Edgar Filing: LANTRONIX INC

lantronix_10q-123109.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2009

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

For the transition period from _________ to ___________.

Commission file number: 1-16027

LANTRONIX, INC.

(Exact name of registrant as specified in its charter)

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

167 Technology Drive, Irvine, California

(Address of principal executive offices)

92618

(Zip Code)

(949) 453-3990

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company x
		(do not check if a smaller reporting company)

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

As of February 2, 2010, 10,315,208, shares of the Registrant’s common stock were outstanding.

LANTRONIX, INC.

FORM 10-Q

FOR THE FISCAL QUARTER ENDED

December 31, 2009

INDEX

		Page

PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

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

	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2009 and 2008	2

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2009 and 2008	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 4.	Controls and Procedures	20

PART II.	OTHER INFORMATION	20

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

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

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Submission of Matters to a Vote of Security Holders	28

Item 5.	Other Information	28

Item 6.	Exhibits	29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31,			June 30,
	2009			2009
Assets
Current assets:
Cash and cash equivalents	$	9,379		$	9,137
Accounts receivable, net		1,762			1,851
Contract manufacturers' receivable		1,026			655
Inventories, net		6,606			6,479
Prepaid expenses and other current assets		847			529
Total current assets		19,620			18,651

Property and equipment, net		2,660			2,230
Goodwill		9,488			9,488
Purchased intangible assets, net		203			265
Other assets		128			122
Total assets	$	32,099		$	30,756

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	7,583		$	5,626
Accrued payroll and related expenses		950			1,414
Warranty reserve		224			224
Restructuring reserve		-			76
Short-term debt		667			667
Other current liabilities		3,062			3,221
Total current liabilities		12,486			11,228
Non-current liabilities:
Long-term liabilities		662			117
Long-term capital lease obligations		222			309
Long-term debt		444			778
Total non-current liabilities		1,328			1,204
Total liabilities		13,814			12,432

Commitments and contingencies

Stockholders' equity:
Common stock		1			1
Additional paid-in capital		190,397			189,584
Accumulated deficit		(172,561	)		(171,687	)
Accumulated other comprehensive income		448			426
Total stockholders' equity		18,285			18,324
Total liabilities and stockholders' equity	$	32,099		$	30,756

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
Net revenue (1)	$	11,478		$	12,885		$	22,432		$	27,097
Cost of revenue		5,429			5,942			10,666			12,630
Gross profit		6,049			6,943			11,766			14,467
Operating expenses:
Selling, general and administrative		4,855			5,315			9,475			10,523
Research and development		1,510			1,549			2,995			3,052
Restructuring charges		-			128			-			721
Amortization of purchased intangible assets		18			18			36			36
Total operating expenses		6,383			7,010			12,506			14,332
Income (loss) from operations		(334	)		(67	)		(740	)		135
Interest expense, net		(42	)		(57	)		(89	)		(83	)
Other income (expense), net		11			(16	)		(25	)		6
Income (loss) before income taxes		(365	)		(140	)		(854	)		58
Provision for income taxes		10			8			20			22
Net income (loss)	$	(375	)	$	(148	)	$	(874	)	$	36

Net income (loss) per share (basic)	$	(0.04	)	$	(0.01	)	$	(0.09	)	$	0.00
Net income (loss) per share (diluted)	$	(0.04	)	$	(0.01	)	$	(0.09	)	$	0.00

Weighted-average shares (basic)		10,301			10,084			10,234			10,073
Weighted-average shares (diluted)		10,301			10,084			10,234			10,107

(1) Includes net revenue from related party	$	142		$	306		$	267		$	560

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six Months Ended
	December 31,
	2009			2008
Operating activities
Net income (loss)	$	(874	)	$	36
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-based compensation		1,143			1,064
Depreciation		404			366
(Recovery) provision for inventories		(119	)		101
Amortization of purchased intangible assets		62			58
Provision (recovery) of doubtful accounts		12			(37	)
Restructuring charge		-			721
Changes in operating assets and liabilities:
Accounts receivable		77			2,057
Contract manufacturers' receivable		(371	)		(456	)
Inventories		(8	)		(190	)
Prepaid expenses and other current assets		(352	)		(121	)
Other assets		(5	)		10
Accounts payable		1,928			(1,222	)
Accrued payroll and related expenses		(478	)		(901	)
Warranty reserve		-			(76	)
Restructuring reserve		(76	)		(1,391	)
Other liabilities		59			488
Net cash provided by operating activities		1,402			507
Investing activities
Purchases of property and equipment, net		(625	)		(354	)
Net cash used in investing activities		(625	)		(354	)
Financing activities
Minimum tax withholding paid on behalf of employees for restricted shares		(263	)		-
Payment of term loan		(333	)		(222	)
Net proceeds from issuances of common stock		150			88
Payment of capital lease obligations		(138	)		(179	)
Proceeds from term loan		-			2,000
Net cash (used in) provided by financing activities		(584	)		1,687
Effect of foreign exchange rate changes on cash		49			(123	)
Increase in cash and cash equivalents		242			1,717
Cash and cash equivalents at beginning of period		9,137			7,434
Cash and cash equivalents at end of period	$	9,379		$	9,151

See accompanying notes.

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Lantronix, Inc. (the “Company” or “Lantronix”) have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2009, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 28, 2009. They contain all normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at December 31, 2009, and the consolidated results of its operations and cash flows for the three and six months ended December 31, 2009 and 2008. All intercompany accounts and transactions have been eliminated. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended December 31, 2009 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

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

2.	Computation of Net Income (Loss) per Share

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

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

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
	(In thousands, except per share data)
Numerator:
Net income (loss)	$	(375	)	$	(148	)	$	(874	)	$	36
Denominator:
Weighted-average shares outstanding		10,620			10,599			10,553			10,588
Less: Unvested common shares outstanding		(319	)		(515	)		(319	)		(515	)
Weighted-average shares (basic)		10,301			10,084			10,234			10,073
Effect of dilutive securities:
Unvested common shares outstanding		-			-			-			34
Stock options		-			-			-			-
Denominator for net income (loss) per share (diluted)		10,301			10,084			10,234			10,107

Net income (loss) per share (basic)	$	(0.04	)	$	(0.01	)	$	(0.09	)	$	0.00

Net income (loss) per share (diluted)	$	(0.04	)	$	(0.01	)	$	(0.09	)	$	0.00

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

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2009		2008		2009		2008
	(In thousands)
Common stock equivalents		1,201		1,518		1,351		1,427

3.	Inventories

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

	December 31,			June 30,
	2009			2009
	(In thousands)
Finished goods	$	4,445		$	4,421
Raw materials		1,513			1,537
Inventory at distributors		1,384			1,355
Large scale integration chips *		792			909
Inventories, gross		8,134			8,222
Reserve for excess and obsolete inventory		(1,528	)		(1,743	)
Inventories, net	$	6,606		$	6,479

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

Warranty

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

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

	Six Months Ended			Year Ended
	December 31,			June 30,
	2009			2009
	(In thousands)
Beginning balance	$	224		$	342
Charged to cost of revenues		117			116
Usage		(117	)		(234	)
Ending balance	$	224		$	224

5.	Restructuring Reserve

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

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

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

6.	Bank Line of Credit and Debt

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

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

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

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

	December 31, 2009		June 30, 2009
	(In thousands)
Available borrowing capacity	$	948	$	426
Outstanding letters of credit	$	651	$	732

7.	Stockholders’ Equity

Common Stock

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

Share-Based Compensation

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

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

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

The compensation committee of the board of directors approved a performance plan for the fiscal year ended June 30, 2010 (“Performance Plan”), which will be paid in vested common shares if minimum revenue, non-GAAP income and management objectives are met. As of December 31, 2009, the Company estimated it was at approximately 10% attainment per the Performance Plan which would result in an expense to share-based compensation of approximately $435,000 for the fiscal year ending June 30, 2010. During the six months ended December 31, 2009, the Company recorded $217,000 to share-based compensation in connection with this Performance Plan.

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

	Number of
	Shares
Balance of options outstanding at June 30, 2009		1,278,505
Options granted		980,219
Options forfeited		(55,919	)
Options expired		(83,913	)
Options exercised		(50,000	)
Balance of options outstanding at December 31, 2009		2,068,892

The following table presents stock option grant date information:

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2009		2008		2009		2008
Weighted-average grant date fair value per share	$	2.14	$	2.10	$	1.88	$	2.22
Weighted-average grant date exercise price per share	$	3.06	$	3.18	$	2.66	$	3.30

The following table presents a summary of restricted stock activity:

				Weighted
				Average
	Number of			Grant - Date
	Shares			Fair Value
Balance of restricted shares at June 30, 2009		472,065		$	3.12
Granted		-			-
Forfeited		(22,693	)		3.00
Vested		(130,763	)		3.09
Balance of restricted shares at December 31, 2009		318,609		$	3.14

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

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2009		2008		2009		2008
	(In thousands)
Fair value of shares vested	$	77	$	-	$	425	$	-

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

	Remaining
	Unrecognized		Remaining
	Compensation		Years
Vesting Condition	Cost		To Vest
	(In thousands)
Stock Option Awards:
Service based	$	2,204
Market and service based		567
Stock option awards	$	2,771	2.9

Restricted Stock Awards:
Service based		837
Market and service based		37
Restricted stock awards	$	874	2.5

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

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2009		2008		2009		2008
	(In thousands)
Cost of revenues	$	10	$	35	$	19	$	47
Selling, general and administrative		428		485		851		714
Research and development		146		221		273		303
Total share-basd compensation	$	584	$	741	$	1,143	$	1,064

Warrants to Purchase Common Stock

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

8.	Income Taxes

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

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

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2009		2008		2009		2008
Effective tax rate		3%		6%		2%		38%

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

9.	Comprehensive Income (Loss)

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

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
	(In thousands)
Net income (loss)	$	(375	)	$	(148	)	$	(874	)	$	36
Other comprehensive income (loss):
Change in translation adjustments, net of taxes of $0		(25	)		2			22			(94	)
Total comprehensive loss	$	(400	)	$	(146	)	$	(852	)	$	(58	)

10.	Litigation

From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. Except as discussed below, the Company is currently not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, prospects, financial position, operating results or cash flows.

During 2006, the Company concluded multiple securities lawsuits and litigation with a former executive officer. The Company may have had an obligation to continue to indemnify the former executive officer and defend him in the litigation regarding the securities violation with which he has been charged. As of December 31, 2009, the litigation had been settled and all legal expenses had been reimbursed by insurance.

11.	Subsequent Events

The Company has evaluated subsequent events through February 8, 2010, which is the date the Company filed its Quarterly Report on Form 10-Q for the fiscal quarter ending December 31, 2009 with the Securities and Exchange Commission. There are no further subsequent events for disclosure.

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

Cautionary Statement

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

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

Overview

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

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

The following describes our M2M device networking product lines:

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

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

The following describes our non-core product line:

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

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

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

Net revenue was $11.5 million for the fiscal quarter ended December 31, 2009, a decrease of $1.4 million or 10.9%, compared to $12.9 million for the fiscal quarter ended December 31, 2008. The decrease was primarily the result of a $1.2 million, or 9.7%, decrease in our device networking product lines and a $205,000, or 38.8%, decrease in our non-core product lines.

Gross profit margin was 52.7% for the fiscal quarter ended December 31, 2009, compared to 53.9% for the fiscal quarter ended December 31, 2008. The decrease in gross profit margin percent was primarily attributable to product mix, increased freight costs and employee severance during the quarter.

Loss from operations was $334,000 for the fiscal quarter ended December 31, 2009, compared to $67,000 for the fiscal quarter ended December 31, 2008.

Net loss was $375,000, or $0.04 per basic and diluted share, for the fiscal quarter ended December 31, 2009, compared to $148,000, or $0.01 per basic and diluted share, for the fiscal quarter ended December 31, 2008.

Cash and cash equivalents were $9.4 million as of December 31, 2009, an increase of $242,000, compared to $9.1 million as of June 30, 2009.

Net accounts receivable were $1.8 million as of December 31, 2009, a decrease of $89,000, compared to $1.9 million as of June 30, 2009. Days sales outstanding (“DSO”) in receivables were 14 days for the fiscal quarter ended December 31, 2009 compared to 22 days for the fiscal quarter ended June 30, 2009. Our accounts receivable and DSO are primarily affected by the timing of shipments within a quarter, our collections performance and the fact that a significant portion of our revenues are recognized on a sell-through basis (upon shipment from distributor inventories rather than as goods are shipped to distributors).

Net inventories were $6.6 million as of December 31, 2009, compared to $6.5 million as of June 30, 2009. Inventory turns were 3.3 turns for the fiscal quarter ended December 31, 2009, compared to 3.2 turns for the fiscal quarter ended June 30, 2009.

Critical Accounting Policies and Estimates

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

Recent Accounting Pronouncements

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

Consolidated Results of Operations

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

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008

Net revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		47.3	%		46.1	%		47.5	%		46.6	%
Gross profit		52.7	%		53.9	%		52.5	%		53.4	%
Operating expenses:
Selling, general and administrative		42.3	%		41.2	%		42.2	%		38.8	%
Research and development		13.2	%		12.0	%		13.4	%		11.3	%
Restructuring charges		0.0	%		1.0	%		0.0	%		2.7	%
Amortization of purchased intangible assets		0.2	%		0.1	%		0.2	%		0.1	%
Total operating expenses		55.6	%		54.4	%		55.8	%		52.9	%
Income (loss) from operations		(2.9	%)		(0.5	%)		(3.3	%)		0.5	%
Interest expense, net		(0.4	%)		(0.4	%)		(0.4	%)		(0.3	%)
Other income (expense), net		0.1	%		(0.1	%)		(0.1	%)		0.0	%
Income (loss) before income taxes		(3.2	%)		(1.1	%)		(3.8	%)		0.2	%
Provision for income taxes		0.1	%		0.1	%		0.1	%		0.1	%
Net income (loss)		(3.3	%)		(1.1	%)		(3.9	%)		0.1	%

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

Net Revenue by Product Line

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

	Three Months Ended December 31,
			% of Net				% of Net		Change
	2009		Revenue		2008		Revenue		$			%
	(In thousands, except percentages)
Device enablement	$	9,255		80.6%	$	10,115		78.5%	$	(860	)		(8.5%)
Device management		1,899		16.5%		2,241		17.4%		(342	)		(15.3%)
Device networking		11,154		97.1%		12,356		95.9%		(1,202	)		(9.7%)
Non-core		324		2.9%		529		4.1%		(205	)		(38.8%)
Net revenue	$	11,478		100.0%	$	12,885		100.0%	$	(1,407	)		(10.9%)

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

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

	Six Months Ended December 31,
			% of Net				% of Net		Change
	2009		Revenue		2008		Revenue		$			%
	(In thousands, except percentages)
Device enablement	$	17,995		80.2%	$	21,668		80.0%	$	(3,673	)		(17.0%)
Device management		3,902		17.4%		4,219		15.6%		(317	)		(7.5%)
Device networking		21,897		97.6%		25,887		95.6%		(3,990	)		(15.4%)
Non-core		535		2.4%		1,210		4.4%		(675	)		(55.8%)
Net revenue	$	22,432		100.0%	$	27,097		100.0%	$	(4,665	)		(17.2%)

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

Net Revenue by Geographic Region

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

	Three Months Ended December 31,
			% of Net				% of Net		Change
	2009		Revenue		2008		Revenue		$			%
	(In thousands, except percentages)
Americas	$	6,135		53.5%	$	7,544		58.5%	$	(1,409	)		(18.7%)
EMEA		3,548		30.9%		3,668		28.5%		(120	)		(3.3%)
Asia Pacific		1,795		15.6%		1,673		13.0%		122			7.3%
Net revenue	$	11,478		100.0%	$	12,885		100.0%	$	(1,407	)		(10.9%)

The decrease in net revenue for the three months ended December 31, 2009 compared to the three months ended December 31, 2008 was primarily the result of a decrease in the Americas region. The decrease in the Americas region was due to the decrease in our device enablement, device management and non-core product lines. The decrease in America’s device enablement net revenue was due to a decrease in the XPort, Micro, EDS, WiBox, and UDS product families. The decrease in the Americas device management net revenue was due to a decrease in our SLC, SLB and SLP product families. We are no longer investing in the development of our non-core product lines.

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

	Six Months Ended December 31,
			% of Net				% of Net		Change
	2009		Revenue		2008		Revenue		$			%
	(In thousands, except percentages)
Americas	$	12,386		55.2%	$	15,972		58.9%	$	(3,586	)		(22.5%)
EMEA		6,457		28.8%		7,480		27.6%		(1,023	)		(13.7%)
Asia Pacific		3,589		16.0%		3,645		13.5%		(56	)		(1.5%)
Net revenue	$	22,432		100.0%	$	27,097		100.0%	$	(4,665	)		(17.2%)

The decrease in net revenue for the six months ended December 31, 2009 compared to the six months ended December 31, 2008 was primarily the result of a decrease in the Americas and EMEA (“Europe, Middle East and Africa”) regions. The decrease in the Americas region was due to the decrease in our device enablement, device management and non-core product lines. The decrease in America’s device enablement net revenue was due to a decrease in the XPort, Micro, EDS, MSS, and UDS product families. The decrease in the Americas device management net revenue was due to a decrease in our SLC, SLB, SCS and SLP product families. We are no longer investing in the development of our non-core product lines. The decrease in our EMEA region was primarily due to a decrease in our device enablement product lines, and more specifically, the ASIC, XPort, UDS, EDS, MSS and XPress product families.

Gross Profit

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

The following table presents fiscal quarter gross profit:

	Three Months Ended December 31,
			% of Net				% of Net		Change
	2009		Revenue		2008		Revenue		$			%
	(In thousands, except percentages)
Gross profit	$	6,049		52.7%	$	6,943		53.9%	$	(894	)		(12.9%)

The decrease in gross profit margin for the three months ended December 31, 2009, compared to the three months ended December 31, 2008 was primarily attributable to product mix, increased freight costs and employee severance.

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

	Six Months Ended December 31,
			% of Net				% of Net		Change
	2009		Revenue		2008		Revenue		$			%
	(In thousands, except percentages)
Gross profit	$	11,766		52.5%	$	14,467		53.4%	$	(2,701	)		(18.7%)

The decrease in gross profit margin for the six months ended December 31, 2009, compared to the six months ended December 31, 2008 was primarily attributable to product mix, increased freight costs and employee severance.

Selling, General and Administrative

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

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

	Three Months Ended December 31,
			% of Net			% of Net	Change
	2009		Revenue	2008		Revenue	$			%
	(In thousands, except percentages)
Personnel-related expenses	$	2,540		$	2,734		$	(194	)		(7.1%)
Professional fees & outside services		491			534			(43	)		(8.1%)
Advertising and marketing		596			712			(116	)		(16.3%)
Facilities		306			321			(15	)		(4.7%)
Share-based compensation		428			485			(57	)		(11.8%)
Depreciation		147			139			8			5.8%
Bad debt expense		17			4			13			325.0%
Other		330			386			(56	)		(14.5%)
Selling, general and administrative	$	4,855	42.3%	$	5,315	41.2%	$	(460	)		(8.7%)

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

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

	Six Months Ended December 31,
			% of Net				% of Net	Change
	2009		Revenue	2008			Revenue	$			%
	(In thousands, except percentages)
Personnel-related expenses	$	4,938		$	5,540			$	(602	)		(10.9%)
Professional fees & outside services		1,107			1,333				(226	)		(17.0%)
Advertising and marketing		1,054			1,268				(214	)		(16.9%)
Facilities		634			700				(66	)		(9.4%)
Share-based compensation		851			714				137			19.2%
Depreciation		280			269				11			4.1%
Bad debt expense (recovery)		12			(37	)			49			(132.4%)
Other		599			736				(137	)		(18.6%)
Selling, general and administrative	$	9,475	42.2%	$	10,523		38.8%	$	(1,048	)		(10.0%)

In order of significance, the decrease in selling, general and administrative expenses for the six months ended December 31, 2009, compared to the six months ended December 31, 2008 was primarily due to: (i) decreased personnel-related expenses as a result of the restructuring activities taken during the prior fiscal year and a company-wide furlough program that was taken in response to the economic downturn and (ii) decreased professional fees and advertising and marketing expenses as a result of cost cutting measures and taking a more focused spending approach; offset by (iii) increased share-based compensation as a result of new option and share grants related to the fiscal 2010 share-based compensation plans.

Research and Development

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

The following table presents fiscal quarter research and development expenses:

	Three Months Ended December 31,
			% of Net			% of Net	Change
	2009		Revenue	2008		Revenue	$			%
	(In thousands, except percentages)
Personnel-related expenses	$	946		$	989		$	(43	)		(4.3%)
Facilities		278			236			42			17.8%
Professional fees & outside services		95			40			55			137.5%
Share-based compensation		146			221			(75	)		(33.9%)
Depreciation		16			19			(3	)		(15.8%)
Other		29			44			(15	)		(34.1%)
Research and development	$	1,510	13.2%	$	1,549	12.0%	$	(39	)		(2.5%)

In order of significance, the decrease in research and development expenses for the three months ended December 31, 2009, compared to the three months ended December 31, 2008 was primarily due to: (i) decreased share-based compensation due to the timing of option grants and (ii) decreased personnel-related expenses as a result of the restructuring activities taken during the prior fiscal year and a company-wide furlough program that was taken in response to the economic downturn; offset by (iii) increased professional fees and outside services due specific projects.

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

	Six Months Ended December 31,
			% of Net			% of Net	Change
	2009		Revenue	2008		Revenue	$			%
	(In thousands, except percentages)
Personnel-related expenses	$	1,919		$	2,044		$	(125	)		(6.1%)
Facilities		522			484			38			7.9%
Professional fees & outside services		143			88			55			62.5%
Share-based compensation		273			303			(30	)		(9.9%)
Depreciation		32			37			(5	)		(13.5%)
Other		106			96			10			10.4%
Research and development	$	2,995	13.4%	$	3,052	11.3%	$	(57	)		(1.9%)

In order of significance, the decrease in research and development expenses for the six months ended December 31, 2009, compared to the six months ended December 31, 2008 was primarily due to: (i) decreased personnel-related expenses as a result of the restructuring activities taken during the prior fiscal year and a company-wide furlough program that was taken in response to the economic downturn; offset by (ii) increased professional fees and outside services due specific projects.

Restructuring Charges

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

The following table presents fiscal quarter restructuring charges:

	Three Months Ended December 31,
			% of Net				% of Net		Change
	2009		Revenue		2008		Revenue		$			%
	(In thousands, except percentages)
Restructuring charges	$	-		0.0%	$	128		1.0%	$	(128	)		(100.0%)

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

Six Months Ended December 31,

% of Net

Change

2009

Revenue

2008