Lantronix, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2019 (Lantronix fiscal Q3 2019, not 2018 Q3 as indicated in the request metadata). Unaudited figures are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Lantronix provides secure data access and management solutions for IoT assets. Revenue is primarily from hardware, organized into IoT, IT Management and Other product lines. The filing describes software and SaaS offerings as early-stage and not yet generating meaningful sales.
Financial performance and position
| Metric | Three months ended Mar. 31, 2019 | Prior-year quarter | Nine months ended Mar. 31, 2019 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $12.344 | $11.601 | $36.737 | $33.543 |
| Gross profit / margin | $7.090 / 57.4% | $6.584 / 56.8% | $20.492 / 55.8% | $18.492 / 55.1% |
| Operating income | $0.838 | $0.379 | $1.032 | $0.033 |
| Net income (loss) | $0.857 | $0.344 | $1.051 | $(0.072) |
| Diluted EPS | $0.04 | $0.02 | $0.05 | $(0.00) |
- Quarterly revenue grew 6.4%; nine-month revenue grew 9.5%. Quarterly growth was led by IT Management, up 63.4%, while IoT declined 3.2%. For the nine months, IoT rose 5.1% and IT Management rose 32.0%; Other continued to decline.
- Quarterly operating expenses were $6.252 million, including R&D of $2.385 million and SG&A of $3.867 million. Nine-month operating expenses were $19.460 million; R&D increased 14.9% to $6.962 million.
- Nine-month operating cash flow was negative $1.597 million, versus positive $0.725 million a year earlier. Investing cash outflow was $0.383 million; financing cash inflow was $10.624 million, principally from an equity offering.
- Cash was $18.212 million at March 31, 2019, up from $9.568 million at June 30, 2018. Working capital was $26.809 million, compared with $13.544 million. Total liabilities were $11.114 million; stockholders’ equity was $37.475 million.
- No borrowings were outstanding under the $4.0 million revolving credit line. The company reported meeting its quick-ratio requirement and tangible net worth of $27.987 million against a $7.750 million minimum covenant. It said available resources should fund requirements for at least the next 12 months.
Changes, outlook and risks
- September 2018 public offering: 2.7 million shares sold for net proceeds of approximately $9.774 million. Operating cash use reflected higher receivables and inventory; management attributed inventory buildup partly to moving contract manufacturing from China to Southeast Asia and mitigating tariffs.
- U.S. tariffs on certain Chinese imports cost approximately $0.220 million in the nine-month period. Management was working to transition manufacturing to Southeast Asia to reduce future tariff exposure.
- ASC 606 adoption on July 1, 2018 changed distributor revenue timing: revenue is generally recognized when control transfers to distributors rather than when they resell products. The adoption added a $0.582 million opening accumulated-deficit adjustment. For the nine months, reported revenue was $3.094 million higher and net income $2.078 million higher than the company’s stated amounts without ASC 606; reported net income of $1.051 million would otherwise have been a $1.027 million loss. Prior-year comparisons were not restated.
- The company recorded approximately $0.460 million in current-year personnel realignment charges, including $0.323 million severance and $0.137 million share-based compensation. A prior-year realignment had approximately $0.506 million in charges.
- Paul Pickle became CEO on April 22, 2019, after the quarter, and received an inducement option for 500,000 shares. Management cited higher R&D investment, product-development costs, distributor returns and pricing estimates, tariffs, and working-capital needs as relevant considerations. It provided no specific financial guidance in the supplied filing text.
- Deferred tax assets had a full valuation allowance due to cumulative losses and uncertainty about future taxable income. Ordinary-course legal proceedings were not expected by management to have a material adverse effect, though litigation may incur costs and divert management resources.
- Disclosure controls were assessed as effective at the reasonable-assurance level as of March 31, 2019; the company reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether revenue growth and profitability persist after separating ASC 606’s distributor sell-in timing effect from underlying demand and sell-through.
- Whether receivables are collected and inventory converts to sales and cash, given the operating cash outflow and inventory buildup.
- Progress and costs of manufacturing relocation, and the company’s continuing exposure to tariffs and other trade changes.
- Growth in IT Management and IoT, product mix and margins, and the returns on increased R&D investment.
- Compliance with the credit facility’s financial covenants and ongoing liquidity needs; the filing reports no current borrowing but a $4.0 million facility.
- Potential dilution from equity awards and future financing, including the CEO’s inducement option and the increase in shares outstanding following the offering.