Item 1.
|
|
Financial Statements
|
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,698
|
|
|
$
|
5,962
|
|
Accounts receivable, net
|
|
|
2,866
|
|
|
|
3,164
|
|
Inventories, net
|
|
|
7,614
|
|
|
|
6,584
|
|
Contract manufacturers' receivable
|
|
|
366
|
|
|
|
369
|
|
Prepaid expenses and other current assets
|
|
|
566
|
|
|
|
580
|
|
Total current assets
|
|
|
18,110
|
|
|
|
16,659
|
|
Property and equipment, net
|
|
|
1,402
|
|
|
|
1,569
|
|
Goodwill
|
|
|
9,488
|
|
|
|
9,488
|
|
Other assets
|
|
|
47
|
|
|
|
63
|
|
Total assets
|
|
$
|
29,047
|
|
|
$
|
27,779
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,280
|
|
|
$
|
2,721
|
|
Accrued payroll and related expenses
|
|
|
2,833
|
|
|
|
1,817
|
|
Warranty reserve
|
|
|
153
|
|
|
|
138
|
|
Other current liabilities
|
|
|
3,235
|
|
|
|
2,922
|
|
Total current liabilities
|
|
|
8,501
|
|
|
|
7,598
|
|
Long-term capital lease obligations
|
|
|
87
|
|
|
|
116
|
|
Other non-current liabilities
|
|
|
353
|
|
|
|
347
|
|
Total liabilities
|
|
|
8,941
|
|
|
|
8,061
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
209,754
|
|
|
|
209,297
|
|
Accumulated deficit
|
|
|
(190,021
|
)
|
|
|
(189,952
|
)
|
Accumulated other comprehensive income
|
|
|
371
|
|
|
|
371
|
|
Total stockholders' equity
|
|
|
20,106
|
|
|
|
19,718
|
|
Total liabilities and stockholders' equity
|
|
$
|
29,047
|
|
|
$
|
27,779
|
|
See accompanying notes.
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(In thousands, except per share data)
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net revenue (1)
|
|
$
|
11,222
|
|
|
$
|
9,540
|
|
|
$
|
22,162
|
|
|
$
|
20,113
|
|
Cost of revenue
|
|
|
5,410
|
|
|
|
4,951
|
|
|
|
10,650
|
|
|
|
10,457
|
|
Gross profit
|
|
|
5,812
|
|
|
|
4,589
|
|
|
|
11,512
|
|
|
|
9,656
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,873
|
|
|
|
3,814
|
|
|
|
7,715
|
|
|
|
7,539
|
|
Research and development
|
|
|
1,873
|
|
|
|
1,716
|
|
|
|
3,818
|
|
|
|
3,387
|
|
Total operating expenses
|
|
|
5,746
|
|
|
|
5,530
|
|
|
|
11,533
|
|
|
|
10,926
|
|
Income (loss) from operations
|
|
|
66
|
|
|
|
(941
|
)
|
|
|
(21
|
)
|
|
|
(1,270
|
)
|
Interest expense, net
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
(13
|
)
|
|
|
(15
|
)
|
Other income, net
|
|
|
4
|
|
|
|
28
|
|
|
|
1
|
|
|
|
47
|
|
Income (loss) before income taxes
|
|
|
64
|
|
|
|
(922
|
)
|
|
|
(33
|
)
|
|
|
(1,238
|
)
|
Provision for income taxes
|
|
|
23
|
|
|
|
6
|
|
|
|
30
|
|
|
|
21
|
|
Net income (loss)
|
|
$
|
41
|
|
|
$
|
(928
|
)
|
|
$
|
(63
|
)
|
|
$
|
(1,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
0.00
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
Net income (loss) per share (diluted)
|
|
$
|
0.00
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares (basic)
|
|
|
17,347
|
|
|
|
15,160
|
|
|
|
17,300
|
|
|
|
15,131
|
|
Weighted-average common shares (diluted)
|
|
|
17,703
|
|
|
|
15,160
|
|
|
|
17,300
|
|
|
|
15,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from related parties
|
|
$
|
–
|
|
|
$
|
45
|
|
|
$
|
–
|
|
|
$
|
113
|
|
(1)
Includes net revenue from related parties
See
accompanying notes.
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(63
|
)
|
|
$
|
(1,259
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
421
|
|
|
|
485
|
|
Depreciation
|
|
|
304
|
|
|
|
423
|
|
Provision for excess and obsolete inventories
|
|
|
53
|
|
|
|
79
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
298
|
|
|
|
315
|
|
Inventories
|
|
|
(1,083
|
)
|
|
|
1,563
|
|
Contract manufacturers’ receivable
|
|
|
3
|
|
|
|
(113
|
)
|
Prepaid expenses and other current assets
|
|
|
14
|
|
|
|
(215
|
)
|
Other assets
|
|
|
14
|
|
|
|
25
|
|
Accounts payable
|
|
|
(477
|
)
|
|
|
(1,352
|
)
|
Accrued payroll and related expenses
|
|
|
1,016
|
|
|
|
(30
|
)
|
Warranty reserve
|
|
|
15
|
|
|
|
(21
|
)
|
Other liabilities
|
|
|
322
|
|
|
|
(290
|
)
|
Cash received related to tenant lease incentives
|
|
|
–
|
|
|
|
53
|
|
Net cash provided by (used in) operating activities
|
|
|
837
|
|
|
|
(337
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(99
|
)
|
|
|
(103
|
)
|
Net cash used in investing activities
|
|
|
(99
|
)
|
|
|
(103
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Minimum tax withholding paid on behalf of employees for restricted shares
|
|
|
(87
|
)
|
|
|
(46
|
)
|
Proceeds from borrowings on line of credit
|
|
|
–
|
|
|
|
1,400
|
|
Payment of borrowings on line of credit
|
|
|
–
|
|
|
|
(1,400
|
)
|
Net proceeds from issuances of common stock
|
|
|
117
|
|
|
|
95
|
|
Payment of capital lease obligations
|
|
|
(32
|
)
|
|
|
(36
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(2
|
)
|
|
|
13
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
736
|
|
|
|
(427
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
5,962
|
|
|
|
4,989
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,698
|
|
|
$
|
4,562
|
|
See accompanying notes.
LANTRONIX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2016
|
1.
|
Summary
of Significant Accounting Policies
|
The Company
Lantronix, Inc. (the “Company,” “Lantronix,”
“we,” “our,” or “us”) is a global provider of secure data access and management for Internet
of Things (“IoT”) and information technology assets. Our mission is to be the leading provider of IoT gateways that
enable companies to dramatically simplify the creation, deployment, and management of IoT projects while providing secure access
to data for applications and people.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements of Lantronix have been prepared in accordance with United States generally accepted accounting principles (“U.S.
GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Securities
and Exchange Commission (“SEC”) 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, 2016, included in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2016, which was filed with the SEC on August 24, 2016. The unaudited condensed consolidated financial
statements contain all normal recurring accruals and adjustments that in the opinion of management, are necessary to present fairly
the consolidated financial position of Lantronix at December 31, 2016 and the consolidated results of our operations for the three
and six months ended December 31, 2016 and our consolidated cash flows for the six months ended December 31, 2016. All intercompany
accounts and transactions have been eliminated. It should be understood that accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended December 31,
2016 are not necessarily indicative of the results to be expected for the full year or any future interim periods.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards
Board (“FASB”) issued accounting guidance that changes how companies account for certain aspects of share-based
payments to employees. Among other things, under the new guidance companies will no longer record excess tax benefits and
certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax
expense or benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance
prospectively. Another component of the new guidance allows companies to make an accounting policy election for the impact of
forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required
historically, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be
adopted using a modified retrospective approach. Lantronix adopted this guidance early for the fiscal year beginning July 1,
2016. In connection with the adoption, we have elected to recognize the impact of forfeitures on our share-based compensation
expense as such forfeitures occur. Accordingly, as of July 1, 2016, we recorded a cumulative effect adjustment of
approximately $6,000 to increase APIC and accumulated deficit. Going forward, we do not expect the adoption of this guidance
to have a material effect on our financial statements.
In February 2016, FASB issued an accounting standard that revises
lease accounting guidance. The standard requires lessees to put most leases on their balance sheets, but recognize expenses on
their income statements in a manner similar to the previous guidance. The standard will be effective for Lantronix in the fiscal
year beginning July 1, 2019. Early adoption is permitted. We are currently evaluating the impact of this standard on our financial
statements and related disclosures.
In August 2014, FASB
issued an accounting standard which requires management of an entity to assess, for each annual and interim period, if there is
substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statement issuance
date. The definition of substantial doubt within the new standard incorporates a likelihood threshold of “probable”
similar to the use of that term under current U.S. GAAP for loss contingencies. Certain disclosures are required if conditions
give rise to substantial doubt about the entity’s ability to continue as a going concern. The standard became effective for
Lantronix for the fiscal year beginning July 1, 2016. The adoption of this standard did not have a material impact on our financial
statements and related disclosures.
Revenue from Contracts with Customers
In May 2014, FASB issued an accounting standard which superseded
existing revenue recognition guidance under current U.S. GAAP. The standard is a comprehensive revenue recognition model that requires
a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration
it expects to receive in exchange for those goods or services. In doing so, among other things, companies will generally need to
use more judgment and make more estimates than under the current guidance. Recently, FASB has issued guidance clarifying certain
topics such as (i) gross versus net revenue reporting, (ii) identifying performance obligations and licensing and (iii) accounting
for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer.
The standard permits two methods of adoption: (i) retrospectively
to each prior reporting period presented (the full retrospective method), or (ii) retrospectively with the cumulative effect of
initially applying the standard recognized at the date of initial application (the cumulative catch-up transition method). We currently
anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented.
The standard will be effective for Lantronix in the fiscal year
beginning July 1, 2018, with an option to adopt the standard in the fiscal year beginning July 1, 2017. We are currently considering
the effective date on which we plan to adopt the standard.
We currently anticipate the standard will have a material impact
on our financial statements and disclosures. While we continue to assess all potential impacts of the standard, we currently believe
the most significant impact relates to our accounting for sales made to distributors under agreements which contain a limited right
to return unsold products and price adjustment provisions. Under the existing revenue guidance, we have historically concluded
that the price to these distributors is not fixed and determinable at the time we deliver products to them. Accordingly, revenue
from sales to these distributors has not historically been recognized until the distributor resells the product. By contrast, under
the new standard, we expect to recognize revenue, including estimates for applicable variable consideration, predominately at the
time of shipment to these distributors.
|
2.
|
Supplemental
Financial Information
|
Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or net realizable value and consist of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Finished goods
|
|
$
|
4,345
|
|
|
$
|
3,822
|
|
Raw materials
|
|
|
1,969
|
|
|
|
1,653
|
|
Finished goods held by distributors
|
|
|
1,300
|
|
|
|
1,109
|
|
Inventories, net
|
|
$
|
7,614
|
|
|
$
|
6,584
|
|
Other Liabilities
The following table presents details of our other liabilities:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Current
|
|
|
|
|
|
|
|
|
Customer deposits and refunds
|
|
$
|
1,025
|
|
|
$
|
663
|
|
Accrued raw materials purchases
|
|
|
646
|
|
|
|
582
|
|
Deferred revenue
|
|
|
188
|
|
|
|
427
|
|
Capital lease obligations
|
|
|
61
|
|
|
|
64
|
|
Taxes payable
|
|
|
272
|
|
|
|
275
|
|
Accrued operating expenses
|
|
|
1,043
|
|
|
|
911
|
|
Total other current liabilities
|
|
$
|
3,235
|
|
|
$
|
2,922
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
$
|
212
|
|
|
$
|
225
|
|
Deferred revenue
|
|
|
141
|
|
|
|
122
|
|
Total other non-current liabilities
|
|
$
|
353
|
|
|
$
|
347
|
|
Computation of Net Income (Loss) per Share
Basic and diluted net income (loss) per share is calculated
by dividing net income (loss) by the weighted-average number of common shares outstanding during the applicable period.
The following table presents the computation
of net income (loss) per share:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
41
|
|
|
$
|
(928
|
)
|
|
$
|
(63
|
)
|
|
$
|
(1,259
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (basic)
|
|
|
17,347
|
|
|
|
15,160
|
|
|
|
17,300
|
|
|
|
15,131
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock awards
|
|
|
356
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Denominator for net income (loss) per share (diluted)
|
|
|
17,703
|
|
|
|
15,160
|
|
|
|
17,300
|
|
|
|
15,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
0.00
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
Net income (loss) per share (diluted)
|
|
$
|
0.00
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
The following table presents the common stock equivalents excluded
from the diluted net income (loss) per share calculation, because they were anti-dilutive for the periods presented. These excluded
common stock equivalents could be dilutive in the future.
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Common stock equivalents
|
|
|
2,190
|
|
|
|
3,857
|
|
|
|
2,446
|
|
|
|
3,774
|
|
Supplemental Cash Flow Information
The following table presents non-cash investing and financing
transactions excluded from the unaudited condensed consolidated statements of cash flows:
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Accrued property and equipment paid for in the subsequent period
|
|
$
|
36
|
|
|
$
|
294
|
|
Non-cash acquisition of property and equipment under capital leases
|
|
$
|
–
|
|
|
$
|
37
|
|
Non-cash tenant improvements paid by landlord
|
|
$
|
–
|
|
|
$
|
190
|
|
The standard warranty periods for our products typically range
from one to five years. We establish reserves for estimated product warranty costs at the time revenue is recognized based upon
our historical warranty experience, and additionally, for any known product warranty issues. Our warranty obligation is affected
by product failure rates, and the use of materials or service delivery costs, which could differ from our estimates. As a result,
increases or decreases to warranty reserves could be required, which could impact our gross margins.
The following table presents details of
our warranty reserve:
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Beginning balance
|
|
$
|
138
|
|
|
$
|
163
|
|
Charged to cost of revenue
|
|
|
50
|
|
|
|
91
|
|
Usage
|
|
|
(35
|
)
|
|
|
(116
|
)
|
Ending balance
|
|
$
|
153
|
|
|
$
|
138
|
|
On September 22, 2016, we entered into an amendment (the “Amendment”)
to our existing Loan and Security Agreement dated May 23, 2006 (as amended, the “Loan Agreement”) with Silicon Valley
Bank (“SVB”). The Amendment provides, among other things, for a renewal of our $4.0 million revolving line of credit,
based on qualified accounts receivable, with an extended maturity date of September 30, 2018.
The Loan Agreement provides for an interest rate per annum equal
to the greater of the prime rate plus 0.75% or 4.25%, provided that we maintain a monthly quick ratio of 1.0 to 1.0 or greater.
The quick ratio measures our ability to use our cash and cash equivalents maintained at SVB to extinguish or retire our current
liabilities immediately. If this ratio is not met, the interest rate will become the greater of the prime rate plus 1.25% or 4.25%.
At December 31, 2016, we met the 1.0 to 1.0 or greater quick ratio.
The Loan Agreement includes a covenant requiring us to
maintain a certain Minimum Tangible Net Worth (“Minimum TNW”), currently required to be approximately $6.0
million. The Minimum TNW is subject to adjustment upward to the extent we raise additional equity or debt financing or
achieve net income in future quarters. Our Actual Tangible Net Worth (“Actual TNW”) is calculated as total
stockholders’ equity, less goodwill.
The following table presents the Minimum
TNW compared to our Actual TNW:
|
|
December 31,
|
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Minimum TNW
|
|
$
|
6,021
|
|
Actual TNW
|
|
$
|
10,618
|
|
The following table presents certain information with respect
to the Loan Agreement with SVB:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Outstanding borrowings on the line of credit
|
|
$
|
–
|
|
|
$
|
–
|
|
Available borrowing capacity
|
|
$
|
2,647
|
|
|
$
|
2,620
|
|
Outstanding letters of credit
|
|
$
|
51
|
|
|
$
|
51
|
|
Our outstanding letters of credit were used as security deposits.
Stock Incentive Plans
Our stock incentive plans permit the granting of stock options
(both incentive and nonqualified stock options), restricted stock units (“RSUs”), stock appreciation rights, non-vested
stock, and performance shares to certain employees, directors and consultants. As of December 31, 2016, no stock appreciation rights,
non-vested stock, or performance shares were outstanding.
Stock Options
The following table presents a summary of activity during
the six months ended December 31, 2016 with respect to our stock options:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
|
Shares
|
|
|
per Share
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance of options outstanding at June 30, 2016
|
|
|
|
3,606
|
|
|
$
|
1.85
|
|
Granted
|
|
|
|
722
|
|
|
|
1.36
|
|
Forfeited
|
|
|
|
(19
|
)
|
|
|
1.26
|
|
Expired
|
|
|
|
(58
|
)
|
|
|
2.71
|
|
|
Exercised
|
|
|
|
–
|
|
|
|
–
|
|
Balance of options outstanding at December 31, 2016
|
|
|
|
4,251
|
|
|
$
|
1.76
|
|
Restricted Stock Units
The following table presents a summary of activity during the
six months ended December 31, 2016 with respect to our RSUs:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance of RSUs outstanding at June 30, 2016
|
|
|
460
|
|
|
$
|
1.10
|
|
Granted
|
|
|
60
|
|
|
|
1.37
|
|
Vested
|
|
|
(160
|
)
|
|
|
1.10
|
|
Cancelled / forfeited
|
|
|
–
|
|
|
|
–
|
|
Balance of RSUs outstanding at December 31, 2016
|
|
|
360
|
|
|
$
|
1.15
|
|
In December 2016, 150,000 RSUs vested pursuant to a RSU
grant made in April 2016 to Jeffrey Benck, our chief executive officer. In connection with the vesting of these RSUs, we
issued approximately 94,000 shares of our common stock to Mr. Benck, and withheld the remaining 56,000 shares for purposes
of employee payroll taxes.
Employee Stock Purchase Plan
Our 2013 Employee Stock Purchase Plan (the “ESPP”)
is intended to provide employees with an opportunity to purchase our common stock through accumulated payroll deductions at the
end of a specified purchase period. Each of our employees (including officers) is eligible to participate in the ESPP, subject
to certain limitations as set forth in the ESPP.
The following table presents a summary of activity under our
ESPP during the six months ended December 31, 2016:
|
|
|
Number of
|
|
|
|
|
Shares
|
|
|
|
|
|
(In thousands)
|
|
|
Shares available for issuance at June 30, 2016
|
|
|
|
736
|
|
|
Shares issued
|
|
|
|
(113
|
)
|
|
Shares available for issuance at December 31, 2016
|
|
|
|
623
|
|
Share-Based Compensation Expense
The following table presents a summary of share-based compensation
expense included in each functional line item on our unaudited condensed consolidated statements of operations:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
13
|
|
|
$
|
20
|
|
|
$
|
24
|
|
|
$
|
38
|
|
Selling, general and administrative
|
|
|
162
|
|
|
|
182
|
|
|
|
311
|
|
|
|
353
|
|
Research and development
|
|
|
45
|
|
|
|
50
|
|
|
|
86
|
|
|
|
94
|
|
Total share-based compensation expense
|
|
$
|
220
|
|
|
$
|
252
|
|
|
$
|
421
|
|
|
$
|
485
|
|
The following table presents the remaining unrecognized share-based
compensation expense related to our outstanding share-based awards as of December 31, 2016:
|
|
Remaining
|
|
|
Remaining
|
|
|
|
Unrecognized
|
|
|
Weighted-
|
|
|
|
Compensation
|
|
|
Average Years
|
|
|
|
Expense
|
|
|
To Recognize
|
|
|
|
(In thousands)
|
|
|
|
|
|
Stock options
|
|
$
|
1,331
|
|
|
|
3.1
|
|
RSUs
|
|
|
391
|
|
|
|
2.9
|
|
Stock purchase rights under ESPP
|
|
|
163
|
|
|
|
1.3
|
|
If there are any modifications or cancellations of the underlying
unvested share-based awards, we may be required to accelerate, increase or cancel remaining unearned share-based compensation expense.
Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional
share-based awards.
We utilize the liability method of accounting for income taxes.
The following table presents our effective tax rates based upon our provision for income taxes for the periods shown:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Effective tax rate
|
|
|
36%
|
|
|
|
1%
|
|
|
|
91%
|
|
|
|
2%
|
|
The difference between our effective tax rates in the periods
presented above and the federal statutory rate is primarily due to a tax benefit from our domestic losses being recorded with a
full valuation 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 that we believe
these assets will more likely than not be realized. As a result of our cumulative losses and uncertainty of generating future taxable
income, we have provided a full valuation allowance against our net deferred tax assets as of December 31, 2016 and June 30, 2016.
|
7.
|
Commitments
and Contingencies
|
From time to time, we are involved in various legal proceedings
and claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted
with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate,
have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the
outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other
factors.
Item 2.
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
You should read the following discussion and analysis in
conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this
Quarterly Report on Form 10-Q for the three months ended December 31, 2016, or this Report, the “Risk Factors” included
in Part II, Item 1A of this Report and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, or the Form 10-K,
filed with the Securities and Exchange Commission, or the SEC, on August 24, 2016, as well as the Cautionary Note Regarding Forward
Looking Statements described elsewhere in this Report, before deciding to purchase, hold or sell our common stock.
Overview
Lantronix, Inc., which we refer to herein as the Company, Lantronix,
we, our, or us, is a global provider of secure data access and management solutions for Internet of Things, or IoT, and information
technology, or IT, assets. Our mission is to be the leading supplier of IoT gateways that enable companies to dramatically simplify
the creation, deployment, and management of IoT projects while providing secure access to data for applications and people.
We conduct our business globally and manage our sales teams
by three geographic regions: the Americas; Europe, Middle East, and Africa, or EMEA; and Asia Pacific Japan, or APJ.
Products and Solutions Overview
We organize our products and solutions
into three product lines: IoT, IT Management and Other.
IoT
Our IoT products typically connect to one or more existing machines,
provide network connectivity and are designed to enhance the value and utility of machines by making the data from the machines
available to users, systems and processes or by controlling their properties and features over available networks.
Our IoT products currently consist of IoT Gateways and IoT Building
Blocks. IoT Gateways are designed to provide secure connectivity and the ability to add integrated device management and advanced
data access features. IoT Building Blocks provide basic secure machine connectivity and unmanaged data access.
The following product families are included in our IoT product
line: EDS, EDS-MD®, PremiereWave® product families, UDS, WiPort®, xDirect®, xPico®, xPico® Wi-Fi, xPress™
and XPort®,
IT Management
Our IT Management product line includes console management,
power management, and keyboard video mouse products that provide remote out-of-band management access to IT and networking infrastructure
deployed in test labs, data centers and server rooms.
The following product families are included in our IT Management
product line: SLB™, SLC™ 8000 and Spider™. In addition, our IT Management product line includes vSLM™,
a virtualized central management solution that simplifies secure administration of enterprise IT out-of-band devices and attached
equipment through a standard web browser. vSLM is designed to operate with both our IT Management products and certain other manufacturers’
IT infrastructure equipment.
Other
We categorize products that are non-focus or end-of-life as
Other. Our Other product line includes non-focus products such as the xPrintServer®, xSenso®, and WiBox®. In addition,
our Other product line includes end-of-life versions of our MatchPort®, SLC™, SLP™, and xPress Pro™ product
families.
Recent Accounting Pronouncements
Refer to
Note 1
of Notes to Unaudited Condensed Consolidated
Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of
recent accounting pronouncements.
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 the Form 10-K. There have been no significant changes in our critical accounting policies and
estimates during the three months ended December 31, 2016 as compared to what was previously disclosed in the Form 10-K.
Results of Operations – Three
Months Ended December 31, 2016 Compared to the Three Months Ended December 31, 2015
Summary
In the three months ended December 31, 2016 our net revenue
increased by $1.7 million, or 17.6%, compared to the three months ended December 31, 2015. The increase in net revenue was primarily
due to sales growth in both our IoT and IT Management product lines, which was partially offset by a decrease in net revenue in
our Other product line. We had net income of $41,000 for the three months ended December 31, 2016 compared to a net loss of $928,000
for the three months ended December 31, 2015. This improvement in profitability was principally driven by the increase in net revenue
and a 26.7% increase in gross profit, partially offset by increased operating expenses of approximately 3.9%.
Net Revenue
The following tables present our fiscal
quarter net revenue by product line and by geographic region:
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
IoT
|
|
$
|
8,304
|
|
|
|
74.0%
|
|
|
$
|
7,086
|
|
|
|
74.3%
|
|
|
$
|
1,218
|
|
|
|
17.2%
|
|
IT Management
|
|
|
2,265
|
|
|
|
20.2%
|
|
|
|
1,318
|
|
|
|
13.8%
|
|
|
|
947
|
|
|
|
71.9%
|
|
Other
|
|
|
653
|
|
|
|
5.8%
|
|
|
|
1,136
|
|
|
|
11.9%
|
|
|
|
(483
|
)
|
|
|
(42.5%
|
)
|
|
|
$
|
11,222
|
|
|
|
100.0%
|
|
|
$
|
9,540
|
|
|
|
100.0%
|
|
|
$
|
1,682
|
|
|
|
17.6%
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
Americas
|
|
$
|
6,453
|
|
|
|
57.5%
|
|
|
$
|
5,203
|
|
|
|
54.5%
|
|
|
$
|
1,250
|
|
|
|
24.0%
|
|
EMEA
|
|
|
3,122
|
|
|
|
27.8%
|
|
|
|
2,820
|
|
|
|
29.6%
|
|
|
|
302
|
|
|
|
10.7%
|
|
Asia Pacific Japan
|
|
|
1,647
|
|
|
|
14.7%
|
|
|
|
1,517
|
|
|
|
15.9%
|
|
|
|
130
|
|
|
|
8.6%
|
|
|
|
$
|
11,222
|
|
|
|
100.0%
|
|
|
$
|
9,540
|
|
|
|
100.0%
|
|
|
$
|
1,682
|
|
|
|
17.6%
|
|
IoT
Net revenue from our IoT product line for the three months ended
December 31, 2016 increased compared to the three months ended December 31, 2015 due to growth in unit sales from a variety of
our product families including XPort across all three geographic regions, as well as both xPico and xDirect, largely in the Americas
region.
IT Management
Net revenue from our IT Management product line for the three
months ended December 31, 2016 increased compared to the three months ended December 31, 2015 primarily due to growth in our SLC
8000 product family, largely in the Americas region, and to a lesser extent, the EMEA and APJ regions. We also experienced growth
in our SLB product family, primarily in the Americas region.
Other
As expected, our Other products, which are comprised of non-focus
and end-of-life product families, continued to decline.
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, manufacturing
overhead, establishing or relieving inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties
and share-based compensation.
The following table presents our fiscal
quarter gross profit:
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
Gross profit
|
|
$
|
5,812
|
|
|
|
51.8%
|
|
|
$
|
4,589
|
|
|
|
48.1%
|
|
|
$
|
1,223
|
|
|
|
26.7%
|
|
Gross profit as a percent of revenue (referred
to as “gross margin”) for the three months ended December 31, 2016 improved compared to the three months ended December
31, 2015 primarily due to lower overhead costs. Additionally, we benefited from improved product mix as some of our higher margin
products, such as the SLC 8000, contributed to a larger portion of our net revenue.
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 our fiscal
quarter selling, general and administrative expenses:
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
Personnel-related expenses
|
|
$
|
2,844
|
|
|
|
|
|
|
$
|
2,230
|
|
|
|
|
|
|
$
|
614
|
|
|
|
27.5%
|
|
Severance expenses
|
|
|
–
|
|
|
|
|
|
|
|
286
|
|
|
|
|
|
|
|
(286
|
)
|
|
|
(100.0%
|
)
|
Professional fees and outside services
|
|
|
280
|
|
|
|
|
|
|
|
326
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
(14.1%
|
)
|
Advertising and marketing
|
|
|
168
|
|
|
|
|
|
|
|
357
|
|
|
|
|
|
|
|
(189
|
)
|
|
|
(52.9%
|
)
|
Facilities and insurance
|
|
|
222
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
(13.3%
|
)
|
Share-based compensation
|
|
|
162
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
(11.0%
|
)
|
Depreciation
|
|
|
56
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
(13.8%
|
)
|
Other
|
|
|
141
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
29
|
|
|
|
25.9%
|
|
Selling, general and administrative
|
|
$
|
3,873
|
|
|
|
34.5%
|
|
|
$
|
3,814
|
|
|
|
40.0%
|
|
|
$
|
59
|
|
|
|
1.5%
|
|
Overall, selling, general and administrative expenses increased
slightly due to higher headcount-related expenses, primarily related to variable compensation. The overall increase was largely
offset by (i) severance expenses from the prior year quarter that did not recur in the current quarter and (ii) lower spending
on outside marketing programs and trade shows in connection with our efforts over the last several quarters to reevaluate and
focus our marketing activities.
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
and product certification costs. Our quarterly costs related to outside services and product certifications vary from period to
period depending on our level of development activities.
The following table presents our fiscal quarter research and
development expenses:
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
Personnel-related expenses
|
|
$
|
1,445
|
|
|
|
|
|
|
$
|
1,118
|
|
|
|
|
|
|
$
|
327
|
|
|
|
29.2%
|
|
Facilities
|
|
|
206
|
|
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
–
|
|
|
|
0.0%
|
|
Outside services
|
|
|
76
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
(105
|
)
|
|
|
(58.0%
|
)
|
Product certifications
|
|
|
42
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
(69
|
)
|
|
|
(62.2%
|
)
|
Share-based compensation
|
|
|
45
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(10.0%
|
)
|
Other
|
|
|
59
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
9
|
|
|
|
18.0%
|
|
Research and development
|
|
$
|
1,873
|
|
|
|
16.7%
|
|
|
$
|
1,716
|
|
|
|
18.0%
|
|
|
$
|
157
|
|
|
|
9.1%
|
|
Research and development expenses increased primarily due to
higher personnel-related expenses, driven by (i) higher variable compensation and (ii) additional headcount attributable to the
growth of our engineering team in India. The overall increase in research and development expenses was partially offset by a decrease
in spending for outside services for engineering resources, as we have redirected a large portion of this spending toward funding
the expansion of our new team in India. We also saw a decrease in product certifications costs as a result of the timing of certain
development projects.
Results of Operations – Six Months
Ended December 31, 2016 Compared to the Six Months Ended December 31, 2015
Summary
In the six months ended December 31, 2016 our net revenue increased
by $2.0 million, or 10.2%, compared to the six months ended December 31, 2015. The increase in net revenue was primarily due to
sales growth in both our IoT and IT Management product lines, which was partially offset by a decrease in net revenue in our Other
product line. We had a net loss of $63,000 for the six months ended December 31, 2016 compared to a net loss of $1.3 million for
the six months ended December 31, 2015. The decrease in net loss was principally driven by the increase in net revenue and a 19.2%
increase in gross profit. The overall decrease in our net loss was partially offset by a 5.6% increase in operating expenses.
Net Revenue
The following tables present our fiscal
year-to-date net revenue by product line and by geographic region:
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
IoT
|
|
$
|
16,173
|
|
|
|
73.0%
|
|
|
$
|
14,969
|
|
|
|
74.4%
|
|
|
$
|
1,204
|
|
|
|
8.0%
|
|
IT Management
|
|
|
4,702
|
|
|
|
21.2%
|
|
|
|
2,666
|
|
|
|
13.3%
|
|
|
|
2,036
|
|
|
|
76.4%
|
|
Other
|
|
|
1,287
|
|
|
|
5.8%
|
|
|
|
2,478
|
|
|
|
12.3%
|
|
|
|
(1,191
|
)
|
|
|
(48.1%
|
)
|
|
|
$
|
22,162
|
|
|
|
100.0%
|
|
|
$
|
20,113
|
|
|
|
100.0%
|
|
|
$
|
2,049
|
|
|
|
10.2%
|
|
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
Americas
|
|
$
|
12,619
|
|
|
|
56.9%
|
|
|
$
|
10,312
|
|
|
|
51.3%
|
|
|
$
|
2,307
|
|
|
|
22.4%
|
|
EMEA
|
|
|
6,223
|
|
|
|
28.1%
|
|
|
|
6,641
|
|
|
|
33.0%
|
|
|
|
(418
|
)
|
|
|
(6.3%
|
)
|
Asia Pacific Japan
|
|
|
3,320
|
|
|
|
15.0%
|
|
|
|
3,160
|
|
|
|
15.7%
|
|
|
|
160
|
|
|
|
5.1%
|
|
|
|
$
|
22,162
|
|
|
|
100.0%
|
|
|
$
|
20,113
|
|
|
|
100.0%
|
|
|
$
|
2,049
|
|
|
|
10.2%
|
|
IoT
Net revenue from our IoT product line for the six months ended
December 31, 2016 increased compared to the six months ended December 31, 2015 due to growth in unit sales from a variety of our
product families including the xPico in the Americas and EMEA regions, as well as the XPort, xDirect and Premierwave XN product
families, largely in the Americas region. The overall increase was partially offset by (i) a decrease in unit sales of our XPort
and xPico WiFi product families in EMEA and (ii) a decline in unit sales of some of our other legacy product families.
IT Management
Net revenue from our IT Management product line for the six
months ended December 31, 2016 increased compared to the six months ended December 31, 2015 primarily due to growth in our SLC
8000 product family, largely in the Americas region, and to a lesser extent, the EMEA and APJ regions. We also experienced growth
in our SLB product family, primarily in the Americas region.
Other
As expected, our Other products, which are comprised of non-focus
and end-of-life product families, continued to decline.
Gross Profit
The following table presents our fiscal
year-to-date gross profit:
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
Gross profit
|
|
$
|
11,512
|
|
|
|
51.9%
|
|
|
$
|
9,656
|
|
|
|
48.0%
|
|
|
$
|
1,856
|
|
|
|
19.2%
|
|
Gross margin for the six months ended December
31, 2016 improved compared to the six months ended December 31, 2015 primarily due to improved product mix as some of our higher
margin products, such as the SLC 8000, contributed to a larger portion of our net revenue.
Selling, General and Administrative
The following table presents our fiscal
year-to-date selling, general and administrative expense:
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
Personnel-related expenses
|
|
$
|
5,598
|
|
|
|
|
|
|
$
|
4,539
|
|
|
|
|
|
|
$
|
1,059
|
|
|
|
23.3%
|
|
Severance expenses
|
|
|
–
|
|
|
|
|
|
|
|
286
|
|
|
|
|
|
|
|
(286
|
)
|
|
|
(100.0%
|
)
|
Professional fees and outside services
|
|
|
619
|
|
|
|
|
|
|
|
712
|
|
|
|
|
|
|
|
(93
|
)
|
|
|
(13.1%
|
)
|
Advertising and marketing
|
|
|
331
|
|
|
|
|
|
|
|
807
|
|
|
|
|
|
|
|
(476
|
)
|
|
|
(59.0%
|
)
|
Facilities and insurance
|
|
|
455
|
|
|
|
|
|
|
|
547
|
|
|
|
|
|
|
|
(92
|
)
|
|
|
(16.8%
|
)
|
Share-based compensation
|
|
|
311
|
|
|
|
|
|
|
|
353
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
(11.9%
|
)
|
Depreciation
|
|
|
110
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(5.2%
|
)
|
Other
|
|
|
291
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
112
|
|
|
|
62.6%
|
|
Selling, general and administrative
|
|
$
|
7,715
|
|
|
|
34.8%
|
|
|
$
|
7,539
|
|
|
|
37.5%
|
|
|
$
|
176
|
|
|
|
2.3%
|
|
Overall, selling, general and administrative expenses increased
slightly due primarily to higher headcount-related expenses, primarily related to variable compensation. The overall increase was
largely offset by (i) lower spending on outside marketing programs and trade shows in connection with our efforts over the last
several quarters to reevaluate and focus our marketing activities, (ii) severance expenses during the during the six months ended
December 31, 2015 that did not recur during the six months ended December 31, 2016 and (iii) lower legal and patent-related fees.
Research and Development
The following table presents our fiscal
year-to-date research and development expenses:
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Change
|
|
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
Personnel-related expenses
|
|
$
|
2,851
|
|
|
|
|
|
|
$
|
2,278
|
|
|
|
|
|
|
$
|
573
|
|
|
|
25.2%
|
|
Facilities
|
|
|
404
|
|
|
|
|
|
|
|
391
|
|
|
|
|
|
|
|
13
|
|
|
|
3.3%
|
|
Outside services
|
|
|
229
|
|
|
|
|
|
|
|
333
|
|
|
|
|
|
|
|
(104
|
)
|
|
|
(31.2%
|
)
|
Product certifications
|
|
|
130
|
|
|
|
|
|
|
|
187
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
(30.5%
|
)
|
Share-based compensation
|
|
|
86
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8.5%
|
)
|
Other
|
|
|
118
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
14
|
|
|
|
13.5%
|
|
Research and development
|
|
$
|
3,818
|
|
|
|
17.2%
|
|
|
$
|
3,387
|
|
|
|
16.8%
|
|
|
$
|
431
|
|
|
|
12.7%
|
|
Research and development expenses increased primarily due to
higher personnel-related expenses, driven by (i) higher variable compensation and (ii) additional headcount attributable to the
growth of our engineering team in India. The overall increase in research and development expenses was partially offset by a decrease
in spending for outside services for engineering resources, as we have redirected a large portion of this spending toward funding
the expansion of our new team in India. We also saw a decrease in product certifications costs as a result of the timing of certain
development projects.
Provision for Income Taxes
The following table presents our effective tax rate based upon
our provision for income taxes:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Effective tax rate
|
|
|
36%
|
|
|
|
1%
|
|
|
|
91%
|
|
|
|
2%
|
|
We utilize the liability method of accounting for income taxes.
The difference between our effective tax rates and the federal statutory rate resulted primarily from a tax benefit from our domestic
losses being recorded with a full valuation 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 that we believe
these assets will more likely than not be realized. As a result of our cumulative losses and uncertainty of generating future taxable
income, we have provided a full valuation allowance against our net deferred tax assets as of December 31, 2016 and June 30, 2016.
Liquidity and Capital Resources
The following table presents details of our working capital
and cash and cash equivalents:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
2016
|
|
|
2016
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Working capital
|
|
$
|
9,609
|
|
|
$
|
9,061
|
|
|
$
|
548
|
|
Cash and cash equivalents
|
|
$
|
6,698
|
|
|
$
|
5,962
|
|
|
$
|
736
|
|
Our principal sources of cash and liquidity include our existing
cash and cash equivalents, borrowings available under our loan agreement, and cash generated from operations. We believe that these
sources will be sufficient to fund our current requirements for working capital, capital expenditures and other financial commitments
for at least the next 12 months. We anticipate that the primary factors affecting our cash and liquidity are net revenue and working
capital requirements.
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
us 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 investment policy primarily emphasizes safety
of principal and secondarily emphasizes maximizing yield.
Our future working capital requirements will depend on many
factors, including the timing and amount of our net revenue, any future restructuring or cost-cutting measures that we may implement
from time to time, research and development expenses, expenses associated with any strategic partnerships or acquisitions, infrastructure
investments and fundraising activities.
From time to time, we may seek additional capital from public
or private offerings of our capital stock, borrowings under our existing or future credit lines or other sources in order to (i)
develop or enhance our products, (ii) take advantage of strategic opportunities, (iii) respond to competition or (iv) continue
to operate our business. We currently have a Form S-3 shelf registration statement on file with the SEC. If we issue equity securities
to raise additional funds, our existing stockholders may experience dilution, and the new equity securities may have rights, preferences
and privileges senior to those of our existing stockholders. If we issue debt securities to raise additional funds, we may incur
debt service obligations, become subject to restrictions limiting or restricting our ability to operate our business or be required
to encumber all or a portion of our assets. There can be no assurance that we will be able to raise any such capital on terms acceptable
to us, if at all.
Loan Agreement
Refer to
Note 4
of Notes to Unaudited Condensed Consolidated
Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of
our loan agreement.
Cash Flows
The following table presents the major
components of the unaudited condensed consolidated statements of cash flows:
|
|
Six Months Ended
December 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
837
|
|
|
$
|
(337
|
)
|
|
$
|
1,174
|
|
Net cash used in investing activities
|
|
|
(99
|
)
|
|
|
(103
|
)
|
|
|
4
|
|
Net cash provided by (used in) financing activities
|
|
|
(2
|
)
|
|
|
13
|
|
|
|
(15
|
)
|
Operating Activities
Net cash provided by operating activities during the six months
ended December 31, 2016 increased as compared to cash used by operating activities during the six months ended December 31, 2015
primarily due to a decrease in our net loss to $63,000 in the six months ended December 31, 2016 as compared to our $1.3
million net loss in the six months ended December 31, 2015.
Inventories increased approximately $1.0 million, or
15.6%, as compared to June 30, 2016 as we have (i) made efforts to increase stock in certain products and (ii) experienced an
increase in inventory held by certain distributors. The impact of the increase in inventories on operating cash flows was
largely offset by increases in (i) accrued payroll and expenses related to accruals for variable compensation and (ii) other
current liabilities. Cash provided by operating activities during the six months ended December 31, 2016 increased due to a
decrease in accounts receivable of approximately 9.4% from June 30, 2016 to December 31, 2016, which was driven by
differences in the timing of our sales during the quarter ended December 31, 2016 as compared to the quarter
ended June 30, 2016.
Investing Activities
Net cash used in investing activities was related to capital
expenditures for the purchase of property and equipment, primarily related to tooling and test equipment, as well as acquisitions
of hardware and equipment related to our new software lab in India.
Financing Activities
Net cash used in financing activities during the six months
ended December 31, 2016 related to payments for (i) withholding taxes in connection with the vesting of restricted stock units
which had been granted to our chief executive officer and (ii) capital leases. This was substantially offset by cash received from
the issuance of common stock to employees in connection with purchases made under our Employee Stock Purchase Plan.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in
transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, or SPEs, which may be established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2016, we were not involved
in any material relationships with unconsolidated SPEs.