Lantronix, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2012. Lantronix designs and sells device-networking and machine-to-machine connectivity products. Amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Prior-year quarter | Six months ended Dec. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $12.162 | $10.452 | $23.364 | $21.636 |
| Gross profit / margin | $6.032 / 49.6% | $5.041 / 48.2% | $11.504 / 49.2% | $10.343 / 47.8% |
| Operating loss | $(0.352) | $(1.333) | $(0.757) | $(2.708) |
| Net loss | $(0.412) | $(1.377) | $(0.842) | $(2.821) |
| Basic and diluted loss per share | $(0.03) | $(0.13) | $(0.06) | $(0.27) |
Quarterly revenue rose 16.4%; six-month revenue rose 8.0%. For the quarter, device management grew 48.7%, embedded device enablement 11.1%, and external device enablement 3.9%. Growth was driven by xPrintServer, SLC, xPort, ASIC, PremierWave EN and EDS products. Americas and EMEA led quarterly regional growth.
Quarterly gross margin improved year over year, helped by a prior-year inventory-obsolescence charge of just under $0.5 million. Management also cited lower-margin product mix and higher freight and fulfillment costs as offsets. Quarterly SG&A increased 6.3%, including higher marketing and bad-debt expense; six-month SG&A declined 4.4%. R&D was broadly flat for the quarter and down 2.0% for six months. Prior-year restructuring charges were absent in the current periods.
Cash, liquidity and debt
- Cash and cash equivalents were $8.452 million at December 31, down from $11.374 million at June 30, 2012. Working capital was $11.524 million, versus $11.927 million.
- Six-month operating cash use was $2.329 million, compared with $1.791 million in the prior-year period. Inventory growth used $3.777 million of cash; management attributed the build to buffer stock, new-product support and anticipated demand.
- Investing cash use was $0.189 million and financing cash use was $0.404 million. Capital expenditures were $0.189 million; term-loan payments were $0.334 million.
- Term-loan balance was $0.500 million, with no revolving-line borrowings. Reported available revolver capacity was $2.489 million under a facility capped at $4 million and subject to a receivables-based borrowing limit. Term-loan maturity was September 30, 2013; revolver maturity was September 30, 2014.
- The minimum tangible net worth covenant was $6.0 million; actual tangible net worth was $12.013 million. The company cautioned that continued losses could make future covenant compliance more difficult.
Outlook, risks and other items
No specific revenue or earnings guidance was provided. Management said existing cash, operating cash generation and available credit were expected to fund working capital, capital expenditures and other requirements for at least the next 12 months. It also noted that additional equity or debt financing might be needed; availability and terms are not assured and equity financing could dilute shareholders.
A newly highlighted risk concerns customer qualification of revised products. Lantronix planned an xPort revision in 2013; qualification delays, changed customer purchasing timing, or excess and obsolete inventory could hurt sales and results. Other stated risks include product failure and warranty-estimate changes, which could reduce gross margin; some new products carry five-year warranties. Management reported no material change to previously disclosed risk factors beyond the qualification risk described in the filing.
The company reported no material legal proceedings or claims known to it. It maintained a full valuation allowance against net deferred tax assets because of cumulative losses and uncertainty about future taxable income. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the inventory build converts into sales and cash generation, and whether inventory obsolescence or lower-margin mix pressures margins.
- Customer qualification and volume-production timing for revised products, particularly the planned xPort revision.
- Cash burn, available borrowing capacity under the borrowing-base formula, and compliance with the tangible-net-worth and quick-ratio loan covenants.
- Progress toward sustained operating profitability and whether additional financing will be required.
- Warranty claims and product-failure experience, including exposure from longer warranty periods.