10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2014

OR

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.)

167 Technology Drive, 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

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 January 23, 2015, there were 14,942,205 shares of the Registrant’s common stock outstanding.

LANTRONIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

December 31, 2014

INDEX

		Page
PART I.	FINANCIAL INFORMATION	4
Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets at December 31, 2014 and June 30, 2014	4
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2014 and 2013	5
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2014 and 2013	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION	20
Item 1.	Legal Proceedings	20
Item 1A	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	20

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014, or the Report, contains forward-looking statements within the meaning of the federal securities laws. 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. These statements include, among other things, any predictions of earnings, revenues, expenses or other financial items; plans or expectations with respect to our development activities or business strategy; statements concerning industry trends; statements regarding anticipated demand for our products, or the products of our competitors, statements relating to manufacturing forecasts, and the potential impact of our relationship with contract manufacturers and original equipment manufacturers on our business; assumptions regarding the future cost and potential benefits of our research and development efforts; forecasts of our liquidity position or available cash resources ; statements relating to the impact of pending litigation; and statements relating to the assumptions underlying any of the foregoing. 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 our 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” in Item 1A of this Report, our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on August 22, 2014, or the Form 10-K, as well as in our other 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. For these reasons, investors are cautioned not to place undue reliance on any forward-looking statements.

You should read this Report in its entirety, together with the Form 10-K, 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.

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31,			June 30,
	2014			2014
Assets
Current assets:
Cash and cash equivalents	$	5,407		$	6,264
Accounts receivable, net		2,634			3,631
Contract manufacturers' receivable		393			359
Inventories, net		9,296			8,404
Prepaid expenses and other current assets		595			524
Total current assets		18,325			19,182
Property and equipment, net		1,432			1,487
Goodwill		9,488			9,488
Deferred tax assets		400			400
Other assets		99			125
Total assets	$	29,744		$	30,682
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	4,265		$	4,547
Accrued payroll and related expenses		1,694			1,863
Warranty reserve		111			150
Deferred tax liabilities		400			400
Other current liabilities		3,302			3,418
Total current liabilities		9,772			10,378
Long-term capital lease obligations		–			7
Other non-current liabilities		75			131
Total liabilities		9,847			10,516
Commitments and contingencies
Stockholders' equity:
Common stock		1			1
Additional paid-in capital		205,638			205,013
Accumulated deficit		(186,113	)		(185,219	)
Accumulated other comprehensive income		371			371
Total stockholders' equity		19,897			20,166
Total liabilities and stockholders' equity	$	29,744		$	30,682

See accompanying notes.

4

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2014			2013			2014			2013
Net revenue (1)	$	10,735		$	10,968		$	22,271		$	21,851
Cost of revenue		5,565			5,531			11,502			11,024
Gross profit		5,170			5,437			10,769			10,827
Operating expenses:
Selling, general and administrative		3,992			4,062			8,067			8,010
Research and development		1,782			1,643			3,526			3,324
Total operating expenses		5,774			5,705			11,593			11,334
Loss from operations		(604	)		(268	)		(824	)		(507	)
Interest expense, net		(3	)		(7	)		(8	)		(16	)
Other income (expense), net		1			(22	)		(20	)		(28	)
Loss before income taxes		(606	)		(297	)		(852	)		(551	)
Provision for income taxes		26			26			42			39
Net loss and comprehensive loss	$	(632	)	$	(323	)	$	(894	)	$	(590	)
Net loss per share (basic and diluted)	$	(0.04	)	$	(0.02	)	$	(0.06	)	$	(0.04	)
Weighted-average common shares (basic and diluted)		14,874			14,621			14,831			14,600
Net revenue from related parties	$	112		$	180		$	191		$	373

(1)  Includes net revenue from related parties

See accompanying notes.

5

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six Months Ended
	December 31,
	2014			2013
Operating activities
Net loss	$	(894	)	$	(590	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Share-based compensation		520			453
Depreciation		463			465
Provision for excess and obsolete inventories		52			159
Changes in operating assets and liabilities:
Accounts receivable		997			(150	)
Contract manufacturers' receivable		(34	)		183
Inventories		(944	)		447
Prepaid expenses and other current assets		(72	)		(114	)
Other assets		20			(12	)
Accounts payable		(319	)		900
Accrued payroll and related expenses		(169	)		189
Warranty reserve		(39	)		(17	)
Other liabilities		(155	)		(692	)
Net cash provided by (used in) operating activities		(574	)		1,221
Investing activities
Purchases of property and equipment		(363	)		(277	)
Net cash used in investing activities		(363	)		(277	)
Financing activities
Payment of term loan		–			(167	)
Net proceeds from issuances of common stock		158			101
Minimum tax withholding paid on behalf of employees for restricted shares		(53	)		–
Payment of capital lease obligations		(25	)		(23	)
Net cash provided by (used in) financing activities		80			(89	)
Increase (decrease) in cash and cash equivalents		(857	)		855
Cash and cash equivalents at beginning of period		6,264			5,243
Cash and cash equivalents at end of period	$	5,407		$	6,098

See accompanying notes. 

6

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

December 31, 2014

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Lantronix, Inc. (referred to in these unaudited condensed consolidated financial statements as “Lantronix,” “we,” “us,” or “our”) 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, 2014, included in our Annual Report on Form 10-K filed with the SEC on August 22, 2014. 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 December 31, 2014, the consolidated results of our operations for the three and six months ended December 31, 2014 and our consolidated cash flows for the six months ended December 31, 2014. All intercompany accounts and transactions have been eliminated. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended December 31, 2014 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

Recent Accounting Pronouncements 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which will supersede existing revenue recognition guidance under current U.S. GAAP. The new standard is a comprehensive new 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 current guidance. The accounting standard will be effective for Lantronix in the fiscal year beginning July 1, 2017. The standard may be adopted using a full retrospective or a modified retrospective (cumulative effect) method. Early adoption is not permitted. We are currently evaluating this standard and have not yet selected a transition method nor have we determined the effect of the standard on our financial statements and related disclosures.

In August 2014, the FASB issued a new standard that will require management of an entity to assess, for each annual and interim period, if there is substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statement issuance date. The definition of substantial doubt within the new standard incorporates a likelihood threshold of “probable” similar to the use of that term under current U.S. GAAP for loss contingencies. Certain disclosures will be required if conditions give rise to substantial doubt. The standard will be effective for Lantronix in the fiscal year beginning July 1, 2016. Early adoption is permitted. We are currently evaluating the impact of this standard on our financial statements and related disclosures.

2. Supplemental Financial Information

Inventories

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

	December 31,		June 30,
	2014		2014
	(In thousands)
Finished goods	$	6,081	$	5,162
Raw materials		1,768		1,890
Finished goods held by distributors		1,362		1,242
Large scale integration chips *		85		110
Inventories, net	$	9,296	$	8,404

* This item is sold individually and embedded into our products.      

7

Other Liabilities

The following table presents details of our other liabilities:

	December 31,		June 30,
	2014		2014
	(In thousands)
Current
Customer deposits and refunds	$	667	$	711
Accrued raw materials purchases		1,013		1,138
Deferred revenue		195		128
Capital lease obligations		29		47
Taxes payable		234		235
Accrued operating expenses		1,164		1,159
Total other current liabilities	$	3,302	$	3,418
Non-current
Deferred revenue	$	75	$	91
Deferred rent		–		40
Total other non-current liabilities	$	75	$	131

Computation of Net Loss per Share

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

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

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2014			2013			2014			2013
	(In thousands, except per share data)
Numerator:
Net loss	$	(632	)	$	(323	)	$	(894	)	$	(590	)
Denominator:
Weighted-average common shares outstanding (basic and diluted)		14,874			14,621			14,831			14,600
Net loss per share (basic and diluted)	$	(0.04	)	$	(0.02	)	$	(0.06	)	$	(0.04	)

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				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	(In thousands)
Common stock equivalents		1,672		2,625		1,632		2,482

Supplemental Cash Flow Information

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

	Six Months Ended
	December 31,
	2014		2013
	(In thousands)
Accrued property and equipment paid for in the subsequent period	$	38	$	–

8

3. Warranty Reserve

The warranty periods for our products generally 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 additionally, for any known product warranty issues. Although we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials or service delivery costs that differ from our estimates. As a result, increases or decreases to warranty reserves could be required, which could impact our gross margins.

The following table presents details of our warranty reserve:

	Six Months Ended			Year Ended
	December 31,			June 30,
	2014			2014
	(In thousands)
Beginning balance	$	150		$	193
Charged to cost of revenues		–			40
Usage		(39	)		(83	)
Ending balance	$	111		$	150

4. Bank Line of Credit

On September 30, 2014, we entered into an amendment (the “Amendment”) to our existing Loan and Security Agreement dated May 23, 2006 (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Amendment provides, among other things, for (i) a renewal of our $4.0 million revolving line of credit with an extended maturity date of September 30, 2016 and (ii) a modification of the revolving credit line borrowing base formula in the Loan Agreement to include a portion of our foreign accounts receivable to the borrowing base and increase the borrowing limit related to domestic accounts receivable.

The Loan Agreement provides for an interest rate per annum equal to the greater of the prime rate plus 0.75% or 4.0%, 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 to extinguish or retire our current liabilities immediately. If this ratio is not met, the interest rate will become the greater of the prime rate plus 1.25% or 4.0%. We maintained a monthly quick ratio greater than 1.0 to 1.0 as of and during the three months ended December 31, 2014.

The Loan Agreement includes a covenant requiring us to maintain a certain Minimum Tangible Net Worth (“Minimum TNW”), which is currently required to be at least $6.0 million. This amount 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. If we continue to incur net losses, we may have difficulty satisfying the Minimum TNW financial covenant in the future, in which case we may be unable to borrow funds under the Loan Agreement and any amounts outstanding may need to be repaid immediately.

As of December 31, 2014, there were no borrowings outstanding on the revolving line of credit.

The following table sets forth the Minimum TNW compared to our Actual TNW:

	December 31,
	2014
	(In thousands)
Minimum TNW	$	6,000
Actual TNW	$	10,409

The following table presents the available borrowing capacity on the revolving line of credit and outstanding letters of credit, which were used as security deposits. To date, we have not used any of the borrowing capacity under the revolving line of credit.

	December 31,		June 30,
	2014		2014
	(In thousands)
Available borrowing capacity	$	2,637	$	1,721
Outstanding letters of credit	$	113	$	113

9

5. Stockholders’ Equity

Share-Based Plans  

Our share-based 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 December 31, 2014, no stock appreciation rights, non-vested stock, or performance shares were outstanding.

Stock Option Awards

The following table presents a summary of stock option activity under all of our stock option plans during the six months ended December 31, 2014:

				Weighted
				Average
	Number of			Exercise Price
	Shares			per Share
	(In thousands)
Balance of options outstanding at June 30, 2014		2,719		$	2.35
Granted		919			1.87
Forfeited		(20	)		1.87
Expired		(59	)		3.56
Exercised		(25	)		1.40
Balance of options outstanding at December 31, 2014		3,534		$	2.21

Restricted Stock Units 

The following table presents a summary of activity with respect to RSUs during the six months ended December 31, 2014:

				Weighted
				Average
				Grant - Date
	Number of			Fair Value
	Shares			per Share
	(In thousands)
Balance of restricted stock units at June 30, 2014		61		$	1.40
Granted		28			1.98
Forfeited		–			–
Vested		(61	)		1.40
Balance of restricted stock units at December 31, 2014		28		$	1.98

Employee Stock Purchase Plan

Our 2013 Employee Stock Purchase Plan (the “ESPP”) is intended to provide employees with an opportunity to purchase our common stock through accumulated payroll deductions. Each of our employees (including officers) is eligible to participate in the ESPP, subject to certain limitations as defined in the ESPP plan document.

The following table presents a summary of activity under our ESPP during the six months ended December 31, 2014:

	Number of
	Shares
	(In thousands)
Shares available for issuance at June 30, 2014		1,126
Reserved for issuance		–
Issued		(97	)
Shares available for issuance at December 31, 2014		1,029

10

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				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	(In thousands)
Cost of revenues	$	16	$	11	$	36	$	24
Selling, general and administrative		195		159		369		317
Research and development		54		52		115		112
Total share-based compensation expense	$	265	$	222	$	520	$	453

The following table summarizes the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of December 31, 2014:

	Remaining		Remaining
	Unrecognized		Weighted
	Compensation		Average Years
	Cost		To Recognize
	(In thousands)
Stock options	$	1,611		2.8
Restricted stock units		31		0.6
Stock purchase rights under ESPP		121		0.9

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 the income tax provision for the periods shown:

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
Effective tax rate		4%		9%		5%		7%

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 that we believe these assets will more likely than not be realized. As a result of 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 December 31, 2014 and June 30, 2014.

7. Litigation and Contingencies

From time to time, we are subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such legal proceedings or claims that are expected to have, individually or in the aggregate, a material adverse effect on our business, prospects, financial position, operating results or cash flows.

8. Facility Lease

On January 16, 2015, we entered into a building lease agreement (the “Lease”) with the Irvine Company, LLC (the “Landlord”). Pursuant to the Lease, we will lease approximately 27,000 square feet of office space for our corporate headquarters in Irvine, California. The Lease shall commence on the date which is the earlier to occur of: (a) the date we take possession of the premises following the completion of certain tenant improvements to the premises, but not earlier than March 1, 2015, or (b) the date we commence our regular business activities on the premises.

11

The Landlord is obligated to provide a tenant improvement allowance of up to $242,600 for tenant improvements, as defined by the Lease. The term of the Lease will be 65 months from the commencement date. The aggregate basic rent payable under the Lease during the 65-month term is currently expected to be paid as follows:

Fiscal year ending June 30,
(In thousands)
2015	$	147
2016		449
2017		469
2018		491
2019		511
Thereafter		581
	$	2,648

Our existing lease with the Landlord shall terminate effective as of the day preceding the commencement date of the Lease, with no early termination fee.

12

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

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included in Item 1 of this Report, the “Risk Factors” included in Item 1A of this Report and in our Annual Report on Form 10-K for the year ended June 30, 2014, or the Form 10-K, as well as the Cautionary Note Regarding Forward Looking Statements described elsewhere in this Report, before deciding to purchase, hold or sell our common stock. 

Overview

Lantronix, Inc. (the “Company,” “Lantronix,” “we,” “our,” or “us”) designs, develops, markets and sells networking and communications products to make it easier and more cost effective for our customers to participate in the Internet of Things (“IoT”) market. We provide solutions and services that enable machines, devices and sensors to be securely accessed, managed and controlled with a focus on the convergence of mobility with machine-to-machine (“M2M”) systems.

We provide a broad portfolio of products intended to enhance the value of electronic devices or machines. Our products are typically used by enterprise and commercial businesses, government institutions, telecommunication and utility companies, financial institutions, and individual consumers.

We organize our solutions into two product lines based on how they are marketed, sold and deployed: OEM Modules and Enterprise Solutions. We conduct our business globally and manage our sales teams by geography, according to four regions: the Americas; Europe, Middle East, and Africa (“EMEA”); Asia Pacific; and Japan.

Products and Solutions Overview

OEM Modules

OEM Modules are electronic products that serve as building blocks embedded inside modern electronic systems and equipment. Our OEM Modules product line includes wired and wireless products that are designed to enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, application hosting, protocol conversion and other functions.

The products are offered with a software suite intended to decrease our customer’s time-to-market and increase their value add. Among others, the following product families are included in our OEM Module product line: MatchPort^®, PremiereWave^® EN, WiPort^®, xPico^®, xPico^® Wi-Fi, and xPort^®.

OEM Modules are typically sold to OEMs, original design manufacturers (“ODMs”), contract manufacturers and distributors. OEMs design and sell products under their own brand that are either manufactured by the OEM in-house or by third-party contract manufacturers. ODMs design and manufacture products for third parties, which then sell those products under their own brand. The design cycles using our OEM modules typically range from 12 to 24 months and can generate revenue for the entire life-cycle of an end-user’s product.

Enterprise Solutions

Our Enterprise Solutions are electronic products that are typically connected to one or more existing pieces of electronic equipment to provide additional connectivity or functionality. Our Enterprise Solutions are designed to enhance the value and utility of machines and other devices through network connectivity, routing, switching, application hosting, remote management, telemetry, telematics, printing, protocol conversion and other functions. Our Enterprise Solutions include products such as wired and wireless device servers, I/O servers, terminal servers, console servers, print servers, remote keyboard video mouse (KVM), management, power management and software management platforms. Among others, the following product families are included in our Enterprise Solutions product line: EDS, PremierWave^® XC, PremierWave^® XN, SLB^™, SLC^™, SLP^™, Spider^™, UDS, xDirect^®, xPress^™, xPrintServer^®, and xSenso^®.

Enterprise Solutions are typically sold through value added resellers (“VARs”), systems integrators, distributors, e-tailers and to a lesser extent to OEMs. Sales are often project based and may result in significant quarterly fluctuations.

Recent Accounting Pronouncements

Please refer to Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1 of this Report 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 six months ended December 31, 2014 as compared to what was previously disclosed in the Form 10-K.

13

Results of Operations - Summary

In the three months ended December 31, 2014 our net revenue decreased by $233,000, or 2%, compared to the three months ended December 31, 2013. Our net loss was $632,000 for the three months ended December 31, 2014 compared to a net loss of $323,000 in the three months ended December 31, 2013. Our net loss for the current quarter was largely impacted by a decrease in revenue and a decrease in gross margin from 49.6% to 48.2%, driven by changes in our product mix between the two periods.

In the six months ended December 31, 2014 our net revenues increased by $420,000, or 2%, compared to the six months ended December 31, 2013. Our net loss was $894,000 for the six months ended December 31, 2014 compared to a net loss of $590,000 in the six months ended December 31, 2013. The increase in net loss was impacted by an increase in operating expenses of $259,000, primarily related to continued investments in research and development.

Results of Operations – Three Months Ended December 31, 2014 Compared to the Three Months Ended December 31, 2013

Net Revenue

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

	Three Months Ended December 31,
			% of Net				% of Net		Change
	2014		Revenue		2013		Revenue		$			%
	(In thousands, except percentages)
OEM Modules	$	5,298		49.4%	$	4,696		42.8%	$	602			12.8%
Enterprise Solutions		5,437		50.6%		6,272		57.2%		(835	)		(13.3%	)
Net revenue	$	10,735		100.0%	$	10,968		100.0%	$	(233	)		(2.1%	)

	Three Months Ended December 31,
	2014						2013
	(In thousands)
	OEM Modules		Enterprise Solutions		Total		OEM Modules		Enterprise Solutions		Total
Americas	$	1,971	$	3,662	$	5,633	$	1,732	$	4,304	$	6,036
EMEA		2,154		1,150		3,304		1,819		1,194		3,013
Asia Pacific		550		349		899		633		440		1,073
Japan		623		276		899		512		334		846
	$	5,298	$	5,437	$	10,735	$	4,696	$	6,272	$	10,968

OEM Modules

Based on our experience, OEM Module products typically have a range of 12 to 24 months prior to reaching a meaningful revenue level. To date, the revenue contribution from our new OEM Modules products has been modest. Net revenue from our OEM Modules product line grew primarily as a result of increased unit sales of a newer product family, xPico, largely in the Americas region, as well as increased unit sales of our MatchPort product family in both the Americas and EMEA regions. Sales of our Premierwave EN in Japan also increased from the year ago quarter.

Enterprise Solutions

Net revenue from our Enterprise Solutions product line decreased primarily as a result of decreased unit sales of our mature products in particular the SLC, UDS, and EDS product families. The overall decrease in this product line was partially offset by sales growth in our new SLB2 and EDS-MD 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, establishing or relieving inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties and share-based compensation.

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The following table presents our fiscal quarter gross profit:

	Three Months Ended December 31,
			% of Net				% of Net		Change
	2014		Revenue		2013		Revenue		$			%
	(In thousands, except percentages)
Gross profit	$	5,170		48.2%	$	5,437		49.6%	$	(267	)		(4.9%	)

Gross profit as a percent of revenue (referred to as “gross margin”) for the three months ended December 31, 2014 was lower than the prior year period due primarily to changes in our product mix.

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 December 31,
			% of Net				% of Net		Change
	2014		Revenue		2013		Revenue		$			%
	(In thousands, except percentages)
Personnel-related expenses	$	2,383			$	2,488			$	(105	)		(4.2%	)
Professional fees and outside services		359				332				27			8.1%
Advertising and marketing		422				422				–			0.0%
Travel		161				155				6			3.9%
Facilities		298				275				23			8.4%
Share-based compensation		195				159				36			22.6%
Depreciation		63				93				(30	)		(32.3%	)
Other		111				138				(27	)		(19.6%	)
Selling, general and administrative	$	3,992		37.2%	$	4,062		37.0%	$	(70	)		(1.7%	)

The decrease in selling, general and administrative expenses was primarily driven by lower variable compensation costs in the current quarter.

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 can 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 December 31,
			% of Net				% of Net		Change
	2014		Revenue		2013		Revenue		$		%
	(In thousands, except percentages)
Personnel-related expenses	$	1,176			$	1,149			$	27		2.3%
Facilities		191				187				4		2.1%
Outside services		229				157				72		45.9%
Product certifications		66				39				27		69.2%
Share-based compensation		54				52				2		3.8%
Other		66				59				7		11.9%
Research and development	$	1,782		16.6%	$	1,643		15.0%	$	139		8.5%

Research and development expenses increased primarily due to outside services and product certification costs, which were impacted by the timing of development projects. Personnel-related expenses were up slightly due to increased headcount and merit increases, partially offset by lower variable compensation costs.

15

Results of Operations – Six Months Ended December 31, 2014 Compared to the Six Months Ended December 31, 2013

Net Revenue

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

	Six Months Ended December 31,
			% of Net				% of Net		Change
	2014		Revenue		2013		Revenue		$			%
	(In thousands, except percentages)
OEM Modules	$	10,926		49.1%	$	9,914		45.4%	$	1,012			10.2%
Enterprise Solutions		11,345		50.9%		11,937		54.6%		(592	)		-5.0%
Net revenue	$	22,271		100.0%	$	21,851		100.0%	$	420			1.9%

	Six Months Ended December 31,
	2014						2013
	(In thousands)
	OEM Modules		Enterprise Solutions		Total		OEM Modules		Enterprise Solutions		Total
Americas	$4,380		$7,812		$12,192		$3,596		$7,990		$11,586
EMEA		4,323		2,275		6,598		3,943		2,400		6,343
Asia Pacific		1,167		661		1,828		1,259		832		2,091
Japan		1,056		597		1,653		1,116		715		1,831
	$	10,926	$	11,345	$	22,271	$	9,914	$	11,937	$	21,851

OEM Modules

Net revenue from our OEM Modules product line grew due to increases in unit sales across substantially all of our product families, particularly attributable to our xPico, Premierwave EN and xPort product families in the Americas region.

Enterprise Solutions

During the current six month period, we experienced declines in our Enterprise Solutions net revenue across all geographic regions. Most notably, declines in unit sales of our mature product families including the SLC, EDS, UDS and xPress product families contributed to the decrease. The overall decrease in net revenue was partially offset by growth in unit sales for many of our newer product families, including the SLB2, EDS-MD, xDirect, and PremierWave XN.

Gross Profit

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

	Six Months Ended December 31,
			% of Net				% of Net		Change
	2014		Revenue		2013		Revenue		$			%
	(In thousands, except percentages)
Gross profit	$	10,769		48.4%	$	10,827		49.5%	$	(58	)		(0.5%	)

Gross margin for the six months ended December 31, 2014 was lower than the prior year period due to (i) the mix of product sales, whereby our OEM Modules contributed to a greater portion of total net sales and (ii) higher spending on manufacturing overhead.

16

Selling, General and Administrative

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

	Six Months Ended December 31,
			% of Net				% of Net		Change
	2014		Revenue		2013		Revenue		$			%
	(In thousands, except percentages)
Personnel-related expenses	$	4,905			$	4,819			$	86			1.8%
Professional fees & outside services		723				769				(46	)		(6.0%	)
Advertising and marketing		841				859				(18	)		(2.1%	)
Travel		310				312				(2	)		(0.6%	)
Facilities		598				550				48			8.7%
Share-based compensation		369				317				52			16.4%
Depreciation		128				203				(75	)		(36.9%	)
Other		193				181				12			6.6%
Selling, general and administrative	$	8,067		36.2%	$	8,010		36.7%	$	57			0.7%

In total, selling, general and administrative spending in the current year period was relatively flat with the prior year period. We saw a small net increase in personnel-related and stock compensation expenses due to merit increases, equity award grants, and several headcount additions, all of which was partially offset by lower variable compensation expenses in the current year period.

Research and Development

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

	Six Months Ended December 31,
			% of Net				% of Net		Change
	2014		Revenue		2013		Revenue		$		%
	(In thousands, except percentages)
Personnel-related expenses	$	2,330			$	2,258			$	72		3.2%
Facilities		380				380				–		0.0%
Outside services		413				380				33		8.7%
Product certifications		147				82				65		79.3%
Share-based compensation		115				112				3		2.7%
Other		141				112				29		25.9%
Research and development	$	3,526		15.8%	$	3,324		15.2%	$	202		6.1%

Research and development expenses increased due to (i) increased outside services and product certification costs, which were impacted by the timing of development projects and (ii) increased personnel-related costs for headcount and merit increases, partially offset by lower variable compensation costs.

Provision for Income Taxes

The following table presents our effective tax rate based upon our income tax provision:

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
Effective tax rate		4%		9%		5%		7%

We utilize the liability method of accounting for income taxes. The difference between our effective tax rates and the federal statutory rate resulted primarily from 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 that we believe these assets will more likely than not be realized. As a result of 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 December 31, 2014 and June 30, 2014.

17

Liquidity and Capital Resources

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

	December 31,		June 30,
	2014		2014		Decrease
	(In thousands)
Working capital	$	8,553	$	8,804	$	(251	)
Cash and cash equivalents	$	5,407	$	6,264	$	(857	)

Our principal sources of cash and liquidity include our existing cash and cash equivalents, amounts available under our credit facilities 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.

We are currently in the process of transitioning the manufacturing of a large portion of our Enterprise Solutions to a new contract manufacturer. During this transition period, we have purchased and expect to purchase buffer stock in order to reduce the likelihood of product shortages to our customers. In addition, we agreed to purchase unused raw material from the previous contract manufacturer. The transition has contributed to an increase in our inventory levels and our cash balance has been impacted. We expect that it will take two to three quarters for us to sell the buffer stock.

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 timing and amount of our net revenue, research and development expenses, and expenses associated with any strategic partnerships or acquisitions and 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 future opportunities, (iii) respond to competition or (iv) continue to operate our business. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all. 

Loan Agreement

On September 30, 2014, we entered into an amendment (the “Amendment”) to our existing Loan and Security Agreement dated May 23, 2006 (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Amendment provides, among other things, for (i) a renewal of our $4.0 million revolving line of credit with an extended maturity date of September 30, 2016 and (ii) a modification of the revolving credit line borrowing base formula in the Loan Agreement to include a portion of our foreign accounts receivable to the borrowing base and increase the borrowing limit related to domestic accounts receivable.

The Loan Agreement provides for an interest rate per annum equal to the greater of the prime rate plus 0.75% or 4.0%, 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 to extinguish or retire our current liabilities immediately. If this ratio is not met, the interest rate will become the greater of the prime rate plus 1.25% or 4.0%. We maintained a monthly quick ratio greater than 1.0 to 1.0 as of and during the three months ended December 31, 2014.

The Loan Agreement includes a covenant requiring us to maintain a certain Minimum Tangible Net Worth (“Minimum TNW”), which is currently required to be $6.0 million. This amount 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. If we continue to incur net losses, we may have difficulty satisfying the Minimum TNW financial covenant in the future, in which case we may be unable to borrow funds under the Loan Agreement and any amounts outstanding may need to be repaid immediately.

18

The following table sets forth the Minimum TNW compared to our Actual TNW:

	December 31,
	2014
	(In thousands)
Minimum TNW	$	6,000
Actual TNW	$	10,409

As of December 31, 2014, there were no borrowings outstanding on the revolving line of credit.

The following table presents the available borrowing capacity on the revolving line of credit and outstanding letters of credit, which were used as security deposits. To date, we have not used any of the borrowing capacity under the revolving line of credit.

	December 31,		June 30,
	2014		2014
	(In thousands)
Available borrowing capacity	$	2,637	$	1,721
Outstanding letters of credit	$	113	$	113

Cash Flows

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

	Six Months Ended
	December 31,						Increase
	2014			2013			(Decrease)
	(In thousands)
Net cash provided by (used in) operating activities	$	(574	)	$	1,221		$	(1,795	)
Net cash used in investing activities		(363	)		(277	)		86
Net cash provided by (used in) financing activities		80			(89	)		(169	)

Operating Activities

Net cash used by operating activities during the six months ended December 31, 2014 increased as compared to the prior year period due primarily to (i) a larger net loss, (ii) and increase in inventories from the prior fiscal year-end of approximately $900,000 as we have built up inventory levels for new products and a transition to a new contract manufacturer and (iii) the payment during the current year period of variable compensation that was accrued as of June 30, 2014.

Our net accounts receivable decreased by approximately $1.0 million from June 30, 2014 to December 31, 2014 primarily as a result of (i) timing of shipments and (ii) lower net revenue in the quarter ended December 31, 2014 as compared to the quarter ended June 30, 2014.

Investing Activities

Cash used in investing activities was related to capital expenditures for the purchase of property and equipment, primarily related to tooling and test equipment for new product deployment.

Financing Activities

The increase in net cash provided by financing activities was primarily due to the payoff of our term loan in September 2013.

Off-Balance Sheet Arrangements

As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2014, we were not involved in any material unconsolidated SPEs. 

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.

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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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is 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. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief 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 Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.

(b) Changes in internal controls over financial reporting

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified during the three months ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to the Form 10-K for a description of our legal proceedings. There have been no material changes to the Company’s legal proceedings as disclosed in the Form 10-K. 

Item 1A. Risk Factors

For a discussion of the substantial risks and uncertainties that could impact our business, financial condition, results of operations or performance, please see the information listed in the item captioned “Risk Factors” in the Form 10-K. There have been no material changes to the risk factors as disclosed in the Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the accompanying Exhibit Index are filed as part of, or hereby incorporated by reference into, this Report.

20

SIGNATURES

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

	LANTRONIX, INC. (Registrant)
Date: January 30, 2015	By:	/s/ KURT BUSCH
		Kurt Busch
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: January 30, 2015	By:	/s/ JEREMY WHITAKER
		Jeremy Whitaker Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

21

Exhibit Index

The exhibits listed below are hereby filed with the SEC as part of this Report.

		Incorporated by Reference
Exhibit	Description	Filed Herewith	Form	Exhibit	Filing Date
10.1	Amendment dated December 31, 2014 to the Loan and Security Agreement dated May 23, 2006 between Lantronix, Inc. and Silicon Valley Bank		8-K	99.1	10/2/2014
10.2	Lease dated January 9, 2015 between Lantronix, Inc. and The Irvine Company, LLC		8-K	99.1	1/20/2015
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended	X
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended	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	The following financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended December 31, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) 101.INS BURL Instance Document; (ii) 101.SCH XBRL Taxonomy Extension Schema Document; (iii) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document; (iv) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document; (v) 101.LAB XBRL Taxonomy Extension Label Linkbase Document; (vi) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.	X

______________

* Furnished, not filed.

22

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kurt Busch, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Lantronix, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 30, 2015	/s/ KURT BUSCH
	Kurt Busch
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeremy Whitaker, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Lantronix, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 30, 2015	/s/ JEREMY WHITAKER
	Jeremy Whitaker
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The following certifications are being furnished solely to accompany the Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014 (the “Report”) pursuant to U.S.C. Section 1350, and pursuant to SEC Release No. 33-8238 are being “furnished” to the SEC rather than “filed” either as part of the Report or as a separate disclosure statement, and are not to be incorporated by reference into the Report or any other filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Certification of the Chief Executive Officer 

I, Kurt Busch, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Lantronix, Inc. as of, and for, the periods presented in such Report.

Date:	January 30, 2015	By: /s/ KURT BUSCH
		Name: Kurt Busch Title: President and Chief Executive Officer (Principal Executive Officer)

Certification of the Chief Financial Officer 

I, Jeremy Whitaker, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Lantronix, Inc. as of, and for, the periods presented in such Report.

Date:	January 30, 2015	By: /s/ JEREMY WHITAKER
		Name: Jeremy Whitaker Title: Chief Financial Officer (Principal Financial and Accounting Officer)

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5. Stockholders' Equity (Details - Unrecognized compensation expense) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Dec. 31, 2014
Options
Unrecognized compensation cost	$ 1,611
Remaining weighted average years to recognize	2 years 9 months 18 days
Restricted Stock Units (RSUs) [Member]
Unrecognized compensation cost	31
Remaining weighted average years to recognize	7 months 6 days
ESPP [Member]
Unrecognized compensation cost	$ 121
Remaining weighted average years to recognize	10 months 24 days

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3. Warranty Reserve (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Dec. 31, 2014	Jun. 30, 2014
Standard Product Warranty Disclosure [Abstract]
Beginning balance	$ 150	$ 193
Charged to cost of revenues	0	40
Usage	(39)	(83)
Ending balance	$ 111	$ 150

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5. Stockholders' Equity

6 Months Ended

Dec. 31, 2014

Equity [Abstract]

5. Stockholders' Equity

Share-Based Plans  

Our share-based 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 December 31, 2014, no stock appreciation rights, non-vested stock, or performance shares were outstanding.

Stock Option Awards

The following table presents a summary of stock option activity under all of our stock option plans during the six months ended December 31, 2014:

				Weighted
				Average
	Number of			Exercise Price
	Shares			per Share
	(In thousands)
Balance of options outstanding at June 30, 2014		2,719		$	2.35
Granted		919			1.87
Forfeited		(20	)		1.87
Expired		(59	)		3.56
Exercised		(25	)		1.40
Balance of options outstanding at December 31, 2014		3,534		$	2.21

Restricted Stock Units 

The following table presents a summary of activity with respect to RSUs during the six months ended December 31, 2014:

				Weighted
				Average
				Grant - Date
	Number of			Fair Value
	Shares			per Share
	(In thousands)
Balance of restricted stock units at June 30, 2014		61		$	1.40
Granted		28			1.98
Forfeited		–			–
Vested		(61	)		1.40
Balance of restricted stock units at December 31, 2014		28		$	1.98

Employee Stock Purchase Plan

Our 2013 Employee Stock Purchase Plan (the “ESPP”) is intended to provide employees with an opportunity to purchase our common stock through accumulated payroll deductions. Each of our employees (including officers) is eligible to participate in the ESPP, subject to certain limitations as defined in the ESPP plan document.

The following table presents a summary of activity under our ESPP during the six months ended December 31, 2014:

	Number of
	Shares
	(In thousands)
Shares available for issuance at June 30, 2014		1,126
Reserved for issuance		–
Issued		(97	)
Shares available for issuance at December 31, 2014		1,029

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				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	(In thousands)
Cost of revenues	$	16	$	11	$	36	$	24
Selling, general and administrative		195		159		369		317
Research and development		54		52		115		112
Total share-based compensation expense	$	265	$	222	$	520	$	453

The following table summarizes the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of December 31, 2014:

	Remaining		Remaining
	Unrecognized		Weighted
	Compensation		Average Years
	Cost		To Recognize
	(In thousands)
Stock options	$	1,611		2.8
Restricted stock units		31		0.6
Stock purchase rights under ESPP		121		0.9

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.

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5. Stockholders' Equity (Details - Stock Option Awards) (Options, USD $)	6 Months Ended
	Dec. 31, 2014
Options
Number of shares
Number of Shares Options Outstanding, Beginning	2,719,000
Number of Shares Options Granted	919,000
Number of Shares Options Forfeited	(20,000)
Number of Shares Options Expired	(59,000)
Number of Shares Options Exercised	(25,000)
Number of Shares Options Outstanding, Ending	3,534,000
Weighted Average Exercise Price per share
Exercise Price Outstanding, Beginning	$ 2.35
Exercise Price Granted	$ 1.87
Exercise Price Forfeited	$ 1.87
Exercise Price Expired	$ 3.56
Exercise Price Exercised	$ 1.40
Exercise Price Outstanding, Ending	$ 2.21

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4. Bank Line of Credit and Debt (Details Narrative) (USD $)	6 Months Ended
	Dec. 31, 2014
Line of Credit Facility [Abstract]
Revolving Line description	On September 30, 2014, we entered into an amendment (the “Amendment”) to our existing Loan and Security Agreement dated May 23, 2006 (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Amendment provides, among other things, for (i) a renewal of our $4.0 million revolving line of credit with an extended maturity date of September 30, 2016 and (ii) a modification of the revolving credit line borrowing base formula in the Loan Agreement to include a portion of our foreign accounts receivable to the borrowing base and increase the borrowing limit related to domestic accounts receivable.
Maximum borrowing amount	$ 4,000,000
Maturity date	Sep. 30, 2016
Interest rate description	The Loan Agreement provides for an interest rate per annum equal to the greater of the prime rate plus 0.75% or 4.0%, provided that we maintain a monthly quick ratio of 1.0 to 1.0 or greater.

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5. Stockholders' Equity (Details - RSUs) (Restricted Stock Units (RSUs) [Member])	6 Months Ended
	Dec. 31, 2014
Restricted Stock Units (RSUs) [Member]
Number of shares
Beginning balance RSU's	61,000
Granted	28,000
Forfeited	0
Vested	(61,000)
Ending balance RSU's	28,000

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5. Stockholders' Equity (Details - Employee Stock Purchase Plan) (ESPP [Member])	6 Months Ended
	Dec. 31, 2014
ESPP [Member]
Number of shares
Shares available for issuance at beginning of period	1,126,000
Shares reserved for issuance	0
Shares issued	(97,000)
Shares available for issuance at end of period	1,029,000

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4. Bank Line of Credit

6 Months Ended

Dec. 31, 2014

Debt Disclosure [Abstract]

4. Bank Line of Credit

On September 30, 2014, we entered into an amendment (the “Amendment”) to our existing Loan and Security Agreement dated May 23, 2006 (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Amendment provides, among other things, for (i) a renewal of our $4.0 million revolving line of credit with an extended maturity date of September 30, 2016 and (ii) a modification of the revolving credit line borrowing base formula in the Loan Agreement to include a portion of our foreign accounts receivable to the borrowing base and increase the borrowing limit related to domestic accounts receivable.

The Loan Agreement provides for an interest rate per annum equal to the greater of the prime rate plus 0.75% or 4.0%, 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 to extinguish or retire our current liabilities immediately. If this ratio is not met, the interest rate will become the greater of the prime rate plus 1.25% or 4.0%. We maintained a monthly quick ratio greater than 1.0 to 1.0 as of and during the three months ended December 31, 2014.

The Loan Agreement includes a covenant requiring us to maintain a certain Minimum Tangible Net Worth (“Minimum TNW”), which is currently required to be at least $6.0 million. This amount 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. If we continue to incur net losses, we may have difficulty satisfying the Minimum TNW financial covenant in the future, in which case we may be unable to borrow funds under the Loan Agreement and any amounts outstanding may need to be repaid immediately.

As of December 31, 2014, there were no borrowings outstanding on the revolving line of credit.

The following table sets forth the Minimum TNW compared to our Actual TNW:

	December 31,
	2014
	(In thousands)
Minimum TNW	$	6,000
Actual TNW	$	10,409

The following table presents the available borrowing capacity on the revolving line of credit and outstanding letters of credit, which were used as security deposits. To date, we have not used any of the borrowing capacity under the revolving line of credit.

	December 31,		June 30,
	2014		2014
	(In thousands)
Available borrowing capacity	$	2,637	$	1,721
Outstanding letters of credit	$	113	$	113

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5. Stockholders' Equity (Details - Share-Based Compensation Expense) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Total share-based compensation	$ 265	$ 222	$ 520	$ 453
Cost of revenues
Total share-based compensation	16	11	36	24
Selling, general and administrative
Total share-based compensation	195	159	369	317
Research and development
Total share-based compensation	$ 54	$ 52	$ 115	$ 112

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Unaudited Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Jun. 30, 2014
Current assets:
Cash and cash equivalents	$ 5,407	$ 6,264
Accounts receivable, net	2,634	3,631
Contract manufacturers' receivable	393	359
Inventories, net	9,296	8,404
Prepaid expenses and other current assets	595	524
Total current assets	18,325	19,182
Property and equipment, net	1,432	1,487
Goodwill	9,488	9,488
Deferred tax assets	400	400
Other assets	99	125
Total assets	29,744	30,682
Current liabilities:
Accounts payable	4,265	4,547
Accrued payroll and related expenses	1,694	1,863
Warranty reserve	111	150
Deferred tax liabilities	400	400
Other current liabilities	3,302	3,418
Total current liabilities	9,772	10,378
Non-current liabilities:
Long-term capital lease obligations	0	7
Other non-current liabilities	75	131
Total liabilities	9,847	10,516
Commitments and contingencies
Stockholders' equity:
Common stock	1	1
Additional paid-in capital	205,638	205,013
Accumulated deficit	(186,113)	(185,219)
Accumulated other comprehensive income	371	371
Total stockholders' equity	19,897	20,166
Total liabilities and stockholders' equity	$ 29,744	$ 30,682

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2. Supplemental Financial Information

6 Months Ended

Dec. 31, 2014

Supplemental Financial Information

2. Supplemental Financial Information

Inventories

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

	December 31,		June 30,
	2014		2014
	(In thousands)
Finished goods	$	6,081	$	5,162
Raw materials		1,768		1,890
Finished goods held by distributors		1,362		1,242
Large scale integration chips *		85		110
Inventories, net	$	9,296	$	8,404

* This item is sold individually and embedded into our products.      

Other Liabilities

The following table presents details of our other liabilities:

	December 31,		June 30,
	2014		2014
	(In thousands)
Current
Customer deposits and refunds	$	667	$	711
Accrued raw materials purchases		1,013		1,138
Deferred revenue		195		128
Capital lease obligations		29		47
Taxes payable		234		235
Accrued operating expenses		1,164		1,159
Total other current liabilities	$	3,302	$	3,418
Non-current
Deferred revenue	$	75	$	91
Deferred rent		–		40
Total other non-current liabilities	$	75	$	131

Computation of Net Loss per Share

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

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

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2014			2013			2014			2013
	(In thousands, except per share data)
Numerator:
Net loss	$	(632	)	$	(323	)	$	(894	)	$	(590	)
Denominator:
Weighted-average common shares outstanding (basic and diluted)		14,874			14,621			14,831			14,600
Net loss per share (basic and diluted)	$	(0.04	)	$	(0.02	)	$	(0.06	)	$	(0.04	)

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				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	(In thousands)
Common stock equivalents		1,672		2,625		1,632		2,482

Supplemental Cash Flow Information

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

	Six Months Ended
	December 31,
	2014		2013
	(In thousands)
Accrued property and equipment paid for in the subsequent period	$	38	$	–

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8. Facility Lease (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014
Leases [Abstract]
2015	$ 147
2016	449
2017	469
2018	491
2019	511
Thereafter	581
Total lease payable	$ 2,648

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2. Supplemental Financial Information (Details - Computation of Net Loss per Share) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Numerator:
Net loss	$ (632)	$ (323)	$ (894)	$ (590)
Denominator:
Weighted-average shares outstanding (basic and diluted)	14,874,000	14,621,000	14,831,000	14,600,000
Net loss per share (basic and diluted)	$ (0.04)	$ (0.02)	$ (0.06)	$ (0.04)

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2. Supplemental Financial Information (Details - Supplemental Cash Flow Information) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Supplemental Financial Information
Accrued property and equipment paid for in the subsequent period	$ 38	$ 0

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3. Warranty Reserve

6 Months Ended

Dec. 31, 2014

Standard Product Warranty Disclosure [Abstract]

3. Warranty Reserve

The warranty periods for our products generally 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 additionally, for any known product warranty issues. Although we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials or service delivery costs that differ from our estimates. As a result, increases or decreases to warranty reserves could be required, which could impact our gross margins.

The following table presents details of our warranty reserve:

	Six Months Ended			Year Ended
	December 31,			June 30,
	2014			2014
	(In thousands)
Beginning balance	$	150		$	193
Charged to cost of revenues		–			40
Usage		(39	)		(83	)
Ending balance	$	111		$	150

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Unaudited Condensed Consolidated Statements of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended				6 Months Ended
	Dec. 31, 2014		Dec. 31, 2013		Dec. 31, 2014		Dec. 31, 2013
Income Statement [Abstract]
Net revenue	$ 10,735	[1]	$ 10,968	[1]	$ 22,271	[1]	$ 21,851	[1]
Cost of revenue	5,565		5,531		11,502		11,024
Gross profit	5,170		5,437		10,769		10,827
Operating expenses:
Selling, general and administrative	3,992		4,062		8,067		8,010
Research and development	1,782		1,643		3,526		3,324
Total operating expenses	5,774		5,705		11,593		11,334
Loss from operations	(604)		(268)		(824)		(507)
Interest expense, net	(3)		(7)		(8)		(16)
Other income (expense), net	1		(22)		(20)		(28)
Loss before income taxes	(606)		(297)		(852)		(551)
Provision for income taxes	26		26		42		39
Net loss and comprehensive loss	(632)		(323)		(894)		(590)
Net loss per share (basic and diluted)	$ (0.04)		$ (0.02)		$ (0.06)		$ (0.04)
Weighted-average common shares (basic and diluted)	14,874,000		14,621,000		14,831,000		14,600,000
Net revenue from related parties	$ 112		$ 180		$ 191		$ 373

[1] Includes net revenue from related parties.

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5. Stockholders Equity (Tables)

6 Months Ended

Dec. 31, 2014

Summary of stock option activity

				Weighted
				Average
	Number of			Exercise Price
	Shares			per Share
	(In thousands)
Balance of options outstanding at June 30, 2014		2,719		$	2.35
Granted		919			1.87
Forfeited		(20	)		1.87
Expired		(59	)		3.56
Exercised		(25	)		1.40
Balance of options outstanding at December 31, 2014		3,534		$	2.21

Schedule of share-based compensation expense

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	(In thousands)
Cost of revenues	$	16	$	11	$	36	$	24
Selling, general and administrative		195		159		369		317
Research and development		54		52		115		112
Total share-based compensation expense	$	265	$	222	$	520	$	453

Schedule of unrecognized compensation costs

	Remaining		Remaining
	Unrecognized		Weighted
	Compensation		Average Years
	Cost		To Recognize
	(In thousands)
Stock options	$	1,611		2.8
Restricted stock units		31		0.6
Stock purchase rights under ESPP		121		0.9

Restricted Stock Units (RSUs) [Member]

Summary of other than options activity

				Weighted
				Average
				Grant - Date
	Number of			Fair Value
	Shares			per Share
	(In thousands)
Balance of restricted stock units at June 30, 2014		61		$	1.40
Granted		28			1.98
Forfeited		–			–
Vested		(61	)		1.40
Balance of restricted stock units at December 31, 2014		28		$	1.98

ESPP [Member]

Summary of other than options activity

	Number of
	Shares
	(In thousands)
Shares available for issuance at June 30, 2014		1,126
Reserved for issuance		–
Issued		(97	)
Shares available for issuance at December 31, 2014		1,029

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Document and Entity Information	6 Months Ended
	Dec. 31, 2014	Jan. 23, 2015
Document And Entity Information
Entity Registrant Name	LANTRONIX INC
Entity Central Index Key	0001114925
Document Type	10-Q
Document Period End Date	Dec. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--06-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		14,942,205
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2015

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6. Income Taxes (Tables)

6 Months Ended

Dec. 31, 2014

Income Taxes Tables

Effective tax rate

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
Effective tax rate		4%		9%		5%		7%

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Unaudited Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Operating activities
Net loss	$ (894)	$ (590)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Share-based compensation	520	453
Depreciation	463	465
Provision for excess and obsolete inventories	52	159
Changes in operating assets and liabilities:
Accounts receivable	997	(150)
Contract manufacturers' receivable	(34)	183
Inventories	(944)	447
Prepaid expenses and other current assets	(72)	(114)
Other assets	20	(12)
Accounts payable	(319)	900
Accrued payroll and related expenses	(169)	189
Warranty reserve	(39)	(17)
Other liabilities	(155)	(692)
Net cash provided by (used in) operating activities	(574)	1,221
Investing activities
Purchases of property and equipment	(363)	(277)
Net cash used in investing activities	(363)	(277)
Financing activities
Payment of term loan	0	(167)
Net proceeds from issuances of common stock	158	101
Minimum tax withholding paid on behalf of employees for restricted shares	(53)	0
Payment of capital lease obligations	(25)	(23)
Net cash provided by (used in) financing activities	80	(89)
Increase (decrease) in cash and cash equivalents	(857)	855
Cash and cash equivalents at beginning of period	6,264	5,243
Cash and cash equivalents at end of period	$ 5,407	$ 6,098

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8. Facility Lease

6 Months Ended

Dec. 31, 2014

Leases [Abstract]

8. Facility Lease

On January 16, 2015, we entered into a building lease agreement (the “Lease”) with the Irvine Company, LLC (the “Landlord”). Pursuant to the Lease, we will lease approximately 27,000 square feet of office space for our corporate headquarters in Irvine, California. The Lease shall commence on the date which is the earlier to occur of: (a) the date we take possession of the premises following the completion of certain tenant improvements to the premises, but not earlier than March 1, 2015, or (b) the date we commence our regular business activities on the premises.

The Landlord is obligated to provide a tenant improvement allowance of up to $242,600 for tenant improvements, as defined by the Lease. The term of the Lease will be 65 months from the commencement date. The aggregate basic rent payable under the Lease during the 65-month term is currently expected to be paid as follows:

Fiscal year ending June 30,
(In thousands)
2015	$	147
2016		449
2017		469
2018		491
2019		511
Thereafter		581
	$	2,648

Our existing lease with the Landlord shall terminate effective as of the day preceding the commencement date of the Lease, with no early termination fee.

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7. Litigation and Contingencies

6 Months Ended

Dec. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

7. Litigation and Contingencies

From time to time, we are subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such legal proceedings or claims that are expected to have, individually or in the aggregate, a material adverse effect on our business, prospects, financial position, operating results or cash flows.

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2. Supplemental Financial Information (Details - Common Stock Equivalents) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Supplemental Financial Information
Common stock equivalents	1,672	2,625	1,632	2,482

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8. Facility Lease (Tables)

6 Months Ended

Dec. 31, 2014

Leases [Abstract]

Schedule of minimum lease payments

Fiscal year ending June 30,
(In thousands)
2015	$	147
2016		449
2017		469
2018		491
2019		511
Thereafter		581
	$	2,648

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3. Warranty Reserve (Tables)

6 Months Ended

Dec. 31, 2014

Standard Product Warranty Disclosure [Abstract]

Warranty reserve

	Six Months Ended			Year Ended
	December 31,			June 30,
	2014			2014
	(In thousands)
Beginning balance	$	150		$	193
Charged to cost of revenues		–			40
Usage		(39	)		(83	)
Ending balance	$	111		$	150

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1. Basis of Presentation (Policies)

6 Months Ended

Dec. 31, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Lantronix, Inc. (referred to in these unaudited condensed consolidated financial statements as “Lantronix,” “we,” “us,” or “our”) 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, 2014, included in our Annual Report on Form 10-K filed with the SEC on August 22, 2014. 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 December 31, 2014, the consolidated results of our operations for the three and six months ended December 31, 2014 and our consolidated cash flows for the six months ended December 31, 2014. All intercompany accounts and transactions have been eliminated. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended December 31, 2014 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which will supersede existing revenue recognition guidance under current U.S. GAAP. The new standard is a comprehensive new 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 current guidance. The accounting standard will be effective for Lantronix in the fiscal year beginning July 1, 2017. The standard may be adopted using a full retrospective or a modified retrospective (cumulative effect) method. Early adoption is not permitted. We are currently evaluating this standard and have not yet selected a transition method nor have we determined the effect of the standard on our financial statements and related disclosures.

In August 2014, the FASB issued a new standard that will require management of an entity to assess, for each annual and interim period, if there is substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statement issuance date. The definition of substantial doubt within the new standard incorporates a likelihood threshold of “probable” similar to the use of that term under current U.S. GAAP for loss contingencies. Certain disclosures will be required if conditions give rise to substantial doubt. The standard will be effective for Lantronix in the fiscal year beginning July 1, 2016. Early adoption is permitted. We are currently evaluating the impact of this standard on our financial statements and related disclosures.

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2. Supplemental Financial Information (Tables)

6 Months Ended

Dec. 31, 2014

Supplemental Financial Information

Schedule of Inventory

	December 31,		June 30,
	2014		2014
	(In thousands)
Finished goods	$	6,081	$	5,162
Raw materials		1,768		1,890
Finished goods held by distributors		1,362		1,242
Large scale integration chips *		85		110
Inventories, net	$	9,296	$	8,404

Schedule of Other Liabilities

	December 31,		June 30,
	2014		2014
	(In thousands)
Current
Customer deposits and refunds	$	667	$	711
Accrued raw materials purchases		1,013		1,138
Deferred revenue		195		128
Capital lease obligations		29		47
Taxes payable		234		235
Accrued operating expenses		1,164		1,159
Total other current liabilities	$	3,302	$	3,418
Non-current
Deferred revenue	$	75	$	91
Deferred rent		–		40
Total other non-current liabilities	$	75	$	131

Schedule of Computation of Net Loss per Share

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2014			2013			2014			2013
	(In thousands, except per share data)
Numerator:
Net loss	$	(632	)	$	(323	)	$	(894	)	$	(590	)
Denominator:
Weighted-average common shares outstanding (basic and diluted)		14,874			14,621			14,831			14,600
Net loss per share (basic and diluted)	$	(0.04	)	$	(0.02	)	$	(0.06	)	$	(0.04	)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	(In thousands)
Common stock equivalents		1,672		2,625		1,632		2,482

Schedule of non-cash investing and financing transactions

	Six Months Ended
	December 31,
	2014		2013
	(In thousands)
Accrued property and equipment paid for in the subsequent period	$	38	$	–

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4. Bank Line of Credit and Debt (Tables)

6 Months Ended

Dec. 31, 2014

Debt Disclosure [Abstract]

Schedule of Minimum Tangible Net Worth

	December 31,
	2014
	(In thousands)
Minimum TNW	$	6,000
Actual TNW	$	10,409

Outstanding balances of loans

	December 31,		June 30,
	2014		2014
	(In thousands)
Available borrowing capacity	$	2,637	$	1,721
Outstanding letters of credit	$	113	$	113

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6. Income Taxes (Details)	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Income Taxes Details
Effective tax rate	4.00%	9.00%	5.00%	7.00%

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2. Supplemental Financial Information (Details - Other liabilities) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Jun. 30, 2014
Current
Customer deposits and refunds	$ 667	$ 711
Accrued raw materials purchases	1,013	1,138
Deferred revenue	195	128
Capital lease obligations	29	47
Taxes payable	234	235
Other accrued liabilities	1,164	1,159
Total other current liabilities	3,302	3,418
Non-current
Deferred revenue	75	91
Deferred rent	0	40
Total other non-current liabilities	$ 75	$ 131

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4. Bank Line of Credit and Debt (Details - TNW) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014
Line of Credit Facility [Abstract]
Minimum TNW	$ 6,000
Actual TNW	$ 10,409

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1. Basis of Presentation

6 Months Ended

Dec. 31, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Lantronix, Inc. (referred to in these unaudited condensed consolidated financial statements as “Lantronix,” “we,” “us,” or “our”) 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, 2014, included in our Annual Report on Form 10-K filed with the SEC on August 22, 2014. 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 December 31, 2014, the consolidated results of our operations for the three and six months ended December 31, 2014 and our consolidated cash flows for the six months ended December 31, 2014. All intercompany accounts and transactions have been eliminated. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended December 31, 2014 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

Recent Accounting Pronouncements 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which will supersede existing revenue recognition guidance under current U.S. GAAP. The new standard is a comprehensive new 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 current guidance. The accounting standard will be effective for Lantronix in the fiscal year beginning July 1, 2017. The standard may be adopted using a full retrospective or a modified retrospective (cumulative effect) method. Early adoption is not permitted. We are currently evaluating this standard and have not yet selected a transition method nor have we determined the effect of the standard on our financial statements and related disclosures.

In August 2014, the FASB issued a new standard that will require management of an entity to assess, for each annual and interim period, if there is substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statement issuance date. The definition of substantial doubt within the new standard incorporates a likelihood threshold of “probable” similar to the use of that term under current U.S. GAAP for loss contingencies. Certain disclosures will be required if conditions give rise to substantial doubt. The standard will be effective for Lantronix in the fiscal year beginning July 1, 2016. Early adoption is permitted. We are currently evaluating the impact of this standard on our financial statements and related disclosures.

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6. Income Taxes

6 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

6. Income Taxes

We utilize the liability method of accounting for income taxes. The following table presents our effective tax rates based upon the income tax provision for the periods shown:

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
Effective tax rate		4%		9%		5%		7%

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 that we believe these assets will more likely than not be realized. As a result of 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 December 31, 2014 and June 30, 2014.

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4. Bank Line of Credit (Details - Available Borrowing Capacity) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Jun. 30, 2014
Line of Credit Facility [Abstract]
Available borrowing capacity under the revolving line	$ 2,637	$ 1,721
Outstanding letters of credit	$ 113	$ 113

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2. Supplemental Financial Information (Details - Inventories) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014		Jun. 30, 2014
Inventories, net	$ 9,296		$ 8,404
Finished Goods
Inventories, net	6,081		5,162
Raw Materials
Inventories, net	1,768		1,890
Finished Goods Held By Distributors
Inventories, net	1,362		1,242
Large Scale Integration Chips
Inventories, net	$ 85	[1]	$ 110	[1]

[1] This item is sold individually and embedded into our products.