Overview

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

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

The following describes our M2M device networking product lines:

·

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

·

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

 

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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 2009 while we complete the exit of this product category.

Financial Highlights and Other Information for the Fiscal Quarter Ended March 31, 2009

The following is a summary of the key factors and significant events that impacted our financial performance during the fiscal quarter ended March 31, 2009:

·

Net revenue was $10.7 million for the fiscal quarter ended March 31, 2009, a decrease of $3.9 million or 26.7%, compared to $14.5 million for the fiscal quarter ended March 31, 2008. The decrease was primarily the result of a $3.3 million, or 24.2%, decrease in our device networking product lines and a $579,000, or 65.2%, decrease in our non-core product lines.

·

Gross profit margin was 52.3% for the fiscal quarter ended March 31, 2009 compared to 50.4% for the fiscal quarter ended March 31, 2008.  The increase in gross profit margin percent was primarily attributable to product mix during the quarter and lower inventory reserve costs.

·

Loss from operations was $239,000 for the fiscal quarter ended March 31, 2009 compared to a loss from operations of $373,000 for the fiscal quarter ended March 31, 2008.

·

Net loss was $263,000, or $0.00 per basic and diluted share, for the fiscal quarter ended March 31, 2009 compared to a net loss of $464,000, or $0.01 per basic and diluted share, for the fiscal quarter ended March 31, 2008.

·

Cash and cash equivalents were $9.2 million as of March 31, 2009, an increase of $1.7 million, compared to $7.4 million as of June 30, 2008.

·

Net accounts receivable were $1.3 million as of March 31, 2009, a decrease of $2.8 million, compared to $4.2 million as of June 30, 2008. Annualized days sales outstanding (“DSO”) in receivables were 23 days for the fiscal quarter ended March 31, 2009 compared to 24 days for the fiscal quarter ended June 30, 2008. 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 $8.0 million as of March 31, 2009 compared to $8.0 million as of June 30, 2008. Annualized inventory turns were 2.5 turns for the fiscal quarter ended March 31, 2009 compared to 3.0 turns for the fiscal quarter ended June 30, 2008.

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 restructuring reserves. These policies are described in further detail in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008. There have been no significant changes in our critical accounting policies and estimates during the fiscal quarter ended March 31, 2009 as compared to what was previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.

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 March 31,								Nine Months Ended March 31,
		2009				2008				2009				2008
Net revenues			100.0%				100.0%				100.0%				100.0%
Cost of revenues			47.7%				49.6%				46.9%				49.5%
Gross profit			52.3%				50.4%				53.1%				50.5%
Operating expenses:
Selling, general and administrative			41.7%				41.1%				39.7%				41.0%
Research and development			12.8%				11.7%				11.7%				12.2%
Restructuring (recovery) charge			(0.2%	)			0.0%				1.8%				0.0%
Amortization of purchased intangible assets			0.2%				0.1%				0.1%				0.1%
Total operating expenses			54.5%				53.0%				53.3%				53.4%
Loss from operations			(2.2%	)			(2.6%	)			(0.3%	)			(2.9%	)
Interest expense, net			(0.5%	)			(0.3%	)			(0.4%	)			(0.3%	)
Other income (expense), net			0.3%				(0.1%	)			0.1%				0.3%
Loss before income taxes			(2.4%	)			(2.9%	)			(0.5%	)			(2.9%	)
Provision (benefit) for income taxes			0.1%				0.2%				0.1%				(0.3%	)
Net loss			(2.5%	)			(3.2%	)			(0.6%	)			(2.6%	)

Comparison of the Fiscal Quarters Ended March 31, 2009 and 2008

Net Revenue by Product Line

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

 

		Three Months Ended March 31,
						% of Net								% of Net				Change
		2009				Revenue				2008				Revenue				$					%
		(In thousands, except percentages)
Device enablement		$	8,737				82.0%			$	11,878				81.7%			$	(3,141	)			(26.4%	)
Device management			1,609				15.1%				1,775				12.2%				(166	)			(9.4%	)
Device networking			10,346				97.1%				13,653				93.9%				(3,307	)			(24.2%	)
Non-core			309				2.9%				888				6.1%				(579	)			(65.2%	)
Net revenue		$	10,655				100.0%			$	14,541				100.0%			$	(3,886	)			(26.7%	)

The decrease in net revenue for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 was the result of a decrease in net revenue across all major product lines and regions. The decrease in our device enablement product line was due to a decrease in our embedded device enablement products, and more specifically, our WiPort, XPort and Micro product families and our external device enablement products, more specifically, our UDS, EDS and XPress product families offset by an increase in our WiBox product family. The decrease in our device management product line was the result of a decrease in our SLC and SCS product families offset by an increase in our SLB product family. We are no longer investing in the development of our non-core product lines and expect net revenue related to these products to continue to decline in the future as we focus our investment on our device networking product lines.

 

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

 

		Nine Months Ended March 31,
						% of Net								% of Net				Change
		2009				Revenue				2008				Revenue				$					%
		(In thousands, except percentages)
Device enablement		$	30,405				80.5%			$	32,992				77.0%			$	(2,587	)			(7.8%	)
Device management			5,828				15.4%				6,601				15.4%				(773	)			(11.7%	)
Device networking			36,233				95.9%				39,593				92.4%				(3,360	)			(8.5%	)
Non-core			1,519				4.1%				3,279				7.6%				(1,760	)			(53.7%	)
Net revenue		$	37,752				100.0%			$	42,872				100.0%			$	(5,120	)			(11.9%	)

 

The decrease in net revenue for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008 was the result of a decrease in net revenue across all major product lines and regions. The decrease in our device enablement product line was due to a decrease in our embedded device enablement products, and more specifically, our WiPort, ASIC and Micro product families and our external device enablement products, more specifically, our UDS, EDS, MSS and XPress product families offset by an increase in our WiBox product family. The decrease in our device management product line was the result of a decrease in our SLC and SCS product families offset by an increase in our SLB product family. We are no longer investing in the development of our non-core product lines and expect net revenue related to these products to continue to decline in the future as we focus our investment on our device networking product lines.

Net Revenue by Geographic Region

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

 

		Three Months Ended March 31,
						% of Net								% of Net				Change
		2009				Revenue				2008				Revenue				$				%
		(In thousands, except percentages)
Americas		$	5,715				53.6%			$	8,294				57.0%			$	(2,579	)			(31.1%	)
EMEA			3,200				30.0%				4,204				28.9%				(1,004	)			(23.9%	)
Asia Pacific			1,740				16.4%				2,043				14.1%				(303	)			(14.8%	)
Net revenue		$	10,655				100.0%			$	14,541				100.0%			$	(3,886	)			(26.7%	)

All major geographic regions contributed to the decrease in net revenue for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The decrease in the Americas region was primarily due to the decrease in our device enablement product lines, and more specifically, the Micro, ASIC, XPort, UDS, EDS, XPress and MSS product families offset by an increase in our WiBox product family, as well a decrease in our non-core product lines. The decrease in our EMEA (“Europe, Middle East and Africa”) region was primarily due to a decrease in our device enablement product lines, and more specifically, the ASIC, XPort, WiPort and UDS product families. The decrease in our Asia Pacific region was due to a decrease in our non-core product lines and our device management product lines, and more specifically, the SLC product family.

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

 

		Nine Months Ended March 31,
						% of Net								% of Net				Change
		2009				Revenue				2008				Revenue				$				%
		(In thousands, except percentages)
Americas		$	21,687				57.4%			$	25,137				58.6%			$	(3,450	)			(13.7%	)
EMEA			10,680				28.3%				11,714				27.3%				(1,034	)			(8.8%	)
Asia Pacific			5,385				14.3%				6,021				14.1%				(636	)			(10.6%	)
Net revenue		$	37,752				100.0%			$	42,872				100.0%			$	(5,120	)			(11.9%	)

All major geographic regions contributed to the decrease in net revenue for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008. The decrease in the Americas region was primarily due to the decrease in our non-core product lines in addition to a decrease in our device enablement product lines, and more specifically, the Micro, ASIC, UDS, EDS, MSS and XPress product families offset by an increase in our WiBox product family, as well as our device management product lines, and more specifically, the SLC and SCS product families offset by an increase in our SLB product family. The decrease in our EMEA region was primarily due to a decrease in our non-core product lines and our device enablement product lines, and more specifically, the ASIC, WiPort and UDS product families offset by an increase in our MatchPort product family. The decrease in our Asia Pacific region was due to a decrease in our non-core product lines and our device management product lines, and more specifically, the SLC product family.

 

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Gross Profit

The following table presents fiscal quarter gross profit:

 

		Three Months Ended March 31,
						% of Net								% of Net				Change
		2009				Revenue				2008				Revenue					$				%
		(In thousands, except percentages)
Gross profit		$	5,569				52.3%			$	7,334				50.4%			$	(1,765	)			(24.1%	)

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

The increase in gross profit margin for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 was primarily attributable to product mix during the quarter and lower inventory reserve costs.

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

 

		Nine Months Ended March 31,
						% of Net								% of Net				Change
		2009				Revenue				2008				Revenue					$				%
		(In thousands, except percentages)
Gross profit		$	20,036				53.1%			$	21,638				50.5%			$	(1,602	)			(7.4%	)

 

The increase in gross profit margin for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008 was primarily attributable to lower inventory reserve costs, lower unfavorable inventory variances and lower personnel-related expenses as a result of the restructuring activities and company-wide furlough program that was taken during the fiscal quarter ended March 31, 2009 in response to the economic downturn.

Selling, General and Administrative

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

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

 

		Three Months Ended March 31,
					% of Net					% of Net		Change
		2009			Revenue		2008			Revenue		$				%
		(In thousands, except percentages)
Personnel-related expenses		$	2,420				$	3,523				$	(1,103	)			(31.3%	)
Professional fees & outside services			438					516					(78	)			(15.1%	)
Advertising and marketing			522					825					(303	)			(36.7%	)
Facilities			327					390					(63	)			(16.2%	)
Share-based compensation			242					186					56				30.1%
Depreciation			153					95					58				61.1%
Bad debt expense (recovery)			91					(20	)				111				(555.0%	)
Other			253					467					(214	)			(45.8%	)
Selling, general and administrative		$	4,446		41.7%		$	5,982		41.1%		$	(1,536	)			(25.7%	)

 

 

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In order of significance, the decrease in selling, general and administrative expenses for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 was primarily due to: (i) decreased personnel-related expenses as a result of the restructuring activities and a company-wide furlough program that was taken during the fiscal quarter ended March 31, 2009 in response to the economic downturn; and (ii) decreased advertising and marketing expenses as a result of more focused spending.

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

 

		Nine Months Ended March 31,
					% of Net					% of Net		Change
		2009			Revenue		2008			Revenue		$				%
		(In thousands, except percentages)
Personnel-related expenses		$	7,960				$	10,108				$	(2,148	)			(21.3%	)
Professional fees & outside services			1,771					1,992					(221	)			(11.1%	)
Advertising and marketing			1,790					2,146					(356	)			(16.6%	)
Facilities			1,027					1,162					(135	)			(11.6%	)
Share-based compensation			956					588					368				62.6%
Depreciation			422					271					151				55.7%
Bad Debt expense (recovery)			54					(23	)				77				(334.8%	)
Other			989					1,348					(359	)			(26.6%	)
Selling, general and administrative		$	14,969		39.7%		$	17,592		41.0%		$	(2,623	)			(14.9%	)

 

In order of significance, the decrease in selling, general and administrative expenses for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008 was primarily due to: (i) decreased personnel-related expenses as a result of the restructuring activities and a company-wide furlough program that was taken during the fiscal quarter ended March 31, 2009 in response to the economic downturn;   (ii) decreased advertising and marketing expenses as a result of more focused spending and (iii) decreased professional fees & outside services due to cost cutting measures; offset by (iv) increased share-based compensation as a result of the new restricted stock grants related to LTIP and Performance Plans.

Research and Development

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

The following table presents fiscal quarter research and development expenses:

 

		Three Months Ended March 31,
					% of Net					% of Net		Change
		2009			Revenue		2008			Revenue		$				%
		(In thousands, except percentages)
Personnel-related expenses		$	910				$	1,264				$	(354	)			(28.0%	)
Facilities			222					223					(1	)			(0.4%	)
Professional fees & outside services			74					53					21				39.6%
Share-based compensation			51					74					(23	)			(31.1%	)
Depreciation			17					14					3				21.4%
Other			93					79					14				17.7%
Research and development		$	1,367		12.8%		$	1,707		11.7%		$	(340	)			(19.9%	)

 

Research and development expenses for the three months ended March 31, 2009 decreased compared to the three months ended March 31, 2008 mainly due to decreased personnel-related expenses as a result of the restructuring activities  and a company-wide furlough program that was taken during the fiscal quarter ended March 31, 2009 in response to the economic downturn.

 

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

 

		Nine Months Ended March 31,
					% of Net					% of Net		Change
		2009			Revenue		2008			Revenue		$				%
		(In thousands, except percentages)
Personnel-related expenses		$	2,954				$	3,852				$	(898	)			(23.3%	)
Facilities			706					651					55				8.4%
Professional fees & outside services