Lantronix, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2019; fiscal second quarter. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context
Lantronix provides secure data access and management solutions for IoT assets, with IoT, IT Management and Other product lines. The July 5, 2019 acquisition of Maestro added cellular connectivity products. After quarter-end, on January 16, 2020, the company completed its acquisition of Intrinsyc, adding IoT computing and embedded-development capabilities.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Six months ended Dec. 31, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $13.228 million | $12.114 million | $25.969 million | $24.393 million |
| Gross profit | $6.777 million | $6.661 million | $12.972 million | $13.441 million |
| Gross margin | 51.2% | 55.0% | 50.0% | 55.1% |
| Operating income (loss) | $(1.288) million | $0.223 million | $(3.723) million | $0.194 million |
| Net income (loss) | $(1.351) million | $0.277 million | $(3.821) million | $0.194 million |
| Diluted EPS | $(0.06) | $0.01 | $(0.17) | $0.01 |
- Quarterly revenue grew 9.2%; six-month revenue grew 6.5%. IoT revenue rose 23.3% in the quarter and 18.7% for six months, partly reflecting Maestro. IT Management revenue fell 36.6% and 31.0%, respectively.
- Gross margin declined as acquired Maestro products generally carry lower margins; six-month margin was also reduced by $171,000 of acquired-inventory profit amortization. Management expected Intrinsyc’s product mix to add further lower-margin products.
- Operating expenses rose 25.3% in the quarter and 26.0% for six months. Drivers included acquisition and restructuring costs, higher share-based compensation, legal and professional fees, facilities costs, and product certification spending.
Cash, liquidity and debt
- At December 31, cash and cash equivalents were $9.347 million and restricted cash was $6.000 million; combined cash, cash equivalents and restricted cash totaled $15.347 million. Working capital was $23.308 million, down from $26.718 million at June 30, 2019.
- Six-month operating cash use was $3.779 million; investing cash use was $5.353 million, including $5.073 million net cash for Maestro and $0.280 million of capital expenditures. Financing provided $6.197 million, principally from the term loan.
- Debt carrying value was $5.890 million: $1.472 million current and $4.418 million long-term. The $6 million SVB term loan was drawn in November 2019 and restricted for the subsequent Intrinsyc acquisition. No revolving-facility borrowings were outstanding at quarter-end; an additional $6 million revolving facility was available, subject to conditions.
- The loan agreement includes a $3 million minimum cash covenant and maximum leverage covenants. The company reported compliance at December 31, 2019.
Outlook, risks and unusual items
- Management said available cash, borrowing capacity and expected operating cash generation should fund working capital, capital expenditures and other commitments for at least the next 12 months. This is not a quantified revenue or earnings forecast.
- Management expected Maestro and Intrinsyc to contribute significant revenue, alongside higher operating costs until anticipated synergies are achieved. It expected further restructuring, acquisition-related charges and purchased-intangible amortization from Intrinsyc.
- Intrinsyc consideration was approximately $11 million cash plus approximately 4.3 million Lantronix shares; its shareholders held just under 16% of Lantronix after closing. The acquisition was subsequent to the reporting date and was funded using cash and restricted cash.
- Reported risks include mature-market revenue, product development and software execution, project-driven order timing and long sales cycles, supply and manufacturing constraints, competition and price pressure, inventory obsolescence, cybersecurity and product defects, acquisition integration and synergies, debt covenants, and public-health disruptions including the coronavirus outbreak.
- Maestro’s preliminary purchase-price allocation remained subject to revision. Ordinary-course legal matters were not expected by management to have a material adverse effect, although litigation may incur costs and divert management resources.
Most important facts for investors to verify
- Whether IoT growth and Maestro/Intrinsyc revenue can offset continuing declines in IT Management and sustain or improve gross margins.
- Whether acquisition-related expenses, restructuring and integration costs decline as anticipated, and whether expected cost synergies materialize.
- Liquidity after the approximately $11 million cash payment for Intrinsyc, including unrestricted cash, working-capital needs and compliance with debt covenants.
- Final Intrinsyc purchase accounting, dilution from issued shares and awards, and the acquired business’s contribution to consolidated results.
- Whether operating cash use improves and management’s stated funding sufficiency for at least 12 months remains valid.