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The Company
Lantronix, Inc. (the “Company,”
“Lantronix,” “we,” “our,” or “us”) is a global provider of secure data access
and management for Internet of Things (“IoT”) and information technology assets. Our mission is to be the leading
provider of IoT gateways that enable companies to dramatically simplify the creation, deployment, and management of IoT projects
while providing secure access to data for applications and people.
Basis of Presentation
The accompanying unaudited condensed
consolidated financial statements of Lantronix have been prepared in accordance with United States generally accepted accounting
principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and
Article 8 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they should be read in conjunction
with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2016, included in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2016, which was filed with the SEC on August 24, 2016. The unaudited
condensed consolidated financial statements contain all normal recurring accruals and adjustments that in the opinion of management,
are necessary to present fairly the consolidated financial position of Lantronix at March 31, 2017, the consolidated results of
our operations for the three and nine months ended March 31, 2017 and our consolidated cash flows for the nine months ended March
31, 2017. 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
nine months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full year or any future
interim periods.
Recent
Accounting Pronouncements
In January 2017, the Financial
Accounting Standards Board (“FASB”) issued guidance to simplify the accounting for goodwill impairment. The guidance
removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance,
a goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value. Companies will
continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The
guidance will be effective for Lantronix for the fiscal year beginning July 1, 2020. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently considering the effective
date on which we plan to adopt this guidance.
In March 2016, FASB issued accounting
guidance that changes how companies account for certain aspects of share-based payments to employees. Among other things, under
the new guidance companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital
(“APIC”), but will instead record such items as income tax expense or benefit in the income statement, and APIC pools
will be eliminated. Companies will apply this guidance prospectively. Another component of the new guidance allows companies to
make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards,
whereby forfeitures can be estimated, as required historically, or recognized when they occur. If elected, the change to recognize
forfeitures when they occur needs to be adopted using a modified retrospective approach. Lantronix adopted this guidance early
for the fiscal year beginning July 1, 2016. In connection with the adoption, we have elected to recognize the impact of forfeitures
on our share-based compensation expense as such forfeitures occur. Accordingly, as of July 1, 2016, we recorded a cumulative effect
adjustment of approximately $6,000 to increase APIC and accumulated deficit. Going forward, we do not expect the adoption of this
guidance to have a material effect on our financial statements.
In February 2016, FASB issued
an accounting standard that revises lease accounting guidance. The standard requires lessees to put most leases on their balance
sheets, but recognize expenses on their income statements in a manner similar to the previous guidance. The standard will be effective
for Lantronix in the fiscal year beginning July 1, 2019. Early adoption is permitted. We are currently evaluating the impact of
this standard on our financial statements and related disclosures.
In August 2014, FASB issued an
accounting standard which requires 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 are required if conditions give rise
to substantial doubt about the entity’s ability to continue as a going concern. The standard became effective for Lantronix
for the fiscal year beginning July 1, 2016. The adoption of this standard did not have a material impact on our financial statements
and related disclosures.
Revenue from Contracts with
Customers
In May 2014, FASB issued an accounting
standard which superseded existing revenue recognition guidance under current U.S. GAAP. The standard is a comprehensive revenue
recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an
amount that reflects the consideration it expects to receive in exchange for those goods or services. In doing so, among other
things, companies will generally need to use more judgment and make more estimates than under the current guidance. Recently,
FASB has issued guidance clarifying certain topics such as (i) gross versus net revenue reporting, (ii) identifying performance
obligations and licensing and (iii) accounting for shipping and handling fees and costs and accounting for consideration given
by a vendor to a customer.
The standard permits two methods
of adoption: (i) retrospectively to each prior reporting period presented (the full retrospective method), or (ii) retrospectively
with the cumulative effect of initially applying the standard recognized at the date of initial application (the cumulative catch-up
transition method). We currently anticipate adopting the standard using the full retrospective method to restate each prior reporting
period presented.
The standard will be effective
for Lantronix in the fiscal year beginning July 1, 2018, with an option to adopt the standard in the fiscal year beginning July
1, 2017. We are currently considering the effective date on which we plan to adopt the standard.
We currently anticipate the standard
will have a material impact on our financial statements and disclosures. We continue to make progress in assessing all potential
impacts of the standard, including any impacts of recently issued amendments. We currently believe the most significant impact
of the standard relates to our accounting for sales made to distributors under agreements which contain a limited right to return
unsold products and price adjustment provisions. Under the existing revenue guidance, we have historically concluded that the
price to these distributors is not fixed and determinable at the time we deliver products to them. Accordingly, revenue from sales
to these distributors has not historically been recognized until the distributor resells the product. By contrast, under the new
standard, we expect to recognize revenue, including estimates for applicable variable consideration, predominately at the time
of shipment to these distributors.
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