Lantronix, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2022. Unaudited results are reported under U.S. GAAP; amounts below are in millions of dollars unless stated otherwise. Lantronix provides industrial and enterprise IoT connectivity, systems, software and services.
Financial performance
| Metric | Quarter ended Dec. 31, 2022 | Prior-year quarter | Six months ended Dec. 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $31.506 | $33.681 | $63.301 | $61.386 |
| Gross profit | $13.794 | $14.440 | $27.830 | $26.903 |
| Gross margin | 43.8% | 42.9% | 44.0% | 43.8% |
| Operating loss | $(2.111) | $(1.739) | $(3.482) | $(3.499) |
| Net loss | $(2.609) | $(2.395) | $(4.262) | $(4.678) |
| Basic and diluted loss per share | $(0.07) | $(0.08) | $(0.12) | $(0.15) |
- Cash flow: For the six months, cash used in operations was $9.951 million, cash used in investing was $6.644 million, and financing provided $6.179 million. Cash declined $10.416 million to $6.805 million.
- Balance sheet and liquidity: At December 31, cash was $6.805 million, working capital was $50.570 million, and total assets were $147.785 million. Current liabilities were $39.475 million.
- Debt: Gross term-loan borrowings were $20.231 million and revolving-credit borrowings were $2.000 million. The term loan’s net carrying amount was $19.947 million, including unamortized issuance costs. The additional $5 million term loan matures August 2, 2025.
- Other notable balances: Inventory was $49.156 million, up $11.477 million (30.5%) from June 30, 2022. Goodwill was $27.151 million and purchased intangible assets, net, were $14.113 million.
Changes versus prior comparable periods
- Quarterly revenue fell 6.5%; Embedded IoT Solutions declined 12.4% and IoT System Solutions declined 8.9%, partly offset by 71.0% growth in Software & Services. Revenue declined across EMEA and APJ as well as slightly in the Americas.
- Quarterly gross margin improved to 43.8%, attributed principally to sales mix, including higher-margin extended-warranty services and NICs and optics. The net loss widened as lower revenue and operating expenses that declined only 1.7% weighed on results.
- Six-month revenue rose 3.1%, led by 28.9% growth in Software & Services and 2.8% growth in Embedded IoT Solutions; IoT System Solutions was essentially flat. The Americas grew 6.1%, while EMEA and APJ declined.
- Six-month net loss narrowed from $4.678 million to $4.262 million, while operating expenses increased 3.0%. SG&A rose 12.6% and R&D rose 15.1%.
- Cash used in operations increased to $9.951 million from $5.405 million. Inventory investment and lower accounts payable were significant working-capital factors.
Outlook, management commentary and risks
- Management said existing cash, operating cash generation and available bank borrowing sources should fund working capital, capital expenditures and other commitments for at least the next 12 months and beyond. This is not a revenue or earnings forecast; the filing provides no specific financial guidance.
- Management attributed inventory growth to critical long-lead components amid supply constraints and materials for a new customer supply agreement signed in January 2023. It noted some supply-chain improvement but continuing uncertainty, including COVID-related disruption in China.
- Lantronix acquired Uplogix on September 12, 2022. The transaction added out-of-band remote-management products and high-margin maintenance and licensing revenue. The preliminary purchase consideration was $10.472 million, including a $1.718 million estimated earnout; the earnout fair value was reduced by $0.673 million during the quarter to $1.045 million. Up to $4 million in earnout payments depend on Uplogix revenue targets through September 30, 2023. Uplogix contributed slightly over 3% of six-month revenue.
- Risks highlighted include semiconductor and other component shortages, reliance on Asian contract manufacturers and distributors, uncertain project-based demand, inventory forecasting and obsolescence, competitive pricing, acquisition integration, and the possibility of continued losses or need for additional capital.
- The SVB facilities require minimum liquidity, maximum leverage and minimum fixed-charge coverage tests. The company reported compliance with all financial covenants. Minimum required liquidity was reduced to $4 million; the company reported $6.805 million of cash at period-end. Substantially all assets are pledged to the lender, and covenant breaches or other defaults could accelerate repayment.
- The company reported ordinary-course legal matters that it did not believe would have a material adverse effect. It added ESG-related risks to its disclosures. Disclosure controls were judged effective at period-end; the October 2022 ERP implementation changed certain controls, which management said it would continue to monitor.
Important facts for investors to verify
- Whether revenue trends in the two hardware product lines recover and whether growth in Software & Services is sustained.
- Inventory quality, demand conversion and the effect of long lead times, component availability and the January 2023 customer agreement on cash needs.
- Uplogix integration, actual revenue performance against earnout thresholds, and the final purchase-price allocation.
- Cash burn, borrowing availability and headroom under the SVB liquidity, leverage and fixed-charge coverage covenants.
- Whether cost growth, share-based compensation and facility costs can be managed while Lantronix continues to report net losses.
- Operating effectiveness of financial controls following the ERP rollout and ongoing exposure to supply-chain, geopolitical and cybersecurity risks.