LANTRONIX INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - CERTIFICATION - LANTRONIX INC	lantronix_10q-ex3102.htm
EX-31.1 - CERTIFICATION - LANTRONIX INC	lantronix_10q-ex3101.htm
EX-32.1 - CERTIFICATION - LANTRONIX INC	lantronix_10q-ex3201.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________.

Commission file number: 1-16027

LANTRONIX, INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0362767
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

167 Technology Drive, Irvine, California

(Address of principal executive offices)

92618

(Zip Code)

(949) 453-3990

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x.

As of April 27, 2010, 10,321,208, shares of the Registrant’s common stock were outstanding.

LANTRONIX, INC.

FORM 10-Q

FOR THE FISCAL QUARTER ENDED

March 31, 2010

INDEX

		Page

PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Unaudited Condensed Consolidated Balance Sheets at March 31, 2010 and June 30, 2009	1

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
	March 31, 2010 and 2009	2

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
	March 31, 2010 and 2009	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8


Item 4.	Controls and Procedures	18

PART II.	OTHER INFORMATION	19

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Reserved	27

Item 5.	Other Information	28

Item 6.	Exhibits	32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	March 31,			June 30,
	2010			2009
Assets
Current assets:
Cash and cash equivalents	$	9,313		$	9,137
Accounts receivable, net		2,575			1,851
Contract manufacturers' receivable		1,002			655
Inventories, net		6,449			6,479
Prepaid expenses and other current assets		542			529
Total current assets		19,881			18,651

Property and equipment, net		2,424			2,230
Goodwill		9,488			9,488
Purchased intangible assets, net		177			265
Other assets		134			122
Total assets	$	32,104		$	30,756

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	7,230		$	5,626
Accrued payroll and related expenses		1,137			1,414
Warranty reserve		224			224
Restructuring reserve		-			76
Short-term debt		667			667
Other current liabilities		3,247			3,221
Total current liabilities		12,505			11,228
Non-current liabilities:
Long-term liabilities		657			117
Long-term capital lease obligations		188			309
Long-term debt		278			778
Total non-current liabilities		1,123			1,204
Total liabilities		13,628			12,432

Commitments and contingencies

Stockholders' equity:
Common stock		1			1
Additional paid-in capital		190,773			189,584
Accumulated deficit		(172,697	)		(171,687	)
Accumulated other comprehensive income		399			426
Total stockholders' equity		18,476			18,324
Total liabilities and stockholders' equity	$	32,104		$	30,756

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Net revenue (1)	$	12,124		$	10,655		$	34,556		$	37,752
Cost of revenue		5,772			5,086			16,438			17,716
Gross profit		6,352			5,569			18,118			20,036
Operating expenses:
Selling, general and administrative		4,804			4,446			14,279			14,969
Research and development		1,643			1,367			4,638			4,419
Restructuring charges		-			(23	)		-			698
Amortization of purchased intangible assets		18			18			54			54
Total operating expenses		6,465			5,808			18,971			20,140
Loss from operations		(113	)		(239	)		(853	)		(104	)
Interest expense, net		(29	)		(51	)		(118	)		(134	)
Other income (expense), net		17			37			(8	)		43
Loss before income taxes		(125	)		(253	)		(979	)		(195	)
Provision for income taxes		11			10			31			32
Net loss	$	(136	)	$	(263	)	$	(1,010	)	$	(227	)

Net loss per share (basic and diluted)	$	(0.01	)	$	(0.03	)	$	(0.10	)	$	(0.02	)

Weighted-average shares (basic and diluted)		10,318			10,087			10,262			10,078

(1) Includes net revenue from related parties	$	214		$	244		$	481		$	804

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	March 31,
	2010			2009
Operating activities
Net loss	$	(1,010	)	$	(227	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Share-based compensation		1,527			1,359
Depreciation		658			568
(Recovery) provision for inventories		(132	)		9
Amortization of purchased intangible assets		88			87
Provision for doubtful accounts		12			54
Restructuring charge		-			698
Changes in operating assets and liabilities:
Accounts receivable		(736	)		2,764
Contract manufacturers' receivable		(347	)		159
Inventories		162			69
Prepaid expenses and other current assets		(53	)		(350	)
Other assets		(12	)		10
Accounts payable		1,603			(1,671	)
Accrued payroll and related expenses		(287	)		(880	)
Warranty reserve		-			(118	)
Restructuring reserve		(76	)		(1,388	)
Other liabilities		(15	)		(129	)
Cash received related to tenant incentives		280			-
Net cash provided by operating activities		1,662			1,014
Investing activities
Purchases of property and equipment, net		(644	)		(495	)
Net cash used in investing activities		(644	)		(495	)
Financing activities
Minimum tax withholding paid on behalf of employees for restricted shares		(263	)		-
Payment of term loan		(499	)		(389	)
Net proceeds from issuances of common stock		155			88
Payment of capital lease obligations		(209	)		(252	)
Proceeds from term loan		-			2,000
Net cash (used in) provided by financing activities		(816	)		1,447
Effect of foreign exchange rate changes on cash		(26	)		(244	)
Increase in cash and cash equivalents		176			1,722
Cash and cash equivalents at beginning of period		9,137			7,434
Cash and cash equivalents at end of period	$	9,313		$	9,156

See accompanying notes.

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Lantronix, Inc. (the “Company” or “Lantronix”) have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2009, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 28, 2009. They contain all normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at March 31, 2010, and the consolidated results of its operations and cash flows for the three and nine months ended March 31, 2010 and 2009. All intercompany accounts and transactions have been eliminated. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

In June 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification, or Codification, as the source of authoritative GAAP recognized by the FASB. The Codification is effective in the first interim and annual periods ending after September 15, 2009 and had no effect on our unaudited condensed consolidated financial statements.

2. Computation of Net Loss per Share

Basic and diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the year, adjusted to reflect the December 2009 one-for-six reverse stock split.

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

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
	(In thousands, except per share data)
Numerator:
Net loss	$	(136	)	$	(263	)	$	(1,010	)	$	(227	)
Denominator:
Weighted-average shares outstanding		10,611			10,580			10,555			10,571
Less: Unvested common shares outstanding		(293	)		(493	)		(293	)		(493	)
Weighted-average shares (basic and diluted)		10,318			10,087			10,262			10,078

Net loss per share (basic and diluted)	$	(0.01	)	$	(0.03	)	$	(0.10	)	$	(0.02	)

The following table presents the common stock equivalents excluded from the diluted net loss per share calculation, because they were anti-dilutive as of such dates. These excluded common stock equivalents could be dilutive in the future.

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
	(In thousands)
Common stock equivalents		1,143		1,281		1,184		1,379

3. Inventories

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

	March 31,			June 30,
	2010			2009
	(In thousands)
Finished goods	$	4,169		$	4,421
Raw materials		1,667			1,537
Inventory at distributors		1,523			1,355
Large scale integration chips *		526			909
Inventories, gross		7,885			8,222
Reserve for excess and obsolete inventory		(1,436	)		(1,743	)
Inventories, net	$	6,449		$	6,479

* This item is sold individually and embedded into the Company's products.

4. Warranty

Upon shipment to its customers, the Company provides for the estimated cost to repair or replace products to be returned under warranty. The Company’s products typically carry a one- or two-year warranty. Although the Company engages in extensive product quality programs and processes, its warranty obligation is affected by product failure rates, use of materials or service delivery costs that differ from the Company’s estimates. As a result, additional warranty reserves could be required, which could reduce gross margins. Additionally, the Company sells extended warranty services, which extend the warranty period for an additional one to three years, depending upon the product.

The following table is a reconciliation of the changes to the product warranty liability for the periods presented:

	Nine Months Ended			Year Ended
	March 31,			June 30,
	2010			2009
	(In thousands)
Beginning balance	$	224		$	342
Charged to cost of revenues		142			116
Usage		(142	)		(234	)
Ending balance	$	224		$	224

5. Restructuring Reserve

During the fourth fiscal quarter ended June 30, 2008, the Company implemented a restructuring plan to optimize its organization to better leverage existing customer and partner relationships in order to drive revenue growth and profitability. As part of the restructuring plan, 10 employees from the senior-level ranks of the sales, marketing, operations and engineering groups were terminated. During the first fiscal quarter ended September 30, 2008, the Company implemented a second restructuring plan. As part of the second restructuring plan, an additional 29 employees from all ranks and across all functional groups of the Company were terminated. During the second fiscal quarter ended December 31, 2008, the Company incurred additional restructuring charges related to the termination of a senior-level employee and closure of a sales office in France. During the fourth fiscal quarter ended June 30, 2009, the Company incurred restructuring charges related to the consolidation of its corporate headquarters.

The following table presents a summary of the activity in the Company’s restructuring reserve:

	Facilities			Severance			Total
	Termination			Related			Restructuring
	Costs			Costs			Costs
	(In thousands)
Restructuring reserve at June 30, 2009	$	73		$	3		$	76
Restructuring charge		-			-			-
Cash payments		(73	)		(3	)		(76	)
Restructuring reserve at March 31, 2010	$	-		$	-		$	-

6. Bank Line of Credit and Debt

In August 2008, the Company entered into an Amendment to Loan and Security Agreement, which provides for a three-year $2.0 million Term Loan and a two-year $3.0 million Revolving Credit Facility (the “Term Loan and Revolving Credit Facility” or “Loan Agreement”). The Term Loan was funded on August 26, 2008 and is payable in 36 equal installments of principal and monthly accrued interest. There are no borrowings outstanding on the Revolving Credit Facility as of the fiscal quarter end.

Borrowings under the Term Loan and Revolving Credit Facility bear interest at the greater of 6.25% or prime rate plus 1.25% per annum. If the Company achieves two consecutive quarters of positive EBITDAS (as defined in the Loan Agreement) greater than $1.00, and only for so long as the Company maintains EBITDAS greater than $1.00 at the end of each subsequent fiscal quarter, then the borrowings under the Term Loan and Revolving Credit Facility will bear interest at the greater of 5.75% or prime rate plus 0.75% per annum. Upon entering into the agreement, the Company paid a fully earned, non-refundable commitment fee of $35,000 and paid an additional $35,000 on the first anniversary of the effective date of the Term Loan.

The Company's obligations under the Term Loan and Revolving Credit Facility are secured by substantially all of the Company's assets, including its intellectual property.

The following table presents our available borrowing capacity and outstanding letters of credit, which were used to secure equipment leases, purchase of materials, deposits for a building lease and security deposits:

	March 31,		June 30,
	2010		2009
	(In thousands)
Available borrowing capacity	$	1,445	$	426
Outstanding letters of credit	$	729	$	732

7. Stockholders’ Equity

Common Stock

On November 18, 2009, Lantronix stockholders approved a proposal to authorize the Company’s board of directors to implement, at its discretion, a reverse stock split of the Company’s outstanding shares of common stock within a range of one-third to one-sixth of a share for each outstanding share of common stock, and to file an Amendment to the Company’s Certificate of Incorporation (the “Certificate of Amendment”) to effect such a reverse stock split. On November 18, 2009, the board of directors authorized a one-for-six reverse stock split of the Company’s common stock. On December 18, 2009, the Company filed the Certificate of Amendment. All references to common shares and per-share data for all periods presented in this report have been retrospectively adjusted to give effect to this reverse stock split. As no change was made to the par value of the common shares, $5,000 was reclassified from common stock to additional paid-in capital.

Share-Based Compensation

The Company has one active share-based plan under which non-qualified and incentive stock options have been granted to employees, non-employees and its board of directors. In addition, the Company has granted restricted stock awards to employees and its board of directors under this share-based plan. The compensation committee of the board of directors determines eligibility, vesting schedules and exercise prices for options and restricted stock awards granted under the plans. The Company issues new shares to satisfy stock option exercises, restricted stock grants, and stock purchases under its share-based plans.

On August 18, 2009, eligible employees were granted awards of options to purchase common stock under the Company’s Long Term Incentive Plan (“LTIP”). Under the terms of the LTIP, eligible employees were granted a total of 679,038 options to purchase common shares. Twenty-five percent of the options vest on September 1, 2010, and an additional 25% of the options vest each year thereafter, all subject to the recipients’ continued employment. The LTIP option awards were made from the Company’s 2000 Stock Plan. The exercise price was equal to the fair market value of the Company’s common stock on the date of grant as listed on the Nasdaq Capital Market.

On September 15, 2009, Jerry D. Chase, President and Chief Executive Officer and Reagan Y. Sakai, Chief Financial Officer and Secretary were granted 76,724 and 44,400 options, respectively, to purchase common stock under the Company’s LTIP plan. Twenty-five percent of the options vest on September 1, 2010, and an additional 25% of the options vest each year thereafter, all subject to the recipients’ continued employment. The LTIP option awards were made from the Company’s 2000 Stock Plan. The exercise price was equal to the fair market value of the Company’s common stock on the date of grant as listed on the Nasdaq Capital Market.

The compensation committee of the board of directors approved a performance plan for the fiscal year ended June 30, 2010 (“Performance Plan”), which will be paid in vested common shares if minimum revenue, non-GAAP income and management objectives are met. If the Company achieves its estimated attainment, it will record share-based compensation of approximately $306,000 for the fiscal year ending June 30, 2010. During the nine months ended March 31, 2010, the Company recorded $230,000 of share-based compensation in connection with this Performance Plan, which is recorded as long-term liability on the consolidated balance sheet.

The following table presents a summary of option activity under all of the Company’s stock option plans:

	Number of
	Shares
Balance of options outstanding at June 30, 2009		1,278,505
Options granted		1,008,137
Options forfeited		(132,695	)
Options expired		(95,556	)
Options exercised		(51,000	)
Balance of options outstanding at March 31, 2010		2,007,391

The following table presents stock option grant date information:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
Weighted-average grant date fair value per share	$	2.30	$	2.34	$	1.89	$	2.22
Weighted-average grant date exercise price per share	$	3.24	$	3.36	$	2.67	$	3.30

The following table presents a summary of restricted stock activity:

				Weighted
				Average
	Number of			Grant - Date
	Shares			Fair Value
Balance of restricted shares at June 30, 2009		472,065		$	3.12
Granted		-			-
Forfeited		(42,871	)		3.00
Vested		(135,763	)		3.16
Balance of restricted shares at March 31, 2010		293,431		$	3.11

The following table presents a summary of the total fair value of shares vested for all of the Company’s restricted share awards:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
	(In thousands)
Fair value of shares vested	$	18	$	15	$	443	$	15

The following table presents a summary of remaining unrecognized share-based compensation by the vesting condition for the Company’s share-based plans:

	Remaining Unrecognized		Remaining
	Compensation		Years
Vesting Condition	Cost		To Vest
	(In thousands)
Stock Option Awards:
Service based	$	1,906
Market and service based		465
Stock option awards	$	2,371		2.8

Restricted Stock Awards:
Service based		710
Market and service based		29
Restricted stock awards	$	739		2.2

The following table presents a summary of share-based compensation by functional line item:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
	(In thousands)
Cost of revenues	$	11	$	2	$	30	$	49
Selling, general and administrative		257		242		1,108		956
Research and development		116		51		389		354
Total share-basd compensation	$	384	$	295	$	1,527	$	1,359

Warrants to Purchase Common Stock

During March 2008, the Company distributed warrants to purchase 179,935 shares of Lantronix common stock as consideration for settlement of a shareholder lawsuit. The warrants have a contractual life of four years and a strike price of $28.08.

8. Income Taxes

At July 1, 2009, the Company’s fiscal 2002 through fiscal 2009 tax years remain open to examination by the federal and state taxing authorities. The Company has net operating losses (“NOLs”) beginning in fiscal 2002 which cause the statute of limitations to remain open for the year in which the NOL was incurred.

The Company utilizes the liability method of accounting for income taxes. The following table presents the Company’s effective tax rates based upon the income tax provision for the periods shown:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
Effective tax rate		9%		4%		3%		16%

The federal statutory rate was 34% for all periods. The difference between the Company’s effective tax rate and the federal statutory rate resulted primarily from the effect of its domestic losses recorded with a fully reserved tax benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate.

9. Comprehensive Income (Loss)

The components of comprehensive income (loss) are as follows:

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
	(In thousands)
Net loss	$	(136	)	$	(263	)	$	(1,010	)	$	(227	)
Other comprehensive income (loss):
Change in translation adjustments, net of taxes of $0		(49	)		2			(27	)		(94	)
Total comprehensive loss	$	(185	)	$	(261	)	$	(1,037	)	$	(321	)

10. Litigation

From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The information contained in this Report is not a complete description of our business. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 and subsequent reports on our Current Reports on Form 8-K.

This Report contains forward-looking statements which include, but are not limited to, statements concerning projected net revenues, expenses, gross profit and net income (loss), the need for additional capital, market acceptance of our products, our ability to achieve further product integration, the status of evolving technologies and their growth potential and our production capacity. Among these forward-looking statements are statements regarding a potential decline in net revenue from non-core product lines, potential variances in quarterly operating expenses, the adequacy of existing resources to meet cash needs, some reduction in the average selling prices and gross margins of products, need to incorporate software from third-party vendors and open source software in our future products and the potential impact of an increase in interest rates or fluctuations in foreign exchange rates on our financial condition or results of operations. These forward-looking statements are based on our current expectations, estimates and projections about our industry, our beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, including but not limited to those identified under the heading “Risk Factors” set forth in Part II, Item 1A hereto. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

We design, develop and market devices that make it possible to access, manage, control and configure electronic products over the Internet or other networks. We are a leader in providing innovative networking solutions. We were initially formed as “Lantronix,” a California corporation, in June 1989. We reincorporated as “Lantronix, Inc.,” a Delaware corporation, in May 2000.

We have a history of providing devices that enable information technology (“IT”) equipment to network using standard protocols for connectivity, including Ethernet and wireless. Our first device was a terminal server that allowed ASCII terminals to connect to a network. Building on the success of our terminal servers, in 1991 we introduced a complete line of print servers that enabled users to inexpensively share printers over a network. Since then, we have continually refined our core technology and have developed additional innovative networking solutions that expand upon the business of providing our customers network connectivity. With the expansion of networking and the Internet, our technology focus has been increasingly expanded beyond IT equipment, so that our device solutions provide a product manufacturer with the ability to network its products within the industrial, service and commercial markets referred to as machine-to-machine (“M2M”) networking.

The following describes our M2M device networking product lines:

Device Enablement (DeviceLinx) – We offer an array of embedded and external device enablement solutions that enable integrators and manufacturers of electronic and electro-mechanical products to add network connectivity, manageability and control. Our customers’ products emanate from a wide variety of applications within the M2M market, from blood analyzers that relay critical patient information directly to a hospital’s information system, to simple devices such as time clocks, allowing the user to obtain information from these devices and to improve how they are managed and controlled. We also offer products such as multi-port device servers that enable devices outside the data center to effectively share the costs of the network connection and convert various protocols to industry standard interfaces such as Ethernet and the Internet.

Device Management (SecureLinx and ManageLinx) – We offer off-the-shelf appliances such as console servers, digital remote keyboard, video, mouse extenders, and power control products that enable IT professionals to remotely connect, monitor and control network infrastructure equipment, distributed branch office equipment and large groups of servers using highly secure out-of-band management technology. In addition, our ManageLinx solution provides secure remote Internet access to virtually any piece of IP-enabled equipment, including our DeviceLinx products – even behind remote firewalls or virtual private networks.

The following describes our non-core product line:

Non-core – Over the years, we have innovated or acquired various product lines that are no longer part of our primary, core markets described above. In general, these non-core product lines represent decreasing markets and we minimize research and development in these product lines. Included in this category are terminal servers, visualization solutions, legacy print servers, software and other miscellaneous products. We have announced the end-of-life for almost all of our non-core products and expect a steep decline in non-core revenues in fiscal 2010 while we complete the exit of this product category.

Financial Highlights and Other Information for the Fiscal Quarter Ended March 31, 2010

The following is a summary of the key factors and significant events that impacted our financial performance during the fiscal quarter ended March 31, 2010:

Net revenue was $12.1 million for the fiscal quarter ended March 31, 2010, an increase of $1.5 million or 14%, compared to $10.7 million for the fiscal quarter ended March 31, 2009. The increase was primarily the result of a $1.6 million, or 15.6%, increase in our device networking product lines, offset by a $142,000, or 46.0%, decrease in our non-core product lines.

Gross profit margin was 52.4% for the fiscal quarter ended March 31, 2010, compared to 52.3% for the fiscal quarter ended March 31, 2009. The increase in gross profit margin percent was primarily attributable to lower inventory reserve costs offset by an increase in freight costs compared to the prior year quarter.

Loss from operations was $113,000 for the fiscal quarter ended March 31, 2010, compared to $239,000 for the fiscal quarter ended March 31, 2009.

Net loss was $136,000, or $0.01 per basic and diluted share, for the fiscal quarter ended March 31, 2010, compared to $263,000, or $0.03 per basic and diluted share, for the fiscal quarter ended March 31, 2009.

Cash and cash equivalents were $9.3 million as of March 31, 2010, an increase of $176,000, compared to $9.1 million as of June 30, 2009.

Net accounts receivable were $2.6 million as of March 31, 2010, an increase of $724,000, compared to $1.9 million as of June 30, 2009. Days sales outstanding (“DSO”) in receivables were 16 days for the fiscal quarter ended March 31, 2010 compared to 22 days for the fiscal quarter ended June 30, 2009. Our accounts receivable and DSO are primarily affected by the timing of shipments within a quarter, our collections performance and the fact that a significant portion of our revenues are recognized on a sell-through basis (upon shipment from distributor inventories rather than as goods are shipped to distributors).

Net inventories were $6.4 million as of March 31, 2010, compared to $6.5 million as of June 30, 2009. Inventory turns were 3.6 turns for the fiscal quarter ended March 31, 2010, compared to 3.2 turns for the fiscal quarter ended June 30, 2009.

Critical Accounting Policies and Estimates

The accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to revenue recognition, warranty reserves, allowance for doubtful accounts, inventory valuation, valuation of deferred income taxes, and goodwill. These policies are described in further detail in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009. There have been no significant changes in our critical accounting policies and estimates during the fiscal quarter ended March 31, 2010 as compared to what was previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Recent Accounting Pronouncements

In September 2009 the FASB reached a consensus on Accounting Standards Update (“ASU”), 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) and ASU 2009-14, Software (Topic 985) – Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: i) vendor-specific objective evidence (“VSOE”) or ii) third-party evidence (“TPE”) before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. These new updates are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the impact that the adoption of these ASUs will have on our consolidated financial statements.

Consolidated Results of Operations

The following table presents the percentage of net revenues represented by each item in our condensed consolidated statement of operations:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2010		2009		2010		2009

Net revenues	100.0%		100.0%		100.0%		100.0%
Cost of revenues	47.6%		47.7%		47.6%		46.9%
Gross profit	52.4%		52.3%		52.4%		53.1%
Operating expenses:
Selling, general and administrative	39.6%		41.7%		41.3%		39.7%
Research and development	13.6%		12.8%		13.4%		11.7%
Restructuring charges	0.0%		(0.2%	)	0.0%		1.8%
Amortization of purchased intangible assets	0.1%		0.2%		0.2%		0.1%
Total operating expenses	53.3%		54.5%		54.9%		53.3%
Loss from operations	(0.9%	)	(2.2%	)	(2.5%	)	(0.3%	)
Interest expense, net	(0.2%	)	(0.5%	)	(0.3%	)	(0.4%	)
Other income (expense), net	0.1%		0.3%		(0.0%	)	0.1%
Loss before income taxes	(1.0%	)	(2.4%	)	(2.8%	)	(0.5%	)
Provision for income taxes	0.1%		0.1%		0.1%		0.1%
Net loss	(1.1%	)	(2.5%	)	(2.9%	)	(0.6%	)

Comparison of the Fiscal Quarters Ended March 31, 2010 and 2009

Net Revenue by Product Line

The following table presents fiscal quarter net revenue by product line:

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2010		Revenue		2009		Revenue		$			%
	(In thousands, except percentages)
Device enablement	$	9,572		79.0%	$	8,737		82.0%	$	835			9.6%
Device management		2,385		19.7%		1,609		15.1%		776			48.2%
Device networking		11,957		98.7%		10,346		97.1%		1,611			15.6%
Non-core		167		1.3%		309		2.9%		(142	)		(46.0%	)
Net revenue	$	12,124		100.0%	$	10,655		100.0%	$	1,469			13.8%

The increase in net revenue for the three months ended March 31, 2010, compared to the three months ended March 31, 2009 was the result of an increase in net revenue from our device enablement and device management product lines, offset by a decrease in our non-core product lines. The increase in our device enablement product line was due to a increase in our embedded device enablement products, and more specifically, our XPort, Micro and MatchPort product families, offset by a decrease in our external device enablement products, more specifically, our WiBox product family. The increase in our device management product line was due to an increase in our SLC and SLS product families, which were impacted by a sale of SLCs to a single U.S. customer. We are no longer investing in the development of our non-core product lines and expect net revenue related to these products to continue to decline in the future as we focus our investment on our device networking product lines.

The following table presents fiscal year-to-date net revenue by product line:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2010		Revenue		2009		Revenue		$			%
	(In thousands, except percentages)
Device enablement	$	27,567		79.8%	$	30,405		80.5%	$	(2,838	)		(9.3%	)
Device management		6,287		18.2%		5,828		15.4%		459			7.9%
Device networking		33,854		98.0%		36,233		95.9%		(2,379	)		(6.6%	)
Non-core		702		2.0%		1,519		4.1%		(817	)		(53.8%	)
Net revenue	$	34,556		100.0%	$	37,752		100.0%	$	(3,196	)		(8.5%	)

The decrease in net revenue for the nine months ended March 31, 2010, compared to the nine months ended March 31, 2009 was the result of a decrease in net revenue from our device enablement and non-core product lines, offset by an increase in our device management product lines. The decrease in our device enablement product line was due to a decrease in our embedded device enablement products, and more specifically, our XPort, ASIC and Micro product families, offset by an increase in our MatchPort product families, and a decrease in our external device enablement products, more specifically, our EDS, UDS, WiBox, MSS and WiBridge product families. The increase in our device management product line was due to an increase in our SLC and SLS product families, offset by a decrease in our SCS, SLB and SLP product families. We are no longer investing in the development of our non-core product lines and expect net revenue related to these products to continue to decline in the future as we focus our investment on our device networking product lines.

Net Revenue by Geographic Region

The following table presents fiscal quarter net revenue by geographic region:

	Three Months Ended March 31,
			% of Net				% of Net			Change
	2010		Revenue		2009		Revenue			$			%
	(In thousands, except percentages)
Americas	$	7,027		58.0%	$	5,715		53.6	%	$	1,312			23.0%
EMEA		3,185		26.3%		3,200		30.0	%		(15	)		(0.5%	)
Asia Pacific		1,912		15.7%		1,740		16.4	%		172			9.9%
Net revenue	$	12,124		100.0%	$	10,655		100.0	%	$	1,469			13.8%

The increase in net revenue for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 was primarily the result of an increase in the Americas region. The increase in the Americas region was due to the increase in our device management and device enablement product lines, offset by a decrease in our non-core product lines. The increase in America’s device management net revenue was due to an increase in the SLC and SLS families, which were impacted by a sale of SLC’s to a single U.S. customer in the amount of $764,000. The increase in America’s device enablement net revenue was due to an increase in the XPort, Micro, EDS, MatchPort product families, offset by a decrease in our WiBox product family. We are no longer investing in the development of our non-core product lines.

The following table presents fiscal year-to-date net revenue by geographic region:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2010		Revenue		2009		Revenue		$			%
	(In thousands, except percentages)
Americas	$	19,413		56.2%	$	21,687		57.4%	$	(2,274	)		(10.5%	)
EMEA		9,642		27.9%		10,680		28.3%		(1,038	)		(9.7%	)
Asia Pacific		5,501		15.9%		5,385		14.3%		116			2.2%
Net revenue	$	34,556		100.0%	$	37,752		100.0%	$	(3,196	)		(8.5%	)

The decrease in net revenue for the nine months ended March 31, 2010 compared to the nine months ended March 31, 2009 was primarily the result of a decrease in the Americas and EMEA (“Europe, Middle East and Africa”) regions. The decrease in the Americas region was due to the decrease in our device enablement and non-core product lines, offset by an increase in our device management product lines. The decrease in America’s device enablement net revenue was due to a decrease in the Micro, ASIC, EDS, MSS, WiBox, and UDS product families. The increase in the Americas device management net revenue was due to an increase in our SLC and SLS product families. We are no longer investing in the development of our non-core product lines. The decrease in our EMEA region was primarily due to a decrease in our device enablement product lines, and more specifically, the ASIC, UDS, EDS, MSS and XPress product families.

Gross Profit

Gross profit represents net revenue less cost of revenue. Cost of revenue consisted primarily of the cost of raw material components, subcontract labor assembly from contract manufacturers, manufacturing overhead, amortization of purchased intangible assets, establishing or relieving inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties and share-based compensation.

The following table presents fiscal quarter gross profit:

	Three Months Ended March 31,
			% of Net				% of Net		Change
	2010		Revenue		2009		Revenue		$		%
	(In thousands, except percentages)
Gross profit	$	6,352		52.4%	$	5,569		52.3%	$	783		14.1%

The increase in gross profit margin for the three months ended March 31, 2010, compared to the three months ended March 31, 2009 was primarily attributable to lower inventory reserve costs offset by an increase in freight costs.

The following table presents fiscal year-to-date gross profit:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2010		Revenue		2009		Revenue		$			%
	(In thousands, except percentages)
Gross profit	$	18,118		52.4%	$	20,036		53.1%	$	(1,918	)		(9.6%	)

The decrease in gross profit margin for the nine months ended March 31, 2010, compared to the nine months ended March 31, 2009 was primarily attributable to product mix, increased freight costs and employee severance.

Selling, General and Administrative

Selling, general and administrative expenses consisted of personnel-related expenses including salaries and commissions, share-based compensation, facility expenses, information technology, trade show expenses, advertising, and legal and accounting fees offset by reimbursement of legal fees from insurance proceeds.

The following table presents fiscal quarter selling, general and administrative expenses:

	Three Months Ended March 31,
			% of Net			% of Net	Change
	2010		Revenue	2009		Revenue	$			%
	(In thousands, except percentages)
Personnel-related expenses	$	2,561		$	2,420		$	141			5.8%
Professional fees & outside services		443			438			5			1.1%
Advertising and marketing		570			522			48			9.2%
Facilities		319			327			(8	)		(2.4%	)
Share-based compensation		257			242			15			6.2%
Depreciation		179			153			26			17.0%
Bad debt expense		-			91			(91	)		(100.0%	)
Other		475			253			222			87.7%
Selling, general and administrative	$	4,804	39.6%	$	4,446	41.7%	$	358			8.1%

In order of significance, the increase in selling, general and administrative expenses for the three months ended March 31, 2010, compared to the three months ended March 31, 2009 was primarily due to: (i) an increase in other expenses mainly due to increased state franchise tax fees and (ii) an increase in personnel –related expenses due to recruiting fees related to sales personnel upgrades in our Japan and Hong Kong offices, employee severance and sales commissions due to the higher net revenue; offset by (iii) a decrease in bad debt expense due a specific reserve in the prior year quarter.

The following table presents fiscal year-to-date selling, general and administrative expenses:

	Nine Months Ended March 31,
			% of Net			% of Net	Change
	2010		Revenue	2009		Revenue	$			%
	(In thousands, except percentages)
Personnel-related expenses	$	7,499		$	7,960		$	(461	)		(5.8%	)
Professional fees & outside services		1,550			1,771			(221	)		(12.5%	)
Advertising and marketing		1,624			1,790			(166	)		(9.3%	)
Facilities		953			1,027			(74	)		(7.2%	)
Share-based compensation		1,108			956			152			15.9%
Depreciation		459			422			37			8.8%
Bad debt expense (recovery)		12			54			(42	)		(77.8%	)
Other		1,074			989			85			8.6%
Selling, general and administrative	$	14,279	41.3%	$	14,969	39.7%	$	(690	)		(4.6%	)

In order of significance, the decrease in selling, general and administrative expenses for the nine months ended March 31, 2010, compared to the nine months ended March 31, 2009 was primarily due to: (i) a decrease in personnel-related expenses as a result of the restructuring activities taken during the prior fiscal year and a company-wide furlough program that was taken in response to the economic downturn and (ii) a decrease in professional fees and advertising and marketing expenses as a result of cost cutting measures and taking a more focused spending approach; offset by (iii) an increase in share-based compensation as a result of new option and share grants related to the fiscal 2010 share-based compensation plans.

Research and Development

Research and development expenses consisted of personnel-related expenses including share-based compensation, as well as expenditures to third-party vendors for research and development activities.

The following table presents fiscal quarter research and development expenses:

	Three Months Ended March 31,
			% of Net			% of Net	Change
	2010		Revenue	2009		Revenue	$			%
	(In thousands, except percentages)
Personnel-related expenses	$	998		$	910		$	88			9.7%
Facilities		308			222			86			38.7%
Professional fees & outside services		114			74			40			54.1%
Share-based compensation		116			51			65			127.5%
Depreciation		13			17			(4	)		(23.5%	)
Other		94			93			1			1.1%
Research and development	$	1,643	13.6%	$	1,367	12.8%	$	276			20.2%

In order of significance, the increase in research and development expenses for the three months ended March 31, 2010, compared to the three months ended March 31, 2009 was primarily due to: (i) an increase in personnel-related expenses as a result of only one mandated furlough week in the current quarter as compared to two furlough weeks in the year ago quarter and (ii) an increase in allocated facilities costs.

The following table presents fiscal year-to-date research and development expenses:

	Nine Months Ended March 31,
			% of Net			% of Net	Change
	2010		Revenue	2009		Revenue	$			%
	(In thousands, except percentages)
Personnel-related expenses	$	2,917		$	2,954		$	(37	)		(1.3%	)
Facilities		830			706			124			17.6%
Professional fees & outside services		257			162			95			58.6%
Share-based compensation		389			354			35			9.9%
Depreciation		45			54			(9	)		(16.7%	)
Other		200			189			11			5.8%
Research and development	$	4,638	13.4%	$	4,419	11.7%	$	219			5.0%

In order of significance, the increase in research and development expenses for the nine months ended March 31, 2010, compared to the nine months ended March 31, 2009 was primarily due to: (i) an increase in allocated facilities costs and (ii) an increase in professional fees and outside services for engineering projects.

Restructuring Charges

During the fourth fiscal quarter ended June 30, 2008, we implemented a restructuring plan to optimize our organization to better leverage existing customer and partner relationships to drive revenue growth and profitability. As part of the restructuring plan, 10 employees from the senior-level ranks of the sales, marketing, operations and engineering groups were terminated. During the first fiscal quarter ended September 30, 2008, we implemented a second restructuring plan. As part of the second restructuring plan, an additional 29 employees from all ranks and across all functional groups of the Company were terminated. During the second fiscal quarter ended December 31, 2008, we incurred additional restructuring expenses related to settling with a senior-level employee in France and closing the France sales office.

The following table presents fiscal quarter restructuring charges:

	Three Months Ended March 31,
			% of Net					% of Net		Change
	2010		Revenue		2009			Revenue		$		%
	(In thousands, except percentages)
Restructuring charges	$	-		0.0%	$	(23	)		-0.2%	$	23		100.0%

The following table presents fiscal year-to-date restructuring charges:

	Nine Months Ended March 31,
			% of Net				% of Net		Change
	2010		Revenue		2009		Revenue		$			%
	(In thousands, except percentages)
Restructuring charge	$	-		0.0%	$	698		1.8%	$	(698	)		(100.0%	)

Provision for Income Taxes

At July 1, 2009, our fiscal 2002 through fiscal 2009 tax years remain open to examination by the Federal and state taxing authorities. We have net operating losses (“NOLs”) beginning in fiscal 2002 which cause the statute of limitations to remain open for the year in which the NOL was incurred.

The following table presents our effective tax rate based upon our income tax provision:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
Effective tax rate		9%		4%		3%		16%

We utilize the liability method of accounting for income taxes. The federal statutory rate was 34% for all periods. The difference between our effective tax rate and the federal statutory rate resulted primarily from the effect of our domestic losses recorded with a fully reserved tax benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. As a result of our cumulative losses, we provided a full valuation allowance against our domestic net deferred tax assets for the fiscal quarters ended March 31, 2010 and 2009.

Liquidity and Capital Resources

The following table presents details of our working capital and cash:

	March 31,		June 30,	Increase
	2010		2009	(Decrease)
	(In thousands)
Working capital	$	7,376	$

LANTRONIX INC - FORM 10-Q - May 3, 2010

Attached files