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LANTRONIX INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company ( as defined in the "Overview") intends the
forward-looking statements contained in this report to be covered by the safe
harbor provisions of such Acts. All statements other than statements of
historical fact in this report or referred to or incorporated by reference into
this report are "forward-looking statements" for purposes of these sections.
These statements include, among other things, 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. 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 can sometimes be identified by the use
of forward-looking words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," "may," "will," "projects," "should," "goal,"
"continues," "pro forma," "forecasts," "confident," and "guidance," other forms
of these words or similar words or expressions or the negative
thereof. Investors are cautioned not to unduly rely on such forward-looking
statements. These forward-looking statements are subject to substantial risks
and uncertainties that could cause the Company's results or future business,
financial condition, results of operations or performance to differ materially
from the historical results or those expressed or implied in any forward-looking
statements contained in this report. Investors should carefully review the
information contained in, or incorporated by reference into, the Company's
annual report on Form10-K for the year ended June 30, 2011 and the subsequent
reports on Forms 10-Q and 8-K that we file with the Securities and Exchange
Commission (the "SEC") for a description of these risks and uncertainties. These
forward-looking statements speak only as of the date on which they are made and
the Company does not undertake any obligation to update any forward-looking
statement to reflect events or circumstances after the date of the statement. If
the Company does update or correct one or more of these statements, investors
and others should not conclude that the Company will make additional updates or
corrections.
Overview
Lantronix, Inc. (the "Company" or "we" or "us") designs, develops, markets and
sells products that make it possible to access, manage, connect, control and
configure electronic products over the Internet or other networks. Our device
enablement solutions enable individual electronic products to be connected to a
wired or wireless network for the primary purpose of remote access. Our device
management solutions address applications that manage equipment at data centers
and remote branch offices to provide a reliable, single point of control and
data flow management for potentially thousands of networked devices.
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Our innovative networking solutions include fully-integrated hardware and
software devices, as well as software tools, to develop related customer
applications. Because we deal with network connectivity, we provide solutions to
broad market segments, including industrial, security, energy, information
technology ("IT"), data centers, transportation, government, healthcare, and
many others.
Recent Accounting Pronouncements
In May 2011, the FASB issued additional guidance on fair value measurements that
clarifies the application of existing guidance and disclosure requirements,
changes certain fair value measurement principles and requires additional
disclosures about fair value measurements. The updated guidance is effective on
a prospective basis for financial statements issued for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2011. We
don't expect the adoption of this guidance to have a material impact on our
financial statements.
In September 2011, the FASB issued new accounting guidance intended to simplify
goodwill impairment testing. Entities will be allowed to perform a qualitative
assessment on goodwill impairment to determine whether a quantitative assessment
is necessary. This guidance is effective for goodwill impairment tests performed
in interim and annual periods for fiscal years beginning after December 15,
2011. Early adoption is permitted. We don't expect the adoption of this guidance
to have a material impact on our financial statements.
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, 2011. Except as described below, there have been
no significant changes in our critical accounting policies and estimates during
the three months ended December 31, 2011 as compared to what was previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30,
2011.
Goodwill impairment testing requires us to compare the fair value of our one
reporting unit to its carrying amount, including goodwill, and record an
impairment charge if the carrying amount of a reporting unit exceeds its
estimated fair value. We perform goodwill impairment tests on an annual basis,
and more frequently if events occur or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. We operate in one segment that is comprised of a single reporting unit.
We evaluate goodwill for potential impairment by comparing the carrying value of
total stockholders' equity to the Company's market capitalization.
During the three months ended September 30, 2010, our stock price dropped, which
significantly affected our market capitalization. Accordingly, we have continued
to monitor our stock price and its effect on our market capitalization. As of
December 31, 2011, the fair value of our single reporting unit was estimated to
be $26.3 million based upon our market capitalization compared to the reporting
unit's carrying amount, including goodwill, of $12.2 million. As of December 31,
2011, we have $9.5 million of goodwill reflected in our consolidated balance
sheet. If actual results are not consistent with our assumptions and judgments
used in estimating fair value, we may be exposed to goodwill impairment losses.
Financial Highlights and Other Information
The following is a summary of the key factors and significant events that
impacted our financial performance during the three months ended December 31,
2011:
? We commenced the implementation of a restructuring plan on November 7,
2011 which reduced the Company's workforce by 14 employees or 11% of the
total workforce, and incurred a restructuring charge of $269,000 for
employee severance and related costs during the three months ended
December 31, 2011.
? Net revenue was $10.5 million for the three months ended December 31, 2011, a decrease of $2.2 million or 17.8%, compared to $12.7 million for
the three months ended December 31, 2010. The decline was primarily the
result of a $2.1 million, or 20.3%, decrease in sales of our device
enablement product lines primarily due to lower unit sales of embedded
device enablement products in our Europe, Middle East and Africa region,
which we believe was significantly impacted by current economic
conditions in Europe. In addition, net revenue for the three months
ended December 31, 2010 included approximately $639,000 of deferred
revenue that was recognized as a result of entering into contracts that
removed certain distributors' rights to stock rotation and price
protection in connection with an initiative to streamline our sales
distribution channel. No similar revenue was recognized during the three
months ended December 31, 2011.
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? Gross profit as a percent of net revenue was 48.2% for the three months
ended December 31, 2011, compared to 49.4% for the three months ended December 31, 2010. Gross profit for the three months ended December 31,
2011 included a $480,000 charge for excess and obsolete inventory.
? Net loss was $1.4 million, or $0.13 per basic and diluted share, for the
three months ended December 31, 2011, compared to $579,000, or $0.06 per
basic and diluted share, for the three months ended December 31, 2010.
? Cash and cash equivalents were $3.3 million as of December 31, 2011, a
decrease of $2.5 million, compared to $5.8 million as of the end of June 30, 2011. The use of cash resulted from the net loss and a reduction of
accounts payable.
? Net accounts receivable were $1.4 million as of December 31, 2011, a
decrease of $1.5 million, compared to $2.9 million as of June 30, 2011.
? Net inventories were $8.5 million as of December 31, 2011, compared to
$9.2 million as of June 30, 2011.
Comparison of the Three and Six Months Ended December 31, 2011 and 2010
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
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Device enablement $ 8,343 79.8% $ 10,469 82.3% $ (2,126 ) (20.3%)
Device management 1,992 19.1% 2,076 16.3% (84 ) (4.0%)
Device networking 10,335 98.9% 12,545 98.6% (2,210 ) (17.6%)
Non-core 117 1.1% 174 1.4% (57 ) (32.8%)
Net revenue $ 10,452 100.0% $ 12,719 100.0% $ (2,267 ) (17.8%)
The decrease in net revenue for the three months ended December 31, 2011,
compared to the three months ended December 31, 2010 was primarily the result of
a decrease in net revenue from our device enablement product line. We believe
that our net revenue was negatively impacted by worldwide economic conditions
and, in particular the Europe, Middle East and Africa (the "EMEA") region, which
experienced a 36.4% decline in net revenue. In addition, net revenue for the
three months ended December 31, 2010 included approximately $639,000 of deferred
revenue that was recognized as a result of entering into contracts that removed
certain distributors' rights to stock rotation and price protection in
connection with an initiative to streamline our sales distribution
channel. There was no similar revenue recognized during the three months ended
December 31, 2011. The decrease in net revenue from our device enablement
product line was primarily due to a decrease in unit sales of some of our
embedded device enablement products, in particular our XPort and, to a lesser
extent, our Micro, which is a legacy embedded serial-to-ethernet solution. The
decreases to the embedded device enablement products were partially offset by an
increase in unit sales of our new products, XPort Pro and PremierWave. For the
most part, net revenue from our external device enablement product line remained
consistent with the comparable prior year period. The decrease in net revenue
from our device management product line was due to a decrease in unit sales of
our SLS Spider product family that was partially offset by an increase in unit
sales of our SLC console server product family.
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The following table presents fiscal year-to-date net revenue by product line:
Six Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)Device enablement $ 17,106 79.1% $ 20,352 81.7% $ (3,246 ) (15.9%)
Device management 4,207 19.4% 4,234 17.0%
(27 ) (0.6%)
Device networking 21,313 98.5% 24,586 98.7% (3,273 ) (13.3%)
Non-core 323 1.5% 325 1.3% (2 ) (0.6%)
Net revenue $ 21,636 100.0% $ 24,911 100.0% $ (3,275 ) (13.1%)
The decrease in net revenue for the six months ended December 31, 2011, compared
to the six months ended December 31, 2010 was primarily the result of a decrease
in net revenue from our device enablement product lines. We believe that our net
revenue was negatively impacted by worldwide general economic conditions and, in
particular the EMEA region, which experienced a 20.8% decline in net revenue. In
addition, net revenue for the six months ended December 31, 2010 included
approximately $639,000 of deferred revenue that was recognized as a result of
entering into contracts that removed certain distributors' rights to stock
rotation and price protection in connection with an initiative to streamline our
sales distribution channel. There was no similar revenue recognized during the
six months ended December 31, 2011. The decrease in net revenue from our device
enablement product line was primarily due to a decrease in unit sales of some of
our embedded device enablement products, in particular our XPort and, to a
lesser extent, our Micro, which is a legacy embedded serial-to-ethernet
solution. In addition, we had a $275,000 embedded royalty sale in the prior year
that did not recur in the current year. The decreases to the embedded device
enablement products were partially offset by an increase in unit sales of our
new products, XPort Pro and PremierWave. To a lesser extent, the decrease in net
revenue from our device enablement product line was impacted by a decrease in
unit sales of our external device enablement products, in particular our MSS
product family, a legacy product, partially offset by an increase in unit sales
of our EDS and Xpress product families. The decrease in net revenue from our
device management product line was due to a decrease in unit sales of our SCS
product family, a legacy product, partially offset by an increase in unit sales
of our SLS Spider product family.
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
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Americas $ 5,847 55.9% $ 6,106 48.0% $ (259 ) (4.2%)
EMEA 2,933 28.1% 4,613 36.3% (1,680 ) (36.4%)
Asia Pacific 1,672 16.0% 2,000 15.7% (328 ) (16.4%)
Net revenue $ 10,452 100.0% $ 12,719 100.0% $ (2,267 ) (17.8%)
The decrease in net revenue for the three months ended December 31, 2011
compared to the three months ended December 31, 2010 reflects decreased unit
sales in EMEA, Asia Pacific, and Americas. The decrease in net revenue from EMEA
region was in large part due to a decrease in unit sales in our embedded device
enablement product lines and to a much lesser extent a decrease in external
device enablement and device management product lines. In addition, net revenue
for the three months ended December 31, 2010 included approximately $639,000, of
which $489,000 related to EMEA and $150,000 related to Asia Pacific, of deferred
revenue that was recognized as a result of entering into contracts that removed
certain distributors' rights to stock rotation and price protection in
connection with an initiative to streamline our sales distribution
channel. There was no similar revenue recognized during the three months ended
December 31, 2011. The decrease in net revenue in the Asia Pacific region was
due to a decrease in unit sales of our device enablement and device management
product lines. The decrease in net revenue in the Americas region was primarily
due to a decrease in unit sales of our embedded device enablement product lines
partially offset by increases in the device management and external device
enablement product lines.
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The following table presents fiscal year-to-date net revenue by geographic
region:
Six Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Americas $ 11,524 53.3% $ 12,677 50.9% $ (1,153 ) (9.1%)
EMEA 6,448 29.8% 8,144 32.7% (1,696 ) (20.8%)
Asia Pacific 3,664 16.9% 4,090 16.4% (426 ) (10.4%)
Net revenue $ 21,636 100.0% $ 24,911 100.0% $ (3,275 ) (13.1%)
The decrease in net revenue for the six months ended December 31, 2011 compared
to the six months ended December 31, 2010 reflects decreased unit sales in the
EMEA, Americas, and Asia Pacific. The decrease in net revenue from EMEA region
was in large part due to a decrease in unit sales in our embedded device
enablement product lines and to a lesser extent our device management product
lines and external device enablement product lines. In addition, net revenue for
the three months ended December 31, 2010 included approximately $639,000, of
which $489,000 related to EMEA and $150,000 related to Asia Pacific, of deferred
revenue that was recognized as a result of entering into contracts that removed
certain distributors' rights to stock rotation and price protection in
connection with an initiative to streamline our sales distribution
channel. There was no similar activity during the six months ended December 31,
2011. The decrease in net revenue from the Americas region was primarily due to
a decrease in unit sales of our embedded device enablement product lines. The
decrease in net revenue in the Asia Pacific region was due to a decrease in unit
sales of our device enablement product and device management product lines.
Gross Profit
Gross profit represents net revenue less cost of revenue. Cost of revenue
consists primarily of the cost of raw material components, subcontract labor
assembly from contract manufacturers, freight, amortization of purchased
intangible assets, establishing inventory reserves for excess and obsolete
products or raw materials, warranty costs, royalties and manufacturing overhead,
which includes personnel-related expenses, such as payroll, facilities expenses
and share-based compensation.
The following table presents fiscal quarter gross profit:
Three Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Gross profit $ 5,041 48.2% $ 6,278 49.4% $ (1,237 ) (19.7%)
The decrease in gross profit as a percent of net revenue (referred to as "gross
margin") for the three months ended December 31, 2011, compared to the three
months ended December 31, 2010 was primarily due to a $480,000 charge taken for
excess and obsolete inventories primarily as a result of a reduction in the
sales forecasts for certain products, partially offset by a favorable change in
product mix as a result of lower embedded device enablement unit sales and a
reduction in manufacturing overhead costs.
The following table presents fiscal year-to-date gross profit:
Six Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Gross profit $ 10,343 47.8% $ 12,505 50.2% $ (2,162 ) (17.3%)
The decrease in gross profit as a percent of net revenue (referred to as "gross
margin") for the six months ended December 31, 2011, compared to the six months
ended December 31, 2010 was primarily due to a charge taken for excess and
obsolete inventories primarily as a result of a reduction in the sales forecasts
for certain products, partially offset by a favorable change in product mix as a
result of lower embedded device enablement unit sales and a reduction in
manufacturing overhead costs.
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--------------------------------------------------------------------------------Selling, General and Administrative
Selling, general and administrative expenses consist of personnel-related
expenses, including salaries and commissions, share-based compensation, facility
expenses, information technology, trade show expenses, advertising, and legal
and accounting fees.
The following table presents fiscal quarter selling, general and administrative
expenses:
Three Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Personnel-related
expenses $ 2,541 $ 2,612 $ (71 ) (2.7%)
Professional fees
and outside services 648 885 (237 ) (26.8%)
Advertising and
marketing 413 333 80 24.0%)
Facilities 331 283 48 17.0%)
Share-based
compensation 113 382 (269 ) (70.4%)
Depreciation 117 166 (49 ) (29.5%)
Bad debt expense
(recovery) (6 ) - (6 ) 100.0%)
Other 284 427 (143 ) (33.5%)
Selling, general and
administrative $ 4,441 42.5% $ 5,088 40.0% $ (647 ) (12.7%)
The decrease in selling, general and administrative expenses for the three
months ended December 31, 2011, compared to the three months ended December 31,
2010 was primarily due to a decrease in share-based compensation due to
reduction in headcount and a lower average stock price for options granted
during the three months ended December 31, 2011. A decrease in professional fees
and outside services as a result of the fees associated with the contested proxy
during the three months ended December 31, 2010 that did not occur in the three
months ended December 31, 2011 also contributed to the decrease in selling,
general and administrative costs during the comparative periods. Cost reduction
efforts, which resulted in a reduction in travel by employees, and a decrease in
the number of board directors from nine to four, which resulted in reduced board
fees paid, yielded a decrease in other expenses for the three months ended
December 31, 2011 as compared to the comparable prior year period.
Personnel-related expenses decreased for the three months ended December 31,
2011 as compared to the comparable prior year period as a result of the
restructuring activities that occurred in November 2011, but this decrease was
partially offset by an increase in salaries due to merit increases.
The following table presents fiscal year-to-date selling, general and
administrative expenses:
Six Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Personnel-related
expenses $ 5,385 $ 5,172 $ 213 4.1%
Professional fees &
outside services 1,654 1,690 (36 ) (2.1%)
Advertising and
marketing 619 783 (164 ) (20.9%)
Facilities 669 571 98 17.2%)
Share-based
compensation 194 790 (596 ) (75.4%)
Depreciation 245 331 (86 ) (26.0%)
Bad debt expense
(recovery) 10 1 9 900.0%
Other 629 803 (174 ) (21.7%)
Selling, general and
administrative $ 9,405 43.5% $ 10,141 40.7% $ (736 ) (7.3%)
The decrease in selling, general and administrative expenses for the six months
ended December 31, 2011, compared to the six months ended December 31, 2010 was
primarily due to a decrease in share-based compensation as consideration for
bonuses, a reduction in head count, and a lower average stock price for options
granted during the six months ended December 31, 2011. Advertising and marketing
expenses during the six months ended December 31, 2011 declined when compared to
the prior year period as a result of cost saving measures. Cost reduction
efforts, which resulted in a reduction in travel by employees, and a decrease in
the number of board members, which resulted in reduced board fees paid, yielded
a decrease in other expenses for the three months ended December 31, 2011 as
compared to the comparable prior year period. These factors were partially
offset by an increase in personnel-related expenses in the six months ended
December 31, 2011 as compared to the comparable prior year period as a result of
an increase in salaries due to annual merit increases, the effect of which was
limited by a reduction in headcount as a result of the restructuring activities
that occurred in November 2011.
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--------------------------------------------------------------------------------Research and Development
Research and development expenses consist 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
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Personnel-related
expenses $ 1,088 $ 1,062 $ 26 2.4%
Facilities 212 266 (54 ) (20.3%)
Professional fees
and outside services 153 169 (16 ) (9.5%)
Share-based
compensation 71 86 (15 ) (17.4%)
Depreciation 7 11 (4 ) (36.4%)
Other 115 103 12 11.7%
Research and
development $ 1,646 15.7% $ 1,697 13.3% $ (51 ) (3.0%)
The decrease in research and development expenses for the three months ended
December 31, 2011, compared to the three months ended December 31, 2010 was
primarily due to a decrease in facilities expenses, a decrease in professional
fees and outside services as a result of the timing of development projects, and
a to decrease in share-based compensation due the reduction in head count and a
lower average stock price for options granted during the comparable prior year
period. Personnel-related expenses decreased for the three months ended December
31, 2011 as compared to the comparable prior year period as a result of the
restructuring activities that occurred in November 2011, but this decrease was
partially offset by an increase in salaries.
The following table presents fiscal year-to-date research and development
expenses:
Six Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Personnel-related
expenses $ 2,264 $ 2,187 $ 77 3.5%
Facilities 425 532 (107 ) (20.1%)
Professional fees &
outside services 327 360 (33 ) (9.2%)
Share-based
compensation 137 236 (99 ) (41.9%)
Depreciation 16 23 (7 ) (30.4%)
Other 172 182 (10 ) (5.5%)
Research and
development $ 3,341 15.4% $ 3,520 14.1% $ (179 ) (5.1%)
The decrease in research and development expenses for the six months ended
December 31, 2011, compared to the six months ended December 31, 2010 was
primarily due to a decrease in facilities expenses and a decrease in the use of
share-based compensation as consideration for bonuses and a lower average stock
price for options granted during the six months ended December 31 2011. These
decreases were partially offset during the six months ended December 31, 2011 as
compared to the prior year period by an increase in personnel-related expenses
as a result of annual merit increases, despite the reduction in salary expense
undertaken in November 2011 as a result of restructuring activities.
Restructuring Charges
During the three months ended December 31, 2011, we implemented a restructuring
plan to reduce operating expenses and to improve future results of operations,
which was substantially completed as of December 31, 2011. As part of the
restructuring plan, the workforce was reduced by 14 employees. The restructuring
charges consisted primarily of severance related payments.
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--------------------------------------------------------------------------------The following table presents fiscal quarter restructuring charges:
Three Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Restructuring charges $ 269 2.6% $ - 0.0% $ 269 100%
The following table presents fiscal year-to-date restructuring charges:
Six Months Ended December 31,
% of Net % of Net Change
2011 Revenue 2010 Revenue $ %
(In thousands, except percentages)
Restructuring charges $ 269 1.2% $ - 0.0% $ 269 100%
Other Income (Expense), Net
The following table presents fiscal quarter other income (expense), net:
Three Months Ended December 31,
% of Net % of Net Change
2011 Revenues 2010 Revenues $ %
Other income (expense), net $ (8 ) (0.1%) $ (5 ) (0.0%) $ (3 ) 60.0%
The change in other income (expense), net, for the three months ended December
31, 2011 compared to the three months ended December 31, 2010 is primarily due
to foreign currency remeasurement and transaction adjustments related to our
foreign subsidiaries whose functional currency is the U.S. dollar.
The following table presents fiscal year-to-date other income (expense), net:
Six Months Ended December 31,
% of Net % of Net Change
2011 Revenues 2010 Revenues $ %
Other income
(expense), net $ (37 ) (0.2%) $ 24 0.1% $ (61 ) (254.2%)
The change in other income (expense), net, for the six months ended December 31,
2011 compared to the six months ended December 31, 2010 is primarily due to
foreign currency remeasurement and transaction adjustments related to our
foreign subsidiaries whose functional currency is the U.S. dollar. Further, due
to the decline in the Company's stock price during the three months ended
September 30, 2011, the Company reduced the carrying amount of a former
director's non-recourse loan to the fair value of the shares that collateralize
the non-recourse note, which resulted in a $17,000 charge to other expense.
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--------------------------------------------------------------------------------Amortization of Purchased Intangibles
The following table presents fiscal quarter amortization of purchased
intangibles:
Three Months Ended December 31,
% of Net % of Net Change
2011 Revenues 2010 Revenues $ %
Amortization of
purchased
intangibles $ 18 0.2% $ 18 0.1% $ - 0.0%
The remaining balance of purchased intangibles of approximately $18,000 will be
fully amortized by March 2012.
The following table presents fiscal year-to-date amortization of purchased
intangibles:
Six Months Ended December 31,
% of Net % of Net Change
2011 Revenues 2010 Revenues $ %
Amortization of
purchased
intangibles $ 36 0.2% $ 36 0.1% $ - 0.0%
The remaining balance of purchased intangibles of approximately $18,000 will be
fully amortized by March 2012.
Provision for Income Taxes
At December 31, 2011, our fiscal 2007 through fiscal 2011 tax years remained
open to examination by the Federal, state, and foreign taxing authorities. We
have net operating losses ("NOLs") beginning in fiscal 2002 that 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 Six Months Ended
December 31, December 31,
2011 2010 2011 2010
Effective tax rate 1% 2% 1% 3%
We utilize the liability method of accounting for income taxes. The federal
statutory rate was 34% for all periods. The difference between our effective tax
rate and the federal statutory rate resulted primarily from a tax benefit from
our domestic losses being recorded with a fully reserved allowance, 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.
Liquidity and Capital Resources
The following table presents information about our working capital and cash:
December 31, 2011 June 30, 2011
(In thousands)
Working capital $ 2,385 $ 5,222
Cash and cash equivalents $ 3,303 $ 5,836
The primary drivers affecting cash and liquidity are net revenue, working
capital requirements, capital expenditures and principal payments on our debt.
As of December 31, 2011, we had $3.3 million of cash and cash equivalents and
$2.4 million of working capital compared to $5.8 million of cash and cash
equivalents and $5.2 million of working capital as of June 30, 2011. Management
defines cash and cash equivalents as highly liquid deposits with original
maturities of 90 days or less when purchased. We maintain cash and cash
equivalents balances at certain financial institutions in excess of amounts
insured by federal agencies. Management does not believe this concentration
subjects the Company to any unusual financial risk beyond the normal risk
associated with commercial banking relationships. We frequently monitor the
third-party depository institutions that hold our cash and cash equivalents. Our
emphasis is primarily on safety of principal and secondarily on maximizing yield
on those funds.
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Our future working capital requirements will depend on many factors, including
the timing and amount of our net revenue, research and development expenses, and
expenses associated with any strategic partnerships or acquisitions and
infrastructure investments.
Based on current macro-economic conditions and conditions in the state of the
device networking business, our own organizational structure and our current
outlook, we presently expect our cash and cash equivalents will be sufficient to
fund our operations, working capital and capital requirements for at least the
next 12 months. We incurred a net loss of $5.3 million for the year ended June
30, 2011 and incurred net losses of $1.4 million and $1.4 million for the
subsequent quarters ended September 30, 2011 and December 31, 2011,
respectively. There can be no assurance that we will generate net profits or be
cash flow positive in future periods. Although, the Company expects its
available cash generated from operations, together with existing sources of
cash, if required, from our credit agreement will be sufficient to fund our
long-term and short-term capital expenditures, working capital and other cash
requirements, we may be required, from time-to-time, to raise capital through
either equity or debt arrangements or a hybrid thereof to (i) develop or enhance
our products, (ii) take advantage of future opportunities,(iii) respond to
competition or (iv) continue to operate our business. We cannot provide
assurance that we will be able to raise capital, including, new equity, debt
arrangements or a hybrid thereof or that required capital would be available on
acceptable terms, if at all, or that any financing activity would not be
dilutive to our current stockholders.
Loan Agreement
In September 2010, we and Silicon Valley Bank ("SVB") entered into an amendment
to the then outstanding Loan and Security Agreement (the "2010 Loan Amendment"),
which provided for a two-year $4.0 million maximum revolving line (the
"Revolving Line") with a three-year $2.0 million term loan (the "Term Loan").
Pursuant to the Amended 2010 Loan Amendment, the proceeds from the Term Loan
were used to pay the balance of $611,000 outstanding on the term loan that was
made under our then-existing agreement with SVB. The Term Loan was funded on
September 28, 2010 and is payable in 36 equal monthly installments of principal
and accrued interest. There were no borrowings outstanding on the Revolving Line
as of December 31, 2011.
We refer to the Loan and Security Agreement by and between the Company and SVB,
as amended from time to time, as the "Amended Loan Agreement." Pursuant to the
Amended Loan Agreement, we have pledged substantially all of our assets to SVB.
We did not meet the Minimum Tangible Net Worth ("Minimum TNW") covenant in the
Amended Loan Agreement for the months of May and June in fiscal 2011.
Accordingly, on August 18, 2011, we entered into a further amendment (the "2011
Loan Amendment") to the Amended Loan Agreement. The 2011 Loan Amendment provided
for (i) a limited waiver to the Minimum TNW covenant, (ii) a modification of the
Minimum TNW covenant and (iii) a modification to the interest rate such that the
interest on the Term Loan will accrue at a per annum rate equal to 2.50% above
the prime rate, payable monthly. The 2011 Loan Amendment provided that, if we
achieved certain profitability thresholds for two consecutive fiscal quarters,
so long as we continue to maintain such thresholds at the end of each subsequent
fiscal quarter, the interest on the Term Loan shall accrue at a per annum rate
equal to the prime rate plus 1.50%, payable monthly. We have not met these
profitability thresholds in any quarter since entering into the 2011 Loan
Amendment.
On January 19, 2012, we entered into another amendment (the "2012 Loan
Amendment") to the Amended Loan Agreement. The 2012 Loan Amendment provided for
(i) a modification of the minimum tangible net worth financial covenant,
effective November 30, 2011, that now requires a tangible net worth of at least
$2.5 million plus 50% of all consideration received for equity securities and
subordinated debt; (ii) a monthly collateral monitoring fee of $2,000 if our
credit extensions outstanding during the month are equal to or greater than $1.0
million, otherwise a monthly collateral fee of $500; (iii) a modification of the
interest rate related to the Term Loan to the prime rate plus 3.00%, payable
monthly. If the Company achieves certain profitability thresholds for two
consecutive fiscal quarters, for so long as the Company continues to maintain
such thresholds, the interest shall accrue at a per annum rate equal to the
prime rate plus 1.50%, payable monthly. In addition, the 2012 Loan Amendment
modified the interest rate related to the Revolving Line to the greater of (i)
the prime rate plus 1.0% or (ii) 5.0%, payable monthly.
Upon entering into the 2010 Loan Amendment, we paid a fully earned,
non-refundable commitment fee of $20,000 and an additional $15,000 which was
required on the first anniversary of the effective date of the 2010 Loan
Amendment. In connection with the 2011 Loan Amendment, we paid $5,000 in fees.
Also, in connection with the 2012 Loan Amendment, we paid an additional $5,000
in fees in January 2012.
17--------------------------------------------------------------------------------
Minimum TNW is computed by subtracting goodwill and intangible assets from total
shareholders' equity less goodwill and intangible assets. If we continue to
incur net losses, we may have difficulty satisfying the Minimum TNW financial
covenant in the future. The following table presents the calculation of our
Minimum TNW compared to the financial covenant requirements in the 2012 Loan
Agreement:
Actual TNW Minimum TNW
December 31, 2011 December 31, 2011
(In thousands)
Minimum TNW $ 2,669 $ 2,500
Pursuant to the 2012 Loan Amendment, the available borrowing capacity under the
Revolving Line is limited to the lesser of (i) $4.0 million or (ii) the current
portion of the trade accounts receivable balance, less fifty percent of the
balance of deferred revenue, less outstanding letters of credit, less a $500,000
reserve for of the balance of Term Loan, less outstanding borrowings on the
Revolving Line.
The following table presents the balance outstanding on the Term Loan, our
available borrowing capacity and outstanding letters of credit, which were used
to as security deposits:
December 31,
2011 June 30, 2011
(In thousands)
Term Loan $ 1,167 $ 1,500
Available borrowing capacity under the Revolving Line $ 487 $ 2,302
Outstanding letters of credit $ 84 $ 84
As of December 31, 2011 and June 30, 2011, approximately $226,000 and $339,000,
respectively, of our cash was held by our foreign subsidiaries in foreign bank
accounts. Such cash may be 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 may be subject to approval by the
foreign subsidiaries' board of directors.
Cash Flows for the Six Months Ended December 31, 2011 and 2010
The following table presents the major components of the consolidated statements
of cash flows:
Six Months Ended
December 31,
2011 2010
(In thousands)
Net cash provided by (used in):
Net loss $ (2,821 ) $ (1,257 )
Non-cash operating expenses, net 1,621 1,775
Changes in operating assets and liabilities:
Accounts receivable 1,489 (629 )
Contract manufacturers' receivable 313 (473 )
Inventories 228 (2,865 )
Prepaid expenses and other current assets 208 87
Other assets 72 (31 )
Accounts payable (3,523 ) 3,210
Accrued payroll and related expenses - (286 )
Warranty reserve (29 ) 26
Restructuring accrual (171 ) -
Other liabilities 822 440
Cash received related to tenant incentives - 32
Net cash provided by (used in) operating activities (1,791 ) 29
Net cash used in investing activities
(305 ) (220 )
Net cash (used in) provided by financing activities (437 ) 714
Effect of foreign exchange rate changes on cash
- 47
Increase (decrease) in cash and cash equivalents $ (2,533 ) $ 570
18
--------------------------------------------------------------------------------Cash Flows for the Six Months Ended December 31, 2011 and 2010
Operating activities used cash during the six months ended December 31, 2011.
This was the result of a net loss and cash used by operating assets and
liabilities, partially offset by non-cash operating expenses. Significant
non-cash items included depreciation, share-based compensation, and
restructuring charges. Changes in operating assets and liabilities which
contributed to a net use of cash during the six months ended December 31, 2011,
as compared to the prior year period, included a decrease in accounts payable as
we paid vendors in a timelier manner. These changes were partially offset by a
decrease in accounts receivable, an increase in other liabilities due to an
accrual for raw materials which have not been invoiced, a decrease in inventory,
and a decrease in contract manufacturers' receivable as a result of a decrease
in their purchase of raw materials.
Operating activities provided cash during the six months ended December 31,
2010. This was the result of non-cash operating expenses offset by a net loss
and cash used by operating assets and liabilities. Significant non-cash items
included share-based compensation and depreciation. Changes in operating assets
and liabilities that provided cash during the six months ended December 31, 2011
included an increase in accounts payable due to the timing of payments to
vendors and an increase in other liabilities related to timing of payments on
legal and consulting fees as a result of the proxy contest. These changes were
partially offset by an increase in inventories mainly due to sourcing components
directly to ensure supply and an increase in accounts receivable and contract
manufacturers' receivable due to the timing of collections and the increase in
sales.
Investing activities used cash during the six months ended December 31, 2011 and
2010, due to the purchase of property and equipment primarily related to test
equipment, software upgrades, and office equipment for our new sales offices in
Hong Kong and Japan, respectively.
Financing activities used cash during the six months ended December 31, 2011 due
to term loan payments, minimum tax withholding paid on behalf of employees
related to the vesting of restricted shares, and payments for capital lease
obligations.
Financing activities provided cash during the six months ended December 31, 2010
due to (i) proceeds from the amended term loan and (ii) proceeds from the sale
of common shares through employee stock option exercises, partially offset by
(iii) term loan payments, (iv) minimum tax withholding paid on behalf of
employees related to the vesting of restricted shares and (v) payments for
capital lease obligations.
Off-Balance Sheet Arrangements
None.
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