Lantronix, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022, Lantronix’s fiscal first quarter of fiscal 2023. The filing is unaudited. Although the request metadata says “2022 Q1,” the filing reports the quarter ended September 30, 2022.
Business context and results
Lantronix provides industrial and enterprise Internet of Things products and services, including embedded IoT solutions, IoT systems, software and engineering services. Its markets include smart cities, utilities, healthcare, transportation and industrial automation.
| Metric | Quarter ended Sep. 30, 2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $31.795 million | $27.705 million | Up 14.8% |
| Gross profit / margin | $14.036 million / 44.1% | $12.463 million / 45.0% | Profit up 12.6%; margin down 0.9 percentage point |
| Operating loss | $1.371 million | $1.760 million | Loss narrowed |
| Net loss | $1.653 million | $2.283 million | Loss narrowed |
| Net loss per share, diluted | $0.05 | $0.08 | Improved |
| Operating cash flow | $(4.666) million | $(0.516) million | Cash use increased |
Revenue growth was led by Embedded IoT Solutions, up 22.0% to $15.095 million, and IoT System Solutions, up 11.1% to $14.621 million. Software & Services revenue decreased 4.2% to $2.079 million. Revenue increased across all reported geographies: Americas 14.8%, EMEA 11.6% and Asia Pacific Japan 17.5%.
Gross margin declined primarily because of sales mix, including higher compute-module sales and lower sales of higher-margin out-of-band products; lower freight and duties costs partly offset the decline. Operating expenses rose 8% to $15.407 million, including higher selling, general and administrative and research and development costs.
Cash, debt and liquidity
- Cash and cash equivalents were $13.125 million at September 30, down from $17.221 million at June 30, 2022. Working capital was $50.316 million, versus $54.512 million.
- Operating activities used $4.666 million; investing activities used $5.606 million, including $4.650 million of net cash used for the Uplogix acquisition; financing activities provided $6.176 million.
- Inventory rose $7.581 million, or 20.1%, to $45.260 million. The increase included $3.590 million acquired with Uplogix; the remainder primarily reflected purchases of long-lead-time components.
- Debt included $20.750 million of gross term-loan borrowings and $2.000 million drawn on the revolving facility. The term loan’s net carrying amount was $20.438 million; cash was $13.125 million.
- The amended credit facilities require minimum liquidity of $4.0 million and impose leverage and fixed-charge coverage tests. The company reported compliance with all financial covenants.
Acquisition, outlook and risks
Lantronix acquired Uplogix on September 12, 2022. The filing reports total purchase consideration of $10.472 million, including an estimated $1.718 million fair value for earnout consideration; the agreement allows up to an additional $4 million tied to revenue targets through September 30, 2023. Management expects the acquisition to expand out-of-band remote management offerings, including maintenance and licensing revenue. Uplogix did not materially contribute to reported quarterly revenue. Preliminary purchase accounting included $6.384 million of goodwill and $2.470 million of amortizable intangible assets.
Management stated that existing cash, borrowing availability and operating cash flows should be sufficient for working capital, capital expenditures and other commitments for at least the next 12 months. The filing gives no specific revenue or earnings guidance. Management noted continuing supply-chain challenges, component cost increases, higher freight and logistics costs, and shipment delays. The company said it expects cost increases to continue and that the effects of COVID-19 remain difficult to predict.
Principal risks include component shortages and dependence on Asian contract manufacturers and distributors; inventory forecasting and obsolescence; project-driven demand and lengthy sales cycles; competitive and pricing pressure; acquisition integration and financing needs; cyber and product-security risks; and geopolitical, tariff, foreign-exchange and pandemic-related disruptions. The company reported no material changes to the risk factors in its latest Form 10-K. Ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Reconcile the prior-year net-loss comparison: the financial statements report $2.283 million, while the MD&A summary says $2.241 million.
- Track inventory levels, operating cash use and whether supply constraints or component costs affect deliveries and gross margins.
- Monitor debt, borrowing costs and compliance with liquidity and financial covenants as acquisition-related borrowing increases.
- Assess Uplogix integration, acquired revenue contribution and the likelihood of earnout payments against the specified revenue targets.
- Review future filings for updated liquidity expectations, operating guidance and any changes to acquisition purchase-price estimates.