Lantronix, Inc. — FY2023 Form 10-K
Reporting period: The filing covers the fiscal year ended June 30, 2023, compared with fiscal 2022. It is not a standalone calendar-year 2022 Q4 report. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Lantronix provides industrial and enterprise IoT connectivity, systems, software and engineering services, targeting applications such as smart cities, intelligent transportation, utilities and data centers. It reports one operating segment. In September 2022, it acquired Uplogix for stated consideration of $8.0 million, subject to adjustments, with an earnout of up to $4.0 million.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $131.2 million | $129.7 million |
| Gross profit / gross margin | $56.3 million / 42.9% | $55.6 million / 42.9% |
| Operating loss | $6.7 million | $5.0 million |
| Net loss | $9.0 million | $5.4 million |
| Net loss per share, basic and diluted | $0.25 | $0.16 |
| Operating cash flow | $0.2 million provided | $9.4 million used |
| Cash and cash equivalents at year-end | $13.5 million | $17.2 million |
| Working capital at year-end | $50.2 million | $54.5 million |
| Debt carrying value, net | $19.0 million | $15.9 million |
Investing activities used $7.3 million, including $4.7 million net cash for Uplogix and $2.7 million for property and equipment. Financing activities provided $3.3 million. Gross borrowings under the senior credit facilities were $19.2 million at year-end; the facilities mature August 2, 2025, are secured by substantially all company assets and carry financial covenants. Lantronix reported compliance with all covenants at June 30, 2023.
Changes versus FY2022
- Revenue rose 1.2%. Embedded IoT Solutions increased 3.0% to $63.6 million, Software & Services increased 13.5% to $10.1 million, and IoT System Solutions declined 2.6% to $57.5 million.
- Gross margin held at 42.9%, but operating expenses increased, including SG&A up 7.0% to $36.9 million and R&D up 11.0% to $19.6 million. Management attributed much of the increase to Uplogix-related and engineering headcount, facilities, compliance and other costs.
- Net loss widened to $9.0 million from $5.4 million. FY2022 included a $1.8 million income tax benefit, including a benefit associated with the TN Companies acquisition; FY2023 recorded a $0.7 million tax provision.
- Operating cash flow improved from a $9.4 million use to $0.2 million provided, but cash fell by $3.8 million during FY2023. Inventory rose $12.1 million, partly associated with a customer component-supply arrangement.
Outlook, risks and unusual items
- Management said existing cash and expected operating cash flows, together with continued access to undrawn credit, should fund obligations and requirements for at least the next 12 months and beyond. This expectation is conditional on continued credit availability; the filing gives no quantified revenue or earnings guidance.
- A customer paid a $15.5 million deposit related to expected future shipments under a component-supply arrangement. The filing reports the deposit in customer deposits and other current liabilities and says related component purchases contributed to the inventory increase.
- Bank exposure remains a liquidity risk. Lantronix had approximately 85% of total cash at Silicon Valley Bank when it failed, later regained access, and amended its loan agreement to reduce the required share of company-wide cash held there from 85% to 50%. The company cautions that a future bank disruption could restrict access to cash and credit.
- Management and the auditor identified a material weakness in IT general controls, specifically financial-system user access and segregation of duties. Management concluded internal control over financial reporting and disclosure controls were ineffective at June 30, 2023; the auditor issued an adverse opinion on ICFR. The financial statement audit opinion was unqualified, and the company reported no material misstatements or revisions to previously released results. Management planned remediation before FY2024 year-end.
- Other significant risks include semiconductor shortages and single-source components, reliance on Asian contract manufacturers and distributors, project-driven and hard-to-forecast demand, customer concentration, cybersecurity, competition, and acquisition integration. The top five customers represented 35% of revenue in FY2023; the top five distributors also accounted for approximately 35%.
- Lantronix recorded $5.8 million of purchased-intangible amortization and $0.7 million of restructuring charges in FY2023. The Uplogix earnout liability was remeasured down by $0.4 million and stood at $1.3 million at year-end. No legal proceeding was identified as likely to have a material adverse effect.
Important facts for investors to verify
- Progress and independent testing of the planned remediation of the material weakness, including whether controls become effective.
- Availability of cash and credit, compliance with facility covenants, and the 50% cash-deposit requirement with the successor to SVB.
- Inventory quality and reserve assumptions, and shipment, cost-reimbursement and revenue timing under the customer supply arrangement.
- Whether Uplogix meets the earnout revenue conditions and contributes durable growth and margins.
- Whether modest revenue growth can translate into improved operating results and sustained positive operating cash flow.