Lantronix, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017 (fiscal 2018 first quarter). Lantronix supplies secure data access and management solutions for IoT assets, with IoT, IT Management, and Other product lines. Unless stated otherwise, dollar amounts are in thousands.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $10,606 | $10,940 |
| Gross profit / gross margin | $5,594 / 52.7% | $5,700 / 52.1% |
| Operating expenses | $6,207 | $5,787 |
| Operating loss | $(613) | $(87) |
| Net loss | $(641) | $(104) |
| Net loss per share, basic and diluted | $(0.04) | $(0.01) |
| Operating cash flow | $111 | $223 |
| Capital expenditures | $50 | $72 |
- Revenue fell 3.1% year over year. IoT revenue rose 7.7% to $8,477; IT Management declined 26.6% to $1,789; Other declined 46.4% to $340.
- Gross margin increased 0.6 percentage points. Management cited favorable product mix, partly offset by higher overhead and excess-and-obsolete inventory reserves.
- SG&A rose 3.7% to $3,986, and R&D rose 14.2% to $2,221. Net loss included $527 of severance and related restructuring charges, primarily severance; activities were substantially completed by quarter-end.
- Cash increased $150 during the quarter to $8,223. Operating cash flow was $111, investing cash flow $(50), and financing cash flow $89.
Financial position and liquidity
- At September 30, 2017, current assets were $18,832 and current liabilities were $8,667; working capital was $10,165, down $226 from June 30, 2017.
- Total liabilities were $9,096 and stockholders’ equity was $20,422. There were no line-of-credit borrowings; available borrowing capacity was $2,480, with $51 of letters of credit outstanding.
- The $4,000 revolving facility matures September 30, 2018. Lantronix met the monthly quick-ratio requirement and its minimum tangible net worth covenant at quarter-end: actual tangible net worth was $10,934 versus a required approximately $6,021.
- Management stated that existing cash, available borrowing capacity, and operating cash generation should be sufficient for working capital, capital expenditures, and other commitments for at least the next 12 months.
Changes, outlook, and risks
- Revenue weakness reflected lower IT Management sales, particularly fewer SLC 8000 shipments as anticipated orders moved out of the quarter, and lower sales of end-of-life/non-focus products. IoT growth came from several product families, partly offset by declines in legacy products.
- Management provided no numerical revenue or earnings guidance in the supplied filing text. It cautioned that interim results are not necessarily indicative of full-year results.
- Lantronix expects adoption of the new revenue-recognition standard in fiscal 2019 using full retrospective application and anticipates a material impact. It expects distributor sales with return and price-adjustment provisions to be recognized predominantly at shipment, rather than upon distributor resale under its existing practice; the quantitative impact had not been determined.
- Other risks include potential covenant compliance, dependence on revenue and working-capital needs, possible need for additional financing and related dilution or restrictions, and customer order timing. Ordinary-course legal matters were not believed likely to have a material adverse effect, though litigation may incur costs and divert management resources.
- The company recorded a $246 inventory obsolescence provision in the quarter, compared with $13 in the prior-year quarter. Deferred tax assets remained subject to a full valuation allowance because of cumulative losses and uncertainty about future taxable income.
- Management concluded disclosure controls were effective as of September 30, 2017; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether delayed SLC 8000 customer orders shipped in subsequent periods and whether IT Management revenue stabilized.
- Whether IoT growth continues and offsets declines in legacy, non-focus, and end-of-life products.
- Progress against operating-cost targets after the resource realignment and the extent to which the $527 restructuring charge was nonrecurring.
- Inventory quality and the effect of additional obsolescence reserves on gross margin and cash needs.
- Compliance with the credit facility’s quick-ratio and tangible-net-worth covenants, remaining borrowing availability, and liquidity as the facility approaches maturity.
- The quantified effects and retrospective adjustments associated with the new revenue-recognition standard.