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Lantronix 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
lantronix_10q-033111.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 March 31, 2011

OR

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 S No £

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 May 3, 2011, there were 10,486,769 shares of the Registrant’s common stock outstanding.
 


 
 
 
 
LANTRONIX, INC.

FORM 10-Q
FOR THE FISCAL QUARTER ENDED
March 31, 2011

INDEX

   
Page
     
PART I.
FINANCIAL INFORMATION 
1
     
Item 1.
Financial Statements.    
1
     
 
Unaudited Condensed Consolidated Balance Sheets at March 31, 2011 and June 30, 2010
1
     
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2011 and 2010
2
     
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010
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.  
19
     
PART II.
OTHER INFORMATION
20
     
Item 1A.
Risk Factors
20
     
Item 6.
Exhibits 
29

 
 

 

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements
 
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 
             
   
March 31,
   
June 30,
 
   
2011
   
2010
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 8,480     $ 10,075  
Accounts receivable, net
    2,490       1,342  
Contract manufacturers' receivable
    1,222       1,015  
Inventories, net
    9,392       6,873  
Prepaid expenses and other current assets
    548       515  
Deferred tax assets
    542       542  
Total current assets
    22,674       20,362  
                 
Property and equipment, net
    1,908       2,392  
Goodwill
    9,488       9,488  
Purchased intangible assets, net
    89       155  
Other assets
    167       135  
Total assets
  $ 34,326     $ 32,532  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable
  $ 8,289     $ 6,545  
Accrued payroll and related expenses
    1,381       1,568  
Warranty reserve
    211       183  
Short-term debt
    667       667  
Other current liabilities
    3,682       3,776  
Total current liabilities
    14,230       12,739  
Non-current liabilities:
               
Long-term liabilities
    428       646  
Long-term capital lease obligations
    73       153  
Long-term debt
    1,000       111  
Deferred tax liabilities
    542       542  
Total non-current liabilities
    2,043       1,452  
Total liabilities
    16,273       14,191  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Common stock
    1       1  
Additional paid-in capital
    192,515       191,147  
Accumulated deficit
    (174,862 )     (173,206 )
Accumulated other comprehensive income
    399       399  
Total stockholders' equity
    18,053       18,341  
Total liabilities and stockholders' equity
  $ 34,326     $ 32,532  
 
See accompanying notes.
 
 
1

 
 
 
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
    Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net revenue (1)
  $ 12,382     $ 12,124     $ 37,293     $ 34,556  
Cost of revenue
    6,023       5,772       18,429       16,438  
Gross profit
    6,359       6,352       18,864       18,118  
Operating expenses:
                               
Selling, general and administrative
    4,942       4,804       15,083       14,279  
Research and development
    1,752       1,643       5,272       4,638  
Amortization of purchased intangible assets
    18       18       54       54  
Total operating expenses
    6,712       6,465       20,409       18,971  
Loss from operations
    (353 )     (113 )     (1,545 )     (853 )
Interest expense, net
    (29 )     (29 )     (87 )     (118 )
Other income (expense), net
    (7 )     17       17       (8 )
Loss before income taxes
    (389 )     (125 )     (1,615 )     (979 )
Provision for income taxes
    10       11       41       31  
Net loss
  $ (399 )   $ (136 )   $ (1,656 )   $ (1,010 )
                                 
Net loss per share (basic and diluted)
  $ (0.04 )   $ (0.01 )   $ (0.16 )   $ (0.10 )
                                 
Weighted-average shares (basic and diluted)
    10,463       10,318       10,414       10,262  
                                 
Net revenue from related parties
  $ 194     $ 214     $ 647     $ 481  
 
 
(1)  Includes net revenue from related parties
 
 
See accompanying notes.
 
 
 
2

 
 
 
LANTRONIX, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
    Nine Months Ended  
    March 31,
   
2011
   
2010
 
Operating activities
           
Net loss
  $ (1,656 )   $ (1,010 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
Share-based compensation
    1,353       1,527  
Depreciation
    773       658  
Provision (recovery) for inventories
    181       (132 )
Amortization of purchased intangible assets
    67       88  
Provision for doubtful accounts
    15       12  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,163 )     (736 )
Contract manufacturers' receivable
    (207 )     (347 )
Inventories
    (2,699 )     162  
Prepaid expenses and other current assets
    (89 )     (53 )
Other assets
    (31 )     (12 )
Accounts payable
    1,740       1,603  
Accrued payroll and related expenses
    (202 )     (287 )
Warranty reserve
    28       -  
Restructuring reserve
    -       (76 )
Other liabilities
    (62 )     (15 )
Cash received related to tenant incentives
    32       280  
Net cash (used in) provided by operating activities
    (1,920 )     1,662  
Investing activities
               
Purchases of property and equipment, net
    (292 )     (644 )
Net cash used in investing activities
    (292 )     (644 )
Financing activities
               
Proceeds from term loan
    2,000       -  
Payment of term loan
    (1,110 )     (499 )
Minimum tax withholding paid on behalf of employees for restricted shares
    (131 )     (263 )
Payment of capital lease obligations
    (271 )     (209 )
Net proceeds from issuances of common stock
    76       155  
Net cash provided by (used in) financing activities
    564       (816 )
Effect of foreign exchange rate changes on cash
    53       (26 )
(Decrease) Increase in cash and cash equivalents
    (1,595 )     176  
Cash and cash equivalents at beginning of period
    10,075       9,137  
Cash and cash equivalents at end of period
  $ 8,480     $ 9,313  
 
 
See accompanying notes.
 
 
 
3

 

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

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 8 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, 2010, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 13, 2010. The unaudited condensed consolidated financial statements 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 March 31, 2011, and the consolidated results of its operations and cash flows for the three and nine months ended March 31, 2011 and 2010. 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 nine months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

2. 
Computation of Net Loss per Share

Basic and diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the year.

The following table presents the computation of net loss per share:
 
    Three Months Ended
March 31,
    Nine Months Ended
March 31,
   
2011
   
2010
   
2011
   
2010
 
    (In thousands, except per share data)  
Numerator:
                       
Net loss
  $ (399 )   $ (136 )   $ (1,656 )   $ (1,010 )
Denominator:
                               
Weighted-average shares outstanding
    10,639       10,611       10,590       10,555  
Less: Unvested common shares outstanding
    (176 )     (293 )     (176 )     (293 )
Weighted-average shares (basic and diluted)
    10,463       10,318       10,414       10,262  
                                 
Net loss per share (basic and diluted)
  $ (0.04 )   $ (0.01 )   $ (0.16 )   $ (0.10 )
 
The following table presents the common stock equivalents excluded from the diluted net loss per share calculation, because they were anti-dilutive as of such dates. These excluded common stock equivalents could be dilutive in the future.
 
    Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
    (In thousands)  
Common stock equivalents
    948       1,143       966       1,184  
 
 
 
4

 
 
3. 
Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
 
   
March 31,
   
June 30,
 
   
2011
   
2010
 
    (In thousands)  
Finished goods
  $ 6,242     $ 4,258  
Raw materials
    2,030       1,390  
Inventory at distributors *
    1,587       1,924  
Large scale integration chips **
    856       516  
Inventories, gross
    10,715       8,088  
Reserve for excess and obsolete inventory
    (1,323 )     (1,215 )
Inventories, net
  $ 9,392     $ 6,873  
                 
* Balance represents finished goods held by distributors.
               
** This item is sold individually and is also embedded into the Company's products.                
 
4. 
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- to 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, which may 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:
 
   
Nine Months
Ended
   
Year Ended
 
   
March 31,
   
June 30,
 
   
2011
   
2010
 
    (In thousands)  
Beginning balance
  $ 183     $ 224  
Charged to cost of revenues
    181       84  
Usage
    (153 )     (125 )
Ending balance
  $ 211     $ 183  
 
5. 
Bank Line of Credit and Debt

In September 2010, the Company entered into an Amendment to Loan and Security Agreement (the “Loan Agreement”), which provides 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”). Per the Loan Agreement, the proceeds from the Term Loan were used to pay the balance of $611,000 outstanding on the term loan that was made under the original agreement in 2008. The Term Loan was funded on September 28, 2010 and is payable in 36 equal monthly installments of principal and accrued interest. There are no borrowings outstanding on the Revolving Line as of the fiscal quarter end.

Borrowings under the Loan Agreement bear interest at the greater of 4.75% or prime rate plus 0.75% per annum. Upon entering into the Loan Agreement, the Company paid a fully earned, non-refundable commitment fee of $20,000 and will pay an additional $15,000 on September 28, 2011, the first anniversary of the effective date of the Loan Agreement.

The Company's obligations under the Loan Agreement are secured by substantially all of the Company's assets, including its intellectual property.

The Borrowing Base (as defined in the Loan Agreement) under the Revolving Line is based upon eligible accounts receivable as defined per the Loan Agreement. The “Amount Available under the Revolving Line” is defined as at any time (a) the lesser of (i) the Revolving Line maximum or (ii) the Borrowing Base, minus (b) the amount of all outstanding letters of credit (including drawn but unreimbursed letters of credit) minus (c) an amount equal to the letter of credit reserves, minus (d) the foreign currency reserve, minus (e) the outstanding principal balance of any advances, and minus (f) one-half of the principal balance then outstanding on the Term Loan.
 
 
5

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

   
March 31,
   
June 30,
 
   
2011
   
2010
 
    (In thousands)
Term Loan
  $ 1,667     $ 778  
Amount Available under the Revolving Line
  $ 1,318     $ 1,031  
Outstanding letters of credit
  $ 764     $ 343  
 
6
Stockholders’ Equity

Share-Based Plans

On December 15, 2010, Lantronix stockholders approved the 2010 Stock Incentive Plan which replaces the expired 2000 Stock Plan and reserves 1.4 million shares of Lantronix common stock as available for issuance under the 2010 Stock Incentive Plan.  In addition, Lantronix stockholders approved an amendment to the Lantronix Certificate of Incorporation to reduce the number of common shares authorized from 200 million shares to 100 million shares.

The Company has share-based plans under which non-qualified and incentive stock options have been granted to employees, non-employees and board members. In addition, the Company has granted restricted stock awards to employees and board members under these share-based plans.

The board of directors determines eligibility, vesting schedules and exercise prices for options and shares granted under the plans. Share-based awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Option awards generally have a term of 7 to10 years. Share-based awards generally vest and become exercisable over a one- to four-year service period. The Company has granted share-based awards with market conditions whereby vesting is accelerated upon achieving certain stock price thresholds. In addition, the board of directors has approved a share-based performance plan whereby employees will be paid in vested common shares if minimum revenue, income and management objectives are met. The Company issues new shares to satisfy stock option exercises, restricted stock grants, and stock purchases under its share-based plans.

The following table presents a summary of share-based compensation by functional line item:
 
    Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
    (In thousands)  
Cost of revenues
  $ 10     $ 11     $ 45     $ 30  
Selling, general and administrative
    202       257       992       1,108  
Research and development
    80       116       316       389  
Total share-based compensation
  $ 292     $ 384     $ 1,353     $ 1,527  
 
 
 
6

 
 
The following table presents a summary of remaining unrecognized share-based compensation by the vesting condition for the Company’s share-based plans as of March 31, 2011:
 
      Remaining
Unrecognized
Compensation
   
Remaining
Years
 
Vesting Condition
   
Cost
 
To Vest
 
     
(In thousands)
 
Stock Option Awards:
           
Service-based
  $
1,651
     
Market- and service-based
   
                   5
     
Stock option awards
  $
1,656
 
2.2
 
             
Restricted Stock Awards:
           
Service-based
  $
377
     
Restricted stock awards
  $
377
 
                1.4
 
 
Stock Option Awards

The fair value of each stock option grant was estimated on the grant date using the Black-Scholes-Merton (“BSM”) option-pricing formula. To the extent that the stock option grant included market conditions, the Company used a lattice model to estimate the fair value for each stock option grant. Expected volatilities were based on the historical volatility of the Company’s stock price. The expected term of options granted was estimated using the simplified method. To the extent that stock option grants included market conditions and therefore did not meet the rules for the simplified method, the Company used a lattice model to estimate the expected term of stock options granted. The risk-free rate for periods within the contractual life of the stock option grant was based on the U.S. Treasury interest rates in effect at the time of grant.
 
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, 2010
    1,890,339  
Options granted
    425,679  
Options forfeited
    (136,842 )
Options expired
    (122,883 )
Options exercised
    (27,180 )
Balance of options outstanding at March 31, 2011
    2,029,113  
 
The following table presents stock option grant date information:
 
   
Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
Weighted-average grant date fair value per share
  $ 2.26     $ 2.30     $ 2.20     $ 1.89  
Weighted-average grant date exercise price per share
  $ 3.58     $ 3.24     $ 3.45     $ 2.67  
 
 
 
7

 
 
Nonvested Share Awards

The following table presents a summary of nonvested share activity:

         
Weighted
 
         
Average
 
   
Number of
   
Grant - Date
 
   
Shares
   
Fair Value
 
   
Unvested
   
per Share
 
Balance of nonvested shares at June 30, 2010
    291,646     $ 3.16  
Granted
    -       -  
Forfeited
    (18,755 )     3.00  
Vested
    (96,874 )     3.21  
Balance of nonvested shares at March 31, 2011
    176,017     $ 3.15  
 
The following table presents a summary of the total fair value of shares vested for all of the Company’s nonvested share awards:
 
    Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
    (In thousands)  
Fair value of shares vested
  $ 27     $ 18     $ 371     $ 443  
 
Warrants to Purchase Common Stock

During March 2008, the Company issued warrants to purchase an aggregate of 179,935 shares of Lantronix common stock as consideration for settlement of a shareholder lawsuit. The warrants had an exercise price of $28.08 per share and expired on February 10, 2011.

7. 
Income Taxes
 
At July 1, 2010, the Company’s fiscal 2003 through fiscal 2009 tax years remained open to examination by the federal, state, and foreign taxing authorities. The Company has annual net operating losses (“NOLs”) beginning in fiscal 2001 that would 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
March 31,
    Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
    (In thousands)  
Effective tax rate
    3%       9%       3%       3%  
 
The federal statutory rate was 34% for all periods. The difference between the Company’s effective tax rate and the federal statutory rate is primarily due to its domestic losses being recorded with a fully reserved tax benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate.
 
 
 
8

 
 
8. 
Comprehensive Income (Loss)

The components of comprehensive income (loss) are as follows:
 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
   
2011
   
2010
   
2011
   
2010
 
    (In thousands)  
Net loss
  $ (399 )   $ (136 )   $ (1,656 )   $ (1,010 )
Other comprehensive income (loss):
                               
Change in translation adjustments, net of taxes of $0
    -       (49 )     -       (27 )
Total comprehensive loss
  $ (399 )   $ (185 )   $ (1,656 )   $ (1,037 )
 
9. 
Litigation

From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. 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.

10. 
Internal Investigation

As disclosed in the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 14, 2011, Bernhard Bruscha, a director of Lantronix, delivered a letter to the Company’s Audit Committee setting forth certain allegations for which he requested an independent investigation.  In response to Mr. Bruscha’s allegations, the Company has retained the law firm of Paul, Hastings, Janofsky & Walker (“Paul Hastings”) to conduct an independent investigation of each of the allegations (the “Investigation”).  The Company currently expects that Paul Hastings will conclude the Investigation in the quarter ended June 30, 2011.  The Company will publicly report the results of the Investigation shortly after its completion.  At this time, Mr. Bruscha’s allegations are only assertions, and the Investigation has made no determination as of this date, preliminary or otherwise, regarding their validity.  Presently, the Company does not anticipate that the resolution of these allegations would result in a material effect on the Company’s previously issued financial statements.  The Company is incurring and will continue to incur significant expenses relating to the Investigation.  For the quarter ended March 31, 2011, the Company incurred approximately $460,000 of expenses relating to the Investigation.  The Company currently anticipates that total expenses relating to the Investigation will be approximately $1.1 million to $1.5 million for the fiscal year ending June 30, 2011.
 
For more details regarding the allegations subject to the Investigation, we request you review the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 14, 2011.

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, 2010 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 regarding projected net revenues, expenses, gross profit and net income (loss), the anticipated effect of the resolution of the allegations subject to the Investigation, the anticipated cost and completion date of the Investigation, the need for additional capital, market acceptance of our products, the status of evolving technologies and their growth potential and our production capacity, 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 and the need to incorporate software from third-party vendors and open source software in our future products. 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.
 
 
9

 
 
Overview

We design, develop, market and sell products that make it possible to access, manage, connect, control and configure electronic products over the Internet or other networks. Our primary products and technology are focused on device enablement solutions that enable individual electronic products to be connected to a wired or wireless network for the primary purpose of remote access. In addition, 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.

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. We also recently identified medical device connectivity as a particularly promising direction for investment and growth.

Products and Solutions

Device Enablement Solutions

Device networking is the technology that enables connectivity within a multitude of vertical markets such as healthcare, industrial, security, energy, IT, data centers, transportation, government and many others. Our device enablement solutions released after 2009 support our AccessMyDevice VIP Access, which allows equipment to be remotely, safely and securely managed behind firewalls. We provide manufacturers, integrators and end users with device enablement solutions for products to be connected, securely accessed, managed and controlled over networks. Our device enablement solutions dramatically shorten a manufacturer’s development time to implement network connectivity and provide competitive advantages with new features, greatly reducing engineering and marketing risks.

Our device servers allow a wide range of equipment to be quickly network-enabled without the need for intermediary gateways, workstations or personal computers (“PC”). Our device servers and web servers eliminate the high cost of ownership and added support issues associated with networking, which frequently would otherwise require using PCs or workstations to perform connectivity and remote management functions. Our solutions contain high-performance processors capable of not only controlling the attached device, but in many cases are also capable of accumulating data and status information. The accumulated data can then be formatted by the device server and presented to users via web pages, e-mail, and other network, transport and application level protocols. Our device servers have a built-in HTTP server, making them easy to manage using any standard Web browser. These device servers include the latest security protocols, such as AES, IPsec, SSL, and SSH, which support the stringent security requirements of the medical, banking, and physical security markets.

Device Management Solutions

We offer single and multi-port products (up to 48 ports) that provide IT professionals with the tools they need to remotely connect to the out-of-band management ports on computers and associated equipment. These solutions include console servers, remote keyboard, video, mouse (“KVM”) servers and managed power distribution products.

Our customers use these solutions to monitor and run their systems to ensure the performance and availability of critical business information systems, network infrastructure and telecommunications equipment. The equipment that our solutions manage includes routers, switches, servers, phone switches and public branch exchanges that are often located in remote or inaccessible locations.

Our console servers provide system administrators and network managers an operationally effective way to connect with their remote equipment through an interface called a console port, helping them work more efficiently, without having to leave their desk or office. Console ports are usually found on servers and special purpose data center equipment, such as environmental monitoring/ control systems, communications switches and storage devices. With remote access, system downtime can be reduced, thereby improving business efficiency. Our console servers provide IT professionals with peace of mind through extensive security features and, in some cases, provisions for dial-in access via modem. These solutions are provided in various configurations and can manage up to 48 devices from one console server.
 
 
10

 
 
Other Products

Our other products are comprised primarily of legacy products such as print servers, software and other miscellaneous products.

Financial Highlights and Other Information for the Fiscal Quarter Ended March 31, 2011

The following is a summary of the key factors and significant events that impacted our financial performance during the fiscal quarter ended March 31, 2011:

·
Net revenue was $12.4 million for the fiscal quarter ended March 31, 2011, an increase of $258,000 or 2%, compared to $12.1 million for the fiscal quarter ended March 31, 2010.  The increase was primarily the result of a $267,000, or 11.2%, increase in sales of our device management product line.  As part of an ongoing corporate initiative to optimize its sales distribution channel, the Company continued to renegotiate its agreements with certain direct customers.  These new agreements remove stock rotation and price protection terms, which causes the Company to recognize revenue upon shipment as opposed to a sell-through basis.  The Company has directed a majority of these customers to purchase through large Lantronix distributors located in their respective regions to create a more efficient sales channel.  The result of these changes was the recognition of revenue during the third fiscal quarter that would have otherwise been deferred in the third fiscal quarter and recognized in the fourth fiscal quarter.  The Company made similar changes to customer agreements in the second fiscal quarter which resulted in the recognition of revenue in that quarter that would have otherwise been recognized in the third fiscal quarter.  As these customers are no longer required to provide sell-through reports and the majority of these customers are now buying from other Lantronix distributors (whose revenue is recognized on a sell-through basis by Lantronix) and not directly through Lantronix, the net impact to revenue in the current quarter is not practically determinable.  It should be noted that the Company has not changed its revenue recognition policy as revenue is still recognized on a sell-through basis for those customers with stock rotation and price protection terms.

·
Gross profit margin was 51.4% for the fiscal quarter ended March 31, 2011, compared to 52.4% for the fiscal quarter ended March 31, 2010. The decrease in gross profit margin was primarily due to increased reserves for excess and obsolete inventory related to end-of-life products and an increase in warranty reserves for a specific product.

·
Loss from operations was $353,000 for the fiscal quarter ended March 31, 2011, compared to $113,000 for the fiscal quarter ended March 31, 2010. The loss from operations in the current fiscal quarter was negatively impacted by approximately $460,000 in legal expenses related to the Investigation.  The Company currently anticipates that total expenses relating to the Investigation will be approximately $1.1 million to $1.5 million for the fiscal year ending June 30, 2011.

·
Net loss was $399,000, or $0.04 per basic and diluted share, for the fiscal quarter ended March 31, 2011, compared to $136,000, or $0.01per basic and diluted share, for the fiscal quarter ended March 31, 2010. The GAAP net loss in the third fiscal quarter of 2011 was negatively impacted by approximately $460,000 of legal expenses related to the Investigation.   The Company currently anticipates that total expenses relating to the Investigation will be approximately $1.1 million to $1.5 million for the fiscal year ending June 30, 2011.

·
Cash and cash equivalents were $8.5 million as of March 31, 2011, a decrease of $1.6 million, compared to $10.1 million as of June 30, 2010.  The decrease was due to purchases of inventory to support growth and on-time customer delivery, as well as payments for legal and consulting expenses related to the proxy contest and Investigation.

·
Net accounts receivable were $2.5 million as of March 31, 2011, an increase of  $1.2 million, compared to $1.3 million as of June 30, 2010. Days sales outstanding (“DSO”) in receivables were 16 days for the fiscal quarter ended March 31, 2011 compared to 15 days for the fiscal quarter ended June 30, 2010. 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 continue to be recognized on a sell-through basis (upon shipment from distributor inventories rather than as goods are shipped to distributors).

·
Net inventories were $9.4 million as of March 31, 2011, compared to $6.9 million as of June 30, 2010. Inventory turns were 2.5 turns for the fiscal quarter ended March 31, 2011 compared to 3.5 turns for the fiscal quarter ended June 30, 2010. The increase was attributable to a buildup of finished goods and strategic components to ensure timely delivery and enhance customer satisfaction.


 
11

 
 
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, 2010. There have been no significant changes in our critical accounting policies and estimates during the fiscal quarter ended March 31, 2011 as compared to what was previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Recent Accounting Pronouncements

During the three months ended March 31, 2011, there were no new accounting pronouncements that would have had a material effect on our unaudited 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
March 31,
 
Nine Months Ended
March 31,
 
   
2011
 
2010
 
2011
   
2010
 
                           
Net revenue
  100.0 %   100.0 %   100.0 %   100.0 %  
Cost of revenue
  48.6 %   47.6 %   49.4 %   47.6 %  
Gross profit
  51.4 %   52.4 %   50.6 %   52.4 %  
Operating expenses:
                         
Selling, general and administrative
  39.9 %   39.6 %   40.4 %   41.3 %  
Research and development
  14.1 %   13.6 %   14.1 %   13.4 %  
Amortization of purchased intangible assets
  0.1 %   0.1 %   0.1 %   0.2 %  
Total operating expenses
  54.2 %   53.3 %   54.7 %   54.9 %  
Loss from operations
  (2.9 %)   (0.9 %)   (4.1 %)   (2.5 %)  
Interest expense, net
  (0.2 %)   (0.2 %)   (0.2 %)   (0.3 %)  
Other income (expense), net
  (0.1 %)   0.1 %   0.0 %   (0.0 %)  
Loss before income taxes
  (3.1 %)   (1.0 %)   (4.3 %)   (2.8 %)  
Provision for income taxes
  0.1 %   0.1 %   0.1 %   0.1 %  
Net loss
  (3.2 %)   (1.1 %)   (4.4 %)   (2.9 %)  
 
 
 
 
12

 
 
Comparison of the Fiscal Quarters Ended March 31, 2011 and 2010

Net Revenue by Product Line

The following table presents fiscal quarter net revenue by product line:
 
     Three Months Ended March 31,      
         
% of Net
         
% of Net
  Change  
   
2011
   
Revenue
   
2010
   
Revenue
  $     %  
    (In thousands, except percentages)  
Device enablement
  $ 9,551       77.1%     $ 9,572       79.0 %   $ (21 )   (0.2%)  
Device management
    2,652       21.4%       2,385       19.7 %     267     11.2%  
Device networking
    12,203       98.5%       11,957       98.7 %     246     2.1%  
Non-core
    179       1.5%       167       1.3 %     12     7.2%  
Net revenue
  $ 12,382       100.0%     $ 12,124       100.0 %   $ 258     2.1%  
 
The increase in net revenue for the three months ended March 31, 2011, compared to the three months ended March 31, 2010 was the result of an increase in net revenue mainly from our device management product line.  The increase in net revenue from our device management product line was due to an increase in unit sales of some of our management device enablement products, in particular our SLC, SLB and Spider product families.

The following table presents fiscal year-to-date net revenue by product line:
 
    Nine Months Ended March 31,      
         
% of Net
         
% of Net
    Change  
   
2011
   
Revenue
   
2010
   
Revenue
  $     %  
    (In thousands, except percentages)  
Device enablement
  $ 29,903       80.2 %   $ 27,567       79.8 %   $ 2,336     8.5%  
Device management
    6,886       18.5 %     6,287       18.2 %     599     9.5%  
Device networking
    36,789       98.7 %     33,854       98.0 %     2,935     8.7%  
Non-core
    504       1.3 %     702       2.0 %     (198 )   (28.2%)  
Net revenue
  $ 37,293       100.0 %   $ 34,556       100.0 %   $ 2,737     7.9%  
 
The increase in net revenue for the nine months ended March 31, 2011, compared to the nine months ended March 31, 2010 was the result of an increase in net revenue from our device enablement and device management product lines, partially offset by a decrease in net revenue from our non-core product lines. The increase in net revenue from our device enablement product line was due to an increase in unit sales of some of our embedded device enablement products, in particular our XPort, XPort Pro, MICRO, MatchPort and ASIC product families, partially offset by a decrease in unit sales of some of our external device enablement products, in particular our WiBox, UBox and MSS product families, offset by an increase in our EDS product family.  The increase in net revenue from our device management product line was due to an increase in unit sales of our Spider and SCS product families, partially offset by a decrease in sales of our SLC product family.

Net Revenue by Geographic Region

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

   
Three Months Ended March 31,
     
         
% of Net
       
% of Net
  Change  
   
2011
   
Revenue
 
2010
   
Revenue
  $     %  
    (In thousands, except percentages)  
Americas
  $ 6,698       54.1 %   $ 7,027       58.0 %   $ (329 )   (4.7%)  
EMEA
    3,749       30.3 %     3,185       26.3 %     564     17.7%  
Asia Pacific
    1,935       15.6 %     1,912       15.7 %     23     1.2%  
Net revenue
  $ 12,382       100.0 %   $ 12,124       100.0 %   $ 258     2.1%  
 
The increase in net revenue for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 reflects increased unit sales mainly from the Europe, Middle East and Africa (the “EMEA”) region, offset by a decrease in revenue from the Americas.  The increase in net revenue from the EMEA region was primarily due to an increase in unit sales in our device enablement product lines, in particular our XPort, MatchPort, MICRO and EDS product families.  The decrease in net revenue in the Americas region was due to a decrease in unit sales in our device enablement product lines, in particular our XPort, UDS and MatchPort product families.
 
 
13

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

    Nine Months Ended March 31,      
         
% of Net
       
% of Net
  Change  
   
2011
   
Revenue
 
2010
   
Revenue
  $   %  
    (In thousands, except percentages)  
Americas
  $ 19,375       52.0 %   $ 19,413       56.2 %   $ (38 )   (0.2%)  
EMEA
    11,893       31.9 %     9,642       27.9 %     2,251     23.3%  
Asia Pacific
    6,025       16.1 %     5,501       15.9 %     524     9.5%  
Net revenue
  $ 37,293       100.0 %   $ 34,556       100.0 %   $ 2,737     7.9%  
 
The increase in net revenue for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010 reflects increased unit sales primarily from the EMEA and Asia Pacific regions.  The increase in net revenue from the EMEA region was mainly due to an increase in unit sales of our device enablement product lines, in particular our XPort, ASIC, MICRO, Xpress and EDS product families.  The increase in net revenue in the Asia Pacific region was due to an increase in unit sales of our device management product lines, in particular our Spider and SLC product families, as well as our device enablement product lines, in particular our MICRO and MatchPort, WiPort and Xpress product families, partially offset by a decrease in sales of our XPort product family.

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 or relieving 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 March 31,
     
         
% of Net
         
% of Net
  Change  
   
2011
   
Revenue
   
2010
   
Revenue
  $     %  
    (In thousands, except percentages)  
Gross profit
  $ 6,359       51.4%     $ 6,352       52.4%   $ 7     0.1%  
 
The decrease in gross profit as a percent of net revenue (referred to as “gross profit margin”) for the three months ended March 31, 2011 was primarily due to increased reserves for excess and obsolete inventory related to end-of-life products and an increase in warranty reserves for a specific product.

The following table presents fiscal year-to-date gross profit:
 
   
Nine Months Ended March 31,
     
         
% of Net
         
% of Net
  Change  
   
2011
   
Revenue
   
2010
   
Revenue
  $     %  
    (In thousands, except percentages)  
Gross profit
  $ 18,864       50.6%     $ 18,118       52.4%   $ 746     4.1%  
 
The decrease in gross profit margin for the nine months ending March 31, 2011 was partly due to a change in product mix primarily related to an increase in unit sales as a percentage of total sales of our embedded device enablement products, which have a lower margin than our other product lines.  Gross profit margin was also negatively impacted by an increase in freight costs due to expediting charges relating to component and product shortages, transitional costs associated with the implementation of third-party logistics providers in Los Angeles and Hong Kong for inventory management and the increase in the volume of inventory receipts.  In addition, gross profit margin was negatively impacted by increased reserves for excess and obsolete inventory related to end-of-life products and an increase in unfavorable purchase variances, offset by an increase in capitalized overhead due to the increase in inventory.
 
 
 
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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, and  information technology, as well as trade show expenses, advertising, and legal and accounting fees.

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

   
Three Months Ended March 31,
     
       
% of Net
     
% of Net
  Change  
   
2011
 
Revenue
 
2010
 
Revenue
  $     %  
    (In thousands, except percentages)  
Personnel-related expenses
  $ 2,530       $ 2,561       $ (31 )   (1.2%)  
Professional fees and outside services
    871         443         428     96.6%  
Advertising and marketing
    544         570         (26 )   (4.6%)  
Facilities
    255         319         (64 )   (20.1%)  
Share-based compensation
    202         257         (55 )   (21.4%)  
Depreciation
    166         179         (13 )   (7.3%)  
Bad debt expense
    14         -         14     100.0%  
Other
    360         475         (115 )   (24.2%)  
Selling, general and administrative
  $ 4,942  
39.9%
  $ 4,804  
39.6%
  $ 138     2.9%  
 
In order of significance, the increase in selling, general and administrative expenses for the three months ended March 31, 2011, compared to the three months ended March 31, 2010 was primarily due to: (i) an increase in professional fees and outside services mainly due to approximately $460,000 of  legal expenses as a result of the Investigation; partially offset by (ii) a decrease in facility related expenses as a result of cost saving efforts, and (iii) a decrease in share based compensation and (iv) a decrease in franchise tax expense.

The following table presents fiscal year-to-date selling, general and administrative expenses:
 
    Nine Months Ended March 31,      
       
 % of Net
     
 % of Net
  Change  
   
2011
 
 Revenue
 
2010
 
 Revenue
  $     %  
    (In thousands, except percentages)  
Personnel-related expenses
  $ 7,705       $ 7,499       $ 206     2.7%  
Professional fees and outside services
    2,562         1,550         1,012     65.3%  
Advertising and marketing
    1,328         1,624         (296 )   (18.2%)  
Facilities
    827         953         (126 )   (13.2%)  
Share-based compensation
    992         1,108         (116 )   (10.5%)  
Depreciation
    497         459         38     8.3%  
Bad debt expense (recovery)
    15         12         3     25.0%  
Other
    1,157         1,074         83     7.7%  
Selling, general and administrative
  $ 15,083  
40.4%
  $ 14,279  
41.3%
  $ 804     5.6%  
 
In order of significance, the increase in selling, general and administrative expenses for the nine months ended March 31, 2011, compared to the nine months ended March 31, 2010 was primarily due to: (i) an increase in professional fees and outside services mainly due to approximately $561,000 of legal and consulting expenses as a result of the proxy contest which was settled in November of 2010 and approximately $460,000 of legal expenses as a result of the Investigation,  and (ii) an increase in personnel-related expenses due to the suspension of a Company-wide furlough program in the equivalent period one year ago, partially offset by (iii) a decrease in marketing expenses and facility related expenses due to cost saving efforts and (iv) a decrease in share based compensation.

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.
 
 
15

 
 
The following table presents fiscal quarter research and development expenses:
 
   
Three Months Ended March 31,
     
       
% of Net
     
% of Net
  Change  
   
2011
 
Revenue
 
2010
 
Revenue
  $     %  
    (In thousands, except percentages)  
Personnel-related expenses
  $ 1,151       $ 998       $ 153     15.3 %
Facilities
    228         308         (80 )   (26.0 %)
Professional fees and outside services
    147         114         33     28.9 %
Share-based compensation
    80         116         (36 )   (31.0 %)
Depreciation
    10         13         (3 )   (23.1 %)
Other
    136         94         42     44.7 %
Research and development
  $ 1,752  
14.1%
  $ 1,643  
13.6%
  $ 109     6.6 %
 
In order of significance, the increase in research and development expenses for the three months ended March 31, 2011, compared to the three months ended March 31, 2010 was primarily due to: (i) an increase in personnel-related expenses due to the suspension of a Company-wide furlough program in the equivalent period one year ago; offset by (ii) a decrease in facility related expenses as a result of cost saving efforts. Research and development expenses could increase as we continue to invest in new development efforts.

The following table presents fiscal year-to-date research and development expenses:
 
   
Nine Months Ended March 31,
     
       
% of Net
     
% of Net
  Change  
   
2011
 
Revenue
 
2010
 
Revenue
  $     %  
    (In thousands, except percentages)  
Personnel-related expenses
  $ 3,339       $ 2,917       $ 422     14.5%  
Facilities
    760         830         (70 )   (8.4%)  
Professional fees and outside services
    505         257         248     96.5%  
Share-based compensation
    316         389         (73 )   (18.8%)  
Depreciation
    33         45         (12 )   (26.7%)  
Other
    319         200         119     59.5%  
Research and development
  $ 5,272  
14.1%
  $ 4,638  
13.4%
  $ 634     13.7%  
 
In order of significance, the increase in research and development expenses for the nine months ended March 31, 2011, compared to the nine months ended March 31, 2010 was primarily due to: (i) an increase in personnel-related expenses due to the suspension of a Company-wide furlough program in the equivalent period one year ago and (ii) an increase in professional fees and outside services related to development projects for upcoming product releases; partially offset by (iii) a decrease in share based compensation and (iv) a decrease in facility related expenses as a result of cost saving efforts. Research and development expenses could increase as we continue to invest in new development efforts.

Provision for Income Taxes
 
At July 1, 2010, our fiscal 2003 through fiscal 2009 tax years remained open to examination by the Federal, state, and foreign taxing authorities. We have annual net operating losses (“NOLs”) beginning in fiscal 2001, which causes the statute of limitations to remain open for the year in which the NOL was incurred.
 
The following table presents our effective tax rate based upon our income tax provision:
 
    Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
    (In thousands)  
Effective tax rate
    3%       9%       3%       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 our domestic losses being recorded with a fully reserved tax benefit, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. As a result of our cumulative losses, we provided a full valuation allowance against our domestic net deferred tax assets for the fiscal quarters ended March 31, 2011 and 2010.
 
 
16

 

Liquidity and Capital Resources

The following table presents information about our working capital and cash:
 
   
March 31,
   
June 30,
   
Increase
 
   
2011
   
2010
   
(Decrease)
 
    (In thousands)  
Working capital
  $ 8,444     $ 7,623     $ 821  
Cash and cash equivalents
  $ 8,480     $ 10,075     $ (1,595 )
 
In order of significance, our working capital as of March 31, 2011 increased as compared to June 30, 2010, primarily due to: (i) an increase in inventory due to the timing of shipments and inventory receipts and (ii) an increase in accounts receivable as a result of the timing of shipments, cash collections and an increase in revenue. This was partially offset by (i) an increase in accounts payable related to the increase in inventory and (ii) a decrease in cash and cash equivalents as a result of purchases of inventory to support growth and on-time customer delivery, as well as payments for legal and consulting expenses related to the proxy contest and the Investigation and (iii) a decrease in accrued payroll and related expense due to the timing of payroll periods.

We believe that our existing cash and cash equivalents and funds available from our line of credit will be adequate to meet our anticipated cash needs through at least the next 12 months. Our future capital requirements will depend on many factors, including the timing and amount of our net revenue, research and development, expenses associated with any strategic partnerships or acquisitions and infrastructure investments, and expenses related to litigation, which could affect our ability to generate additional cash. If cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may need to raise capital by borrowing additional funds through bank loans, the selling of securities or other means. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all. If we are unable to secure additional financing, we may not be able to develop or enhance our products, take advantage of future opportunities, respond to competition or continue to operate our business.

In September 2010, we entered into an Amendment to the Loan and Security Agreement (the “Loan Agreement”), which provides 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”). Per the Loan Agreement, the proceeds from the Term Loan were used to pay the balance of $611,000 outstanding on the term loan that was made under the original agreement in 2008. The Term Loan was funded on September 28, 2010 and is payable in 36 equal monthly installments of principal and accrued interest. There are no borrowings outstanding on the Revolving Line as of the fiscal quarter end.

Borrowings under the Loan Agreement bear interest at the greater of 4.75% or prime rate plus 0.75% per annum. Upon entering into the Loan Agreement, we paid a fully earned, non-refundable commitment fee of $20,000 and will pay an additional $15,000 on September 28, 2011, the first anniversary of the effective date of the Loan Agreement.

The Borrowing Base (as defined in the Loan Agreement) under the Revolving Line is based upon eligible accounts receivable as defined per the Loan Agreement. The “Amount Available under the Revolving Line” is defined as at any time (a) the lesser of (i) the Revolving Line maximum or (ii) the Borrowing Base, minus (b) the amount of all outstanding letters of credit (including drawn but unreimbursed letters of credit), minus (c) an amount equal to the letter of credit reserves, minus (d) the foreign currency reserve, minus (e) the outstanding principal balance of any advances, and minus (f) one-half of the principal balance then outstanding of the Term Loan.

The following table presents the balance outstanding on the Term Loan, our available borrowing capacity and outstanding letters of credit, which were used to secure equipment leases, deposits for a building lease, and security deposits:
 
   
March 31,
   
June 30,
 
   
2011
   
2010
 
    (In thousands)  
Term Loan
  $ 1,667     $ 778  
Amount Available under the Revolving Line
  $ 1,318     $ 1,031  
Outstanding letters of credit
  $ 764     $ 343  
 
 
17

 
 
As of March 31, 2011 and June 30, 2010, approximately $389,000 and $400,000, 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 Three and Nine Months Ended March 31

The following table presents the major components of the consolidated statements of cash flows:
 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
    (In thousands)  
Net cash provided by (used in):
                       
Net loss
  $ (399 )   $ (136 )   $ (1,656 )   $ (1,010 )
Non-cash operating expenses, net
    614       651       2,389       2,153  
Changes in operating assets and liabilities:
                               
Accounts receivable
    (534 )     (813 )     (1,163 )     (736 )
Contract manufacturers' receivable
    266       24       (207 )     (347 )
Inventories
    166       170       (2,699 )     162  
Prepaid expenses and other current assets
    (176 )     299       (89 )     (53 )
Other assets
    -       (7 )     (31 )     (12 )
Accounts payable
    (1,470 )     (325 )     1,740       1,603  
Accrued payroll and related expenses
    84       191       (202 )     (287 )
Warranty reserve
    2       -       28       -  
Restructuring reserve
    -       -       -       (76 )
Other liabilities
    (502 )     (74 )     (62 )     (15 )
Cash received related to tenant incentives
    -       280       32       280  
Net cash (used in) provided by operating activities
    (1,949 )     260       (1,920 )     1,662  
Net cash used in investing activities
    (72 )     (19 )     (292 )     (644 )
Net cash (used in) provided by financing activities
    (150 )     (232 )     564       (816 )
Effect of foreign exchange rate changes on cash
    6       (75 )     53       (26 )
(Decrease) Increase in cash and cash equivalents
  $ (2,165 )   $ (66