		$	138
Charged to cost of revenue		138			65
Usage		(150	)		(78	)
Ending balance	$	113		$	125

4.	Bank Line of Credit

We are party to a Loan and Security Agreement (as amended, the “Loan Agreement”) with Silicon Valley Bank (“SVB”), which provides a $4,000,000 revolving line of credit, based on qualified accounts receivable. The Loan Agreement has a maturity date of September 30, 2018.

The Loan Agreement provides for an interest rate per annum equal to the greater of the prime rate plus 0.75% or 4.25%, provided that we maintain a monthly quick ratio of 1.0 to 1.0 or greater. The quick ratio measures our ability to use our cash and cash equivalents maintained at SVB and our net accounts receivable to extinguish or retire our current liabilities. If this ratio is not met, the interest rate per annum will become the greater of the prime rate plus 1.25% or 4.25%. At March 31, 2018, we met the 1.0 to 1.0 or greater quick ratio requirement.

The Loan Agreement also includes a covenant requiring us to maintain a certain Minimum Tangible Net Worth (“Minimum TNW”), currently required to be approximately $6,305,000. The Minimum TNW is subject to adjustment upward to the extent we raise additional equity or debt financing or achieve net income in future quarters. Our Actual Tangible Net Worth (“Actual TNW”) is calculated as total stockholders’ equity, less goodwill.

The following table presents the Minimum TNW compared to our Actual TNW:

	March 31, 2018
		(In thousands)
Minimum TNW	$	6,305
Actual TNW	$	12,378

The following table presents certain information with respect to the Loan Agreement with SVB:

	March 31, 2018			June 30, 2017
	(In thousands)
Outstanding borrowings on the line of credit	$	–	$	–
Available borrowing capacity	$	2,830	$	2,812
Outstanding letters of credit	$	51	$	51

Our outstanding letters of credit are used as security deposits.

5.	Stockholders’ Equity

Stock Incentive Plans

In November 2017, our stockholders approved an amendment to our Amended and Restated 2010 Stock Incentive Plan to increase the number of shares of common stock reserved for issuance under the plan by 2,000,000 shares.

Our stock incentive plans permit the granting of stock options (both incentive and nonqualified stock options), restricted stock units (“RSUs”), stock appreciation rights, non-vested stock, and performance shares to certain employees, directors and consultants. As of March 31, 2018, no stock appreciation rights, non-vested stock, or performance shares were outstanding.

Stock Options

The following table presents a summary of activity during the nine months ended March 31, 2018 with respect to our stock options:

	Number of Shares			Weighted- Average Exercise Price per Share
		(In thousands)
Balance of options outstanding at June 30, 2017	$	4,184		$	1.78
Granted		929			2.15
Forfeited		(177	)		1.70
Expired		(309	)		3.70
Exercised		(203	)		1.67
Balance of options outstanding at March 31, 2018	$	4,424		$	1.73

Restricted Stock Units

The following table presents a summary of activity during the nine months ended March 31, 2018 with respect to our RSUs:

	Number of Shares			Weighted- Average Grant Date Fair Value per Share
		(In thousands)
Balance of RSUs outstanding at June 30, 2017		300		$	1.29
Granted		40			2.05
Vested		(150	)		1.29
Balance of RSUs outstanding at March 31, 2018		190		$	1.45

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, 2018:

Share-Based Compensation Expense

The following table presents a summary of share-based compensation expense included in each functional line item on our unaudited condensed consolidated statements of operations:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2018		2017		2018		2017
	(In thousands)
Cost of revenue	$	14	$	12	$	40	$	36
Selling, general and administrative		237		169		688		480
Research and development		44		43		149		129
Total share-based compensation expense	$	295	$	224	$	877	$	645

The following table presents the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of March 31, 2018:

	Remaining Unrecognized Compensation Expense		Remaining Weighted- Average Years To Recognize
		(In thousands)
Stock options	$	1,762		2.7
RSUs		236		1.0
Stock purchase rights under ESPP		223		1.5
	$	2,221

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.

6.	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

March 31,

Nine Months Ended

March 31,

2018

2017

2018

2017

Effective tax rate

12%

460%

26%

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, 2018 and June 30, 2017.

Tax Cuts and Jobs Act

In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are expected to affect companies. Among other things, the 2017 Act (i) lowers U.S. corporate tax rates and implements a territorial tax system, (ii) generally reduces a company’s ability to utilize accumulated net operating losses and (iii) requires the calculation of a one-time transition tax on certain previously unrepatriated foreign earnings and profits (“E&P”) as part of the transition to the new territorial tax system. In addition, the 2017 Act impacts a company’s estimates of its deferred tax assets and liabilities.

Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of enactment, and the resulting effects are recorded as discrete components of the income tax provision related to continuing operations in the same period. We are in the process of evaluating the impact of the 2017 Act on our financial statements. Based on our initial assessments to date, we expect the one-time transition tax on certain foreign E&P to have a minimal impact on us as we anticipate that we will be able to utilize our existing net operating losses to substantially offset any taxes payable on foreign E&P. Additionally, we expect significant adjustments to our gross deferred tax assets and liabilities; however, we also expect to record a corresponding offset to our estimated full valuation allowance against our net deferred tax assets, which should result in minimal net effect to our provision for income taxes. Since Lantronix has a June 30 fiscal year-end, the lower U.S. corporate tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years.

In accordance with the SEC’s Staff Accounting Bulletin No. 118, we have not recorded any income tax effects of the 2017 Act in our financial statements (including any provisional amounts) because we do not yet have the necessary information available, prepared or analyzed in reasonable detail to complete the applicable accounting. We anticipate completing the analysis, and any resulting adjustments to our financial statements, by the end of our current fiscal year ending June 30, 2018.

7.	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.

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, 2018, 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

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, or IoT, assets. Our mission is to be the leading supplier of IoT 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.

We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa, or EMEA; and Asia Pacific Japan, or 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, provide network connectivity and 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, IoT Building Blocks and IoT Management Software. 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 Management Software consists of Lantronix Gateway Central and MACH10^® Global Device Manager. Lantronix Gateway Central is a cloud-based Software as a Service, or SaaS, offering that provides remote monitoring and management of Lantronix IoT Gateways, allowing device manufacturers, system integrators and end users to remotely monitor and manage deployed Lantronix IoT Gateways. MACH10^® Global Device Manager is a ready-to-use industrial IoT application that enables device manufacturers to integrate IoT device lifecycle management for remote monitoring and management for their connected devices.

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 OEM customers’ regulatory certification costs and speeding their time to market.

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

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 dedicated network channels to manage 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 IT Management product line includes console management, power management, and keyboard video mouse products that provide remote access to IT and networking infrastructure deployed in test labs, data centers and server rooms.

The following product families are included in our IT Management product line: SLB™, SLC™ 8000, and Spider™. In addition, this product line includes vSLM™, a virtualized central management software solution that simplifies secure administration of our IT Management products and the equipment attached to them through a standard web browser. vSLM is designed to operate with both our IT Management products and certain other manufacturers’ IT infrastructure equipment.

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^®, and WiBox product families.

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, warranty reserves, allowance for doubtful accounts, inventory valuation, valuation of deferred income taxes, and goodwill. These policies are described in further detail in the Form 10-K. There have been no significant changes in our critical accounting policies and estimates during the three and nine months ended March 31, 2018 as compared to what was previously disclosed in the Form 10-K.

Results of Operations – Three Months Ended March 31, 2018 Compared to the Three Months Ended March 31, 2017

Summary

In the three months ended March 31, 2018 our net revenue increased by $77,000, or 0.7%, compared to the three months ended March 31, 2017. The increase in net revenue was driven by a 7.4% increase in net revenue in our IoT product line, which was largely offset by a decline in our IT Management product line. We had net income of $344,000 for the three months ended March 31, 2018 compared to a net loss of $72,000 for the three months ended March 31, 2017. The improvement in profitability was driven by (i) a 2.9% increase in gross profit and (ii) a 5.1% decrease in operating expenses.

Net Revenue

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

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2018		Revenue		2017		Revenue		$			%
	(In thousands, except percentages)
IoT	$	9,281		80.0%	$	8,644		75.0%	$	637			7.4%
IT Management		1,964		16.9%		2,569		22.3%		(605	)		(23.6%	)
Other		356		3.1%		311		2.7%		45			14.5%
	$	11,601		100.0%	$	11,524		100.0%	$	77			0.7%

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2018		Revenue		2017		Revenue		$			%
	(In thousands, except percentages)
Americas	$	5,832		50.3%	$	6,625		57.5%	$	(793	)		(12.0%	)
EMEA		4,055		35.0%		3,392		29.4%		663			19.5%
Asia Pacific Japan		1,714		14.7%		1,507		13.1%		207			13.7%
	$	11,601		100.0%	$	11,524		100.0%	$	77			0.7%

IoT

Net revenue from our IoT product line for the three months ended March 31, 2018 increased compared to the three months ended March 31, 2017 due to increases in unit sales in a variety of our product families in different geographic regions including (i) Premierwave EN in our EMEA region, (ii) xPico in our Americas and EMEA regions and (iii) SGX, one of our newer products, in the Americas and EMEA regions. The overall increase was partially offset by decreases in unit sales of our Premierwave XN and EDS product families in the Americas region.

IT Management

Net revenue from our IT Management product line for the three months ended March 31, 2018 decreased compared to the three months ended March 31, 2017 primarily due to decreased unit sales of our SLC 8000 product family in the Americas region. Sales of this product family benefited in the prior year period due primarily to two large customer deployments which did not recur in the current quarter.

Other

Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, slightly increased year-over-year as we saw increased revenue from one of our legacy product families.

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 fiscal quarter gross profit:

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2018		Revenue		2017		Revenue		$		%
	(In thousands, except percentages)
Gross profit	$	6,584		56.8%	$	6,398		55.5%	$	186		2.9%

Gross profit as a percent of revenue (referred to as “gross margin”) for the three months ended March 31, 2018 improved compared to the three months ended March 31, 2017 due primarily to lower overhead costs.

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 fiscal quarter selling, general and administrative expenses:

	Three Months Ended March 31,
				% of Net				% of Net		Change
	2018			Revenue		2017		Revenue		$			%
	(In thousands, except percentages)
Personnel-related expenses	$	3,198				$	3,160			$	38			1.2%
Severance and related charges		(1	)				246				(247	)		100.0%
Professional fees and outside services		243					221				22			10.0%
Advertising and marketing		231					254				(23	)		(9.1%	)
Facilities and insurance		202					234				(32	)		(13.7%	)
Share-based compensation		237					169				68			40.2%
Depreciation		47					56				(9	)		(16.1%	)
Other		84					74				10			13.5%
Selling, general and administrative	$	4,241			36.6%	$	4,414		38.3%	$	(173	)		(3.9%	)

The decrease in selling, general and administrative expenses is primarily attributable to the severance and related charges recorded during the three months ended March 31, 2017, which were driven by a reorganization plan with respect to our European sales team.

The overall decrease in selling, general and administrative expenses is partially offset by an increase in share-based compensation expenses, primarily attributable to stock awards being granted with a higher estimated fair value, along with increased participation in our 2013 Employee Stock Purchase Plan, or our ESPP.

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 fiscal quarter research and development expenses:

	Three Months Ended March 31,
				% of Net				% of Net		Change
	2018			Revenue		2017		Revenue		$			%
	(In thousands, except percentages)
Personnel-related expenses	$	1,659				$	1,669			$	(10	)		(0.6%	)
Facilities		199					193				6			3.1%
Outside services		53					52				1			1.9%
Product certifications		43					96				(53	)		(55.2%	)
Share-based compensation		44					43				1			2.3%
Other		(34	)				73				(107	)		(146.6%	)
Research and development	$	1,964			16.9%	$	2,126		18.4%	$	(162	)		(7.6%	)

Research and development expenses decreased primarily due to (i) lower product certification costs and (ii) the reversal of certain previously estimated accrued charges, included in the “Other” line item in the table above, for which we have determined no remaining liability exists.

Results of Operations – Nine Months Ended March 31, 2018 Compared to the Nine Months Ended March 31, 2017

Summary

In the nine months ended March 31, 2018 our net revenue decreased by $143,000 or 0.4%, compared to the nine months ended March 31, 2017. The overall decrease in net revenue was primarily due to declines in our IT Management and Other product lines, but largely offset by growth in our IoT product line. We had a net loss of $72,000 for the nine months ended March 31, 2018 compared to a net loss of $225,000 for the nine months ended March 31, 2017. The decrease in our net loss was principally driven by a 3.2% increase in gross profit, partially offset by a 2.1% increase in operating expenses.

Net Revenue

The following tables present our fiscal year-to-date net revenue by product line and geographic region:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2018		Revenue		2017		Revenue		$			%
	(In thousands, except percentages)
IoT	$	25,729		76.7%	$	24,817		73.7%	$	912			3.7%
IT Management		6,971		20.8%		7,271		21.6%		(300	)		(4.1%	)
Other		843		2.5%		1,598		4.7%		(755	)		(47.2%	)
	$	33,543		100.0%	$	33,686		100.0%	$	(143	)		(0.4%	)

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2018		Revenue		2017		Revenue		$			%
	(In thousands, except percentages)
Americas	$	17,821		53.1%	$	19,244		57.1%	$	(1,423	)		(7.4%	)
EMEA		10,391		31.0%		9,615		28.5%		776			8.1%
Asia Pacific Japan		5,331		15.9%		4,827		14.4%		504			10.4%
	$	33,543		100.0%	$	33,686		100.0%	$	(143	)		(0.4%	)

IoT

Net revenue from our IoT product line for the nine months ended March 31, 2018 increased compared to the nine months ended March 31, 2017 due to growth in unit sales in a variety of our product families in different geographic regions including (i) XPort in the EMEA and APJ regions, (ii) XPort Pro in the Americas region and (iii) SGX, one of our newer products, in the Americas and EMEA regions. These increases were partially offset by decreased unit sales in our Premierwave XN, WiPort and EDS product families in the Americas region.

IT Management

Net revenue from our IT Management product line for the nine months ended March 31, 2018 decreased compared to the nine months ended March 31, 2017 primarily due to a decrease in unit sales of our SLC 8000 product family, largely in the Americas, and to a lesser extent, the EMEA region. This decrease was partially offset by growth in unit sales of our SLB product family driven by deployments of this product to two large customers in the Americas region.

Other

Net revenue from our Other products declined year-over-year due to (i) a decrease in net revenue from our xPrintServer, for which we experienced a large customer deployment in the prior year and (ii) the expected overall ongoing decline in other legacy products within this product line.

Gross Profit

The following table presents our fiscal year-to-date gross profit:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2018		Revenue		2017		Revenue		$		%
	(In thousands, except percentages)
Gross profit	$	18,492		55.1%	$	17,910		53.2%	$	582		3.2%

Gross margin for the nine months ended March 31, 2018 improved compared to the nine months ended March 31, 2017 primarily due to a combination of improved pricing, product mix and cost reductions.

Included in our cost of revenue for the nine months ended March 31, 2018 was $38,000 in severance and related charges.

Selling, General and Administrative

The following table presents our fiscal year-to-date selling, general and administrative expense:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2018		Revenue		2017		Revenue		$			%
	(In thousands, except percentages)
Personnel-related expenses	$	9,031			$	8,758			$	273			3.1%
Severance and related charges		154				246				(92	)		(37.4%	)
Professional fees and outside services		857				840				17			2.0%
Advertising and marketing		590				585				5			0.9%
Facilities and insurance		670				689				(19	)		(2.8%	)
Share-based compensation		688				480				208			43.3%
Depreciation		138				166				(28	)		(16.9%	)
Other		272				365				(93	)		(25.5%	)
Selling, general and administrative	$	12,400		37.0%	$	12,129		36.0%	$	271			2.2%

Selling, general and administrative expenses increased primarily due to (i) higher headcount-related expenses, as we have added personnel within our marketing and sales teams and (ii) higher share-based compensation expenses, primarily attributable to stock awards being granted with a higher estimated fair value, along with increased participation in our ESPP. Our “Other” expenses in the table above were down year over year primarily due to lower estimates for bad debt expense.

From July 2017 through September 2017, we realigned certain resources throughout our organization, primarily to optimize our operations and engineering efforts. These activities resulted in total net charges of approximately $506,000, which consisted primarily of severance costs, and to a lesser extent, termination costs related to our facility lease in Hong Kong. Of the total charges, approximately $154,000 was classified within selling, general and administrative expenses for the nine months ended March 31, 2018.

During the nine months ended March 31, 2017, we executed a plan to reorganize our European sales team, for which we incurred approximately $246,000 in severance costs, facility lease termination costs and other associated costs.

Research and Development

The following table presents our fiscal year-to-date research and development expenses:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2018		Revenue		2017		Revenue		$			%
	(In thousands, except percentages)
Personnel-related expenses	$	4,621			$	4,520			$	101			2.2%
Severance and related charges		314				–				314			100.0%
Facilities		595				597				(2	)		(0.3%	)
Outside services		150				281				(131	)		(46.6%	)
Product certifications		177				226				(49	)		(21.7%	)
Share-based compensation		149				129				20			15.5%
Other		53				191				(138	)		(72.3%	)
Research and development	$	6,059		18.1%	$	5,944		17.6%	$	115			1.9%

Research and development expenses increased primarily due to higher personnel-related expenses, driven by the severance and related charges discussed above. During the current year, we have also continued to add headcount to our internal engineering team in India, which has enabled us to reduce our spending on outside services for similar resources. During the current year period we benefited from the reversal of certain previously estimated accrued charges, included in the “Other” line item in the table above, for which we have determined no remaining liability exists.

Provision for Income Taxes

Refer to Note 6 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

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

	March 31, 2018		June 30, 2017		Change
	(In thousands)
Working capital	$	11,579	$	10,391	$	1,188
Cash and cash equivalents	$	8,955	$	8,073	$	882

Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings available under our loan agreement, 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 and working capital requirements.

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 investment policy primarily emphasizes safety of principal and secondarily emphasizes maximizing yield.

Our future working capital requirements will depend on many factors, including the timing and amount of our net revenue, any future restructuring or cost-cutting measures that we may implement from time to time, research and development expenses, expenses associated with any strategic partnerships or acquisitions, infrastructure investments and fundraising activities.

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 an effective 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.

Bank Line of Credit

Refer to Note 4 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 agreement.

Cash Flows

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

	Nine Months Ended March 31,
	2018			2017			Change
	(In thousands)
Net cash provided by operating activities	$	725		$	1,464		$	(739	)
Net cash used in investing activities		(171	)		(144	)		(27	)
Net cash provided by financing activities		328			107			221

Operating Activities

Net cash provided by operating activities during the nine months ended March 31, 2018 decreased compared to the prior year period largely due to the impacts of changes in certain operating assets and liabilities as further described directly below.

Accounts payable increased approximately $1.5 million or 53.6%, as compared to June 30, 2017 primarily due to the timing of our payments to vendors, along with a 6.0% increase in inventories at March 31, 2018 compared to June 30, 2017. The impact of the increase in our accounts payable balance on operating cash flows was partially offset by (i) a decrease in accrued payroll and related expenses of approximately $959,000, or 31.1%, as compared to June 30, 2017 resulting from payments of accrued variable compensation made during the current year period which exceeded amounts paid during the nine months ended March 31, 2017 and (ii) increases in accounts receivable and contract manufacturers’ receivable of approximately $402,000, or 11.7%, and $245,000, or 51.5%, respectively, as compared to June 30, 2017 primarily due to the timing of our sales and collections.

Investing Activities

Net cash used in investing activities was related to capital expenditures 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-month periods ended March 31, 2018 and 2017 resulted primarily from cash we received from the issuance of common stock to employees for (i) stock option exercises and (ii) ESPP purchases. This was partially offset by payments for (i) withholding taxes related to the vesting of restricted stock units and (ii) capital leases.

Off-Balance Sheet Arrangements

As of March 31, 2018, 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, 2018 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, 2018 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 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.

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

See the “Exhibit Index” immediately following the signature page of this Report, which is incorporated herein by reference.

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: April 27, 2018	By:	/s/ JEFFREY BENCK
		Jeffrey Benck
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: April 27, 2018	By:	/s/ JEREMY WHITAKER
		Jeremy Whitaker Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX

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

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

_________________

*	Furnished, not filed.