Lantronix, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018 (the company’s fiscal 2019 first quarter; unaudited). Unless noted otherwise, financial amounts below are in U.S. dollars.
Business context
Lantronix provides secure data access and management solutions for Internet of Things (IoT) assets. Its product lines are IoT, IT Management and Other. Most revenue comes from hardware; newly introduced software and SaaS offerings had not yet generated revenue.
Financial performance
| Metric | Three months ended Sept. 30, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $12.279 million | $10.606 million |
| Gross profit / margin | $6.741 million / 54.9% | $5.594 million / 52.7% |
| Operating expenses | $6.770 million | $6.207 million |
| Operating loss | $29,000 | $613,000 |
| Net loss | $83,000 | $641,000 |
| Net loss per share, diluted | $0.00 loss | $0.04 loss |
| Operating cash flow | $(474,000) | $111,000 |
| Investing cash flow | $(64,000) | $(50,000) |
| Financing cash flow | $9.895 million | $89,000 |
Revenue increased 15.8% as reported. IT Management revenue grew 73.3% to $3.101 million and IoT revenue grew 6.0% to $8.967 million; Other revenue fell 41.2% to $211,000. By geography, Americas revenue rose 21.4% to $6.914 million, EMEA rose 11.3% to $3.520 million, and Asia Pacific Japan rose 5.7% to $1.845 million.
Gross margin improved primarily because of lower charges for scrap and excess or obsolete inventory. Operating expenses increased 9.1%; SG&A rose 12.2% to $4.472 million and R&D rose 3.5% to $2.298 million. Management attributed expense increases to staffing, share-based compensation and product-development outside services, partly offset by lower severance costs in R&D.
Financial position and liquidity
- At September 30, cash and cash equivalents were $18.925 million, versus $9.568 million at June 30, 2018. Working capital was $24.407 million, up from $13.544 million.
- Total assets were $44.798 million and total liabilities were $10.098 million. Stockholders’ equity was $34.700 million. There were no bank borrowings at quarter-end; reported capital lease obligations totaled $44,000.
- Operating cash use reflected higher accounts receivable, partly offset by the smaller net loss. The cash increase was principally funded by a common-stock offering.
- In September, Lantronix sold 2.6 million shares at $4.00 per share, receiving approximately $9.438 million net. It sold another 100,000 shares in October for approximately $366,000 net. The filing reported 21,997,843 common shares outstanding as of October 19, 2018.
- A new $4.0 million accounts-receivable-based revolving credit facility with Silicon Valley Bank was entered into in October, after quarter-end, and matures September 30, 2020. The agreement includes quick-ratio and minimum tangible net worth covenants; the company reported compliance with the quick-ratio requirement at September 30 and tangible net worth of $25.212 million against a $7.0 million minimum.
Material changes, outlook and risks
- ASC 606 adoption: Effective July 1, 2018, the company adopted the new revenue standard using the modified retrospective method, recording a $582,000 non-cash adjustment to opening accumulated deficit. It now generally recognizes distributor sales when control transfers, rather than when distributors resell products, while estimating returns and price adjustments.
- Comparability caution: The prior-year quarter was not restated. For the 2018 quarter, the company disclosed revenue of $12.279 million as reported versus $10.651 million without ASC 606; net loss was $83,000 as reported versus $989,000 without ASC 606. Thus, reported year-over-year growth is substantially affected by the accounting change and distributor inventory timing.
- Tariffs: Management said it had a plan to substantially mitigate exposure to expanded U.S. tariffs on Chinese goods, but expected approximately $100,000–$200,000 of increased tariff costs in the quarter ending December 31, 2018.
- Restructuring: Personnel realignment activities substantially completed by September 30 generated approximately $460,000 in charges, including $323,000 of severance-related costs and $137,000 of share-based compensation. A $210,000 severance liability remained at quarter-end.
- Outlook: No specific revenue or earnings guidance was provided. Management believed available cash, operating cash generation and credit resources would be sufficient for working capital, capital expenditures and other commitments for at least the next 12 months.
- Other risks and contingencies: Revenue estimates for distributor returns and pricing adjustments require judgment; actual outcomes could differ. The company cited ordinary-course legal matters it did not believe would have a material adverse effect, while noting litigation can consume costs and management time. It also noted potential dilution or restrictions if it seeks additional capital. Management concluded disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- How much of reported revenue growth reflects ASC 606 timing and distributor restocking, rather than underlying sell-through demand.
- Whether the tariff mitigation plan limits costs to the expected $100,000–$200,000 and how tariffs affect margins thereafter.
- Cash conversion, especially collections of the quarter’s higher accounts receivable, and the sustainability of operating cash flow.
- Compliance with the credit facility’s financial covenants and the terms and availability of its receivables-based borrowing capacity.
- The effect of the stock offering, outstanding equity awards and future share-based compensation on dilution and per-share results.