Lantronix, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018. Lantronix provides secure data access and management solutions for IoT assets and IT infrastructure. Financial amounts below are in U.S. dollars; statements are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Six months ended Dec. 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $12.114 million | $11.336 million | $24.393 million | $21.942 million |
| Gross profit / margin | $6.661 million / 55.0% | $6.314 million / 55.7% | $13.402 million / 54.9% | $11.908 million / 54.3% |
| Operating income (loss) | $223,000 | $267,000 | $194,000 | $(346,000) |
| Net income (loss) | $277,000 | $225,000 | $194,000 | $(416,000) |
| Diluted earnings (loss) per share | $0.01 | $0.01 | $0.01 | $(0.02) |
- Quarterly revenue increased 6.9%, led by IoT revenue growth of 13.9%; IT Management revenue declined 10.3%. EMEA revenue rose 28.6%, while Americas and Asia Pacific Japan were slightly lower.
- For the six-month period, revenue increased 11.2%; IoT grew 9.9% and IT Management grew 19.6%. Revenue increased in all three reported regions.
- Quarterly gross margin declined 0.7 percentage points, principally reflecting approximately $150,000 of tariff charges and a prior-year benefit from reserve-related product sales. Six-month gross margin improved 0.6 percentage points, mainly from product mix, partly offset by tariffs.
- Quarterly R&D expense increased 21.6% to $2.279 million, including higher engineering headcount and outside services. Six-month R&D increased 11.8% to $4.577 million. Six-month SG&A increased 5.8% to $8.631 million, including higher share-based compensation.
Liquidity, cash flow and capital
- At December 31, 2018, cash and cash equivalents were $19.367 million, working capital was $25.545 million, and total assets were $46.751 million. Cash increased $9.799 million from June 30, 2018.
- Six-month operating cash flow was a use of $313,000, versus $89,000 provided in the prior-year period. Management attributed the use largely to inventory buildup for a contract-manufacturer transition and tariff mitigation. Investing cash use was $355,000, primarily for tooling, test equipment and production software.
- Financing provided $10.467 million, primarily from a September 2018 public offering of 2.7 million shares, which generated approximately $9.775 million net proceeds. The offering increased weighted-average shares outstanding.
- No bank-line borrowings were outstanding at period-end. The new SVB agreement provides a $4.0 million receivables-based revolving facility maturing September 30, 2020. Lantronix reported compliance with its quick-ratio requirement and tangible net worth covenant; actual tangible net worth was $26.528 million against a $7.321 million minimum.
- Balance-sheet liabilities totaled $10.735 million; the filing reports no significant funded debt and only limited capital-lease obligations. Management said available liquidity and other sources should fund working capital, capital expenditures and commitments for at least 12 months.
Material changes, outlook and risks
- Revenue-standard comparability: Lantronix adopted ASC 606 on July 1, 2018 using the modified retrospective method, recording a $582,000 cumulative adjustment to accumulated deficit. The standard accelerated recognition for certain distributor sales from sell-through to transfer of control. Reported 2018 revenue therefore is not directly comparable with prior-year revenue.
- Without ASC 606, the filing’s recast figures show quarterly revenue of $11.076 million and a net loss of $559,000; six-month revenue of $21.727 million and a net loss of $1.548 million. Reported results were revenue of $12.114 million and $24.393 million, respectively, with net income in both periods. This accounting timing effect is material to interpreting growth and profitability.
- Lantronix incurred approximately $460,000 of current-period personnel realignment charges, including $323,000 severance and $137,000 share-based compensation. Activities were substantially completed by September 30, 2018.
- Management described tariff mitigation plans and inventory buildup tied to moving between overseas contract manufacturers. Tariffs, product mix, distributor returns and price-adjustment estimates, and the timing of distributor purchases could affect revenue and margins.
- No numerical revenue or earnings guidance was provided. New IoT/IT software and SaaS offerings were still in early evaluation and had not generated revenue. Adoption of the new lease standard is expected to add right-of-use assets and lease liabilities; quantitative impact had not yet been determined.
- Lantronix reported a full valuation allowance against net deferred tax assets due to cumulative losses and uncertainty about future taxable income. Ordinary-course legal matters were not expected by management to have a material adverse effect, though litigation may entail costs and management distraction.
Important facts for investors to verify
- Separate underlying demand from ASC 606’s distributor sell-in timing effect; compare revenue and earnings on a consistent accounting basis.
- Track tariff costs, mitigation progress, contract-manufacturer transition, inventory levels and operating cash conversion.
- Assess whether IoT growth can continue and whether IT Management revenue recovers after prior-year large customer deployments.
- Monitor dilution and share-based compensation following the equity offering and increased stock awards.
- Review the $4.0 million credit facility’s borrowing availability, covenant compliance and future lease-standard impact.