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Overview

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

 

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

 

The following describes our device networking product lines:

·

Device Enablement – We offer an array of embedded and external device enablement solutions that enable integrators and manufacturers of electronic and electro-mechanical products to add network connectivity, manageability and control.  Our customers’ products originate from a wide variety of applications within the M2M market, from blood analyzers that relay critical patient information directly to a hospital’s information system, to simple devices such as time clocks, allowing the user to obtain information from these devices and to improve how they are managed and controlled.  We also offer products such as multi-port 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.

·

Device Management –We offer off-the-shelf appliances such as console servers, digital remote keyboard, video, mouse extenders, and power control products that enable IT professionals to remotely connect, monitor and control network infrastructure equipment, distributed branch office equipment and large groups of servers using highly secure out-of-band management technology.  In addition, we offer off-the-shelf appliances that enable IT professionals to reliably, remotely and simply monitor, configure and manage multiple devices from a single point of control.

The following describes our non-core product line:

·

Non-core – Over the years, we have innovated or acquired various product lines that are no longer part of our primary, core markets described above. In general, these non-core businesses represent decreasing markets and we minimize research and development in these product lines. Included in this category are terminal servers, visualization solutions, legacy print servers, software and other miscellaneous products. We have announced the end-of-life for almost all of our non-core products and expect a steep decline in non-core revenues in fiscal 2008 while we complete the exit of this product category.

 Financial Highlights and Other Information for the Three Months Ended March 31, 2008

The following is a summary of the key factors and significant events that impacted our financial performance during the three months ended March 31, 2008:

·

Net revenues were $14.5 million for the three months ended March 31, 2008, an increase of $1.3 million or 9.7% as compared to $13.3 million for the three months ended March 31, 2007.  The increase was primarily the result of a $2.1 million or 17.8% increase in our device networking product lines offset by a $776,000, or 46.6% decrease in our non-core product lines.

 

·

Gross profit as a percentage of net revenues was 50.4% for the three months ended March 31, 2008 as compared to 51.8% reported for the three months ended March 31, 2007.  The decrease in gross profit margin percent was primarily attributable to the product mix as a result of an increase in embedded device networking product sales as a percent of net revenues.

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·	Loss from operations was $373,000, or 2.6%, of net revenues for the three months ended March 31, 2008 as compared to a loss from operations of $1.1 million, or 7.9%, of net revenues for the three months ended March 31, 2007.

·	Net loss of $464,000, or $0.01 per basic and diluted share, for the three months ended March 31, 2008, decreased from a net loss of $1.1 million, or $0.02 per basic and diluted share, for the three months ended March 31, 2007.

·	Cash, cash equivalents and marketable securities were $7.3 million as of March 31, 2008 as compared to $7.7 million as of June 30, 2007.

·

Net accounts receivable were $2.8 million as of March 31, 2008 as compared to $3.4 million as of June 30, 2007. Annualized days sales outstanding (“DSO”) in receivables were 19 days for the three months ended March 31, 2008 as compared to 21 days for the three months ended June 30, 2007. Our accounts receivable and DSO are primarily affected by the timing of shipments within a quarter, our collections performance and the fact that a significant portion of our revenues are recognized on a sell-through basis (upon shipment from distributor inventories rather than as goods are shipped to distributors).

·	Net inventories were $8.1 million as of March 31, 2008 as compared to $11.0 million as of June 30, 2007. Annualized inventory turns were 3.0 for the three months ended March 31, 2008 as compared to 2.8 for the three months ended June 30, 2007.

Critical Accounting Policies and Estimates

The accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to revenue recognition, warranty reserves, allowance for doubtful accounts, inventory valuation, valuation of deferred income taxes, goodwill and purchased intangible assets and legal settlement costs. These policies are described in further detail in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.  There have been no significant changes in our critical accounting policies and estimates during the nine months ended March 31, 2008 as compared to what was previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

Recent Accounting Pronouncements

 

Recent accounting pronouncements issued by the Financial Accounting Standards Board (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

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Consolidated Results of Operations

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

 

		Three Months Ended				Nine Months Ended
		March 31,				March 31,
		2008		2007		2008		2007
Net revenues		100.0%		100.0%		100.0%		100.0%
Cost of revenues		49.6%		48.2%		49.5%		48.6%
Gross profit		50.4%		51.8%		50.5%		51.4%
Operating expenses:
Selling, general and administrative		41.1%		45.3%		41.0%		43.2%
Research and development		11.7%		14.3%		12.2%		13.5%
Litigation settlement costs		0.0%		0.0%		0.0%		0.2%
Amortization of purchased intangible assets		0.1%		0.1%		0.1%		0.1%
Total operating expenses		53.0%		59.7%		53.4%		57.1%
Loss from operations		(2.6%)		(7.9%)		(2.9%)		(5.7%)
Interest expense, net		(0.3%)		(0.1%)		(0.3%)		(0.0%)
Other (expense) income, net		(0.1%)		0.0%		0.3%		1.8%
Loss before income taxes		(2.9%)		(8.0%)		(2.9%)		(3.9%)
Provision (benefit) for income taxes		0.2%		0.1%		(0.3%)		0.1%
Net loss		(3.2%)		(8.1%)		(2.6%)		(4.0%)

 

Comparison of the Three and Nine Months Ended March 31, 2008 and 2007

Net Revenues by Product Line

The following table presents net revenues by product line:

 

		Three Months Ended March 31,
						% of Net								% of Net				Change
		2008				Revenues				2007				Revenues				$				%
		(In thousands, except percentages)
Device enablement		$	11,878				81.7%			$	9,864				74.4%			$	2,014				20.4%
Device management			1,775				12.2%				1,725				13.0%				50				2.9%
Device networking			13,653				93.9%				11,589				87.4%				2,064				17.8%
Non-core			888				6.1%				1,664				12.6%				(776	)			(46.6%)
Net revenues		$	14,541				100.0%			$	13,253				100.0%			$	1,288				9.7%

 

The increase in net revenues for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 was primarily due to the increase in net revenues from our device enablement product lines, offset by a decrease in our non-core product lines.  The increase in our device enablement product lines was primarily due to an increase in our embedded device enablement products, specifically our XPort product family.  We are no longer investing in the development of our non-core product lines and expect net revenues related to these products to continue to decline in the future as we focus our investment on our device networking product lines.

 

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The following table presents net revenues by product line:

		Nine Months Ended March 31,
						% of Net								% of Net				Change
		2008				Revenue				2007				Revenue				$				%
		(In thousands, except percentages)
Device enablement		$	32,992				77.0%			$	29,700				73.2%			$	3,292				11.1%
Device management			6,601				15.4%				5,999				14.8%				602				10.0%
Device networking			39,593				92.4%				35,699				88.0%				3,894				10.9%
Non-core			3,279				7.6%				4,897				12.0%				(1,618	)			(33.0%)
Net revenues		$	42,872				100.0%			$	40,596				100.0%			$	2,276				5.6%

 

The increase in net revenues for the nine months ended March 31, 2008 as compared to the nine months ended March 31, 2007 was the result of an increase in net revenues from our device enablement and device management product lines, offset by a decrease in our non-core product lines.  The increase in our device enablement product lines was due to increases in our embedded and external device enablement product lines.  The increase in device management was due to an increase in our SecureLinx products.  We are no longer investing in the development of our non-core product lines and expect net revenues related to these products to continue to decline in the future as we focus our investment on our device networking product lines.

Net Revenues by Region

The following table presents net revenues by geographic region:

 

		Three Months Ended March 31,
						% of Net								% of Net				Change
		2008				Revenues				2007				Revenues				$				%
		(In thousands, except percentages)
Americas		$	8,294				57.0%			$	8,247				62.2%			$	47				0.6%
EMEA			4,204				28.9%				3,484				26.3%				720				20.7%
Asia Pacific			2,043				14.1%				1,522				11.5%				521				34.2%
Net revenues		$	14,541				100.0%			$	13,253				100.0%			$	1,288				9.7%

 

The increase in net revenues for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 was primarily a result of an increase in net revenues in the EMEA (“Europe, Middle East and Africa”) and Asia Pacific regions.  The increase in net revenues in the EMEA and Asia Pacific regions was primarily attributable to an increase in our device enablement product lines.

 

The following table presents net revenues by geographic region:

		Nine Months Ended March 31,
						% of Net								% of Net				Change
		2008				Revenue				2007				Revenue				$				%
		(In thousands, except percentages)
Americas		$	25,137				58.6%			$	25,476				62.8%			$	(339	)			(1.3%)
EMEA			11,714				27.3%				10,195				25.1%				1,519				14.9%
Asia Pacific			6,021				14.1%				4,925				12.1%				1,096				22.3%
Net revenues		$	42,872				100.0%			$	40,596				100.0%			$	2,276				5.6%

 

The increase in net revenues for the nine months ended March 31, 2008 as compared to the nine months ended March 31, 2007 was primarily a result of an increase in net revenues in the EMEA and Asia Pacific regions offset by a decrease in the Americas region.  The increase in net revenues in the EMEA region was primarily attributable to an increase in sales of our device enablement product lines.  The increase in net revenues in Asia Pacific region was primarily attributable to an increase in our device enablement and device management product lines offset by a decrease in our non-core product line.  The decrease in the Americas region was primarily due to the expected decrease in our non-core product lines offset by an increase in device enablement and device management product lines.

 

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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.

 

The following table presents gross profit:

		Three Months Ended March 31,
						% of Net								% of Net				Change
		2008				Revenues				2007				Revenues				$				%
		(In thousands, except percentages)
Gross profit		$	7,334				50.4%			$	6,866				51.8%			$	468				6.8%

 

The decrease in gross profit margin percent was primarily attributable to the product mix as a result of an increase in embedded device networking products as a percent of net revenues.

 

The following table presents gross profit:

 

		Nine Months Ended March 31,
						% of Net								% of Net				Change
		2008				Revenue				2007				Revenue				$				%
		(In thousands, except percentages)
Gross profit		$	21,638				50.5%			$	20,873				51.4%			$	765				3.7%

 

The decrease in gross profit margin percent was primarily attributable to an increase in certain inventory reserves in connection with a review of our product offerings as part of our effort to simplify our product portfolio by discontinuing slow-moving and non-strategic products.

Selling, General and Administrative

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

 

The following table presents selling, general and administrative expenses:

 

		Three Months Ended March 31,
					% of Net					% of Net		Change
		2008			Revenues		2007			Revenues		$				%
		(In thousands, except percentages)
Personnel-related expenses		$	3,523				$	3,324				$	198				6.0%
Professional fees & outside services			516					676					(160	)			(23.7%)
Advertising and marketing			825					718					107				14.9%
Facilities			390					523					(133	)			(25.4%)
Share-based compensation			186					292					(105	)			(36.1%)
Depreciation			95					68					27				39.7%
Other			447					400					47				11.8%
Selling, general and administrative		$	5,982		41.1%		$	6,001		45.3%		$	(19	)			(0.3%)

 

In order of significance, the decrease in selling, general and administrative expenses for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 was primarily due to: (i) a decrease in professional fees & outside services, (ii) a decrease in facilities as a result of lower insurance and other allocated facility costs, and (iii) a decrease in share-based compensation; offset by (iv) an increase in personnel-related expenses and (v) an increase in advertising and marketing spending due to the timing of product launches.

 

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The following table presents selling, general and administrative expenses:

		Nine Months Ended March 31,
					% of Net					% of Net		Change
		2008			Revenues		2007			Revenues		$				%
		(In thousands, except percentages)
Personnel-related expenses		$	10,108				$	9,375				$	733				7.8%
Professional fees & outside services			1,992					2,281					(289	)			(12.7%)
Advertising and marketing			2,146					2,305					(159	)			(6.9%)
Facilities			1,162					1,540					(378	)			(24.5%)
Share-based compensation			588					702					(114	)			(16.2%)
Depreciation			271					211					60				28.4%
Other			1,325					1,142					183				16.0%
Selling, general and administrative		$	17,592		41.0%		$	17,556		43.2%		$	36				0.2%

 

In order of significance, the change in selling, general and administrative expenses for the nine months ended March 31, 2008 as compared to the nine months ended March 31, 2007 was primarily due to: (i) an increase in personnel-related expenses as a result of severance charges related to the departure of the former president and chief executive officer and other former employees; offset by (ii) a decrease in facilities as a result of lower insurance and other allocated facility costs, (iii) a decrease in professional fees & outside services and (iv) a decrease in advertising and marketing spending due to the timing of product launches and more focused marketing spending.

Research and Development

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

 

The following table presents research and development expenses:

		Three Months Ended March 31,
					% of Net					% of Net		Change
		2008			Revenues		2007			Revenues		$				%
		(In thousands, except percentages)
Personnel-related expenses		$	1,264				$	1,354				$	(90)				(6.6%)
Facilities			223					176					47				26.7%
Professional fees & outside services			53					178					(125)				(70.2%)
Share-based compensation			74					97					(23)				(23.7%)
Depreciation			14					10					4				40.0%
Other			79					83					(4)				(4.8%)
Research and development		$	1,707		11.7%		$	1,898		14.3%		$	(191)				(10.1%)

 

In order of significance, the decrease in research and development expenses for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 was primarily due to: (i) a decrease in professional fees & outside services and (ii) a decrease in personnel-related expenses.

 

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The following table presents research and development expenses:

		Nine Months Ended March 31,
					% of Net					% of Net		Change
		2008			Revenues		2007			Revenues		$				%
		(In thousands, except percentages)
Personnel-related expenses		$	3,852				$	3,967				$	(115)				(2.9%)
Facilities			651					490					161				32.9%
Professional fees & outside services			187					396					(209)				(52.8%)
Share-based compensation			260					285					(25)				(8.8%)
Depreciation			40					30					10				33.3%
Other			243					330					(87)				(26.4%)
Research and development		$	5,233		12.2%		$	5,498		13.5%		$	(265)				(4.8%)

 

In order of significance, the decrease in research and development expenses for the nine months ended March 31, 2008 as compared to the nine months ended March 31, 2007 was primarily due to: (i) a decrease in professional fees & outside services and (ii) a decrease in personnel-related expenses.

Provision for Income Taxes

 

On July 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”).  In connection with the adoption of FIN 48, we recognized an adjustment of approximately $226,000 to the beginning balance of accumulated deficit on our consolidated balance sheet.  Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2008, we had recorded $151,000 of uncertain tax positions including approximately $74,000 of accrued interest and penalties related to uncertain tax positions.

 

At July 1, 2007, our fiscal 2001 through fiscal 2007 tax years remain open to examination by the Federal and state taxing authorities.  However, we have net operating losses (“NOLs”) beginning in fiscal 2001 which would cause the statute of limitations to remain open for the year in which the NOL was incurred.

 

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

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2008				2007				2008				2007
Effective tax rate			8%				1%				9%				2%

 

We utilize the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.”  The tax benefit during the fiscal quarter ended March 31, 2008 is the result of a reduction in estimated foreign taxes and penalties.   The federal statutory rate was 34% for all periods.  The difference between our effective tax rate and the federal statutory rate resulted primarily from the effect of our domestic losses recorded without a tax benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. As a result of our cumulative losses, we provided a full valuation allowance against our domestic net deferred tax assets for the fiscal quarters ended March 31, 2008 and 2007.

Other (Expense) Income, Net

Other (expense) income, net consists of gains (losses) on the sale of investments, foreign currency transactions and the disposal of fixed assets.

 

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The following tables present other (expense) income, net:

 

		Three Months Ended March 31,
						% of Net								% of Net				Change
		2008				Revenue				2007				Revenue				$				%
		(In thousands, except percentages)
Other (expenses) income, net		$	(16)				-0.1%			$	6				0.0%			$	(22)				(366.7%)

 

		Nine Months Ended March 31,
						% of Net								% of Net				Change
		2008				Revenue				2007				Revenue				$				%
		(In thousands, except percentages)
Other (expenses) income, net		$	115				0.3%			$	733				1.8%			$	(618)				(84.3%)

 

The decrease in other (expense) income, net for the nine months ended March 31, 2008 as compared to the nine months ended March 31, 2007 is primarily due to $700,000 of income recognized on the sale of our investment in Xanboo during December of 2006. The decrease was partially offset by the sale of our marketable securities of approximately $104,000 in the nine months ended March 31, 2008.

Liquidity and Capital Resources

Since inception to date, we have financed our operations primarily through the issuance of common stock and operating activities. We refer to the sum of cash and cash equivalents and marketable securities as “cash” for the purposes of discussing our cash balance and liquidity.

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

		March 31,				June 30,				Increase
		2008				2007				(Decrease)
		(In thousands)
Working capital		$	6,895			$	5,587			$	1,308
Cash and cash equivalents		$	7,297			$	7,582			$	(285	)
Marketable securities			-				97				(97	)
Total cash, cash equivalents and marketable securities		$	7,297			$	7,679			$	(382	)

 

Our cash balance decreased compared to prior year end as a result of our cash management activities, which included the timing of cash payments to our vendors and the timing of cash receipts from our customers.  The increase in working capital as of March 31, 2008 is primarily due to a $1.1 million reduction in the accrued settlement liability as a result of the distribution of warrants to purchase Lantronix common stock as final consideration for the settlement of the shareholder lawsuit.

Our future capital requirements depend on many factors, including the timing and amount of our net revenues, research and development, expenses associated with any strategic partnerships or acquisitions and infrastructure investments, and expenses related to government investigations and litigation, which could affect our ability to generate additional cash. If cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may need to raise capital by borrowing funds through bank loans, the selling of securities or other means. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all. If we are unable to secure additional financing, we may not be able to develop or enhance our products, take advantage of future opportunities, respond to competition or continue to operate our business.

 

In May 2006, we entered into a two-year secured revolving Loan and Security Agreement ("Line of Credit”) with a bank, which provides for borrowings up to $5.0 million. The borrowing capacity is limited to eligible accounts receivable as defined under the Line of Credit. Borrowings under the Line of Credit bear interest at the prime rate plus 1.75% per annum. We are required to pay an unused line fee of 0.50% on the unused portion of the Line of Credit. As of March 31, 2008 and June 30, 2007, we had no borrowings against the Line of Credit.  Our Line of Credit expires in May 2008.  We are currently negotiating terms for a new debt agreement.

 

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

 

 

		March 31,				June 30,
		2008				2007
		(In thousands)
Available borrowing capacity		$	1,717			$	3,462
Outstanding letters of credit		$	2,269			$	1,280

 

As of March 31, 2008 and June 30, 2007, approximately $814,000 and $2.0 million, respectively, of our cash was held in foreign subsidiary bank accounts.  Such cash is unrestricted with regard to foreign liquidity needs; however, our ability to utilize a portion of this cash to satisfy liquidity needs outside of such foreign locations is subject to approval by the foreign location board of directors.

Cash Flows

The following table presents the major components of the consolidated statements of cash flows:

 

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
						(In thousands)
Net cash provided by (used in):
Net loss		$	(464	)		$	(1,070	)		$	(1,134	)		$	(1,634	)
Non-cash operating expenses, net			487				461				1,687				672
Changes in operating assets and liabilities:			-
Accounts receivable			446				710				594				309
Inventories			1,836				(1,235	)			2,540				(1,580	)
Contract manufacturers' receivable			(320	)			(321	)			(51	)			(305	)
Prepaid expenses and other current assets			(274	)			73				(139	)			48
Other assets			28				3				11				(3	)
Accounts payable			(1,271	)			1,131				(3,543	)			2,403
Accrued payroll and related expenses			(437	)			(133	)			(104	)			171
Accrued settlements			-				-				-				(400	)
Warranty reserve			-				(29	)			(104	)			(248	)
Other liabilities			54				(27	)			(141	)			(644	)
Net cash provided (used) in operating activities			85				(437	)			(384	)			(1,211	)
Net cash (used) provided in investing activities			(131	)			(125	)			(279	)			304
Net cash provided by financing activities			27				280				178				597
Effect of foreign exchange rate changes on cash			92				21				200				64
Increase (decrease) in cash and cash equivalents		$	73			$	(261	)		$	(285	)		$	(246	)

 

Operating activities provided cash during the three months ended March 31, 2008. This was the result of non-cash operating expenses and cash provided by operating assets and liabilities, offset by a net loss. The non-cash items that had a significant impact on the net loss included share-based compensation, depreciation and provisions for inventories.  In order of significance, the changes in operating assets and liabilities that had a significant impact on the cash provided by operating activities included (i) a decrease in inventory, and (ii) a decrease in accounts receivable due to the timing of collections and linearity of sales; offset by (iii) a decrease in accounts payable due to the timing of payments.

Operating activities used cash during the three months ended March 31, 2007. This was the result of a net loss, offset by cash provided by operating assets and liabilities and non-cash operating expenses.  The non-cash items that had a significant impact on net loss included share-based compensation and depreciation. In order of significance, the changes in operating assets and liabilities that had a significant impact on the cash provided by operating activities included (i) an increase in accounts payable as a result of the timing of payments to vendors and (ii) a decrease in accounts receivable due to the timing of collections and linearity of sales; offset by (iii) an increase in inventories due to the timing of shipments.

Investing activities used cash during the three months ended March 31, 2008 and 2007 due to the purchase of property and equipment.

Financing activities provided cash during the three months ended March 31, 2008 and 2007 due to proceeds from the sale of common shares through employee stock option exercises, which was offset by repayments on capital lease obligations.

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Operating activities used cash during the nine months ended March 31, 2008. This was the result of a net loss, and cash used by operating assets and liabilities, which was offset by non-cash operating expenses. The non-cash items that had a significant impact on the net loss included share-based compensation, depreciation, provisions for inventories and a gain on the sale of marketable securities. In order of significance, the changes in operating assets and liabilities which had a significant impact on the cash used in operating activities included (i) a decrease in accounts payable due to the timing of payments; offset by (ii) a decrease in inventory due to the timing of shipments and (iii) an decrease in accounts receivable due to the timing of shipment and collections.

Operating activities used cash during the nine months ended March 31, 2007. This was the result of a net loss, and cash used by operating assets and liabilities, which was offset by non-cash operating expenses. The non-cash items that had a significant impact on the net loss included a gain on the sale of the company’s investment in Xanboo, share-based compensation and depreciation. In order of significance, the changes in operating assets and liabilities which had a significant impact on the cash used in operating activities included (i) an increase in inventories, (ii) a decrease in other liabilities as a result of a decrease in customer deposits and the timing of payments to vendors, (iii) a decrease in accrued settlements as a result of the payment of the Digi settlement and (iv) a reduction in the warranty reserve to reflect lower expected warranty return rates; offset by (v) an increase in accounts payable as a result of the timing of cash payments to vendors.

Investing activities used cash during the nine months ended March 31, 2008.  This was due to the purchase of property and equipment, which was offset by proceeds from the sale of marketable securities.

Investing activities provided cash during the nine months ended March 31, 2007. This was due to the sale of the Company’s investment in Xanboo for $700,000, which was offset by the purchase of property and equipment.

Financing activities provided cash during the nine months ended March 31, 2008 and 2007. This was due to proceeds from the sale of common shares through employee stock option exercises, which was offset by repayments on capital lease obligations.

Off-Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of March 31, 2008.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments for speculative or trading purposes. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy.

Interest Rate Risk

 

Our exposure to interest rate risk is limited to the exposure related to our cash, cash equivalents and marketable securities. Our cash and cash equivalents are held in cash deposit accounts and, as such, we believe our cash and cash equivalents are not subject to significant interest rate risk. We believe our marketable securities would not decline in value by a significant amount if interest rates increase, and therefore would not have a material effect on our financial condition or results of operations.

The following table presents our cash, cash equivalents and marketable securities:

 

		March 31,				June 30,
		2008				2007
		(In thousands)
Cash and cash equivalents		$	7,297			$	7,582
Marketable securities			-				97
Total cash, cash equivalents and marketable securities		$	7,297			$	7,679

 

Foreign Currency Risk

 

We hold a significant portion of our cash balance in foreign currencies (particularly the Euro) and, as such, we are subject to foreign currency fluctuations. In addition, we sell products internationally. As a result, our financial results could be harmed by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if we feel our foreign currency exposure has increased, we may consider entering into hedging transactions to help mitigate that risk.

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The following table presents our cash balance held in foreign currencies:

 

		March 31,				June 30,
		2008				2007
		(In thousands)
Cash held in foreign currencies		$	1,827			$	2,042

 

Item 4.    Controls and Procedures

(a) Evaluation of disclosure controls and procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of our fiscal quarter ended March 31, 2008. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.

 

(b) Changes in internal controls over financial reporting

 

There have been no changes in our internal controls over financial reporting identified during the fiscal quarter that ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

The information set forth in Notes 9 and 10 to our notes to the unaudited condensed consolidated financial statements of Part I, Item 1 of this Quarterly Report is hereby incorporated by reference.

Item 1A. Risk Factors

 

We operate in a rapidly changing environment that involves numerous risks and uncertainties.  Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described in this section. This section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Report. If any of these risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

 

Our quarterly operating results may fluctuate, which could cause our stock price to decline.

 

We have experienced, and expect to continue to experience, significant fluctuations in net revenues, expenses and operating results from quarter to quarter. We, therefore, believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance, and you should not rely on them to predict our future performance or the future performance of our stock. A high percentage of our operating expenses are relatively fixed and are based on our expectations of future net revenues. If we were to experience a reduction in revenues in a quarter, we would likely be unable to adjust our short-term expenditures. If this were to occur, our operating results for that fiscal quarter would be harmed. If our operating results in future fiscal quarters fall below the expectations of market analysts and investors, the price of our common stock would likely fall. Other factors that might cause our operating results to fluctuate on a quarterly basis include:

 

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·	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.

Our common stock may be delisted, which could significantly harm our business.

Our common stock is currently listed on The Nasdaq Capital Market under the symbol “LTRX.” We currently are not in compliance with the $1.00 minimum bid price requirement for inclusion in The Nasdaq Capital Market; however, we have until June 23, 2008, to regain compliance. At that time we may then be eligible for an additional 180 calendar day grace period in which to regain compliance with the $1.00 minimum bid price requirement. If our common stock was delisted from The Nasdaq Capital Market, some or all of the following could be reduced, harming our investors:

·	the liquidity of our common stock;

·	the market price of our common stock;

·	the number of institutional investors that will consider investing in our common stock;

·	the number of investors in general that will consider investing in our common stock;

·	the number of market makers in our common stock;

·	the availability of information concerning the trading prices;

·	the number of broker-dealers willing to execute trades in shares of our common stock; and

·	our ability to obtain financing for the continuation of our operations.

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:

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		Nine Months Ended
		March 31,
		2008				2007
Top five customers (1)			38.0%				34.0%
Tech Data			13.3%				7.0%
Ingram Micro			8.4%				12.0%
(1) Includes Ingram Micro and Tech Data.

 

The loss or deferral of one or more significant customers in a quarter could harm our operating results. We have in the past, and might in the future, lose one or more major customers. If we fail to continue to sell to our major customers in the quantities we anticipate, or if any of these customers terminate our relationship, our reputation, the perception of our products and technology in the marketplace, could be harmed. The demand for our products from our OEM, VAR and systems integrator customers depends primarily on their ability to successfully sell their products that incorporate our device networking solutions technology. Our sales are usually completed on a purchase order basis and we have few long-term purchase commitments from our customers.

 

Our future success also depends on our ability to attract new customers, which often involves an extended selling process. The sale of our products often involves a significant technical evaluation, and we often face delays because of our customers’ internal procedures for evaluating and deploying new technologies. For these and other reasons, the sales cycle associated with our products is typically lengthy, often lasting six to nine months and sometimes longer. Therefore, if we were to lose a major customer, we might not be able to replace the customer in a timely manner, or at all. This would cause our net revenues to decrease and could cause our stock price to decline.

 

If we fail to develop or enhance our products to respond to changing market conditions and government and industry standards, our competitive position will suffer and our business will be adversely affected.

 

Our future success depends in large part on our ability to continue to enhance existing products, lower product cost and develop new products that maintain technological competitiveness and meet government and industry standards. The demand for network-enabled products is relatively new and can change as a result of innovations, new technologies 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