UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
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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, 2007
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£
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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)
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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:
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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. x
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):
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Large
accelerated filer £
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Accelerated
filer £
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Non-accelerated
filed S
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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, 2006,
as
reported by the NASDAQ Capital Market, was approximately $43,516,000. 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, 2006. This determination of affiliate
status is not a conclusive determination for other purposes.
As
of
September 4, 2007, there were 59,871,809 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 2007 Definitive Proxy Statement to be filed
not later than 120 days after the close of the 2007 fiscal
year.
1
LANTRONIX,
INC.
ANNUAL
REPORT ON FORM 10-K
For
the Fiscal Year Ended June 30, 2007
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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13
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Item
1B.
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Unresolved
Staff Comments
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20
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Item
2.
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Properties
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20
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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20
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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21
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Item
6.
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Selected
Financial Data
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23
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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37
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Item
8.
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Financial
Statements and Supplementary Data
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37
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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37
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Item
9A.
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Controls
and Procedures
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37
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Item
9B.
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Other
Information
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38
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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38
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Item
11.
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Executive
Compensation
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38
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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38
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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39
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Item
14.
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Principal
Accountant Fees and Services
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39
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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40
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2
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.
3
PART
I
ITEM
1. BUSINESS
Overview
We
design, develop and market devices that make it possible to access, manage,
control and configure electronic products over the Internet or other networks.
We are a leader in providing innovative networking solutions. We were initially
formed as “Lantronix,” a California corporation, in June 1989. We reincorporated
as “Lantronix, Inc.,” a Delaware corporation, in May 2000.
We
have a
history of providing devices that enable information technology (“IT”) equipment
to network using standard protocols for connectivity, including Ethernet
and
wireless. Our first device was a terminal server that allowed “dumb” terminals
to connect to a network. Building on the success of our terminal servers,
in
1991 we introduced a complete line of print servers that enabled users to
inexpensively share printers over a network. Since then, we have continually
refined our core technology and have developed additional innovative networking
solutions that expand upon the business of providing our customers network
connectivity. With the expansion of networking and the Internet, our technology
focus has been increasingly broader and has 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.
Our
primary products and technology have focused on “device enablement” solutions
that enable individual electronic products to be connected to a network and
the
data center market for “device management” solutions that connect or bridge
groups of devices onto the network for the primary purpose of remote access.
We
are expanding our device management solutions to address applications outside
the data center and have recently launched new products to help manage equipment
at remote branch offices and a new product category that provides a reliable,
single point of control and data flow management for potentially thousands
of
networked devices. Together, the device enablement and device management
product
lines constitute our growth strategy and make up our “M2M device networking
business,” which we formerly referred to as our “core business.” In addition, we
continue to sell certain older legacy “non-core” products which we expect to
exit in fiscal 2008. 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 M2M device networking business 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 products 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,
the
United Kingdom, Japan and the Netherlands.
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 enablement and remote connection 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 enablement
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.
4
This
strategy is accomplished by providing our customers with hardware and software
that connect devices to a network and intelligently manage and control them.
With our 18 years of networking expertise, knowledge of industry trends and
our
capability to develop solutions based on open industry-standards, we believe
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.
During
the fiscal quarter ended September 30, 2006, we renamed our product lines
to
reflect our single focus on M2M device networking and our broadening product
portfolio and entry into new adjacent applications. The Company reports its
two
M2M device networking product lines as “device enablement” (formerly “device
networking”), and “device management” (formerly “IT management”). The non-core
category, representing older legacy products, now includes terminal servers
formerly categorized as a part of “IT management” and all prior periods have
been adjusted to conform to the new presentation.
The
following describes our M2M device networking product lines:
| · |
Device
Enablement
-
We offer an array of embedded and external device enablement solutions
that enable integrators and manufacturers of electronic and
electro-mechanical products to add network connectivity, manageability
and
control. Our customers’ products originate from a wide variety of
applications within the M2M market, from blood analyzers that relay
critical patient information directly to a hospital’s information system,
to simple devices such as time clocks, allowing the user to obtain
information from these devices and to improve how they are managed
and
controlled. We also offer products such as multi-port devices servers
that
enable devices outside the data center to cost effectively share
the
network connection and convert various protocols to industry standard
interfaces such as Ethernet and the
Internet.
|
| · |
Device
Management -We
offer off-the-shelf appliances such as console servers, digital remote
KVM
extenders, and power control products that enable IT professionals
to
remotely connect, monitor and control network infrastructure equipment,
distributed branch office equipment and large groups of servers using
highly secure out-of-band management technology. In addition, we
offer
off-the-shelf appliances that enable IT professionals to reliably,
remotely and simply monitor, configure and manage multiple devices
from a
single point of control.
|
The
following describes our non-core product line:
| · |
Non-core
-
Over the years, we have innovated or acquired various product lines
that
are no longer part of our primary, core markets described above.
In
general, these non-core businesses represent decreasing markets and
we
minimize research and development in these product lines. Included
in this
category are terminal servers, visualization solutions, legacy print
servers, software and other miscellaneous products. We have announced
the
end-of-life for almost all of our non-core products and expect a
steep
decline in non-core revenues in fiscal 2008 while we complete the
exit of
this product category.
|
Products
Device
Enablement Solutions
M2M
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 enablement 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 products
leverage the power of network connectivity, manufacturers and users are
realizing the benefits of networking. Our device enablement 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 into our customer’s product
(completed circuit boards or intelligent connectors with electronic components
and the necessary connectors and software), and external hardware modules
(device servers) with one or two ports that can be connected to the customer’s
product by cables. Embedded and external hardware modules incorporate a
real-time operating system and application software required to make the
devices
effective. We also offer application- and industry-specific solutions for
certain markets such as industrial device servers.
5
Our
device servers allow a wide range of equipment to be quickly network-enabled
without the need for intermediary gateways, workstations or PCs. 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. Our 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 technology and a reduction 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. WiBox® dual-port
device servers enable users to connect equipment to 802.11b/g networks via
serial or Ethernet, quickly and easily. By merging wireless networking and
Lantronix device server technology, WiBox® simplifies connectivity to devices in
applications where mobility is required or cabling is impractical.
In
January 2007, we introduced the XPort® Direct™, an embedded networking device
gateway module and the latest offering in our XPort® family. The XPort® Direct™
embedded device gateway is a complete, miniaturized communications subsystem
targeted at applications that need to move commands, status and information
over
IP networks or the Internet, to or from remote devices. The XPort® Direct™ is
designed to bring Ethernet and Internet connectivity to new high-volume,
cost-sensitive applications in commercial and consumer
markets.
In
February 2007, we introduced the IntelliBox®-I/O
2100,
a fully
programmable external device server, which automates the task of managing
remote
equipment and associated reporting. Powered by Lantronix EventTrak™ technology,
the IntelliBox® enables customers to connect their industrial, commercial,
medical, retail and security equipment to IP networks and the Internet to
automatically monitor and respond to events in real-time with no human
intervention.
In
April
2007, we introduced the MatchPort™
b/g, our
third generation, full-featured, secure, embedded wireless (802.11 b/g)
networking device server module. With the MatchPort™
b/g, OEM
manufacturers can easily design-in standards compliant, secure 802.11 b/g
wireless connectivity giving their products mobility and remote management
capabilities. MatchPort™
b/g is
suited for a variety of vertical applications including
telematics/transportation, security access control, building/industrial
automation, medical, retail/POS and power/utilities metering.
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.
In
July
2007, we introduced the expansion of our Industrial Device Networking product
offerings with a new family of industrial Ethernet switches. The XPress-Pro
SW™
series
complements our current XPress line of industrial device servers by adding
a
line of five and eight-port managed and unmanaged hardened Ethernet
switches.
Device
Management Solutions
Our
device management solutions are single and multi-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
equipment. These solutions include console servers, remote keyboard, video,
mouse (“KVM”) servers and managed power distribution products and terminal
servers.
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.
6
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, 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.
In
addition, our ManageLinx™ device management solutions provide M2M service
organizations with the tools they need to remotely connect many network-enabled
devices. These enterprise level solutions provide secure connectivity making
it
simple to maintain, configure, monitor and control large device networking
deployments. ManageLinx™ will be entering initial customer testing in fiscal
2008.
In
September 2005, we introduced SecureLinx™ Management Appliance, our first
management appliance for the data center market. This product enables IT
administrators to aggregate and manage an entire complex of multiple console
serves, remote KVM servers and power devices used in multiple racks of
equipment.
In
March
2007, we introduced SecureLinx Spider™, our IP-based “Distributed KVM” remote
server management solution. The SecureLinx Spider™ is a cable-friendly, single
port, KVM to IP converter small enough to be held in one hand. The SecureLinx
Spider™ compresses keyboard, video and mouse signals, sending them over the
network or Internet to a remote PC or handheld device running industry-standard
Web browsers.
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. We have announced the end-of-life for almost all of our
non-core products and expect a steep decline in non-core revenues in fiscal
2008
while we complete the exit of this product category.
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 announced the end of
life of
these visualization products and exited this product line in 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 intend to exit this product line
in
fiscal 2008.
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. We intend to exit this product line in fiscal
2008.
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:
7
|
Years
Ended June 30,
|
|||||||||||||
|
Product
Line
|
Primary
Product Function
|
2007
|
2006
|
2005
|
|||||||||
|
(In
thousands)
|
|||||||||||||
|
Device
enablement
|
Enable
electronic products to become network enabled.
|
$
|
39,734
|
$
|
35,419
|
$
|
29,979
|
||||||
|
Device
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.
|
8,866
|
7,676
|
7,753
|
|||||||||
|
Total
M2M device networking net revenues
|
48,600
|
43,095
|
37,732
|
||||||||||
|
Non-core
|
Includes
terminal servers, visualization solutions, legacy print servers,
serial
board, software and miscellaneous products.
|
6,706
|
8,848
|
10,770
|
|||||||||
|
Total
net revenues
|
$
|
55,306
|
$
|
51,943
|
$
|
48,502
|
|||||||
Financial
Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards
(“SFAS”) 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 thirteen major distributors, some of which operate from
multiple warehouses. Our major distributors in the Americas region include:
Ingram Micro, Tech Data, KMJ Communications, Arrow Electronics, Inc and Symmetry
Electronics. In Europe, the Middle East and Africa (“EMEA”) region, we
distribute to the following major distributors: Sphinx Computer Vertriebs
GmbH,
Jade Communications, LTD, Atlantik Systems GmbH, transtec AG (a related party
due to common ownership by our largest stockholder), Astradis Elecktronik
GmbH
and Acal plc. In the Asia Pacific region, we distribute to the following
major
distributors: Nissin Systems, Co., Ltd and PowerCorp Pty 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.
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 enablement 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. In many cases, the customer simply has to call
in to
obtain assistance in identifying which networking device would be most
appropriate for their need. 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.
Customer
Concentrations
The
following table presents sales to our significant customers and a related
party
as a percentage of net revenues:
8
|
Years
Ended June 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Top
five customers (1)
|
34.0
|
%
|
38.0
|
%
|
42.0
|
%
|
||||
|
Ingram
Micro
|
12.0
|
%
|
13.0
|
%
|
16.0
|
%
|
||||
|
Tech
Data
|
8.0
|
%
|
10.0
|
%
|
11.0
|
%
|
||||
|
Related
party
|
2.0
|
%
|
3.0
|
%
|
2.0
|
%
|
||||
|
(1)
Includes Ingram Micro and Tech Data.
|
||||||||||
No
other
customer represented more than 10% of our annual net revenues during these
fiscal years. An international customer, transtec AG, is a related party
due to
common ownership by our largest stockholder and Lantronix director, Bernhard
Bruscha.
The
following table presents our net revenues by geographic region:
|
Years
Ended June 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Americas
|
63.2
|
%
|
62.5
|
%
|
64.3
|
%
|
||||
|
EMEA
|
25.3
|
%
|
27.1
|
%
|
27.2
|
%
|
||||
|
Asia
Pacific
|
11.5
|
%
|
10.4
|
%
|
8.5
|
%
|
||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
Information
concerning our customer concentrations and sales by geographic region can
be
found in Part IV, Item 15 of this Annual Report on Form 10-K and is presented
in
footnote 14 to our notes of our consolidated financial statements. Please
see
Part I, Item 1A “Risk Factors” below for a discussion of the risks associated
with foreign sales.
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 have expanded our network of sales partners and have 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
existing high potential accounts. We implement marketing programs, 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,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Sales
and marketing
|
66
|
64
|
56
|
|||||||
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. We can concentrate on developing
new relationships at accounts that we believe represent our largest
opportunities while our sales partners continue to identify new incremental
opportunities and service existing customers.
Our
device enablement 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 to bring our device
enablement solutions to a greater number of customers within the OEM
market.
We
market
and sell our device management solutions and select external device enablement
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 most cases, support our
solutions to the end users.
9
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, sales and marketing.
We utilize
contract manufacturers located in the U.S., China, Malaysia and
Taiwan. 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 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, which may be sourced on an OEM basis.
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,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Number
of employees
|
45
|
45
|
37
|
|||||||
|
Research
and development expenses
|
$
|
7,362
|
$
|
5,999
|
$
|
6,325
|
||||
Developer
Relations
Recruiting,
informing and participating with third-party developers are integral parts
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. The following sets
forth a
partial list of current and potential competitors by techology:
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., Raritan, Rose Electronics, Sena Technologies Inc., Wind River
Systems, Inc., and ZiLOG, Inc.
Equipment
for Device management Solutions
Companies
such as Avocent Corporation, Cisco Systems, Inc., Digi International, Inc.,
Moxa
Technologies, MRV Communications, Inc., Open Gear and Perle
Systems.
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;
|
| · |
product
pricing;
|
| · |
potential
customers’ awareness and perception of our products and of
network-enabling technologies;
and
|
| · |
the
customer’s decision to make vs.
buy.
|
10
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 we have recently begun to build
a
patent portfolio. 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.
Environmental
Matters
Federal,
state and local regulations impose various environmental controls on the
storage, handling, discharge and disposal of chemicals and gases used in
our
manufacturing processes. Our company quality manual requires all subcontractors
and raw material suppliers to be ISO14001 certified. State agencies require
us
to report usage of environmentally hazardous materials and we have retained
the
appropriate personnel to help ensure compliance with all applicable
environmental regulations. We actively manage and monitor compliance through
our
internal auditing program. We believe that our activities conform to present
environmental regulations; however, increasing public attention has been
focused
on the environmental impact of semiconductor operations and these regulations
may require us to fund remedial action regardless of fault.
In
addition, the use and disposal of electronics is under increasing scrutiny
and
various countries have begun to adopt regulations such as the European Union’s
Waste Electrical and Electronic Equipment (“WEEE”) and the Reduction of the use
of certain Hazardous Substances in electrical and electronic equipment (“RoHS”)
directives, which could require us to both redesign our products to comply
with
the standards and develop compliance administration systems. We expect
additional countries and locations to adopt similar regulations in the future
which may be more stringent than the current regulations. Currently however,
we
believe the majority of our commercial products are compliant with these
emerging regulations.
While
we
have not experienced any materially adverse effects on our operations from
environmental regulations, there can be no assurance that changes in such
regulations will not impose the need for additional capital equipment or
other
requirements. We have already invested significant resources into developing
compliance tracking systems, and further investments may be required. Any
failure by us to adequately restrict the discharge of hazardous substances
could
subject us to future liabilities or could cause our manufacturing operations
to
be suspended.
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:
11
|
Years
Ended June 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Research
and development
|
45
|
45
|
37
|
|||||||
|
Sales
and marketing
|
66
|
64
|
56
|
|||||||
|
Operations
|
21
|
21
|
24
|
|||||||
|
General
and administrative
|
29
|
27
|
27
|
|||||||
|
Total
employees
|
161
|
157
|
144
|
|||||||
Backlog
Normally,
we manufacture our products in advance of receiving firm purchase 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.
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. 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
H. Nussbaum
|
51
|
President and Chief Executive Officer | |||||
|
Reagan
Y. Sakai
|
48
|
Chief Financial Officer and Secretary | |||||
MARC
H.
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.
REAGAN
Y.
SAKAI has served as our Chief Financial Officer and Secretary since November
2006. From April 2005 to October 2006, Mr. Sakai served as Chief Financial
Officer for HyPerformix Corporation, a private software company based in
Austin,
Texas. From September 2003 to April 2005, Mr. Sakai served as Chief Financial
Officer for VIEO Corporation, an early-stage software company. From May
1999 to January 2003, Mr. Sakai served as Chief Financial Officer of Crossroads
Systems Corporation, a public data storage routing company, where he oversaw
the
company's IPO in October 1999. Earlier in his career, Mr. Sakai held
various financial positions with Exabyte Corporation, Maxtor Corporation,
McDATA
Corporation, and StorageTek Corporation. Mr. Sakai holds a BS degree and
an MBA
from the University of Colorado at Boulder.
12
Item
1A. Risk Factors
We
operate in a rapidly changing environment that involves numerous risks and
uncertainties. Before deciding to purchase, hold or sell our common stock,
you
should carefully consider the risks described in this section. This section
should be read in conjunction with the consolidated financial statements
and
accompanying notes thereto, and Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in this Annual Report
on
Form 10-K. If any of these 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
net revenues, expenses and operating results from quarter to quarter. We,
therefore, believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance, and you should not rely
on
them to predict our future performance or the future performance of our stock.
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 quarter, we would likely be unable to adjust our
short-term expenditures. If this were to occur, our operating results for
that
fiscal quarter would be harmed. If our operating results in future fiscal
quarters fall below the expectations of market analysts and investors, the
price
of our common stock would likely fall. Other factors that might cause our
operating results to fluctuate on a quarterly basis include:
| · |
changes
in the mix of net revenues attributable to higher-margin and lower-margin
products;
|
| · |
customers’
decisions to defer or accelerate orders;
|
| · |
variations
in the size or timing of orders for our
products;
|
| · |
changes
in demand for our products;
|
| · |
fluctuations
in exchange rates;
|
| · |
defects
and other product quality problems;
|
| · |
loss
or gain of significant customers;
|
| · |
short-term
fluctuations in the cost or availability of our critical
components;
|
| · |
announcements
or introductions of new products by our
competitors;
|
| · |
effects
of terrorist attacks in the U.S. and abroad;
and
|
| · |
changes
in demand for devices that incorporate our
products.
|
If
a major distributor or customer cancels, reduces or delays purchases, our
net
revenues might decline and our business could be adversely
affected.
The
number and timing of sales to our distributors have been difficult for us
to
predict. While our distributors are customers in the sense they buy our
products, they are also part of our product distribution system. Some of
our
distributors could be acquired by a competitor and stop buying product from
us.
The
following table presents sales to our significant customers as a percentage
of
net revenues:
|
Years
Ended June 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Top
five customers (1)
|
34.0
|
%
|
38.0
|
%
|
42.0
|
%
|
||||
|
Ingram
Micro
|
12.0
|
%
|
13.0
|
%
|
16.0
|
%
|
||||
|
Tech
Data
|
8.0
|
%
|
10.0
|
%
|
11.0
|
%
|
||||
|
Related
party
|
2.0
|
%
|
3.0
|
%
|
2.0
|
%
|
||||
|
(1)
Includes Ingram Micro and Tech Data.
|
||||||||||
13
The
loss
or deferral of one or more significant customers in a quarter could harm
our
operating results. We have in the past, and might in the future, lose one
or
more major customers. If we fail to continue to sell to our major customers
in
the quantities we anticipate, or if any of these customers terminate our
relationship, our reputation, the perception of our products and technology
in
the marketplace, could be harmed. The demand for our products from our OEM,
VAR
and systems integrator customers depends primarily on their ability to
successfully sell their products that incorporate our device networking
solutions technology. Our sales are usually completed on a purchase order
basis
and we have few long-term purchase commitments from our customers.
Our
future success also depends on our ability to attract new customers, which
often
involves an extended selling process. The sale of our products often involves
a
significant technical evaluation, and we often face delays because of our
customers’ internal procedures for evaluating and deploying new technologies.
For these and other reasons, the sales cycle associated with our products
is
typically lengthy, often lasting six to nine months and sometimes longer.
Therefore, if we were to lose a major customer, we might not be able to replace
the customer in a timely manner, or at all. This would cause our net revenues
to
decrease and could cause our stock price to decline.
If
we fail to develop or enhance our products to respond to changing market
conditions and government and industry standards, our competitive position
will
suffer and our business will be adversely affected.
Our
future success depends in large part on our ability to continue to enhance
existing products, lower product cost and develop new products that maintain
technological competitiveness and meet government and industry standards.
The
demand for network-enabled products is relatively new and can change as a
result
of innovations, changes or new government and industry standards. For example,
a
recent directive in the European Union bans the use of lead and other heavy
metals in electrical and electronic equipment after July 1, 2006. As a
result, in advance of this deadline, some of our customers selling products
in
Europe had begun demanding product from component manufacturers that did
not
contain these banned substances. Any failure by us to develop and introduce
new
products or enhancements in response to new government and industry standards
could harm our business, financial condition or results of operations. These
requirements might or might not be compatible with our current or future
product
offerings. We might not be successful in modifying our products and services
to
address these requirements and standards. For example, our competitors might
develop competing technologies based on Internet Protocols, Ethernet Protocols
or other protocols that might have advantages over our products. If this
were to
happen, our net revenues might not grow at the rate we anticipate, or could
decline.
Delays
in deliveries or quality problems with our component suppliers could damage
our
reputation and could cause our net revenues to decline and harm our results
of
operations.
We
and
our contract manufacturers are responsible for procuring raw materials for
our
products. Our products incorporate components or technologies that are only
available from single or limited sources of supply. In particular, some of
our
integrated circuits are only available from a single source and in some cases
are no longer being manufactured. From time to time, integrated circuits
used in
our products will be phased out of production. When this happens, we attempt
to
purchase sufficient inventory to meet our needs until a substitute component
can
be incorporated into our products. Nonetheless, we might be unable to purchase
sufficient components to meet our demands, or we might incorrectly forecast
our
demands, and purchase too many or too few components. In addition, our products
use components that have, in the past, been subject to market shortages and
substantial price fluctuations. From time to time, we have been unable to
meet
our orders because we were unable to purchase necessary components for our
products. We do not have long-term supply arrangements with many of our vendors
to obtain necessary components or technology for our products. If we are
unable
to purchase components from these suppliers, product shipments could be
prevented or delayed, which could result in a loss of sales. If we are unable
to
meet existing orders or to enter into new orders because of a shortage in
components, we will likely lose net revenues and risk losing customers and
harming our reputation in the marketplace, which could adversely affect our
business, financial condition or results of operations. We have recently
redesigned many of our products to comply with the new environmental Reduction
of Hazardous Substances ("RoHS") 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.
14
Environmental
regulations such as the WEEE and RoHS directives may require us to redesign
our
products and to develop compliance administration
systems.
Various
countries have begun to require companies selling a broad range of electrical
equipment to conform to regulations such as the WEEE and RoHS directives
and we
expect additional countries and locations to adopt similar regulations in
the
future. New environmental standards such as these could require us to redesign
our products in order to comply with the standards, and require the development
of compliance administration systems. We have already invested significant
resources into developing compliance tracking systems, and further investments
may be required. Additionally, we may incur significant costs to redesign
our
products and to develop compliance administration systems; however alternative
designs may have an adverse effect on our gross profit margin. If we cannot
develop compliant products timely or properly administer our compliance
programs, our revenues may also decline due to lower sales, which would
adversely affect our operating results.
If
our research and development efforts are not successful, our net revenues
could
decline and our business could be harmed.
If
we are
unable to develop new products as a result of our research and development
efforts, or if the products we develop are not successful, our business could
be
harmed. Even if we do develop new products that are accepted by our target
markets, we do not know whether the net revenues from these products will
be
sufficient to justify our investment in research and development. In addition,
if we do not invest sufficiently in research and development, we may be unable
to maintain our competitive position. Our research and development may decrease,
which may put us at a competitive disadvantage compared to our competitors
and
adversely affect our market position.
We
expect the average selling prices of our products to decline, which could
reduce
our net revenues, gross margins and profitability.
In
the
past, we have experienced some reduction in the average selling prices and
gross
margins of products, and we expect that this will continue for our products
as
they mature. We expect competition to continue to increase, and we anticipate
this could result in additional downward pressure on our pricing. Our average
selling prices for our products might decline as a result of other reasons,
including promotional programs and customers who negotiate price reductions
in
exchange for longer-term purchase commitments. We also may not be able to
increase the price of our products if the prices of components or our overhead
costs increase. In addition, we may be unable to adjust our prices in response
to currency exchange rate fluctuations resulting in lower gross margins.
If
these were to occur, our gross margins would decline and we may not be able
to
reduce the cost to manufacture our products to keep up with the decline in
prices.
Current
or future litigation could adversely affect us.
We
recently concluded multiple securities lawsuits and litigation with a former
executive officer. We may have an obligation to continue to indemnify the
former
executive officer and defend the securities violation that he has been charged
with. There is a risk that our insurance carriers may not reimburse us for
such
costs. Any lawsuit may involve complex questions of fact and law and may
require
the expenditure of significant funds and the diversion of other resources.
Except as described elsewhere 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.
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.
15
If
software that we license or acquire from the open source software community
and
incorporate into our products were to become unavailable or no longer available
on commercially reasonable terms, it could adversely affect sales of our
products, which could disrupt our business and harm our financial results.
Certain
of our products contain components developed and maintained by third-party
software vendors or are available through the “open source” software community.
We also expect that we may incorporate software from third-party vendors
and
open source software in our future products. Our business would be disrupted
if
this software, or functional equivalents of this software, were either no
longer
available to us or no longer offered to us on commercially reasonable terms.
In
either case, we would be required to either redesign our products to function
with alternate third-party software or open source software, or develop these
components ourselves, which would result in increased costs and could result
in
delays in our product shipments. Furthermore, we might be forced to limit
the
features available in our current or future product offerings.
If
our contract manufacturers are unable or unwilling to manufacture our products
at the quality and quantity we request, our business could be harmed.
We
outsource substantially all of our manufacturing to four manufacturers in
Asia:
Venture Electronics Services, Uni Precision Industrial Ltd., Universal
Scientific Industrial Company, LTD and Hana Microelectronics, Inc. In addition,
two independent third party foundries located in Asia manufacture substantially
all of the Company’s large scale integration chips. Our reliance on these
third-party manufacturers exposes us to a number of significant risks,
including:
| · |
reduced
control over delivery schedules, quality assurance, manufacturing
yields
and production costs;
|
| · |
lack
of guaranteed production capacity or product supply;
and
|
| · |
reliance
on these manufacturers to maintain competitive manufacturing
technologies.
|
Our
agreements with these manufacturers provide for services on a purchase order
basis. If our manufacturers were to become unable or unwilling to continue
to
manufacture our products at requested quality, quantity, yields and costs,
or in
a timely manner, our business would be seriously harmed. As a result, we
would
have to attempt to identify and qualify substitute manufacturers, which could
be
time consuming and difficult, and might result in unforeseen manufacturing
and
operations problems. For example, Jabil Circuit, Inc. acquired Varian, Inc.
in
March 2005 and closed the facility that manufactured our products. We
transferred this production to another contract manufacturer. Moreover, as
we
shift products among third-party manufacturers, we may incur substantial
expenses, risk material delays or encounter other unexpected issues.
In
addition, a natural disaster could disrupt our manufacturers’ facilities and
could inhibit our manufacturers’ ability to provide us with manufacturing
capacity in a timely manner or at all. If this were to occur, we likely would
be
unable to fill customers’ existing orders or accept new orders for our products.
The resulting decline in net revenues would harm our business. We also are
responsible for forecasting the demand for our individual products. These
forecasts are used by our contract manufacturers to procure raw materials
and
manufacture our finished goods. If we forecast demand too high, we may invest
too much cash in inventory, and we may be forced to take a write-down of
our
inventory balance, which would reduce our earnings. If our forecast is too
low
for one or more products, we may be required to pay charges that would increase
our cost of revenues or we may be unable to fulfill customer orders, thus
reducing net revenues and therefore earnings.
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.
Our
international activities are subject to uncertainties, which include
international economic, regulatory, political and other risks that could
harm
our business, financial condition or results of operations.
The
following table presents our sales within geographic regions:
|
Years
Ended June 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Americas
|
63.2
|
%
|
62.5
|
%
|
64.3
|
%
|
||||
|
EMEA
|
25.3
|
%
|
27.1
|
%
|
27.2
|
%
|
||||
|
Asia
Pacific
|
11.5
|
%
|
10.4
|
%
|
8.5
|
%
|
||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
16
We
expect
that international revenues will continue to represent a significant portion
of
our net revenues in the foreseeable future. Doing business internationally
involves greater expense and many risks. For example, because the products
we
sell abroad and the products and services we buy abroad may be priced in
foreign
currencies, we could be affected by fluctuating exchange rates. In the past,
we
have lost money because of these fluctuations. We might not successfully
protect
ourselves against currency rate fluctuations, and our financial performance
could be harmed as a result. In addition, we use contract manufacturers based
in
Asia to manufacture substantially all of our products. International revenues
and operations are subject to numerous risks, including:
| · |
unexpected
changes in regulatory requirements, taxes, trade laws and
tariffs;
|
| · |
reduced
protection for intellectual property rights in some
countries;
|
| · |
differing
labor regulations;
|
| · |
compliance
with a wide variety of complex regulatory
requirements;
|
| · |
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,
|
|||||||
|
2007
|
2006
|
||||||
|
(In
thousands)
|
|||||||
|
Finished
goods
|
$
|
7,848
|
$
|
6,518
|
|||
|
Raw
materials
|
2,653
|
3,863
|
|||||
|
Inventory
at distributors
|
1,876
|
1,690
|
|||||
|
Large
scale integration chips *
|
1,530
|
731
|
|||||
|
Inventories,
gross
|
13,907
|
12,802
|
|||||
|
Reserve
for excess and obsolete inventory
|
(2,926
|
)
|
(4,689
|
)
|
|||
|
Inventories,
net
|
$
|
10,981
|
$
|
8,113
|
|||
*
This
item is both sold individually and embedded into the Company's
products.
In
the
event we are required to substantially discount our inventory or are unable
to
sell our inventory in a timely manner, we would be required to increase our
reserves and our operating results could be substantially harmed.
We
are subject to export control regulations that could restrict our ability
to
increase our international revenue and may adversely affect our
business.
Our
products and technologies are subject to U.S. export control laws, including
the
Export Administration Regulations, administered by the Department of Commerce
and the Bureau of Industry Security, and their foreign counterpart laws and
regulations, which may require that we obtain an export license before we
can
export certain products or technology to specified countries. These export
control laws, and possible changes to current laws, regulations and policies,
could restrict our ability to sell products to customers in certain countries
or
give rise to delays or expenses in obtaining appropriate export licenses.
Failure to comply with these laws and regulations could result in government
sanctions, including substantial monetary penalties, denial of export
privileges, and debarment from government contracts. Any of these could
adversely affect our operations and, as a result, our financial results could
suffer.
17
If
we are unable to attract, retain or motivate key senior management and technical
personnel, it could seriously harm our business.
Our
financial performance depends substantially on the performance of our executive
officers, key technical, marketing and sales employees. We are dependent
in
particular on Marc Nussbaum, our President and Chief Executive Officer. We
are
also dependent upon our technical personnel, due to the specialized technical
nature of our business. If we were to lose the services of Mr. Nussbaum or
any
of our key personnel and were not able to find replacements in a timely manner,
our business could be disrupted, other key personnel might decide to leave,
and
we might incur increased operating expenses associated with finding and
compensating replacements.
If
our OEM customers develop their own expertise in network-enabling products,
it
could result in reduced sales of our products and harm our operating
results.
We
sell
to both resellers and OEMs. Selling products to OEMs involves unique risks,
including the risk that OEMs will develop internal expertise in network-enabling
products or will otherwise incorporate network functionality in their products
without using our device networking solutions. If this were to occur, our
sales
to OEMs would likely decline, which could reduce our net revenues and harm
our
operating results.
New
product introductions and pricing strategies by our competitors could reduce
our
market share or cause us to reduce the prices of our products, which would
reduce our net revenues and gross margins.
The
market for our products is intensely competitive, subject to rapid change
and is
significantly affected by new product introductions and pricing strategies
of
our competitors. We face competition primarily from companies that
network-enable devices, semiconductor companies, companies in the automation
industry and companies with significant networking expertise and research
and
development resources. Our competitors might offer new products with features
or
functionality that are equal to or better than our products. In addition,
since
we work with open standards, our customers could develop products based on
our
technology that compete with our offerings. We might not have sufficient
engineering staff or other required resources to modify our products to match
our competitors. Similarly, competitive pressure could force us to reduce
the
price of our products. In each case, we could lose new and existing customers
to
our competition. If this were to occur, our net revenues could decline and
our
business could be harmed.
Current
or future litigation over intellectual property rights could adversely affect
us.
Substantial
litigation regarding intellectual property rights exists in our industry.
For
example, in May 2006 we settled a patent infringement lawsuit with Digi in
which
we signed an agreement with Digi to cross-license each other’s patents. In
addition, we paid Digi $600,000 as part of the settlement. The results of
litigation are inherently uncertain, and adverse outcomes are possible. Adverse
outcomes may have a material adverse effect on our business, financial condition
or results of operations. 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.
18
We
may not be able to adequately protect or enforce our intellectual property
rights, which could harm our competitive position or require us to incur
significant expenses to enforce our rights.
We
have
not historically relied on patents to protect our proprietary rights, although
we are now building a patent portfolio. In May 2006, we entered into a patent
cross-license agreement with Digi in which the parties agreed to cross-license
each other’s patents, which could reduce the value of our existing patent
portfolio. We rely primarily on a combination of laws, such as copyright,
trademark and trade secret laws, and contractual restrictions, such as
confidentiality agreements and licenses, to establish and protect our
proprietary rights. Despite any precautions that we have taken:
| · |
laws
and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar
technologies;
|
| · |
other
companies might claim common law trademark rights based upon use
that
precedes the registration of our marks;
|
| · |
other
companies might assert other rights to market products using our
trademarks;
|
| · |
policing
unauthorized use of our products and trademarks is difficult, expensive
and time-consuming, and we might be unable to determine the extent
of this
unauthorized use;
|
| · |
courts
may determine that our software programs use open source software
in such
a way that deprives the entire programs of intellectual property
protection; and
|
| · |
current
federal laws that prohibit software copying provide only limited
protection from software pirates.
|
Also,
the
laws of some of the countries in which we market and manufacture our products
offer little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third-parties to benefit from our technology without
paying us for it. Consequently, we may be unable to prevent our proprietary
technology from being exploited by others in the U.S. or abroad, which could
require costly efforts to protect our technology. Policing the unauthorized
use
of our products, trademarks and other proprietary rights is expensive, difficult
and, in some cases, impracticable. Litigation may be necessary in the future
to
enforce or defend our intellectual property rights, to protect our trade
secrets
or to determine the validity and scope of the proprietary rights of others.
Such
litigation could result in substantial costs and diversion of management
resources, either of which could harm our business. Accordingly, despite
our
efforts, we may not be able to prevent third parties from infringing upon
or
misappropriating our intellectual property, which may harm our business,
financial condition and results of operations.
Acquisitions,
strategic partnerships, joint ventures or investments may impair our capital
and
equity resources, divert our management’s attention or otherwise negatively
impact our operating results.
We
may
pursue acquisitions, strategic partnerships and joint ventures that we believe
would allow us to complement our growth strategy, increase market share in
our
current markets and expand into adjacent markets, broaden our technology
and
intellectual property and strengthen our relationships with distributors
and
OEMs. Any future acquisition, partnership, joint venture or investment may
require that we pay significant cash, issue stock or incur substantial debt.
Acquisitions, partnerships or joint ventures may also result in the loss
of key
personnel and the dilution of existing stockholders as a result of issuing
equity securities. In addition, acquisitions, partnerships or joint ventures
require significant managerial attention, which may be diverted from our
other
operations. These capital, equity and managerial commitments may impair the
operation of our business. Furthermore, acquired businesses may not be
effectively integrated, may be unable to maintain key pre-acquisition business
relationships, may contribute to increased fixed costs and may expose us
to
unanticipated liabilities and otherwise harm our operating results.
We
may experience difficulties in implementing or enhancing new information
systems.
During
fiscal 2006, we began an upgrade of our existing enterprise resource planning
(“ERP”) information system to manage our business operations. The possibility
exists that our migration to the upgraded ERP information system could adversely
affect our disclosure controls and procedures or our operations in future
periods. The process of implementing information systems could adversely
impact
our ability to do the following in a timely manner: accept and process customer
orders, receive inventory and ship products, invoice and collect receivables,
place purchase orders and pay invoices, and all other business transactions
related to the finance, order entry, purchasing, supply chain and human resource
processes within the ERP system. Any such disruption could adversely affect
our
financial position, results of operations, cash flows and the market price
of
our common stock.
19
Business
interruptions could adversely affect our business.
Our
operations and those of our suppliers are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure, terrorist attacks and
other
events beyond our control. A substantial portion of our facilities, including
our corporate headquarters and other critical business operations, are located
near major earthquake faults and, therefore, may be more susceptible to damage
if an earthquake occurs. We do not carry earthquake insurance for direct
earthquake-related losses. If a business interruption occurs, our business
could
be materially and adversely affected.
If
we fail to maintain an effective system of disclosure controls or internal
controls over financial reporting, our business and stock price could be
adversely affected.
Section 404
of the Sarbanes-Oxley Act of 2002 requires companies to evaluate periodically
the effectiveness of their internal controls over financial reporting, and
to
include a management report assessing the effectiveness of their internal
controls as of the end of each fiscal year. Beginning with our annual report
on
Form 10-K for our fiscal year ending June 30, 2008, we will be required to
comply with the requirement of Section 404 of the Sarbanes-Oxley Act of 2002
to
include in each of our annual reports an assessment by our management of
the
effectiveness of our internal controls over financial reporting. Beginning
with
our annual report on Form 10-K for our fiscal year ending June 30, 2009,
our
independent registered public accounting firm will issue a report assessing
the
effectiveness of our internal controls.
Our
management does not expect that our internal controls over financial reporting
will prevent all errors or frauds. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits
of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
involving us have been, or will be, detected. These inherent limitations
include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple errors or mistakes. Controls can also
be
circumvented by individual acts of a person, or by collusion among two or
more
people, or by management override of the controls. The design of any system
of
controls is based in part on certain assumptions about the likelihood of
future
events, and we cannot assure you that any design will succeed in achieving
its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies and procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to errors
or
frauds may occur and not be detected.
We
cannot
assure you that we or our independent registered public accounting firm will
not
identify a material weakness in our disclosure controls and internal controls
over financial reporting in the future. If our internal controls over financial
reporting are not considered adequate, we may experience a loss of public
confidence, which could have an adverse effect on our business and our stock
price.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM
2. PROPERTIES
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
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.
ITEM
3. LEGAL PROCEEDINGS
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.
ITEM
4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of our security holders during the fourth
fiscal quarter ended June 30, 2007.
20
PART
II
ITEM
5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
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 4, 2007 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, 2007
|
|||||||
|
First
Quarter
|
$
|
2.13
|
$
|
1.29
|
|||
|
Second
Quarter
|
1.78
|
1.36
|
|||||
|
Third
Quarter
|
1.90
|
1.57
|
|||||
|
Fourth
Quarter
|
1.61
|
1.24
|
|||||
|
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
|
|||||
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.
Recent
Sales of Unregistered Securities
We
did
not repurchase any of our common stock during the fourth fiscal quarter of
2007.
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.
Stock
Price Performance Graph
The
performance graph below is required by the SEC and shall not be deemed to
be
incorporated by reference by any general statement incorporating by reference
this annual report on Form 10-K into any filing under the Securities Act
or the
Exchange Act except to the extent we specifically incorporate this information
by reference and shall not otherwise be deemed soliciting material or filed
under such acts.
The
graph
below compares the cumulative total return to stockholders on our common
stock
with the cumulative total return on the NASDAQ Composite Index and the Research
Data Group (“RDG”) Technology Composite for the period commencing June 30, 2002
and ending on June 30, 2007. The following graph assumes the investment of
$100
in our common stock and in the two other indices, and reinvestment of all
dividends.
The
comparisons shown in the graph below are based upon historical data. We caution
that the stock price performance shown in the graph below is not indicative
of,
nor intended to forecast, the potential future performance of our common
stock.
21
22
ITEM
6. SELECTED
FINANCIAL DATA
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. Effective the first quarter of fiscal 2006, we adopted FASB
Statement No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123R”). In
accordance with SFAS 123R, we elected to adopt the standard using the modified
prospective method. 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, 2007, 2006 and 2005 and the balance sheet data
as of
June 30, 2007 and 2006 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, 2004 and 2003, and the
balance sheet data as of June 30, 2005, 2004 and 2003, 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,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Consolidated
Statement of Operations Data
|
(In
thousands, except per share data)
|
|||||||||||||||
|
Net
revenues (1)
|
$
|
55,306
|
$
|
51,943
|
$
|
48,502
|
$
|
48,885
|
$
|
49,389
|
||||||
|
Cost
of revenues (2)
|
26,964
|
25,276
|
24,326
|
25,026
|
36,264
|
|||||||||||
|
Gross
profit
|
28,342
|
26,667
|
24,176
|
23,859
|
13,125
|
|||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling,
general and administrative
|
23,243
|
24,203
|
24,770
|
23,599
|
29,734
|
|||||||||||
|
Research
and development
|
7,362
|
5,999
|
6,325
|
7,854
|
9,809
|
|||||||||||
|
Litigation
settlement costs
|
90
|
960
|
-
|
-
|
1,533
|
|||||||||||
|
Amortization
of purchased intangible assets
|
72
|
20
|
65
|
148
|
602
|
|||||||||||
|
Restructuring
(recovery) charge
|
-
|
(17
|
)
|
-
|
(2,093
|
)
|
5,600
|
|||||||||
|
Impairment
of goodwill and intangible assets
|
-
|
-
|
-
|
-
|
2,353
|
|||||||||||
|
Total
operating expenses
|
30,767
|
31,165
|
31,160
|
29,508
|
49,631
|
|||||||||||
|
Loss
from operations
|
(2,425
|
)
|
(4,498
|
)
|
(6,984
|
)
|
(5,649
|
)
|
(36,506
|
)
|
||||||
|
Interest
income (expense), net
|
(13
|
)
|
46
|
(20
|
)
|
50
|
248
|
|||||||||
|
Other
income, net
|
749
|
1,376
|
173
|
(5,333
|
)
|
(926
|
)
|
|||||||||
|
Loss
before income taxes and cumulative effect of accounting
changes
|
(1,689
|
)
|
(3,076
|
)
|
(6,831
|
)
|
(10,932
|
)
|
(37,184
|
)
|
||||||
|
Provision
(benefit) for income taxes
|
34
|
(31
|
)
|
229
|
(325
|
)
|
250
|
|||||||||
|
Loss
from continuing operations
|
(1,723
|
)
|
(3,045
|
)
|
(7,060
|
)
|
(10,607
|
)
|
(37,434
|
)
|
||||||
|
Income
(loss) from discontinued operations
|
-
|
-
|
56
|
(5,047
|
)
|
(10,115
|
)
|
|||||||||
|
Loss
before cumulative effect of accounting changes
|
(1,723
|
)
|
(3,045
|
)
|
(7,004
|
)
|
(15,654
|
)
|
(47,549
|
)
|
||||||
|
Cumulative
effect of accounting changes:
|
||||||||||||||||
|
Adoption
of new accounting standard SFAS No. 142
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Net
loss
|
$
|
(1,723
|
)
|
$
|
(3,045
|
)
|
$
|
(7,004
|
)
|
(15,654
|
) |
(47,549
|
) | |||
|
Basic
and diluted loss per share from continuing
|
||||||||||||||||
|
operations
before cumulative effect of accounting changes
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.12
|
)
|
$
|
(0.19
|
)
|
$
|
(0.69
|
)
|
|
|
Income
(loss) from discontinued operations
|
-
|
-
|
-
|
(0.09
|
)
|
(0.19
|
)
|
|||||||||
|
Loss
before cumulative effect of accounting changes
|
(0.03
|
)
|
(0.05
|
)
|
(0.12
|
)
|
(0.28
|
)
|
(0.88
|
)
|
||||||
|
Cumulative
effect of accounting changes per share:
|
||||||||||||||||
|
Adoption
of new accounting standard SFAS No. 142
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Net
loss per share
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.12
|
)
|
$
|
(0.28
|
)
|
$
|
(0.88
|
)
|
|
|
Weighted
average shares (basic and diluted)
|
59,603
|
58,702
|
58,202
|
56,862
|
54,329
|
|||||||||||
|
As
of June 30,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Consolidated
Balance Sheet Data
|
(In
thousands)
|
|||||||||||||||
|
Cash
and cash equivalents
|
$
|
7,582
|
$
|
7,729
|
$
|
6,690
|
$
|
9,128
|
$
|
7,328
|
||||||
|
Marketable
securities
|
97
|
88
|
85
|
3,050
|
6,750
|
|||||||||||
|
Working
capital
|
5,587
|
5,372
|
7,824
|
12,087
|
17,312
|
|||||||||||
|
Goodwill
|
9,488
|
9,488
|
9,488
|
9,488
|
9,488
|
|||||||||||
|
Purchased
intangible assets, net
|
485
|
610
|
559
|
2,056
|
4,275
|
|||||||||||
|
Total
assets
|
35,958
|
47,815
|
30,368
|
37,250
|
54,947
|
|||||||||||
|
Long-term
capital lease obligations
|
142
|
211
|
51
|
-
|
867
|
|||||||||||
|
Accumulated
deficit
|
(168,173
|
)
|
(166,450
|
)
|
(163,082
|
)
|
(156,078
|
)
|
(140,424
|
)
|
||||||
|
Total
stockholders' equity
|
17,228
|
16,778
|
18,468
|
24,791
|
37,717
|
|||||||||||
|
(1)
Includes net revenues from related party
|
||||||||||||||||
|
(2)
Includes amortization of purchased intangible assets
|
||||||||||||||||
23
ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of our financial condition and results
of
operations should be read 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 this annual report on Form 10-K, we refer to the fiscal year ended
June 30, 2007 as fiscal 2007, the fiscal year ended June 30, 2006 as fiscal
2006
and the fiscal year ended June 30, 2007 as fiscal 2005.
Fiscal
Year 2007 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, 2007 are as follows:
| · |
Net
revenues of $55.3 million for the fiscal year ended June 30, 2007
increased by $3.4 million or 6.5% as compared to $51.9 million
reported for the fiscal year ended June 30, 2006. The increase was
primarily the result of a $5.5 million or 12.8% increase in our M2M
device
networking product lines offset by a $2.1 million or 24.2% decrease
in our
non-core product lines.
|
| · |
Gross
profit as a percentage of net revenues was 51.2% for the fiscal year
ended
June 30, 2007 as compared to 51.3% reported for the fiscal year ended
June
30, 2006.
|
| · |
Loss
from operations as a percentage of net revenues was 4.4% for the
fiscal
year ended June 30, 2007 as compared to 8.7% for the fiscal year
ended
June 30, 2006.
|
| · |
Net
loss of $1.7 million or $0.03 per diluted share, for the fiscal year
ended June 30, 2007 improved from a loss of $3.0 million, or
$0.05 per diluted share, for the fiscal year ended June 30,
2006.
|
| · |
Cash,
cash equivalents and marketable securities decreased by $138,000
during
fiscal 2007 to $7.7 million. The decrease in cash, cash equivalents
and
marketable securities was primarily the result of an increase in
inventories and a net loss offset by an increase in our accounts
payable.
In addition, the change in our cash balances is significantly impacted
by
our cash management activities, which included the timing of cash
payments
to our vendors and the timing of cash receipts from our customers.
|
| · |
Net
accounts receivable increased by $324,000 during fiscal 2007. Days
sales
outstanding (“DSO”) in receivables remained constant at 21 days as of
June 30, 2007 and 2006, respectively. Our accounts receivable and
DSO are
primarily affected by the timing of shipments within the quarter,
our
collections performance and the fact that a significant portion of
our net
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.
|
| · |
Net
inventories were $11.0 million as of June 30, 2007 as compared to
$8.1 million as of June 30, 2006. The change in inventories was
primarily a result of an increase in (i) LSI chips, which are sold
individually and embedded in our products and (ii) incremental inventories
to support the launch of new products. Our annualized inventory turns
in
fiscal 2007 of 2.8 turns declined from the 3.4 turns in fiscal 2006.
|
Recent
Accounting Pronouncements
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.
24
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 us 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. 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. Therefore, the recognition of net
revenues and related cost of revenues from sales to distributors are deferred
until the distributor resells the product. Net revenues 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 revenues are 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.
Our
products typically carry a one- or 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 net revenues are recognized ratably 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.
25
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 and one
of our
current directors 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, 2007, 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 revenues, 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,
2007, we have approximately $485,000 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
26
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.
During
fiscal 2007, we concluded multiple securities lawsuits and litigation with
Steven Cotton, a former executive officer. As a former executive officer,
we
have an obligation to indemnify Mr. Cotton and defend the securities violation
that he has been charged with. There is a risk that our insurance carriers
may
not reimburse us for all such costs. Accordingly, legal expenses for Mr.
Cotton’s defense are recorded as incurred and reimbursement of the legal
expenses from insurance are recorded upon receipt. As of June 30, 2007, we
had
$138,000 of reimbursable legal expenses recorded as a liability on our
consolidated balance sheets.
Consolidated
Results of Operations
The
following discussion of results of operations includes a discussion of
continuing operations only. Certain amounts in the fiscal 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,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
revenues (1)
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost
of revenues (2)
|
48.8
|
%
|
48.7
|
%
|
50.2
|
%
|
||||
|
Gross
profit
|
51.2
|
%
|
51.3
|
%
|
49.8
|
%
|
||||
|
Operating
expenses:
|
||||||||||
|
Selling,
general and administrative
|
42.0
|
%
|
46.6
|
%
|
51.1
|
%
|
||||
|
Research
and development
|
13.3
|
%
|
11.5
|
%
|
13.0
|
%
|
||||
|
Litigation
settlement costs
|
0.2
|
%
|
1.8
|
%
|
0.0
|
%
|
||||
|
Amortization
of purchased intangible assets
|
0.1
|
%
|
0.0
|
%
|
0.1
|
%
|
||||
|
Restructuring
recovery
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||
|
Total
operating expenses
|
55.6
|
%
|
60.0
|
%
|
64.2
|
%
|
||||
|
Loss
from operations
|
(4.4
|
%)
|
(8.7
|
%)
|
(14.4
|
%)
|
||||
|
Interest
income (expense), net
|
(0.1
|
%)
|
0.2
|
%
|
(0.1
|
%)
|
||||
|
Other
income, net
|
1.4
|
%
|
2.6
|
%
|
0.4
|
%
|
||||
|
Loss
before income taxes
|
(3.1
|
%)
|
(5.9
|
%)
|
(14.1
|
%)
|
||||
|
Provision
(benefit) for income taxes
|
0.0
|
%
|
0.0
|
%
|
0.5
|
%
|
||||
|
Loss
from continuing operations
|
(3.1
|
%)
|
(5.9
|
%)
|
(14.6
|
%)
|
||||
|
Income
from discontinued operations
|
0.0
|
%
|
0.0
|
%
|
0.2
|
%
|
||||
|
Net
loss
|
(3.1
|
%)
|
(5.9
|
%)
|
(14.4
|
%)
|
||||
|
(1)
Includes net revenues from related party
|
||||||||||
|
(2)
Includes amortization of purchased intangible assets
|
||||||||||
Fiscal
Years Ended June 30, 2007 and 2006
Net
Revenues by Product Line
The
following table presents net revenues by product line:
27
|
Years
Ended June 30,
|
|||||||||||||||||||
|
%
of Net
|
%
of Net
|
Change
|
|||||||||||||||||
|
2007
|
Revenues
|
2006
|
Revenues
|
$
|
%
|
||||||||||||||
|
(In
thousands, except percentages)
|
|||||||||||||||||||
|
Device
enablement
|
$
|
39,734
|
71.9
|
%
|
$
|
35,419
|
68.2
|
%
|
$
|
4,315
|
12.2
|
%
|
|||||||
|
Device
management
|
8,866
|
16.0
|
%
|
7,676
|
14.8
|
%
|
1,190
|
15.5
|
%
|
||||||||||
|
M2M
device networking
|
48,600
|
87.9
|
%
|
43,095
|
83.0
|
%
|
5,505
|
12.8
|
%
|
||||||||||
|
Non-core
|
6,706
|
12.1
|
%
|
8,848
|
17.0
|
%
|
(2,142
|
)
|
(24.2
|
%)
|
|||||||||
|
Net
revenues
|
$
|
55,306
|
100.0
|
%
|
$
|
51,943
|
100.0
|
%
|
$
|
3,363
|
6.5
|
%
|
|||||||
The
increase in net revenues for fiscal 2007 as compared to fiscal 2006 was
primarily a result of an increase in net revenues from our device enablement
and
device management products offset by a decrease in our non-core products.
The
increase in our device enablement products was primarily due to an increase
in
volume in our embedded device enablement products, which included our XPort® and
WiPort™ product families. The increase in device management product sales was
primarily a result of an increase in our SecureLinx™ product sales. We are no
longer investing in the development of our non-core product lines and we
expect
net revenues related to these products to continue to decline in the future
as
we focus our investment in our M2M device networking product lines.
Net
Revenues by Geographic Region
The
following table presents net revenues by geographic region:
|
Years
Ended June 30,
|
|||||||||||||||||||
|
%
of Net
|
%
of Net
|
Change
|
|||||||||||||||||
|
2007
|
Revenues
|
2006
|
Revenues
|
$
|
%
|
||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||
|
Americas
|
$
|
34,950
|
63.2
|
%
|
$
|
32,463
|
62.5
|
%
|
$
|
2,487
|
7.7
|
%
|
|||||||
|
EMEA
|
14,002
|
25.3
|
%
|
14,094
|
27.1
|
%
|
(92
|
)
|
(0.7
|
%)
|
|||||||||
|
Asia
Pacific
|
6,354
|
11.5
|
%
|
5,386
|
10.4
|
%
|
968
|
18.0
|
%
|
||||||||||
|
Net
revenues
|
$
|
55,306
|
100.0
|
%
|
$
|
51,943
|
100.0
|
%
|
$
|
3,363
|
6.5
|
%
|
|||||||
The
increase in net revenues in the Americas region was primarily attributable
to an
increase in sales of device enablement and device management products offset
by
a decrease in non-core products. The increase in net revenues in the Asia
Pacific region was primarily attributable to an increase in sales of embedded
device enablement products. The decrease in net revenues in the EMEA (“Europe,
Middle East and Africa”) region was primarily due to a decrease in non-core
products offset by an increase in sales of our embedded device enablement
and
device management 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,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Top
five customers (1)
|
34.0
|
%
|
38.0
|
%
|
42.0
|
%
|
||||
|
Ingram
Micro
|
12.0
|
%
|
13.0
|
%
|
16.0
|
%
|
||||
|
Tech
Data
|
8.0
|
%
|
10.0
|
%
|
11.0
|
%
|
||||
|
Related
party
|
2.0
|
%
|
3.0
|
%
|
2.0
|
%
|
||||
|
(1)
Includes Ingram Micro and Tech Data.
|
||||||||||
An
international customer, transtec AG, is a related party due to common ownership
by our largest stockholder and Lantronix director, Bernhard
Bruscha.
Gross
Profit
Gross
profit represents net revenues less cost of revenues. Cost of revenues consisted
primarily of the cost of raw material components, subcontract labor assembly
from contract manufacturers, manufacturing overhead, amortization of purchased
intangible assets, establishing or relieving inventory reserves for excess
and
obsolete products or raw materials, warranty costs, royalties and share-based
compensation.
28
The
following table presents gross profit:
|
Years
Ended June 30,
|
|||||||||||||||||||
|
%
of Net
|
%
of Net
|
Change
|
|||||||||||||||||
|
2007
|
Revenues
|
2006
|
Revenues
|
$
|
%
|
||||||||||||||
|
(In
thousands, except percentages)
|
|||||||||||||||||||
|
Gross
profit
|
$
|
28,342
|
51.2
|
%
|
$
|
26,667
|
51.3
|
%
|
$
|
1,675
|
6.3
|
%
|
|||||||
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 professional
legal
and accounting fees offset by reimbursement of legal fees from insurance
proceeds.
The
following table presents selling, general and administrative
expenses:
|
Years
Ended June 30,
|
|||||||||||||||||||
|
%
of Net
|
%
of Net
|
Change
|
|||||||||||||||||
|
2007
|
Revenues
|
2006
|
Revenues
|
$
|
%
|
||||||||||||||
|
(In
thousands, except percentages)
|
|||||||||||||||||||
|
Personnel-related
expenses
|
$
|
12,522
|
$
|
11,200
|
$
|
1,322
|
11.8
|
%
|
|||||||||||
|
Professional
fees & outside services
|
2,704
|
5,382
|
(2,678
|
)
|
(49.8
|
%)
|
|||||||||||||
|
Advertising
and marketing
|
3,232
|
3,370
|
(138
|
)
|
(4.1
|
%)
|
|||||||||||||
|
Facilities
|
2,044
|
1,951
|
93
|
4.8
|
%
|
||||||||||||||
|
Share-based
compensation
|
922
|
736
|
186
|
25.3
|
%
|
||||||||||||||
|
Depreciation
|
288
|
322
|
(34
|
)
|
(10.6
|
%)
|
|||||||||||||
|
Other
|
1,531
|
1,242
|
289
|
23.3
|
%
|
||||||||||||||
|
Selling,
general and administrative
|
$
|
23,243
|
42.0
|
%
|
$
|
24,203
|
46.6
|
%
|
$
|
(960
|
)
|
(4.0
|
%)
|
||||||
In
order
of significance, the decrease in selling, general and administrative expense
for
fiscal 2007 as compared to fiscal 2006 was primarily due to a (i) decrease
in
legal and professional fees primarily as a result of the settlement of our
outstanding litigation, which has led to lower legal fees; offset by (ii)
an
increase in personnel-related expenses and share-based compensation due to
annual merit increases, (iii) a headcount increase and (iv) a $194,000 charge
related to a consulting and severance agreement with our former Chief Financial
Officer, Jim Kerrigan.
Research
and Development
Research
and development expenses consisted of personnel-related expenses including
share-based compensation, as well as expenditures to third-party vendors
for
research and development activities.
The
following table presents research and development expenses:
|
Years
Ended June 30,
|
|
||||||||||||||||||
|
%
of Net
|
%
of Net
|
Change
|
|||||||||||||||||
|
2007
|
Revenues
|
2006
|
Revenues
|
$
|
%
|
||||||||||||||
|
(In
thousands, except percentages)
|
|||||||||||||||||||
|
Personnel-related
expenses
|
$
|
5,315
|
$
|
4,358
|
$
|
957
|
22.0
|
%
|
|||||||||||
|
Facilities
|
667
|
579
|
88
|
15.2
|
%
|
||||||||||||||
|
Professional
fees & outside services
|
519
|
398
|
121
|
30.4
|
%
|
||||||||||||||
|
Share-based
compensation
|
378
|
255
|
123
|
48.2
|
%
|
||||||||||||||
|
Depreciation
|
41
|
47
|
(6
|
)
|
(12.8
|
%)
|
|||||||||||||
|
Other
|
442
|
362
|
80
|
22.1
|
%
|
||||||||||||||
|
Research
and development
|
$
|
7,362
|
13.3
|
%
|
$
|
5,999
|
11.5
|
%
|
$
|
1,363
|
22.7
|
%
|
|||||||
The
increase in research and development expenses for fiscal 2007 as compared
to
fiscal 2006 was primarily due to an increase in personnel-related expenses
and
share-based compensation as a result of annual merit increases, an increase
in
average headcount and fees for outside consultants for research and development
activities.
29
Litigation
Settlement Costs
The
following table presents litigation settlement costs:
|
Years
Ended June 30,
|
|||||||||||||||||||
|
%
of Net
|
%
of Net
|
Change
|
|||||||||||||||||
|
2007
|
Revenues
|
2006
|
Revenues
|
$
|
%
|
||||||||||||||
|
(In
thousands, except percentages)
|
|||||||||||||||||||
|
Litigation
settlement costs
|
$
|
90
|
0.2
|
%
|
$
|
960
|
1.8
|
%
|
$
|
(870
|
)
|
(90.6
|
%)
|
||||||
The
decrease in litigation settlement costs for fiscal 2007 as compared to fiscal
2006 was primarily due to the litigation settlement accrual that was recorded
during fiscal 2006.
The
following table presents details of our litigation settlement
costs:
|
Years
Ended June 30,
|
|||||||
|
2007
|
2006
|
||||||
|
(In
thousands)
|
|||||||
|
Class
Action and Synergetic
|
$
|
90
|
$
|
1,217
|
|||
|
Patent
infringement
|
-
|
165
|
|||||
|
Steve
Cotton settlement recovery
|
-
|
(422
|
)
|
||||
|
Total
litigation settlement costs
|
$
|
90
|
$
|
960
|
|||
Other
Income (Expense), Net
The
following table presents other income (expense) net:
|
Years
Ended June 30,
|
|||||||||||||||||||
|
%
of Net
|
%
of Net
|
Change
|
|||||||||||||||||
|
2007
|
Revenues
|
2006
|
Revenues
|
$
|
%
|
||||||||||||||
|
(In
thousands, except
percentages)
|
|||||||||||||||||||
|
Other
income, net
|
$
|
749
|
1.4
|
%
|
$
|
1,376
|
2.6
|
%
|
$
|
(627
|
)
|
(45.6
|
%)
|
||||||
The
decrease in other income for fiscal 2007 as compared fiscal 2006 was primarily
due to $700,000 of income recognized on the sale of our investment in Xanboo
in
fiscal 2007 as compared to $1.3 million of other income recognized in fiscal
2006.
Provision
(Benefit) for Income Taxes
The
following table presents our effective tax rate based upon our income tax
provision:
|
Years
Ended June 30,
|
|||||||
|
2007
|
2006
|
||||||
|
Effective
tax rate
|
(2.0
|
%)
|
(1.0
|
%)
|
|||
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 2007 and 2006. As of June 30, 2007,
we had net operating loss carryovers of $75.2 million and $42.5 million for
federal and California state income tax purposes, respectively. The federal
and
California net operating loss carryovers begin to expire in fiscal years
2021
and 2013, respectively.
Fiscal
Years Ended June 30, 2006 and 2005
Net
Revenues by Product Line
30
The
following table presents net revenues by product line:
|
Years
Ended June 30,
|
|||||||||||||||||||
|
%
of Net
|
%
of Net
|
Change
|
|||||||||||||||||
|
2006
|
Revenues
|
2005
|
Revenues
|
$
|
%
|
||||||||||||||
|
(In
thousands, except
percentages)
|
|||||||||||||||||||
|
Device
enablement
|
$
|
35,419
|
68.2
|
%
|
$
|
29,979
|
61.8
|
%
|
$
|
5,440
|
18.1
|
%
|
|||||||
|
Device
management
|
7,676
|
14.8
|
%
|
7,753
|
16.0
|
%
|
(77
|
)
|
(1.0
|
%)
|
|||||||||
|
M2M
device networking
|
43,095
|
83.0
|
%
|
37,732
|
77.8
|
%
|
5,363
|
14.2
|
%
|
||||||||||
|
Non-core
|
8,848
|
17.0
|
%
|
10,770
|
22.2
|
%
|
(1,922
|
)
|
(17.8
|
%)
|
|||||||||
|
Net
revenues
|
$
|
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 enablement products, offset
by a
decrease in our device management products and our non-core products. The
increase in our device enablement product line was primarily due to an increase
in volume in our embedded device enablement products, which includes our
XPort®
products. The decrease in device management product sales was a result of
a
decrease in our SecureLinx 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 enablement and device management products.
Net
Revenues by Geographic 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
|
%
|
||||||||||
|
Net
revenues
|
$
|
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 across all of our geographic regions. The
increase in net revenues in the Americas region is primarily attributable
to an
increase in sales of device enablement products offset by lower sales of
device
management and non-core products. The increase in net revenues in the EMEA
and
Asia Pacific regions is primarily due to an increase in sales of our device
enablement 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
|
||||||
|
Top
five customers (1)
|
38.0
|
%
|
42.0
|
%
|
|||
|
Ingram
Micro
|
13.0
|
%
|
16.0
|
%
|
|||
|
Tech
Data
|
10.0
|
%
|
11.0
|
%
|
|||
|
Related
party
|
3.0
|
%
|
2.0
|
%
|
|||
|
(1)
Includes Ingram Micro and Tech Data.
|
|||||||
An
international customer, transtec AG, is a related party due to common ownership
by our largest stockholder, Bernhard Bruscha.
Gross
Profit
Gross
profit represents net revenues less cost of revenues. Cost of revenues consisted
primarily of the cost of raw material components, subcontract labor assembly
from contract manufacturers, manufacturing overhead, amortization of purchased
intangible assets, establishing or relieving inventory reserves for excess
and
obsolete products or raw materials, warranty costs, royalties and share-based
compensation.
31
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
|
%
|
|||||||
In
order
of significance, the increase in gross profit as a percentage of net revenues
for fiscal 2006 as compared to fiscal 2005 was primarily 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 enablement sales towards lower margin
product
sales.
Selling,
General and Administrative
Selling,
general and administrative expenses consisted primarily of personnel-related
expenses including salaries, commissions and share-based compensation, facility
expenses, information technology, trade show expenses, advertising, purchased
patents and professional legal and accounting fees offset by reimbursement
of
legal fees from insurance proceeds.
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)
|
|||||||||||||||||||
|
Personnel-related
expenses
|
$
|
11,200
|
$
|
12,991
|
$
|
(1,791
|
)
|
(13.8
|
%)
|
||||||||||
|
Professional
fees & outside services
|
5,382
|
3,316
|
2,066
|
62.3
|
%
|
||||||||||||||
|
Advertising
and marketing
|
3,370
|
3,441
|
(71
|
)
|
(2.1
|
%)
|
|||||||||||||
|
Facilities
|
1,951
|
2,736
|
(785
|
)
|
(28.7
|
%)
|
|||||||||||||
|
Share-based
compensation
|
736
|
171
|
565
|
330.4
|
%
|
||||||||||||||
|
Depreciation
|
322
|
486
|
(164
|
)
|
(33.7
|
%)
|
|||||||||||||
|
Other
|
1,242
|
1,629
|
(387
|
)
|
(23.8
|
%)
|
|||||||||||||
|
Selling,
general and administrative
|
$
|
24,203
|
46.6
|
%
|
$
|
24,770
|
51.1
|
%
|
$
|
(567
|
)
|
(2.3
|
%)
|
||||||
In
order
of significance, the decrease in selling, general and administrative expense
for
fiscal 2006 as compared to fiscal 2005 was primarily 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
primarily due to a reduction in building rent expense for our Irvine facility;
(iii) a reduction of advertising expenditures; (iv) a recovery of bad debts;
partially offset by an increase in legal and professional fees primarily
as a
result of legal fees related to the fiscal 2006 patent litigation settlement
and
an increase in share-based compensation expense as a result of our adoption
of
SFAS 123R as of July 1, 2005.
Research
and Development
Research
and development expenses consisted primarily of personnel-related expenses
including share-based compensation, as well as expenditures to third-party
vendors for research and development activities.
32
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)
|
|||||||||||||||||||
|
Personnel-related
expenses
|
$
|
4,358
|
|||||||||||||||||