Lantronix, Inc. — Q2 FY2021 Form 10-Q
Business context and reporting period. Lantronix provides hardware, engineering services and SaaS for edge computing, IoT and remote environment management (REM). This unaudited quarterly report covers the three and six months ended December 31, 2020; the comparable periods are the three and six months ended December 31, 2019. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2020 | Six months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Revenue | $16.585M | $13.228M | $33.731M | $25.969M |
| Gross profit | $6.996M | $6.777M | $15.235M | $12.972M |
| Gross margin | 42.2% | 51.2% | 45.2% | 50.0% |
| Operating loss | $1.322M | $1.288M | $1.528M | $3.723M |
| Net loss | $1.459M | $1.351M | $1.761M | $3.821M |
| Basic and diluted loss per share | $0.05 | $0.06 | $0.06 | $0.17 |
- Revenue mix: Q2 IoT revenue was $13.402M, up 19.9%; REM was $3.095M, up 68.9%; and Other was $0.088M, down 59.3%. For the six-month period, IoT revenue rose 30.9% to $28.022M and REM rose 33.0% to $5.497M.
- Cash flow: For the six months, operating activities provided $1.113M, compared with $3.779M used in the prior-year period. Investing activities used $0.289M, versus $5.353M, principally reflecting the prior-year Maestro acquisition. Financing activities used $0.894M, versus $6.197M provided in the prior year.
- Cash, working capital and debt: At December 31, cash and cash equivalents were $7.621M, down $0.070M from June 30, 2020; working capital was $19.422M, up $0.681M. Term-loan borrowings were $4.500M gross and $4.418M net of issuance costs; $1.472M was current. No borrowings were outstanding on the $6.0M revolving facility.
- Other key balances: Total assets were $68.421M and total liabilities $22.308M at December 31, 2020. Accounts receivable was $13.298M and inventory $14.304M.
Material changes versus the prior comparable period
- Q2 revenue increased 25.4%, but gross margin fell 9.0 percentage points to 42.2%. Management attributed the margin decline primarily to the acquired Intrinsyc products and services, which generally have lower margins than Lantronix’s legacy offerings.
- Q2 net loss increased to $1.459M from $1.351M, with management citing lower gross margin and a 3.1% increase in operating expenses. Purchased-intangible amortization rose to $0.879M from $0.151M.
- For the six months, revenue increased 29.9% and gross profit increased 17.4%; net loss narrowed to $1.761M from $3.821M. The prior-year period included $0.996M of acquisition-related costs and higher restructuring charges.
- Six-month Americas revenue rose 63.3% to $18.952M and APJ rose 35.0% to $7.400M; EMEA declined 16.9% to $7.379M.
Outlook, risks and unusual items
- Lantronix gave no specific revenue or earnings guidance in the supplied filing text. Management said existing cash, operating cash generation and available borrowing capacity should fund working capital, capital expenditures and other commitments for at least the next 12 months.
- COVID-19 continues to create uncertainty. Management reported no material customer payment defaults or delays to date and no known contract-manufacturer capacity problems, but warned that shutdowns, supply constraints, reduced customer demand, longer sales cycles and interruption of manufacturing could adversely affect future revenue and cash collections. Most employees continued working remotely.
- The company’s contract manufacturers are primarily in Malaysia, Thailand and China; the filing also flags component availability, input-cost volatility, tariffs and reliance on distributors as risks.
- The SVB loan requires a minimum $3.0M cash balance at the bank and compliance with leverage limits. The company reported compliance with all financial covenants at December 31, 2020. Management cautioned that covenant requirements could limit access to credit if liquidity deteriorates.
- Lantronix recorded $0.229M of restructuring charges in the six months and said further restructuring charges may occur. Ordinary-course legal matters were not expected by management to have a material adverse effect, although litigation can involve costs and management distraction.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It also said there were no material changes to the risk factors disclosed in the prior Form 10-K.
Important facts for investors to verify
- Whether revenue growth, particularly in IoT and REM, continues and how much reflects acquired Intrinsyc business versus organic growth.
- Whether gross margin stabilizes or recovers as the acquired product mix and costs evolve.
- Whether operating cash flow remains positive as receivables and inventory change; accounts receivable increased $1.887M from June 30, while accounts payable increased $2.141M.
- Debt repayment, revolver availability and continued compliance with the minimum-cash and leverage covenants.
- The realized effects of COVID-19 on customer demand, supply-chain capacity, component availability and costs, and the development of the SaaS and software offerings.