Lantronix, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014. Amounts are in thousands, except per-share data. Lantronix designs and sells networking and communications products, organized into OEM Modules and Enterprise Solutions, for connected devices and machine-to-machine applications.
Financial results
| Metric | Three months ended Dec. 31, 2014 | Prior-year quarter | Six months ended Dec. 31, 2014 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $10,735 | $10,968 | $22,271 | $21,851 |
| Gross profit / margin | $5,170 / 48.2% | $5,437 / 49.6% | $10,769 / 48.4% | $10,827 / 49.5% |
| Operating expenses | $5,774 | $5,705 | $11,593 | $11,334 |
| Operating loss | $(604) | $(268) | $(824) | $(507) |
| Net loss | $(632) | $(323) | $(894) | $(590) |
| Net loss per share | $(0.04) | $(0.02) | $(0.06) | $(0.04) |
- Quarterly revenue mix: OEM Modules rose 12.8% to $5,298; Enterprise Solutions declined 13.3% to $5,437. The filing attributes OEM growth chiefly to xPico and MatchPort sales, while weakness in mature SLC, UDS, and EDS families weighed on Enterprise Solutions.
- Six-month revenue mix: OEM Modules increased 10.2% to $10,926; Enterprise Solutions decreased 5.0% to $11,345. Enterprise declines across regions were partly offset by newer products.
- Profitability: Quarterly gross margin fell 1.4 percentage points, primarily due to product mix. Six-month margin fell 1.1 points, reflecting product mix and higher manufacturing overhead. Six-month R&D expense increased 6.1% to $3,526, mainly from development services, certifications, and personnel costs.
- Cash flow: Operating activities used $574 for the six months, versus $1,221 provided in the prior-year period. Capital expenditures used $363; financing activities provided $80. Cash declined $857 to $5,407.
- Liquidity and balance sheet: At December 31, cash was $5,407, current assets $18,325, current liabilities $9,772, and working capital $8,553. The current ratio was approximately 1.9. Total liabilities were $9,847; no revolving-credit borrowings were outstanding. Available line capacity was $2,637, with $113 in letters of credit. There was no material conventional debt outstanding disclosed; capital lease obligations totaled $29 current and none long-term.
Material changes, outlook, and risks
- Management said the quarterly net loss widened largely because of lower revenue and gross margin; for the six-month period, higher operating expenses—especially continued R&D investment—contributed to the larger loss.
- Inventory increased to $9,296 from $8,404 at June 30, 2014. Management said inventory and cash were affected by a manufacturing transition, buffer-stock purchases, and an agreement to buy unused raw materials from the former contract manufacturer; it expected to sell the buffer stock over two to three quarters.
- Management believed existing cash, credit availability, and operating cash sources would fund working capital, capital expenditures, and other commitments for at least the next 12 months. No specific revenue or earnings guidance was provided.
- The $4.0 million revolving facility was renewed through September 30, 2016. The company met its 1.0 quick-ratio requirement during the quarter. Its minimum tangible net worth covenant was $6,000 versus actual tangible net worth of $10,409; management cautioned continued losses could make future compliance difficult and restrict borrowing or trigger repayment.
- After quarter-end, Lantronix entered a 65-month lease for approximately 27,000 square feet of Irvine office space. Aggregate basic rent was expected to be $2,648; the landlord offered up to $242.6 for tenant improvements.
- The company reported no material change in legal proceedings or risk factors from its latest 10-K, and no known proceedings expected to have a material adverse effect. Disclosure controls were judged effective; no material changes in internal control over financial reporting were identified.
Important facts for investors to verify
- Whether OEM Modules growth and newer-product sales can offset continued declines in mature Enterprise Solutions products, and how product mix affects gross margin.
- Inventory levels, buffer-stock sell-through, and cash conversion during the contract-manufacturer transition.
- Operating cash use, cash balance, and access to the credit line; covenant headroom may narrow if losses continue.
- Execution and total cost of the new headquarters lease, including rent and tenant improvements.
- The full risk-factor disclosure in the company’s Form 10-K and any subsequent filings; this 10-Q states that deferred tax assets carried a full valuation allowance and that future taxable income remains uncertain.