Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

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 September 30, 2026 (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.

Unless otherwise indicated by the context, all references to the "Company", "Lantronix", "we", "us", and "our" in this Quarterly Report on Form 10-Q include Lantronix, Inc. and its consolidated subsidiaries.

Overview

Lantronix, Inc. is a global leader in Edge AI and Industrial IoT solutions that power NDAA-compliant unmanned systems, critical infrastructure and resilient enterprise networks. We deliver intelligent computing, secure connectivity, and remote management for mission-critical applications, enabling customers to optimize operations, enhance security and accelerate digital transformation. Our comprehensive portfolio of hardware, software, and services powers applications ranging from mission-critical autonomous platforms and edge analytics for critical infrastructure to intelligent surveillance and secure network management. By bringing intelligence to the network edge, we help organizations achieve efficiency, security, and a competitive edge in today's AI-driven world.

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").

Recent Developments

Nero Acquisition

On July 7, 2026, we entered into an asset purchase agreement to acquire the industrial IoT business of Vecima, including its Nero platform, for aggregate consideration of approximately $11.6 million, excluding working capital adjustments and other customary purchase price adjustments. The acquired business provides GPS-based fleet and asset tracking solutions and serves customers across the fleet, municipal, restoration and industrial asset-tracking markets in North America. We closed the transaction on August 1, 2026.

Refer to Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, which are incorporated herein by reference, for additional information regarding the acquisition.

Products and Solutions

We organize our portfolio of products and services into the following product lines: Embedded IoT Solutions, IoT System Solutions, and Software and Services.

Embedded IoT Solutions

Our embedded product portfolio includes a broad range of compute system-on-module ("SoM") and System-in-Package ("SiP") solutions, together with wired and wireless connectivity products. As semiconductor technology continues to evolve and integrate more functionality, our compute modules now provide not only processing power but also the ability to run advanced AI and machine learning applications. This enables our customers to process and analyze digital inputs such as video, audio, and sensor data, directly at the device level, reducing latency, enhancing security, and enabling real-time decision making.

IoT System Solutions

Our IoT System Solutions portfolio includes a wide range of fully functional standalone systems that provide routing, switching or gateway functionalities as well as telematics and media conversion. These products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, power for IoT end devices through Power over Ethernet ("PoE"), application hosting, protocol conversion, media conversion, secure access for distributed IoT deployments and many other functions. By offering pre-certified products across multiple regions, Lantronix significantly reduces Original Equipment Manufacturer ("OEM") customers' regulatory certification costs and speeds up their time-to-market.

Software and Services

Our Software and Services offerings are central to our strategy of increasing recurring, higher margin revenue across each of our vertical markets. Our Percepxion™ Software as a Service ("SaaS") platform offers comprehensive single-pane-of-glass management for our Out-Of-Band ("OOB") and Industrial IoT deployments, enabling customers to easily deploy, monitor, manage and automate across their global deployments, all from a single platform login, virtually and seamlessly connected as if located directly on each device. Our platform eliminates the need for 24/7 personnel on site and makes it easy to observe and address issues quickly, even in large-scale deployments. Following our August 2026 acquisition of Nero, our Software and Services portfolio also includes GPS-based vehicle and asset tracking capabilities for fleet, municipal, and industrial asset tracking customers, further broadening our recurring revenue base.

We leverage our deep engineering expertise and product development best practices to deliver high-quality, innovative products cost-effectively and on schedule across each of our three vertical markets. Our engineering services model is flexible, offering either turnkey product development or team augmentation to accelerate complex product development challenges, including camera tuning and computer vision for unmanned aerial systems ("UAS" or "drones") and public safety applications, machine learning and AI model integration for edge compute deployments supporting critical infrastructure and defense customers, and voice control, augmented/virtual reality, and other advanced feature development for enterprise and OEM customers.

We also provide extended warranty, support and maintenance services related to our OOB and certain other product families, which, together with our SaaS offerings, further support our recurring revenue model.

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 judgments are those relating to revenue recognition, sales returns and allowances, inventory valuation, valuation of deferred income taxes, and valuation of goodwill and long-lived and intangible assets. These policies are described in further detail in our Annual Report on Form 10-K for the fiscal year ended June 30, 2026 and filed with the SEC on August 27, 2026 (the "Form 10-K") and have not changed significantly during the three months ended September 30, 2026 as compared to what was previously disclosed in the Form 10-K.

Results of Operations - Three Months Ended September 30, 2026 Compared to the Three Months Ended September 30, 2025

Summary

In the three months ended September 30, 2026, our net revenue increased by $2,575,000 or 8.6%, compared to the three months ended September 30, 2025. The increase in net revenue was driven by a 36.7% increase in net revenue in our Embedded IoT Solutions product line and a 40.0% increase in our Software and Services product line and was partially offset by a 14.5% decrease in net revenue in our IoT System Solutions product line. We had a net loss of $463,000 for the three months ended September 30, 2026 compared to a net loss of $1,401,000 for the three months ended September 30, 2025. The decrease in net loss was primarily driven by the increase in revenues for the three months ended September 30, 2026 compared to the three months ended September 30, 2025.

Net Revenue

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

		Three Months Ended September 30,
						% of Net								% of Net				Change
		2026				Revenue				2025				Revenue				$				%
		(In thousands, except percentages)
Embedded IoT Solutions		$	15,680				48.4%			$	11,467				38.5%			$	4,213				36.7%
IoT System Solutions			14,074				43.5%				16,459				55.2%				(2,385	)			(14.5%	)
Software and Services			2,615				8.1%				1,868				6.3%				747				40.0%
		$	32,369				100.0%			$	29,794				100.0%			$	2,575				8.6%

		Three Months Ended September 30,
						% of Net								% of Net				Change
		2026				Revenue				2025				Revenue				$				%
		(In thousands, except percentages)
Americas		$	23,302				72.0%			$	20,651				69.3%			$	2,651				12.8%
EMEA			5,602				17.3%				5,087				17.1%				515				10.1%
APJ			3,465				10.7%				4,056				13.6%				(591	)			(14.6%	)
		$	32,369				100.0%			$	29,794				100.0%			$	2,575				8.6%

Embedded IoT Solutions

Net revenue increased primarily due to (i) higher unit sales of our embedded compute products across all regions, which include our drone and aerospace and defense products, and (ii) higher unit sales of our embedded wired connectivity products in the Americas region.

IoT System Solutions

Net revenue decreased mainly due to (i) reduced unit sales in our media converters product family across all regions, and (ii) decreased unit sales of our telematics gateways in the Americas and EMEA regions; revenues from these products can be dependent on project-based capital spending, customer deployment schedules, and federal and other government agency funding patterns. These decreases were partially offset by (i) higher unit sales of our network switches in the Americas region, and (ii) higher unit sales of our gateways, routers and modems in the Americas and EMEA regions.

Software and Services

Net revenue increased primarily due to higher SaaS solutions revenue across all regions, particularly the Americas region, driven by revenue from the Nero acquisition.

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, direct and indirect personnel expenses related to professional services, 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:

		Three Months Ended September 30,
						% of Net								% of Net				Change
		2026				Revenue				2025				Revenue				$				%
		(In thousands, except percentages)
Gross profit		$	14,513				44.8%			$	13,346				44.8%			$	1,167				8.7%

Gross profit as a percentage of revenue (referred to as "gross margin") remained consistent for both periods in the table above. Our revenue mix in the current quarter was more heavily weighted toward certain lower-margin embedded compute products compared to the prior year period. The impact on our gross margin in the current quarter was positively offset by additional SaaS revenue from Nero, along with lower inventory charges and overhead costs compared to the prior year.

We currently expect that gross margin will fluctuate in future periods based on, among other factors, changes in our product mix, average selling prices, and average manufacturing costs.

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, advertising and marketing expenses, and professional, legal and accounting fees.

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

		Three Months Ended September 30,
						% of Net								% of Net				Change
		2026				Revenue				2025				Revenue				$				%
		(In thousands, except percentages)
Personnel-related expenses		$	5,837							$	5,400							$	437				8.1%
Professional fees and outside services			1,100								1,105								(5	)			(0.5%	)
Advertising and marketing			676								530								146				27.5%
Facilities and insurance			544								482								62				12.9%
Share-based compensation			1,372								1,454								(82	)			(5.6%	)
Depreciation			230								290								(60	)			(20.7%	)
Other			251								281								(30	)			(10.7%	)
Selling, general and administrative		$	10,010				30.9%			$	9,542				32.0%			$	468				4.9%

Selling, general and administrative expenses increased primarily due to (i) higher personnel-related expenses related to increased headcount, including employees added from the Nero acquisition, and (ii) higher advertising and marketing costs related to certain promotional and trade show spending.

Research and Development

Research and development expenses consist of personnel-related expenses, share-based compensation, and 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 and timing of development activities.

The following table presents our research and development expenses:

		Three Months Ended September 30,
						% of Net								% of Net				Change
		2026				Revenue				2025				Revenue				$				%
		(In thousands, except percentages)
Personnel-related expenses		$	2,991							$	3,090							$	(99	)			(3.2%	)
Facilities			641								592								49				8.3%
Outside services			170								337								(167	)			(49.6%	)
Product certifications			97								116								(19	)			(16.4%	)
Share-based compensation			205								284								(79	)			(27.8%	)
Other			232								179								53				29.6%
Research and development		$	4,336				13.4%			$	4,598				15.4%			$	(262	)			(5.7%	)

Research and development expenses decreased primarily due to (i) lower spending on outside services, including outsourced product development and contractor costs, and (ii) lower personnel-related expenses in our engineering team resulting from restructuring activities during the prior fiscal year.

Restructuring, Severance and Related Charges

During the three months ended September 30, 2026, we incurred charges of $89,000 related primarily to certain headcount and lease reductions.

We may incur additional restructuring, severance and related charges in future periods as we continue to identify cost savings and efficiencies related to our business.

Acquisition-Related Costs

During the three months ended September 30, 2026, we incurred approximately $245,000 of acquisition costs, primarily related to the Nero acquisition. These costs were mainly comprised of legal and other professional fees.

Interest Income (Expense), Net

For the three months ended September 30, 2026 and 2025, we earned interest income on our domestic cash balances and marketable securities, and incurred interest expense on borrowings under our Loan Agreement.

Other Income (Expense), Net

Our other income (expense), net, is comprised primarily of foreign currency remeasurement and transaction adjustments related to our foreign subsidiaries whose functional currency is the U.S. dollar.

Provision for Income Taxes

Refer to Note 9 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 regarding our provision for income taxes.

Liquidity and Capital Resources

Liquidity

The following table presents details of our working capital, cash and cash equivalents, and marketable securities:

		September 30,				June 30,
		2026				2026				Change
		(In thousands)
Working capital		$	79,528			$	85,359			$	(5,831	)
Cash and cash equivalents		$	37,620			$	60,466			$	(22,846	)
Marketable securities		$	13,836			$	-			$	13,836

Our principal sources of cash and liquidity include our existing cash and cash equivalents, marketable securities, borrowings and amounts available under our Loan Agreement (as defined in Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report), and cash generated from operations. We are subject to a variable amount of interest on the principal balance of our borrowings and could be adversely impacted by rising interest rates in the future. We believe that our current cash and marketable securities holdings, cash provided by operating activities, and the expected availability under our Loan Agreement will be sufficient to fund our material requirements for working capital, capital expenditures and other financial commitments for at least the next 12 months and beyond. We anticipate that the primary factors affecting our cash and liquidity are net revenue, working capital requirements, payments of principal and interest on our borrowings, payments to satisfy employees' tax withholding obligations for restricted shares, and capital expenditures.

We define cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. We maintain cash and cash equivalents balances at certain financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation ("FDIC"). There can be no assurance that our deposits in excess of the FDIC limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.

Our marketable securities consist of U.S. Treasury Securities recorded at fair value. All of our marketable securities are less than one year from maturity.

Our future working capital requirements will depend on many factors, including the following: timing and amount of our net revenue; our product mix and the resulting gross margins; research and development expenses; selling, general and administrative expenses; and expenses associated with any strategic partnerships, acquisitions or infrastructure investments.

From time to time, we may seek additional capital from public or private offerings of our capital stock, borrowings under our existing or future credit lines or other sources in order to (i) develop or enhance our products, (ii) take advantage of strategic opportunities, (iii) respond to competition or (iv) continue to operate our business. We currently have a Form S-3 shelf registration statement on file with the SEC. If we issue equity securities to raise additional funds, our existing stockholders would likely experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of our existing stockholders. If we issue debt securities to raise additional funds, we may incur debt service obligations, become subject to additional restrictions that limit or restrict our ability to operate our business, or be required to further encumber our assets. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all.

During the fiscal year ended June 30, 2026, we entered into a sales agreement with sales agents, with respect to an at-the-market offering program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, with an aggregate offering price of up to $30,000,000. As of September 30, 2026, approximately $17,000,000 of the aggregate offering capacity remained available.

Bank Loan Agreements

Refer to Note 7 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 Loan Agreement.

Cash Flows

The following table presents the major components of the unaudited condensed consolidated statements of cash flows:

		Three Months Ended September 30,
		2026				2025				Change
		(In thousands)
Net cash (used in) provided by operating activities		$	(2,505	)		$	3,605			$	(6,110	)
Net cash used in investing activities			(24,253	)			(74	)			(24,179	)
Net cash provided by (used in) financing activities			3,912				(1,438	)			5,350

Operating Activities

For the three months ended September 30, 2026, our net loss included $2,336,000 of non-cash charges, while the changes in operating assets and liabilities used net cash of $4,378,000. We used cash in operating activities during the current quarter primarily as a result of an increase in our inventory balances and the payment of variable accrued compensation, along with the timing of our collections on accounts receivable, payments of accounts payable.

Accounts receivable increased by $3,577,000, or 14.1%, from June 30, 2026 to September 30, 2026. The increase was primarily due to the higher volume of shipments in the current quarter, as well as the timing of payments from certain customers near quarter-end.

Inventories increased by $5,357,000, or 20.8% from June 30, 2026 to September 30, 2026. The increase was primarily due to (i) higher finished goods to support the timely fulfillment of customer orders and (ii) purchases of memory components to help meet forecasted demand and support continuity of future production.

Accounts payable increased by $6,018,000, or 35.5%, from June 30, 2026 to September 30, 2026, primarily due to the increase in inventory as well as the timing of payments made to our vendors.

Accrued payroll and related expenses decreased by $1,021,000, or 21.2%, from June 30, 2026 to September 30, 2026 as we disbursed certain accrued variable compensation in the current quarter.

Investing Activities

Net cash used in investing activities for the three months ended September 30, 2026 includes (i) $10,343,000 for the Nero acquisition, (ii) the purchase of marketable securities of $13,800,000, and (iii) purchases of property and equipment totaling $110,000, primarily consisting of computer software.

Net cash used in investing activities for the three months ended September 30, 2025 consisted of purchases of equipment totaling $74,000, primarily for computer hardware and tooling at our contract manufacturers, business analysis tools, and certain research and development equipment.

Financing Activities

Net cash provided by financing activities during the three months ended September 30, 2026 resulted primarily from $4,895,000 of net borrowings under our Loan Agreement, partially offset by cash used of $979,000 for tax withholdings paid on behalf of employees for restricted shares.

Net cash used in financing activities during the three months ended September 30, 2025 resulted primarily from $1,106,000 of net payments under our Prior Loan Agreement, and $300,000 of tax withholdings paid on behalf of employees for restricted shares.