UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31,September 30, 2015

OR

For the transition period from _________ to ___________.

Commission file number: 1-16027

LANTRONIX, INC.

(Exact name of registrant as specified in its charter)

167 Technology7535 Irvine Center Drive, Suite 100, Irvine, California

(Address of principal executive offices)

92618

(Zip Code)

(949) 453-3990

(Registrant’s telephone number, including area code)

                    Not Applicable                    

(Former name, former address and former fiscal year, if changed since last report)

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. Yesx Noo

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). Yesx Noo

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yeso Nox

As of April 24,October 23, 2015, there were 14,942,20515,104,710 shares of the Registrant’s common stock outstanding.

LANTRONIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31,September 30, 2015

INDEX

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the quarterly periodthree months ended March 31,September 30, 2015, or the Report, contains forward-looking statements within the meaning of the federal securities laws.laws, which statements are subject to substantial risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report, or incorporated by reference into this Report, are forward-looking statements. These statements include, among other things, any predictions of earnings, revenues, expenses or other financial items; plans or expectations with respect to our development activities or business strategy; statements concerning industry trends; statements regarding anticipated demand for our products, or the products of our competitors, statements relating to manufacturing forecasts, and the potential impact of our relationship with contract manufacturers and original equipment manufacturers on our business; assumptions regarding the future cost and potential benefits of our research and development efforts; forecasts of our liquidity position or available cash resources ; statements relating to the impact of pending litigation; and statements relating to the assumptions underlying any of the foregoing. Throughout this Report, we have attempted to identify forward-looking statements by using words such as “may,” “believe,” “will,” “could,” “project,” “anticipate,” “expect,” “estimate,” “should,” “continue,” “potential,” “plan,” “forecasts,” “goal,” “seek,” “intend,” other forms of these words or similar words or expressions or the negative thereof. In particular, this Report contains forward-looking statements relating to, among other things:

We have based our forward-looking statements on our current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, results of operations or performance, to differ materially from our historical results or those expressed or implied in any forward-looking statement contained in this Report. Some of the risks and uncertainties that may cause actual results to differ from those expressed or implied in the forward-looking statements are described in “Risk Factors” in Item 1A of this Report, our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on August 22, 2014,21, 2015, or the Form 10-K, as well as in our other filings with the Securities and Exchange Commission, or the SEC. In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business. For these reasons, investors are cautioned not to place undue reliance on any forward-looking statements.

You should read this Report in its entirety, together with the Form 10-K, the documents that we file as exhibits to this Report and the documents that we incorporate by reference into this Report, with the understanding that our future results may be materially different from what we currently expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of The Nasdaq Stock Market, LLC. If we do update or correct any forward-looking statements, investors should not conclude that we will make additional updates or corrections.

We qualify all of our forward-looking statements by these cautionary statements.

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(1)  Includes net revenue from related parties 

See accompanying notes.

LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See accompanying notes.

LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31,SEPTEMBER 30, 2015

The Company

Lantronix, Inc. (the “Company,” “Lantronix,” “we,” “our,” or “us”) is a specialized networking company providing machine to machine (“M2M”) and Internet of Things (“IoT”) solutions. Our products deliver secure connectivity, device management and mobility for today's increasingly connected world. By networking and managing devices and machines that have never before been connected, we enable our customers to realize the possibilities of the IoT.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Lantronix, Inc. (referred to in these unaudited condensed consolidated financial statements as “Lantronix,” “we,” “us,” or “our”)the Company 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, 2014,2015, included in our Annual Report on Form 10-K filed with the SEC on August 22, 2014.21, 2015. 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 March 31,September 30, 2015 and the consolidated results of our operations for the three and nine months ended March 31, 2015 and our consolidated cash flows for the ninethree months ended March 31,September 30, 2015. 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,September 30, 2015 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

Reclassifications

Certain reclassifications have been made to the prior year financial information to conform to the current period presentation.

Recent Accounting Pronouncements 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which will supersede existing revenue recognition guidance under current U.S. GAAP. The new standard is a comprehensive new 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. Currently,The standard permits the accountinguse of either a retrospective or cumulative effect transition method. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, the standard will be effective for Lantronix in the fiscal year beginning July 1, 2017. The standard may be adopted using a full retrospective or a modified retrospective (cumulative effect) method. Currently, early adoption is not permitted. In April 2015, the FASB issued a proposal to defer the effective date of the new standard by one year, but to permit companies2018, with an option to adopt onethe standard for the fiscal year earlier if they choose.beginning July 1, 2017. We are currently evaluating this standard and have not yet selected a transition method or the effective date on which we plan to adopt the standard, nor have we determined the effect of the standard on our financial statements and related disclosures.

In August 2014, the FASB issued a new standard that will require 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 will be required if conditions give rise to substantial doubt. The standard will be effective for Lantronix in the fiscal year beginning July 1, 2016. Early adoption is permitted. We are currently evaluating the impact of this standard on our financial statements and related disclosures.

In July 2015, the FASB issued final guidance that simplifies the subsequent measurement of inventory for which cost is determined by methods other than last-in first-out (“LIFO”) and the retail inventory method. For inventory within the scope of the new guidance, entities will be required to compare the cost of inventoryto only one measure, its net realizable value, and not the three measures required by the existing guidance. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance does not change how entities initially measure the cost of inventory. Lantronix adopted this guidance in the fiscal year beginning July 1, 2015. Such adoption did not have a material impact on our financial statements.

Inventories

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

* This item is sold individually and embedded into our products.

Other Liabilities

The following table presents details of our other liabilities:

Computation of Net Loss per Share

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

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

The following table presents the common stock equivalents excluded from the diluted net loss per share calculation, because they were anti-dilutive for the periods presented. These excluded common stock equivalents could be dilutive in the future.

Facility Lease

The lease for our new corporate headquarters in Irvine, California, commenced in July 2015. The lease agreement provided for a tenant improvement allowance from the landlord of up to $243,000 for tenant improvements and other qualified expenses. In connection with this allowance, the landlord paid for approximately $190,000 in tenant improvements, and, in September 2015, reimbursed Lantronix for the remaining $53,000.

Supplemental Cash Flow Information

The following table presents non-cash investing and financing transactions excluded from the unaudited condensed consolidated statements of cash flows:

The warranty periods for our products generally 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, use of materials or service delivery costs that 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:

On September 30, 2014, 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 (i) a renewal of our $4.0 million revolving line of credit with an extended maturity date of September 30, 2016 and (ii) a modification of the revolving credit line borrowing base formula to include a portion of our foreign accounts receivable to the borrowing base and increase the borrowing limit related to domestic accounts receivable.

The Loan Agreement provides for an interest rate per annum equal to the greater of the prime rate plus 0.75% or 4.0%, 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 4.0%. We maintained a monthly quick ratio greater than 1.0 to 1.0 as of and during the three months ended March 31, 2015.

The Loan Agreement includes a covenant requiring us to maintain a certain Minimum Tangible Net Worth (“Minimum TNW”), which is currently required to be at least $6.0 million. This amount 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. If we continue to incur net losses, we may have difficulty satisfying the Minimum TNW financial covenant in the future, in which case we may be unable to borrow funds under the Loan Agreement and any amounts outstanding may need to be repaid immediately.

As of March 31, 2015, we had no borrowings outstanding on the revolving line of credit.

The following table sets forth the Minimum TNW compared to our Actual TNW:

The following table presents certain information with respect to the available borrowing capacity on the revolving line of credit andLoan Agreement with SVB:

Our outstanding letters of credit. To date, we have not used any of the borrowing capacity under the revolving line of credit.

In February 2015, we executed a letter of credit with SVB for $591,000 in connection with the purchase of raw materials from one of our contract manufacturers. We paid for the purchase of such materials in early April 2015. All other outstanding letters of credit at March 31, 2015 and June 30, 2014 were used as security deposits.

Share-Based Plans

Our share-based 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 March 31,September 30, 2015, no stock appreciation rights, non-vested stock, or performance shares were outstanding.

Stock Option Awards

The following table presents a summary of stock option activity under all of our stock option plans during the nine months ended March 31, 2015:plans:

Restricted Stock Units 

The following table presents a summary of activity with respect to RSUs during the nine months ended March 31, 2015:our RSUs:

In September 2015, our Chief Executive Officer was granted 50,000 performance-based RSUs. Vesting of these RSUs is subject to the achievement of certain financial performance targets for the fiscal year ending June 30, 2016 ("Fiscal 2016"). If we achieve the performance targets for Fiscal 2016: (a) 50% of the RSUs will vest on September 1, 2016, and (b) the remaining 50% of the RSUs will vest in four equal quarterly installments beginning on December 1, 2016. We have recorded share-based compensation expense for these RSUs based on management’s current estimates of the probability of achieving the performance targets.

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. Each of our employees (including officers) is eligible to participate in the ESPP, subject to certain limitations as defined in the ESPP plan document.

The following table presents a summary of activity under our ESPP during the nine months ended March 31, 2015:ESPP:

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:

The following table summarizes the remaining unrecognized share-based compensation expense related to our outstanding share-based awards as of March 31,September 30, 2015:

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 the income tax provision for the periods shown:

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 March 31,September 30, 2015 and June 30, 2014.2015.

From time to time, we are subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such legal proceedings or claims that are expected to have, individually or in the aggregate, a material adverse effect on our business, prospects, financial position, operating results or cash flows.

On January 16, 2015, we entered into a building lease agreement (the “Lease”) with the Irvine Company, LLC (the “Landlord”). Pursuant to the Lease, we will lease approximately 27,000 square feet of office space for our corporate headquarters in Irvine, California. The Lease shall commence on the date which is the earlier to occur of: (a) the date we take possession of the premises following the completion of certain tenant improvements to the premises, but not earlier than March 1, 2015, or (b) the date we commence our regular business activities on the premises. We currently expect to take possession of the premises, and commence our regular business activities, sometime in June 2015.

The Landlord is obligated to provide a tenant improvement allowance of up to $242,600 for tenant improvements, as defined by the Lease. The term of the Lease will be 65 months from the commencement date. The aggregate basic rent payable under the Lease during the 65-month term is currently expected to be paid as follows:

Our existing lease with the Landlord shall terminate effective as of the day preceding the commencement date of the Lease, with no early termination fee.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included in Item 1 of this Report, the “Risk Factors” included in Item 1A of this Report and in our Annual Report on Form 10-K for the year ended June 30, 2014,2015, or the Form 10-K, 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. (the “Company,” “Lantronix,” “we,” “our,” or “us”) is a specialized networking company providing machine to machine (“M2M”) and Internet of Things (“IoT”) solutions. Our products deliver secure connectivity, device management and mobility for today's increasingly connected world. By networking and managing devices and machines that have never before been connected, we enable our customers to realize the possibilities of the IoT.

Founded in 1989, we pioneer robust, intelligentWe provide a broad portfolio of products intended to enhance the value of electronic devices and easy to deploy solutions for mission critical applications in a wide range of industries, including data center, medical, security, industrial, transportation, retail,machines. Our products are typically used by enterprise and commercial businesses, government institutions, telecommunication and utility companies, financial institutions, healthcare providers and government. individual consumers.

We organize our solutions into two product lines based on how they are marketed, sold and deployed: OEMIoT Modules and Enterprise Solutions. We conduct our business globally and manage our sales teams by geography, according to four regions: the Americas; Europe, Middle East, and Africa (“EMEA”); Asia Pacific; and Japan.

Products and Solutions Overview

“New ProductsProducts” are defined as products that have been released since the second quarter of the fiscal year ended June 30, 2012. All other products are referred to as “Legacy Products.”

OEMIoT Modules

OEMIoT Modules are electronic products that serve as building blocks embedded insidewithin modern electronic systems and equipment. Each module consists of one or more silicon integrated circuits combined with specialized firmware to provide a self-contained function. Many modules are pre-certified in a number of countries thereby significantly reducing the customer’s regulatory certification costs and accelerating time to market. Our OEMIoT Modules product line includes wired and wireless products that are designed to enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, application hosting, protocol conversion and other functions.

The products are offered with a software suite intended to further decrease our customer’s time-to-market and increase their value add. Among others, the following product families are included in our OEM ModuleIoT Modules product line: ASIC, MatchPort^®, PremiereWave^® EN, WiPort^®, xPico^®, xPico^®Wi-Fi, and xPort^®.

OEMOur IoT Modules are typically sold to original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), contract manufacturers and distributors. OEMs design and sell products under their own brand that are either manufactured by the OEM in-house or by third-party contract manufacturers. ODMs design and manufacture products for third parties, which then sell those products under their own brand. The design cycles using our OEM modulesIoT Modules typically range from 12 to 24 months and can generate revenue for the entire life-cycle of an end-user’s product.

Enterprise Solutions

Our Enterprise Solutions areconsist of electronic products that are typically connectedconnect to one or more existing pieces of electronic equipment tomachines and devices and provide additionalnetwork connectivity or additional functionality. Our Enterprise Solutions are designed to enhance the value and utility of machines and other devices throughby making the data from them available to users, systems and processes or by controlling their properties and features over the network. Our Enterprise Solutions primarily serve three markets: IoT Gateways, IT Infrastructure Management and Mobile Printing, based on the target application while relying on a common set of core technologies such as network connectivity, routing, switching application hosting,and remote management, telemetry, telematics, printing, protocol conversion and other functions. Our Enterprise Solutions include products such asmanagement. IoT Gateways encompass our line of wired and wireless device servers I/O servers,and terminal servers that add network connectivity to legacy or existing machines and intelligent gateways that add application hosting, protocol conversion and secure access for distributed Enterprise IoT deployments. IT Infrastructure Management includes console servers, print servers, remotemanagement, power management, keyboard video mouse (KVM), products that provide out-of-band management power managementaccess to IT and software management platforms. Among others,networking infrastructure deployed in data centers and server rooms. Mobile Printing covers the lineup of print servers that enhances the installed base of printers to work with Google Cloud Print and Apple Airprint. The following product families are included in our Enterprise Solutions product line: EDS, EDS-MD, PremierWave^® XC, PremierWave^®XN, SLB^™, SLC^™, SLC8000, SLP^™, Spider^™, UDS, xDirect^®, xPress^™, xPrintServer^®, and xSenso^®.

Enterprise Solutions are typically sold through value added resellers (“VARs”), systems integrators, distributors, e-tailers and to a lesser extent to OEMs. Sales are often project basedproject-based and may result in significant quarterly fluctuations.

Recent Accounting Pronouncements

Please refer to Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1 of this Report 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 ninethree months ended March 31,September 30, 2015 as compared to what was previously disclosed in the Form 10-K.

Results of Operations - Summary

In the three months ended March 31,September 30, 2015 our net revenue decreased by $1.1 million,$963,000, or 10%8.3%, compared to the three months ended March 31, 2014September 30, 2014. Primarily as increased sales froma result of cost cutting efforts and lower variable compensation expenses, our New Products was not large enoughoperating expenses were reduced by approximately 7.3% during the three months ended September 30, 2015 as compared to outpace the decline in sales of our Legacy Products and weakness in capital spending that impacted the timing of customer projects. The decline in Legacy Products was partially offset by 33% growth in New Product revenue.three months ended September 30, 2014. Our net loss was $839,000$331,000 for the three months ended March 31,September 30, 2015 compared to a net loss of $130,000$262,000 in the three months ended March 31,September 30, 2014. Our net loss for the current quarter was largely impacted by a decrease in revenue and a decrease in gross margin from 50.9% to 45.1%, primarily resulting from charges for excess inventories in the amount of $290,000. 

In the nine months ended March 31, 2015 our net revenues decreased by $729,000, or 2%, compared to the nine months ended March 31, 2014 as revenue contribution from our New Products was not large enough to outpace the decline in our Legacy Products and weakness in capital spending that impacted the timing of customer projects. The decline in Legacy Products was partially offset by 59% growth in New Product revenue. Our net loss was $1.7 million for the nine months ended March 31, 2015 compared to a net loss of $720,000 in the nine months ended March 31, 2014. The increase in net loss was driven by the decrease in net revenue, and decrease in gross margin from 50.0% to 47.3%, primarily resulting from charges for excess inventories approximating $480,000 and changes in our product mix.

Results of Operations – Three Months Ended March 31,September 30, 2015 Compared to the Three Months Ended March 31,September 30, 2014

Net Revenue

The following tables present our fiscal quarter net revenue by product line and geographic region:

OEMIoT Modules

Based on our experience, OEM Module products typically have a range of 12 to 24 months prior to reaching a meaningful revenue level. Net revenue from our OEMIoT Modules product line declined primarily as a result of a decline in sales from Legacy Products.Products, particularly our WiPort and Micro product families in the Americas region. The overall decline in OEM Modulesrevenues in this product line was slightlypartially offset by growth from one of our New Products, the xPico WiFi, which benefited from a design winswin in the EMEA region moving into production during the three months ended March 31, 2015.current quarter.

Enterprise Solutions

Net revenue from our Enterprise Solutions product line decreased primarily as a result of (i) decreased unit sales of our Legacy Products, in particular the SLC and SLS product familiesfamily in the EMEAAmericas region and weakness(ii) decreased unit sales of certain other New Product families. One of the primary reasons for the decline in capital spendingNew Products in the Enterprise Solutions category is that impactedin the timingquarter ended September 30, 2014, two customers began a regional roll out of customer projects.our SLB2 product family resulting in increased unit sales of the product. In the current fiscal quarter, we saw a much lower rate of purchases of this product family by these customers. The overall decline in Enterprise Solutions was partially offset by an increase in unit sales across manyof the SLC8000, one of our New Product families including the new SLB, EDS-MD, SLC8000, xDirect, PremierWave XN, and PremierWave XC.Products.

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:

Gross profit as a percent of revenue (referred to as “gross margin”) for the three months ended March 31,September 30, 2015 was lower than the prior year period primarily due to charges for excess inventories of approximately $290,000higher overhead costs and, to a lesser extent, product mix related to lower contribution from our SLC product family during the current quarter.charges for excess inventories.

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:

The decrease in selling, general and administrative expenses was primarily due to (i) lower variable compensation costsheadcount-related expenses, as we reduced headcount at the end of the prior fiscal year in the current quarterorder to reduce our ongoing operating expenses and (ii) lower marketing spending, primarily related to trade shows and other external costs.

variable compensation expenses.

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 can vary from period to period depending on our level of development activities.

The following table presents our fiscal quarter research and development expenses:

Research and development expenses decreased primarily due to lower material expenses (included in “Other”)outside services and product certificationother related costs, which were impacted by the timing of development projects.

Results of Operations – Nine Months Ended March 31, 2015 Compared to the Nine Months Ended March 31, 2014

Net Revenue

The following tables present fiscal year-to-date net revenue by product line and geographic region:

OEM Modules

Net revenue from our OEM Modules product line increased primarily as a result of an increase in New Product sales which offset a decline in Legacy Product sales. Specifically, we experienced increased unit sales of the xPico (New) and xPort Pro product families in the Americas and the xPico WiFi (New) product family in the EMEA region. We also saw an increase in the Premierwave EN product family in all regions. The overall increase in net revenue in this product line for the current year-to-date period was partially offset by decreased unit sales of three of our Legacy Product families: (i) Micro in the Americas and Asia Pacific regions, (ii) ASIC in the Americas and EMEA regions and (iii) WiPort in Japan and the Asia Pacific region.

Enterprise Solutions

Net revenue from our Enterprise Solutions product line decreased primarily due to a decrease in our Legacy Products, such as the SLC, SLS, EDS, UDS and xPress and weakness in capital spending that impacted the timing of customer projects. The decrease in Legacy Product sales was partially offset by growth in unit sales for many of our New Products, including the new SLB, EDS-MD, xDirect, PremierWave XN and SLC8000.

Gross Profit

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

Gross margin for the nine months ended March 31, 2015 was lower than the prior year period primarily due to (i) charges for excess inventories of approximately $480,000 and (ii) product mix as our higher-margin Enterprise Solutions product line contributed at a lower level than the prior year period.

Selling, General and Administrative

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

Selling, general and administrative expenses decreased in the current year period primarily due to (i) lower levels of spending on trade shows and outside marketing programs, (ii) lower variable compensation expenses and (iii) a decrease in legal fees.

Research and Development

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

In total, research and development spending in the current year period was relatively consistent with the prior year period. We experienced an increase in personnel-related expense due to headcount and merit increases, which were partially offset by lower variable compensation expenses in the current year period.  

Provision for Income Taxes

The following table presents our effective tax rate based upon our income tax provision:

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 March 31,September 30, 2015 and June 30, 2014.2015.

Liquidity and Capital Resources

The following table presents details of our working capital and cash and cash equivalents: