Lantronix, Inc. 10-K
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
S
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended June 30, 2006
£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from ________ to
________ |
Commission
File Number 1-16027
LANTRONIX,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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33-0362767
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification
No.)
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15353
Barranca Parkway, Irvine, California 92618
(Address
of principal executive offices)
(949)
453-3990
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name of each exchange on
which registered
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Common
Stock, $0.0001 par value
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The NASDAQ Stock
Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes £ No S
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes £ No S
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 S No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. £
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 2b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filed S
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No S
The
aggregate market value of the registrant’s common stock held by non-affiliates
based upon the closing sales price of the common stock on December 31, 2005,
as
reported by the NASDAQ Capital Market, was approximately $40,106,000. Shares
of
common stock held by each current executive officer and director and by each
person who is known by the registrant to own 5% or more of the outstanding
common stock have been excluded from this computation in that such persons
may
be deemed to be affiliates of the registrant. Share ownership information of
certain persons known by the registrant to own greater than 5% of the
outstanding common stock for purposes of the preceding calculation is based
solely on information on Schedule 13G filed with the Securities and Exchange
Commission and is as of December 31, 2005. This determination of affiliate
status is not a conclusive determination for other purposes.
As
of September 1, 2006, there were 59,206,372 shares of the Registrant’s common
stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of Part III of this Form 10-K incorporate information by reference
from portions of the registrant’s 2006 Definitive Proxy Statement to be filed
not later than 120 days after the close of the 2006 fiscal
year.
LANTRONIX,
INC.
ANNUAL
REPORT ON FORM 10-K
For
the Fiscal Year Ended June 30, 2006
TABLE
OF CONTENTS
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Page
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PART
I
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4
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11
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19
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PART
II
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20
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21
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22
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35
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36
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36
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36
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36
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PART
III
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37
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37
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37
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37
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37
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PART
IV
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38
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FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements within the meaning of the federal
securities laws. Statements that are not purely historical should be considered
forward-looking statements. Often they can be identified by the use of
forward-looking words and phrases, such as “intend,” “may,” “will,” “could,”
“project,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,”
“forecasts,” and the like. Statements concerning current conditions may also be
forward-looking if they imply a continuation of current conditions. Examples
of
forward-looking statements include, but are not limited to, statements
concerning industry trends, anticipated demand for our products, the impact
of
pending litigation, our overall business strategy, market acceptance of new
products, future customer and sales developments, manufacturing forecasts,
including the potential benefits of our contract manufacturers sourcing and
supplying raw materials, the significant role of original equipment
manufacturers in our business, the future cost and potential benefits of our
research and development efforts and liquidity and cash resources
forecasts.
Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the forward-looking
statements. Readers are urged to carefully review the cautionary statements
made
by the Company in this report concerning risks and other factors that may affect
the Company’s business and operating results, including those made in this
report under the caption “Risk Factors,” in Part I, Item 1A and elsewhere in
this report as well as the Company’s other reports filed with the Securities and
Exchange Commission (“SEC”). We may from time to time make additional
forward-looking statements in our filings with the SEC, in our reports to our
stockholders, and elsewhere. Readers are cautioned not to place undue reliance
on these forward-looking statements. We do not undertake any obligation to
update any forward-looking statement that may be made from time to time by
us or
on our behalf.
PART
I
Overview
We
design, develop and market products that make it possible to access, manage,
control and configure electronic devices 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 products that network information technology equipment
using standard protocols for connectivity, primarily Ethernet. Our first product
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 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 dedicated
our businesses to helping industrial and commercial manufacturers and
integrators extend their business processes to the world of remote devices.
Our
products are primarily targeted to emerging Machine-to-Machine (“M2M”)
applications which are also known as device networking applications. These
applications include vertical markets such as the data center equipment
management market and various markets within the security, industrial control,
building automation, healthcare, transportation and retail sectors.
Our
primary products and technology have focused on “device networking” solutions
that enable individual electronic products to be connected to a network and
the
data center market for “IT management” solutions that connect or bridge groups
of devices onto the network for the primary purpose of remote access. We are
expanding our IT management solutions to address applications outside the data
center and have recently launched a new product category of solutions that
provides a reliable, single point of control and data flow management for
potentially thousands of networked devices. Together, the device networking
and
IT management product lines constitute our growth strategy and make up our
“core
business”. In addition, we continue to sell certain older legacy “non-core”
products which we expect will continue to decline in sales. Products within
the
non-core category include print servers, visualization (optically-based video
extenders), serial terminal servers and serial cards for servers. Expansion
of
our business is directed at our core business of device networking and we no
longer invest R&D or marketing resources in our non-core product
lines.
Today,
our solutions include fully integrated hardware and software devices, as well
as
software tools, to develop related customer applications. Because we deal with
network connectivity, we provide solutions to extremely broad market segments,
including information technology, security, industrial, retail, medical,
building automation, transportation and others. Our technology is used to
provide networking capabilities to devices such as building heating ventilation
and air conditioning systems, elevators, process control equipment, vending
machines, thermostats, security cameras, RF ID readers, bar code scanners,
scales, temperature sensors, blood analyzers, turnstiles, card readers, point
of
sale terminals, audio-visual projectors, time clocks, and virtually any product
that has some form of electronic control capability.
We
sell
our products through a global network of distributors, resellers and
manufacturer representatives, systems integrators, value-added resellers
(“VARs”) and original equipment manufacturers (“OEMs”). In addition, we sell
directly to selected accounts.
Our
common stock is currently traded on The NASDAQ Capital Market under the symbol
LTRX.
Our
worldwide headquarters is located in Irvine, California, and we have sales
offices in France and Hong Kong. We also have employees (primarily sales)
working from home offices in other areas of the world, including Germany, United
Kingdom, Japan and the Netherlands. Since September 2003, our international
operations have been managed from our Irvine, California facility.
We
provide information regarding our company and our products on our Internet
website, www.lantronix.com.
Our
Strategy
Our
business strategy is based on our proven capability to develop fully integrated
device networking solutions that increase the value of our customers’ products
and services by making it easy to access and monitor devices over the Internet
or private local network. Our technology is easy to integrate and typically
provides our customer’s device with compatibility with industry-wide standards
such as Ethernet, the Internet, WiFi, standard web browsers and enterprise
security standards. By using our device networking technology, customers can
reduce basic data connection costs, reduce maintenance and repair costs, create
differentiation based on better service and can create new revenue sources
from
device related services.
This
strategy is accomplished by providing our customers with hardware and software
that connects devices to a network and intelligently manages and controls
them.
With our 16 years of networking expertise, knowledge of industry trends and
our
capability to develop solutions based on open industry standards, we have
been
able to anticipate our customers’ device networking technology requirements and
offer solutions that enable them to achieve their connectivity objectives.
By
providing a complete solution of hardware and integrated software, we have
been
able to provide “turnkey” solutions for network enabling a device, eliminating
the need for our customers to build expensive design and manufacturing expertise
in-house. This results in savings to the customer both in terms of financial
investment and time.
Our
solutions have enabled us to become a technology and industry leader. We
focus
on the following key areas:
·
|
Device
Networking Solutions
-
We offer an array of embedded and external device networking solutions
that enable integrators and manufacturers of electronic and
electro-mechanical devices to add network connectivity, manageability
and
control. Our customers’ products originate from a wide variety of
applications within the machine-to-machine (“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 products and to improve how
they are
managed and controlled.
|
·
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IT
Management Solutions - We
offer off-the-shelf appliances such as console servers, remote KVM
servers, and power control products that enable IT professionals
to
remotely connect, monitor and control network infrastructure equipment
and
large groups of servers using highly secure out-of-band management
technology. We also offer products such as multi-port device 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. We also currently offer
terminal servers that enable multiple users to share access to one
or more
servers using thin-client “dumb” terminals. 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.
|
·
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Non-core
Products
-
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 visualization solutions, legacy print servers, software
and
other miscellaneous products.
|
Our
strategy is to drive the product development and revenues of our core products,
which includes device networking solutions, IT management
solutions.
Products
Device
Networking Solutions
Device
networking is the technology that enables connectivity within a multitude of
commercial and industrial vertical markets such as security, building
automation, medical, industrial automation, point-of-sale, and many others.
We
provide manufacturers, integrators and users with device networking solutions
that in some applications include the technology for products to be connected,
managed and controlled over networks using standard protocols for connectivity,
including wired Ethernet and WiFi wireless. As common everyday devices leverage
the power of network connectivity, manufacturers and users are realizing the
benefits of networking. Our device networking solutions represent complete
engineered solutions that dramatically shorten a manufacturer’s development time
to implement network connectivity, provide competitive advantages with new
features, greatly reducing engineering and marketing risks. Our hardware
solutions include large scale integration (“LSI”) chips, embedded modules
(embedded web servers) for mounting onto the printed circuit board of our
customer's devices, and external hardware modules (device servers) with one
or
two ports that can be connected to the cutomer's product by cables. These
products incorporate a real-time operating system and application
software. We also offer application- and industry-specific solutions for
certain markets such as industrial automation.
Our
device servers and web servers eliminate the high cost of ownership associated
with networking, which frequently would otherwise require using PCs and
workstations to perform connectivity and remote management functions. Our
solutions contain high-performance processors capable of not only controlling
the attached device, but in many cases are also capable of accumulating data
and
status. The accumulated data can then be formatted by the device server and
presented to users via SNMP or e-mail. Device servers have a built-in HTTP
server, making them easy to manage using any standard Web browser.
In
2003,
we introduced our XPort embedded web server, which represented an improvement
in physical size and price for this type of functionality. The thumb-sized
XPort is a self-contained network communications server and miniaturized web
server enclosed within a rugged RJ-45 connector package, which can be embedded
in virtually any electronic product. Products incorporating XPort often have
their own IP address on a network and can be configured to be accessible from
any web browser, including a wireless PC or Internet-enabled cell phone, from
anywhere in the world. The XPort can serve up Internet-standard web pages,
initiate e-mails for notifications or alerts, and can be configured to run
other
applications as defined and developed by the device manufacturer. XPort makes
it
simple for a product manufacturer to connect, because the XPort includes a
complete, integrated solution with a 10/100 Base-T Ethernet connection, a
reliable and proven operating system, an embedded web server, flexible firmware,
a full TCP/IP protocol stack, and optional encryption. The relatively low price
of the XPort, and the speed and ease with which a manufacturer can design the
device into its products, can make many products more attractive by
cost-effectively providing network connectivity.
In
March
2004, we introduced WiPort, a wireless (and wired) embedded web server with
substantially the same functionality as XPort, but with an 802.11 standard
wireless configuration for embedded application in products and situations
where
a wired Ethernet environment is not available or practical. In August 2004,
we
introduced WiBox, an external wireless device server.
IT
Management Solutions
Our
IT
management solutions are muti-port products (up to 48 ports) that primarily
provide IT professionals with the tools they need to remotely connect to the
out-of-band management ports on computers and associated corporate data center
equipment. These solutions include console servers, remote keyboard, video,
mouse (“KVM”) servers and managed power distribution products and terminal
servers. We also offer products such as multi-port device 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. We also currently offer terminal servers that enable multiple
users to share access to one or more servers using thin-client ‘dumb’
terminals.
Our
customers use these solutions to monitor and run their systems to ensure the
performance and availability of critical business information systems, network
infrastructure and telecommunications equipment. The equipment our solutions
manage includes routers, switches, servers, phone switches and public branch
exchanges that are often located in remote or inaccessible
locations.
Our
console servers provide system administrators and network managers a way to
connect with their remote equipment through an interface called a console port,
helping them work more efficiently without having to leave their desk or office.
Console ports are usually found in Unix servers, Linux servers and on special
purpose data center equipment such as environmental monitoring/control systems,
communications switches and storage devices. With remote access, system downtime
can be reduced, improving business efficiency. Our console servers provide
IT
professionals with peace-of-mind through extensive security features, and in
some cases, provisions for dial-in access via modem. These solutions are
provided in various configurations and can manage up to 48 devices from one
console server.
Our
remote KVM products provide customers with the ability to extend traditional
server keyboard, video, and mouse controls over long distances using standard
IP
networks. These solutions are typically used to remotely manage Windows based
servers.
In
addition, our data center Management Appliance, introduced in September
2005, provides IT professionals with the tools they need to remotely manage
large data centers that are using many individually networked devices or
multiple infrastructure products. These enterprise level solutions provide
a
secure, single point of management at the top of a hierarchical structure,
making it simple to maintain, configure, monitor and control
large deployments.
Non-core
Businesses: Visualization Solutions, Print Servers and Other Legacy
Products
Over
a
period of years, primarily as a result of product technology acquired through
acquisitions, we have product categories that no longer represent the focus
of
future research and development and expansion; in other cases these products
are
legacy products developed and sold in the past, but are no longer part of our
strategic focus. To support our customers, we continue to distribute and sell
these older products. These non-core products are generally declining in
revenues over time, and we expect this decline to continue.
We
offer
visualization solutions that provide switching and optical extension of high
performance video, audio, keyboard and mouse over long distances within a
building or campus environment. Products include video display extenders,
analog
KVM extension systems and matrix hubs. Our analog remote KVM products provide
a
valuable solution for extending and sharing audio, video, keyboard and mouse
signals among many users and over optical cable without loss of resolution.
KVM
products enable a single keyboard, monitor and mouse to be switched between
multiple computers, providing immediate access and control from a single
location. The customers for these devices typically are companies that need
to
isolate users from the core computing center for security reasons, or require
high speed video sources to be shared among many users. Our visualization
solutions can be found in government agencies and at customers involved with
large scale simulation and display applications. We have announced the end
of
life of these Visualization products and plan on exiting this product line
in
fiscal year 2007.
Early
in
our business history, we provided external print servers that connect various
printers to a network for shared printing tasks. Over the years, we have
updated
and continue to provide print servers that work with a myriad of operating
systems and network configurations. The requirement for external print servers
is decreasing, as printer manufacturers have incorporated networking hardware
and software as part of many printers.
We
acquired a line of low-cost products that we market under the “Stallion” brand.
Stallion products include a variety of network servers and a range of multi-port
serial I/O cards.
Various
other small categories of our legacy business are included in the non-core
category, such as software revenues and other product lines we have discontinued
or that are being de-emphasized.
The
following table presents net revenues by product line. Definitions of these
families have been modified slightly from time to time, and the data has
been
revised to conform to the current definitions:
|
|
|
|
Years
Ended June 30,
|
|
Product
Family
|
|
Primary
Product Function
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
(In
thousands)
|
|
Device
networking
|
|
Enable
electronic products to become network enabled. |
|
$
|
35,419
|
|
$
|
29,979
|
|
$
|
27,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
management
|
|
Allow
the user to control equipment by way of a network using a wide
range of
protocols. This category includes console servers and remote digital
KVM. |
|
|
11,499
|
|
|
12,341
|
|
|
12,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core
|
|
Includes
visualization solutions, legacy print servers, software and miscellaneous
products. |
|
|
5,025
|
|
|
6,182
|
|
|
8,849
|
|
|
|
|
|
|
$
|
51,943
|
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$
|
48,502
|
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$
|
48,885
|
|
Financial
Accounting Standards Board (“FASB”) Statement No. 131, “Disclosures about
Segments of an Enterprise and Related Information,” establishes standards for
disclosures about operating segments in annual consolidated financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. We operate in one segment,
networking and Internet connectivity.
Customers
Distributors
Our
principal customers are our distributors, which account for the largest
percentage of our net revenues. Distributors resell our products to a wide
variety of end customers, including consumers, corporate customers and VARs.
We
sell to a group of ten major distributors, some of which operate from multiple
warehouses. Our major distributors in the Americas region include: Ingram Micro,
Tech Data, KMJ Communications, Symmetry Electronics and Arrow Electronics,
Inc.
In Europe, the Middle East and Africa (“EMEA”) region, we distribute to the
following major distributors: transtec AG (a related party due to common
ownership by our largest stockholder), Sphinx Computer Vertriebs GmbH, Jade
Communications, LTD, Astradis Elecktronik GmbH and Atlantik Systems GmbH. In
the
Asia Pacific region, we distribute to the following major distributors:
PowerCorp Pty Ltd and Nissin Systems, Co., Ltd.
OEM
Manufacturers
We
have
established a broad range of OEM customers in various industries, such as
industrial automation, medical, security, building automation, consumer and
audiovisual. To shorten the development cycle and add network connectivity
to a
product, OEMs can use our external devices to network-enable their installed
base of products, while board-level embedded modules are typically used in
new
product designs. Our capabilities and solutions enable OEMs to focus on their
core competencies, resulting in reduced research and development costs, fewer
integration problems and faster time to market. We also sell development tools
to our customers and sometimes use internal resources to develop customized
solutions for large or strategic opportunities.
End
User Businesses
We
have a
broad range of end user customers in various vertical markets such as retail,
universities/education, manufacturing, healthcare/hospitals and
financial/banking. End user businesses require solutions that are simple to
install, set up and operate, and can provide immediate results. Generally,
these
customers need to connect to a diverse range of products and equipment, without
modifying existing software and systems.
Our
external device networking solutions enable end users to quickly, securely
and
easily connect their devices and equipment to networks, extending the life
of
existing investments. We provide a number of support services including
telephone-based sales and technical support as well as a wide array of
Internet-based resources. After buying the devices from us or one of our
distributors, a customer often only has to plug a cable from their device to
our
external device, and then plug our device into their network.
Sales
and Marketing
We
maintain both an inside and a field sales force to provide management and
support to our worldwide network of selling partners. Over the past several
years, we expanded our network of sales partners and developed an indirect
sales
model, using manufacturers’ representatives, VARs and other resellers throughout
the world. We have sales managers in major regions throughout the world to
manage our relationship with our sales partners, identify and develop major
new
sales opportunities and increase penetration at high potential accounts. We
implement marketing programs, products, tools and services specifically geared
to drive demand for our products.
The
following table presents the number of our employees that participate in sales
and marketing activities:
|
|
Years
Ended June 30,
|
|
|
2006
|
|
2005
|
|
2004
|
Sales
and marketing
|
|
|
64
|
|
|
56
|
|
|
82
|
We
believe that our multi-channel approach provides several advantages. We can
engage the customers and end users through their channel of choice, making
our
solutions available from a variety of sources and we can concentrate on
developing relationships at accounts that we believe represent our largest
opportunities while our sales partners continue to identify
new opportunities and service existing customers.
Our
embedded device networking solutions are principally sold to manufacturers
by
our worldwide OEM sales force and our group of manufacturers’ representatives.
We have continued to expand our use of manufacturers’ representatives and other
resellers, leveraging their established relationships.
We
market
and sell our IT management solutions and select external device networking
solutions through information technology resellers, industry-specific system
integrators, VARs and directly to end user organizations. Resellers and
integrators will often obtain our products through distributors. These
distributors supply our products to a broad range of VARs, system integrators,
direct marketers, government resellers and e-commerce resellers. In turn, these
distributor customers market, sell, install and, in some cases, support our
solutions to the end users.
The
following table presents our net revenues by geographic region:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Americas
|
|
|
62.5
|
% |
|
64.3
|
% |
|
69.3
|
% |
EMEA |
|
|
27.1 |
% |
|
27.2 |
% |
|
23.0 |
% |
Asia
Pacific |
|
|
10.4 |
% |
|
8.5 |
% |
|
7.7 |
% |
|
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
Information
concerning our sales by geographic region can be found in Part IV, Item 15
of
this Form 10-K and is presented in footnote 14. Please see Part I, Item 1A
“Risk
Factors” below for a discussion of the risks associated with foreign sales.
Manufacturing
A
key
element of our operations strategy is to outsource manufacturing to
produce reliable, high quality products at competitive prices and to achieve
on-time delivery to our customers. This practice enables us to concentrate
our resources on engineering and marketing.
We utilize
contract manufacturers located in the U.S., China, Malaysia and
Taiwan. Both Lantronix and our contract manufacturers source raw
materials, components and integrated circuits, in accordance with our
pre-determined specifications and forecasts, and perform printed circuit
board assembly, final assembly, functional testing and quality control. We
believe this arrangement decreases our working capital requirements and provides
better raw material and component pricing, enhancing our gross margins and
operating margins. Please see Part I, Item 1A “Risk Factors” below for a
discussion of the risks associated with contract manufacturing.
Research
and Development
Our
research and development efforts are focused on the development of technology
and products that will enhance our competitive position in the markets we serve.
Products are developed in-house and through outside research and development
resources.
The
following table presents the number of our employees that participate in
research and development activities and our research and development
expenses:
|
|
Years
Ended June 30,
|
|
|
|
(In
thousands, except number of employees)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Number
of employees
|
|
|
45
|
|
|
37
|
|
|
60
|
|
Research
and development expenses
|
|
$
|
5,999
|
|
$
|
6,325
|
|
$
|
7,854
|
|
Industry
Partners
In
keeping with our business strategy, we have engaged or participated with a
portfolio of partners, consortia and standards committees in an effort to
provide the most complete networking solutions to our customers.
Developer
Relations
Recruiting,
informing and participating with third-party developers is an integral part
of
our ongoing strategy. We encourage, enable and support others in the development
of vertical applications using our hardware, firmware and software products.
With their help and investment in creating additional applications and markets
for our products, we improve our ability to secure a defensible market position
and loyal customers.
Competition
The
markets in which we compete are dynamic and highly competitive. As these markets
grow and develop, we expect competition to intensify. Companies with the
following technologies are our current and potential competitors:
Device
Network-enabling Technologies
Companies
such as Digi International, Inc., DPAC Technologies Corp., Echelon Corporation,
Freescale Semiconductor, Inc., Moxa Technologies, MRV Communications, Inc.,
Quatech, Inc., Sena Technologies Inc., Wind River Systems, Inc., and ZiLOG,
Inc.
Equipment
for IT Management Solutions
Companies
such as Avocent Corporation, Cisco Systems, Inc., Digi International, Inc.,
Moxa
Technologies, MRV Communications, Inc., Open Gear, Perle Systems, Raritan
and Rose Electronics.
The
principal competitive factors that affect the market for our products
are:
· |
product
quality, technological innovation, compatibility with standards and
protocols, reliability, functionality, ease of use and
compatibility;
|
·
|
potential
customers’ awareness and perception of our products and of
network-enabling technologies; and
|
·
|
the
customer’s decision to make vs.
buy.
|
Intellectual
Property Rights
We
have
developed proprietary methodologies, tools, processes and software in connection
with delivering our services. We have not historically relied on patents to
protect our proprietary rights, although our patent portfolio has increased
in recent years. We have historically relied on a combination of copyright,
trademark, trade secret laws and contractual restrictions, such as
confidentiality agreements and licenses, to establish and protect our
proprietary rights.
On
May 2,
2006, we entered into a six-year patent cross-license and litigation dismissal
agreement with Digi International, Inc. (“Digi”). The cross-license includes all
pre-existing patents (not including design patents) held by us and Digi. In
addition, the cross-license covers all future patents (not including design
patents) during the six-year cross-license term.
Gordian,
Inc. (“Gordian”) developed certain intellectual property used in our micro
serial server line of products. These products represented and continue to
represent a significant portion of our net revenues. An agreement with Gordian
gives us joint ownership of the Gordian intellectual property that is embodied
in the products Gordian designed for us.
United
States and Foreign Government Regulation
Many
of
our products and the industries in which they are used are subject to federal,
state or local regulation in the U.S. In addition, our products are exported
worldwide. Therefore, we are subject to the regulation of foreign governments.
For example, wireless communication is highly regulated in both the U.S. and
elsewhere. Some of our products employ encryption technology; the export of
some
encryption software is restricted. At this time our activities comply with
existing laws, but we cannot determine whether future, more restrictive laws,
if
enacted, would adversely affect us. Please see Part I, Item 1A “Risk Factors”
below for risks associated with foreign operations.
Employees
We
have
never experienced a work stoppage, none of our employees are currently
represented by a labor union, and we consider our employee relations to be
good.
The
following table presents our part- and full-time employees:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Research
and development
|
|
|
45
|
|
|
37
|
|
|
60
|
|
Sales
and marketing
|
|
|
64
|
|
|
56
|
|
|
82
|
|
Operations
|
|
|
21
|
|
|
24
|
|
|
21
|
|
General
and administrative
|
|
|
27
|
|
|
27
|
|
|
35
|
|
Total
|
|
|
157
|
|
|
144
|
|
|
198
|
|
Backlog
Normally,
we manufacture our products in advance of receiving firm product orders from
our
customers based upon our forecasts of worldwide customer demand. Most customer
orders are placed on an as-needed basis and may be canceled or rescheduled
by
the customer without significant penalty. Accordingly, backlog as of any
particular date is not necessarily indicative of our future sales. Because
most
of our business is on an as-needed basis, we do not rely on backlog as a metric
of our operations. We have no significant non-cancelable customer orders
extending more than several months into the future.
Available
Information
Our
annual report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on
Form 8-K and amendments to reports filed or furnished pursuant to Section 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), are available free of charge on our website at www.lantronix.com
shortly
after we electronically file such material with, or furnish it to, the SEC.
The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling
1-800-SEC-0330. The SEC also maintains a website at www.sec.gov
that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically. We assume no obligation to update
or
revise forward looking statements in this Form 10-K, whether as a result of
new
information, future events or otherwise, unless we are required to do so by
law.
Executive
Officers of the Registrant
The
following table presents the names, ages and positions held by all our executive
officers as of August 31, 2006. There are no family relationships between any
director or executive officer and any other director or executive officer of
Lantronix. Executive officers serve at the discretion of the Board of
Directors.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Marc
Nussbaum
|
|
50
|
|
President
and Chief Executive Officer
|
James
Kerrigan
|
|
70
|
|
Chief
Financial Officer and
Secretary
|
MARC
NUSSBAUM has served as our President and Chief Executive Officer since May
2002
(on an Interim basis until February 2003). From April 2000 to March 2002, Mr.
Nussbaum served as Senior Vice President and Chief Technical Officer for MTI
Technology Corporation, a developer of enterprise storage solutions. From April
1981 to November 1998, Mr. Nussbaum served in various positions at Western
Digital Corporation, a manufacturer of PC components, communication controllers,
storage controllers and hard drives. Mr. Nussbaum led business development,
strategic planning and product development activities, serving as Western
Digital’s Senior Vice President, Chief Technical Officer from 1995 to 1998 and
Vice President, Storage Technology and Product Development from 1988 through
1995. Mr. Nussbaum holds a BA degree in physics from the State University of
New
York.
JAMES
KERRIGAN has served as our Chief Financial Officer since May 2002 (on an Interim
basis until February 2003) and as Secretary since July 2005. From March 2000
to
October 2000, he was Chief Financial Officer of Motiva, a privately-owned
company that developed, marketed and sold collaboration software systems. From
January 1998 to February 1999, he was Chief Financial Officer of Who?Vision
Systems, Inc., an incubator company that developed biometric fingerprint devices
and software. From April 1995 to March 1997, Mr. Kerrigan was Chief Financial
Officer of Artios, Inc., a privately-owned company that designs, manufactures,
and sells prototyping hardware and software to the packaging industry.
Previously, Mr. Kerrigan has served as chief financial officer for other larger,
public companies. Mr. Kerrigan has a BS degree in engineering and a MBA degree
from Northwestern University. On August 15, 2006, we issued a press release
announcing the retirement of Mr. Kerrigan during fiscal 2007. We are currently
conducting an extensive executive search, and following his retirement, Mr.
Kerrigan will continue to assist us in an advisory role to ensure a smooth
transition.
Before
deciding to purchase, hold or sell our common stock, you should carefully
consider the risks described below, in addition to the other cautionary
statements and risks described elsewhere and the other information contained
in
this Report and in our other filings with the SEC, including our subsequent
reports on Forms 10-Q and 8-K. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also affect our business.
If any of these known or unknown risks or uncertainties actually occurs with
material adverse effects on Lantronix, 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
revenues, expenses and operating results from quarter-to-quarter. We 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. Our short-term
expense levels for ongoing operations are relatively fixed and are based on
our
expectations of future net revenues. If we were to experience a reduction in
revenues in a fiscal 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;
|
·
|
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.
|
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
International, Inc. (“Digi”) in which we signed an agreement with Digi to
cross-license each other’s patents. In addition, we agreed to pay Digi $600,000
as part of the settlement of which $200,000 was paid in May 2006 with the
remaining balance to be paid in July 2006. 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. For a more detailed description of pending litigation, see Note
10 to the notes to our consolidated financial statements of Part IV, Item 15
of
this Form 10-K.
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.
Our
use of contract manufacturers in China, Malaysia and Taiwan involves risks
that could adversely affect us.
We
use
contract manufacturers based in China, Malaysia and Taiwan. There are
significant risks of doing business in these locations, including the
following:
·
|
These
locations do not afford the same level of protection to intellectual
property as do domestic or many foreign countries. If our products
were
reverse-engineered or our intellectual property were otherwise pirated
(reproduced and duplicated without our knowledge or approval), our
revenues would be reduced;
|
·
|
Delivery
times are extended due to the distances involved, requiring more
lead-time
in ordering and increasing the risk of excess
inventories;
|
·
|
We
could incur ocean freight delays because of labor problems, weather
delays
or customs problems; and
|
·
|
U.S.
foreign relations with these locations have historically been subject
to
change. Political considerations and actions could interrupt our
expected
supply of products from these
locations.
|
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 effect our
business, financial condition or results of operations. We have recently
redesigned many of our products to comply with the new environmental Reduction
of Hazardous Substances standard. This standard is 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.
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 revenue 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 research and development spending
has
decreased, which may put us at a competitive disadvantage compared to our
competitors and adversely affect our market position.
The
following table presents our research and development expenses as a percentage
of net revenues:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
|
%
of Net
|
|
|
Change
|
|
|
|
2006
|
|
|
|
|
2005
|
|
Revenues
|
|
|
$
|
|
%
|
|
|
|
(In
thousands, except
percentages)
|
|
Research
and development
|
|
$
|
5,999
|
|
|
11.5
|
% |
|
$
|
6,325
|
|
|
13.0
|
%
|
|
$
|
(326
|
)
|
|
(5.2
|
%)
|
If
a major 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. To some extent,
any business lost from a distributor would likely be replaced by sales to other
customer/distributors in a reasonable period, rather than a total loss of that
business such as from a customer who used our products in their business or
products. 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 and a related
party
as a percentage of net revenues:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Top
five customers (1)
|
|
|
38.0
|
% |
|
42.0
|
% |
|
38.0
|
% |
Ingram
Micro |
|
|
13.0 |
% |
|
16.0 |
% |
|
14.0 |
% |
Tech
Data |
|
|
10.0 |
% |
|
11.0 |
% |
|
9.0 |
% |
Related
party |
|
|
3.0 |
% |
|
2.0 |
% |
|
3.0 |
% |
(1)
Includes Ingram Micro, Tech Data and related party.
The
loss
or deferral of one or more significant sales in a fiscal quarter could harm
our
operating results. We have in the past, and might in the future, lose one
or
more of our 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 their relationship with us, our reputation, the perception of our
products and technology in the marketplace, could be harmed. The demand for
our
products from our OEMs, VARs 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.
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, and we expect that will continue as these products 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. 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
are
currently involved in litigation, including a federal securities class action
lawsuit. We recently concluded multiple securities lawsuits and litigation
with
a former executive officer. We may have an obligation to continue to indemnify
the former executive officer and defend any violations that he may be 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-K, 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. For a more detailed
description of our current and recent litigation, see Note 10 to the notes
to
our consolidated financial statements of Part IV, Item 15 of this Form
10-K.
If
the SEC should levy fines against us, or if we have violated the rules regarding
offering securities to the public, it could damage our reputation with customers
and vendors and adversely affect our stock price.
The
SEC
is investigating the events surrounding the restatement of our financial
statements filed on June 25, 2002 for the fiscal year ended June 30, 2001
and
for the six months ended December 31, 2001. During June 2006, we reached an
agreement in principle with the regional staff of the SEC regarding the terms
of
a settlement that the regional staff has agreed to recommend to the
SEC. The SEC could conclude that we violated the rules of the Securities
Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). In either event, the SEC might levy
civil fines against us, or might conclude that we lack sufficient internal
controls to warrant our being allowed to continue offering our shares to
the
public. This investigation involves substantial cost. These costs, and the
cost
of any fines imposed by the SEC, are not covered by insurance. In addition
to
sanctions imposed by the SEC, an adverse determination could significantly
damage our reputation with customers and vendors, and harm our employees’
morale.
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. We are presently
developing products for use on the Linux platform. The SCO Group (“SCO”) has
filed and threatened to file lawsuits against companies that operate Linux
for
commercial purposes, alleging that such use of Linux infringes SCO’s rights.
These allegations may adversely affect the demand for the Linux platform
and,
consequently, the sales of our Linux-based products.
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
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: Venture
Electronics Services, Uni Precision Industrial Ltd., Universal Scientific
Industrial Company, LTD and eSilicon Corporation. 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.
Because
we depend on international sales for a substantial amount of our net revenues,
we are subject to 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 as a percentage
of
net revenues:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Americas
|
|
|
62.5
|
% |
|
64.3
|
% |
|
69.3
|
% |
EMEA |
|
|
27.1 |
% |
|
27.2 |
% |
|
23.0 |
% |
Asia
Pacific |
|
|
10.4 |
% |
|
8.5 |
%
|
|
7.7 |
% |
|
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
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
and
services we buy abroad are priced in foreign currencies, we are affected by
fluctuating exchange rates. We might not successfully protect ourselves against
currency rate fluctuations, and our financial performance could be harmed as
a
result. In addition, we face other risks of doing business internationally,
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;
|
·
|
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.
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:
|
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Raw
materials
|
|
$
|
3,863
|
|
|
$
|
3,973
|
|
Finished
goods
|
|
|
7,249
|
|
|
|
7,330
|
|
Inventory
at distributors
|
|
|
1,690
|
|
|
|
1,181
|
|
|
|
|
12,802
|
|
|
|
12,484
|
|
Reserve
for excess and obsolete inventory
|
|
|
(4,689
|
)
|
|
|
(5,656
|
)
|
|
|
$
|
8,113
|
|
|
$
|
6,828
|
|
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.
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 and key technical employees. We are dependent in particular on Marc
Nussbaum, our President and Chief Executive Officer, with whom we have no
employment contract. We are also dependent upon our technical personnel,
due to
the specialized technical nature of our business. James Kerrigan, our Chief
Financial Officer, has announced his intention to retire before the end of
the
calendar year 2006, although he intends to remain in an advisory capacity
to
assist with the transition to a new Chief Financial Officer. We are currently
searching for a replacement for Mr. Kerrigan. If we were unable to locate
a
suitable replacement candidate in a timely manner, our business could suffer.
In
addition, if we were to lose the services of Mr. Nussbaum or any of our key
technical 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 revenue 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.
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.
We
may not be able to adequately protect or enforce our intellectual property
rights, which could harm our competitive position.
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, which could significantly harm our business.
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 carriers 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.
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. In addition, we do not carry business interruption
insurance for, nor do we carry financial reserves against, business
interruptions arising from earthquakes or certain other events. If a business
interruption occurs, our business could be materially and adversely
affected.
If
we fail to implement and maintain an effective system of disclosure controls
and
internal controls over financial reporting, we may not be able to report our
financial results in an accurate or timely manner, prevent fraud or comply
with
Section 404 of the Sarbanes-Oxley Act of 2002, which may harm our business
and
adversely affect the trading price of our stock.
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 and a report
of
our independent registered public accounting firm addressing these
assessments.
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.
We
may experience difficulties in implementing or enhancing new information
systems.
During
calendar 2006, we began the implementation of a new enterprise resource planning
(“ERP”) information system to manage our business operations. While we did not
use the new ERP information system to manage our business during the fiscal
year
ended June 30, 2006, the possibility exists that our migration to the new
ERP
information system could adversely affect our disclosure controls and procedures
or our operations in future periods. The process of implementing new 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 new ERP systems. Any
such
disruption could adversely affect our financial position, results of operations,
cash flows and the market price of our common stock.
None.
We
lease
a building in Irvine, California, that comprises our corporate headquarters
and
includes administration, sales, marketing, research and development, warehouse
and order fulfillment functions. During fiscal 2005, we extended the lease
for
our Irvine facility until July 2010. In addition, we have sales offices in
France and Hong Kong. Our leased facilities comprise an aggregate of
approximately 55,000 square feet of which our Irvine facility represents the
majority.
We
continue to make payments on lease obligations for facilities we no longer
occupy, including our facilities located in Naperville, Illinois and Ames,
Iowa
(both leases terminate in February 2007). The remaining liability for these
lease obligations is included in our restructuring reserve at June 30,
2006.
We
believe our existing facilities are adequate to meet our needs. If additional
space is needed in the future, we believe that suitable space will be available
on commercially reasonable terms.
The
legal
proceedings as required by this item are incorporated by reference from Part
IV,
Item 15 of this Form 10-K and are presented under footnotes 10 and 11 to our
notes to our consolidated financial statements.
No
matters were submitted to a vote of our security holders during the fourth
fiscal quarter ended June 30, 2006.
PART
II
Price
Range of Common Stock
Our
common stock was traded on The NASDAQ National Market under the symbol “LTRX”
from our initial public offering on August 4, 2000 through October 22, 2002.
On
October 23, 2002 our listing was changed to The NASDAQ SmallCap Market, which
has since been renamed The NASDAQ Capital Market. The number of holders of
record of our common stock as of September 11, 2006 was approximately 80. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock:
|
High
|
|
Low
|
Year
Ended June 30, 2006
|
|
|
|
|
|
First
Quarter
|
$
|
1.56
|
|
$
|
1.19
|
Second
Quarter
|
|
1.67
|
|
|
1.26
|
Third
Quarter
|
|
2.57
|
|
|
1.64
|
Fourth
Quarter
|
|
2.77
|
|
|
1.98
|
|
|
|
|
|
|
Year
Ended June 30, 2005
|
|
|
|
|
|
First
Quarter
|
$
|
1.25
|
|
$
|
0.99
|
Second
Quarter
|
|
1.24
|
|
|
0.85
|
Third
Quarter
|
|
1.85
|
|
|
1.08
|
Fourth
Quarter
|
|
1.80
|
|
|
1.24
|
We
believe that a number of factors, including but not limited to quarterly
fluctuations in results of operations, may cause the market price of our common
stock to fluctuate significantly. See Part II, Item 7 of this Form 10-K.
Dividend
Policy
We
have
never declared or paid cash dividends on our common stock. We do not anticipate
paying any cash dividends on our common stock in the foreseeable future, and
we
intend to retain any future earnings for use in the expansion of our business
and for general corporate purposes.
Equity
Compensation Plans
The
information required by Item 201(d) of Regulation S-K is incorporated by
reference to the information set forth under “Equity Compensation Plan
Information” in our definitive proxy statement for the 2006 Annual Shareholders
to be filed not later than 120 days after June 30, 2006 (the “Proxy
Statement”).
Recent
Sales of Unregistered Securities
We
did
not repurchase any of our common stock during the fourth fiscal quarter of
2006.
Since July 1, 2003, we have issued the following unregistered
securities:
In
June
2006, we issued an aggregate of 84,053 shares in connection with the settlement
of securities claims brought by former stockholders of Synergetic Micro Systems,
Inc. The shares in the foregoing transactions were exempt from registration
pursuant to Section 3(a)(10) of the Securities Act.
The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included below. In March 2004, we completed the sale of our Premise business
unit that was originally purchased in January 2002. Accordingly, the information
set forth in the table below reflects the Premise business unit as a
discontinued operation. The consolidated statements of operations data for
the
fiscal years ended June 30, 2006, 2005 and 2004 and the balance sheet data
as of
June 30, 2006 and 2005 are derived from the audited consolidated financial
statements included elsewhere in this report. The consolidated statements of
operations data for the fiscal years ended June 30, 2003 and 2002, and the
balance sheet data as of June 30, 2004, 2003 and 2002, are derived from the
audited consolidated financial statements not included elsewhere in this report.
The historical results are not necessarily indicative of results to be expected
for future periods.
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Consolidated
Statement of Operations Data
|
|
(In
thousands, except per share data)
|
|
Net
revenues (1)
|
|
$
|
51,943
|
|
$
|
48,502
|
|
$
|
48,885
|
|
$
|
49,389
|
|
$
|
57,591
|
|
Cost
of revenues (2)
|
|
|
25,276
|
|
|
24,326
|
|
|
25,026
|
|
|
36,264
|
|
|
40,281
|
|
Gross
profit
|
|
|
26,667
|
|
|
24,176
|
|
|
23,859
|
|
|
13,125
|
|
|
17,310
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
24,203
|
|
|
24,770
|
|
|
23,599
|
|
|
29,734
|
|
|
42,624
|
|
Research
and development
|
|
|
5,999
|
|
|
6,325
|
|
|
7,854
|
|
|
9,809
|
|
|
9,457
|
|
Litigation
settlement costs
|
|
|
960
|
|
|
-
|
|
|
-
|
|
|
1,533
|
|
|
1,912
|
|
Amortization
of purchased intangible assets
|
|
|
20
|
|
|
65
|
|
|
148
|
|
|
602
|
|
|
960
|
|
Restructuring
(recovery) charge
|
|
|
(17
|
)
|
|
-
|
|
|
(2,093
|
)
|
|
5,600
|
|
|
3,473
|
|
Impairment
of goodwill and intangible assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,353
|
|
|
50,445
|
|
Total
operating expenses
|
|
|
31,165
|
|
|
31,160
|
|
|
29,508
|
|
|
49,631
|
|
|
108,871
|
|
Loss
from operations
|
|
|
(4,498
|
)
|
|
(6,984
|
)
|
|
(5,649
|
)
|
|
(36,506
|
)
|
|
(91,561
|
)
|
Interest
income (expense), net
|
|
|
46
|
|
|
(20
|
)
|
|
50
|
|
|
248
|
|
|
1,548
|
|
Other
income (expense), net
|
|
|
1,376
|
|
|
173
|
|
|
(5,333
|
)
|
|
(926
|
)
|
|
(760
|
)
|
Loss
before income taxes and cumulative effect of accounting
changes
|
|
|
(3,076
|
)
|
|
(6,831
|
)
|
|
(10,932
|
)
|
|
(37,184
|
)
|
|
(90,773
|
)
|
(Benefit)
provision for income taxes
|
|
|
(31
|
)
|
|
229
|
|
|
(325
|
)
|
|
250
|
|
|
(6,665
|
)
|
Loss
from continuing operations
|
|
|
(3,045
|
)
|
|
(7,060
|
)
|
|
(10,607
|
)
|
|
(37,434
|
)
|
|
(84,108
|
)
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
56
|
|
|
(5,047
|
)
|
|
(10,115
|
)
|
|
(3,444
|
)
|
Loss
before cumulative effect of accounting changes
|
|
|
(3,045
|
)
|
|
(7,004
|
)
|
|
(15,654
|
)
|
|
(47,549
|
)
|
|
(87,552
|
)
|
Cumulative
effect of accounting changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of new accounting standard SFAS No. 142
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,905
|
)
|
Net
loss
|
|
$
|
(3,045
|
)
|
$
|
(7,004
|
)
|
$
|
(15,654
|
)
|
$
|
(47,549
|
)
|
$
|
(93,457
|
)
|
Basic
and diluted loss per share from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
before cumulative effect of accounting changes
|
|
$
|
(0.05
|
)
|
$
|
(0.12
|
)
|
$
|
(0.19
|
)
|
$
|
(0.69
|
)
|
$
|
(1.63
|
)
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
(0.09
|
)
|
|
(0.19
|
)
|
|
(0.07
|
)
|
Loss
before cumulative effect of accounting changes
|
|
|
(0.05
|
)
|
|
(0.12
|
)
|
|
(0.28
|
)
|
|
(0.88
|
)
|
|
(1.70
|
)
|
Cumulative
effect of accounting changes per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of new accounting standard SFAS No. 142
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.12
|
)
|
Net
loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.12
|
)
|
$
|
(0.28
|
)
|
$
|
(0.88
|
)
|
$
|
(1.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares (basic and diluted)
|
|
|
58,702
|
|
|
58,202
|
|
|
56,862
|
|
|
54,329
|
|
|
51,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Consolidated
Balance Sheet Data
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
7,729
|
|
$
|
6,690
|
|
$
|
9,128
|
|
$
|
7,328
|
|
$
|
26,491
|
|
Marketable
securities
|
|
|
88
|
|
|
85
|
|
|
3,050
|
|
|
6,750
|
|
|
6,963
|
|
Working
capital
|
|
|
5,372
|
|
|
7,824
|
|
|
12,087
|
|
|
17,312
|
|
|
40,317
|
|
Goodwill
|
|
|
9,488
|
|
|
9,488
|
|
|
9,488
|
|
|
9,488
|
|
|
7,218
|
|
Purchased
intangible assets, net
|
|
|
610
|
|
|
559
|
|
|
2,056
|
|
|
4,275
|
|
|
11,891
|
|
Total
assets
|
|
|
47,815
|
|
|
30,368
|
|
|
37,250
|
|
|
54,947
|
|
|
103,812
|
|
Long-term
capital lease obligations
|
|
|
211
|
|
|
51
|
|
|
-
|
|
|
867
|
|
|
1,000
|
|
Accumulated
deficit
|
|
|
(166,450
|
)
|
|
(163,082
|
)
|
|
(156,078
|
)
|
|
(140,424
|
)
|
|
(92,875
|
)
|
Total
stockholders' equity
|
|
|
16,778
|
|
|
18,468
|
|
|
24,791
|
|
|
37,717
|
|
|
82,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes net revenues from related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Includes amortization of purchased intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes thereto included elsewhere in this report. In
addition to historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties. Actual results
could differ materially from those anticipated by these forward-looking
statements due to factors including, but not limited to, those factors set
forth
under Part I, Item 1A “Risk Factors” and elsewhere in this report.
Overview
We
design, develop and market devices that make it possible to access, manage,
control and configure electronic devices over the Internet and 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. Our products are sold
to distributors, OEMs, VARs, and systems integrators, as well as directly to
end
users.
In
March
2004, we sold substantially all of the net assets of our Premise business unit.
The Company’s consolidated financial statements have been presented to reflect
Premise as a discontinued operation for all periods presented.
Fiscal
Year 2006 Financial Highlights and Other Information
A
summary
of the key factors and significant events which impacted our financial
performance during the fiscal year ended June 30, 2006 are as follows:
·
|
Net
revenues of $51.9 million for the fiscal year ended June 30, 2006
increased by $3.4 million or 7.1% as compared to the $48.5 million
reported during the fiscal year ended June 30, 2005. The increase
was
primarily the result of an increase in our device networking product
line.
|
·
|
Gross
profit as a percentage of net revenues was 51.3% for the fiscal year
ended
June 30, 2006, increasing 1.5 percentage points from the 49.8%
reported in the fiscal year ended June 30, 2005. The improvement
in gross
profit is in part due to a decrease in the amortization of purchased
intangible assets, a decrease in manufacturing overhead as a percentage
of
net revenues and a reduction in product warranty reserves to reflect
a
decrease in our product return rates offset by an increase in direct
product costs.
|
·
|
Loss
from operations as a percentage of net revenues was 8.7% for the
fiscal
year ended June 30, 2006 as compared to 14.4% in the fiscal year
ended
June 30, 2005.
|
·
|
Net
loss of $3.0 million, or $0.05 per diluted share, in the fiscal
year ended June 30, 2006 improved from a loss of $7.0 million, or
$0.12 per diluted share, in the fiscal year ended June 30,
2005.
|
·
|
Cash,
cash equivalents and marketable securities increased by $1.0 million
during fiscal 2006 to $7.8 million. The increase in cash and cash
equivalents is in part the result of our cash management activities
which
includes the timing of cash payments to vendors and cash collection
efforts. In addition, during the fourth quarter of fiscal 2006 we
received
$1.3 million in cash from the sale of a long-term
investment.
|
·
|
Accounts
receivable increased by $190,000 during fiscal 2006. Days sales
outstanding (“DSO”) in receivables as of June 30, 2006 decreased to
21.0 days from 23.1 days as of June 30, 2005. Our accounts
receivable and DSO are affected by the timing of shipments within the
quarter, our collections performance and the fact that revenues are
recognized on a sell-through basis (upon shipment from distributor
inventories rather than as goods are shipped to distributors). There
can
be no assurance that we will be able to maintain our DSO ratios consistent
with historical trends and DSO ratios may increase in the future.
|
·
|
Inventories
were $8.1 million as of June 30, 2006 as compared to
$6.8 million as of June 30, 2005. The increase was in part a result
of a build-up in our embedded device networking products. Our annualized
inventory turns in fiscal 2006 of 3.4 turns declined from the
3.6 turns in fiscal 2005.
|
·
|
We
have reached agreements to settle or have settled all of our outstanding
litigation. We recorded a $960,000 settlement charge during the fiscal
year ended June 30, 2006 in connection with such settlement agreements.
As
of June 30, 2006, we have accrued settlements of $16.8 million of
which we
expect our insurance carriers to pay $15.3 million with the remaining
balance of $1.4 million to be paid by us in the form of warrants,
common stock or cash.
|
Adoption
of SFAS 123R
In
December 2004, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS
123R”). Effective the first quarter of fiscal 2006, we adopted SFAS 123R using
the modified prospective method, which requires us to record compensation
expense for all awards granted after the date of adoption, and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption. Accordingly, prior period amounts presented herein have not been
restated to reflect the adoption of SFAS 123R.
As
a
result of adopting SFAS 123R, our share-based compensation expense is higher
for
the fiscal year ended June 30, 2006 than if we had continued to account for
share-based compensation under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (“APB 25”). The following table
presents the impact of adopting SFAS 123R on loss before income taxes, net
loss
and basic and diluted loss per share:
|
|
Year
Ended
June
30, 2006
|
|
|
|
(In
thousands,
except
per
share
data)
|
|
|
|
|
|
Loss
before income taxes
|
|
$
|
(1,074
|
)
|
Net
loss
|
|
$
|
(1,074
|
)
|
Net
loss per share (basic and diluted)
|
|
$
|
(0.02
|
)
|
The
following table presents the effect on net loss and net loss per share as if
we
had applied the fair value recognition provisions of SFAS No. 123, “Accounting
for Stock Based Compensation” (“SFAS 123”) to options granted under our stock
option plans:
|
|
Years
Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(In
thousands,
except
per share data)
|
|
Net
loss - as reported
|
|
$
|
(7,004
|
)
|
$
|
(15,654
|
)
|
Add:
Share-based employee compensation expense included
|
|
|
|
|
|
|
|
in
net loss, net of related tax effects - as reported
|
|
|
171
|
|
|
395
|
|
Deduct:
Share-based employee compensation expense determined
|
|
|
|
|
|
|
|
under
fair value method, net of related tax effects - pro forma
|
|
|
(1,186
|
)
|
|
(3,092
|
)
|
Net
loss - pro forma
|
|
$
|
(8,019
|
)
|
$
|
(18,351
|
)
|
Net
loss per share (basic and diluted) - as reported
|
|
$
|
(0.12
|
)
|
$
|
(0.28
|
)
|
Net
loss per share (basic and diluted) - pro forma
|
|
$
|
(0.14
|
)
|
$
|
(0.32
|
)
|
The
following table presents total share-based compensation cost related to
nonvested awards not yet recognized and the weighted-average period over which
the cost is expected to be recognized:
|
|
June
30, 2006
|
|
|
|
(In
thousands)
|
|
Cost
of revenues
|
|
$
|
229
|
|
Sales,
general and administrative
|
|
|
1,708
|
|
Research
and development
|
|
|
649
|
|
Total
|
|
$
|
2,586
|
|
|
|
|
|
|
Weighted-average
remaining years
|
|
|
2.8
|
|
Recent
Accounting Pronouncements
In
May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections” (“SFAS 154”). SFAS 154 requires retroactive application of a
voluntary change in accounting principle to prior period financial statements
unless it is impracticable. SFAS 154 also requires that a change in method
of
depreciation, amortization, or depletion for long-lived, non-financial assets
be
accounted for as a change in accounting estimate that is affected by a change
in
accounting principle. SFAS 154 replaces APB Opinion 20, “Accounting Changes”,
and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” The
Company will adopt the provisions of SFAS 154 in fiscal 2007 consolidated
financial statements. We believe that adoption of the provisions of SFAS 154
will not have a material impact on our consolidated financial statements.
In
June
2006, FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes,” by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Under FIN 48, the financial statement effects of a tax position
should initially be recognized when it is more likely than not, based on
the
technical merits, that the position will be sustained upon examination. A
tax
position that meets the more-likely-than-not recognition threshold should
initially and subsequently be measured as the largest amount of tax benefit
that
has a greater than fifty percent likelihood of being realized upon ultimate
settlement with a taxing authority. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The cumulative effect, if any, of
applying the provisions of FIN 48 will be reported as an adjustment to the
opening balance of retained earnings in the period adopted. We are currently
evaluating the impact that the adoption of FIN 48 will have on our results
of
operations, financial position and liquidity.
Other
recent accounting pronouncements issued by the FASB (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
our present or future consolidated financial statements.
Critical
Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in accordance with
accounting principles generally accepted in the U.S. requires us to make
judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of net revenues and expenses during the reporting period. We regularly evaluate
our estimates and assumptions related to net revenues, allowances for doubtful
accounts, sales returns and allowances, inventory valuation, valuation of
deferred income taxes, goodwill and purchased intangible asset valuations,
warranty reserves, restructuring costs, litigation and other contingencies.
We
base our estimates and assumptions on historical experience and on various
other
factors that we believe to be reasonable under the circumstances, the results
of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. To the extent
there are material differences between our estimates and the actual results,
our
future results of operations will be affected.
We
believe the following critical accounting policies require us to make
significant judgments and estimates in the preparation of our consolidated
financial statements:
Revenue
Recognition
We
do not
recognize revenue until all of the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred or services have been
rendered; our price to the buyer is fixed or determinable; and collectibility
is
reasonably assured. However, a significant portion of our sales are made to
distributors under agreements which contain a limited right to return unsold
product and price protection provisions. Recognition
of revenue and related cost of revenues from sales to distributors are deferred
until the distributor resells the product. Net revenue from certain smaller
distributors for which point-of-sale information is not available, is recognized
approximately one month after the shipment date. This estimate approximates
the
timing of the sale of the product by the distributor to the end
user.
When
product sales revenue is recognized, we establish an estimated allowance for
future product returns based on historical returns experience; when price
reductions are approved, we establish an estimated liability for price
protection payable on inventories owned by product resellers. Should actual
product returns or pricing adjustments exceed our estimates, additional
reductions to revenues would result.
Warranty
Reserve
Our
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 we engage in extensive product quality programs and processes, our
warranty obligation is affected by product failure rates, use of materials
or
service delivery costs that differ from our estimates. As a result, additional
warranty reserves could be required, which could reduce gross margins.
Additionally, we sell extended warranty services, which extend the warranty
period for an additional one to three years, depending upon the product.
Warranty revenue is recognized evenly over the warranty service
period.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for estimated losses resulting
from
the inability of our customers to make required payments. Our allowance for
doubtful accounts is based on our assessment of the collectibility of specific
customer accounts, the aging of accounts receivable, our history of bad debts
and the general condition of the industry. If a major customer’s credit
worthiness deteriorates, or our customers’ actual defaults exceed our historical
experience, our estimates could change and impact our reported
results.
We
also
maintain a reserve for uncertainties relative to the collection of officer
notes
receivable. Factors considered in determining the level of this reserve include
the value of the collateral securing the notes, our ability to effectively
enforce collection rights and the ability of the former officers to honor their
obligations.
Inventory
Valuation
Our
policy is to value inventories at the lower of cost or market on a part-by-part
basis. This policy requires us to make estimates regarding the market value
of
our inventories, including an assessment of excess and obsolete inventories.
We
determine excess and obsolete inventories based on an estimate of the future
sales demand for our products within a specified time horizon, generally three
to twelve months. The estimates we use for demand are also used for near-term
capacity planning and inventory purchasing and are consistent with our revenue
forecasts. In addition, specific reserves are recorded to cover risks in the
area of end of life products, inventory located at our contract manufacturers,
deferred inventory in our sales channel and warranty replacement
stock.
If
our
sales forecast is less than the inventory we have on hand at the end of an
accounting period, we may be required to take excess and obsolete inventory
charges, which will decrease gross margin and net operating results for that
period.
Valuation
of Deferred Income Taxes
We
have
recorded a valuation allowance to reduce our net deferred tax assets to zero,
primarily due to historical net operating losses and uncertainty of generating
future taxable income. We consider estimated future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a
valuation allowance. If we determine that it is more likely than not that we
will realize a deferred tax asset, which currently has a valuation allowance,
we
would be required to reverse the valuation allowance that would be reflected
as
an income tax benefit at that time.
Goodwill
and Purchased Intangible Assets
The
purchase method of accounting for acquisitions requires extensive use of
accounting estimates and judgments to allocate the purchase price to the fair
value of the net tangible and intangible assets acquired, including in-process
research and development. The amounts and useful lives assigned to intangible
assets impact future amortization. If the assumptions and estimates used to
allocate the purchase price are not correct, purchase price adjustments or
future asset impairment charges could be required.
We
perform goodwill impairment tests on an annual basis, and more frequently if
events occur or circumstances change that would more likely than not reduce
the
fair value of a reporting unit below its carrying amount. Goodwill impairment
testing requires us to compare the fair value of each reporting unit to its
carrying amount, including goodwill, and record an impairment charge if the
carrying amount of a reporting unit exceeds its estimated fair value. The
determination of a reporting unit’s fair value requires significant judgment and
is based on management’s best estimate, which generally considers the unit’s
expected future earnings. If actual results are not consistent with our
assumptions and judgments used in estimating fair value, we may be exposed
to
additional goodwill impairment losses. As of June 30, 2006, we have $9.5 million
of goodwill reflected in our consolidated balance sheet.
We
evaluate purchased intangible assets when indicators of impairment, such as
reductions in demand or significant economic slowdowns, are present. Reviews
are
performed to determine whether the carrying values of these assets are impaired
based on a comparison to the undiscounted expected future cash flows. If the
comparison indicates that there is impairment, the expected future cash flows
using a discount rate based upon our weighted average cost of capital is used
to
estimate the fair value of the assets. Impairment is based on the excess of
the
carrying amount over the fair value of those assets. Significant management
judgment is required in the forecast of future operating results that is used
in
the preparation of expected discounted cash flows. It is reasonably possible
that the estimates of anticipated future net revenue, the remaining estimated
economic lives of the products and technologies, or both, could differ from
those used to assess the recoverability of our purchased intangible assets.
In
the event they are lower, additional impairment charges or shortened useful
lives of certain purchased intangible assets could be required. As of June
30,
2006, we have approximately $610,000 of purchased intangible assets reflected
in
our consolidated balance sheet.
Settlement
Costs
From
time
to time, we are involved in legal actions arising in the ordinary course
of
business. We cannot assure you that these actions or other third party
assertions against us will be resolved without costly litigation, or in a
manner
that is not adverse to our financial position, results of operations or cash
flows. As facts concerning contingencies become known, we reassess our position
and make appropriate adjustments to the financial statements. There are many
uncertainties associated with any litigation. If our initial assessments
regarding the merits of a claim prove to be wrong, our results of operations
and
financial condition could be materially and adversely affected. In addition,
if
further information becomes available that causes us to determine a loss
in any
of our pending litigation, it is probable and we can reasonably estimate
a range
of loss associated with such litigation, then we would record at least the
minimum estimated liability. However, the actual liability in any such
litigation may be materially different from our estimates, which could result
in
the need to record additional costs or recover amounts previously recorded.
Generally, legal expenses billed directly to us are expensed as incurred.
Legal
expenses covered by an insurance policy have been recorded and paid as incurred;
reimbursement of legal expenses from insurance or other sources are recorded
upon receipt. This practice was modified in May 2005, when a new insurance
carrier became responsible for certain legal expenses related to our stockholder
lawsuits. Since May 2005, the new insurance carrier receives invoices from
attorneys and reviews and pays these invoices on our behalf directly. Invoices
related to stockholder litigation that were unpaid as of June 30, 2006 have
been
recorded as a liability, with a receivable from insurance to offset that
liability. Litigation settlement costs have generally been recognized as
a
liability, with a receivable from insurance to offset that liability until
the
settlement is paid by the insurance company.
Consolidated
Results of Operations
The
following discussion of results of operations includes a discussion of
continuing operations only. Certain amounts in the fiscal 2005 and 2004
consolidated financial statements have been reclassified to conform with the
current year presentation.
The
following table presents the percentage of net revenues represented by each
item
in our consolidated statements of operations:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
revenues (1)
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
Cost
of revenues (2)
|
|
|
48.7%
|
|
|
50.2%
|
|
|
51.2%
|
|
Gross
profit
|
|
|
51.3%
|
|
|
49.8%
|
|
|
48.8%
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
46.6%
|
|
|
51.1%
|
|
|
48.3%
|
|
Research
and development
|
|
|
11.5%
|
|
|
13.0%
|
|
|
16.1%
|
|
Litigation
settlement costs
|
|
|
1.8%
|
|
|
0.0%
|
|
|
0.0%
|
|
Amortization
of purchased intangible assets
|
|
|
0.0%
|
|
|
0.1%
|
|
|
0.3%
|
|
Restructuring
recovery
|
|
|
0.0%
|
|
|
0.0%
|
|
|
(4.3%
|
)
|
Total
operating expenses
|
|
|
60.0%
|
|
|
64.2%
|
|
|
60.4%
|
|
Loss
from operations
|
|
|
(8.7%
|
)
|
|
(14.4%
|
)
|
|
(11.6%
|
)
|
Interest
income (expense), net
|
|
|
0.2%
|
|
|
(0.1%
|
)
|
|
0.1%
|
|
Other
income (expense), net
|
|
|
2.6%
|
|
|
0.4%
|
|
|
(10.9%
|
)
|
Loss
before income taxes
|
|
|
(5.9%
|
)
|
|
(14.1%
|
)
|
|
(22.4%
|
)
|
(Benefit)
provision for income taxes
|
|
|
0.0%
|
|
|
0.5%
|
|
|
(0.7%
|
)
|
Loss
from continuing operations
|
|
|
(5.9%
|
)
|
|
(14.6%
|
)
|
|
(21.7%
|
)
|
Income
(loss) from discontinued operations
|
|
|
0.0%
|
|
|
0.2%
|
|
|
(10.3%
|
)
|
Net
loss
|
|
|
(5.9%
|
)
|
|
(14.4%
|
)
|
|
(32.0%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes net revenues from related party
|
|
|
|
|
|
|
|
|
|
|
(2)
Includes amortization of purchased intangible assets
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Years Ended June 30, 2006 and 2005
Net
Revenues by Product Category
The
following table presents net revenues by product category:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2006
|
|
Revenues
|
|
2005
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Device
networking
|
|
$
|
35,419
|
|
|
68.2%
|
|
$
|
29,979
|
|
|
61.9%
|
|
$
|
5,440
|
|
|
18.1%
|
|
IT
management
|
|
|
11,499
|
|
|
22.1%
|
|
|
12,341
|
|
|
25.4%
|
|
|
(842
|
)
|
|
(6.8%
|
)
|
Non-core
|
|
|
5,025
|
|
|
9.7%
|
|
|
6,182
|
|
|
12.7%
|
|
|
(1,157
|
)
|
|
(18.7%
|
)
|
|
|
$
|
51,943
|
|
|
100.0%
|
|
$
|
48,502
|
|
|
100.0%
|
|
$
|
3,441
|
|
|
7.1%
|
|
The
increase in net revenues for fiscal 2006 as compared to fiscal 2005 was a
result
of an increase in net revenues from our device networking products, offset
by a
decrease in our IT management products, and our non-core products. The increase
in our device networking product line is in part due to an increase in volume
in
our embedded device networking products, which includes our XPort products.
The
decrease in IT management product sales is a result of a decrease in our
Secure
Console Server and ETS Terminal Server product sales. 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 in device networking and IT management products.
Net
Revenues by Region
The
following table presents net revenues by geographic region:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2006
|
|
Revenues
|
|
2005
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Americas
|
|
$
|
32,463
|
|
|
62.5%
|
|
$
|
31,162
|
|
|
64.3%
|
|
$
|
1,301
|
|
|
4.2%
|
|
EMEA
|
|
|
14,094
|
|
|
27.1%
|
|
|
13,213
|
|
|
27.2%
|
|
|
881
|
|
|
6.7%
|
|
Asia
Pacific
|
|
|
5,386
|
|
|
10.4%
|
|
|
4,127
|
|
|
8.5%
|
|
|
1,259
|
|
|
30.5%
|
|
|
|
$
|
51,943
|
|
|
100.0%
|
|
$
|
48,502
|
|
|
100.0%
|
|
$
|
3,441
|
|
|
7.1%
|
|
The
increase in net revenues for fiscal 2006 as compared to fiscal 2005 is a result
of an increase in net revenues across all of our geographic regions. The
increase in net revenues in the Americas region is in part attributable to
an
increase in sales of device networking products offset by lower sales of IT
management and non-core products. The increase in net revenues in the EMEA
(“Europe, Middle East and Africa”) and Asia Pacific regions is in part due to an
increase in sales of our device networking products.
Net
Revenues by Significant Customer
The
following table presents net revenues by significant customer and a related
party as a percentage of net revenues:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Top
five customers (1)
|
|
|
38.0%
|
|
|
42.0%
|
|
|
38.0%
|
|
Ingram
Micro |
|
|
13.0% |
|
|
16.0% |
|
|
14.0% |
|
Tech
Data |
|
|
10.0% |
|
|
11.0% |
|
|
9.0% |
|
Related
party |
|
|
3.0% |
|
|
2.0% |
|
|
3.0% |
|
(1)
Includes Ingram Micro, Tech Data and related party.
An
international customer, transtec AG, is a related party due to common ownership
by our largest stockholder, Bernhard Bruscha.
Gross
Profit
The
following table presents gross profit:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2006
|
|
Revenues
|
|
2005
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Gross
profit
|
|
$
|
26,667
|
|
|
51.3%
|
|
$
|
24,176
|
|
|
49.8%
|
|
$
|
2,491
|
|
|
10.3%
|
|
Gross
profit represents net revenues less cost of revenues. Cost of revenues consists
in part 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.
In
order
of significance, the increase in gross profit as a percentage of net revenues
for fiscal 2006 as compared to fiscal 2005 is in part due to the following
factors: (i) a decrease in the amortization of purchased intangible assets
as a
result of a majority of our purchased intangible assets becoming fully
amortized; (ii) a reduction in product warranty reserves to reflect a decrease
in our product return rates; and (iii) a reduction in manufacturing overhead
costs; offset by an increase in direct standard product costs as a result of
a
shift in the product mix of device networking sales towards lower margin product
sales.
Selling,
General and Administrative
The
following table presents selling, general and administrative
expenses:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2006
|
|
Revenues
|
|
2005
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Selling,
general and administrative
|
|
$
|
24,203
|
|
|
46.6%
|
|
$
|
24,770
|
|
|
51.1%
|
|
$
|
(567
|
) |
|
(2.3%
|
)
|
Selling,
general and administrative expenses consist in part of personnel-related
expenses including salaries, commissions and share-based compensation, facility
expenses, information technology, trade show expenses, advertising, and
professional legal and accounting fees offset by reimbursement of legal fees
from insurance proceeds.
In
order
of significance, the decrease in selling, general and administrative expense
for
fiscal 2006 as compared to fiscal 2005 is in part due to the following factors:
(i) a decrease in personnel-related expenses as a result of a reduction in
average headcount for the period; (ii) a reduction in facilities expenses in
part due to a reduction in building rent expense for our Irvine facility; (iii)
a reduction of advertising expenditures; (iv) a recovery of bad debts; offset
by
an increase in legal and professional fees in part as a result of legal fees
related to the fiscal 2006 patent litigation and an
increase in share-based compensation expense as a result of our adoption of
SFAS
123R as of July 1, 2005. See above section, Adoption of SFAS 123R, for
additional detail.
Research
and Development
The
following table presents research and development expenses:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2006
|
|
Revenues
|
|
2005
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Research
and development
|
|
$
|
5,999
|
|
|
11.5%
|
|
$
|
6,325
|
|
|
13.0%
|
|
$
|
(326
|
) |
|
(5.2%
|
)
|
Research
and development expenses consist in part of personnel-related expenses including
share-based compensation, as well as expenditures to third-party vendors for
research and development activities.
In
order
of significance, the decrease in research and development expenses for fiscal
2006 as compared to fiscal 2005 is in part due to the following factors: a
decrease in personnel-related expenses as a result of a reduction of average
headcount for the period; partially offset by an increase in professional fees
and outside services used to supplement our research and development activities
and an increase in share-based compensation expense as a result of our adoption
of SFAS 123R as of July 1, 2005. See our discussion above in the section
entitled, Adoption of SFAS 123R, for additional detail.
Litigation
Settlement Costs
The
following table presents litigation settlement costs:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2006
|
|
Revenues
|
|
2005
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Litigation
settlement costs
|
|
$
|
960
|
|
|
1.8%
|
|
$
|
-
|
|
|
0.0%
|
|
$
|
960
|
|
|
-
|
|
The
increase in litigation settlement costs for fiscal 2006 as compared to fiscal
2005 is in part due to: (i) a $1.2 million settlement charge we recorded in
connection with an agreement in principle to settle the outstanding class action
lawsuits and (ii) a $165,000 settlement charge we recorded in connection with
a
six-year patent cross-license and litigation dismissal settlement agreement;
offset by (iii) a $422,000 employment litigation settlement recovery in
connection with the settlement of an employment suit brought by the Company’s
former Chief Financial Officer and Chief Operating Officer.
Under
the
terms of the settlement of the employment suit we: (i) transferred to Mr. Cotton
150,000 shares of Lantronix’s Common Stock previously issued to Mr. Cotton
pursuant to his exercise of stock options and held by us as collateral for
notes
given by Mr. Cotton in connection with his exercise of such stock options;
(ii)
relinquished any claims we might have had to shares of our Common
Stock in possession of Mr. Cotton; (iii) cancelled all remaining debt on the
notes given by Mr. Cotton to us in connection with his exercise of such stock
options; and (iv) will dismiss with prejudice the cross-complaint we filed
in the arbitration proceeding. Under the terms of the settlement, Mr. Cotton:
(i) assigned to us 198,040 of the shares issued to Mr. Cotton pursuant to his
exercise of the stock options referred to above; and (ii) will dismiss with
prejudice the lawsuit and arbitration proceedings referred to above. In
connection with the settlement, we recorded a $422,000 litigation settlement
recovery in the consolidated statements of operations for the fiscal year ended
June 30, 2006 representing the fair value of the 198,040 shares collateralizing
the cancelled notes for which we took a charge to operations of $1.2 million
in
fiscal 2002.
The
following table presents details of our litigation settlement
costs:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Class
Action and Synergetic
|
|
$
|
1,217
|
|
$
|
-
|
|
Patent
infringement litigation
|
|
|
165
|
|
|
-
|
|
Cotton
settlement recovery
|
|
|
(422
|
)
|
|
-
|
|
|
|
$
|
960
|
|
$
|
-
|
|
Other
Income (Expense), Net
The
following table presents other income (expense) net:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2006
|
|
Revenues
|
|
2005
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Other
income (expense), net
|
|
$
|
1,376
|
|
|
2.6%
|
|
$
|
173
|
|
|
0.4%
|
|
$
|
1,203
|
|
|
695.4%
|
|
The
increase in other income for fiscal 2006 as compared fiscal 2005 is in part
due
to $1.3 million of other income recognized on the sale of our investment in
Xanboo Inc. ("Xanboo").
Provision
(Benefit) for Income Taxes
The
following table presents our effective tax rate based upon our income tax
provision:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Effective
tax rate
|
|
|
1.0%
|
|
|
3.4%
|
|
We
utilize the liability method of accounting for income taxes as set forth
in SFAS
No. 109, “Accounting for Income Taxes.” The federal statutory rate was 34% for
both periods. The difference between our effective tax rate and the federal
statutory rate resulted in part 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 net deferred tax assets in fiscal 2006 and 2005.
Fiscal
Years Ended June 30, 2005 and 2004
Net
Revenues by Product Category
The
following table presents net revenues by product category:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2005
|
|
Revenues
|
|
2004
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Device
networking
|
|
$
|
29,979
|
|
|
61.9%
|
|
$
|
27,481
|
|
|
56.2%
|
|
$
|
2,498
|
|
|
9.1%
|
|
IT
management
|
|
|
12,341
|
|
|
25.4%
|
|
|
12,555
|
|
|
25.7%
|
|
|
(214
|
)
|
|
(1.7%
|
)
|
Non-core
|
|
|
6,182
|
|
|
12.7%
|
|
|
8,849
|
|
|
18.1%
|
|
|
(2,667
|
)
|
|
(30.1%
|
)
|
|
|
$
|
48,502
|
|
|
100.0%
|
|
$
|
48,885
|
|
|
100.0%
|
|
$
|
(383
|
)
|
|
(0.8%
|
)
|
The
decrease in net revenues for fiscal 2005 as compared to fiscal 2004 is in part
attributable to a decrease in net revenue from our non-core products and, to
a
lesser extent, our IT management products; offset by an increase in our device
networking products. Our increase in device networking products is in part
due
to volume increases. The decrease in our non-core product net revenues is in
part due to a decrease in our print server, visualization and other 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 in device networking and IT management
products.
Net
Revenues by Region
The
following table presents net revenues by geographic region:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2005
|
|
Revenues
|
|
2004
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Americas
|
|
$
|
31,162
|
|
|
64.3%
|
|
$
|
33,847
|
|
|
69.3%
|
|
$
|
(2,685
|
)
|
|
(7.9%
|
)
|
EMEA
|
|
|
13,213
|
|
|
27.2%
|
|
|
11,252
|
|
|
23.0%
|
|
|
1,961
|
|
|
17.4%
|
|
Asia
Pacific
|
|
|
4,127
|
|
|
8.5%
|
|
|
3,786
|
|
|
7.7%
|
|
|
341
|
|
|
9.0%
|
|
|
|
$
|
48,502
|
|
|
100.0%
|
|
$
|
48,885
|
|
|
100.0%
|
|
$
|
(383
|
)
|
|
(0.8%
|
)
|
The
decrease in net revenues for fiscal 2005 as compared to fiscal 2004 is in part
due to a decrease in the Americas region offset by an increase in EMEA and,
to a
lesser extent, Asia Pacific. The decrease in net revenues in the Americas region
is in part attributable to lower sales of non-core products. We are no longer
investing in the development of these non-core product lines and expect net
revenues related to these product lines, primarily our print server,
visualization and other product lines, to continue to decline in the future
as
we focus our investment on device networking and IT management products. The
increase in the EMEA region is in part due to growth in our device networking
products.
Net
Revenues by Significant Customer
The
following table presents net revenues by significant customer and a related
party as a percentage of net revenues:
|
|
Years
Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Top
five customers (1)
|
|
|
42.0%
|
|
|
38.0%
|
|
Ingram
Micro
|
|
|
16.0%
|
|
|
14.0%
|
|
Tech
Data
|
|
|
11.0%
|
|
|
9.0%
|
|
Related
party
|
|
|
2.0%
|
|
|
3.0%
|
|
(1)
Includes Ingram Micro, Tech Data and related party.
An
international customer, transtec AG, is a related party due to common ownership
by our largest stockholder, Bernhard Bruscha.
Gross
Profit
The
following table presents gross profit:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2005
|
|
Revenues
|
|
2004
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Gross
profit
|
|
$
|
24,176
|
|
|
49.8%
|
|
$
|
23,859
|
|
|
48.8%
|
|
$
|
317
|
|
|
1.3%
|
|
Gross
profit represents net revenues less cost of revenues. Cost of revenues consists
in part of the cost of raw material components, subcontract labor assembly
from
outside manufacturers, amortization of purchased intangible assets, establishing
or relieving inventory reserves for excess and obsolete products or raw
materials, overhead, warranty costs and royalty payments.
The
improvement in profit margins is in part due to a decrease in the amortization
of purchased intangible assets and a reduction in product warranty reserves
to
reflect a decrease in our product return rates. Cost
of
revenues for the fiscal years ended June 30, 2005 and 2004 included $1.4 million
and $2.1 million of amortization of purchased intangible assets, respectively.
Selling,
General and Administrative
The
following table presents selling, general and administrative
expenses:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2005
|
|
Revenues
|
|
2004
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Selling,
general and administrative
|
|
$
|
24,770
|
|
|
51.1%
|
|
$
|
23,599
|
|
|
48.3%
|
|
$
|
1,171
|
|
|
5.0%
|
|
Selling,
general and administrative expenses consist in part of personnel-related
expenses including salaries and commissions and share-based compensation
expense, facility expenses, information technology, trade show expenses,
advertising, insurance reimbursements, and professional legal and
accounting fees.
The
increase in selling, general and administrative expense for fiscal 2005 as
compared to fiscal 2004 is in part due to increased legal fees, increased
marketing expenses for new product introductions and existing products and
an
increase in channel marketing programs and increased severance, offset by
the recovery of accrued professional fees and decreased depreciation. Legal
fees
incurred in defense of the stockholder suits are reimbursable to the extent
provided in our directors and officers liability insurance policies, and subject
to the coverage limitations and exclusions contained in such policies. For
the
fiscal years ended June 30, 2005 and 2004, we were reimbursed approximately
$767,000 and $3.0 million, respectively.
Research
and Development
The
following table presents research and development expenses:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2005
|
|
Revenues
|
|
2004
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Research
and development
|
|
$
|
6,325
|
|
|
13.0%
|
|
$
|
7,854
|
|
|
16.1%
|
|
$
|
(1,529
|
) |
|
(19.5%
|
)
|
Research
and development expenses consist in part of personnel-related costs of employees
including share-based compensation, as well as expenditures to third-party
vendors for research and development activities.
The
decrease in research and development expenses for the fiscal year ended June
30,
2005 is in part due to a reduction in headcount and outside services.
Amortization
of Purchased Intangible Assets
The
following table presents amortization of purchased intangible
assets:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2005
|
|
Revenues
|
|
2004
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Amortization
of purchased intangible assets
|
|
$
|
65
|
|
|
0.1%
|
|
$
|
148
|
|
|
0.3%
|
|
$
|
(83
|
) |
|
56.1%
|
|
Purchased
intangible assets include existing technology, patents and non-compete
agreements which are amortized on a straight-line basis over the estimated
useful lives of the respective assets, ranging from one to five
years.
The
decrease in amortization of purchased intangible assets is in part due to assets
becoming fully amortized. Approximately $1.4 million and $2.1 million of
amortization of purchased intangible assets have been classified as cost of
revenues for the fiscal years ended June 30, 2005 and 2004, respectively.
Restructuring
(Recovery) Charges
From
the
fiscal quarter ended March 31, 2002 through the fiscal quarter ended March
31,
2003, we implemented plans to restructure our operations to prioritize our
initiatives around the growth area of our business, focus on profit
contribution, reduce expenses and improve operating efficiency. These
restructuring plans included a worldwide workforce reduction, consolidation
of
excess facilities and other charges. During the fiscal years ended June 30,
2004
and 2003, approximately 58 and
50 employees,
respectively, were terminated across all of our business functions and
geographic regions in connection with the restructuring plans. No additional
restructuring plans were entered into during the fiscal year ended June 30,
2005.
During
the fiscal year ended June 30, 2004, approximately $2.1 million of restructuring
charges were recovered related to a favorable settlement of a contractual
obligation, consolidation of excess facilities and workforce reductions, which
were previously accrued for in fiscal 2003. No similar recovery occurred during
the fiscal year ended June 30, 2005. The remaining restructuring reserve is
related to facility closures in Naperville, Illinois; Hillsboro, Oregon;
Redmond, Washington; and Ames, Iowa.
Interest
Income (Expense), Net
The
following table presents interest income (expense), net:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2005
|
|
Revenues
|
|
2004
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Interest
income (expense), net
|
|
$
|
(20
|
) |
|
(0.1%
|
)
|
$
|
50
|
|
|
0.1%
|
|
$
|
(70
|
) |
|
(140.0%
|
)
|
Interest
income of $58,000 and $94,000 for the fiscal years ended June 30, 2005 and
2004,
respectively, consists in part of interest earned on cash, cash equivalents
and
marketable securities. The decrease is in part due to lower average investment
balances. Interest expense of $78,000 and $44,000 for the fiscal years ended
June 30, 2005 and 2004, respectively, consists primarily of interest expense
related to our line of credit.
Other
Income (Expense), Net
The
following table presents other income (expense), net:
|
|
Years
Ended June 30,
|
|
|
|
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Change
|
|
|
|
2005
|
|
Revenues
|
|
2004
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
Other
income (expense), net
|
|
$
|
173
|
|
|
0.4%
|
|
$
|
(5,333
|
) |
|
(10.9%
|
)
|
$
|
5,506
|
|
|
103.2%
|
|
The
decrease in other expense is due to the write-off of our long-term investment
in
Xanboo in 2004. On the basis of events occurring during the fiscal quarter
ended
June 30, 2004, we performed an analysis and recorded a charge in the amount
of
$5.0 million, representing a write-off of all remaining value of this
non-marketable equity security. This charge is included within the consolidated
statements of operations as other expense. No similar write-off occurred during
the fiscal year ended June 30, 2005.
Provision
(Benefit) for Income Taxes
The
following table presents our effective tax rate based upon our income tax
provision:
|
|
Years
Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Effective
tax rate
|
|
|
3.4%
|
|
|
3.0%
|
|
We
utilize the liability method of accounting for income taxes as set forth in
SFAS
No. 109, “Accounting for Income Taxes.” The federal statutory rate was 34% for
both 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 net deferred tax assets in fiscal 2005 and 2004.
Liquidity
and Capital Resources
Liquidity
Since
inception through fiscal 2006, we have financed our operations through the
issuance of common stock. 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:
|
|
June
30,
|
|
Increase
|
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
|
|
(In
thousands)
|
|
Working
capital
|
|
$
|
5,372
|
|
$
|
7,824
|
|
$
|
(2,452
|
)
|
Cash
and cash equivalents
|
|
$
|
7,729
|
|
$
|
6,690
|
|
$
|
1,039
|
|
Marketable
securities
|
|
|
88
|
|
|
85
|
|
|
3
|
|
|
|
$
|
7,817
|
|
$
|
6,775
|
|
$
|
1,042
|
|
In
order
of significance, our working capital decreased in fiscal 2006 in part due to
(i)
a net loss, (ii) an increase in accounts payable and other liabilities as a
result of the timing of cash payments to vendors and (iii) an increase in
accrued settlements; offset by (iv) cash received from the sale of our interest
in Xanboo. Our cash balances increased in fiscal 2006 in part due to cash
received from the sale of our interest in Xanboo and as a result of our cash
management activities which include the timing of cash payments to our vendors
and the timing of cash receipts from our customers.
We
believe that the cumulative effect of expense reductions initiated
in fiscal 2005 and the settlement of our patent litigation during fiscal
2006 will result in reduced operating expenses and will lower our cash
breakeven point to approximately $13.0 to $14.0 million per fiscal quarter.
This
target is based upon a financial model, and we expect that actual expenses
may
vary in any fiscal quarter and therefore financial results impacting cash usage
or profitability will vary. Also, uses of cash to fund inventories, receivables
and payables will cause results to vary from the financial model.
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 twelve 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 borrow funds through bank loans, sales
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 June
30, 2006, 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, foreign value added tax account deposits and security
deposits:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands) |
|
Available
borrowing capacity
|
|
$
|
2,221
|
|
$
|
2,520
|
|
Outstanding
letters of credit
|
|
$
|
1,594
|
|
$
|
480
|
|
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 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 June 30, 2006, we had incurred $364,000 in connection
with
the ERP implementation which will be advanced by the lessor.
As
of
June 30, 2006, approximately $2.4 million of our tangible assets (primarily
cash
held in foreign subsidiary bank accounts) were held by subsidiaries outside
the
U.S. Such assets are unrestricted with regard to foreign liquidity needs;
however, our ability to utilize a portion of such assets 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:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,045
|
)
|
$
|
(7,004
|
)
|
Non-cash
operating expenses, net
|
|
|
55
|
|
|
958
|
|
Changes
in operating assets and liabilities
|
|
|
1,722
|
|
|
8
|
|
Net
cash provided by (used in) operating activities
|
|
|
73
|
|
|
(4,370
|
)
|
Net
cash provided by investing activities
|
|
|
628
|
|
|
2,926
|
|
Net
cash provided by (used in) financing activities
|
|
|
267
|
|
|
(910
|
)
|
Effect
of foreign exchange rate changes on cash
|
|
|
71
|
|
|
(84
|
)
|
Increase
(decrease) in cash and cash equivalents
|
|
$
|
1,039
|
|
$
|
(2,438
|
)
|
Operating
activities provided cash during fiscal 2006. This was the result
of cash provided by operating assets and liabilities and non-cash operating
expenses offset by a net loss. In order of significance, the changes in
operating assets and liabilities which had a significant impact on the cash
provided by operating activities included (i) an increase in accounts payable
as
a result of the timing of cash payments to vendors and (ii) an increase in
other
liabilities as a result of an increase in customer deposits; offset by
(iii) an increase in inventories and a reduction in warranty reserve. In order
of significance, the non-cash items that had a significant impact on net
loss included share-based compensation, litigation settlement costs,
amortization of purchased intangible assets and depreciation partially offset
by
a gain on the sale of the Xanboo investment.
Operating
activities used cash during fiscal 2005. This was the result of the
net loss offset by non-cash operating expenses. In order of
significance, the non-cash operating expenses that had a significant
impact on net loss included amortization of purchased intangible assets,
depreciation, share-based compensation, provision for inventories and foreign
currency transaction gain. 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) cash payments applied to other liabilities,
(ii) a reduction in the warranty reserve, (iii) cash payments applied towards
the restructuring reserve, accrued payroll and related expenses, and (iv) an
increase in the balance of inventories; offset by (i) a reduction in prepaid
expenses and other current assets, accounts receivable and contract
manufacturers’ receivable and (ii) an increase in accounts payable as a result
of the timing of cash payments.
Investing
activities provided cash during fiscal 2006. This was due to net proceeds
received in connection with the partial sale of our equity interest in Xanboo
offset by cash used in the purchase of property and equipment.
Investing
activities provided cash during fiscal 2005. This was due to net proceeds
from the purchase and sale of marketable securities offset by cash used in
the
purchase of property and equipment.
Financing
activities provided cash during fiscal 2006. This was due to proceeds from
the sale of common shares through employee stock option exercises and the
Employee Stock Purchase Plan offset by repayments on capital lease
obligations.
Financing
activities used cash during fiscal 2005. This was due to a payment to
retire our convertible note payable and payments on our line of credit offset
by
proceeds from the sale of common shares through employee stock option exercises
and the Employee Stock Purchase Plan.
Contractual
Obligations and Commitments
The
following table presents our contractual payment obligations and
commitments:
|
|
Years
Ending June 30,
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Total
|
|
|
|
(In
thousands)
|
|
Purchase
obligations
|
|
$
|
8,921
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,921
|
|
Capital
leases
|
|
|
147
|
|
|
122
|
|
|
101
|
|
|
-
|
|
|
-
|
|
|
370
|
|
Operating
leases
|
|
|
655
|
|
|
619
|
|
|
630
|
|
|
636
|
|
|
53
|
|
|
2,593
|
|
|
|
$
|
9,723
|
|
$
|
741
|
|
$
|
731
|
|
$
|
636
|
|
$
|
53
|
|
$
|
11,884
|
|
Purchase
obligations represent open purchase orders for inventory and other
commitments in the ordinary course of business as of June 30, 2006. In addition
to the above operating lease obligations, we have operating lease obligations
from restructured facilities. These costs will be paid over the respective
lease
terms through 2007. These amounts are included in our consolidated balance
sheets.
Off-Balance
Sheet Arrangements
We
did
not have any off-balance sheet arrangements as of June 30, 2006 and
2005.
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:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
7,729
|
|
$
|
6,690
|
|
Marketable
securities
|
|
|
88
|
|
|
85
|
|
|
|
$
|
7,817
|
|
$
|
6,775
|
|
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:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Cash
held in foreign currencies
|
|
$
|
2,554
|
|
$
|
5,064
|
|
The
financial statements and supplementary data required by this item are
incorporated by reference from Part IV, Item 15 of this Form 10-K and are
presented beginning on page F-1.
On
a
Form 8-K filed with the SEC on January 21, 2005, as amended on February 18,
2005, we previously reported our decision to dismiss our former independent
registered public accounting firm, Ernst & Young LLP, effective January
17, 2005, and appoint McGladrey & Pullen, LLP as our new independent
registered public accounting firm, to perform auditing services beginning with
the second fiscal quarter ended December 31, 2004.
We
were
advised by Ernst & Young LLP that there were control deficiencies related to
our financial statement close process which contributed to the errors in the
initial filing of our Annual Report on Form 10-K for the fiscal year ended
June
30, 2004, which errors had been corrected by us in Form 10-K/A amendments.
These
control deficiencies included a lack of secondary review within Lantronix and
the failure to incorporate final changes prior to filing. Ernst & Young LLP
further advised that our processes to document contract manufacturer inventory
and purchase order transactions contributed to significant errors in reconciling
our records. These conditions were determined to be reportable conditions under
the standards established by the American Institute of Certified Public
Accountants.
(a)
Evaluation of disclosure controls and procedures
We
carried out an evaluation, under the supervision and with the participation
of
our management, including our Chief Executive Officer and our 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
Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of our
fiscal year. Based upon that evaluation, our Chief Executive Officer and our
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 Chief Executive Officer and our Chief Financial
Officer to allow timely decisions regarding required disclosure.
(b)
Changes in internal controls
There
have been no changes in our internal controls over financial reporting
identified during the fiscal quarter that ended June 30, 2006 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
None.
PART
III
Certain
information required by Part III is included in our Proxy Statement and is
incorporated herein by reference. The Proxy Statement will be filed pursuant
to
Regulation 14A of the Exchange Act not later than 120 days after the end of
the
fiscal year covered by this Form 10-K.
The
names
of our executive officers and their ages, titles and biographies as of the
date
hereof are set forth in Part I, Item 1 in the section entitled “Executive
Officers of the Registrant” above, and are incorporated herein by
reference.
The
following information is included in our Proxy Statement and is incorporated
herein by reference:
·
|
Information
regarding our directors is set forth under the proposal “Election of
Directors”
|
·
|
Information
regarding our Audit Committee and designated “audit committee financial
experts” is set forth under “Election
of Directors — Audit Committee”
|
·
|
Information
on our code of business conduct and ethics for directors, officers
and
employees is set forth under “Election of Directors —
Code
of Ethics and Complaint Procedure”
|
·
|
Information
regarding Section 16(a) beneficial ownership reporting compliance is
set forth under “Executive
Compensation and Related Information —
Section 16(a)
Beneficial Ownership Reporting
Compliance”
|
Information
regarding compensation of our named executive officers is set forth under
“Executive Compensation and Related Information” in the Proxy Statement and is
incorporated herein by reference. Information regarding compensation of our
directors is set forth under “Election of Directors —
Director
Compensation” in the Proxy Statement and is incorporated herein by reference.
Information
regarding security ownership of certain beneficial owners, directors and
executive officers is set forth under “Election of Directors” and “Security
Ownership of Certain Beneficial Owners and Management” in the Proxy Statement
and is incorporated herein by reference. Information regarding our equity
compensation plans is set forth under “Executive Compensation and Related
Information —
Equity
Compensation Plan Information” in the Proxy Statement and is incorporated by
reference.
Information
regarding certain relationships and related transactions is set forth under
“Executive Compensation and Related Information —
Related
Party Transactions” in the Proxy Statement and is incorporated herein by
reference.
Information
regarding principal auditor fees and services is set forth under the proposal
“Ratification of Appointment of Independent Registered Public Accountants” in
the Proxy Statement and is incorporated herein by reference.
PART
IV
(a) |
1.
Consolidated Financial
Statements
|
The
following financial statements of the Company and related Reports of Independent
Registered Public Accounting Firms are filed as part of this Form
10-K.
|
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm, McGladrey & Pullen,
LLP
|
|
F-1
|
|
Report
of Independent Registered Public Accounting Firm, Ernst & Young
LLP
|
|
F-2
|
|
Consolidated
Balance Sheets as of June 30, 2006 and 2005
|
|
F-3
|
|
Consolidated
Statements of Operations for the fiscal years ended June 30, 2006,
2005
and 2004
|
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity for the fiscal years ended June 30,
2006, 2005 and 2004
|
|
F-5
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended June 30, 2006,
2005
and 2004
|
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
- F-32
|
|
2.
Financial Statement Schedule
|
The
following financial statement schedule of the Company is filed as part of
this
Form 10-K.
|
(1) Schedule
II-Consolidated Valuation and Qualifying Accounts |
PAGE
EX-99.1
|
All
other
financial statement schedules have been omitted because they are not applicable,
not required, or the information is included in the consolidated financial
statements or notes thereto.
3.
Exhibits
The
exhibits listed on the accompanying index to exhibits immediately following
the
financial statements are filed as part of, or hereby incorporated by reference
into, this Form 10-K.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Lantronix,
Inc.
Irvine,
California
We
have
audited the consolidated balance sheets of Lantronix, Inc. as of June 30,
2006
and 2005, and the related consolidated statements of operations, stockholders’
equity and cash flows for each of the two years in the period ended June
30,
2006. Our
audit
also included the 2006 and 2005 financial statement schedule listed at
Item 15.
These
financial statements and the schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We
conducted our audits
in
accordance with the standards of the Public Company Accounting Oversight
Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are
free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit
also includes assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our
opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Lantronix, Inc. as
of June
30, 2006 and 2005, and the results of its operations and its cash flows
for the
years then ended, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a
whole, presents fairly in all material respects the information set forth
therein.
/s/
MCGLADREY & PULLEN, LLP
Irvine,
California
September
7, 2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ERNST & YOUNG
LLP
The
Board
of Directors and Stockholders
Lantronix,
Inc.
We
have
audited the accompanying consolidated statements of operations, stockholders'
equity, and cash flows for the fiscal year ended June 30, 2004. Our audit
also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company’s internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as
a basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audit provides a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the consolidated financial position of Lantronix, Inc.
at
June 30, 2004, and the consolidated results of its operations and its cash
flows
for the fiscal year ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion,
the
related financial statement schedule, when considered in relation to the
basic
financial statements taken as a whole, presents fairly in all material
respects
the information set-forth therein.
/s/
ERNST
& YOUNG LLP
Orange
County, California
September
10, 2004
|
LANTRONIX,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,729
|
|
$
|
6,690
|
|
Marketable
securities
|
|
|
88
|
|
|
85
|
|
Accounts
receivable (net of allowance for doubtful accounts of
$84
and $158 at June 30, 2006 and 2005, respectively)
|
|
|
3,087
|
|
|
2,897
|
|
Inventories,
net
|
|
|
8,113
|
|
|
6,828
|
|
|
|
|
|
|
|
|
|
Contract
manufacturers' receivable (net of allowance of $22 at June
30,
2005)
|
|
|
1,049
|
|
|
711
|
|
Settlements
recovery
|
|
|
15,325
|
|
|
1,200
|
|
Prepaid
expenses and other current assets
|
|
|
577
|
|
|
1,055
|
|
Total
current assets
|
|
|
35,968
|
|
|
19,466
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,589
|
|
|
674
|
|
Goodwill
|
|
|
9,488
|
|
|
9,488
|
|
Purchased
intangible assets, net
|
|
|
610
|
|
|
559
|
|
Officer
loans (net of allowance of $3,115 and $4,470
at
June 30, 2006 and 2005, respectively)
|
|
|
122 |
|
|
116 |
|
Other
assets
|
|
|
38
|
|
|
65
|
|
Total
assets
|
|
$
|
47,815
|
|
$
|
30,368
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,865
|
|
$
|
4,702
|
|
Accrued
payroll and related expenses
|
|
|
1,596
|
|
|
1,296
|
|
Warranty
reserve
|
|
|
693
|
|
|
1,248
|
|
Restructuring
reserve
|
|
|
80
|
|
|
264
|
|
Accrued
settlements
|
|
|
16,767
|
|
|
1,200
|
|
Other
current liabilities
|
|
|
3,595
|
|
|
2,932
|
|
Total
current liabilities
|
|
|
30,596
|
|
|
11,642
|
|
Long-term
liabilities
|
|
|
230
|
|
|
207
|
|
Long-term
capital lease obligations
|
|
|
211
|
|
|
51
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value; 5,000,000 shares authorized;
none
issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.0001 par value; 200,000,000 shares authorized;
59,204,172
and 58,790,413 shares issued and outstanding at
June
30, 2006 and June 30, 2005, respectively
|
|
|
6
|
|
|
6
|
|
Additional
paid-in capital
|
|
|
182,857
|
|
|
181,264
|
|
Deferred
compensation
|
|
|
-
|
|
|
(17
|
)
|
Accumulated
deficit
|
|
|
(166,450
|
)
|
|
(163,082
|
)
|
Accumulated
other comprehensive income
|
|
|
365
|
|
|
297
|
|
Total
stockholders' equity
|
|
|
16,778
|
|
|
18,468
|
|
Total
liabilities and stockholders' equity
|
|
$
|
47,815
|
|
$
|
30,368
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
LANTRONIX,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
revenues (1)
|
|
$
|
51,943
|
|
$
|
48,502
|
|
$
|
48,885
|
|
Cost
of revenues (2)
|
|
|
25,276
|
|
|
24,326
|
|
|
25,026
|
|
Gross
profit
|
|
|
26,667
|
|
|
24,176
|
|
|
23,859
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
24,203
|
|
|
24,770
|
|
|
23,599
|
|
Research
and development
|
|
|
5,999
|
|
|
6,325
|
|
|
7,854
|
|
Litigation
settlement costs
|
|
|
960
|
|
|
-
|
|
|
-
|
|
Amortization
of purchased intangible assets
|
|
|
20
|
|
|
65
|
|
|
148
|
|
Restructuring
recovery
|
|
|
(17
|
)
|
|
-
|
|
|
(2,093
|
)
|
Total
operating expenses
|
|
|
31,165
|
|
|
31,160
|
|
|
29,508
|
|
Loss
from operations
|
|
|
(4,498
|
)
|
|
(6,984
|
)
|
|
(5,649
|
)
|
Interest
income (expense), net
|
|
|
46
|
|
|
(20
|
)
|
|
50
|
|
Other
income (expense), net
|
|
|
1,376
|
|
|
173
|
|
|
(5,333
|
)
|
Loss
before income taxes
|
|
|
(3,076
|
)
|
|
(6,831
|
)
|
|
(10,932
|
)
|
(Benefit)
provision for income taxes
|
|
|
(31
|
)
|
|
229
|
|
|
(325
|
)
|
Loss
from continuing operations
|
|
|
(3,045
|
)
|
|
(7,060
|
)
|
|
(10,607
|
)
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
56
|
|
|
(5,047
|
)
|
Net
loss
|
|
$
|
(3,045
|
)
|
$
|
(7,004
|
)
|
$
|
(15,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.05
|
)
|
$
|
(0.12
|
)
|
$
|
(0.19
|
)
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
(0.09
|
)
|
Net
loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.12
|
)
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares (basic and diluted)
|
|
|
58,702
|
|
|
58,202
|
|
|
56,862
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes net revenues from related party
|
|
$
|
1,376
|
|
$
|
1,136
|
|
$
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Includes amortization of purchased intangible assets
|
|
$
|
570
|
|
$
|
1,432
|
|
$
|
2,071
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
LANTRONIX,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Comon
Stock
|
|
Paid-In
|
|
Deferred
|
|
Accumulated
|
|
Comprehensive
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficit
|
|
Income
|
|
Equity
|
|
Balance
at June 30, 2003
|
|
|
55,425,774
|
|
$
|
6
|
|
$
|
178,628
|
|
$
|
(695
|
)
|
$
|
(140,424
|
)
|
$
|
202
|
|
$
|
37,717
|
|
Stock
options exercised
|
|
|
496,335
|
|
|
-
|
|
|
359
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
359
|
|
Employee
stock purchase plan
|
|
|
505,935
|
|
|
-
|
|
|
369
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
369
|
|
Deferred
compensation net
|
|
|
-
|
|
|
-
|
|
|
(197
|
)
|
|
197
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Share-based
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
395
|
|
|
-
|
|
|
-
|
|
|
395
|
|
Dunstan
settlement
|
|
|
1,726,703
|
|
|
-
|
|
|
1,553
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,553
|
|
Components
of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
52
|
|
|
52
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15,654
|
)
|
|
-
|
|
|
(15,654
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15,602
|
)
|
Balance
at June 30, 2004
|
|
|
58,154,747
|
|
|
6
|
|
|
180,712
|
|
|
(103
|
)
|
|
(156,078
|
)
|
|
254
|
|
|
24,791
|
|
Stock
options exercised
|
|
|
281,862
|
|
|
-
|
|
|
193
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
193
|
|
Employee
stock purchase plan
|
|
|
353,804
|
|
|
-
|
|
|
275
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
275
|
|
Share-based
compensation
|
|
|
-
|
|
|
-
|
|
|
84
|
|
|
86
|
|
|
-
|
|
|
-
|
|
|
170
|
|
Components
of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(42
|
)
|
|
(42
|
)
|
Change
in net unrealized
income
on investment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
85
|
|
|
85
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,004
|
)
|
|
-
|
|
|
(7,004
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,961
|
)
|
Balance
at June 30, 2005
|
|
|
58,790,413
|
|
|
6
|
|
|
181,264
|
|
|
(17
|
)
|
|
(163,082
|
)
|
|
297
|
|
|
18,468
|
|
Stock
options exercised
|
|
|
261,293
|
|
|
-
|
|
|
203
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
203
|
|
Employee
stock purchase plan
|
|
|
266,453
|
|
|
-
|
|
|
240
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
240
|
|
Deferred
compensation net
|
|
|
-
|
|
|
-
|
|
|
(17
|
)
|
|
17
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Share-based
compensation
|
|
|
-
|
|
|
-
|
|
|
1,091
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,091
|
|
Synergetic
settlement
|
|
|
84,053
|
|
|
-
|
|
|
175
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
175
|
|
Cotton
settlement
|
|
|
(198,040
|
)
|
|
-
|
|
|
(99
|
)
|
|
-
|
|
|
(323
|
)
|
|
-
|
|
|
(422
|
)
|
Components
of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
65
|
|
|
65
|
|
income
on investment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
3
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,045
|
)
|
|
-
|
|
|
(3,045
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,977
|
)
|
Balance
at June 30, 2006
|
|
|
59,204,172
|
|
$
|
6
|
|
$
|
182,857
|
|
$
|
-
|
|
$
|
(166,450
|
)
|
$
|
365
|
|
$
|
16,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
LANTRONIX,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Years
Ended June 30,
|
|
Cash
flows from operating activities:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
$ |
(3,045 |
) |
$ |
(7,004 |
) |
$ |
(15,654 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
(Gain)
loss on sale of long-term investment
|
|
|
(1,300
|
)
|
|
-
|
|
|
31
|
|
Share-based
compensation
|
|
|
1,091
|
|
|
171
|
|
|
395
|
|
Litigation
settlement costs
|
|
|
960
|
|
|
-
|
|
|
-
|
|
Amortization
of purchased intangible assets
|
|
|
590
|
|
|
1,497
|
|
|
2,219
|
|
Depreciation
|
|
|
424
|
|
|
611
|
|
|
1,742
|
|
Provision
for inventories
|
|
|
(327
|
)
|
|
163
|
|
|
368
|
|
Recovery
(provision) for doubtful accounts
|
|
|
(24
|
)
|
|
140
|
|
|
(164
|
)
|
Restructuring
recovery
|
|
|
(17
|
)
|
|
(56
|
)
|
|
(1,551
|
)
|
(Gain)
loss on disposal of fixed assets
|
|
|
(1
|
)
|
|
22
|
|
|
-
|
|
Foreign
currency transaction gain
|
|
|
-
|
|
|
78
|
|
|
-
|
|
Revaluation
of strategic investment
|
|
|
-
|
|
|
-
|
|
|
5,007
|
|
Deferred
income taxes
|
|
|
-
|
|
|
-
|
|
|
(600
|
)
|
Equity
losses from unconsolidated business
|
|
|
-
|
|
|
-
|
|
|
413
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(166
|
)
|
|
141
|
|
|
708
|
|
Inventories
|
|
|
(958
|
)
|
|
(315
|
)
|
|
199
|
|
Contract
manufacturers' receivable
|
|
|
(338
|
)
|
|
289
|
|
|
777
|
|
Prepaid
expenses and other current assets
|
|
|
11
|
|
|
843
|
|
|
1,173
|
|
Other
assets
|
|
|
22
|
|
|
112
|
|
|
(28
|
)
|
Accounts
payable
|
|
|
3,161
|
|
|
650
|
|
|
(725
|
)
|
Accrued
payroll and related expenses
|
|
|
292
|
|
|
(303
|
)
|
|
414
|
|
Due
to Gordian
|
|
|
-
|
|
|
-
|
|
|
(1,000
|
)
|
Accrued
settlements
|
|
|
(200
|
)
|
|
-
|
|
|
-
|
|
Warranty
reserve
|
|
|
(555
|
)
|
|
(522
|
)
|
|
577
|
|
Restructuring
reserve
|
|
|
(167
|
)
|
|
(432
|
)
|
|
(932
|
)
|
Other
liabilities
|
|
|
620
|
|
|
(455
|
)
|
|
318
|
|
Changes
in operating assets and liabilities of discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
2,759
|
|
Net
cash provided by (used in) operating activities
|
|
|
73
|
|
|
(4,370
|
)
|
|
(3,554
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of long-term investment
|
|
|
1,300
|
|
|
-
|
|
|
7
|
|
Purchases
of property and equipment, net
|
|
|
(672
|
)
|
|
(124
|
)
|
|
(248
|
)
|
Proceeds
from sale of marketable securities
|
|
|
-
|
|
|
4,050
|
|
|
4,252
|
|
Purchases
of marketable securities
|
|
|
-
|
|
|
(1,000
|
)
|
|
(552
|
)
|
Investing
cash flows of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
617
|
|
Net
cash provided by investing activities
|
|
|
628
|
|
|
2,926
|
|
|
4,076
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuances of common stock
|
|
|
443
|
|
|
468
|
|
|
726
|
|
Payment
of capital lease obligations
|
|
|
(176
|
)
|
|
(11
|
)
|
|
-
|
|
Payment
of convertible note payable
|
|
|
-
|
|
|
(867
|
)
|
|
-
|
|
(Payment)
borrowing of line of credit
|
|
|
-
|
|
|
(500
|
)
|
|
500
|
|
Net
cash provided by (used in) financing activities
|
|
|
267
|
|
|
(910
|
)
|
|
1,226
|
|
Effect
of foreign exchange rate changes on cash
|
|
|
71
|
|
|
(84
|
)
|
|
52
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
1,039
|
|
|
(2,438
|
)
|
|
1,800
|
|
Cash
and cash equivalents at beginning of period
|
|
|
6,690
|
|
|
9,128
|
|
|
7,328
|
|
Cash
and cash equivalents at end of period
|
|
$
|
7,729
|
|
$
|
6,690
|
|
$
|
9,128
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
30
|
|
$
|
85
|
|
$
|
43
|
|
Income
taxes (refunded) paid
|
|
$
|
(23
|
)
|
$
|
179
|
|
$
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
1. Summary
of Significant Accounting Policies
The
Company
Lantronix,
Inc. (the “Company”), incorporated in California in June 1989 and
re-incorporated in the State of Delaware in May 2000, is engaged primarily
in
the design and distribution of networking and Internet connectivity products
on
a worldwide basis. The actual assembly and a portion of the engineering
of the
Company’s products are outsourced to third parties.
The
Company has incurred losses from operations and prior to the fiscal year
ended
June 30, 2006 had reported negative operating cash flows. As of June 30,
2006,
the Company had an accumulated deficit of $166.5 million and cash and cash
equivalents and marketable securities of $7.8 million. The Company has
no
material financial commitments other than operating and capital lease agreements
and inventory purchase orders. The Company believes that its existing cash
and
cash equivalents, and any cash generated from operations, will be sufficient
to
fund its working capital requirements, capital expenditures and other
obligations through the next twelve months. Long term the Company may face
significant risks associated with the successful execution of its business
strategy and may need to raise additional capital in order to fund more
rapid
expansion, to expand its marketing activities, to develop new or enhance
existing services or products, and to respond to competitive pressures
or to
acquire complementary services, businesses, or technologies. If the Company
is
not successful in generating sufficient cash flow from operations, it may
need
to raise additional capital through public or private financing, strategic
relationships, or other arrangements.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and
its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. At June 30, 2006, approximately
$2.4 million of the Company’s net tangible assets (primarily cash held in
foreign bank accounts) were located outside the U.S. Such assets are
unrestricted with regard to foreign liquidity needs, however, the ability
of the
Company to utilize such assets to satisfy liquidity needs outside of such
foreign locations are subject to approval by the foreign location board
of
directors.
In
March
2004, the Company completed the sale of substantially all of the net assets
of
Premise Systems, Inc. (“Premise”) (Note 6). The Company’s consolidated financial
statements have been presented to reflect Premise as a discontinued operation
for all periods presented.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The industry in which the Company operates
is
characterized by rapid technological change and short product life cycles.
As a
result, estimates made in preparing the consolidated financial statements
include the allowance for doubtful accounts, sales returns and allowances,
inventory reserves, allowance for officer loans, strategic investments,
goodwill
and purchased intangible asset valuations, deferred income tax asset valuation
allowances, warranty reserves, restructuring costs, litigation and other
contingencies. To the extent there are material differences between estimates
and the actual results, future results of operations will be
affected.
Revenue
Recognition
The
Company does not recognize revenue until all of the following criteria
are met:
persuasive evidence of an arrangement exists; delivery has occurred or
services
have been rendered; the Company’s price to the buyer is fixed or determinable;
and collectibility is reasonably assured. However, a significant portion of
the Company’s sales are made to distributors under agreements which contain a
limited right to return unsold product and price protection provisions
The
recognition of revenue and related cost of revenue from sales to distributors
are deferred until the distributor resells the product. Net revenue from
certain
smaller distributors, for which point-of-sale information is not available,
is
recognized approximately one month after the shipment date. This estimate
approximates the timing of the sale of the product by the distributor to
the end
user.
LANTRONIX,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
When
product sales revenue is recognized, the Company establishes an estimated
allowance for future product returns based on historical returns experience;
when price reductions are approved, it establishes an estimated liability
for
price protection payable on inventories owned by product resellers. Should
actual product returns or pricing adjustments exceed the Company’s estimates,
additional reductions to revenues would result.
Revenue
from the licensing of software is recognized at the time of shipment (or
at the
time of resale in the case of software products sold through distributors),
provided the Company has vendor-specific objective evidence of the fair
value of
each element of the software offering and collectibility is probable.
Additionally, the Company sells extended warranty services which extend
the
warranty period for an additional one to three years, depending upon the
product. Warranty revenue is recognized ratably over the warranty service
period.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
The
Company’s allowance for doubtful accounts is based on its assessment of the
collectibility of specific customer accounts, the aging of accounts receivable,
the Company’s history of bad debts and the general condition of the industry.
Accounts that are deemed uncollectible are written off against the allowance
for
doubtful accounts. If
a
major customer’s creditworthiness deteriorates, or the Company’s customers’
actual defaults exceed its historical experience, such estimates could
change
and impact reported results. The Company also maintains a reserve for
uncertainties relative to the collection of officer notes receivable. Factors
considered in determining the level of this reserve include the value of
the
collateral securing the notes, the Company’s ability to effectively enforce
collection rights and the ability of the former officers to honor their
obligations.
Concentration
of Credit Risk
The
Company’s accounts receivable are primarily derived from revenues earned from
customers located throughout North America, Europe and Asia. The Company
performs ongoing credit evaluations of its customers’ financial condition and
maintains allowances for potential credit losses. Credit losses have
historically been within management’s expectations. The Company generally does
not require collateral or other security from its customers. The Company
invests
its excess cash in deposits with major banks, in U.S. Government agencies,
state, municipal and county government notes and bonds.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash, cash equivalents,
marketable securities, accounts receivable, notes receivable, contract
manufacturers’ receivable, accounts payable and accrued liabilities. The Company
believes all of the financial instruments’ recorded values approximate current
values because of the nature and short duration of these
instruments.
Foreign
Currency Translation
The
financial statements of foreign subsidiaries whose functional currency
is not
the U.S. dollar have been translated to U.S. dollars in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency
Translation.” Foreign currency assets and liabilities are valued in U.S. dollars
at the end-of-period exchange rates. Revenues and expenses are translated
at
average exchange rates in effect during each period. Exchange gains and
losses
from foreign currency translations are reported as a component of accumulated
other comprehensive income within stockholders’ equity. Exchange gains and
losses from foreign currency transactions are recognized in the consolidated
statement of operations and historically have not been material.
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of cash and short-term investments with original
maturities of 90 days or less.
LANTRONIX,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
Investments
Available-for-Sale
Investments
The
Company accounts for its investments in debt and equity securities with
readily
determinable fair values that are not accounted for under the equity method
of
accounting under SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities.” Management determines the appropriate classification of such
securities at the time of purchase and reevaluates such classification
as of
each balance sheet date. The Company classifies its marketable securities
as
available-for-sale under SFAS 115. Marketable securities consist of equity
securities The specific identification method is used to determine the
cost
basis of securities disposed of. Unrealized gains and losses on the marketable
securities are included as a separate component of accumulated other
comprehensive income, net of tax.
Long-term
Investments
The
Company is accounting for its long-term investment in Xanboo Inc.
(“Xanboo”) under
the
equity method based upon the Company’s ability, through representation on
Xanboo’s board of directors, to exercise significant influence over its
operations. Under the equity method of accounting, the Company’s proportionate
share of income or losses from the long-term investment, and any gain or
loss on
disposal, are recorded in other expense, net. The Company’s proportionate share
of losses are not recorded to the extent that they exceed the carrying
value of
the long-term investment.
Impairment
of Investments
The
Company periodically reviews its investments for which fair value is less
than
cost to determine if the decline in value is other-than-temporary. Additionally,
the Company monitors its long-term investment for impairment and makes
appropriate reductions in the carrying value if the Company determines
that an
impairment charge is required based primarily on the financial condition
and
near-term prospects of the investment. If the decline in value is judged
to be
other-than-temporary, the cost basis of the security is written down to
fair
value. The Company generally believes an other-than-temporary decline has
occurred when the fair value of the investment is below the carrying value
for
two consecutive fiscal quarters, absent evidence to the contrary.
Inventories
Inventories
are stated at the lower of cost (on a first-in, first-out basis) or market.
The
Company provides reserves for excess and obsolete inventories determined
primarily based upon estimates of future demand for the Company’s products.
Shipping and handling costs are classified as a component of cost of revenues
in
the consolidated statements of operations.
Inventory
Sale and Purchase Transactions with Contract Manufacturers
Under
certain circumstances, the Company sells raw materials to its contract
manufacturers and subsequently repurchases finished goods from the contract
manufacturers which contain such raw materials. Net sales of raw materials
to
the contract manufacturers are eliminated from the Company’s net revenues as the
Company intends to repurchase the raw materials from the contract manufacturers
in the form of finished goods. Raw materials sold to the contract manufacturers
which the Company intends to purchase as part of finished goods are recorded
on
the Company’s consolidated balance sheets as contract manufacturers’ receivable.
Property
and Equipment
Property
and equipment are carried at cost. Depreciation is provided using the
straight-line method over the assets’ estimated useful lives ranging from three
to five years. Depreciation and amortization of leasehold improvements
are
computed using the shorter of the remaining lease term or five years. Major
renewals and betterments are capitalized, while replacements, maintenance
and
repairs, which do not improve or extend the lives of the respective assets,
are
expensed as incurred.
Capitalized
Internal Use Software Costs
The
Company capitalizes the costs of computer software developed or obtained
for
internal use in accordance with AICPA Statement of Position 98-1, “Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use.”
Capitalized computer software costs consist of purchased software licenses
and
implementation costs. The capitalized software costs are being amortized
on a
straight-line basis over a period of three to five years.
LANTRONIX,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
Goodwill
and Purchased Intangible Assets
Goodwill
is recorded as the difference, if any, between the aggregate consideration
paid
for an acquisition and the fair value of the net tangible and intangible
assets
acquired. In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets” (“SFAS 142”),
the Company tests goodwill for impairment at the reporting unit level (operating
segment or one level below an operating segment) on an annual basis in
the
fourth fiscal quarter or more frequently if the Company believes indicators
of
impairment exist. The performance of the test involves a two-step process.
The
first step of the impairment test involves comparing the fair values of
the
applicable reporting unit with its aggregate carrying value, including
goodwill.
The Company generally determines the fair value of its reporting unit using
the
market or income approach methodology of valuation that includes comparing
to
market values of similar companies, the discounted cash flow method as
well as
other generally accepted valuation methodologies. If the carrying amount
of the
reporting unit exceeds the reporting unit’s fair value, the Company performs the
second step of the goodwill impairment test to determine the amount of
impairment loss. The second step of the goodwill impairment test involves
comparing the implied fair value of the affected reporting unit’s goodwill with
the carrying value of that goodwill.
During
the fourth fiscal quarters ended June 30, 2006, 2005 and 2004, the Company
completed its annual goodwill impairment tests in accordance with SFAS
142 and
determined that no impairment was indicated as the estimated fair values
exceeded their respective carrying values.
The
Company accounts for long-lived assets, including other purchased intangible
assets, in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which requires
impairment losses to be recorded on long-lived assets used in operations
when
indicators of impairment are present. Reviews are performed to determine
whether
the carrying value of an asset is impaired, based on comparisons to undiscounted
expected future cash flows. If this comparison indicates that there is
impairment, the impaired asset is written down to fair value,
which is
typically calculated using (i) quoted market prices and/or
(ii) discounted expected future cash flows utilizing a discount rate
consistent with the guidance provided in FASB Concepts Statement No. 7,
“Using Cash Flow Information and Present Value in Accounting Measurements.”
Impairment is based on the excess of the carrying amount over the fair
value of
those assets.
Discontinued
Operations
In
accordance with SFAS 144, assets and liabilities within a separate business
segment or reporting unit that has been disposed of through closure or
sale, or
are classified as held for sale, are disclosed separately as assets or
liabilities within discontinued operations in the consolidated balance
sheets
for all periods presented. The assets and liabilities are deemed to be
held for
sale upon management’s approval and commitment to a plan to dispose of or sell
the business segment or reporting unit. As of June 30, 2006 and 2005, the
Company held no assets or liabilities of discontinued operations. The revenues
and expenses associated with a discontinued operation are included within
loss
from discontinued operations, net of tax, in the consolidated statements
of
operations.
Income
Taxes
Income
taxes are computed under the liability method. This method requires the
recognition of deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of the Company’s assets
and liabilities. The impact on deferred taxes of changes in tax rates and
laws,
if any, are applied to the years during which temporary differences are
expected
to be settled and are reflected in the consolidated financial statements
in the
period of enactment. A valuation allowance is recorded when it is more
likely
than not that some of the deferred tax assets will not be realized.
Share-Based
Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised
2004), “Share-Based Payment,” (“SFAS 123R”). This Statement requires companies
to expense the estimated fair value of stock options and similar equity
instruments issued to employees over the requisite service period. SFAS
123R
eliminates the alternative to use the intrinsic method of accounting provided
for in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (“APB 25”), which generally resulted in no compensation
expense recorded in the financial statements related to the grant of stock
options to employees if certain conditions were met. However, under APB
25 and
related accounting guidance, the Company recognized compensation expense
for
in-the-money option grants to employees and employee stock options assumed
by
the Company in connection with its acquisitions of the businesses that
previously employed those individuals. Additionally, the pro forma impact
from
recognition of the estimated fair value of stock options granted to employees
has been disclosed in the footnotes as required under previous accounting
rules.
LANTRONIX,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
Effective
for the first quarter of fiscal 2006, the Company adopted SFAS 123R using
the
modified prospective method, which requires it to record compensation expense
for all awards granted after the date of adoption, and for the unvested
portion
of previously granted awards that remain outstanding at the date of adoption.
Accordingly, prior period amounts presented herein have not been restated
to
reflect the adoption of SFAS 123R.
The
fair
value concepts were not changed significantly in SFAS 123R; however, in
adopting
SFAS 123R, companies must choose among alternative valuation models and
amortization assumptions. After assessing alternative valuation models
and
amortization assumptions, the Company is continuing to use both the
Black-Scholes-Merton (“BSM”) option-pricing formula and straight-line
amortization of compensation expense over the requisite service period
of the
grant. The Company will reconsider use of this model if additional information
becomes available in the future that indicates another model would be more
appropriate for it, or if grants issued in future periods have characteristics
that cannot be reasonably estimated using this model. Under SFAS No. 123,
“Accounting for Stock Based Compensation” (“SFAS 123”), the Company was not
required to estimate forfeitures in its expense calculation for the stock
compensation pro forma footnote disclosure; however, SFAS 123R requires
an
estimate of forfeitures and upon adoption the Company changed its methodology
to
include an estimate of forfeitures. The adoption of SFAS 123R had no effect
on
cash flows from financing activities.
As
a
result of adopting SFAS 123R, the Company’s share-based compensation expense is
higher for the fiscal year ended June 30, 2006 than if the Company had
continued
to account for share-based compensation under APB 25. The following table
presents the impact of adopting SFAS 123R on loss before income taxes,
net loss
and basic and diluted loss per share:
|
|
Year
Ended
June
30, 2006
|
|
|
|
(In
thousands,
except
per
share
data)
|
|
Loss
before income taxes
|
|
$
|
(1,074
|
)
|
Net
loss
|
|
$
|
(1,074
|
)
|
Net
loss per share (basic and diluted)
|
|
$
|
(0.02
|
)
|
For
purposes of the following pro forma disclosure, the fair value of the options
is
estimated using a BSM option-pricing formula and amortized on a straight-line
basis to expense over the options’ vesting period. The following table presents
the effect on net loss and net loss per share as if the Company had applied
the
fair value recognition provisions of SFAS 123 to options granted under
the
Company’s stock option plans:
|
|
Years
Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(In
thousands,
except
per share
data)
|
|
Net
loss - as reported
|
|
$
|
(7,004
|
)
|
$
|
(15,654
|
)
|
Add:
Share-based employee compensation expense included
in
net loss, net of related tax effects - as reported
|
|
|
171
|
|
|
395
|
|
Deduct:
Share-based employee compensation expense determined
under
fair value method, net of related tax effects - pro forma
|
|
|
(1,186
|
)
|
|
(3,092
|
)
|
Net
loss - pro forma
|
|
$
|
(8,019
|
)
|
$
|
(18,351
|
)
|
Net
loss per share (basic and diluted) - as reported
|
|
$
|
(0.12
|
)
|
$
|
(0.28
|
)
|
Net
loss per share (basic and diluted) - pro forma
|
|
$
|
(0.14
|
)
|
$
|
(0.32
|
)
|
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
Net
Income (Loss) Per Share
Net
income (loss) per share (basic) is calculated by dividing net income (loss)
by
the weighted average number of common shares outstanding during the fiscal
year.
Net income (loss) per share (diluted) is calculated by adjusting the weighted
average number of common shares outstanding, assuming any dilutive effects
of
options using the treasury stock method.
Research
and Development Costs
Costs
incurred in the research and development of new products and enhancements
to
existing products are expensed as incurred. The Company believes its current
process for developing products is essentially completed concurrently with
the
establishment of technological feasibility. Software development costs
incurred
after the establishment of technological feasibility have not been material
and,
therefore, have been expensed as incurred.
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.
Advertising
Expenses
Advertising
costs are expensed in the period incurred.
Comprehensive
Income
SFAS
No.
130, “Reporting Comprehensive Income,” establishes standards for reporting and
displaying comprehensive income (loss) and its components in the consolidated
financial statements. Accumulated other comprehensive income includes foreign
currency translation adjustments and unrealized gains on investments.
Segment
Information
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information,”
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards
for
related disclosures about products and services, geographic areas and major
customers. The Company has only one reportable segment, networking and
Internet
connectivity.
Reclassifications
Certain
amounts in the 2005 and 2004 consolidated financial statements have been
reclassified to conform with the current year presentation.
Recent
Accounting Pronouncements
In
May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections” (“SFAS 154”). SFAS 154 requires retroactive application of a
voluntary change in accounting principle to prior period financial statements
unless it is impracticable. SFAS 154 also requires that a change in method
of
depreciation, amortization, or depletion for long-lived, non-financial
assets be
accounted for as a change in accounting estimate that is affected by a
change in
accounting principle. SFAS 154 replaces APB Opinion 20, “Accounting Changes”,
and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” The
Company will adopt the provisions of SFAS 154 in fiscal 2007 consolidated
financial statements. Management currently believes that adoption of the
provisions of SFAS 154 will not have a material impact on the Company’s
consolidated financial statements.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
In
June
2006, FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes,” by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Under FIN 48, the financial statement effects of a tax position
should initially be recognized when it is more likely than not, based on
the
technical merits, that the position will be sustained upon examination.
A tax
position that meets the more-likely-than-not recognition threshold should
initially and subsequently be measured as the largest amount of tax benefit
that
has a greater than fifty percent likelihood of being realized upon ultimate
settlement with a taxing authority. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The cumulative effect, if any, of
applying the provisions of FIN 48 will be reported as an adjustment to
the
opening balance of retained earnings in the period adopted. The Company
is
currently evaluating the impact that the adoption of FIN 48 will have on
the
results of operations, financial position and liquidity.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants,
and
the Securities and Exchange Commission did not or are not believed by management
to have a material impact on the Company’s present or future consolidated
financial statements.
2. Supplemental
Financial Information
Inventories
The
following table presents details of the Company’s inventories:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Raw
materials
|
|
$
|
3,863
|
|
$
|
3,973
|
|
Finished
goods
|
|
|
7,249
|
|
|
7,330
|
|
Inventory
at distributors
|
|
|
1,690
|
|
|
1,181
|
|
|
|
|
12,802
|
|
|
12,484
|
|
Reserve
for excess and obsolete inventory
|
|
|
(4,689
|
)
|
|
(5,656
|
)
|
|
|
$
|
8,113
|
|
$
|
6,828
|
|
Property
and Equipment
The
following table presents details of the Company’s property and
equipment:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Computer
and office equipment
|
|
$
|
6,572
|
|
$
|
6,171
|
|
Furniture
and fixtures
|
|
|
1,100
|
|
|
1,082
|
|
Production
and warehouse equipment
|
|
|
621
|
|
|
582
|
|
Construction-in-progress
|
|
|
859
|
|
|
-
|
|
|
|
|
9,152
|
|
|
7,835
|
|
Less
accumulated depreciation
|
|
|
(7,563
|
)
|
|
(7,161
|
)
|
|
|
$
|
1,589
|
|
$
|
674
|
|
The
following table presents details of property and equipment recorded in
connection with capital lease obligations:
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Property
and equipment
|
|
$
|
516
|
|
$
|
214
|
|
Less
accumulated depreciation
|
|
|
(169
|
)
|
|
(11
|
)
|
|
|
$
|
347
|
|
$
|
203
|
|
The
following table presents details of costs capitalized as internal use software
included in construction-in-progress and computer and office
equipment:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Capitalized
internal use software
|
|
$
|
410
|
|
$
|
11
|
|
The
following table presents the details of depreciation of capitalized internal
use
software:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Depreciation
of capitalized internal use software
|
|
$
|
32
|
|
$
|
64
|
|
$
|
659
|
|
Purchased
Intangible Assets
The
following table presents details of the Company’s purchased intangible
assets:
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lives
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
in
Years
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Gross
|
|
Amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Existing
technology
|
|
|
1
- 5
|
|
$
|
7,297
|
|
$
|
(7,103
|
)
|
$
|
194
|
|
$
|
7,090
|
|
$
|
(6,533
|
)
|
$
|
557
|
|
Patent/core
technology
|
|
|
6
|
|
|
839
|
|
|
(423
|
)
|
|
416
|
|
|
405
|
|
|
(405
|
)
|
|
-
|
|
Tradename/trademark
|
|
|
5
|
|
|
32
|
|
|
(32
|
)
|
|
-
|
|
|
32
|
|
|
(30
|
)
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
8,168
|
|
$
|
(7,558
|
)
|
$
|
610
|
|
$
|
7,527
|
|
$
|
(6,968
|
)
|
$
|
559
|
|
The
following table presents details of the unamortized balance of purchased
intangible assets that will be amortized to cost of revenues:
|
|
Years
Ended June 30,
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Total
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Amount
remaining to be amortized
|
|
$
|
266
|
|
$
|
73
|
|
$
|
73
|
|
$
|
73
|
|
$
|
73
|
|
$
|
52
|
|
$
|
610
|
|
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
Warranty
Reserve
The
following table presents details of the Company’s warranty
reserve:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Beginning
balance
|
|
$
|
1,248
|
|
$
|
1,770
|
|
Recovered
to cost of revenues
|
|
|
(35
|
)
|
|
(88
|
)
|
Usage
|
|
|
(520
|
)
|
|
(434
|
)
|
Ending
balance
|
|
$
|
693
|
|
$
|
1,248
|
|
Accrued
Settlements and Settlements Recovery
The
following table presents details of the Company’s accrued settlements and
settlements recovery (Note 10):
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Accrued
settlements:
|
|
|
|
|
|
Class
Action and Synergetic
|
|
$
|
15,167
|
|
$
|
-
|
|
Derivative
|
|
|
1,200
|
|
|
1,200
|
|
Patent
infringement litigation
|
|
|
400
|
|
|
-
|
|
|
|
|
16,767
|
|
|
1,200
|
|
Settlements
recovery:
|
|
|
|
|
|
|
|
Class
Action and Synergetic
|
|
|
14,125
|
|
|
-
|
|
Derivative
|
|
|
1,200
|
|
|
1,200
|
|
|
|
|
15,325
|
|
|
1,200
|
|
Direct
settlement obligations of the Company
|
|
$
|
1,442
|
|
$
|
-
|
|
The
following table presents details of the Company’s litigation settlement
costs:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Class
Action and Synergetic
|
|
$
|
1,217
|
|
$
|
-
|
|
$
|
-
|
|
Patent
infringement
|
|
|
165
|
|
|
-
|
|
|
-
|
|
Cotton
settlement recovery
|
|
|
(422
|
)
|
|
-
|
|
|
-
|
|
|
|
$
|
960
|
|
$
|
-
|
|
$
|
-
|
|
Other
Liabilities
The
following table presents details of the Company’s other
liabilities:
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Current
|
|
|
|
|
|
Customer
deposits and refunds
|
|
$
|
1,274
|
|
$
|
369
|
|
ERP
implementation costs
|
|
|
364
|
|
|
-
|
|
Taxes
payable
|
|
|
320
|
|
|
470
|
|
Insurance
payable
|
|
|
198
|
|
|
195
|
|
Deferred
revenue
|
|
|
155
|
|
|
194
|
|
Short-term
capital lease obligations
|
|
|
129
|
|
|
163
|
|
Legal
expenses to be reimbursed by insurance carriers
|
|
|
-
|
|
|
471
|
|
Other
|
|
|
1,155
|
|
|
1,070
|
|
|
|
$
|
3,595
|
|
$
|
2,932
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
$
|
117
|
|
$
|
131
|
|
Other
|
|
|
113
|
|
|
76
|
|
|
|
$
|
230
|
|
$
|
207
|
|
Advertising
Expenses
The
following table presents details of the Company’s advertising
expenses:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Advertising
expenses
|
|
$
|
888
|
|
$
|
1,191
|
|
$
|
392
|
|
Interest
Expense
The
following table presents details of the Company’s interest expense:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Interest
Expense
|
|
$
|
29
|
|
$
|
78
|
|
$
|
44
|
|
Computation
of Net Loss per Share
The
following table presents the computation of net loss per share:
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(3,045
|
)
|
$
|
(7,060
|
)
|
$
|
(10,607
|
)
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
56
|
|
|
(5,047
|
)
|
Net
loss
|
|
$
|
(3,045
|
)
|
$
|
(7,004
|
)
|
$
|
(15,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
Weighted-average shares outstanding
|
|
|
59,034
|
|
|
58,534
|
|
|
57,194
|
|
Less:
Unvested common shares outstanding
|
|
|
(332
|
)
|
|
(332
|
)
|
|
(332
|
)
|
Denominator
for net loss per share (basic and diluted)
|
|
|
58,702
|
|
|
58,202
|
|
|
56,862
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.05
|
)
|
$
|
(0.12
|
)
|
$
|
(0.19
|
)
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
(0.09
|
)
|
Net
loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.12
|
)
|
$
|
(0.28
|
)
|
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.
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Common
stock equivalents
|
|
|
2,656,221
|
|
|
2,297,323
|
|
|
1,126,503
|
|
Supplemental
Cash Flow Information
The
following table presents non-cash transactions excluded from the consolidated
statements of cash flows:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Non-cash
acquisition of property and equipment
|
|
$
|
666
|
|
$
|
214
|
|
$
|
-
|
|
Common
stock consideration for settlement of Synergetics claims
|
|
|
175
|
|
|
-
|
|
|
-
|
|
Tenant
leasehold improvements
|
|
|
-
|
|
|
98
|
|
|
-
|
|
3. Investments
Marketable
Securities
The
following table presents details of the Company’s available-for-sale
investments, which are classified as marketable securities in the consolidated
balance sheets:
|
|
|
|
Gross
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
June
30, 2006
|
|
|
|
(In
thousands)
|
|
|
|
Publicly
traded equity securities
|
|
$
|
-
|
|
$
|
88
|
|
$
|
-
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publicly
traded equity securities
|
|
$
|
-
|
|
$
|
85
|
|
$
|
-
|
|
$
|
85
|
|
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
There
were no gross realized gains and losses related to the Company’s
available-for-sale investments during the fiscal years ended June 30, 2006,
2005
and 2004.
Long-term
Investments
In
September and October 2001, the Company paid an aggregate of $3.0 million
to
Xanboo for convertible promissory notes, which converted in January 2002,
in
accordance with their terms, into Xanboo preferred stock. In addition,
the
Company purchased $4.0 million of Xanboo preferred stock in January 2002.
The
Company’s ownership interest in Xanboo was 4.7% and 14.4% at June 30, 2006 and
2005, respectively. On the basis of events occurring during the fiscal
quarter
ended June 30, 2004, the Company fully impaired its investment in Xanboo
resulting in a charge of $5.0 million to other expense in the consolidated
statements of operations. The Company’s interest in the losses of Xanboo
aggregating $413,000 during the fiscal year ended June 30, 2004 was recognized
as other expense in the consolidated statement of operations.
In
June
2006, the Company entered into an agreement to sell its ownership interest
in
Xanboo for cash consideration of $2 million. On June 13, 2006, 65% of
the total Xanboo shares held by the Company were sold for cash
consideration of $1.3 million. The agreement provides for the
remaining shares to be sold for cash consideration of $700,000 on or before
September 12, 2006. The Company recorded the $1.3 million cash payment
received
during June 2006 as other income in the consolidated statements of operations
for the fiscal year ended June 30, 2006. The Company expects to recognize
income
on the sale of the remaining Xanboo shares when the transaction closes
in
September 2006.
4. Officer
Loans
The
Company has outstanding notes receivable from one former officer and an
outside
director primarily related to taxes on exercised stock options. These notes
are
non-recourse, secured by shares of common stock, and bear interest at rates
ranging from 5.19% to 7.50% per annum. Principal and any unpaid interest
are due
upon any transfer or disposition of the secured common stock.
One
of
the note holders is a former Chief Executive Officer who assumed the role
of
Chief Technology and Strategy Officer of the Company effective May 30,
2002 and
resigned from the Company effective September 1, 2002. During fiscal 2002,
the
Company reduced the carrying amount of the former officer’s loans to zero by
establishing a reserve for uncertainties relative to collection of the
related
notes receivable. Factors considered in determining the level of this reserve
include the value of the collateral securing the notes, the ability of
the
Company to effectively enforce its collection rights and the ability of
the
former officer to honor his obligations to the Company.
As
of
June 30, 2006, no impairment has been recorded as it relates to the note
receivable from the outside director.
In
connection with a settlement agreement, the Company cancelled the remaining
debt
on the former Chief Operating Officer and Chief Financial Officer’s outstanding
notes receivable, which were fully reserved as of June 30, 2006 and for
which
the Company took a charge to operations of $1.2 million in fiscal 2002.
The
terms of the settlement agreement are fully described in Note 10.
5. Restructuring
Charges
From
the
fiscal quarter ended March 31, 2002 through the fiscal quarter ended March
31,
2003, the Company implemented plans to restructure its operations to prioritize
its initiatives around the growth area of its business, focus on profit
contribution, reduce expenses, and improve operating efficiency. These
restructuring plans included a worldwide workforce reduction, consolidation
of
excess facilities and other charges. During the fiscal years ended June
30, 2004
and 2003, approximately 58 and
50 employees,
respectively, were terminated across all of the Company’s business functions and
geographic regions in connection with the restructuring plans.
During
the fiscal year ended June 30, 2004, the Company completed the sale of
its
Premise business unit as described in Note 6. As a result, the Company
recorded
approximately $670,000 of restructuring charges which are included in loss
from
discontinued operations in the consolidated statement of operations of
which
$633,000 related to certain future lease obligations and $37,000 related
to
workforce reductions of three Premise employees that were not transferred
to the
buyer.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
During
the fiscal year ended June 30, 2004, approximately $2.1 million of restructuring
charges were recovered related to a favorable settlement of a contractual
obligation, consolidation of excess facilities and workforce reductions
which
were previously accrued for during the fiscal year ended June 30, 2003.
No
similar recovery occurred during the fiscal years ended June 30, 2006 and
2005.
The remaining restructuring reserve is related to facility closures in
Naperville, Illinois; Hillsboro, Oregon; and Ames, Iowa. Payments under
the
lease obligations will end in fiscal 2007.
The
following table presents a summary of the activity in the Company’s
restructuring liability:
|
|
|
|
Consolidation
|
|
|
|
|
|
|
|
Workforce
|
|
of
Excess
|
|
Contractual
|
|
|
|
|
|
Reductions
|
|
Facilities
|
|
Obligations
|
|
Total
|
|
|
|
(In
thousands)
|
|
Restructuring
liabilities at June 30, 2003
|
|
$
|
260
|
|
$
|
975
|
|
$
|
2,000
|
|
$
|
3,235
|
|
Restructuring
recovery
|
|
|
(183
|
)
|
|
(360
|
)
|
|
(1,550
|
)
|
|
(2,093
|
)
|
Restructuring
activity included in discontinued operations
|
|
|
21
|
|
|
521
|
|
|
-
|
|
|
542
|
|
Cash
payments
|
|
|
(98
|
)
|
|
(384
|
)
|
|
(450
|
)
|
|
(932
|
)
|
Restructuring
liabilities at June 30, 2004
|
|
|
-
|
|
|
752
|
|
|
-
|
|
|
752
|
|
Restructuring
activity included in discontinued operations
|
|
|
-
|
|
|
(56
|
)
|
|
-
|
|
|
(56
|
)
|
Cash
payments
|
|
|
-
|
|
|
(432
|
)
|
|
-
|
|
|
(432
|
)
|
Restructuring
liabilities at June 30, 2005
|
|
|
-
|
|
|
264
|
|
|
-
|
|
|
264
|
|
Reversal
of restructuring liabilities
|
|
|
-
|
|
|
(17
|
)
|
|
-
|
|
|
(17
|
)
|
Cash
payments
|
|
|
-
|
|
|
(167
|
)
|
|
-
|
|
|
(167
|
)
|
Restructuring
liabilities at June 30, 2006
|
|
$
|
-
|
|
$
|
80
|
|
$
|
-
|
|
$
|
80
|
|
6. Discontinued
Operations
In
March
2004, the Company completed the sale of substantially all of the net assets
of
its Premise business unit for $1.0 million. Additionally, the Company incurred
$383,000 of disposal costs.
The
following table presents net revenues and income (loss) from discontinued
operations:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
$
|
-
|
|
$
|
56
|
|
$
|
(5,639
|
)
|
Gain
on sale of assets of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
592
|
|
Income
(loss) from discontinued operations, net of income taxes of
$0
|
|
$
|
-
|
|
$
|
56
|
|
$
|
(5,047
|
)
|
During
the fiscal quarter ended December 31, 2003, the Company identified indicators
of
an other than temporary impairment as it related to its Premise acquisition
of
goodwill and purchased intangible assets. The Company performed an assessment
of
the value of its goodwill and purchased intangible assets related to the
Premise
acquisition in accordance with SFAS 142 and SFAS 144. The Company identified
certain conditions including continued losses and the inability to achieve
significant revenues from the existing home automation and media management
software markets as indicators of asset impairment. These conditions led
to
operating results and forecasted future results that were substantially
less
than had been anticipated. The Company revised its projections and determined
that the projected results utilizing a discounted cash flow valuation technique
would not fully support the carrying values of the goodwill and purchased
intangible assets associated with the Premise acquisition. Based on this
assessment, the Company recorded an impairment charge of $2.2 million during
the
fiscal quarter ended December 31, 2003 to write-off the value of the Premise
goodwill. Additionally, the Company recorded a $790,000 impairment charge
for
the Premise-purchased intangible assets. The impairment of Premise goodwill
and
purchased intangibles are included in the loss from discontinued operations
in
the consolidated statements of operations for the fiscal year ended June
30,
2004.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
7. Lines
of Credit and Convertible Note Payable
Line
of Credit
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 is required to pay an additional $54,000 on the first anniversary
of
the Effective Date.
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
June 30, 2006, the Company had no borrowings against the Line of
Credit.
Expired
Line of Credit
In
January 2002, the Company entered into a two-year line of credit (“Expired Line
of Credit”) with a bank in an amount not to exceed $20.0 million. The Company
was also required to maintain certain financial ratios as defined in the
Expired
Line of Credit. Pursuant to the Expired Line of Credit, the Company was
restricted from paying any dividends. The Expired Line of Credit had an
annual
revolving maturity date that renewed on the effective date. As of June
30, 2005,
the Company had no borrowings against the Expired Line of Credit. As of
June 30,
2005, the Company was not in compliance with the quick ratio covenant as
defined
in the Expired Line of Credit. A waiver was granted by the bank during
August
2005. The line of credit expired on July 22, 2005.
Availability
under the Lines of Credit
The
following table presents the Company’s available borrowing capacity and
outstanding letters of credit, which were used to secure equipment leases,
deposits for a building lease, foreign value added tax account deposits
and
security deposits:
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Available
borrowing capacity
|
|
$
|
2,221
|
|
$
|
2,520
|
|
Outstanding
letters of credit
|
|
$
|
1,594
|
|
$
|
480
|
|
Convertible
Note Payable
The
Company issued a two-year note with a principal amount of $867,000 as partial
consideration for its August 2002 acquisition of Stallion Technologies
PTY, LTD.
The notes were convertible into the Company’s common stock at any time, at the
election of the holders, at a $5.00 conversion price and accrued interest
at a
rate of 2.5% per annum. The notes were due and paid in August 2004 as the
holders elected not to convert the notes into the Company’s common
stock.
8. Stockholders’
Equity
Share-based
Plans
The
Company has in effect several share-based plans under which non-qualified
and
incentive stock options have been granted to employees, non-employees and
board
members. The Company also has an employee stock purchase plan for all eligible
employees. The Board of Directors determines eligibility, vesting schedules
and
exercise prices for options granted under the plans. The Company issues
new
shares to satisfy stock option exercises and stock purchases under its
share-based plans. No income tax benefit was realized from activity in
the
Company’s share-based plans during the fiscal years ended June 30, 2006, 2005
and 2004.
The
following table presents a summary of the shares authorized for grant under
each
plan:
|
|
June
30, 2006
|
|
|
|
Shares
|
|
|
|
Authorized
|
|
|
|
for
Grant
|
|
2000
Stock Plan (“2000 Plan”)
|
|
|
12,000,000
|
|
2000
Employee Stock Purchase Plan (“ESPP”)
|
|
|
2,250,000
|
|
|
|
|
14,250,000
|
|
Under
the
2000 Plan, the number of shares available for issuance may be increased
annually
on the first day of the calendar year by an amount of shares equal to the
lesser
of (i) 2,000,000 shares, (ii) 5% of the outstanding shares on such date
or (iii)
a lesser amount as determined by the Board of the Directors. Each board
member
is automatically granted an option to purchase 25,000 shares of common
stock
following each annual meeting of stockholders, subject to certain eligibility
requirements. As a result of the Company’s acquisitions, the Company assumed
stock options granted under stock option plans established by each acquired
company; no additional options will be granted under those plans. Option
awards
are generally granted with an exercise price equal to the market price
of the
Company’s stock at the date of grant. Option awards generally have a term of 10
years and vest and become exercisable over a three- to four-year service
period.
The
following table presents a summary of share-based compensation by functional
line item:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Cost
of revenues
|
|
$
|
100
|
|
$
|
-
|
|
$
|
48
|
|
Selling,
general and administrative
|
|
|
736
|
|
|
160
|
|
|
306
|
|
Research
and development
|
|
|
255
|
|
|
11
|
|
|
41
|
|
|
|
$
|
1,091
|
|
$
|
171
|
|
$
|
395
|
|
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
The
following table presents a summary of share-based compensation for the
Company’s
share-based plans:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
(In
thousands)
|
|
|
|
Stock
option
|
|
$
|
919
|
|
$
|
171
|
|
$
|
395
|
|
ESPP
|
|
|
172
|
|
|
-
|
|
|
-
|
|
|
|
$
|
1,091
|
|
$
|
171
|
|
$
|
395
|
|
Stock
Option Plans
The
fair
value of each share-based award is estimated on the grant date using the
BSM
option-pricing formula. Expected volatilities are based on the historical
volatility of the Company’s stock price. The expected term of options granted
subsequent to the adoption of SFAS 123R is derived using the simplified
method
as defined in the SEC’s Staff Accounting Bulletin 107, “Implementation of FASB
123R.” The risk-free rate for periods within the contractual life of the option
is based on the U.S. Treasury interest rates in effect at the time of grant.
The
fair value of options granted was estimated using the following weighted-average
assumptions:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Expected
term (in years)
|
|
|
6.23
|
|
|
4.00
|
|
|
4.00
|
|
Expected
volatility
|
|
|
0.93
|
|
|
0.97
|
|
|
1.24
|
|
Risk-free
interest rate
|
|
|
4.57
|
%
|
|
3.57
|
%
|
|
3.60
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
The
following table presents a summary of option activity under the Company’s stock
option plans:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Available
for
|
|
Number
of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Grant
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
(In
thousands, except per share data)
|
|
Balance
at June 30, 2005
|
|
|
4,535,002
|
|
|
5,084,110
|
|
$
|
1.49
|
|
|
|
|
|
|
|
Additional
shares reserved
|
|
|
2,000,000
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Options
granted
|
|
|
(1,312,576
|
)
|
|
1,312,576
|
|
|
2.08
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
371,057
|
|
|
(371,057
|
)
|
|
1.48
|
|
|
|
|
|
|
|
Options
expired
|
|
|
209,593
|
|
|
(296,583
|
)
|
|
2.19
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
-
|
|
|
(261,293
|
)
|
|
0.78
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
|
5,803,076
|
|
|
5,467,753
|
|
$
|
1.62
|
|
|
7.5
|
|
$
|
4,515
|
|
Vested
or expected to vest at June 30, 2006
|
|
|
|
|
|
5,116,854
|
|
$
|
1.61
|
|
|
7.4
|
|
$
|
4,377
|
|
Options
exercisable at June 30, 2006
|
|
|
|
|
|
3,242,437
|
|
$
|
1.60
|
|
|
6.5
|
|
$
|
3,340
|
|
The
following table presents a summary of option grant-date fair value and
intrinsic
value information:
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands, except per share data)
|
|
Weighted-average
grant-date fair value per share
|
|
$
|
1.63
|
|
$
|
0.80
|
|
$
|
0.87
|
|
Grant-date
fair value of shares vested
|
|
$
|
783
|
|
$
|
1,337
|
|
$
|
1,672
|
|
Intrinsic
value of options exercised
|
|
$
|
272
|
|
$
|
166
|
|
$
|
335
|
|
The
following table presents a summary of the activity of the Company’s nonvested
options:
|
|
Year
Ended June 30, 2006
|
|
|
|
|
|
Weighted-Average
|
|
Remaining
|
|
|
|
|
|
|
|
Remaining
|
|
Unrecognized
|
|
|
|
|
|
Grant-Date
|
|
Years
|
|
Compensation
|
|
|
|
Shares
|
|
Fair
Value
|
|
To
Vest
|
|
Cost
|
|
|
|
(In
thousands, except per share data)
|
|
Nonvested
outstanding at beginning of fiscal year
|
|
|
2,296,938
|
|
$
|
0.81
|
|
|
|
|
|
|
|
Granted
|
|
|
1,312,576
|
|
|
1.63
|
|
|
|
|
|
|
|
Vested
|
|
|
(1,013,149
|
)
|
|
0.77
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(371,049
|
)
|
|
1.09
|
|
|
|
|
|
|
|
Nonvested
outstanding at end of fiscal year
|
|
|
2,225,316
|
|
$
|
1.26
|
|
|
2.8
|
|
$
|
2,586
|
|
Employee
Stock Purchase Plan
The
number of shares available for issuance may be increased annually on the
first
day of the Company’s fiscal year in an amount equal to the lesser of (i) 150,000
shares, (ii) 2% of the outstanding shares on such date or (iii) a lesser
amount
as determined by the Board of Directors. Under the ESPP plan, each eligible
employee may purchase common stock at each semi-annual purchase date (the
last
business day of February and August each year), but not more than 15% of
the
participant’s compensation, as defined. The purchase payable per share will be
equal to eighty-five percent (85%) of the lower of (i) the closing selling
price per share of common stock on the employee’s entry date into the two-year
offering period in which that semi-annual purchase date occurs and (ii) the
closing selling price per share of common stock on the semi-annual purchase
date. Participants may discontinue their participation in the ESPP or may
increase or decrease the rate of their payroll deductions during the ESPP
offering period. In November 2004, the Company’s stockholders authorized 750,000
additional shares to be available pursuant to the ESPP.
The
following table presents a summary of activity under the Company’s
ESPP:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Shares
available for issuance at beginning of fiscal year
|
|
|
654,138
|
|
|
107,942
|
|
|
463,877
|
|
Shares
reserved for issuance
|
|
|
150,000
|
|
|
900,000
|
|
|
150,000
|
|
ESPP
shares issued
|
|
|
(266,453
|
)
|
|
(353,804
|
)
|
|
(505,935
|
)
|
Shares
available for future issuance at end of fiscal year
|
|
|
537,685
|
|
|
654,138
|
|
|
107,942
|
|
The
following table presents a summary of ESPP purchase price and intrinsic
value
information:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands, except per share data)
|
|
Average
purchase price of common shares
|
|
$
|
0.90
|
|
$
|
0.78
|
|
$
|
0.73
|
|
Intrinsic
value of ESPP shares on purchase date
|
|
$
|
237
|
|
$
|
139
|
|
$
|
303
|
|
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
The
fair
value of ESPP shares granted during the fiscal year ended June 30, 2006
was
estimated using the BSM option-pricing formula with an expected term (in
years)
of 0.5 to 2.0, expected volatility of 0.93 to 0.95, risk-free interest
rate of
3.9% to 4.7% and dividend yield of zero. For ESPP shares granted during
the
fiscal years ended June 30, 2005 and 2004, the Company measured share-based
compensation expense in its pro forma disclosure using the intrinsic value
method as described in SFAS 123.
Accumulated
Other Comprehensive Income
The
following table presents the components of accumulated other comprehensive
income:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Accumulated
unrealized gain on investments
|
|
$
|
88
|
|
$
|
85
|
|
Accumulated
translation adjustment
|
|
|
277
|
|
|
212
|
|
Total
accumulated other comprehensive income
|
|
$
|
365
|
|
$
|
297
|
|
9. 401(k)
Plan
The
Company has a savings plan (the “Plan”) which is qualified under Section 401(k)
of the Internal Revenue Code. Eligible employees may elect to make contributions
to the Plan through salary deferrals up to 15% of their base pay, subject
to
limitations. The Company’s contributions are discretionary and are subject to
limitations. For the fiscal years ended June 30, 2006, 2005 and 2004, the
Company contributed $0.50 for each $1.00 of employee salary deferral
contributions up to a maximum of 6% of the employee’s annual gross wages,
subject to limitations.
The
following table presents 401(k) matching contributions:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
401(k)
matching contributions
|
|
$
|
247
|
|
$
|
270
|
|
$
|
166
|
|
10. 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 and 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 alleges 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 are
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 are 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
are 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 alleges 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 alleges that during the Class Period, Lantronix overstated financial
results through improper revenue recognition and failure to comply with
Generally Accepted Accounting Principles (“GAAP”). Defendants filed an
answer to the complaint and the case entered discovery. The Court set
a trial date in September 2006. While the complaint did not specify the
damages plaintiff may seek on behalf of the purported classes of stockholders,
a
recovery by the plaintiff and the plaintiff classes could have a material
adverse impact on the Company. The proceeds from certain insurance policies
have
funded and continue to fund much of the Company’s defense to the Class Action
lawsuit.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
The
Company has reached an agreement with plaintiffs to settle the Class Action
lawsuit. The Company has also reached agreements with its relevant insurance
carriers with respect to the funding of the cash portions of the settlement
with
plaintiffs. Under the terms of the agreement with the Class Action plaintiffs,
the Company will not be 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 has 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
below, the Company has recorded a charge of $1.2 million in the
consolidated statement of operations for the fiscal year ended June 30,
2006.
As
of
June 30, 2006, the
Company has recorded an accrued settlement of $15.2 million of which the
Company’s insurance carriers have agreed to fund $14.1
million.
On
August 29, 2006, the Court held a hearing to consider a motion for preliminary
approval of the settlement, and granted preliminary approval on September
8, 2006. The
court
has scheduled a final settlement approval hearing date on November 22,
2006. There is no guarantee that the Class Action settlement will be
finalized or approved by the court.
Securities
Claims Brought by Former Stockholders of Synergetic Micro Systems, Inc.
(“Synergetic”)
On
October 17, 2002, Richard Goldstein and several other former stockholders
of
Synergetic filed a complaint entitled Goldstein,
et al. v. Lantronix, Inc., et al.
in the
Superior Court of the State of California, County of Orange, against the
Company
and certain of its former officers and directors. Plaintiffs filed an amended
complaint on January 7, 2003. The amended complaint alleged fraud, negligent
misrepresentation, breach of warranties and covenants, breach of contract
and
negligence, all stemming from its acquisition of Synergetic. The complaint
sought an unspecified amount of damages, interest, attorneys’ fees, costs,
expenses, and an unspecified amount of punitive damages. On May 5, 2003,
the
Company answered the complaint and generally denied the allegations in
the
complaint.
In
May
2006, the Company entered into a definitive settlement agreement with the
plaintiffs in the Synergetic action. Pursuant to the settlement agreement,
in
June 2006, the Company issued 84,053 common shares with a fair value of
$175,000
as partial consideration for its settlement of the Synergetic claims, and
the
Company’s insurance carriers paid $750,000 to the plaintiffs. In connection with
the settlement, the plaintiffs filed a request for dismissal with prejudice
of
all claims against all parties with the Court on July 7, 2006, and this
litigation is now concluded.
Derivative
Lawsuit Settlement
On
June
9, 2005, the Superior Court of the State of California, County of Orange,
approved the settlement of a stockholder derivative action (entitled
Drake
v. Bruscha, et al.)
pending against the Company and certain of its current and former directors
and
former officers. The settlement involves the adoption of certain corporate
governance measures and payment of attorneys’ fees and expenses to the
derivative plaintiff’s counsel in the amount of $1.2 million. The action was
dismissed with prejudice as to all parties, including Mr. Steven Cotton,
who was
not a party to the settlement agreement and who had objected to the settlement.
As part of the settlement, the Company’s insurance carrier agreed to pay the
$1.2 million after the settlement becomes final, and the payment of the
settlement by the insurance carrier will have no impact on the Company’s
financial condition or results of operations. The settlement is recorded
as a
$1.2 million settlement recovery and accrued settlement in the consolidated
balance sheets as of June 30, 2006 and 2005. On August 12, 2005, Mr. Cotton
appealed the Superior Court’s approval of the settlement, specifically
challenging the amount of the $1.2 million fee award. This settlement does
not
impact the securities Class Action or Synergetic cases. On June 29, 2006,
the
Court of Appeals rejected Mr. Cotton’s appeal and affirmed the trial court’s
approval of the settlement in full. After the Court of Appeals’ ruling became
final, the $1.2 million fee award was paid by the Company’s insurance carriers
on August 10, 2006. In light of final affirmance of the trial court’s settlement
orders, this litigation has now concluded.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
Patent
Infringement Settlement
On
May 2,
2006, the Company entered into a six-year patent cross-license and litigation
dismissal agreement with Digi International, Inc. (“Digi”). In connection with
the agreement, the Company agreed to pay Digi $600,000 of which $200,000
was
paid on May 2, 2006 with the remaining balance to be paid on or before
July 10,
2006. In connection with the agreement, the Company capitalized $434,000,
which
represents the estimated value of the six-year patent cross-license, as
a
purchased intangible asset in its unaudited condensed consolidated balance
sheet
at June 30, 2006. The remaining balance of the payment, which represents
the
estimated value of the dismissal of the ongoing litigation between the
Company
and Digi, was recorded as a settlement charge in the consolidated statements
of
operations.
Government
Investigation
During
June 2006, the Company reached an agreement in principle with the regional
staff
of the Securities and Exchange Commission (“SEC”) regarding the terms of a
settlement that the regional staff has agreed to recommend to the SEC.
The
proposed agreement, under which the Company will not admit or deny any
wrongdoing, will, if approved by the Commission, fully resolve all claims
against the Company relating to the formal investigation that the SEC commenced
in July 2002 relating to the Company’s restatement of its financial results
announced in May and June 2002. The proposed settlement includes the following
principal terms:
·
|
The
Company will agree to a cease and desist order from future
violations of
securities laws;
|
·
|
The
Company will not be required to pay any monetary penalties;
and
|
·
|
The
Company will agree to cooperate with the Commission on any
further
proceedings in connection with its
investigation.
|
The
SEC
has informed the Company that it will proceed with a civil action against
Lantronix if a settlement is not reached.
Employment
Suit Brought by Former Chief Financial Officer and Chief Operating Officer
Steve
Cotton
On
July
6, 2006, the Company completed a settlement agreement with Mr. Steven Cotton,
the Company's former CFO and COO. Mr. Cotton had filed a complaint against
the
Company in September 2002 in the Superior Court of the State of California,
alleging claims for breach of contract, breach of the covenant of good
faith and
fair dealing, wrongful termination, misrepresentation, defamation and
declaratory relief. The Company had filed a motion to dismiss the suit
on the
grounds that Mr. Cotton's complaints were subject to the binding arbitration
provisions in Mr. Cotton's employment agreement. The Court ruled that five
of
the six counts in the complaint were subject to binding arbitration and
set the
sixth cause of action for declaratory relief for trial. The Company filed
a
cross-complaint in the arbitration proceeding alleging breach of contract
on
various promissory notes given by Mr. Cotton to the Company in connection
with
Mr. Cotton's exercise of stock options during his employment with the Company.
Under
the
terms of the settlement, the Company: (i) transferred to Mr. Cotton 150,000
shares of the Company's Common Stock previously issued to Mr. Cotton pursuant
to
his exercise of stock options and held by the Company as collateral for
notes
given by Mr. Cotton in connection with his exercise of such stock options;
(ii)
relinquished any claims it might have had to shares of the Company's Common
Stock in possession of Mr. Cotton; (iii) cancelled all remaining debt on
the
notes given by Mr. Cotton to the Company in connection with his exercise
of such
stock options; and (iv) will dismiss with prejudice the cross-complaint
it filed
in the arbitration proceeding. Under the terms of the settlement, Mr. Cotton:
(i) assigned to the Company 198,040 of the shares issued to Mr. Cotton
pursuant
to his exercise of the stock options referred to above; and (ii) will dismiss
with prejudice the lawsuit and arbitration proceedings referred to above.
In
connection with the settlement, the Company recorded a $422,000 litigation
settlement recovery in the consolidated statements of operations for the
fiscal
year ended June 30, 2006 representing the fair value of the 198,040 shares
collateralizing the cancelled notes for which the Company took a charge
to
operations of $1.2 million in fiscal 2002.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
11.
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 10, 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.
12. Income
Taxes
The
income tax provision (benefit) consists of the following
components:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
$
|
-
|
|
$
|
91
|
|
State
|
|
|
-
|
|
|
(6
|
)
|
|
7
|
|
Foreign
|
|
|
(31
|
)
|
|
235
|
|
|
177
|
|
|
|
|
(31
|
)
|
|
229
|
|
|
275
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
-
|
|
|
(476
|
)
|
State
|
|
|
-
|
|
|
-
|
|
|
(124
|
)
|
|
|
|
- |
|
|
-
|
|
|
(600
|
)
|
(Benefit)
provision for income taxes
|
|
$
|
(31
|
)
|
$
|
229
|
|
$
|
(325
|
)
|
The
following table presents U.S. and foreign income (loss) from continuing
operations before taxes:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
United
States
|
|
$
|
(3,191
|
)
|
$
|
(7,047
|
)
|
$
|
(11,716
|
)
|
Foreign
|
|
|
115
|
|
|
216
|
|
|
784
|
|
|
|
$
|
(3,076
|
)
|
$
|
(6,831
|
)
|
$
|
(10,932
|
)
|
The
tax
effects of temporary differences that give rise to deferred tax assets
and
liabilities are as follows:
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Deferred
tax assets:
|
|
|
|
|
|
Tax
losses and credits
|
|
$
|
34,965
|
|
$
|
35,436
|
|
Reserves
not currently deductible
|
|
|
2,996
|
|
|
4,022
|
|
Inventory
capitalization
|
|
|
2,086
|
|
|
2,777
|
|
Marketing
rights
|
|
|
1,102
|
|
|
1,262
|
|
Writeoff
of long-term investment
|
|
|
990
|
|
|
-
|
|
Deferred
compensation
|
|
|
314
|
|
|
60
|
|
Gross
deferred tax assets
|
|
|
42,453
|
|
|
43,557
|
|
Valuation
allowance
|
|
|
(42,234
|
)
|
|
(43,434
|
)
|
Deferred
tax assets, net
|
|
|
219
|
|
|
123
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(144
|
)
|
|
(81
|
)
|
Other
|
|
|
(75
|
)
|
|
-
|
|
Identified
intangibles
|
|
|
-
|
|
|
(40
|
)
|
State
taxes
|
|
|
-
|
|
|
(2
|
)
|
Deferred
tax liabilities
|
|
|
(219
|
)
|
|
(123
|
)
|
Net
deferred tax assets (liabilities)
|
|
$
|
-
|
|
$
|
-
|
|
The
following table presents a reconciliation of the income tax provision (benefit)
for loss from continuing operations before discontinued operations and
cumulative effect of accounting changes to taxes computed at the U.S. federal
statutory rate:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Statutory
federal provision (benefit) for income taxes
|
|
$
|
(1,046
|
)
|
$
|
(2,322
|
)
|
$
|
(3,717
|
)
|
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
Change
in effective state tax rate
|
|
|
1,999
|
|
|
-
|
|
|
-
|
|
Change
in valuation allowance
|
|
|
(1,200
|
)
|
|
2,897
|
|
|
4,338
|
|
Research
and development credit
|
|
|
(277
|
)
|
|
(444
|
)
|
|
(570
|
)
|
Investment
in foreign subsidiaries
|
|
|
276
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
|
75
|
|
|
-
|
|
|
84
|
|
Permanent
differences
|
|
|
28
|
|
|
24
|
|
|
193
|
|
Foreign
tax rate variances
|
|
|
23
|
|
|
162
|
|
|
(90
|
)
|
State
taxes, net of federal tax benefit
|
|
|
-
|
|
|
(4
|
)
|
|
(77
|
)
|
Reduction
in tax contingency reserve based on IRS exam and other
|
|
|
-
|
|
|
-
|
|
|
(486
|
)
|
Other
|
|
|
91
|
|
|
(84
|
)
|
|
-
|
|
(Benefit)
provision for income taxes
|
|
$
|
(31
|
)
|
$
|
229
|
|
$
|
(325
|
)
|
As
of
June 30, 2006, the Company has net operating loss carryovers of $74.3 million
and $31.7 million for federal and California income tax purposes, respectively.
The federal and California net operating loss carryovers begin to expire
in
fiscal years 2021 and 2013, respectively.
The Company has a capital loss carryforward of $3.3 million related to
the sale of its investment in Xanboo. This capital loss can only be offset
with future capital gains. It begins to expire in 2011.
Approximately
$2.3 million of the net operating loss carryforwards resulted from a purchase
business combination. Due to uncertainties surrounding the realization
of the
deferred tax assets related to the net operating loss carryforwards, a
valuation
allowance of approximately $773,000 was established. If or when realized,
a
portion of the tax benefit for those items will be applied to reduce goodwill
and acquired intangibles related to the purchase business
combination.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
The
Company has research and development tax credit carryforwards of $3.8
million and
$2.5
million for federal and California purposes, respectively. Federal tax
credits
begin to expire in 2021. California tax credits have no expiration.
The
Company has recorded a valuation allowance against its net deferred tax
assets.
If or when realized, the tax benefits relating to, and the reversal of,
approximately $4.3 million of the valuation allowance will be accounted
for as
an increase in additional paid-in capital as a result of tax deductible
compensation arising from stock option exercises. The valuation allowance
was
established due to uncertainties surrounding the realization of the deferred
tax
assets.
Due
to
the “change of ownership” provision of the Tax Reform Act of 1986, utilization
of the Company’s net operating loss carryforwards and tax credit carryforwards
may be subject to an annual limitation against taxable income in future
periods.
As a result of the annual limitation, a portion of these carryforwards
may
expire before ultimately becoming available to reduce future income tax
liabilities.
Deferred
income taxes were not provided on undistributed earnings of certain foreign
subsidiaries because such undistributed earnings are expected to be reinvested
indefinitely.
In
2003,
the Internal Revenue Service completed its audit of the Company’s federal income
tax returns for the fiscal years ended June 30, 1999, 2000 and 2001. The
Company
had accrued for this liability in prior fiscal periods. Based on the final
resolution and related state impact of the IRS examination, the Company
recorded
a reduction in its tax contingency reserve of approximately $500,000 during
the
fiscal year ended June 30, 2004.
The
Company had discussions with the Swiss Federal Tax Authorities (“SFTA”)
regarding the inability of the Company’s Swiss subsidiary, Lantronix
International AG, to meet certain guidelines as set within a tax ruling
that was
obtained in May 2001. The ruling provided for reduced Swiss tax rates.
The
subsidiary was unable to meet the guidelines set forth in the ruling due
to
slower than planned growth and has since converted to a holding company.
The
SFTA has ruled on this matter, resulting in tax and interest to the SFTA
of
approximately $55,000. This was paid in the fiscal quarter ended June 30,
2005.
13.
Commitments
and Contingencies
Leases
The
Company leases office equipment and its office and warehouse facilities
under
non-cancelable capital and operating leases. In 2005, the Company renewed
its
office and warehouse facility lease in Irvine, California, commencing in
August
2005 and expiring in July 2010.
The
following schedule represents minimum lease payments for all non-cancelable
operating and capitalized leases as of June 30, 2006:
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
|
Capital
|
|
Operating
|
|
|
|
Years
Ended June 30,
|
|
Leases
|
|
Leases
|
|
Total
|
|
|
|
|
|
(In
thousands)
|
|
|
|
2007
|
|
$
|
147
|
|
$
|
655
|
|
$
|
802
|
|
2008
|
|
|
122
|
|
|
619
|
|
|
741
|
|
2009
|
|
|
101
|
|
|
630
|
|
|
731
|
|
2010
|
|
|
-
|
|
|
636
|
|
|
636
|
|
2011
|
|
|
-
|
|
|
53
|
|
|
53
|
|
Thereafter
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
370
|
|
$
|
2,593
|
|
$
|
2,963
|
|
Amounts
representing interest
|
|
|
(30
|
)
|
|
|
|
|
|
|
Present
value of net minimum lease payments
|
|
|
340
|
|
|
|
|
|
|
|
Less:
capital lease obligations, short-term portion
(included
in other current liabilities)
|
|
|
129
|
|
|
|
|
|
|
|
Capital
lease obligations, long-term portion
|
|
$
|
211
|
|
|
|
|
|
|
|
In
addition to the above operating lease obligations, the Company has operating
lease obligations from restructured facilities. These costs will be paid
over
the respective lease terms through 2007. These amounts are included in
the
Company’s consolidated balance sheets.
The
following table presents facilities rent expense:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Facilities
rent expense
|
|
$
|
871
|
|
$
|
1,080
|
|
$
|
1,325
|
|
During
March 2006, the Company 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 the Company’s
business operations. During the ERP implementation period, the Company
will pay
interest of 9.0% on the amounts advanced. The lease agreement states that
the
aggregate amount advanced to the Company by the lessor will be repaid over
a
three-year period following the completion of the ERP implementation. As
of June
30, 2006, the Company had recorded accrued liabilities of $364,000 in connection
with the ERP implementation.
14.
Significant
Geographic, Product Line, Customer and Supplier Information
Geographic
The
following table presents the Company’s sales within geographic regions as a
percentage of net revenues:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Americas
|
|
|
62.5
|
%
|
|
64.3
|
%
|
|
69.3
|
%
|
EMEA
|
|
|
27.1
|
%
|
|
27.2
|
%
|
|
23.0
|
%
|
Asia
Pacific
|
|
|
10.4
|
%
|
|
8.5
|
%
|
|
7.7
|
%
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Product
Line
The
following table presents the Company’s net revenues by product
line:
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Device
networking
|
|
$
|
35,419
|
|
$
|
29,979
|
|
$
|
27,481
|
|
IT
management
|
|
|
11,499
|
|
|
12,341
|
|
|
12,555
|
|
Non-core
|
|
|
5,025
|
|
|
6,182
|
|
|
8,849
|
|
|
|
$
|
51,943
|
|
$
|
48,502
|
|
$
|
48,885
|
|
Customers
The
following table presents sales to the Company’s significant customers and a
related party as a percentage of net revenues:
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Top
five customers (1)
|
|
|
38.0
|
%
|
|
42.0
|
%
|
|
38.0
|
%
|
Ingram
Micro
|
|
|
13.0
|
%
|
|
16.0
|
%
|
|
14.0
|
%
|
Tech
Data
|
|
|
10.0
|
%
|
|
11.0
|
%
|
|
9.0
|
%
|
Related
party
|
|
|
3.0
|
%
|
|
2.0
|
%
|
|
3.0
|
%
|
(1) Includes
Ingram Micro, Tech Data and related party.
No
other
customer represented more than 10% of the Company’s annual net revenue during
these fiscal years. An international customer, transtec AG, is a related
party
due to common ownership by the Company’s largest stockholder, Bernhard
Bruscha.
Suppliers
The
Company does not own or operate a manufacturing facility. Four independent
third-party contract manufacturers located in Asia manufacture substantially
all
of the Company’s products. Any sudden demand for an increased amount of products
or sudden reduction or elimination of any existing source or sources of
products
could result in a material delay in the shipment of the Company’s products. Any
problems associated with the manufacturing facilities or the delivery,
quality
or cost of the Company’s products could have a material adverse effect on the
Company’s business, results of operations and financial condition.
15. Quarterly
Financial Data (Unaudited)
The
following table presents unaudited quarterly financial data of the Company.
In
the Company’s opinion, this information has been prepared on a basis consistent
with that of its audited consolidated financial statements and all necessary
material adjustments, consisting of normal recurring accruals and adjustments,
have been included to present fairly the unaudited quarterly financial
data. The
Company’s quarterly results of operations for these periods are not necessarily
indicative of future results of operations.
LANTRONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2006
|
Quarter
Ended Fiscal 2006
|
|
|
|
|
|
|
|
Sept
30,
|
|
Dec
31,
|
|
|
Mar
31,
|
|
|
June
30,
|
|
|
Total
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
Net
revenues
|
$ |
12,240
|
|
|
$ |
12,955
|
|
|
|
$ |
13,063
|
|
|
$ |
13,685
|
|
|
$ |
51,943
|
|
|
Gross
profit
|
$ |
6,120
|
|
|
$ |
6,598
|
|
|
|
$ |
6,572
|
|
|
$ |
7,377
|
|
|
$ |
26,667
|
|
|
(Loss)
income from continuing operations
|
$ |
(1,341
|
) |
|
$ |
(3,571
|
) |
(1)
|
|
$ |
399
|
(2)
|
|
$ |
1,468
|
(3)
|
|
$ |
(3,045
|
) |
|
Net
(loss) income
|
$ |
(1,341
|
) |
|
$ |
(3,571
|
) |
|
|
$ |
399
|
|
|
$ |
1,468
|
|
|
$ |
(3,045
|
) |
|
Basic
and diluted (loss) income per share
from
continuing operations
|
$ |
(0.02
|
) |
|
$ |
(0.06
|
) |
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
(0.05
|
) |
*
|
Basic
and diluted net (loss) income per share
|
$ |
(0.02
|
) |
|
$ |
(0.06
|
) |
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
(0.05
|
) |
*
|
|
Quarter
Ended Fiscal 2005
|
|
|
|
|
|
|
|
|
Sept
30,
|
|
Dec
31,
|
|
|
Mar
31,
|
|
|
June
30,
|
|
|
|
Total
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
Net
revenues
|
$ |
11,045
|
|
|
$ |
12,908
|
|
|
|
$ |
12,303
|
|
|
$ |
12,246
|
|
(4)
|
|
$ |
48,502
|
|
|
Gross
profit
|
$ |
5,557
|
|
|
$ |
6,256
|
|
|
|
$ |
5,689
|
|
|
$ |
6,674
|
|
(5)
|
|
$ |
24,176
|
|
|
Loss
from continuing operations
|
$ |
(3,611
|
) |
|
$ |
(1,538
|
) |
|
|
$ |
(1,362
|
)
|
|
$ |
(549
|
) |
(6)
|
|
$ |
(7,060
|
) |
|
Net
loss
|
$ |
(3,555
|
) |
|
$ |
(1,538
|
) |
|
|
$ |
(1,362
|
) |
|
$ |
(549
|
) |
|
|
$ |
(7,004
|
) |
|
Basic
and diluted loss per share
from
continuing operations
|
$ |
(0.06
|
) |
|
$ |
(0.03
|
) |
|
|
$ |
(0.02
|
) |
|
$ |
(0.01
|
) |
|
|
$ |
(0.12
|
) |
|
Basic
and diluted net loss per share
|
$ |
(0.06
|
) |
|
$ |
(0.03
|
) |
|
|
$ |
(0.02
|
) |
|
$ |
(0.01
|
) |
|
|
$ |
(0.12
|
) |
|
*
Annual
per share amounts
may not agree to the sum of the quarterly per share amounts due to differences
between average shares outstanding during the periods.
(1)
Includes litigation settlement charge of $2.6
million.
(2)
Includes litigation settlement recovery of $1.4
million.
(3)
Includes other income from the sale of the Company’s interest in Xanboo of $1.3
million and net litigation settlement recoveries of $255,000 from the
settlement
of two legal matters.
(4)
Includes reduction to the reserve for rebates of $80,000.
(5)
Includes reduction to warranty reserve of $317,000.
(6)
Includes reduction to accrued liabilities of $141,000.
INDEX
TO EXHIBITS
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
|
File
No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Lantronix,
Inc.
|
|
8
-
K
|
|
001-16027
|
|
99.1
|
|
07/29/2005
|
|
|
3.2
|
|
Amended
and restated Bylaws as amended on July 28, 2005
|
|
8
-
K
|
|
001-16027
|
|
99.2
|
|
07/29/2005
|
|
|
4.1
|
|
Form
of Registrant’s common stock certificate
|
|
S
-
1,
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
10.1
|
|
Form
of Indemnification Agreement entered into by registrant with
each of its
directors and executive officers
|
|
S
-
1,
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
10.2
|
|
1993
Stock Option Plan and forms of agreements thereunder
|
|
S
-
1,
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
10.3
|
|
1994
Nonstatutory Stock Option Plan and forms of agreements
thereunder
|
|
S
-
1,
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
10.4
|
|
2000
Stock Plan and forms of agreement
|
|
S
-
8,
|
|
333-103395
|
|
4.1
|
|
02/24/2003
|
|
|
10.4.1
|
|
Form
of Stock Option Agreement
|
|
|
|
|
|
|
|
|
|
X
|
10.5
|
|
Amendment
to the 2000 Stock Plan
|
|
S-8
|
|
333-103395
|
|
4.2
|
|
02/24/2003
|
|
|
10.6
|
|
2000
Employee Stock Purchase Plan, amended and restated dated as of
November
18, 2004
|
|
S
-
8,
|
|
333-121000
|
|
4.1
|
|
12/06/2004
|
|
|
10.7
|
|
Employment
Agreement between registrant and Fred Thiel
|
|
S
-
1
|
|
333-37508
|
|
|
|
05/19/2000
|
|
|
10.8
|
|
Employment
Agreement between registrant and Steve Cotton
|
|
S
-
1
|
|
333-37508
|
|
|
|
05/19/2000
|
|
|
10.9
|
|
Employment
Agreement between registrant and Johannes Rietschel
|
|
S
-
1
|
|
333-37508
|
|
|
|
05/19/2000
|
|
|
10.10
|
|
Lease
Agreement between registrant and The Irvine Company
|
|
S
-
1,
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
10.11
|
|
First
Amendment to Lease Agreement between registrant and Irvine Technology
Partners III dated as of August 10, 1995
|
|
S-1
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
10.12
|
|
Second
Amendment to Lease Agreement between registrant and Irvine Technology
Partners III dated as of July 6, 2000
|
|
10
- K
|
|
001-16027
|
|
10.03
|
|
09/28/2000
|
|
|
10.13
|
|
Third
Amendment to Lease Agreement between Registrant and Irvine Technology
Partners dated as of March 16, 2005
|
|
8
-
K
|
|
001-16027
|
|
10.04
|
|
03/22/2005
|
|
|
10.14
|
|
Research
and Development Agreement between registrant and Gordian
|
|
S
-
1,
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
|
|
*
Confidential treatment pursuant to Rule 406
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Distributor
Contract between registrant and Tech Data Corporation
|
|
S
-
1,
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
|
|
*
Confidential treatment pursuant to Rule 406
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Distributor
Contract between registrant and Ingram Micro Inc.
|
|
S
-
1,
Amend.
No. 1
|
|
333-37508
|
|
|
|
06/13/2000
|
|
|
|
|
*
Confidential treatment pursuant to Rule 406
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Offer
to Exchange Outstanding Options, dated December 19, 2002
|
|
Schedule
TO
|
|
001-16027
|
|
99(a)(1)
|
|
12/19/2002
|
|
|
10.18
|
|
Loan
and Security Agreement between registrant and Silicon Valley
Bank dated
February 14, 2002
|
|
10-Q
|
|
001-16027
|
|
10.16
|
|
02/14/2002
|
|
|
10.19
|
|
Amendment
to Loan Documents between Lantronix, Inc. and Silicon Valley
Bank dated
February 15, 2005
|
|
8
-
K
|
|
001-16027
|
|
10.17
|
|
02/15/2005
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
|
File
No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
10.20
|
|
Letter
from Ernst & Young LLP, dated January 21, 2005
|
|
8
-
K
|
|
001-16027
|
|
16.1
|
|
01/21/2005
|
|
|
10.21
|
|
Loan
and Security Agreement between Lantronix, Inc. and Silicon Valley
Bank
dated May 31, 2006.
|
|
8-K
|
|
001-16027
|
|
|
|
06/02/06
|
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21.1
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Subsidiaries
of registrant
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10
- K
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X
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23.1
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Consent
of Independent Registered Public Accounting Firm, McGladrey & Pullen,
LLP
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X
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23.2
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Consent
of Independent Registered Public Accounting Firm, Ernst & Young
LLP
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X
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24.1
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Power
of Attorney (see page II-2)
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31.1
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Certificate
of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes - Oxley Act of 2002
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X
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31.2
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Certificate
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes
- Oxley
Act of 2002
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X
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32.1
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Certification
of Chief Executive Officer and Chief Financial Officer furnished
pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of Sarbanes Oxley Act of
2002
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X
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99.1 |
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Consolidated
Valuation and Qualifying Accounts |
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X
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, Lantronix has duly caused this Report on Form 10-K to be signed on
its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 11th day of September, 2006.
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LANTRONIX,
INC. |
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By: |
/s/ JAMES
W.
KERRIGAN |
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JAMES
W. KERRIGAN |
|
CHIEF
FINANCIAL OFFICER |
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James Kerrigan, his attorney-in-fact, with the
power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Form 10-K and to file
the
same, with all exhibits thereto in all documents in connection therewith,
with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and
agents, and each of them, full power and authority to do and perform each
and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do
in
person, hereby ratifying and confirming all that such attorneys-in-fact
and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended,
this
Report on Form 10-K has been signed by the following persons in the capacities
and on the dates indicated:
Signature
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Title
|
Date
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/s/ H. K.
DESAI
|
Chairman of the Board |
09/11/06
|
H. K.
DESAI |
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/s/ MARC H.
NUSSBAUM
|
Chief Executive Officer, |
09/11/06
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MARC H. NUSSBAUM
|
President (Principal
Executive Officer) |
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/s/
JAMES W.
KERRIGAN
|
Chief Financial Officer and
Secretary |
09/11/06
|
JAMES
W. KERRIGAN |
(Principal Financial and Accounting
Officer) |
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/s/
THOMAS W.
BURTON
|
Director |
09/11/06
|
THOMAS W.
BURTON |
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/s/ HOWARD T.
SLAYEN
|
Director |
09/11/06
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HOWARD T.
SLAYEN |
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/s/
KATHRYN B.
LEWIS
|
Director |
09/11/06
|
KATHRYN B.
LEWIS |
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II-3