| Summary of Significant Accounting Policies | 1. Summary
of Significant Accounting Policies The Company Lantronix, Inc. (referred to in these notes to 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”) assets. Our mission is to be the leading supplier
of IoT solutions that enable companies to 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, 2018, approximately $3,591,000 of our tangible assets were located outside of the United States (“U.S.”),
a large portion of which was 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 valuation, 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, 2018 and 2017, over 99%
of our net revenue came from sales of hardware products. Our remaining 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 limited rights 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. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at the amount we expect to collect,
which is net of 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 primarily of cash and cash equivalents,
accounts receivable, contract manufacturers’ receivable, accounts payable, and accrued liabilities. 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 fiscal years ended June 30, 2018 and 2017 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. 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 currencies
were previously their respective local currencies 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, 2018 and 2017. We did not have any other comprehensive income or losses during the fiscal
years ended June 30, 2018 or 2017. 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 net realizable value. 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 our single reporting unit is less than its carrying value, we conduct a quantitative goodwill impairment test, which
involves comparing the estimated fair value of our single reporting unit with its carrying value, including goodwill. We estimate
the fair value of our single 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 recognize an impairment loss for the difference. During the fourth quarter of the fiscal year ended June 30, 2018,
we made a qualitative assessment of whether goodwill impairment existed and did not determine that it was more likely that not
that the fair value of our single reporting unit was less than its carrying amount. 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 by a taxing
authority. 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 ratably over the requisite service period. We recognize the impact of forfeitures
on our share-based compensation expense as such forfeitures occur. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing net
income (loss) by the weighted-average number of common shares outstanding during the fiscal year. Diluted net income (loss) per
share 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 product’s 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 thus, software development
costs have been expensed as incurred. Warranty The standard warranty periods we provide for our products typically
range from one to five years. We establish reserves for estimated product warranty costs at the time revenue is recognized based
upon our historical warranty experience, and for any known or anticipated product warranty issues. Advertising Expenses Advertising expenses are recorded in the period incurred and totaled
$213,000 and $108,000 for the fiscal years ended June 30, 2018 and 2017, respectively. Segment Information We have one operating and reportable business segment. Recent Accounting Pronouncements Shared-Based Compensation In June 2018, the Financial Accounting Standards Board (“FASB”)
issued an accounting standard that expands the scope of existing share-based compensation guidance for employees. The new standard
will include share-based payment transactions for acquiring goods and services from nonemployees, whereby share-based payments
to nonemployees will be measured and recorded at the fair value of the equity instruments that an entity is obligated to issue
on the grant date. The standard will be effective for us beginning July 1, 2019, with early adoption permitted. Entities are required
to adopt the standard using a modified retrospective approach with a cumulative adjustment to opening retained earnings in the
year of adoption for the remeasurement of liability-classified awards that have not been settled by the date of adoption and equity-classified
awards for which a measurement date has not been established. We are currently evaluating the date we intend to adopt this guidance
and currently do not anticipate that the adoption of this guidance will have a material impact on our consolidated financial statements. Leases In February 2016, FASB issued an accounting standard that revises
lease accounting guidance. Most prominent among the changes in the standard is the recognition of right-of-use (“ROU”)
assets and lease liabilities by lessees for those leases classified as operating leases under the existing guidance. The standard
requires entities to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative
period presented using a modified retrospective approach, with certain practical expedients available. In July 2018, FASB issued
a practical expedient that would allow entities the option to apply the provisions of the new lease guidance at the effective date
of adoption without adjusting the comparative periods presented. The standard will be effective for Lantronix in the fiscal year
beginning July 1, 2019, with early adoption permitted. While we are continuing to assess the potential impacts of this standard,
we currently expect the most significant impact on our financial statements will be the recognition of ROU assets and lease liabilities
for our operating leases. We have not yet determined which practical expedients we intend to utilize in connection with adopting
the new standard, nor have we determined any quantitative impacts on our financial statements. Revenue from Contracts with Customers In May 2014, FASB issued an accounting standard which superseded
previous revenue recognition guidance under U.S. GAAP. The standard is a comprehensive revenue recognition model that requires
a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration
it expects to receive in exchange for those goods or services. In doing so, among other things, companies will generally need to
use more judgment and make more estimates than under the previous guidance. The standard permits two methods of adoption: (i) retrospectively
to each prior reporting period presented (the full retrospective method), or (ii) retrospectively with the cumulative effect of
initially applying the standard recognized at the date of initial application (the modified retrospective transition method). The standard is effective for annual reporting periods beginning after December 15, 2017, including interim
periods within that reporting period. We
will adopt the standard in the fiscal year beginning July 1, 2018 using the modified retrospective transition method, with the
cumulative effect recognized in our accumulated deficit at the date of adoption. We believe the most significant impact of adopting the standard relates
to the timing of when revenue is recognized for sales made to distributors under agreements which contain limited rights to return
unsold products and price adjustment provisions. Under the previous revenue guidance, we have historically concluded that the price
to these distributors is not fixed and determinable at the time we deliver products to them, and thus revenue from sales to these
distributors has not historically been recognized until the distributor resells the product. By contrast, under the new standard,
we will recognize revenue when we transfer control to the distributor rather than deferring recognition until the distributor resells
the products. In addition, we will establish appropriate accruals for the variable consideration aspect of sales to distributors,
estimated primarily based on historical experience, including estimates for returns and price adjustments. Further, given
certain requirements in the new standard regarding the presentation of estimated return assets and refund liabilities, we expect
the adoption will result in an increase in our accounts receivable, net and a decrease in our inventories, net. We currently expect
to record a decrease to the opening balance of accumulated deficit between $500,000 and $700,000 as a result of adopting the new
standard. |
