Lantronix, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016. Lantronix provides machine-to-machine and Internet of Things connectivity, device-management and mobility products, organized as IoT Modules and Enterprise Solutions. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $10.573 million | $11.536 million | Down $963,000, or 8.3% |
| Gross profit / margin | $5.067 million / 47.9% | $5.599 million / 48.5% | Gross profit down 9.5%; margin down 0.6 percentage points |
| Operating expenses | $5.396 million | $5.819 million | Down 7.3% |
| Operating loss | $329,000 | $220,000 | Loss increased |
| Net loss | $331,000 | $262,000 | Loss increased; loss per share was $0.02 in both periods |
| Operating cash flow | $(219,000) | $212,000 | Decreased by $431,000 |
| Investing cash flow | $(15,000) | $(181,000) | Lower capital spending |
| Financing cash flow | $(37,000) | $(12,000) | Higher cash use |
Cash and cash equivalents were $4.718 million at September 30, down $271,000 from June 30. Working capital was $7.575 million, compared with $7.447 million at June 30. Total assets were $28.822 million and stockholders’ equity was $18.595 million.
Debt included $700,000 outstanding under the revolving credit line and $138,000 in long-term capital lease obligations. The $4.0 million credit facility matures September 30, 2016; available borrowing capacity was $1.910 million, with $51,000 in outstanding letters of credit. Actual tangible net worth was $9.107 million against a $6.0 million minimum covenant.
Material changes and management commentary
- Revenue fell in both product lines: IoT Modules to $5.232 million from $5.628 million, and Enterprise Solutions to $5.341 million from $5.908 million. Legacy-product revenue declined 10.1%; New Products revenue increased 1.9% to $1.753 million.
- Management attributed the IoT Modules decline mainly to lower legacy WiPort and Micro sales in the Americas; growth in xPico Wi-Fi, including an EMEA design win entering production, partly offset the decline. Enterprise Solutions was affected by lower SLC sales and reduced repeat purchases of SLB2 following a prior-year customer rollout; SLC8000 sales partly offset weakness.
- By region, Americas revenue decreased 22.1% to $5.109 million, while EMEA increased 16.0% to $3.821 million. Asia Pacific and Japan were down 3.0% and 1.6%, respectively.
- Gross margin decreased primarily because of higher overhead costs and, to a lesser extent, excess-inventory charges. Lower headcount-related and variable-compensation expenses helped reduce SG&A; R&D costs declined mainly with the timing of development work.
- Operating cash use reflected lower accounts payable as the company paid for previously accumulated inventory and higher accounts receivable due to shipment timing. Inventory fell approximately 5% during the quarter.
Liquidity, outlook, risks and other items
- Management expected existing cash, credit availability and operating cash generation to fund working capital, capital expenditures and other requirements for at least the next 12 months. This is management’s liquidity assessment, not specific earnings or revenue guidance.
- Management cautioned that continued net losses could make the minimum tangible-net-worth covenant harder to meet; a breach could restrict borrowing and require repayment of outstanding amounts. The company reported compliance at quarter-end.
- The company reported a net loss and negative operating cash flow. Its ability to sustain liquidity depends in part on revenue, working-capital needs and access to financing; management noted future fundraising may be considered and could dilute existing shareholders.
- Enterprise Solutions sales can fluctuate with project timing. Management also cited risks around product demand, competition, product development and pending litigation in its forward-looking-statement discussion. It reported no material changes to the risk factors or legal proceedings described in its latest Form 10-K, and no known legal matter expected to have a material adverse effect.
- The new Irvine headquarters lease commenced in July 2015. The landlord paid approximately $190,000 of tenant improvements and reimbursed $53,000 during the quarter. Adoption of the revised inventory measurement guidance had no material financial-statement impact.
- Disclosure controls were judged effective at the reasonable-assurance level as of September 30, 2015; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether revenue declines in legacy products and the Americas stabilize, and whether newer products sustain growth.
- Whether gross margin recovers from the 47.9% level and excess-inventory charges or overhead costs persist.
- Whether operating cash flow improves as receivables, payables and inventory change, and whether the stated 12-month liquidity outlook remains supportable.
- Ongoing compliance with the $6.0 million tangible-net-worth covenant and the credit facility’s availability and September 2016 maturity.
- Potential dilution and share-based compensation: 3.550 million common-stock equivalents were excluded from diluted loss per share as anti-dilutive; 15.104 million common shares were outstanding as of October 23, 2015.