March 31, 2006
Lantronix, Inc. (LTRX on Nasdaq) would like to thank the Advisory Committee on Small Public Companies (the Committee) for the opportunity to comment on the recent recommendations to the Securities and Exchange Committee (SEC).
It is our opinion that the SEC should adopt the Committees recommendation for small companies (both micro and small cap companies). As mentioned in the recommendation, the cost would outweigh the benefits if small companies had to be compliant with the external requirements of Section 404 of the Sarbanes-Oxley Act. Many small-cap companies, such as Lantronix, will have an extremely difficult time absorbing the external cost of compliance with Section 404. Based on the current laws in effect, we have estimated that, in the year of implementation alone, the external cost of Section 404 compliance could approach $1 million, not to mention the cost and burden on our internal resources. In addition to hiring more internal resources, the Company would have to engage external consultants to assist with the effort. The external costs of Section 404 compliance could amount to over 2% of our total forecasted revenues for the year. We also have information from other similar counterparts that have reiterated the burden of costs associated with external compliance.
We feel that the smaller companies would gain significant benefit solely by improving the functions of their processes and controls and assessing such controls internally, as opposed to limited incremental benefits from external auditor sign-off. We continue our progress to improve our compliance with the provisions and spirit of the Sarbanes-Oxley Act and we see the benefit of such actions.
As a public company, our financial statement processes are already subject to the oversight and review of our independent auditors in connection with our quarterly financial reviews and annual audit. We already comply with Sarbanes-Oxley requirements by certification, and other processes. The added cost of 404 external verification is an extraordinary burden to a smaller company like Lantronix.
We believe that the spirit of the Sarbanes-Oxley Act can be active and evident at smaller companies without putting the burden of external compliance on these organizations. We also believe that shareholder confidence will continue to increase industry and market-wide as the Sarbanes-Oxley Act continues to proceed for larger companies.
Once again, we would like to thank you for the opportunity to comment on this recommendation. We sincerely hope that the SEC adopts the recommendation.