| 1. Summary of Significant Accounting Policies | The Company Lantronix, Inc. (referred to in
these consolidated financial statements as Lantronix, we, our, or us),
is a global provider of secure data access and management solutions for Internet of Things (IoT) and information
technology assets. Our mission is to be the leading supplier 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. We were incorporated in California
in 1989 and re-incorporated in Delaware in 2000. Basis of Presentation The consolidated financial statements
include the accounts of Lantronix and our wholly-owned subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. At June 30, 2016, approximately $2.3 million of our tangible assets were located outside of
the United States (U.S.), and were substantially comprised of inventory held at (i) our third-party logistics provider
in Hong Kong and (ii) our contract manufacturers in China. Use of Estimates The preparation of financial statements
in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The industry
in which we operate is characterized by rapid technological change. As a result, estimates made in preparing the consolidated
financial statements include the allowance for doubtful accounts, sales returns and allowances, inventory reserves, goodwill valuation,
deferred income tax asset valuation allowances, share-based compensation and warranty reserves. To the extent there are material
differences between our estimates and actual results, future results of operations will be affected. Reclassifications Certain reclassifications have
been made to the prior fiscal year financial information to conform to the current fiscal year presentation. Revenue Recognition We recognize revenue when all
of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered;
the price to the buyer is fixed or determinable; and collectability is reasonably assured. For each of the fiscal years ended
June 30, 2016 and 2015, approximately 99% of our net revenues came from sales of hardware products. The remaining 1% of our net
revenues in each of these years was primarily attributable to professional engineering services and extended warranty services.
We sell extended warranty services which extend the warranty period for an additional one to three years, depending upon the product.
Warranty net revenue is deferred and recognized ratably over the warranty service period. When product revenue is recognized,
we establish an estimated allowance for future product returns based on historical returns experience. We also record reductions
of revenue for pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue
is recognized, based on approved pricing adjustments and historical experience. Actual product returns or pricing adjustments
that differ from our estimates could result in increases or decreases to our net revenue. A significant portion of
our sales are made to distributors under agreements which contain a limited right to return unsold products and price adjustment
provisions. Given these provisions, we have concluded the price to these distributors is not fixed and determinable at the time
we deliver products to them. Accordingly, revenue and the related cost of revenue from sales to these distributors is not recognized
until the distributor resells the product. In addition, when the deferred revenue attributable to any distributor exceeds their
receivable balance due to Lantronix at the balance sheet date, such excess is reclassified from net accounts receivable to a customer
deposit and refunds liability, which is included in other current liabilities on the accompanying consolidated balance sheets. Multiple-Element Arrangements From time to time, we may enter
into arrangements with customers that provide for multiple deliverables that generally include the sale of products, professional
engineering services and other product qualification or certification services (collectively, the deliverables).
Pursuant to the applicable accounting guidance, when multiple deliverables in an arrangement are separated into different units
of accounting, the arrangement consideration is allocated to the identified separate units that have stand-alone value at the
inception of the contract based on a relative selling price hierarchy. We determine the relative selling price for a deliverable
based on its vendor-specific objective evidence of selling price (VSOE), if available, third-party evidence (TPE),
if VSOE is not available, and our best estimate of selling price, if neither VSOE nor TPE is available. We recognize the relative
fair value of the deliverables as they are delivered assuming all other revenue recognition criteria are met. Allowance for Doubtful Accounts We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to make required payments. Our evaluation of the collectability
of customer accounts receivable is based on various factors, including the length of time the receivables are past due, our history
of bad debts and general industry conditions. Accounts that are deemed uncollectible are written off against the allowance for
doubtful accounts. Concentration of Credit Risk Our accounts receivable are primarily
derived from revenue earned from customers located throughout North America, Europe and Asia. We perform periodic credit evaluations
of our customers financial condition and maintain allowances for potential credit losses. Credit losses have historically
been within our expectations. We generally do not require collateral or other security from our customers. Fair Value of Financial Instruments Our financial instruments consist
principally of cash and cash equivalents, accounts receivable, contract manufacturers receivable, accounts payable, accrued
liabilities and long-term debt. The fair value of a financial instrument is the amount that would be received in an asset sale
or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured
at fair value are categorized based on whether or not the inputs are observable in the market and the degree to which the inputs
are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input
that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest)
defined as follows: Level 1: Level 2: Level 3: The hierarchy noted above requires
us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. We
do not have any assets or liabilities that were measured at fair value on a recurring basis, and during the years ended June 30,
2016 and June 30, 2015 we did not have any assets or liabilities that were measured at fair value on a non-recurring basis. We believe all of our financial
instruments recorded values approximate their current fair values because of the nature and short duration of these instruments.
The fair value of long-term debt approximates its carrying value because the related effective rates of interest approximate current
market rates available to us for debt with similar terms and similar remaining maturities. Foreign Currency Remeasurement The functional currency for all
our foreign subsidiaries is currently the U.S. dollar. Non-monetary and monetary foreign currency assets and liabilities are valued
in U.S. dollars at historical and end-of-period exchange rates, respectively. Exchange gains and losses from foreign currency
transactions and remeasurements are recognized in the consolidated statements of operations. Translation adjustments for foreign
subsidiaries whose functional currency was previously the local currency are suspended in accumulated other comprehensive income. Accumulated Other Comprehensive
Income Accumulated other comprehensive
income is composed of accumulated translation adjustments as of June 30, 2016 and 2015. We did not have any other comprehensive
income or losses during the fiscal years ended June 30, 2016 or 2015. Cash and Cash Equivalents Cash and cash equivalents consist
of cash and short-term investments, with original maturities of 90 days or less. Inventories Inventories are stated at the
lower of cost (on a first-in, first-out basis) or market. We provide reserves for excess and obsolete inventories determined primarily
based upon estimates of future demand for our products. Shipping and handling costs are classified as a component of cost of revenue
in the consolidated statements of operations. Inventory Sale and Purchase
Transactions with Contract Manufacturers Under certain circumstances, we
sell raw materials to our contract manufacturers and subsequently repurchase finished goods from the contract manufacturers which
contain such raw materials. Net sales of raw materials to the contract manufacturers are recorded on the consolidated balance
sheets as contract manufacturers receivables, and are eliminated from net revenue as we intend to repurchase the raw materials
from the contract manufacturers in the form of finished goods. We have contractual arrangements
with certain of our contract manufacturers that require us to purchase unused inventory that the contract manufacturer has purchased
to fulfill our forecasted manufacturing demand. To the extent that inventory on-hand at one or more of these contract manufacturers
exceeds our contractually reported forecasts, we record the amount we may be required to purchase as part of other current liabilities
and inventories on the consolidated balance sheets. Property and Equipment Property and equipment are carried
at cost. Depreciation is provided using the straight-line method over the assets estimated useful lives, generally ranging
from three to five years. Depreciation and amortization of leasehold improvements are computed using the shorter of the remaining
lease term or five years. Major renewals and betterments are capitalized, while replacements, maintenance and repairs, which do
not improve or extend the estimated useful lives of the respective assets, are expensed as incurred. Capitalized Internal Use Software
Costs We capitalize the costs of computer
software developed or obtained for internal use. Capitalized computer software costs consist of purchased software licenses and
implementation costs. Capitalized software costs are amortized on a straight-line basis over a period of three to five
years. Goodwill Goodwill is recorded as the difference,
if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible
assets acquired. We evaluate goodwill for impairment on an annual basis in our fiscal fourth quarter or more frequently if we
believe indicators of impairment exist that would more likely than not reduce the fair value of our single reporting unit below
its carrying amount. We begin by assessing qualitative factors to determine whether it is more likely than not that the fair value
of our single reporting unit is less than its carrying value. Based on that qualitative assessment, if we conclude that it is
more likely than not that the fair value of a reporting unit is less than its carrying value, we conduct a two-step goodwill impairment
test. The first step of the impairment test involves comparing the estimated fair value of our single reporting unit with its
carrying value, including goodwill. We estimate the fair value of our reporting unit using a combination of the income and market
approach. If the carrying value of the reporting unit exceeds its estimated fair value, we perform the second step of the goodwill
impairment test which involves comparing the implied fair value of the reporting units goodwill with the carrying value
of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized
as an impairment loss. During the fourth quarter of fiscal
2016, using a combination of the income and market approaches of valuation, we performed the first step of the two-step goodwill
impairment test described above. Such test resulted in an estimated fair value of our reporting unit in excess of our book value.
Accordingly, we concluded that no goodwill impairment existed as of June 30, 2016. Income Taxes Income taxes are computed under
the liability method. This method requires the recognition of deferred tax assets and liabilities for temporary differences between
the financial reporting basis and the tax basis of our assets and liabilities. The impact on deferred taxes of changes in tax
rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected
in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely
than not that some of the deferred tax assets will not be realized. Financial statement effects of
a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will
be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement
with a taxing authority. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income
tax expense. Share-Based Compensation We account for share-based compensation
by expensing the estimated grant date fair value of our shared-based awards over the requisite service period. We record amortization
of share-based compensation expense ratably over the requisite service period of the grant. We also estimate forfeitures based
on historical experience in our calculation of share-based compensation expense. Net Income (Loss) Per Share Net income (loss) per share (basic)
is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the fiscal year.
Net income (loss) per share (diluted) is calculated by adjusting the weighted average number of common shares outstanding, assuming
any dilutive effects of outstanding share-based awards using the treasury stock method. Research and Development Costs Costs incurred in the research
and development of new products and enhancements to existing products are expensed as incurred. Development costs of computer
software to be sold, leased or otherwise marketed are subject to capitalization beginning when a products technological
feasibility has been established and ending when a product is available for general release to customers. In most instances, we
believe our current process for developing products is essentially completed concurrently with the establishment of technological
feasibility and as a result, software development costs have been expensed as incurred. Warranty The standard warranty periods
for our products typically range from one to five years. We establish reserves for estimated product warranty costs at the time
revenue is recognized based upon our historical warranty experience, and additionally for any known product warranty issues. Although
we engage in extensive 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. Advertising Expenses Advertising costs are expensed
in the period incurred. Segment Information We have one operating and reportable
business segment. Recent Accounting Pronouncements In May 2014, the Financial Accounting
Standards Board (FASB) issued an accounting standard which superseded existing revenue recognition guidance under
current U.S. GAAP. The 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 standard permits the use of either a retrospective or cumulative effect
transition method. In July 2015, FASB deferred the effective date of the standard by an additional year; however, it provided
companies the option to adopt one year earlier, commensurate with the original effective date. More 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 will be effective for Lantronix in the fiscal year beginning July 1, 2018, with an option to adopt the
standard for the fiscal year beginning July 1, 2017. We are currently evaluating this standard and have not yet selected a transition
method or the effective date on which we plan to adopt the standard, nor have we determined the effect of the 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 entitys 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 entitys ability to continue as a going concern. The standard will be effective for Lantronix
in the fiscal year beginning July 1, 2016. We do not expect adoption of this standard to have a material impact on our financial
statements and related disclosures. In November 2015, FASB issued
final guidance simplifying the balance sheet classification of deferred taxes. The guidance requires that all deferred tax assets
and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each
jurisdiction now only has one net noncurrent deferred tax asset or liability. The guidance does not change the existing requirement
that only permits offsetting within a jurisdiction that is, companies are still prohibited from offsetting deferred tax
liabilities from one jurisdiction against deferred tax assets of another jurisdiction. Lantronix elected to adopt this guidance
as of the fiscal quarter ended December 31, 2015. We have retrospectively applied this guidance to the accompanying consolidated
balance sheet as of June 30, 2015, which had the effect of increasing our working capital by $442,000 as compared to what was
originally reported as of that date. 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 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 today, or recognized when they occur. If elected, the change to recognize forfeitures
when they occur needs to be adopted using a modified retrospective approach. The guidance will be effective for Lantronix in the
fiscal year beginning July 1, 2017. Early adoption is permitted. We are currently evaluating the impact of this standard on our
financial statements and related disclosures. |
