Lantronix, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended December 31, 2021. Financial amounts below are in U.S. dollars; income and cash-flow figures are compared with the prior-year periods. Lantronix provides hardware, engineering services and SaaS for IoT, edge computing and remote environment management.
Financial results
| Metric | Three months ended Dec. 31, 2021 | Prior-year quarter | Six months ended Dec. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $33.681 million | $16.585 million | $61.386 million | $33.731 million |
| Gross profit / margin | $14.440 million / 42.9% | $6.996 million / 42.2% | $26.903 million / 43.8% | $15.235 million / 45.2% |
| Operating loss | $1.739 million | $1.322 million | $3.499 million | $1.528 million |
| Net loss | $2.395 million | $1.459 million | $4.678 million | $1.761 million |
| Diluted loss per share | $0.08 | $0.05 | $0.15 | $0.06 |
- Quarterly revenue increased 103.1%; six-month revenue rose 82.0%. IoT revenue was $28.521 million for the quarter and $51.352 million for the six months; REM revenue was $4.977 million and $9.743 million, respectively.
- Management attributed growth to the August 2021 acquisition of Transition Networks and Net2Edge, as well as organic growth in selected IoT products and higher REM sales. The acquired businesses contributed slightly over 25% of six-month revenue and just over 20% of quarterly revenue.
- Quarterly gross margin improved modestly year over year, but six-month margin declined 1.4 percentage points. Management cited product mix, higher supply-chain and freight costs, and acquired-inventory profit amortization as pressures.
- Operating expenses rose substantially. Six-month charges included $709,000 of restructuring costs, $609,000 of acquisition-related costs, $2.633 million of purchased-intangible amortization, and a $1.259 million earnout fair-value remeasurement expense.
Cash, liquidity and debt
- At December 31, 2021, cash and cash equivalents were $36.364 million, working capital was $64.174 million and current assets were $94.337 million versus current liabilities of $30.163 million.
- Cash-flow statement figures for the six months: operating cash used of $5.405 million, investing cash used of $24.189 million, and financing cash provided of $56.219 million. Cash increased $26.625 million to $36.364 million.
- Operating cash use reflected the net loss and working-capital investment, including inventory build for long-lead-time components. Inventories rose to $29.369 million from $15.059 million at June 30, 2021; accounts receivable rose to $23.865 million from $13.515 million.
- At period-end, gross borrowings were $29.062 million and net carrying debt was $27.986 million. The company raised approximately $32.6 million net from a November share offering and received $29.5 million gross from new credit facilities during the six months.
- On January 20, 2022, Lantronix repaid the $12 million mezzanine term loan for $12.1525 million and terminated that facility. The company said it was discussing an increase to its $2.5 million revolving credit capacity. Substantially all tangible and intangible assets secure the remaining credit facilities; financial covenants include liquidity, leverage and fixed-charge tests. The company reported compliance at quarter-end.
Outlook, risks and other developments
- No specific revenue, earnings or margin guidance is provided. Management stated that available cash, operating cash and borrowing sources should fund working capital, capital expenditures and other commitments for at least the next 12 months.
- Management reported component shortages, higher component and freight costs, shipment delays, and supply-chain exposure to manufacturers in Thailand, Taiwan and China. It noted that COVID-19 effects remain uncertain and could affect demand, operations and cash collections.
- Other highlighted risks include dependence on distributors and contract manufacturers, limited-source components, variable project-based demand, competition, acquisition integration and execution, cybersecurity, international trade and currency risks, and the history of losses. The filing says there were no material changes to the risks disclosed in the prior Form 10-K.
- The Transition Networks acquisition brought complementary connectivity products. Purchase accounting remained preliminary; earnout consideration was remeasured to $1.652 million based on updated expectations of meeting revenue targets. A new California headquarters lease and a Minnesota operations/warehouse lease were also disclosed; the Minnesota lease has approximately $6.5 million of stated basic rent over its initial term.
- Management concluded disclosure controls were effective as of December 31, 2021. The filing reports no material change in internal control over financial reporting during the quarter and no legal matters expected to have a material adverse effect.
Most important facts for investors to verify
- Reconcile the cash-flow figures: the cash-flow statement reports operating and investing cash use of $5.405 million and $24.189 million, while the MD&A cash-flow table reports $5.012 million and $24.582 million, respectively.
- Confirm the acquisition’s final purchase-price allocation, contingent earnout exposure and realized synergies; the filing describes preliminary accounting and varying aggregate purchase-price figures.
- Assess the effect of the mezzanine loan repayment on remaining debt, interest expense, liquidity and covenant headroom, and whether revolving-credit capacity is increased.
- Track whether elevated inventory and receivables convert to shipments and cash, particularly given component shortages, shipment delays and higher logistics costs.
- Monitor whether revenue growth and acquisition integration improve operating results and margins, given continuing losses, higher expenses and dilution from the equity offering.