LANTRONIX INC

Previous wording

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 December 31, 2024 (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.

Current wording

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, 2025 (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 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.

Previous wording

Lantronix, Inc. is a global leader of compute and connectivity solutions, targeting high-growth markets such as Smart Cities, Automotive, and Enterprise markets. Our products and services empower companies to succeed in the growing internet of things (“IoT”) market by delivering customizable solutions that enable artificial intelligence (“AI”) edge intelligence.

Current wording

Lantronix, Inc. is a global leader of compute and connectivity solutions, targeting high-growth markets such as Smart Cities, Automotive, and Enterprise markets. Our products and services empower companies to succeed in the growing internet of things (“IoT”) market by delivering customizable solutions that enable AI Edge Intelligence.

Previous wording

Our portfolio of embedded products provides a comprehensive range of options, including Compute System-on-Module (“SOM”) and System-in-Package (“SIP”) solutions, complemented by wired and wireless network connectivity products. As the level of silicon integration continues to advance, our compute modules offer the capability to collect, analyze, and interpret digital information (e.g., Video, Audio or Sensor data) using specialized artificial intelligence (“AI”)/machine learning algorithms.

Current wording

Our portfolio of embedded products provides a comprehensive range of options, including Compute System-on-Module (“SOM”) and System-in-Package (“SIP”) solutions, complemented by wired and wireless network connectivity products. As the level of silicon integration continues to advance, our compute modules offer the capability to collect, analyze, and interpret digital information (e.g., Video, Audio or Sensor data) using specialized AI/machine learning algorithms.

Previous wording

On December 23, 2024, we finalized the acquisition of Netcomm Wireless Pty Ltd (“Netcomm”), a subsidiary of DZS Inc., for all of its enterprise IoT business assets for $6,458,000 in cash. The acquisition complements our focus on Enterprise and Smart City vertical markets and adds products to enhance our connectivity solutions in areas such as critical infrastructure, asset monitoring and telecommunications.

Current wording

On December 23, 2024, we finalized the acquisition of Netcomm Wireless Pty Ltd (“Netcomm”), a subsidiary of DZS Inc., for $6,458,000 in cash. Netcomm operates an enterprise IoT business. The acquisition complements our focus on Enterprise and Smart City vertical markets and adds products to enhance our connectivity solutions in areas such as critical infrastructure, asset monitoring and telecommunications.

Previous wording

Refer toNote 3 of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, which are incorporated herein by reference, for additional discussions regarding the acquisition.

Current wording

Refer toNote 3 of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, which is incorporated herein by reference, for additional discussion regarding the acquisition.

Previous wording

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, sales returns and allowances, inventory valuation, restructuring charges, valuation of deferred income taxes, business combinations, valuation of goodwill and long-lived and intangible assets, and stock-based compensation. These policies are described in further detail in our Annual Report on Form 10-K for the year ended June 30, 2024 and filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2024 (the “Form 10-K”) and have not changed significantly during the six months ended December 31, 2024 as compared to what was previously disclosed in the Form 10-K.

Current wording

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, sales returns and allowances, inventory valuation, restructuring charges, valuation of deferred income taxes, business combinations, valuation of goodwill and long-lived and intangible assets, and stock-based compensation. These policies are described in further detail in our Annual Report on Form 10-K for the year ended June 30, 2024 and filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2024 (the “Form 10-K”) and have not changed significantly during the nine months ended March 31, 2025 as compared to what was previously disclosed in the Form 10-K.

Previous wording

In the three months ended December 31, 2024, our net revenue decreased by $5,877,000 or 15.9%, compared to the three months ended December 31, 2023. The decrease in net revenue was driven by a 19.2% decrease in net revenue in our IoT System Solutions product line, as well as decreases in net revenue in our Embedded IoT Solutions product line of 8.3% and our Software and Services product line of 20.7%. We had a net loss of $2,372,000 for the three months ended December 31, 2024 compared to a net loss of $2,593,000 for the three months ended December 31, 2023. The decrease in net loss was primarily the result of a decrease in operating expenses of $1,345,000 offset by a decrease in gross margin of $1,747,000.

Current wording

In the three months ended March 31, 2025, our net revenue decreased by $12,683,000 or 30.8%, compared to the three months ended March 31, 2024. The decrease in net revenue was driven by a 45.0% decrease in net revenue in our IoT System Solutions product line, as well as decreases in net revenue in our Embedded IoT Solutions product line of 3.7% and our Software and Services product line of 8.3%. We had a net loss of $3,868,000 for the three months ended March 31, 2025 compared to a net loss of $423,000 for the three months ended March 31, 2024. The increase in net loss was primarily driven by the decrease in revenues partially offset by a reduction in operating expenses of $617,000 for the three months ended March 31, 2025 compared to the three months ended March 31, 2024.*** ***

Previous wording

Net revenue decreased primarily due to lower unit sales of (i) certain legacy products in our embedded ethernet connectivity product family in the Americas and APJ regions and (ii) our wireless communications products in the Americas and APJ regions. These decreases were partially offset by higher unit sales of our network interface cards in the Americas and EMEA regions and higher unit sales of our embedded compute products in the Americas and APJ regions.

Current wording

Net revenue decreased primarily due to (i) lower unit sales of certain legacy products in our embedded ethernet connectivity product family in the EMEA and APJ regions, (ii) decreased unit sales of our network interface cards in the Americas region, and (iii) decreased unit sales of our embedded GPS receivers product family in the EMEA and APJ regions. These decreases were partially offset by (i) higher unit sales of our embedded compute products across all regions, and (ii) higher unit sales of our wireless communications products in the APJ region.

Previous wording

Net revenue decreased primarily due to (i) decreased unit sales of our network switches and OOB products across all regions and (ii) decreased unit sales of our converters and device servers in the Americas region.

Current wording

The decrease in net revenue was substantially driven by our custom solution to our European smart energy grid customer. In the three months ended March 31, 2024, we saw net revenue from this product of just under $12,000,000. In the three months ended March 31, 2025, there was no corresponding revenue as this customer is currently working through their deployments. In addition, compared to the prior year period, we experienced (i) decreased unit sales of our network switches in the Americas and EMEA regions, and (ii) decreased unit sales of our OOB products across all regions, as revenues from these products can be dependent on project-based capital spending. These decreases were partially offset by higher unit sales of (i) our gateways, routers, and modems products across all regions, which was largely driven by contributions from our Netcomm acquisition, and (ii) our converters and device servers in the Americas and EMEA regions.

Previous wording

Net revenue decreased primarily due to a decrease in our engineering services revenue in the Americas and EMEA regions as well as lower revenues from our extended warranty services in the Americas region.

Current wording

Net revenue decreased primarily due to a decrease in some of our extended warranty services in the Americas region, primarily related to our OOB products.

Previous wording

Gross profit as a percent of revenue (referred to as “gross margin”) increased due to our product sales mix in the current quarter, along with slightly lower freight and overhead costs.

Current wording

Gross profit as a percentage of revenue (referred to as “gross margin”) increased primarily as a result of lower overhead costs and our product sales mix.

Previous wording

In the six months ended December 31, 2024, our net revenue decreased by $4,485,000 or 6.4%, compared to the six months ended December 31, 2023. The decrease in net revenue was driven by an 11.2% decrease in net revenue in our IoT System Solutions product line as well as a 16.7% decrease in our Software and Services production line. These decreases were partially offset by a 4.5% increase in net revenue in our Embedded IoT Solutions product line. We had a net loss of $4,874,000 for the six months ended December 31, 2024 compared to a net loss of $4,479,000 for the six months ended December 31, 2023. The increase in net loss was primarily driven by the decrease in revenues partially offset by a reduction in operating expenses of $413,000 for the six months ended December 31, 2024 compared to the six months ended December 31, 2023, mostly due to lower selling, general and administrative costs in the current year period.

Current wording

In the nine months ended March 31, 2025, our net revenue decreased by $17,168,000 or 15.4%, compared to the nine months ended March 31, 2024. The decrease in net revenue was driven by a 24.4% decrease in net revenue in our IoT System Solutions product line as well as a 14.3% decrease in our Software and Services production line. These decreases were partially offset by a 1.6% increase in net revenue in our Embedded IoT Solutions product line. We had a net loss of $8,742,000 for the nine months ended March 31, 2025, compared to a net loss of $4,902,000 for the nine months ended March 31, 2024. The increase in net loss was primarily driven by the decrease in revenues partially offset by a reduction in operating expenses of $1,030,000 for the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024.

Previous wording

Net revenue increased primarily due to higher unit sales of our embedded compute product line driven by a video conferencing customer in the APJ region. This was partially offset by lower unit sales in some of our legacy embedded ethernet connectivity products across all regions and (ii) in our wireless communications products in the Americas region.

Current wording

Net revenue increased slightly due to higher unit sales of our embedded compute product line driven by a video conferencing customer in the APJ region. This growth was partially offset by lower unit sales in some of our legacy embedded ethernet connectivity products across all regions and lower volume sales of our network interface cards in the Americas and APJ regions.

Previous wording

Net revenue decreased primarily due to (i) decreased unit sales of our OOB products primarily in the Americas and (ii) decreased unit sales of our network switches in all regions. These reductions were partially offset by current year growth in unit sales of our custom solutions to a European smart energy grid provider that we ramped production for in the second half of the prior fiscal year.

Current wording

Net revenue decreased primarily due to (i) decreased unit sales of our custom solution to our European smart energy grid provider in the EMEA region and (ii) decreased unit sales of our OOB products and our network switches across all regions. These decreases were partially offset by moderate growth in (i) our gateways, routers, and modems which was largely driven by contributions from our Netcomm acquisition and (ii) our telematic gateways.

Previous wording

Net revenue decreased primarily due to lower engineering services revenue in the EMEA region as two of our large design services projects transitioned in the prior year from the design phase to full production.

Current wording

Net revenue decreased primarily due to lower engineering services revenue in the EMEA region as two of our large design services projects transitioned in the prior year from the design phase to full production. We also saw a moderate decrease in our extended warranty services in the Americas region, primarily related to lower volumes in our OOB products.

Previous wording

Selling, general and administrative expenses decreased primarily due to (i) lower sales conference and facilities-related costs and (ii) reduced share-based compensation costs based on the value of new and outstanding awards.

Current wording

Selling, general and administrative expenses decreased primarily due to (i) lower spending on various sales conferences, IT infrastructure and related facilities costs, and (ii) reduced share-based compensation costs based on the value of new and outstanding awards. This was partially offset by higher legal expenses included in “professional fees and outside services” above.

Previous wording

Research and development expenses increased primarily due to (i) slightly higher facilities-related equipment and software costs and (ii) certain prototype and materials costs, which are included in the “Other” category in the table above.

Current wording

Research and development expenses decreased primarily due to (i) lower personnel-related expenses in our engineering groups resulting from restructuring activities during the current fiscal year, (ii) reduced share-based compensation costs based on the value of new and outstanding awards, and (iii) lower product certification expenses based on the timing of various development projects. These decreases were partially offset by (i) higher facilities-related equipment and software costs, (ii) increased costs for third party contract labor, which are included in the “outside services” category in the table above, and (iii) increased spending on certain prototype and materials costs, which are included in the “other” category in the table above.

Previous wording

During the three and six months ended December 31, 2024, we incurred charges of $193,000 and $1,093,000, respectively, related to headcount reductions. During the three and six months ended December 31, 2023, we incurred $530,000 and $550,000, respectively, of restructuring, severance and related charges.

Current wording

During the three and nine months ended March 31, 2025, we incurred charges of $1,581,000 and $2,674,000, respectively, mostly related to headcount reductions. During the three and nine months ended March 31, 2024, we incurred $350,000 and $900,000, respectively, of restructuring, severance and related charges.

Previous wording

During the three months ended December 31, 2024, we incurred approximately $208,000 of costs primarily in connection with the acquisition of Netcomm. These costs were mainly comprised of banking, legal and other professional fees.

Current wording

During the three and nine months ended March 31, 2025, we incurred approximately $100,000 and $337,000 of costs primarily in connection with the acquisition of Netcomm. These costs were mainly comprised of banking, legal and other professional fees.

Previous wording

For the three and six months ended December 31, 2024 and December 31, 2023, we incurred net interest expense due to borrowings on our credit facilities. We also earn interest income on our domestic cash balance.

Current wording

For the three and nine months ended March 31, 2025 and March 31, 2024, we incurred net interest expense related to borrowings on our credit facilities. We also earn interest income on our domestic cash balance.

Previous wording

Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts available under our existing term loan and revolving credit facility (together, the “Senior Credit Facilities”), and cash generated from operations. We are subject to a variable amount of interest on the principal balance of our Senior Credit Facilities and could be adversely impacted by rising interest rates in the future. We believe that our current cash holdings and net cash flows from operations are sufficient to satisfy our current obligations for the foreseeable future, and, assuming continued access to the undrawn amounts available under our Senior Credit Facilities, these combined sources will be sufficient to fund our material requirements for working capital, capital expenditures and other financial commitments for at least the next 12 months and beyond. We continue to monitor our existing banking relationships and the availability of potential alternate sources of credit based on market conditions and our ongoing capital requirements. There can be no guarantee that we would be able to obtain any needed alternate financing on acceptable terms, or at all, or that such a financing would not result in a default under the Loan Agreement (as defined inNote 6 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report). We anticipate that the primary factors affecting our cash and liquidity are net revenue, working capital requirements and capital expenditures.

Current wording

Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts available under our existing term loan and revolving credit facility (together, the “Senior Credit Facilities”), and cash generated from operations. We are subject to a variable amount of interest on the principal balance of our Senior Credit Facilities and could be adversely impacted by rising interest rates in the future. We believe that our current cash holdings and net cash flows from operations are sufficient to satisfy our current obligations for the foreseeable future, and, assuming continued access to the undrawn amounts available under our Senior Credit Facilities, these combined sources will be sufficient to fund our material requirements for working capital, capital expenditures and other financial commitments for at least the next 12 months and beyond.

Previous wording

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. 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.

Current wording

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 will 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.

Previous wording

Refer toNote 6of 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.

Current wording

Refer toNote 6of 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.

Previous wording

Cash provided by operating activities during the six months ended December 31, 2024 decreased compared to the prior year period. Cash from operations was positively impacted in the prior year period due to our reduction of inventories and receipt of deposits relating to deliveries to our European smart grid provider customer. In the current year period, inventories increased slightly, and we also made payments against previously accrued variable compensation balances, as discussed further below. For the six months ended December 31, 2024, our net loss included $6,749,000 of non-cash charges, while the changes in operating assets and liabilities provided net cash of $1,128,000.

Current wording

Cash provided by operating activities during the nine months ended March 31, 2025 decreased compared to the prior year period. Cash from operations was positively impacted in the prior year period due to (i) reduction of our inventories and higher net revenues and (ii) the receipt of deposits relating to deliveries to our European smart grid provider customer. In the current year period, inventories increased slightly, and we also made payments against previously accrued variable compensation balances, as discussed further below. For the nine months ended March 31, 2025, our net loss included $9,705,000 of non-cash charges, while the changes in operating assets and liabilities provided net cash of $5,270,000.

Previous wording

Accounts receivable decreased by $807,000, or 2.6% from June 30, 2024 to December 31, 2024. The decrease was primarily due to the higher volume of shipments that took place during the fourth quarter of our fiscal 2024 as well as the timing of payments from certain customers in the current year period. The reduction was partially offset by $904,000 of accounts receivable acquired in the Netcomm acquisition.

Current wording

Accounts receivable decreased by $7,631,000, or 24.4% from June 30, 2024 to March 31, 2025. The decrease was primarily due to lower net revenue levels in the current fiscal year, as well as the timing of payments from certain customers.

Previous wording

Inventories, net increased by $1,372,000, or 5.0% from June 30, 2024 to December 31, 2024. The increase was primarily the result of $972,000 of net inventories acquired in the Netcomm acquisition.

Current wording

Inventories, net increased by $453,000, or 1.6% from June 30, 2024 to March 31, 2025. The increase was primarily the result of $797,000 of net inventories acquired in the Netcomm acquisition.

Previous wording

Accounts payable increased by $5,628,000, or 54.4%, from June 30, 2024 to December 31, 2024 primarily due to the timing of inventory receipts and payments made to our vendors.

Current wording

Accounts payable increased by $658,000, or 6.4%, from June 30, 2024 to March 31, 2025 primarily due to the timing of inventory receipts and payments made to our vendors.

Previous wording

Accrued payroll and related expenses decreased by $2,868,000 or 49.1% from June 30, 2024 to December 31, 2024. The decrease is primarily due to accrued variable compensation paid out during the current year period.

Current wording

Accrued payroll and related expenses decreased by $1,931,000 or 33.1% from June 30, 2024 to March 31, 2025. The decrease was primarily due to accrued variable compensation paid out during the current year period.

Previous wording

Net cash used in investing activities for the six months ended December 31, 2024 includes the acquisition of Netcomm, which used cash of $6,458,000. We also purchased equipment totaling $241,000, primarily for tooling at our contract manufacturers and certain research and development projects. Cash used during the six months ended December 31, 2023 consisted of purchases of plant and equipment of $1,189,000 primarily for research and development and certain business analysis tools.

Current wording

Net cash used in investing activities for the nine months ended March 31, 2025 includes the acquisition of Netcomm, which used cash of $6,458,000. We also paid for property and equipment totaling $362,000, primarily for tooling at our contract manufacturers as well as certain research and development projects. Cash used during the nine months ended March 31, 2024 consisted of purchases of property and equipment of $1,325,000 primarily for research and development and certain business analysis tools.

Previous wording

Net cash used in financing activities during the six months ended December 31, 2024 and the six months ended December 31, 2023 resulted primarily from tax withholdings paid on behalf of employees for restricted shares as well as principal payments on the Senior Credit Facilities. During the six months ended December 31, 2023 we also used cash to pay the contingent consideration related to the acquisition of Uplogix.

Current wording

Net cash used in financing activities during the nine months ended March 31, 2025 and the nine months ended March 31, 2024 resulted primarily from principal payments on the Senior Credit Facilities, as well as tax withholdings paid on behalf of employees for restricted shares. During the nine months ended March 31, 2024 we also used cash to pay the contingent consideration related to the acquisition of Uplogix, Inc.