lantronix_10q-093007.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x |
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For
the quarterly period ended September 30, 2007
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)
Delaware
|
33-0362767
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
15353
Barranca Parkway, Irvine, California
(Address
of principal executive offices)
92618
(Zip
Code)
(949)
453-3990
(Registrant’s
telephone number, including area code)
Former
name, former address and former fiscal year, if changed since last
report: N/A
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x.
|
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
November 12, 2007, 60,058,661 shares of the Registrant’s common stock were
outstanding.
LANTRONIX,
INC.
FORM
10-Q
FOR
THE FISCAL QUARTER ENDED
September
30, 2007
INDEX
|
|
|
Page
|
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
1
|
|
|
|
|
Item
1.
|
Financial
Statements.
|
|
1
|
|
|
|
|
|
Unaudited
Condensed Consolidated Balance Sheets at September 30, 2007 and June
30,
2007
|
|
1
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations for the Three Months
Ended
|
|
|
|
September
30, 2007 and
2006
|
|
2
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended
|
|
|
|
September
30, 2007 and
2006
|
|
3
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial
Statements.
|
|
4
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
8
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
|
16
|
|
|
|
|
Item
4.
|
Controls
and
Procedures.
|
|
17
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
17
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
17
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
17
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
|
25
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior
Securities
|
|
25
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
|
25
|
|
|
|
|
Item
5.
|
Other
Information
|
|
25
|
|
|
|
|
Item
6.
|
Exhibits
|
|
25
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
LANTRONIX,
INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
7,089
|
|
|
$ |
7,582
|
|
Marketable
securities
|
|
|
96
|
|
|
|
97
|
|
Accounts
receivable, net
|
|
|
1,955
|
|
|
|
3,411
|
|
Inventories,
net
|
|
|
10,453
|
|
|
|
10,981
|
|
Contract
manufacturers' receivable
|
|
|
1,251
|
|
|
|
1,270
|
|
Prepaid
expenses and other current assets
|
|
|
511
|
|
|
|
578
|
|
Total
current assets
|
|
|
21,355
|
|
|
|
23,919
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
2,101
|
|
|
|
1,911
|
|
Goodwill
|
|
|
9,488
|
|
|
|
9,488
|
|
Purchased
intangible assets, net
|
|
|
462
|
|
|
|
485
|
|
Officer
loans
|
|
|
130
|
|
|
|
129
|
|
Other
assets
|
|
|
27
|
|
|
|
26
|
|
Total
assets
|
|
$ |
33,563
|
|
|
$ |
35,958
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
8,638
|
|
|
$ |
11,017
|
|
Accrued
payroll and related expenses
|
|
|
2,209
|
|
|
|
1,993
|
|
Warranty
reserve
|
|
|
373
|
|
|
|
446
|
|
Accrued
settlements
|
|
|
1,068
|
|
|
|
1,068
|
|
Other
current liabilities
|
|
|
4,762
|
|
|
|
3,808
|
|
Total
current liabilities
|
|
|
17,050
|
|
|
|
18,332
|
|
Long-term
liabilities
|
|
|
238
|
|
|
|
256
|
|
Long-term
capital lease obligations
|
|
|
269
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
6
|
|
|
|
6
|
|
Additional
paid-in capital
|
|
|
185,540
|
|
|
|
184,953
|
|
Accumulated
deficit
|
|
|
(170,052 |
) |
|
|
(168,173 |
) |
Accumulated
other comprehensive income
|
|
|
512
|
|
|
|
442
|
|
Total
stockholders' equity
|
|
|
16,006
|
|
|
|
17,228
|
|
Total
liabilities and stockholders' equity
|
|
$ |
33,563
|
|
|
$ |
35,958
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
LANTRONIX,
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
Net
revenues (1)
|
|
$ |
13,054
|
|
|
$ |
12,514
|
|
Cost
of revenues (2)
|
|
|
6,613
|
|
|
|
5,907
|
|
Gross
profit
|
|
|
6,441
|
|
|
|
6,607
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
6,279
|
|
|
|
5,498
|
|
Research
and development
|
|
|
1,768
|
|
|
|
1,718
|
|
Litigation
settlement costs
|
|
|
-
|
|
|
|
15
|
|
Amortization
of purchased intangible assets
|
|
|
18
|
|
|
|
18
|
|
Total
operating expenses
|
|
|
8,065
|
|
|
|
7,249
|
|
Loss
from operations
|
|
|
(1,624 |
) |
|
|
(642 |
) |
Interest
income (expense), net
|
|
|
(19 |
) |
|
|
6
|
|
Other
income (expense), net
|
|
|
11
|
|
|
|
(3 |
) |
Loss
before income taxes
|
|
|
(1,632 |
) |
|
|
(639 |
) |
Provision
for income taxes
|
|
|
21
|
|
|
|
12
|
|
Net
loss
|
|
$ |
(1,653 |
) |
|
$ |
(651 |
) |
|
|
|
|
|
|
|
|
|
Net
loss per share (basic and diluted)
|
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Weighted-average
shares (basic and diluted)
|
|
|
59,943
|
|
|
|
59,262
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
net revenues from related party
|
|
$ |
291
|
|
|
$ |
279
|
|
|
|
|
|
|
|
|
|
|
(2) Includes
amortization of purchased intangible assets
|
|
$ |
5
|
|
|
$ |
2
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
LANTRONIX,
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,653 |
) |
|
$ |
(651 |
) |
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
409
|
|
|
|
314
|
|
Depreciation
|
|
|
132
|
|
|
|
100
|
|
Amortization
of purchased intangible assets
|
|
|
23
|
|
|
|
20
|
|
Provision
for doubtful accounts
|
|
|
16
|
|
|
|
18
|
|
Litigation
settlement costs
|
|
|
-
|
|
|
|
15
|
|
Provision
for inventories
|
|
|
152
|
|
|
|
1
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,434
|
|
|
|
334
|
|
Inventories
|
|
|
376
|
|
|
|
(1,122 |
) |
Contract
manufacturers' receivable
|
|
|
19
|
|
|
|
368
|
|
Prepaid
expenses and other current assets
|
|
|
76
|
|
|
|
25
|
|
Other
assets
|
|
|
(1 |
) |
|
|
(3 |
) |
Accounts
payable
|
|
|
(2,380 |
) |
|
|
1,957
|
|
Accrued
payroll and related expenses
|
|
|
203
|
|
|
|
(213 |
) |
Accrued
settlements
|
|
|
-
|
|
|
|
(400 |
) |
Warranty
reserve
|
|
|
(73 |
) |
|
|
(198 |
) |
Other
liabilities
|
|
|
677
|
|
|
|
(741 |
) |
Net
cash used in operating activities
|
|
|
(590 |
) |
|
|
(176 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment, net
|
|
|
(126 |
) |
|
|
(4 |
) |
Net
cash used in investing activities
|
|
|
(126 |
) |
|
|
(4 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuances of common stock
|
|
|
179
|
|
|
|
184
|
|
Payment
of capital lease obligations
|
|
|
(30 |
) |
|
|
(33 |
) |
Net
cash provided by financing activities
|
|
|
149
|
|
|
|
151
|
|
Effect
of foreign exchange rate changes on cash
|
|
|
74
|
|
|
|
(13 |
) |
Decrease
in cash and cash equivalents
|
|
|
(493 |
) |
|
|
(42 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
7,582
|
|
|
|
7,729
|
|
Cash
and cash equivalents at end of period
|
|
$ |
7,089
|
|
|
$ |
7,687
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
LANTRONIX,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
1. Basis
of
Presentation
The
accompanying unaudited condensed consolidated financial statements of Lantronix,
Inc. (the “Company” or “Lantronix”) have been prepared by the Company in
accordance with generally accepted accounting principles (“GAAP”) for interim
financial information and in accordance with the instructions to Form 10-Q
and
Article 10 of 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, 2007, included in the Company’s Annual Report
on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on
September 11, 2007.They contain all normal recurring accruals and adjustments
which, in the opinion of management, are necessary to present fairly the
consolidated financial position of the Company at September 30, 2007, and
the
consolidated results of its operations and cash flows for the three months
ended
September 30, 2007 and 2006. All intercompany accounts and
transactions have been eliminated. It should be understood that accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end. The results of operations for the three months ended September
30, 2007 are not necessarily indicative of the results to be expected for
the
full year or any future interim periods.
2. Computation
of Net Loss per Share
Basic
and
diluted net loss per share is calculated by dividing net loss by the
weighted-average number of common shares outstanding during the
year.
The
following table presents the computation of net loss per share:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands,
|
|
|
|
except
per share data)
|
|
Numerator:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,653 |
) |
|
$ |
(651 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding (basic and diluted)
|
|
|
59,943
|
|
|
|
59,262
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share (basic and diluted)
|
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
The
following table presents the common stock equivalents excluded from the diluted
net loss per share calculation, because they were anti-dilutive as of such
dates. These excluded common stock equivalents could be dilutive in
the future.
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Common
stock equivalents
|
|
|
3,640,025
|
|
|
|
2,587,780
|
|
3. Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market and consist
of
the following:
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Finished
goods
|
|
$ |
7,448
|
|
|
$ |
7,848
|
|
Raw
materials
|
|
|
2,301
|
|
|
|
2,653
|
|
Inventory
at distributors
|
|
|
1,866
|
|
|
|
1,876
|
|
Large
scale integration chips *
|
|
|
1,536
|
|
|
|
1,530
|
|
Inventories,
gross
|
|
|
13,151
|
|
|
|
13,907
|
|
Reserve
for excess and obsolete inventory
|
|
|
(2,698 |
) |
|
|
(2,926 |
) |
Inventories,
net
|
|
$ |
10,453
|
|
|
$ |
10,981
|
|
*
This
item is sold individually and embedded into the Company's products.
4. Warranty
Upon
shipment to its customers, the Company provides for the estimated cost to
repair
or replace products to be returned under warranty. The Company’s
products typically carry a one- to two-year warranty. In addition, certain
products that were sold prior to August 2003 carry a five-year
warranty. Although the Company engages in extensive product quality
programs and processes, its warranty obligation is affected by product failure
rates, use of materials or service delivery costs that differ from the Company’s
estimates. As a result, additional warranty reserves could be required, which
could reduce gross margins. Additionally, the Company sells extended warranty
services, which extend the warranty period for an additional one to three
years
depending upon the product.
The
following table is a reconciliation of the changes to the product warranty
liability for the periods presented:
|
|
Three
Months Ended
|
|
|
Year
Ended
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Beginning
balance
|
|
$ |
446
|
|
|
$ |
693
|
|
Charged
to cost of revenues
|
|
|
7
|
|
|
|
107
|
|
Usage
|
|
|
(80 |
) |
|
|
(354 |
) |
Ending
balance
|
|
$ |
373
|
|
|
$ |
446
|
|
5. Bank
Line of Credit and Debt
In
May
2006, the Company entered into a two-year secured revolving Loan and Security
Agreement ("Line of Credit”) with a bank, which provides for borrowings up to
$5.0 million. The borrowing capacity is limited to eligible accounts receivable
as defined under the Line of Credit. Borrowings under the Line of Credit
bear
interest at the prime rate plus 1.75% per annum. The Company is required
to pay
an unused line fee of 0.50% on the unused portion of the Line of Credit.
In
addition, the Company paid a fully earned, non-refundable commitment fee
of
$54,000 and paid an additional $54,000 on the first anniversary of the effective
date of the Line of Credit.
The
Company's obligations under the Line of Credit are secured by substantially
all
of the Company's assets, including its intellectual property.
The
Company is subject to a number of covenants under the Line of Credit, pursuant
to which, among other things, the Company has agreed that it will not,
without
the bank's prior written consent: (a) sell, lease, transfer or otherwise
dispose, any of the Company's business or property, provided, however,
that the
Company may sell inventory in the ordinary course of business consistent
with
the provisions of the Line of Credit; (b) change the Company's business
structure, liquidate or dissolve, or permit a change in beneficial ownership
of
more than 20% of the outstanding shares; (c) acquire, merge or consolidate
with
or into any other business organization; (d) incur any debts outside the
ordinary course of the Company's business, except for permitted indebtedness,
or
grant any security interests in or permit a lien, claim or encumbrance
upon all
or any portion of the Company's assets, except in favor of or agreed to
by the
bank; (f) make any investments other than permitted investments; (g) make
or
permit any payments on any subordinated debt, except under the terms of
existing
subordinated debt or on terms acceptable to the bank, or amend any provision
in
any document related to the subordinated debt that would increase the amount
thereof, or (h) become an "investment company" as such term is defined
under the
Investment Company Act of 1940. The Line of Credit also contains a number
of
affirmative covenants, including, among other things, covenants regarding
the
delivery of financial statements and notice requirements, accounts receivable,
payment of taxes, access to collateral and books and records, maintenance
of
properties and insurance policies, and litigation by third parties.
The
Line
of Credit includes events of default that include, among other things,
non-payment of principal, interest or fees, violation of affirmative and
negative covenants, cross default to certain other indebtedness, material
adverse change, material judgments, bankruptcy and insolvency
events.
As
of
September 30, 2007, the Company had no borrowings against the Line of
Credit.
6. Share-Based
Compensation
The
following table presents a summary
of option activity under the Company’s stock option
plans:
|
|
|
|
|
|
Number
of
|
|
|
|
Shares
|
|
Balance
of options outstanding at June 30, 2007
|
|
|
5,891,896
|
|
Options
granted
|
|
|
75,600
|
|
Options
forfeited
|
|
|
(801,466 |
) |
Options
expired
|
|
|
(65,619 |
) |
Options
exercised
|
|
|
(36,896 |
) |
Balance
of options outstanding at September 30, 2007
|
|
|
5,063,515
|
|
The
following table presents stock option grant date information:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Weighted-average
grant date fair value
|
|
$ |
0.99
|
|
|
$ |
1.24
|
|
Weighted-average
grant date exercise price
|
|
$ |
1.32
|
|
|
$ |
1.60
|
|
The
following table presents a summary of share-based compensation by functional
line item:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Cost
of revenues
|
|
$ |
27
|
|
|
$ |
12
|
|
Selling,
general and administrative
|
|
|
270
|
|
|
|
209
|
|
Research
and development
|
|
|
112
|
|
|
|
93
|
|
Total
share-basd compensation
|
|
$ |
409
|
|
|
$ |
314
|
|
7. Income
Taxes
On
July
1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of
FASB Statement No. 109” (“FIN 48”). In connection with the adoption
of FIN 48, the Company recognized an adjustment of approximately $226,000
to the
beginning balance of accumulated deficit on its consolidated balance
sheet. The Company’s continuing practice is to recognize interest and/or
penalties related to income tax matters in income tax expense. As of September
30, 2007, the Company had recorded $326,000 of uncertain tax positions including
approximately $98,000 of accrued interest and penalties related to these
uncertain tax positions.
At
July
1, 2007, the Company’s fiscal 2001 through fiscal 2007 tax years remain open to
examination by the Federal taxing authorities. The Company’s fiscal 2001 through
fiscal 2007 tax years remain open to examination by the state taxing
authorities. However, the Company has net operating losses (“NOLs”)
beginning in fiscal 2001 which would cause the statute of limitations to
remain
open for the year in which the NOL was incurred.
The
Company utilizes the liability method of accounting for income
taxes. The following table presents the Company’s effective tax rates
based upon the income tax provision for the periods shown:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Effective
tax rate
|
|
|
1 |
% |
|
|
2 |
% |
The
federal statutory rate was 34% for all periods. The difference
between our effective tax rate and the federal statutory rate resulted primarily
from the effect of our domestic losses recorded without a tax benefit, as
well
as the effect of foreign earnings taxed at rates differing from the federal
statutory rate.
8. Comprehensive
Loss
The
components of comprehensive loss are as follows:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Net
loss
|
|
$ |
(1,653 |
) |
|
$ |
(651 |
) |
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Change
in net unrealized gain on investment, net of taxes of $0
|
|
|
(1 |
) |
|
|
6
|
|
Change
in translation adjustments, net of taxes of $0
|
|
|
71
|
|
|
|
(14 |
) |
Total
comprehensive loss
|
|
$ |
(1,583 |
) |
|
$ |
(659 |
) |
9. Litigation
Settlements
Securities
Litigation Settlements
Securities
Class Action Lawsuits (“Class Action”)
Beginning
on May 15, 2002, a number of securities class actions were filed against
the
Company and certain of its current and former directors and former officers
alleging violations of the federal securities laws. These actions were
consolidated into a single action pending in the United States District
Court
for the Central District of California entitled In re Lantronix,
Inc. Securities Litigation, Case No. CV 02-3899 GPS (JTLx). After the
Court appointed a lead plaintiff, amended complaints were filed by the
plaintiff, and the defendants filed various motions to dismiss directed
at
particular allegations. Through that process, certain of the allegations
were dismissed by the Court.
On
October 18, 2004, the plaintiff filed the third amended complaint, which
was the
operative complaint in the action. The complaint alleged violations
of Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities
Act”) and violations of Sections 10(b) and 20(a) and Rule 10b-5 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). The
Securities Act claims were brought on behalf of all persons who purchased
common
stock of Lantronix pursuant or traceable to the Company’s August 4, 2000 initial
public offering (“IPO”). The Exchange Act claims were based on
alleged misstatements related to the Company’s financial results that were
contained in the Registration Statement and Prospectus for the
IPO. The claims brought under the Exchange Act were brought on behalf
of all persons and entities that purchased or acquired Lantronix securities
from
November 1, 2000 through May 30, 2002 (the “Class Period”). The
complaint alleged that defendants issued false and misleading statements
concerning the business and financial condition in order to allegedly inflate
the value of the Company’s securities during the Class Period. The
complaint alleged that during the Class Period, Lantronix overstated financial
results through improper revenue recognition and failure to comply with
GAAP.
The
Company reached an agreement with plaintiffs to settle the Class Action
lawsuit.
The Company also reached agreements with its relevant insurance carriers
with
respect to the funding of the cash portions of the settlement with plaintiffs,
and the cash funding of the settlement has been
completed. Under the terms of the agreement with the Class
Action plaintiffs, the Company was not required to contribute any cash
to the
Class Action settlement, as all cash contributed would be from the Company’s
insurance carriers. However, as part of the agreement with the
plaintiffs in the Class Action lawsuit, the Company agreed to issue certain
Lantronix securities to the plaintiffs. As a result of the
anticipated issuance of such securities, and in connection with the issuance
of
securities for the settlement of the Synergetic action described in detail
in
previous filings, the Company recorded a charge of $1.2 million in the
consolidated statement of operations for the fiscal year ended June 30,
2006. On December 11, 2006, the United States District Court for the
Central District of California gave its final approval to the settlement
and
issued a final order and judgment in the matter. During the fiscal
quarter ended December 31, 2006, the insurance carriers funded their share
of
the settlement, which totaled $13.9 million. On January 10, 2007, the
settlement of the Company’s securities litigation became final and
effective. During the fiscal quarter ended March 31, 2007, the
Company reduced its accrued settlement liability and settlement recovery
by
$13.9 million in connection with the settlement becoming final and
effective. As of June 30, 2007, the Company had an accrued settlement
liability of $1.1 million. The Company expects to issue warrants to
purchase Lantronix common stock with a fair value of $1.1 million to the
class
action plaintiffs as final consideration for the remaining settlement
liability. Per the terms of the settlement agreement, the number of
shares to be issued pursuant to the warrants shall be determined by using
the
Black-Scholes model option-pricing formula using a contract life of four
years
and a strike price of $3 above the average trading price of the Company’s common
stock over the 45 trading days ending two trading days prior to the issuance
date (20 days after the settlement date) of the warrants. The
warrants will be issued when the escrow administrator provides the Company
with
a final list of the eligible class action plaintiffs. The Company
expects the warrants to be issued during fiscal 2008.
10. Litigation
From
time to time, the Company is
subject to other legal proceedings and claims in the ordinary course of
business. Except as discussed in Note 9, the Company is currently not aware
of
any such legal proceedings or claims that it believes will have, individually
or
in the aggregate, a material adverse effect on its business, prospects,
financial position, operating results or cash flows.
During
2006, the Company concluded multiple securities lawsuits and litigation
with a
former executive officer. The Company may have an obligation to
continue to indemnify the former executive officer and defend the securities
violation that he has been charged with. There is a risk that the
Company’s insurance carriers may not reimburse us for such
costs. Accordingly, legal expenses for this former executive
officer’s defense are recorded as incurred and reimbursement of the legal
expenses from insurance are recorded upon receipt. As of September
30, 2007, the Company had $90,000 of reimbursable legal expenses recorded
as a
liability on its consolidated balance sheets.
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
You
should read the following discussion and analysis in conjunction with
our
unaudited condensed consolidated financial statements and the related
notes
thereto contained elsewhere in this Quarterly Report on Form
10-Q. The information contained in this Report is not a complete
description of our business. We urge you to carefully review and
consider the various disclosures made by us in this Report and in our
other
reports filed with the Securities and Exchange Commission (“SEC”), including our
Annual Report on Form 10-K for the fiscal year ended June 30, 2007 and
subsequent reports on our Current Reports on Form 8-K.
This
Report contains forward-looking statements which include, but are not limited
to, statements concerning projected net revenues, expenses, gross profit
and net
income (loss), the need for additional capital, market acceptance of our
products, our ability to achieve further product integration, the status
of
evolving technologies and their growth potential and our production capacity.
Among these forward-looking statements are statements regarding a potential
decline in net revenue from non-core product lines, potential variances
in
quarterly operating expenses, the adequacy of existing resources to meet
cash
needs, some reduction in the average selling prices and gross margins of
products, need to incorporate software from third-party vendors and open
source
software in our future products and the potential impact of an increase
in
interest rates or fluctuations in foreign exchange rates on our financial
condition or results of operations. These forward-looking statements are
based
on our current expectations, estimates and projections about our industry,
our
beliefs and certain assumptions made by us. Words such as “anticipates,”
“expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will”
and variations of these words or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. These statements are not guarantees of future performance and
are
subject to certain risks, uncertainties and assumptions that are difficult
to
predict. Therefore, our actual results could differ materially and adversely
from those expressed in any forward-looking statements as a result of various
factors, including but not limited to those identified under the heading
“Risk
Factors” set forth in Part II, Item 1A hereto. We undertake no obligation to
revise or update publicly any forward-looking statements for any reason.
Overview
We
design, develop and market devices that make it possible to access, manage,
control and configure electronic products over the Internet or other networks.
We are a leader in providing innovative networking solutions. We were initially
formed as “Lantronix,” a California corporation, in June 1989. We reincorporated
as “Lantronix, Inc.,” a Delaware corporation, in May 2000.
We
have a
history of providing devices that enable information technology (“IT”) equipment
to network using standard protocols for connectivity, including Ethernet
and
wireless. Our first device was a terminal server that allowed “dumb” terminals
to connect to a network. Building on the success of our terminal servers,
in
1991 we introduced a complete line of print servers that enabled users
to
inexpensively share printers over a network. Since then, we have continually
refined our core technology and have developed additional innovative networking
solutions that expand upon the business of providing our customers network
connectivity. With the expansion of networking and the Internet, our technology
focus has been increasingly expanded beyond IT equipment, so that our device
solutions provide a product manufacturer with the ability to network its
products within the industrial, service and commercial markets referred
to as
machine-to-machine (“M2M”) networking.
The
following describes our device networking product lines:
·
|
Device
Enablement– We offer an array of embedded and external device
enablement solutions that enable integrators and manufacturers
of
electronic and electro-mechanical products to add network connectivity,
manageability and control. Our customers’ products originate
from a wide variety of applications within the M2M market, from
blood
analyzers that relay critical patient information directly to
a hospital’s
information system, to simple devices such as time clocks, allowing
the
user to obtain information from these devices and to improve
how they are
managed and controlled. We also offer products such as
multi-port devices servers that enable devices outside the data
center to
cost effectively share the network connection and convert various
protocols to industry standard interfaces such as Ethernet and
the
Internet.
|
·
|
Device
Management –We offer off-the-shelf appliances such as console
servers, digital remote keyboard, video, mouse extenders, and
power
control products that enable IT professionals to remotely connect,
monitor
and control network infrastructure equipment, distributed branch
office
equipment and large groups of servers using highly secure out-of-band
management technology. In addition, we offer off-the-shelf
appliances that enable IT professionals to reliably, remotely
and simply
monitor, configure and manage multiple devices from a single
point of
control.
|
The
following describes our non-core product line:
·
|
Non-core–
Over the years, we have innovated or acquired various product
lines that
are no longer part of our primary, core markets described above.
In
general, these non-core businesses represent decreasing markets
and we
minimize research and development in these product lines. Included
in this
category are terminal servers, visualization solutions, legacy
print
servers, software and other miscellaneous products. We have announced
the
end-of-life for almost all of our non-core products and expect
a steep
decline in non-core revenues in fiscal 2008 while we complete
the exit of
this product category.
|
Financial
Highlights and Other Information for the Fiscal Quarter Ended September
30,
2007
The
following is a summary of the key factors and significant events that
impacted
our financial performance during the fiscal quarter ended September 30,
2007:
·
|
Net
revenues of $13.1 million for the fiscal quarter ended September 30,
2007 increased by $540,000 or 4.3% as compared to $12.5 million
reported for the fiscal quarter ended September 30, 2006. The
increase was primarily the result of a $1.1 million or 9.9%
increase in
our device networking product lines offset by a $523,000 or
29% decrease
in our non-core product
lines.
|
·
|
Gross
profit as a percentage of net revenues was 49.3% for the fiscal
quarter
ended September 30, 2007 as compared to 52.8% reported for the
fiscal
quarter ended September 30, 2006. The decrease in gross profit
margin percent was primarily attributable to an increase in certain
inventory reserves in connection with a review of our product
offerings as
part of our effort to simplify our product portfolio by discontinuing
slow-moving and non-strategic
products.
|
·
|
Loss
from operations as a percentage of net revenues was $1.6 million
or 12.4%
for the fiscal quarter ended September 30, 2007 as compared
to $642,000 or
5.1% for the fiscal quarter ended September 30, 2006. Loss from
operations for the fiscal quarter ended September 30, 2007
includes
expenses totaling approximately $1.0 million related to the
departure of
our former president and chief executive officer and other
former
employees, expenses associated with the executive search for
a permanent
chief executive officer and $121,000 for a value added tax
(“VAT”)
liability in connection with an audit of a foreign
subsidiary.
|
·
|
Net
loss of $1.7 million, or $0.03 per basic and diluted share, for the
fiscal quarter ended September 30, 2007, increased from a net
loss of
$651,000, or $0.01 per basic and diluted share, for the fiscal
quarter ended September 30,
2006.
|
·
|
Cash,
cash equivalents and marketable securities were $7.2 million
as of
September 30, 2007 compared to $7.7 million as of June 30,
2007.
|
·
|
Net
accounts receivable were $2.0 million as of September 30, 2007 as
compared to $3.4 million as of June 30, 2007. Annualized days sales
outstanding (“DSO”) in receivables as of September 30,
2007 decreased to 19 days from 21 days as of June 30, 2007.
Our accounts receivable and DSO are primarily affected by the
timing of
shipments within a quarter, our collections performance and the
fact that
a significant portion of our revenues are recognized on a sell-through
basis (upon shipment from distributor inventories rather than
as goods are
shipped to distributors).
|
·
|
Net
inventories were $10.5 million as of September 30, 2007 as compared
to $11.0 million as of June 30, 2007. Our annualized inventory turns
decreased to 2.5 annualized turns for the fiscal quarter ended
September
30, 2007 compared to 2.8 annualized turns for the fiscal quarter
ended June 30, 2007.
|
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, warranty reserves, allowance for doubtful accounts,
inventory valuation, valuation of deferred income taxes, goodwill and purchased
intangible assets and legal settlement costs. These policies are described
in
further detail in our Annual Report on Form 10-K for the fiscal year ended
June
30, 2007. There have been no significant changes in our critical
accounting policies and estimates during the fiscal quarter ended September
30,
2007 as compared to what was previously disclosed in our Annual Report
on Form
10-K for the fiscal year ended June 30, 2007.
Recent
Accounting Pronouncements
Recent
accounting pronouncements issued by the Financial Accounting Standards
Board
(including its Emerging Issues Task Force), the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management
to
have a material impact on the Company’s present or future consolidated financial
statements.
Consolidated
Results of Operations
The
following table presents the percentage of net revenues represented by each
item
in our condensed consolidated statement of operations:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of revenues
|
|
|
50.7 |
% |
|
|
47.2 |
% |
Gross
profit
|
|
|
49.3 |
% |
|
|
52.8 |
% |
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
48.1 |
% |
|
|
43.9 |
% |
Research
and development
|
|
|
13.5 |
% |
|
|
13.7 |
% |
Litigation
settlement costs
|
|
|
0.0 |
% |
|
|
0.1 |
% |
Amortization
of purchased intangible assets
|
|
|
0.1 |
% |
|
|
0.1 |
% |
Total
operating expenses
|
|
|
61.8 |
% |
|
|
57.9 |
% |
Loss
from operations
|
|
|
(12.4 |
%) |
|
|
(5.1 |
%) |
Interest
income (expense), net
|
|
|
(0.1 |
%) |
|
|
0.0 |
% |
Other
income (expense), net
|
|
|
0.1 |
% |
|
|
(0.0 |
%) |
Loss
before income taxes
|
|
|
(12.5 |
%) |
|
|
(5.1 |
%) |
Provision
for income taxes
|
|
|
0.2 |
% |
|
|
0.1 |
% |
Net
loss
|
|
|
(12.7 |
%) |
|
|
(5.2 |
%) |
Comparison
of the Fiscal Quarter Ended September 30, 2007 and 2006
Net
Revenues by Product Line
The
following table presents net
revenues by product line:
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
|
|
%
of Net
|
|
|
Change
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
$
|
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Device
enablement
|
|
$ |
9,829
|
|
|
|
75.3 |
% |
|
$ |
9,003
|
|
|
|
71.9 |
% |
|
$ |
826
|
|
|
|
9.2 |
% |
Device
management
|
|
|
1,951
|
|
|
|
14.9 |
% |
|
|
1,714
|
|
|
|
13.7 |
% |
|
|
237
|
|
|
|
13.8 |
% |
Device
networking
|
|
|
11,780
|
|
|
|
90.2 |
% |
|
|
10,717
|
|
|
|
85.6 |
% |
|
|
1,063
|
|
|
|
9.9 |
% |
Non-core
|
|
|
1,274
|
|
|
|
9.8 |
% |
|
|
1,797
|
|
|
|
14.4 |
% |
|
|
(523 |
) |
|
|
(29.1 |
%) |
Net
revenues
|
|
$ |
13,054
|
|
|
|
100.0 |
% |
|
$ |
12,514
|
|
|
|
100.0 |
% |
|
$ |
540
|
|
|
|
4.3 |
% |
The
increase in net revenues for the fiscal quarter ended September 30, 2007 as
compared to the fiscal quarter ended September 30, 2006 was primarily a result
of an increase in net revenues from our device enablement and device management
product lines, offset by a decrease in our non-core product
lines. The increase in our device enablement product lines was
primarily due to an increase in our external device enablement
products. We are no longer investing in the development of our
non-core product lines and expect net revenues related to these products to
continue to decline in the future as we focus our investment on our device
networking product lines.
Net
Revenues by Region
The
following table presents net
revenues by geographic region:
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
|
|
%
of Net
|
|
|
Change
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
$
|
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Americas
|
|
$ |
7,935
|
|
|
|
60.8 |
% |
|
$ |
7,656
|
|
|
|
61.2 |
% |
|
$ |
279
|
|
|
|
3.6 |
% |
EMEA
|
|
|
3,385
|
|
|
|
25.9 |
% |
|
|
2,991
|
|
|
|
23.9 |
% |
|
|
394
|
|
|
|
13.2 |
% |
Asia
Pacific
|
|
|
1,734
|
|
|
|
13.3 |
% |
|
|
1,867
|
|
|
|
14.9 |
% |
|
|
(133 |
) |
|
|
-7.1 |
% |
Net
revenues
|
|
$ |
13,054
|
|
|
|
100.0 |
% |
|
$ |
12,514
|
|
|
|
100.0 |
% |
|
$ |
540
|
|
|
|
4.3 |
% |
The
increase in net revenues for the fiscal quarter ended September 30, 2007 as
compared to the fiscal quarter ended September 30, 2006 is primarily a result
of
an increase in net revenues in the EMEA (“Europe, Middle East and Africa”) and
Americas regions offset by a decrease in the Asia Pacific region. The
increase in net revenues in the EMEA region is primarily attributable to an
increase in sales of our device enablement product lines offset by a decrease
in
our non-core product lines. The increase in the Americas region is
primarily due to an increase in device networking product lines offset by a
decline in non-core product lines. The decrease in the Asia
Pacific region is primarily due to a decrease in non-core product
lines.
Gross
Profit
The
following table presents gross
profit:
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
|
|
%
of Net
|
|
|
Change
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
$
|
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Gross
profit
|
|
$ |
6,441
|
|
|
|
49.3 |
% |
|
$ |
6,607
|
|
|
|
52.8 |
% |
|
$ |
(166 |
) |
|
|
(2.5 |
%) |
Gross
profit represents net revenues less cost of revenues. Cost of revenues consisted
primarily of the cost of raw material components, subcontract labor assembly
from contract manufacturers, manufacturing overhead, amortization of purchased
intangible assets, establishing or relieving inventory reserves for excess
and
obsolete products or raw materials, warranty costs, royalties and share-based
compensation.
The
decrease in gross profit margin percent was primarily attributable to an
increase in certain inventory reserves in connection with a review of our
product offerings as part of our effort to simplify our product portfolio by
discontinuing slow-moving and non-strategic products.
Selling,
General and Administrative
Selling,
general and administrative expenses consisted of personnel-related expenses
including salaries and commissions, share-based compensation, facility expenses,
information technology, trade show expenses, advertising, and legal and
accounting fees offset by reimbursement of legal fees from insurance
proceeds.
The
following table presents selling,
general and administrative expenses:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2007
|
|
Revenues
|
|
2006
|
|
Revenues
|
|
$
|
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Personnel-related
expenses
|
|
$ |
3,663
|
|
|
|
$ |
2,861
|
|
|
|
$ |
802
|
|
|
|
28.0 |
% |
Professional
fees & outside services
|
|
|
708
|
|
|
|
|
758
|
|
|
|
|
(50 |
) |
|
|
(6.6 |
%) |
Advertising
and marketing
|
|
|
658
|
|
|
|
|
745
|
|
|
|
|
(87 |
) |
|
|
(11.7 |
%) |
Facilities
|
|
|
383
|
|
|
|
|
540
|
|
|
|
|
(157 |
) |
|
|
(29.1 |
%) |
Share-based
compensation
|
|
|
270
|
|
|
|
|
209
|
|
|
|
|
61
|
|
|
|
29.2 |
% |
Depreciation
|
|
|
83
|
|
|
|
|
77
|
|
|
|
|
6
|
|
|
|
7.8 |
% |
Other
|
|
|
514
|
|
|
|
|
308
|
|
|
|
|
206
|
|
|
|
66.9 |
% |
Selling,
general and administrative
|
|
$ |
6,279
|
|
48.1%
|
|
$ |
5,498
|
|
43.9%
|
|
$ |
781
|
|
|
|
14.2 |
% |
In
order
of significance, the increase in selling, general and administrative expenses
for the fiscal quarter ended September 30, 2007 as compared to the fiscal
quarter ended September 30, 2006 was primarily due to: (i) increased
personnel-related expenses as a result of severance charges related to the
departure of the former president and chief executive officer and other former
employees, (ii) costs associated with the executive search for a permanent
CEO
and (iii) increased expenses due to a $121,000 VAT liability in connection
with a tax audit of a foreign subsidiary.
Research
and Development
Research
and development expenses consisted of personnel-related expenses including
share-based compensation, as well as expenditures to third-party vendors
for
research and development activities.
The
following table presents research
and development expenses:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2007
|
|
Revenues
|
|
2006
|
|
Revenues
|
|
$
|
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Personnel-related
expenses
|
|
$ |
1,255
|
|
|
|
$ |
1,274
|
|
|
|
$ |
(19 |
) |
|
|
(1.5 |
%) |
Facilities
|
|
|
212
|
|
|
|
|
166
|
|
|
|
|
46
|
|
|
|
27.7 |
% |
Professional
fees & outside services
|
|
|
81
|
|
|
|
|
81
|
|
|
|
|
-
|
|
|
|
0.0 |
% |
Share-based
compensation
|
|
|
112
|
|
|
|
|
93
|
|
|
|
|
19
|
|
|
|
20.4 |
% |
Depreciation
|
|
|
12
|
|
|
|
|
9
|
|
|
|
|
3
|
|
|
|
33.3 |
% |
Other
|
|
|
96
|
|
|
|
|
95
|
|
|
|
|
1
|
|
|
|
1.1 |
% |
Research
and development
|
|
$ |
1,768
|
|
13.5%
|
|
$ |
1,718
|
|
13.7%
|
|
$ |
50
|
|
|
|
2.9 |
% |
Total research
and development expenses for the fiscal quarter ended September 30, 2007
remained consistent compared to the fiscal quarter ended September 30,
2006. Personnel-related expenses decreased slightly due to lower
average headcount, partially offset by approximately $120,000 in charges
related
to the departure of a former employee.
Provision
for Income Taxes
On
July
1, 2007, we adopted FIN 48. In connection with the adoption of FIN 48, we
recognized an adjustment of approximately $226,000 to the beginning balance
of
accumulated deficit on our consolidated balance sheet. Our continuing
practice is to recognize interest and/or penalties related to income tax
matters
in income tax expense. As of September 30, 2007, we had recorded $326,000
of
uncertain tax positions including approximately $98,000 of accrued interest
and
penalties related to these uncertain tax positions.
At
July
1, 2007, our fiscal 2001 through fiscal 2007 tax years remain open to
examination by the Federal and state taxing authorities. However, we
have net operating losses (“NOLs”) beginning in fiscal 2001 which would cause
the statute of limitations to remain open for the year in which the NOL was
incurred.
The
following table presents our effective tax rate based upon our income tax
provision:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Effective
tax rate
|
|
|
1 |
% |
|
|
2 |
% |
We
utilize the liability method of accounting for income taxes as set forth
in
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes.” The federal statutory rate was 34% for all
periods. The difference between our effective tax rate and the
federal statutory rate resulted primarily from the effect of our domestic
losses
recorded without a tax benefit, 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 these assets will more likely than not be
realized. As a result of our cumulative losses, we provided a full valuation
allowance against our domestic net deferred tax assets for the fiscal quarters
ended September 30, 2007 and 2006.
Liquidity
and Capital Resources
Since
inception through fiscal 2007, we have financed our operations primarily
through
the issuance of common stock and operating activities. We refer to the sum
of
cash and cash equivalents and marketable securities as “cash” for the purposes
of discussing our cash balance and liquidity.
The
following table presents details of our working capital and cash:
|
|
September
30,
|
|
|
June
30,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
Working
capital
|
|
$ |
4,305
|
|
|
$ |
5,587
|
|
|
$ |
(1,336 |
) |
Cash
and cash equivalents
|
|
$ |
7,089
|
|
|
$ |
7,582
|
|
|
$ |
(493 |
) |
Marketable
securities
|
|
|
96
|
|
|
|
97
|
|
|
|
(1 |
) |
Total
cash, cash equivalents and marketable securities
|
|
$ |
7,185
|
|
|
$ |
7,679
|
|
|
$ |
(494 |
) |
In
order
of significance, our working capital as of September 30, 2007 decreased compared
to June 30, 2007 primarily due to: (i) a net loss and (ii) a decrease in
accounts receivable as a result of lower net revenues for the fiscal quarter
ended September 30, 2007 as compared to the fiscal quarter ended June 30,
2007. Our cash balance decreased compared to prior year end as a
result of our cash management activities, which included the timing of cash
payments to our vendors and the timing of cash receipts from our
customers.
We
believe that our existing cash, cash equivalents, marketable securities and
funds available from our line of credit will be adequate to meet our anticipated
cash needs through at least the next 12 months. Our future capital requirements
will depend on many factors, including the timing and amount of our net
revenues, research and development, expenses associated with any strategic
partnerships or acquisitions and infrastructure investments, and expenses
related to government investigations and litigation, which could affect our
ability to generate additional cash. If cash generated from operations and
financing activities is insufficient to satisfy our working capital
requirements, we may need to raise capital by borrowing funds through bank
loans, the selling of securities or other means. There can be no assurance
that
we will be able to raise any such capital on terms acceptable to us, if at
all.
If we are unable to secure additional financing, we may not be able to develop
or enhance our products, take advantage of future opportunities, respond
to
competition or continue to operate our business.
In
May
2006, we entered into a two-year secured revolving Loan and Security Agreement
("Line of Credit”) with a bank, which provides for borrowings up to $5.0
million. The borrowing capacity is limited to eligible accounts receivable
as
defined under the Line of Credit. Borrowings under the Line of Credit bear
interest at the prime rate plus 1.75% per annum. We are required to pay an
unused line fee of 0.50% on the unused portion of the Line of Credit. As
of
September 30, 2007 and June 30, 2007, we had no borrowings against the Line
of
Credit.
The
following table presents our available borrowing capacity and outstanding
letters of credit, which were used to secure equipment leases, deposits for
a
building lease and security deposits:
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Available
borrowing capacity
|
|
$ |
1,813
|
|
|
$ |
3,462
|
|
Outstanding
letters of credit
|
|
$ |
1,280
|
|
|
$ |
1,280
|
|
During
March 2006, we entered into a lease agreement whereby the lessor will advance
an
amount not to exceed $1.0 million for the implementation of a new enterprise
resource planning (“ERP”) information system to manage our business operations.
During the ERP implementation period, we will pay interest of 9.0% on the
amounts advanced. The lease agreement states that the aggregate amount advanced
to us by the lessor will be repaid over a three-year period following the
completion of the ERP implementation. As of September 30, 2007, we had incurred
costs of $500,000 in connection with the ERP implementation which will be
advanced by the lessor.
As
of
September 30, 2007 and June 30, 2007, approximately $1.1 million and $2.0
million, respectively, of our cash was held in foreign subsidiary bank
accounts. Such cash is unrestricted with regard to foreign liquidity
needs; however, our ability to utilize a portion of this cash to satisfy
liquidity needs outside of such foreign locations is subject to approval
by the
foreign location board of directors.
Cash
Flows
The
following table presents the major components of the consolidated statements
of
cash flows:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,653 |
) |
|
$ |
(651 |
) |
Non-cash
operating expenses, net
|
|
|
732
|
|
|
|
468
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,434
|
|
|
|
334
|
|
Inventories
|
|
|
376
|
|
|
|
(1,122 |
) |
Contract
manufacturers' receivable
|
|
|
19
|
|
|
|
368
|
|
Prepaid
expenses and other current assets
|
|
|
76
|
|
|
|
25
|
|
Other
assets
|
|
|
(1 |
) |
|
|
(3 |
) |
Accounts
payable
|
|
|
(2,380 |
) |
|
|
1,957
|
|
Accrued
payroll and related expenses
|
|
|
203
|
|
|
|
(213 |
) |
Accrued
settlements
|
|
|
-
|
|
|
|
(400 |
) |
Warranty
reserve
|
|
|
(73 |
) |
|
|
(198 |
) |
Other
liabilities
|
|
|
677
|
|
|
|
(741 |
) |
Net
cash used in operating activities
|
|
|
(590 |
) |
|
|
(176 |
) |
Net
cash used in investing activities
|
|
|
(126 |
) |
|
|
(4 |
) |
Net
cash provided by financing activities
|
|
|
149
|
|
|
|
151
|
|
Effect
of foreign exchange rate changes on cash
|
|
|
74
|
|
|
|
(13 |
) |
Decrease
in cash and cash equivalents
|
|
$ |
(493 |
) |
|
$ |
(42 |
) |
Operating
activities used cash during the fiscal quarter ended September 30, 2007.
This
was the result of a net loss, offset by non-cash operating expenses and cash
provided by operating assets and liabilities. The non-cash items that had
a
significant impact on net loss included share-based compensation and
depreciation. In order of significance, the changes in operating assets and
liabilities that had a significant impact on the cash used in operating
activities included (i) a decrease in net accounts receivable due to the
timing
of collections and linearity of sales (ii) an increase in other liabilities
as a
result of increase in customer prepayments and (iii) a decrease in finished
good
inventories; offset by (iii) a decrease in accounts payable as a result of
the
timing of inventory receipts and cash payments to vendors.
Operating
activities used cash during the fiscal quarter ended September 30, 2006.
This
was the result of at net loss, offset by non-cash operating expenses and
cash
provided by operating assets and liabilities. The non-cash items that had
a
significant impact on the net loss included share-based compensation and
depreciation. In order of significance, the changes in operating assets and
liabilities which had a significant impact on the cash used in operating
activities included (i) an increase in accounts payable as a result of the
timing of cash payments to vendors and (ii) a decrease in receivable balances
as
a result of our cash collection efforts; offset by (iii) an increase in
inventories, (iv) a decrease in other liabilities as a result of a decrease
in
customer deposits, (v) a decrease in accrued settlements as a result of the
payment of the Digi settlement and (vi) a reduction in the warranty reserve
to
reflect lower expected warranty return rates.
Investing
activities used cash during the fiscal quarter ended September 30, 2007.
This
was due to the purchase of property and equipment.
Investing
activities used cash during the fiscal quarter ended September 30, 2006.
This
was due to the purchase of property and equipment.
Financing
activities provided cash during the fiscal quarter ended September 30, 2007.
This was due to proceeds from the sale of common shares through employee
stock
option exercises and the 2000 Employee Stock Purchase Plan (the “ESPP”) offset
by repayments on capital lease obligations.
Financing
activities provided cash during the fiscal quarter ended September 30, 2006.
This was due to proceeds from the sale of common shares through employee
stock
option exercises and the ESPP offset by repayments on capital lease
obligations.
Off-Balance
Sheet Arrangements
We
did not have any off balance sheet
arrangements as of September 30, 2007.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
We
do not
use derivative financial instruments for speculative or trading purposes.
We
place our investments in instruments that meet high credit quality standards,
as
specified in our investment policy.
Interest
Rate Risk
Our
exposure to interest rate risk is limited to the exposure related to our
cash
and cash equivalents and marketable securities. Our cash and cash equivalents
are held in cash deposit accounts and, as such, we believe our cash and cash
equivalents are not subject to significant interest rate risk. We believe
our
marketable securities would not decline in value by a significant amount
if
interest rates increase, and therefore would not have a material effect on
our
financial condition or results of operations.
The
following table presents our cash and cash equivalents and marketable
securities:
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
$ |
7,089
|
|
|
$ |
7,582
|
|
Marketable
securities
|
|
|
96
|
|
|
|
97
|
|
Total
cash, cash equivalents and marketable securities
|
|
$ |
7,185
|
|
|
$ |
7,679
|
|
Foreign
Currency Risk
We
hold a
significant portion of our cash balance in foreign currencies (particularly
the
euro) and, as such, we are subject to foreign currency fluctuations. In
addition, we sell products internationally. As a result, our financial results
could be harmed by factors such as changes in foreign currency exchange rates
or
weak economic conditions in foreign markets. We do not currently enter into
forward exchange contracts to hedge exposure denominated in foreign currencies
or any other derivative financial instruments for trading or speculative
purposes. In the future, if we feel our foreign currency exposure has increased,
we may consider entering into hedging transactions to help mitigate that
risk.
The
following table presents our cash
balance held in foreign currencies:
|
|
September
30,
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Cash
held in foreign currencies
|
|
$ |
2,071
|
|
|
$ |
2,042
|
|
Item
4. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures
We
carried out an evaluation, under the supervision and with the participation
of
our management, including our Interim Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of our fiscal quarter ended September
30,
2006. Based upon that evaluation, our Interim Chief Executive Officer and
Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in ensuring that information required to be disclosed by us in
reports
that we file or submit under the Exchange Act (i) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and (ii) is accumulated and communicated to our management, including
our
Interim Chief Executive Officer and Chief Financial Officer to allow timely
decisions regarding required disclosure.
(b)
Changes in internal controls over
financial reporting
There
have been no changes in our internal controls over financial reporting
identified during the fiscal quarter that ended September 30, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
The
information set forth in Note 9 and 10 to our notes to the unaudited
condensed consolidated financial statements of Part I, Item 1 of this Form
10-Q
is hereby incorporated by reference.
Item
1A. Risk Factors
We
operate in a rapidly changing environment that involves numerous risks and
uncertainties. Before deciding to purchase, hold or sell our common
stock, you should carefully consider the risks described in this section.
This
section should be read in conjunction with the unaudited consolidated financial
statements and accompanying notes thereto, and Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in this
Report. If any of these risks or uncertainties actually occurs with material
adverse effects on us, our business, financial condition and results of
operations could be seriously harmed. In that event, the market price for
our
common stock could decline and you may lose all or part of your
investment.
Our
quarterly operating results may fluctuate, which could cause our stock to
decline.
We
have experienced, and expect to
continue to experience, significant fluctuations in net revenues, expenses
and
operating results from quarter to quarter. We, therefore, believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance, and you should not rely on them to
predict
our future performance or the future performance of our stock. A high percentage
of our operating expenses are relatively fixed and are based on our expectations
of future net revenues. If we were to experience a reduction in revenues
in a
quarter, we would likely be unable to adjust our short-term expenditures.
If
this were to occur, our operating results for that fiscal quarter would be
harmed. If our operating results in future fiscal quarters fall below the
expectations of market analysts and investors, the price of our common stock
would likely fall. Other factors that might cause our operating results to
fluctuate on a quarterly basis include:
·
|
changes
in the mix of net revenues attributable to higher-margin and lower-margin
products;
|
·
|
customers’
decisions to defer or accelerate
orders;
|
·
|
variations
in the size or timing of orders for our
products;
|
·
|
changes
in demand for our products;
|
·
|
fluctuations
in exchange rates;
|
·
|
defects
and other product quality problems;
|
·
|
loss
or gain of significant customers;
|
·
|
short-term
fluctuations in the cost or availability of our critical
components;
|
·
|
announcements
or introductions of new products by our
competitors;
|
·
|
effects
of terrorist attacks in the U.S. and abroad;
and
|
·
|
changes
in demand for devices that incorporate our
products.
|
If
a major distributor or customer cancels, reduces or delays purchases, our
net
revenues might decline and our business could be adversely
affected.
The
number and timing of sales to our distributors have been difficult for us
to
predict. While our distributors are customers in the sense they buy our
products, they are also part of our product distribution system. Some of
our
distributors could be acquired by a competitor and stop buying product from
us.
The
following table presents sales to our significant customers as a percentage
of
net revenues:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Top
five customers
(1)
|
|
|
40.0 |
% |
|
|
35.6 |
% |
Tech
Data
|
|
|
15.0 |
% |
|
|
9.9 |
% |
Ingram
Micro
|
|
|
9.7 |
% |
|
|
9.2 |
% |
(1)
Includes
Ingram Micro and
Tech Data.
The
loss
or deferral of one or more significant customers in a quarter could harm
our
operating results. We have in the past, and might in the future, lose one
or
more major customers. If we fail to continue to sell to our major customers
in
the quantities we anticipate, or if any of these customers terminate our
relationship, our reputation, the perception of our products and technology
in
the marketplace, could be harmed. The demand for our products from our OEM,
VAR
and systems integrator customers depends primarily on their ability to
successfully sell their products that incorporate our device networking
solutions technology. Our sales are usually completed on a purchase order
basis
and we have few long-term purchase commitments from our customers.
Our
future success also depends on our
ability to attract new customers, which often involves an extended selling
process. The sale of our products often involves a significant technical
evaluation, and we often face delays because of our customers’ internal
procedures for evaluating and deploying new technologies. For these and other
reasons, the sales cycle associated with our products is typically lengthy,
often lasting six to nine months and sometimes longer. Therefore, if we were
to
lose a major customer, we might not be able to replace the customer in a
timely
manner, or at all. This would cause our net revenues to decrease and could
cause
our stock price to decline.
If
we fail to develop or enhance our products to respond to changing market
conditions and government and industry standards, our competitive position
will
suffer and our business will be adversely affected.
Our
future success depends in large part on our ability to continue to enhance
existing products, lower product cost and develop new products that maintain
technological competitiveness and meet government and industry standards.
The
demand for network-enabled products is relatively new and can change as a
result
of innovations, changes or new government and industry standards. For example,
a
recent directive in the European Union bans the use of lead and other heavy
metals in electrical and electronic equipment after July 1, 2006. As a
result, in advance of this deadline, some of our customers selling products
in
Europe had begun demanding product from component manufacturers that did
not
contain these banned substances. Any failure by us to develop and introduce
new
products or enhancements in response to new government and industry standards
could harm our business, financial condition or results of operations. These
requirements might or might not be compatible with our current or future
product
offerings. We might not be successful in modifying our products and services
to
address these requirements and standards. For example, our competitors might
develop competing technologies based on Internet Protocols, Ethernet Protocols
or other protocols that might have advantages over our products. If this
were to
happen, our net revenues might not grow at the rate we anticipate, or could
decline.
Delays
in deliveries or quality problems with our component suppliers could damage
our
reputation and could cause our net revenues to decline and harm our results
of
operations.
We
and our contract manufacturers are
responsible for procuring raw materials for our products. Our products
incorporate components or technologies that are only available from single
or
limited sources of supply. In particular, some of our integrated circuits
are
only available from a single source and in some cases are no longer being
manufactured. From time to time, integrated circuits used in our products
will
be phased out of production. When this happens, we attempt to purchase
sufficient inventory to meet our needs until a substitute component can be
incorporated into our products. Nonetheless, we might be unable to purchase
sufficient components to meet our demands, or we might incorrectly forecast
our
demands, and purchase too many or too few components. In addition, our products
use components that have, in the past, been subject to market shortages and
substantial price fluctuations. From time to time, we have been unable to
meet
our orders because we were unable to purchase necessary components for our
products. We do not have long-term supply arrangements with many of our vendors
to obtain necessary components or technology for our products. If we are
unable
to purchase components from these suppliers, product shipments could be
prevented or delayed, which could result in a loss of sales. If we are unable
to
meet existing orders or to enter into new orders because of a shortage in
components, we will likely lose net revenues and risk losing customers and
harming our reputation in the marketplace, which could adversely affect our
business, financial condition or results of operations. We have recently
redesigned many of our products to comply with the new environmental regulation
such as the Reduction of Hazardous Substances (“RoHS”) directive. These
regulations are relatively new for our supply chain and interruptions in
parts
supply due to the additional complexities and limited number of second source
supply choices could adversely impact our business.
If
we lose the services of any of our contract manufacturers or suppliers, we
may
not be able to obtain alternate sources in a timely manner, which could harm
our
customer relations and adversely affect our net revenues and harm our results
of
operations.
We
do not
have long-term agreements with our contract manufacturers or suppliers. If
any
of these subcontractors or suppliers ceased doing business with us, we may
not be able to obtain alternative sources in a timely or cost-effective manner.
Due to the amount of time that it usually takes us to qualify contract
manufacturers and suppliers, we could experience delays in product shipments
if
we are required to find alternative subcontractors and suppliers. Some of
our
suppliers have or provide technology or trade secrets, the loss of which
could
be disruptive to our procurement and supply processes. If a competitor should
acquire one of our contract manufacturers or suppliers, we could be subjected
to
more difficulties in maintaining or developing alternative sources of supply
of
some components or products. Any problems that we may encounter with the
delivery, quality or cost of our products could damage our customer
relationships and materially and adversely affect our business, financial
condition or results of operations.
Environmental
regulations such as the Waste Electrical and Electronic Equipment
(“WEEE”) and RoHS directives may require us to redesign our products
and to develop compliance administration systems.
Various
countries have begun to require companies selling a broad range of electrical
equipment to conform to regulations such as the WEEE and RoHS directives
and we
expect additional countries and locations to adopt similar regulations in
the
future. New environmental standards such as these could require us to redesign
our products in order to comply with the standards, and require the development
of compliance administration systems. We have already invested significant
resources into developing compliance tracking systems, and further investments
may be required. Additionally, we may incur significant costs to redesign
our
products and to develop compliance administration systems; however alternative
designs may have an adverse effect on our gross profit margin. If we cannot
develop compliant products timely or properly administer our compliance
programs, our revenues may also decline due to lower sales, which would
adversely affect our operating results.
If
our research and development
efforts are not successful, our net revenues could decline and our business
could be harmed.
If
we are
unable to develop new products as a result of our research and development
efforts, or if the products we develop are not successful, our business could
be
harmed. Even if we do develop new products that are accepted by our target
markets, we do not know whether the net revenues from these products will
be
sufficient to justify our investment in research and development. In addition,
if we do not invest sufficiently in research and development, we may be unable
to maintain our competitive position. Our investment in research and development
may decrease, which may put us at a competitive disadvantage compared to
our
competitors and adversely affect our market position.
We
expect the average selling prices of our products to decline, which could
reduce
our net revenues, gross margins and profitability.
In
the
past, we have experienced some reduction in the average selling prices and
gross
margins of products, and we expect that this will continue for our products
as
they mature. We expect competition to continue to increase, and we anticipate
this could result in additional downward pressure on our pricing. Our average
selling prices for our products might decline as a result of other reasons,
including promotional programs and customers who negotiate price reductions
in
exchange for longer-term purchase commitments. We also may not be able to
increase the price of our products if the prices of components or our overhead
costs increase. In addition, we may be unable to adjust our prices in response
to currency exchange rate fluctuations resulting in lower gross
margins. Further, as is characteristic of our industry, the average
selling prices of our products have historically decreased over the products’
life cycles and we expect this pattern to continue. If these were to
occur, our gross margins would decline and we may not be able to reduce the
cost
to manufacture our products to keep up with the decline in prices.
Current
or future litigation could adversely affect us.
We
recently concluded multiple securities lawsuits with our stockholders and
litigation with a former executive officer. We may have an obligation
to continue to indemnify the former executive officer and defend the securities
violation that he has been charged with. There is a risk that our
insurance carriers may not reimburse us for such costs. Any lawsuit may involve
complex questions of fact and law and may require the expenditure of significant
funds and the diversion of other resources. Except as described in this Form
10-Q, we do not know what the outcome of outstanding legal proceedings will
be
and cannot determine the extent to which these resolutions might have a material
adverse effect on our business, financial condition or results of operations.
The results of litigation are inherently uncertain, and adverse outcomes
are
possible.
Our
products may contain undetected software or hardware errors or defects that
could lead to an increase in our costs, reduce our net revenues or damage
our
reputation.
We
currently offer warranties ranging from one to two years on each of our
products. Our products could contain undetected errors or defects. If there
is a
product failure, we might have to replace all affected products without being
able to book revenue for replacement units, or we may have to refund the
purchase price for the units. We do not have a long history with which to
assess
the risks of unexpected product failures or defects for our device server
product line. Regardless of the amount of testing we undertake, some errors
might be discovered only after a product has been installed and used by
customers. Any errors discovered after commercial release could result in
loss
of net revenues and claims against us. Significant product warranty claims
against us could harm our business, reputation and financial results and
cause
the price of our stock to decline.
If
software that we license or acquire from the open source software community
and
incorporate into our products were to become unavailable or no longer available
on commercially reasonable terms, it could adversely affect sales of our
products, which could disrupt our business and harm our financial
results.
Certain
of our products contain components developed and maintained by third-party
software vendors or are available through the “open source” software community.
We also expect that we may incorporate software from third-party vendors
and
open source software in our future products. Our business would be disrupted
if
this software, or functional equivalents of this software, were either no
longer
available to us or no longer offered to us on commercially reasonable terms.
In
either case, we would be required to either redesign our products to function
with alternate third-party software or open source software, or develop these
components ourselves, which would result in increased costs and could result
in
delays in our product shipments. Furthermore, we might be forced to limit
the
features available in our current or future product offerings.
If
our contract manufacturers are unable or unwilling to manufacture our products
at the quality and quantity we request, our business could be
harmed.
We
outsource substantially all of our manufacturing to four manufacturers in
Asia:
Venture Electronics Services, Uni Precision Industrial Ltd., Universal
Scientific Industrial Company, LTD and Hana Microelectronics, Inc. In addition,
two independent third party foundries located in Asia manufacture substantially
all of our large scale integration chips. Our reliance on these third-party
manufacturers exposes us to a number of significant risks,
including:
·
|
reduced
control over delivery schedules, quality assurance, manufacturing
yields
and production costs;
|
·
|
lack
of guaranteed production capacity or product supply;
and
|
·
|
reliance
on these manufacturers to maintain competitive manufacturing
technologies.
|
Our
agreements with these manufacturers
provide for services on a purchase order basis. If our manufacturers were
to
become unable or unwilling to continue to manufacture our products at requested
quality, quantity, yields and costs, or in a timely manner, our business
would
be seriously harmed. As a result, we would have to attempt to identify and
qualify substitute manufacturers, which could be time consuming and difficult,
and might result in unforeseen manufacturing and operations problems. For
example, Jabil Circuit, Inc. acquired Varian, Inc. in March 2005 and closed
the
facility that manufactured our products. We transferred this production to
another contract manufacturer. Moreover, as we shift products among third-party
manufacturers, we may incur substantial expenses, risk material delays or
encounter other unexpected issues.
In
addition, a natural disaster could disrupt our manufacturers’ facilities and
could inhibit our manufacturers’ ability to provide us with manufacturing
capacity in a timely manner or at all. If this were to occur, we likely would
be
unable to fill customers’ existing orders or accept new orders for our products.
The resulting decline in net revenues would harm our business. We also are
responsible for forecasting the demand for our individual products. These
forecasts are used by our contract manufacturers to procure raw materials
and
manufacture our finished goods. If we forecast demand too high, we may invest
too much cash in inventory, and we may be forced to take a write-down of
our
inventory balance, which would reduce our earnings. If our forecast is too
low
for one or more products, we may be required to pay charges that would increase
our cost of revenues or we may be unable to fulfill customer orders, thus
reducing net revenues and therefore earnings.
Our
international activities are subject to uncertainties, which include
international economic, regulatory, political and other risks that could
harm
our business, financial condition or results of
operations.
The
following table presents our sales
within geographic regions:
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
|
|
%
of Net
|
|
|
Change
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
$
|
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Americas
|
|
$ |
7,935
|
|
|
|
60.8 |
% |
|
$ |
7,656
|
|
|
|
61.2 |
% |
|
$ |
279
|
|
|
|
3.6 |
% |
EMEA
|
|
|
3,385
|
|
|
|
25.9 |
% |
|
|
2,991
|
|
|
|
23.9 |
% |
|
|
394
|
|
|
|
13.2 |
% |
Asia
Pacific
|
|
|
1,734
|
|
|
|
13.3 |
% |
|
|
1,867
|
|
|
|
14.9 |
% |
|
|
(133 |
) |
|
|
-7.1 |
% |
Net
revenues
|
|
$ |
13,054
|
|
|
|
100.0 |
% |
|
$ |
12,514
|
|
|
|
100.0 |
% |
|
$ |
540
|
|
|
|
4.3 |
% |
We
expect
that international revenues will continue to represent a significant portion
of
our net revenues in the foreseeable future. Doing business internationally
involves greater expense and many risks. For example, because the products
we
sell abroad and the products and services we buy abroad may be priced in
foreign
currencies, we could be affected by fluctuating exchange rates. In the past,
we
have lost money because of these fluctuations. We might not successfully
protect
ourselves against currency rate fluctuations, and our financial performance
could be harmed as a result. In addition, we use contract manufacturers based
in
Asia to manufacture substantially all of our products. International revenues
and operations are subject to numerous risks, including:
·
|
unexpected
changes in regulatory requirements, taxes, trade laws and
tariffs;
|
·
|
reduced
protection for intellectual property rights in some
countries;
|
·
|
differing
labor regulations;
|
·
|
compliance
with a wide variety of complex regulatory
requirements;
|
·
|
fluctuations
in currency exchange rates;
|
·
|
changes
in a country’s or region’s political or economic
conditions;
|
·
|
effects
of terrorist attacks in the U.S. and
abroad;
|
·
|
greater
difficulty in staffing and managing foreign operations;
and
|
·
|
increased
financial accounting and reporting burdens and
complexities.
|
Our
international operations require significant attention from our management
and
substantial financial resources. We do not know whether our investments in
other
countries will produce desired levels of net revenues or
profitability.
We
are exposed to foreign currency exchange risks, which could harm our business
and operating results.
We
hold a
significant portion of our cash balance in foreign currencies (particularly
euros), and as such are exposed to adverse changes in exchange rates associated
with foreign currency fluctuations. However, we do not currently engage in
any
hedging transactions to mitigate these risks. Although from time to time
we
review our foreign currency exposure and evaluate whether we should enter
into
hedging transactions, we may not adequately hedge against any future volatility
in currency exchange rates and, if we engage in hedging transactions, the
transactions will be based on forecasts which later may prove to be inaccurate.
Any failure to hedge successfully or anticipate currency risks properly could
adversely affect our operating results.
If
we are unable to sell our inventory in a timely manner it could become obsolete,
which could require us to increase our reserves and harm our operating
results.
At
any
time, competitive products may be introduced with more attractive features
or at
lower prices than ours. There is a risk that we may be unable to sell our
inventory in a timely manner to avoid it becoming obsolete.
The
following table presents our inventory and reserve for excess and obsolete
inventory reserve:
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Finished
goods
|
|
$ |
7,448
|
|
|
$ |
7,848
|
|
Raw
materials
|
|
|
2,301
|
|
|
|
2,653
|
|
Inventory
at distributors
|
|
|
1,866
|
|
|
|
1,876
|
|
Large
scale integration chips *
|
|
|
1,536
|
|
|
|
1,530
|
|
Inventories,
gross
|
|
|
13,151
|
|
|
|
13,907
|
|
Reserve
for excess and obsolete inventory
|
|
|
(2,698 |
) |
|
|
(2,926 |
) |
Inventories,
net
|
|
$ |
10,453
|
|
|
$ |
10,981
|
|
*
This
item
is
sold individually and embedded into our products.
In
the
event we are required to substantially discount our inventory or are unable
to
sell our inventory in a timely manner, we would be required to increase our
reserves and our operating results could be substantially harmed.
We
are subject to export control regulations that could restrict our ability
to
increase our international revenue and may adversely affect our
business.
Our
products and technologies are subject to U.S. export control laws, including
the
Export Administration Regulations, administered by the Department of Commerce
and the Bureau of Industry Security, and their foreign counterpart laws
and
regulations, which may require that we obtain an export license before
we can
export certain products or technology to specified countries. These export
control laws, and possible changes to current laws, regulations and policies,
could restrict our ability to sell products to customers in certain countries
or
give rise to delays or expenses in obtaining appropriate export licenses.
Failure to comply with these laws and regulations could result in government
sanctions, including substantial monetary penalties, denial of export
privileges, and debarment from government contracts. Any of these could
adversely affect our operations and, as a result, our financial results
could
suffer.
If
we are unable to attract, retain or motivate key senior management and technical
personnel, it could seriously harm our business.
Our
financial performance depends
substantially on the performance of our executive officers, key technical,
marketing and sales employees. In September 2007, our then President and
Chief
Executive Officer, Marc Nussbaum, was replaced as President and Chief Executive
Officer. While we are actively conducting a search for Mr. Nussbaum’s
permanent replacement, we cannot assure you that we will be able to recruit
a
qualified individual in a timely manner. Even though we have established
Reagan Sakai, Interim Chief Executive Officer and Chief Financial Officer,
to
assume Mr. Nussbaum’s responsibilities, any disruption resulting from Mr.
Nussbaums’s departure may adversely impact our customer relationships, employee
morale and our business. We are also dependent upon our technical
personnel, due to the specialized technical nature of our
business. If we were to lose the services of Mr. Sakai or any of our
key personnel and were not able to find replacements in a timely manner,
our
business could be disrupted, other key personnel might decide to leave, and
we
might incur increased operating expenses associated with finding and
compensating replacements.
If
our OEM customers develop their own expertise in network-enabling products,
it
could result in reduced sales of our products and harm our operating
results.
We
sell to both resellers and
OEMs. Selling products to OEMs involves unique risks, including the
risk that OEMs will develop internal expertise in network-enabling products
or
will otherwise incorporate network functionality in their products without
using
our device networking solutions. If this were to occur, our sales to OEMs
would
likely decline, which could reduce our net revenues and harm our operating
results.
New
product introductions and pricing strategies by our competitors could reduce
our
market share or cause us to reduce the prices of our products, which would
reduce our net revenues and gross margins.
The
market for our products is intensely competitive, subject to rapid change
and is
significantly affected by new product introductions and pricing strategies
of
our competitors. We face competition primarily from companies that
network-enable devices, semiconductor companies, companies in the automation
industry and companies with significant networking expertise and research
and
development resources. Our competitors might offer new products with features
or
functionality that are equal to or better than our products. In addition,
since
we work with open standards, our customers could develop products based on
our
technology that compete with our offerings. We might not have sufficient
engineering staff or other required resources to modify our products to match
our competitors. Similarly, competitive pressure could force us to reduce
the
price of our products. In each case, we could lose new and existing customers
to
our competition. If this were to occur, our net revenues could decline and
our
business could be harmed.
Current
or future litigation over intellectual property rights could adversely affect
us.
Substantial
litigation regarding intellectual property rights exists in our
industry. For example, in May 2006 we settled a patent infringement
lawsuit with Digi in which we signed an agreement with Digi to cross-license
each other’s patents. In addition, we paid Digi $600,000 as part of
the settlement. The results of litigation are inherently uncertain,
and adverse outcomes are possible. Adverse outcomes may have a
material adverse effect on our business, financial condition or results of
operations.
There
is
a risk that other third parties could claim that our products, or our customers’
products, infringe on their intellectual property rights or that we have
misappropriated their intellectual property. In addition, software, business
processes and other property rights in our industry might be increasingly
subject to third party infringement claims as the number of competitors grows
and the functionality of products in different industry segments overlaps.
Other
parties might currently have, or might eventually be issued, patents that
pertain to the proprietary rights we use. Any of these third parties might
make
a claim of infringement against us. The results of litigation are
inherently uncertain, and adverse outcomes are possible.
Responding
to any infringement claim, regardless of its validity, could:
·
|
be
time-consuming, costly and/or result in
litigation;
|
·
|
divert
management’s time and attention from developing our
business;
|
·
|
require
us to pay monetary damages, including treble damages if we are
held to
have willfully infringed;
|
·
|
require
us to enter into royalty and licensing agreements that we would
not
normally find acceptable;
|
·
|
require
us to stop selling or to redesign certain of our products;
or
|
·
|
require
us to satisfy indemnification obligations to our
customers.
|
If
any of
these occur, our business, financial condition or results of operations could
be
adversely affected.
We
may not be able to adequately protect or enforce our intellectual property
rights, which could harm our competitive position or require us to incur
significant expenses to enforce our rights.
We
have not historically relied on
patents to protect our proprietary rights, although we are now building a
patent
portfolio. In May 2006, we entered into a patent cross-license agreement
with
Digi in which the parties agreed to cross-license each other’s patents, which
could reduce the value of our existing patent portfolio. We rely
primarily on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. Despite any
precautions that we have taken:
·
|
laws
and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar
technologies;
|
·
|
other
companies might claim common law trademark rights based upon use
that
precedes the registration of our
marks;
|
·
|
other
companies might assert other rights to market products using our
trademarks;
|
·
|
policing
unauthorized use of our products and trademarks is difficult, expensive
and time-consuming, and we might be unable to determine the extent
of this
unauthorized use;
|
·
|
courts
may determine that our software programs use open source software
in such
a way that deprives the entire programs of intellectual property
protection; and
|
·
|
current
federal laws that prohibit software copying provide only limited
protection from software pirates.
|
Also,
the
laws of some of the countries in which we market and manufacture our products
offer little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third-parties to benefit from our technology without
paying us for it. Consequently, we may be unable to prevent our
proprietary technology from being exploited by others in the U.S. or abroad,
which could require costly efforts to protect our technology. Policing the
unauthorized use of our products, trademarks and other proprietary rights
is
expensive, difficult and, in some cases, impracticable. Litigation may be
necessary in the future to enforce or defend our intellectual property rights,
to protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial
costs
and diversion of management resources, either of which could harm our business.
Accordingly, despite our efforts, we may not be able to prevent third parties
from infringing upon or misappropriating our intellectual property, which
may
harm our business, financial condition and results of operations.
Acquisitions,
strategic partnerships, joint ventures or investments may impair our capital
and
equity resources, divert our management’s attention or otherwise negatively
impact our operating results.
We
may
pursue acquisitions, strategic partnerships and joint ventures that we believe
would allow us to complement our growth strategy, increase market share in
our
current markets and expand into adjacent markets, broaden our technology
and
intellectual property and strengthen our relationships with distributors
and
OEMs. Any future acquisition, partnership, joint venture or investment may
require that we pay significant cash, issue stock or incur substantial debt.
Acquisitions, partnerships or joint ventures may also result in the loss
of key
personnel and the dilution of existing stockholders as a result of issuing
equity securities. In addition, acquisitions, partnerships or joint ventures
require significant managerial attention, which may be diverted from our
other
operations. These capital, equity and managerial commitments may impair the
operation of our business. Furthermore, acquired businesses may not be
effectively integrated, may be unable to maintain key pre-acquisition business
relationships, may contribute to increased fixed costs and may expose us
to
unanticipated liabilities and otherwise harm our operating results.
We
may experience difficulties in implementing or enhancing new information
systems.
During
fiscal 2006, we began an upgrade of our existing ERP information system to
manage our business operations. The possibility exists that our
migration to the upgraded ERP information system could adversely affect our
disclosure controls and procedures or our operations in future periods. The
process of implementing information systems could adversely impact our ability
to do the following in a timely manner: accept and process customer
orders, receive inventory and ship products, invoice and collect receivables,
place purchase orders and pay invoices, and all other business transactions
related to the finance, order entry, purchasing, supply chain and human resource
processes within the ERP system. Any such disruption could adversely affect
our
financial position, results of operations, cash flows and the market price
of
our common stock.
Business
interruptions could adversely affect our business.
Our
operations and those of our suppliers are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure, terrorist attacks and
other
events beyond our control. A substantial portion of our facilities, including
our corporate headquarters and other critical business operations, are located
near major earthquake faults and, therefore, may be more susceptible to damage
if an earthquake occurs. We do not carry earthquake insurance for direct
earthquake-related losses. If a business interruption occurs, our business
could
be materially and adversely affected.
If
we fail to maintain an effective system of disclosure controls or internal
controls over financial reporting, our business and stock price could be
adversely affected.
Section 404
of the Sarbanes-Oxley Act of 2002 requires companies to evaluate periodically
the effectiveness of their internal controls over financial reporting,
and to
include a management report assessing the effectiveness of their internal
controls as of the end of each fiscal year. Beginning with our annual report
on
Form 10-K for our fiscal year ending June 30, 2008, we will be required
to
comply with the requirement of Section 404 of the Sarbanes-Oxley Act of
2002 to
include in each of our annual reports an assessment by our management of
the
effectiveness of our internal controls over financial
reporting. Beginning with our annual report on Form 10-K for our
fiscal year ending June 30, 2009, our independent registered public
accounting firm will issue a report assessing the effectiveness of our
internal
controls.
Our
management does not expect that our internal controls over financial reporting
will prevent all errors or frauds. A control system, no matter how well
designed
and operated, can provide only reasonable, not absolute, assurance that
the
control system’s objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits
of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
involving us have been, or will be, detected. These inherent limitations
include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple errors or mistakes. Controls can
also be
circumvented by individual acts of a person, or by collusion among two
or more
people, or by management override of the controls. The design of any system
of
controls is based in part on certain assumptions about the likelihood of
future
events, and we cannot assure you that any design will succeed in achieving
its
stated goals under all potential future conditions. Over time, controls
may
become inadequate because of changes in conditions or deterioration in
the
degree of compliance with policies and procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to errors
or
frauds may occur and not be detected.
We
cannot
assure you that we or our independent registered public accounting firm will
not
identify a material weakness in our disclosure controls and internal controls
over financial reporting in the future. If our internal controls over financial
reporting are not considered adequate, we may experience a loss of public
confidence, which could have an adverse effect on our business and our stock
price.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibit
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Number
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Description
of Document
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10.1
(1)
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Separation
Agreement and General Release of Claims effective as of September
24, 2007
between the Company and Marc Nussbaum.
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31.1
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Certification
of Principal Executive Officer and Principal Financial Officer
pursuant to
Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification
of Interim Chief Executive Officer and Chief Financial Officer
Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002.*
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*
Furnished, not filed.
(1) Incorporated
by reference from Exhibit 10.1 of our Current Report of Form 8-K filed
with the
SEC on September 28, 2007.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
November 14, 2007 |
LANTRONIX,
INC.
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By:
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/s/ Reagan
Y.
Sakai
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Reagan
Y. Sakai
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Interim
Chief Executive
Officer
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Chief
Financial Officer and Secretary
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(Principal
Executive and Financial Officer)
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