Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020

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)

7535 Irvine Center Drive, Suite 100, Irvine, California

(Address of principal executive offices)

92618

(Zip Code)

(949) 453-3990

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 May 7, 2020, there were 27,958,802 shares of the registrant’s common stock outstanding.

LANTRONIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31, 2020

INDEX

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the three months ended March 31, 2020, or this Report, contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to substantial risks and uncertainties. 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. 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 management’s 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. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to: the impact of COVID-19 and the measures to reduce its spread on our employees, supply and distribution chains, the global economy and our financial condition and liquidity; the effects of negative or worsening regional and worldwide economic conditions or market instability on our business, including effects on purchasing decisions by our customers; our ability to continue to generate revenue from products sold into mature markets; our ability to develop, market, and sell new products; our ability to succeed with our new software offerings; fluctuations in our revenue due to the project-based timing of orders from certain customers; unpredictable timing of our revenues due to the lengthy sales cycle for our products and services and potential delays in customer completion of projects; our ability to accurately forecast future demand for our products; delays in qualifying revisions of existing products; constraints or delays in the supply of, or quality control issues with, certain materials or components; difficulties associated with the delivery, quality or cost of our products from our contract manufacturers or suppliers; risks related to the outsourcing of manufacturing and international operations; difficulties associated with our distributors or resellers; intense competition in our industry and resultant downward price pressure; rises in inventory levels and inventory obsolescence; undetected software or hardware errors or defects in our products; cybersecurity risks; our ability to obtain appropriate industry certifications or approvals from governmental regulatory bodies; changes in applicable U.S. and foreign government laws, regulations, and tariffs; environmental or other regulatory claims or litigation; our ability to successfully implement our acquisitions strategy or integrate acquired companies; uncertainty as to the future profitability of acquired businesses, and delays in the realization of, or the failure to realize, any accretion from acquisition transactions; acquiring, managing and integrating new operations, businesses or assets, and the associated diversion of management attention or other related costs or difficulties; our ability to protect patents and other proprietary rights and avoid infringement of others’ proprietary technology rights; the level of our indebtedness, our ability to service our indebtedness and the restrictions in our debt agreements; our ability to attract and retain qualified management; and any additional factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on September 11, 2019, including in the section entitled “Risk Factors” in Item 1A of Part I of such report, as well as in our other public filings with the SEC, including this Quarterly Report on Form 10-Q. 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.

You should read this Report in its entirety, together with 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 Capital Market. If we do update or correct any forward-looking statements, investors should not conclude that we will make additional updates or corrections.

We qualify all of our forward-looking statements by these cautionary statements.

PART I. FINANCIAL INFORMATION

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(In thousands)

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See accompanying notes.

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

The Company

Lantronix, Inc., which we refer to herein as the Company, 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 and related Information Technology (“IT”) management solutions 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, 2019, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, which was filed with the SEC on September 11, 2019. 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, 2020, the consolidated results of our operations for the three and nine months ended March 31, 2020 and our consolidated cash flows for the nine months ended March 31, 2020. All intercompany accounts and transactions have been eliminated. 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, 2020 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

The spread of the COVID-19 virus during the quarter ended March 31, 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. Government reactions to the public health crisis with mitigation measures have created significant uncertainties in the U.S. and global economies. The extent to which the coronavirus pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict and which may cause the actual results to differ from the estimates and assumptions we are required to make in the preparation of financial statements according to U.S. GAAP.

In order to protect our employee population and comply with local directives, most of our employees transitioned to remote working arrangements commencing in March and still continuing through the date hereof. To facilitate the increased data traffic associated with remote access, we have upgraded some of our information technology systems. We have also made changes relating to videoconferencing by providing most of our employees with a new videoconferencing and collaboration platform to accommodate better remote collaboration and communication. To date, remote working has not had a significant adverse impact on our financial results or our operations, including, financial reporting and disclosure controls and procedures.

Reclassifications

Certain reclassifications have been made to the prior fiscal year financial information to conform with the current fiscal year presentation.

Recent Accounting Pronouncements

Shared-Based Compensation

On July 1, 2019, Lantronix adopted Accounting Standard Update No. 2018-07 that expands the scope of existing share-based compensation guidance for employees. The standard includes 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 adoption of the standard did not have a material impact on our financial statements.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02 (“ASU 2016-02” or “Topic 842”) 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 based on the present value of lease payments over the lease term by lessees for those leases classified as operating leases under the existing guidance.

We adopted Topic 842 on July 1, 2019 using the modified retrospective approach by applying the new standard to leases existing at the date of adoption and not restating comparative prior periods. The adoption did not have a material impact on our results of operations or cash flows. Refer to Note 4 below for additional information.

Acquisition of Maestro

On July 5, 2019 (the "Acquisition Date"), Lantronix acquired all outstanding shares of Maestro Wireless Solutions Limited, a Hong Kong private company limited by shares (“MWS”), Fargo Telecom Asia Limited, a Hong Kong private company limited by shares (“FTA” and together with MWS and their respective subsidiaries, the “Acquired Companies” or “Maestro”) for $5,355,000 in cash. The acquisition provides complementary cellular connectivity technologies to our portfolio of IoT solutions.

We recorded Maestro’s tangible and intangible assets and liabilities based on their estimated fair values as of the Acquisition Date and allocated the remaining purchase consideration to goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets. The consideration allocation set forth herein is preliminary and may be revised as additional information becomes available during the measurement period which could be up to 12 months from the Acquisition Date. During the current quarter we adjusted the preliminary purchase price allocation to reduce certain amounts allocated to other assets, accounts payable, and other liabilities, with offsetting adjustments to goodwill. Any additional revisions or changes may be material. The preliminary purchase price allocation is as follows (in thousands):

The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that the acquisition will create a more diverse IoT company with respect to product offerings and our belief that we are committed to improving cost structures in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of overall efficiencies.

Acquisition-related costs were expensed in the periods in which the costs were incurred.

The valuation of identifiable intangible assets and their estimated useful lives are as follows:

The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.

Acquisition of Intrinsyc

On January 16, 2020 (the “Closing Date”), we completed the previously announced acquisition of Intrinsyc Technologies Corporation (“Intrinsyc”), a company existing under the laws of British Columbia, Canada. Pursuant to the terms of the agreement, dated October 30, 2019 (the “Agreement”), by and between Lantronix and Intrinsyc, all of the outstanding common shares of Intrinsyc were acquired by Lantronix. Under the Agreement, we paid $0.50 and 0.2275 of a share of our common stock for each issued and outstanding common share of Intrinsyc. Pursuant to the Agreement, we paid, in the aggregate, approximately $11,519,000 in cash and issued approximately 4,279,000 shares of Lantronix common stock to Intrinsyc shareholders. Following the acquisition, Intrinsyc shareholders owned just under 16% of the outstanding shares of Lantronix common stock. Pursuant to the Agreement, Lantronix agreed to exchange certain options to purchase Intrinsyc shares and restricted stock units (“RSUs”) for cash payments, Lantronix common stock options or RSUs or a combination thereof, as further outlined in the Agreement.

The acquisition provides us with complementary IoT computing and embedded product development capabilities and expands our IoT market opportunity.

We recorded Intrinsyc’s tangible and intangible assets and liabilities based on their estimated fair values as of the Closing Date and allocated the remaining purchase consideration to goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets. The consideration allocation set forth herein is preliminary and may be revised as additional information becomes available during the measurement period which could be up to 12 months from the Closing Date. Any such revisions or changes may be material.

A summary of the purchase consideration for Intrinsyc is as follows (in thousands):

The preliminary purchase price allocation is as follows (in thousands):

The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that the acquisition will create a more diverse IoT company with respect to product offerings and our belief that we are committed to improving cost structures in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of overall efficiencies.

Acquisition-related costs were expensed in the periods in which the costs were incurred.

The valuation of identifiable intangible assets and their estimated useful lives are as follows:

The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.

Supplemental Pro Forma Information

The following supplemental pro forma data summarizes the Company’s results of operations for the periods presented, as if we completed the acquisitions of Maestro and Intrinsyc as of the first day of fiscal 2019. The supplemental pro forma data reports actual operating results adjusted to include the pro forma effect and timing of the impact in amortization expense of identified intangible assets, restructuring costs, the purchase accounting effect on inventories acquired, and transaction costs. In accordance with the pro forma acquisition date, we recorded in the fiscal 2019 supplemental pro forma data (i) cost of goods sold from manufacturing profit in acquired inventory of $262,000, (ii) acquisition related restructuring costs of $2,477,000 and (iii) acquisition-related costs of $2,246,000, with a corresponding reduction in the fiscal 2020 supplemental proforma data. Additionally, we recorded $2,947,000 of amortization expense in the fiscal 2019 supplemental pro-forma data, and additional amortization expense of $862,000 in the fiscal 2020 supplemental pro forma data to represent the amount related to assets that would have been fully amortized.

Net sales related to products and services from the acquisitions of Maestro and Intrinsyc contributed approximately 31% to 35% of net sales for the nine months ended March 31, 2020. Post-acquisition net sales and earnings on a standalone basis are generally impracticable to determine, as on the Acquisition Date and Closing Date, we implemented a plan developed prior to the completion of the acquisitions and began to immediately integrate the acquisition into existing operations, engineering groups, sales distribution networks and management structure.

Supplemental pro forma data is as follows:

Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We apply the following five-step approach in determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied. On occasion we enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

Revenue is recognized net of (i) any taxes collected from customers, which are subsequently remitted to governmental authorities and (ii) shipping and handling costs collected from customers.

Product Shipments

Most of our product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that our customer obtains control of the promised products. A smaller portion of our product revenue is recognized when our customer receives delivery of the promised products.

A significant portion of our products are sold to distributors under agreements which contain (i) limited rights to return unsold products and (ii) price adjustment provisions, both of which are accounted for as variable consideration when estimating the amount of revenue to recognize. We base our estimates for returns and price adjustments primarily on historical experience; however, we also consider contractual allowances, approved pricing adjustments and other known or anticipated returns and price adjustments in a given period. Such estimates are generally made at the time of shipment to the customer and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Our estimates of accrued variable consideration are included in other current liabilities in the accompanying condensed unaudited consolidated balance sheets.

Services

Revenues from our extended warranty and services are generally recognized ratably over the applicable service period. We expect revenues from future sales of our software-as-a-service (“SaaS”) products to be recognized ratably over the applicable service period as well. Revenues from professional engineering services are generally recognized as services are performed.

As a result of our recent acquisition of Intrinsyc (see Note 2), we now derive an increased portion of our revenues from engineering and related consulting service contracts with customers. These contracts generally include performance obligations in which control is transferred over time because the customer either simultaneously receives and consumes the benefits provided or our performance on the contract creates or enhances an asset that the customer controls. These contracts typically provide services on the following basis:

Performance obligations for T&M contracts qualify for the "Right to Invoice" practical expedient within the revenue guidance. Under this practical expedient, we may recognize revenue, over time, in the amount to which we have a right to invoice. In addition, we are not required to estimate variable consideration upon inception of the contract and reassess the estimate each reporting period. We determined that this method best represents the transfer of services as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to the customer of our performance completed to date.

We recognize revenue on fixed price contracts, over time, using the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete the contract performance obligation. We determined that this method best represents the transfer of services as the proportion closely depicts the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation.

Multiple Performance Obligations

From time to time, we may enter into contracts with customers that include promises to transfer multiple deliverables that may include sales of products, professional engineering services and other product qualification or certification services. Determining whether the deliverables in such arrangements are considered distinct performance obligations that should be accounted for separately versus together often requires judgment. We consider performance obligations to be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily available and when the promised good or service is separately identifiable from other promised goods or services in the contract. In such arrangements, we allocate revenue on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation.

Net Revenue by Product Line and Geographic Region

We organize our products and solutions into three product lines: IoT, IT Management and Other. Our IoT products typically connect to one or more existing machines or are built into new industrial devices to provide network connectivity. Our IT Management product line includes out-of-band management, console management, power management, and keyboard-video-mouse (commonly referred to as KVM) products that provide remote access to IT and networking infrastructure deployed in test labs, data centers, branch offices and server rooms. We categorize products that are non-focus or end-of-life as Other.

We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”).

The following tables present our net revenue by product line and by geographic region. Net revenues by geographic region are based on the “bill-to” location of our customers:

The following table presents product revenues and service revenues as a percentage of our total net revenue:

Service revenue is comprised primarily of professional services, software license subscriptions, and extended warranties.

Contract Balances

In certain instances, the timing of revenue recognition may differ from the timing of invoicing to our customers. We record a contract asset receivable when revenue is recognized prior to invoicing, and a contract or deferred revenue liability when revenue is recognized subsequent to invoicing. With respect to product shipments, we expect to fulfill contract obligations within one year and so we have elected not to separately disclose the amount nor the timing of recognition of these remaining performance obligations. For contract balances related to contracts that include services and multiple performance obligations, refer to the deferred revenue discussion below.

Deferred Revenue

Deferred revenue is primarily comprised of unearned revenue related to our extended warranty services and certain software services. These services are generally invoiced at the beginning of the contract period and revenue is recognized ratably over the service period. Current and non-current deferred revenue balances represent revenue allocated to the remaining unsatisfied performance obligations at the end of a reporting period and are respectively included in other current liabilities and other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets.

The following table presents the changes in our deferred revenue balance for the nine months ended March 31, 2020 (in thousands):

We expect to recognize substantially all of the non-current portion of deferred revenue over the next two to four years.

On July 1, 2019, we adopted Topic 842 and elected the available practical expedient to recognize the cumulative effect of initially adopting the standard as an adjustment to the opening balance sheet of the period of adoption (i.e., July 1, 2019). We also elected other available practical expedients and will not separate lease components from non-lease components for office leases, or reassess historical lease classification, whether existing or expired contracts are or contain leases, or the initial direct costs for existing leases as of July 1, 2019. The unaudited condensed consolidated balance sheets and results from operations for reporting periods beginning after July 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under Topic 840.

Adoption of the standard resulted in the recording of net operating and financing lease ROU assets and corresponding operating and financing lease liabilities of $984,000 and $1,114,000, respectively, on July 1, 2019. The adoption of the standard did not materially affect the unaudited condensed consolidated statements of operations and had no impact on cash flows.

Our leases include office buildings for facilities worldwide and car leases in Germany, which are all classified as operating leases. We also have financing leases related to office equipment in the United States. On October 1, 2019 we entered into a lease agreement for an office in Hyderabad, India, which replaced and expanded our existing office space there.

In May 2020 we entered into an extension to our office lease for our corporate headquarters in Irvine, California. The amendment extends the term of the lease by 13 months through January 2022.

We determine if an arrangement is a lease at inception. Certain leases include renewal options that are under the Company's sole discretion. The renewal options were included in the ROU asset and lease liability calculation if it is reasonably assured that we will exercise the option. As our leases generally do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Lease expense for these leases is recognized on a straight-line basis over the lease term.

Components of lease expense and supplemental cash flow information:

The weighted-average remaining lease term is 1.5 years. The weighted-average discount rate is 6.03 percent.

Maturities of lease liabilities as of March 31, 2020 were as follows:

The lease liabilities and ROU assets as of March 31, 2020 include leases assumed in the acquisitions of Maestro and Intrinsyc if the remaining lease term at the acquisition date was determined to exceed one year. Refer to Note 2 above for further information on the acquisitions. As of March 31, 2020, the ROU assets totaled $2,982,000 and were recorded in other assets in the unaudited condensed consolidated balance sheet.

Inventories

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

Other Liabilities

The following table presents details of our other liabilities:

Computation of Net Income (Loss) per Share

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

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

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.

Severance and Related Charges

Current Fiscal Year

During the nine months ended March 31, 2020, we continued a plan to realign certain personnel resources to better fit our current business needs, which includes identifying cost savings and synergies to be gained from the acquisitions of Maestro and Intrinsyc. Additionally, the current year charges include costs incurred pursuant to change-in-control agreements for certain employees of Intrinsyc.

The following table presents details of the liability we recorded related to these activities:

The ending balance is recorded in accrued payroll and related expenses on the accompanying unaudited condensed consolidated balance sheet at March 31, 2020.

Prior Fiscal Year

During the nine months ended March 31, 2019, we incurred charges totaling approximately $323,000 in severance-related costs in connection with a plan to realign certain personnel and cost structure needs.

Supplemental Cash Flow Information

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

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.

The following table presents details of our warranty reserve:

On November 12, 2019, we entered into a Second Amended and Restated Loan and Security Agreement (“Amended Agreement”) with Silicon Valley Bank (“SVB”), which amended, restated and superseded our previous agreement with SVB in its entirety.

Pursuant to the Amended Agreement, SVB made available to us a senior secured revolving line of credit of up to $6,000,000 (“Revolving Facility”) and a senior secured term loan of $6,000,000 (“Term Loan Facility”). Advances under the Revolving Facility may be borrowed from time to time prior to November 12, 2021, subject to the satisfaction of certain conditions, and may be used to fund our working capital and general business requirements. The $6,000,000 proceeds of the Term Loan Facility were drawn in full in November 2019 and were used to fund our acquisition of Intrinsyc, which occurred in January 2020 (refer to Note 2 above). The Revolving Facility matures on November 12, 2021. There were no borrowings on the Revolving Facility at March 31, 2020. The Term Loan Facility is repayable over a 48 month period commencing January 1, 2020.

The interest rate on the Revolving Facility floats at a rate per annum equal to the greater of the prime rate and 5.00 percent. The interest rate on the Term Loan Facility floats at a rate per annum equal to the greater of 1.00 percent above the prime rate and 6.00 percent. We may elect to repay and reborrow the amounts outstanding under the Revolving Facility at any time prior to the maturity date of the Revolving Facility without premium or penalty. We may elect to repay the Term Loan Facility at any time without premium or penalty in minimum amounts equal to at least $1,000,000. A commitment fee in the amount of $60,000 was paid to SVB on the closing date and a $10,000 anniversary fee is payable to SVB on the earliest to occur of the one year anniversary of the effective date, the termination of the Amended Agreement or the Revolving Facility, or the occurrence of an event of default.

The following table summarizes our outstanding debt:

During the three and nine months ended March 31, 2020 we recognized $94,000 and $140,000, respectively of interest expense in our unaudited condensed consolidated statements of operations related to interest and amortization of debt issuance associated with the outstanding Term Loan Facility.

The Amended Agreement includes a financial covenant that requires that we maintain a minimum cash balance of $3,000,000 at SVB, as measured at the end of each month. The Amended Agreement also requires that we do not exceed a maximum leverage ratio, calculated as the ratio of funded debt to the consolidated trailing 12 month earnings before interest, taxes, depreciation and amortization, and certain other allowable exclusions of (i) 3.0 to 1.0 for each calendar quarter ending December 31, 2019 through and including December 31, 2020, (ii) 2.5 to 1.0 for each calendar quarter ending March 31, 2021 through and including December 31, 2021, and (iii) 2.0 to 1.0 for each calendar quarter ending after January 1, 2022. We are currently in compliance with all covenants.

 Stock Incentive Plans

Our stock incentive plans permit the granting of stock options (both incentive and nonqualified stock options), RSUs, stock appreciation rights, non-vested stock, and performance shares to certain employees, directors and consultants. As of March 31, 2020, no stock appreciation rights or non-vested stock was outstanding.

Stock Options

The following table presents a summary of activity during the nine months ended March 31, 2020 with respect to our stock options:

Restricted Stock Units

The following table presents a summary of activity during the nine months ended March 31, 2020 with respect to our RSUs:

Performance Stock Units

In October 2019, we granted 975,000 RSUs with performance-based vesting requirements (“performance stock units” or “PSUs”) to certain executive employees. In February 2020, we granted an additional 70,000 RSUs with performance-based vesting requirements and vesting schedule identical to those granted in October 2019. One third of the PSUs will be eligible to vest in each of the three years beginning in fiscal 2020 if certain earnings per share, revenue targets and market conditions are met. The estimate of the grant date fair value and related share-based compensation expense included the use of a Monte Carlo simulation which incorporates estimates of the potential outcomes of the market condition of these awards.

Employee Stock Purchase Plan

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

The following table presents a summary of activity under our ESPP during the nine months ended March 31, 2020:

Share-Based Compensation Expense

The following table presents a summary of share-based compensation expense included in each functional line item on our accompanying unaudited condensed consolidated statements of operations:

The following table presents the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of March 31, 2020:

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.

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

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 we believe it is more likely than not that these assets will be realized. Due to 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 March 31, 2020 and June 30, 2019.

From time to time, we are involved in various legal proceedings and claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other factors.

Small Business Administration Loan

In April 2020, we executed a promissory note (the “Note”) in the principal amount of approximately $2,438,000 as part of the Paycheck Protection Program (the “PPP Loan”) administered by the Small Business Administration (the “SBA”) and authorized under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan was made through Silicon Valley Bank. On May 6, 2020, we repaid the Note in full.

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the three months ended March 31, 2020, or this Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. See the section of this Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in “Risk Factors” in Part II, Item 1A of this Report.

Overview

Lantronix, Inc., which we refer to herein as the Company, 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 and related Information Technology (“IT”) management solutions 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 conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”).

Products and Solutions Overview

We organize our products and solutions into three product lines: IoT, IT Management and Other.

IoT

Our IoT products typically connect to one or more existing machines or are built into new industrial devices to provide network connectivity. Our products are designed to enhance the value and utility of machines by making the data from the machines available to users, systems and processes or by controlling their properties and features over the network.

Our IoT products currently consist of IoT Gateways and IoT Building Blocks. IoT Gateways are designed to provide secure connectivity and the ability to add integrated device management and advanced data access features. IoT Building Blocks provide basic secure machine connectivity and unmanaged data access.

Our IoT products may be embedded into new designs or attached to existing machines. Our IoT products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, application hosting, protocol conversion, secure access for distributed IoT deployments and many other functions. Many of the products are offered with software tools intended to further accelerate our customer’s time-to-market and increase their value add.

Most of our IoT products are pre-certified in a number of countries thereby significantly reducing our original equipment manufacturer customers’ regulatory certification costs and accelerating their time to market.

The following product families are included in our IoT product line: EDS, EDS-MD, PremierWave^® EN, PremierWave^® XC, SGX^™, UDS, WiPort^®, xDirect^®, xPico^®, xPico^® Wi-Fi, xPico^® 200, xPress^™, XPort^®, XPort^® Pro, XPort^® Edge, Micro, and MACH10^® Global Device Manager.

On July 5, 2019 we acquired Maestro Wireless Solutions Limited and its subsidiaries (together, “Maestro”). The acquisition provides additional and complementary cellular connectivity, LPWAN, and telematic technologies and devices to our portfolio of IoT solutions. The following product families are now included in our IoT product line as a result of the acquisition: M110, E210, E220, Bolero45, FOX3-2G, FOX3-3G, FOX3-4G, S40, and D2Sphere.

On January 16, 2020 we acquired Intrinsyc Technologies Corporation (“Intrinsyc”). The acquisition provides additional and complementary IoT computing and embedded product development capabilities and expands our IoT market opportunity. Additionally, we acquired edge computing and design capabilities crucial to the development of intelligent IoT solutions. As a result of the acquisition, we now offer the following in our IoT product line: System on Module (SoM), Single Board Computer (SBC), and Development Kits. We also offer services for mechanical, hardware, and software engineering for camera, audio, and artificial intelligence / machine learning development. 

IT Management

Today, organizations are managing an ever-increasing number of devices and data on enterprise networks where 24/7 reliability is mission critical. Out-of-band management is a technique that uses a dedicated management network to access critical network devices to ensure management connectivity (including the ability to determine the status of any network component) independent of the status of other in-band network components. Remote out-of-band access allows organizations to effectively manage their enterprise IT resources and at the same time, optimize their IT support resources. Our vSLM™, a virtualized central management software solution, simplifies secure administration of our IT Management products and the equipment attached to them through a standard web browser.

Our IT Management product line includes out-of-band management, console management, power management, and keyboard-video-mouse (commonly referred to as KVM) products that provide remote access to IT and networking infrastructure deployed in test labs, data centers, branch offices and server rooms.

The following product families are included in our IT Management product line: SLB^™, SLC^™8000, Spider^™, ConsoleFlow and vSLM™.

Other

We categorize products that are non-focus or end-of-life as Other. Our Other product line includes non-focus products such as the xPrintServer^®. In addition, this product line includes end-of-life versions of our MatchPort^®, SLC^™, SLP^™, xPress Pro, xSenso^®, PremierWave^® XN, and WiBox product families.

Recent Developments

Refer to Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of our acquisitions of Maestro and Intrinsyc.

Following their acquisitions, Maestro and Intrinsyc have contributed significant revenue to the Company. We also saw a corresponding increase in operational expenses, which will remain consistent until we realize expected cost synergies.  Furthermore, we expect that the combined entity will have better economies of scale driven by our plan to reduce redundant costs which we believe will result in improved operational effectiveness and greater earnings potential.

Impact of COVID-19

In order to protect our employee population and comply with local directives, most of our employees transitioned to remote working arrangements commencing in March and still continuing through the date hereof. To facilitate the increased data traffic associated with remote access, we have upgraded some of our information technology systems. We have also made changes relating to videoconferencing by providing most of our employees with a new videoconferencing and collaboration platform to accommodate better remote collaboration and communication. To date, remote working has not had a significant adverse impact on our financial results or our operations, including, financial reporting and disclosure controls and procedures. We do not believe that our productivity has been substantially affected by working remotely. However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, encouragement and support is normally generated by being present at a physical location and believe that prolonged remote working may have a negative impact over time on our business and on employee productivity. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

Supply Chain and Shipping

The COVID-19 epidemic continues to challenge our supply chain, and if prolonged may have an adverse impact on our ability to produce and ship products. In early January 2020, we began to anticipate some supply chain issues. To mitigate, we built-up our inventory position. This increased inventory helped alleviate some, but not all, of the impact of subsequent shutdowns that occurred in China during the period. However, there were instances where we were unable to fulfill orders, resulting in revenue decline and causing us to miss our initial revenue target.

Our supply chain still faces significant challenges. Most of our manufacturing is done in Malaysia, China and Thailand. Our major contract manufacturer in Malaysia is not at full capacity because of temporary local stay-at-home orders, and we expect to experience supply constraints if the partial shutdown of this contract manufacturer is prolonged or expanded. Similar issues could arise with either one or both of our major contract manufacturers one in Thailand and the other in China, although at the present time we have not been informed of any current issues.

Our ability to ship products has also been affected by the impact that COVID-19 has had on air travel. Most of our products are shipped via air freight. With the reduction of air travel, shipping costs have increased, and shipping delays may have occurred and may continue to occur.

We are attempting to mitigate both the production and shipping risks by asking our contract manufacturers to expedite orders where possible, and otherwise taking and shipping products from our contract manufacturers as soon as they are available. We have also been forced to sell into the United States products in inventory that were manufactured in China for our non-US markets, thus incurring tariffs in the United States and negatively impacting our profits.

Our ability to manufacture products is also dependent on the availability of certain raw materials and components that our contract manufacturers purchase in China, and our sales are subject to demand for certain of our products that are purchased by our customers for assembly in China into our customers’ end-products. If a second wave of COVID-19 and associated shutdown were to occur in China, this would likely have an adverse impact on our ability to manufacture and sell our products due to related shortages of materials and components and delays in customer orders. Depending on the severity of such future shutdowns, we could experience a materially diminished ability to produce products or longer lead times. This would result in delayed or reduced revenue from the affected orders in production and potentially higher operating costs. Because COVID-19 is a global pandemic, it may be difficult or impossible to move our manufacturing capability in a timely manner as needed, or to put in place any additional mitigation actions other than to pull and ship products as fast as our manufacturers can manufacture them. These mitigation efforts may also have a negative impact on our financial results by increasing inventory levels.

Sales and Marketing

Our sales and marketing efforts have been impacted by COVID-19 in a variety of ways. On the positive side, we saw an increase in orders for videoconferencing-related and medical-related products and services. But this increase has been offset primarily by a reduction in other product sales caused by global shutdowns and overall uncertainty arising as a result of COVID-19.

Many of our leads are generated through industry events, trade shows and business travel necessary to support customer engagement. With the recent sudden cessation of all trade shows and business travel, our lead pipeline has been negatively impacted, which may negatively affect our sales in the coming quarters. We are attempting to mitigate this risk by using this time to focus our sales and marketing teams on greater customer engagement, particularly with anchor customers. However, prolonged shutdowns, or additional future shutdowns as a result of a second wave of COVID-19, would negate our mitigation efforts and lead to a reduction in revenue during the coming quarters. In addition, to mitigate the potential declines, we are also changing our go-to-market approach by adding more distributors and value-added resellers, who are closer to the customers and end-customers.

Research and Development

Our research and development efforts have not been impacted in any material respect as a result of our transition to a remote working arrangement. However, if the shutdowns persist, we may experience project delays because of lack of access for our engineers to use testing and other equipment that is situated in our office labs. We will attempt to mitigate any such prolonged impact by enabling engineers to have limited access to our office labs while imposing procedures that ensure that only a few people are in the office at any given time, social distancing and other guidelines are observed, and appropriate disinfection is taking place. Prolonged shutdowns at third-party partners, especially relating to product certifications, may also delay our sales and shipments. In the event of prolonged shutdowns, we believe we can mitigate by putting in place, where possible, agreements with our customers covering the sale of non-certified products.

Recent Accounting Pronouncements

Refer to Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, 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, allowance for doubtful accounts, inventory valuation, warranty reserves, valuation of deferred income taxes, goodwill and business combinations. Other than the policies regarding revenue recognition and business combinations, which we have updated and added below, respectively, these policies are described in further detail in the Form 10-K and have not changed significantly during the nine months ended March 31, 2020 as compared to what was previously disclosed in the Form 10-K.

Revenue Recognition

Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We apply the following five-step approach in determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied.

A significant portion of our products are sold to distributors under agreements which contain (i) limited rights to return unsold products and (ii) price adjustment provisions, both of which are accounted for as variable consideration when estimating the amount of revenue to recognize. Establishing accruals for product returns and pricing adjustments requires the use of judgment and estimates that impact the amount and timing of revenue recognition. When product revenue is recognized, we establish an estimated allowance for future product returns based primarily on historical returns experience and other known or anticipated returns. 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 primarily on approved pricing adjustments and our historical experience. Actual product returns or pricing adjustments that differ from our estimates could result in increases or decreases to our net revenue.

A portion of our revenues are derived from engineering and related consulting service contracts with customers. These contracts generally include performance obligations in which control is transferred over time because the customer either simultaneously receives and consumes the benefits provided or our performance on the contract creates or enhances an asset that the customer controls. These contracts typically provide services on the following basis:

Performance obligations for T&M contracts qualify for the "Right to Invoice" practical expedient within the revenue guidance. Under this practical expedient, we may recognize revenue, over time, in the amount to which we have a right to invoice. In addition, we are not required to estimate variable consideration upon inception of the contract and reassess the estimate each reporting period. We determined that this method best represents the transfer of services as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to the customer of our performance completed to date.

We recognize revenue on fixed price contracts, over time, using the proportion of our actual costs incurred (generally labor hours expended) to the total costs expected to complete the contract performance obligation. We determined that this method best represents the transfer of services as the proportion closely depicts the efforts or inputs completed towards the satisfaction of a fixed price contract performance obligation.

From time to time, we may enter into contracts with customers that include promises to transfer multiple deliverables that may include sales of products, professional engineering services and other product qualification or certification services. Determining whether the deliverables in these arrangements are considered distinct performance obligations that should be accounted for separately versus together often requires judgment. We consider performance obligations to be distinct when the customer can benefit from the promised good or service on its own or by combining it with other resources readily available and when the promised good or service is separately identifiable from other promised goods or services in the contract. In these arrangements, we allocate revenue on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation. Additionally, estimating standalone selling prices for separate performance obligations within a contract may require significant judgment and consideration of various factors including market conditions, items contemplated during negotiation of customer arrangements and internally-developed pricing models. Changes to performance obligations that we identify, or the estimated selling prices pertaining to a contract, could materially impact the amounts of earned and unearned revenue that we record.

Business Combinations

We allocate the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), if applicable, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life. The valuation of acquired assets and assumed liabilities requires significant judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs, and discount rates. We estimate the fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed as incurred.

Results of Operations – Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Summary

In the three months ended March 31, 2020, our net revenue increased by $4,168,000, or 33.8%, compared to the three months ended March 31, 2019. The increase in net revenue was driven by a 55.8% increase in net revenue in our IoT product line partially offset by a decline in revenue of 24.5% in our IT Management product line. We had a net loss of $5,216,000 for the three months ended March 31, 2020 compared to net income of $857,000 for the three months ended March 31, 2019. The decrease in net income was driven by a 12.8% decrease in gross margin percentage and a 101.5% increase in operating expenses.

Net Revenue

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

IoT

Net revenue from our IoT product line for the three months ended March 31, 2020 increased in the APJ and Americas regions when compared to the three months ended March 31, 2019 due primarily to the addition of sales of products and services obtained through the acquisitions of Maestro and Intrinsyc. We also saw moderate growth in our newer SGX product family, mostly in the Americas region. The overall increase in net revenues was partially offset primarily by decreases in unit sales of (i) our XPort, Premierwave EN, and XPort Pro product families in all regions and (ii) our UDS product family in the Americas and EMEA regions.

IT Management

Net revenue from our IT Management product line for the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019 due primarily to decreased unit sales of (i) our SLC8000 product family across all regions and (ii) our SLB product family in the Americas region.

Other

Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, declined slightly in APJ and EMEA.

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, inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties and share-based compensation.

The following table presents our gross profit:

Gross profit as a percent of revenue (referred to as “gross margin”) for the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019 due primarily to sales of products obtained through the acquisitions of Maestro and Intrinsyc, which typically have lower margins than the Lantronix products that existed prior to the acquisitions.

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 selling, general and administrative expenses:

Selling, general and administrative expenses increased primarily due to (i) increased share-based compensation primarily due to the issuance of equity awards to certain executive and other employees, including employees brought on from our acquisitions, (ii) higher personnel-related costs resulting from the increased headcount assumed in the acquisitions of Intrinsyc and Maestro, (iii) higher professional fees and outside services resulting from increased legal and accounting costs, and (iv) higher facilities and insurance costs resulting from additional facility space gained through the acquisitions of Maestro and Intrinsyc.

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 vary from period to period depending on our level of development activities.

The following table presents our research and development expenses:

Research and development expenses for the three months ended March 31, 2020 increased when compared to the three months ended March 31, 2019 primarily due to (i) higher product certification costs related to the timing of various new product development projects and (ii) higher facilities costs and personnel-related expenses, resulting from an increase in facility space and headcount resulting from the acquisitions of Maestro and Intrinsyc as well as the addition of our new facility lease in India. These increases were slightly offset by a decrease in outside services expenses as we lowered our spending on certain outside headcount resources.

Results of Operations – Nine Months Ended March 31, 2020 Compared to the Nine Months Ended March 31, 2019

Summary

In the nine months ended March 31, 2020 our net revenue increased by $5,744,000, or 15.6%, compared to the nine months ended March 31, 2019. The increase in net revenue was driven by a 31.0% increase in net revenue in our IoT product line partially offset by a decline in revenue of 28.7% in our IT Management product line. We had a net loss of $9,037,000 for the nine months ended March 31, 2020 compared to net income of $1,051,000 for the nine months ended March 31, 2019. The decrease in net income was driven by an 8.0% decrease in gross margin percentage and a 50.2% increase in operating expenses.

Net Revenue

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

IoT

Net revenue from our IoT product line for the nine months ended March 31, 2020 increased across all regions when compared to the nine months ended March 31, 2019 due to the addition of sales of products and services obtained through the acquisitions of Maestro and Intrinsyc. The overall increase was partially offset by decreases in unit sales of (i) our XPort, UDS, and Premierwave EN product families across all regions, (ii) our XPort Pro family, mostly in the Americas and (iii) our large-scale integration chips in the EMEA region.

IT Management

Net revenue from our IT Management product line for the nine months ended March 31, 2020 decreased compared to the nine months ended March 31, 2019 due primarily to decreased unit sales of our SLC8000 and SLB product families in the Americas and EMEA regions. In the prior year, we saw stronger demand for both product families partially driven by the timing of sales to certain large customers.

Other

Net revenue from our Other products, which are comprised of non-focus and end-of-life product families, increased slightly across all regions.

Gross Profit

The following table presents our gross profit:

Gross margin for the nine months ended March 31, 2020 decreased compared to the nine months ended March 31, 2019 due primarily to sales of products obtained through the acquisitions of Maestro and Intrinsyc, which typically have lower margins than the Lantronix products that existed prior to the acquisitions. Gross margin in the current year period was also negatively impacted by the amortization of unrealized profit in acquired inventory in the amount of approximately $204,000.

Selling, General and Administrative

The following table presents our selling, general and administrative expenses: