March 17, 2005
VIA EDGAR
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CONFIDENTIAL
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U. S. Securities and Exchange Commission
450 Fifth St., N.W.
Judiciary Plaza
Washington, DC 20549
Attention: Christine Davis
RE: LANTRONIX, INC.
FORM 8-K FILED JANUARY 21, 2005
FORM 8-K FILED FEBRUARY 18, 2005
SEC FILE NO. 001-16027
Ladies and Gentlemen:
On behalf of Lantronix, Inc. (the "Company") and in response to the
comments of the Staff (the "Staff") of the Securities and Exchange Commission
(the "SEC" or "Commission") set forth in the SEC's letter dated March 7, 2005,
in connection with the Company's Form 8-K, filed with the SEC on January 21,
2005, and amended on February 18, 2005 (the "Form 8-K"), set forth below are the
Company's responses to the comments regarding the Form 8-K. For your convenience
the Staff's comments are reproduced prior to each response.
1. ALTHOUGH WE NOTE THAT YOU HAVE REVISED THE ITEM 4 DISCLOSURES IN
YOUR FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2004, WE NOTE THAT YOU DID NOT
REVISE YOUR FORM 10-K/A OR YOUR FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
2004. YOUR 10-K/A AND 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2004 SHOULD BE
REVISED TO CLEARLY STATE THAT YOUR DISCLOSURE CONTROLS AND PROCEDURES EITHER
WERE EFFECTIVE OR WERE INEFFECTIVE AS OF THE DATE OF THIS REPORT. ANY
QUALIFICATIONS, SUCH AS "SUFFICIENTLY EFFECTIVE," ON THIS CONCLUSION DO NOT
CONFORM TO THE REQUIREMENTS OF ITEM 307 OF REGULATION S-K. WHEN REVISING YOUR
DISCLOSURE PLEASE NOTE THAT MANAGEMENT SHOULD NOT STATE THAT THE CONTROLS ARE
EFFECTIVE EXCEPT TO THE EXTENT THAT CERTAIN PROBLEMS HAVE BEEN IDENTIFIED.
RATHER, MANAGEMENT MUST TAKE THOSE PROBLEMS INTO ACCOUNT WHEN CONCLUDING WHETHER
THE CONTROLS AND PROCEDURES ARE EFFECTIVE OR INEFFECTIVE. IF THE CONTROLS AND
PROCEDURES ARE INEFFECTIVE, MANAGEMENT SHOULD STATE THE SPECIFIC REASONS WHY
THEY ARE INEFFECTIVE. REFER TO QUESTION 5 OF THE FAQ ON RELEASE NO. 34-47986
"MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND DISCLOSURE
IN EXCHANGE ACT PERIODIC REPORTS."
The Company respectfully notes that based on the analysis detailed
below it believes the disclosure contained in its Form 10-K/A and Form 10-Q for
the quarter ended September 30, 2004 satisfies the requirements of Item 307.
Therefore, the Company respectfully requests that it not be required to amend
these prior reports. The Company does reconfirm its undertaking to refrain from
the use of "sufficiently effective" or any similar phrase in future disclosure.
Item 307 requires that a registrant disclose the conclusions of its
principal executive and principal financial officers regarding the effectiveness
of its disclosure controls and procedures. Although the Commission did not
mandate specific language responsive to such requirement, it did subsequently
address the form such disclosure may take in Question 5 of the FAQ on Release
No, 34-47986 ("Question 5"). Question 5 states in part: "Management may not
state that the registrant's controls and procedures are effective except to the
extent that certain problems have been identified or express similar qualified
conclusions."
Question 5 makes it clear that a registrant may not soften the impact
of disclosure of ineffective controls by couching its disclosure in an
affirmative statement that controls are effective subject to identified
weaknesses. In contrast to the situation addressed by Question 5, in its
disclosure, the Company's executives have affirmatively concluded that its
disclosure controls and procedures were effective to ensure timely compliance
with its disclosure requirements. The use of the phrase "sufficiently effective"
in no way changes the conclusion that the controls and procedures were
effective.
The Company also notes that a substantial number of registrants have
used (and many continue to use) disclosure substantially identical to that
previously included in the Company's reports, which it believes reflects a
widely-held belief that such language is consistent with applicable regulations
and interpretation. For example, since January 1, 2005, at least thirty
registrants have used the phrase "sufficiently effective" in characterizing
their disclosure controls and procedures. A substantially greater number of
registrants have used similar language in prior periods.
Finally, the Company undertakes that it will not assert as a defense in
any proceeding initiated by the Commission or any person under the federal
securities laws of the United States, that the use of the phrase "sufficiently
effective" in its controls and procedures disclosure discussed above has any
meaning different than the word "effective" would have had.
2. IN AN EMAIL SENT BY JIM KERRIGAN ON OCTOBER 28, 2004 (12:50PM) WE
NOTED A REFERENCE TO DISCUSSIONS BETWEEN MCGLADREY AND THE COMPANY. THE EMAIL
NOTES "I ALSO DISCUSSED WITH MCGLADREY, THE CONTINUED AUDIT LETTER
RECOMMENDATION OF E&Y THAT WE HIRE AN SEC REPORTING PERSON TO THE ACCOUNTING
STAFF. THEY SAID THEY WOULD NEVER HAVE SUCH A RECOMMENDATION FOR A COMPANY OUR
SIZE...." ITEM 304(A)(2) REQUIRES THAT CERTAIN CONSULTATIONS WITH THE NEWLY
ENGAGED ACCOUNTANT BE DISCLOSED IN ITEM 4 FORM 8-K. SUPPLEMENTALLY TELL US HOW
YOU CONSIDERED ITEM 304(A)(2) IN DETERMINING THAT THESE DISCUSSIONS WITH
MCGLADREY DID NOT REQUIRE DISCLOSURE.
Item 304(a)(2) requires disclosure if the Company, or someone acting on
its behalf, consulted with McGladrey & Pullen, LLP, regarding the application of
accounting principles to a specific transaction or the type of audit opinion
that might be rendered on the Company's financial statement if either a written
report or oral advice was provided that McGladrey concluded was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue.
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Neither the Company nor its representatives consulted with McGladrey
regarding the application of accounting principles to a specific transaction or
hypothetical transaction. Although the Company did discuss the issue of the
potential of hiring an SEC reporting person, this discussion did not involve any
discussion of the potential impact such hiring decision could have on any
opinion on the Company's financial statements. Instead, the Company was
attempting to determine what industry "best practices" were in this respect
among companies of a similar size and complexity. Because the issue of whether
to hire a Director of Financial Reporting has been an on-going management letter
comment, the Company had informally discussed staffing with approximately thirty
CFOs or controllers employed by small cap companies at various conferences
during 2004. The conversation with McGladrey was an additional data point in
this on-going analysis.
Item 304(a)(2) also requires disclosure if the Company consulted
McGladrey regarding a matter that was either the subject of a disagreement or a
reportable event. The consultation regarding the hiring of a Director of
Financial Reporting was neither a disagreement nor a reportable event. Item
304(a)(1)(iv) defines "disagreement" to mean a disagreement on any matter of
accounting principles or practices, which disagreements, if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter of the disagreement in connection with its report. The
Company's former auditors, Ernst & Young LLP, initially recommended the creation
of the new position in or around November 2002, and was merely restating its
prior recommendations in its final management letter. The Company has no reason
to believe Ernst & Young would have issued a qualified report in the event the
Company continued to operate without a Director of Financial Reporting. The
Company also notes that if the question of hiring a Director of Financial
Reporting constituted a disagreement under Item 304(a)(1)(iv), the Company would
have been required to disclose such fact in its Form 8-K regardless of any
discussion of the matter with McGladrey. Ernst & Young reviewed the initial Form
8-K filing, and did not suggest that this (or any other issues) constituted
disagreements mandating disclosure.
Item 304(a)(1)(v) sets forth those items that would constitute
reportable events. As detailed in our comment response letter dated February 18,
2005, nothing identified in the Ernst & Young Management Letter, including the
recommendation to hire a Director of Financial Reporting, constituted a
reportable event. Accordingly, no disclosure was required under Item 304(a)(2).
Undertakings
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The Company acknowledges that:
The Company is responsible for the adequacy and accuracy of the
disclosure in its filings, including the Form 8-K filed January 21,
2005 as amended;
Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filings; and
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The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Please feel free to call our outside counsel at Wilson Sonsini Goodrich &
Rosati, PC. with any questions you may have: Jack Sheridan may be reached at
(650) 320-4631 and John Turner may be reached at (650) 565-3599.
Sincerely,
/s/ James W. Kerrigan
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James W. Kerrigan
Chief Financial Officer
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