Lantronix, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2014, with year-to-date results for the nine months ended March 31, 2014. This is fiscal 2014’s third quarter; the request’s “2013 Q3” label does not match the filing period. Dollar figures below are in millions unless otherwise noted.
Business context
Lantronix designs and sells networking and communications products focused on machine-to-machine connectivity and the Internet of Things. Its two product lines are OEM Modules and Enterprise Solutions. OEM products are embedded in customers’ systems, while Enterprise Solutions are typically sold through resellers and can have project-driven quarterly fluctuations.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2014 | Three months ended Mar. 31, 2013 | Nine months ended Mar. 31, 2014 | Nine months ended Mar. 31, 2013 |
|---|---|---|---|---|
| Revenue | $11.593 | $12.164 | $33.444 | $35.528 |
| Gross profit / margin | $5.899 / 50.9% | $5.617 / 46.2% | $16.726 / 50.0% | $17.121 / 48.2% |
| Operating loss | $(0.106) | $(0.785) | $(0.613) | $(1.542) |
| Net loss | $(0.130) | $(0.801) | $(0.720) | $(1.643) |
| Basic and diluted loss per share | $(0.01) | $(0.05) | $(0.05) | $(0.11) |
For the nine-month period, operating cash flow was $1.099 million, compared with cash used of $3.116 million a year earlier. Investing used $0.417 million, primarily for tooling and test equipment; financing used $0.048 million. Cash increased by $0.634 million to $5.877 million from June 30, 2013. Management attributed the operating cash-flow improvement mainly to lower inventory and higher accounts payable, partly offset by increased accounts receivable.
At March 31, 2014, working capital was $8.739 million and total assets were $29.893 million. Total liabilities were $9.840 million. The $2.0 million term loan was fully repaid in September 2013; there were no revolving-line borrowings. Available revolving capacity was $1.656 million, subject to borrowing-base limits. The company reported actual tangible net worth of $10.565 million against a $6.0 million minimum covenant.
Material changes and management commentary
- Revenue declined 4.7% in the quarter and 5.9% year to date. Year-to-date OEM Modules revenue fell 9.3%; Enterprise Solutions declined 2.4%.
- Quarterly gross margin improved to 50.9%, with management citing lower materials costs, fewer sales discounts, and lower inventory-reserve costs. Year-to-date margin improvement also reflected lower manufacturing and freight costs and favorable product mix.
- Quarterly SG&A fell 9.3%, mainly because of lower advertising and marketing and professional fees. Year-to-date SG&A declined 10.3%, also reflecting lower commissions and cost reductions. R&D increased 1.8% year to date, partly due to personnel and new-product development costs.
- Management said new OEM products had contributed modest revenue so far. Mature OEM product sales were weaker, while xPico and certain Enterprise Solutions product wins provided partial offsets. The company also cited lower xPrintServer sales and weaker distribution sales in the Americas.
- Related-party revenue was $79,000 for the quarter and $452,000 year to date. From February 1, 2014, Lantronix stopped selling directly to Lynx; related-party revenue thereafter included Barix AG.
Outlook, risks, and contingencies
No specific revenue or earnings guidance is provided. Management believes cash, operating cash flows, and available credit are sufficient for working capital, capital expenditures, and other commitments for at least the next 12 months. It cautions that future cash needs depend on revenue, R&D, strategic opportunities, and infrastructure investment, and that additional financing may not be available on acceptable terms.
Continued losses could make it harder to meet the minimum tangible-net-worth covenant. Revenue can fluctuate with product cycles and project-based sales; newer products may initially pressure margins. Warranty estimates, inventory valuation, and customer collections are additional operating sensitivities. The company maintained a full valuation allowance against net deferred tax assets due to cumulative losses and uncertainty about future taxable income. Management reported no known legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were judged effective, with no material changes in internal control over financial reporting reported.
Important facts for investors to verify
- Whether revenue declines in mature OEM products and the Americas stabilize, and whether new-product wins translate into sustained sales.
- Whether improved gross margins persist as product mix and new-product volumes change.
- Whether operating cash generation continues, particularly given the period’s effects from inventory reduction, accounts payable, and receivables.
- Remaining borrowing capacity and compliance with the $6.0 million tangible-net-worth covenant if losses continue.
- Future related-party sales, warranty claims, and the recoverability of deferred tax assets.