Lantronix, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021 (fiscal 2022 first quarter). Financial statements are unaudited. Lantronix provides hardware, engineering services and SaaS for IoT, edge computing and remote environment management.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $27.705 million | $17.146 million |
| Gross profit / margin | $12.463 million / 45.0% | $8.239 million / 48.1% |
| Operating loss | $1.760 million | $0.206 million |
| Net loss | $2.283 million | $0.302 million |
| Diluted loss per share | $0.08 | $0.01 |
| Cash from operations | $(0.516) million | $0.830 million |
| Cash used in investing | $(24.092) million | $(0.113) million |
| Cash from financing | $25.139 million | $(0.699) million |
Revenue grew 61.6% year over year. IoT revenue rose 56.2% to $22.831 million and REM revenue rose 98.4% to $4.766 million; Other revenue was $0.108 million. By region, revenue increased 66.8% in the Americas, 76.5% in EMEA and 34.7% in APJ.
Gross margin declined 3.1 percentage points. Management attributed the decrease mainly to revenue mix, higher supply-chain costs, lower sales of certain higher-margin legacy products and approximately $0.180 million of acquired-inventory profit amortization. Operating expenses increased, including higher share-based compensation, restructuring charges and acquisition costs.
Financial position and liquidity
- At September 30, 2021, cash was $10.270 million, working capital was $32.191 million and total current assets were $63.293 million against current liabilities of $31.102 million.
- Gross term-loan borrowings were $29.500 million; the net carrying amount was $28.590 million. Total liabilities were $59.553 million and stockholders’ equity was $45.634 million.
- Operating cash use included working-capital demands, notably higher receivables and inventory. Inventory reached $26.557 million, up from $15.059 million at June 30, 2021; the increase included acquired inventory and stock built to address supply constraints.
- The company reported compliance with its loan covenants and said available cash, borrowing sources and operating cash flows should fund requirements for at least 12 months. Credit facilities include leverage, fixed-charge coverage and minimum-liquidity tests; the report identifies minimum liquidity requirements of $5 million and $3 million under the respective facilities.
Material changes and unusual items
- Lantronix acquired the Transition Networks and Net2Edge businesses on August 2, 2021. The preliminary purchase consideration was $23.997 million, including $23.651 million cash consideration after working-capital adjustment and an estimated $0.346 million earnout fair value; additional earnout payments of up to $7 million may be payable based on revenue targets. Acquired products contributed approximately 26%–29% of quarterly net sales.
- The acquisition was financed in part with new term loans: a $17.5 million senior term loan and a $12 million mezzanine loan. Investing cash use included $23.975 million for the acquisition. Acquisition-related costs were $0.541 million; restructuring, severance and related charges were $0.542 million.
- The company recorded $1.481 million of share-based compensation, compared with $0.603 million a year earlier. Interest expense, net was $0.379 million.
- Supplemental pro forma results, assuming the acquisition had occurred earlier, showed revenue of $30.492 million and net loss of $1.509 million for Q1 FY2022, versus pro forma revenue of $25.901 million and net loss of $1.685 million for Q1 FY2021. These figures are not the reported results.
Outlook, risks and other matters
The filing provides no specific revenue or earnings guidance. Management said it expects its funding sources to cover current needs for at least 12 months, while noting that future requirements depend on revenue, product mix, operating expenses, acquisitions and investment needs.
- Supply-chain constraints, including semiconductor shortages, longer component lead times, higher component and freight costs, and shipment delays, were affecting operations. Most manufacturing is outsourced to Asia, and the company cited reliance on limited-source components and suppliers.
- COVID-19-related uncertainty could affect demand, customer projects, travel and trade events, suppliers and cash collections. Management said the pandemic’s future impact remained difficult to predict.
- Debt covenants and restrictions may constrain financial and operating flexibility; substantially all assets are pledged to lenders. The company noted that covenant requirements could limit access to borrowing if liquidity conditions deteriorate.
- Lantronix reported a history of losses and cautioned that it may not achieve future profitability or positive operating cash flow. Other disclosed risks include acquisition integration and expected synergies, competition, customer and distributor concentration, long sales cycles, product obsolescence, cybersecurity, foreign operations and currency exposure.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect, though outcomes are uncertain. Disclosure controls were assessed as effective as of September 30, 2021.
- After quarter-end, the company signed a seven-year lease for approximately 13,767 square feet of Irvine office space, with initial basic rent of $28,900 per month and additional operating expenses.
Key facts for investors to verify
- Whether acquisition-related revenue, cost savings and integration synergies develop as expected, and how earnout payments ultimately compare with the preliminary estimate.
- Whether supply availability, shipping delays and higher input costs improve, and the effects on inventory, revenue and gross margin.
- Whether operating cash flow strengthens as receivables and inventory levels normalize.
- Debt repayment, interest burden, covenant headroom and compliance with lender liquidity requirements.
- Future restructuring, acquisition and share-based compensation costs, and the company’s progress toward profitability.