Lantronix, Inc. — Form 10-Q summary
Reporting period: Three months ended September 30, 2019 (fiscal 2020 first quarter). Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. The interim statements are unaudited.
Business context and results
Lantronix provides secure data access and management solutions for IoT assets and IT infrastructure. Its product lines are IoT, IT Management, and Other. On July 5, 2019, it acquired Maestro Wireless Solutions, expanding its cellular connectivity and IoT product portfolio.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $12,741 | $12,279 |
| Gross profit / margin | $6,195 / 48.6% | $6,780 / 55.2% |
| Operating expenses | $8,630 | $6,809 |
| Operating loss | $(2,435) | $(29) |
| Net loss | $(2,470) | $(83) |
| Net loss per share, basic and diluted | $(0.11) | $(0.00) |
| Cash used in operating activities | $(1,079) | $(474) |
Revenue rose 3.8% year over year. IoT revenue increased 14.0% to $10.2 million, while IT Management revenue fell 25.8% to $2.3 million; Other revenue was essentially flat. By region, Americas revenue declined 16.6% to $5.8 million, while EMEA rose 28.4% to $4.5 million and Asia Pacific Japan rose 33.1% to $2.5 million. Management attributed the international growth largely to Maestro.
Gross margin declined primarily because Maestro products generally have lower margins than legacy products, and because $171,000 of acquired-inventory manufacturing profit was recognized in cost of revenue. Management expects the lower-margin product mix to continue. Operating expenses increased 26.7%, including $749,000 of restructuring charges, $643,000 of acquisition-related costs, and $144,000 of acquired-intangible amortization. Research and development expense rose 18.3%; SG&A rose 4.7%.
Financial position and liquidity
| Metric | September 30, 2019 | June 30, 2019 |
|---|---|---|
| Cash and cash equivalents | $12,028 | $18,282 |
| Working capital | $19,011 | $26,718 |
| Total assets | $50,754 | $48,944 |
| Total liabilities | $15,362 | $11,678 |
| Stockholders’ equity | $35,392 | $37,266 |
| Debt borrowings under then-current credit line | $0 | $0 |
Cash decreased by $6.3 million during the quarter. Investing cash use was $5.2 million, primarily the $5.1 million net cash payment for Maestro; operating cash use was $1.1 million. The company reported no outstanding borrowings under its existing $4 million receivables-based credit line at quarter end.
Management stated that available cash, borrowing capacity, and operating cash generation were expected to fund working capital, capital expenditures, and other commitments for at least 12 months. This assessment preceded the subsequent Intrinsyc transaction and amended financing.
Material developments, outlook, and risks
- Maestro acquisition: Purchase consideration was $5.355 million in cash. The preliminary allocation included $2.969 million of goodwill and $1.910 million of amortizable intangible assets and may be revised during the measurement period. Maestro products contributed approximately 25%–29% of quarterly revenue; standalone acquired-company earnings were impracticable to determine.
- Intrinsyc transaction after quarter end: On October 30, 2019, Lantronix agreed to acquire Intrinsyc, subject to shareholder approval and other closing conditions. Consideration was approximately $11.5 million in cash plus about 4.3 million Lantronix shares. Completion was expected by December 31, 2019 or shortly thereafter; completion was not assured.
- Subsequent financing: On November 12, 2019, Lantronix entered into an amended SVB agreement providing up to a $6 million revolving facility and a $6 million term loan. The term loan was drawn in full for the Intrinsyc acquisition and must be repaid if that acquisition does not close by January 31, 2020. The agreement includes a $3 million minimum cash covenant and leverage limits; the filing states the company was in compliance.
- Restructuring: The company continued personnel realignment intended to fit business needs and pursue Maestro-related cost savings and synergies. The quarter-end restructuring liability was $820,000.
- Tax and contingencies: A full valuation allowance remained against net deferred tax assets because of cumulative losses and uncertainty about future taxable income. Management did not expect ordinary-course legal matters to have a material adverse effect, while noting litigation can involve costs and management distraction.
- Guidance: The filing provides no specific revenue or earnings forecast. Management expected revenue outside the Americas to remain a majority of sales and anticipated continued lower-margin product mix following Maestro.
- Controls: Management concluded disclosure controls were effective at the reasonable-assurance level as of September 30, 2019; no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether the expected IoT growth and international revenue gains can offset continued weakness in IT Management and lower gross margins.
- Intrinsyc closing status, final cash and share consideration, integration costs, and the financing implications if the deal does not close.
- Maestro’s final purchase-price allocation and the realization of expected cost savings and operating synergies.
- Cash generation, working-capital needs, and compliance with the amended credit agreement’s cash and leverage covenants.
- Whether restructuring, acquisition-related, and acquired-intangible expenses remain elevated in subsequent periods.