Lantronix, Inc. — FY2019 Form 10-K
Period: Fiscal year ended June 30, 2019. Although the request specifies “2018 Q4,” this is an annual report for FY2019, not a quarterly filing. Comparisons below are with the year ended June 30, 2018. Amounts are in U.S. dollars.
Business context
Lantronix provides secure data access and management products for Internet of Things (IoT) assets. It reports one operating segment and product lines for IoT, IT Management, and Other. Most revenue comes from hardware; new software and SaaS offerings had not generated meaningful revenue in FY2019. Sales are largely through distributors, and products are primarily manufactured by third parties in Asia.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change or context |
|---|---|---|---|
| Revenue | $46.890 million | $45.580 million | Up 2.9% |
| Gross profit / margin | $26.273 million / 56.0% | $25.406 million / 55.7% | Gross profit up 3.4%; margin rose 0.3 percentage points |
| Operating expenses | $26.761 million | $24.602 million | Up $2.159 million, or 8.8% |
| Operating income (loss) | $(0.488) million | $0.804 million | Moved to an operating loss |
| Net income (loss) | $(0.408) million | $0.680 million | Basic and diluted loss per share: $0.02 |
| Operating cash flow | $(1.748) million | $0.509 million | Cash used in operations |
| Investing cash flow | $(0.891) million | $(0.229) million | Mainly equipment, tooling, and production software |
| Financing cash flow | $11.353 million | $1.215 million | Primarily public offering proceeds |
| Cash and cash equivalents | $18.282 million | $9.568 million | Up $8.714 million |
| Working capital | $26.718 million | $13.544 million | Up $13.174 million |
At June 30, 2019, total liabilities were $11.678 million and stockholders’ equity was $37.266 million. There were no borrowings under the $4.0 million revolving line of credit; available borrowing capacity was $3.842 million. The facility matures September 30, 2020 and includes financial covenants. Management stated available resources were expected to fund requirements for at least 12 months.
Material changes and comparability
- IoT revenue increased 1.6% to $35.299 million; IT Management revenue increased 12.2% to $10.845 million; Other revenue declined 36.3% to $0.746 million.
- Revenue grew in EMEA by 7.1% to $14.586 million; Americas revenue rose 1.0% to $25.179 million and APJ revenue rose 1.3% to $7.125 million.
- Operating expenses increased primarily due to restructuring and severance, increased R&D investment, and higher share-based compensation. FY2019 included $1.146 million of severance-related charges, $0.410 million of acquisition-related costs, and a $0.275 million non-cash impairment charge for a software platform license.
- Gross margin improved with a higher mix of higher-margin products, partly offset by approximately $0.269 million of tariff costs. The company was shifting contract manufacturing from China to Southeast Asia to mitigate tariff exposure.
- Lantronix adopted ASC 606 on July 1, 2018 using the modified retrospective method. The change accelerated recognition of certain distributor sales and added $0.582 million to opening accumulated deficit. FY2018 was not restated. For FY2019, the filing estimates revenue would have been $43.331 million and net loss $2.909 million without ASC 606, versus reported revenue of $46.890 million and net loss of $0.408 million. This accounting change materially affects year-over-year comparability.
- The company raised approximately $9.774 million net from issuing 2.7 million shares in September and October 2018.
Outlook, commentary, risks, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management described IoT growth and strategic acquisitions as priorities; software and SaaS offerings remained at an early evaluation stage without meaningful revenue.
- On July 5, 2019, after year-end, Lantronix acquired Maestro for approximately $5.070 million in cash, subject to adjustments. The acquisition adds cellular and mobile-tracking IoT connectivity. Purchase accounting was incomplete when the 10-K was filed; the company expected preliminary allocation and pro forma disclosures in its September 2019 quarterly filing.
- Key risks include volatile project-driven demand and long sales cycles; reliance on distributors (top five accounted for 57% of FY2019 revenue); customer concentration (Ingram Micro represented 24% and Arrow 13%); competition and pricing pressure; single-source components and reliance on Asian contract manufacturers; tariffs and foreign-exchange exposure; cybersecurity and product-quality risks; and the possibility of continued losses or need for additional capital.
- Lantronix reported a full valuation allowance against net deferred tax assets. Federal NOLs were $90.984 million, of which approximately $51.9 million were expected to expire by June 30, 2023; use may be limited. Gross unrecognized tax benefits were $6.6 million.
- Management concluded disclosure controls and internal control over financial reporting were effective at June 30, 2019. The auditor issued an unqualified opinion on the financial statements; it did not provide an attestation opinion on internal control.
Important facts for investors to verify
- Assess underlying growth and profitability after accounting for ASC 606’s effect on distributor revenue recognition; FY2018 was not restated.
- Track cash conversion, receivables, and inventory: operating cash flow was negative, receivables rose to $7.388 million, and inventory rose to $10.509 million.
- Review the Maestro acquisition’s final purchase-price allocation, integration results, and cash impact, including the approximately $5.0 million post-year-end payment.
- Monitor distributor and customer concentration, tariff-mitigation progress, and supply-chain continuity as manufacturing shifts to Southeast Asia.
- Check covenant compliance and liquidity under the SVB facility, and the effect of share issuance and equity compensation on dilution.