Lantronix, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2015. Financial amounts are in U.S. dollars; unless stated otherwise, figures below are in millions. Lantronix provides machine-to-machine and Internet of Things connectivity products, organized into IoT Modules and Enterprise Solutions.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Prior-year quarter | Six months ended Dec. 31, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $9.540 | $10.735 | $20.113 | $22.271 |
| Gross profit / margin | $4.589 / 48.1% | $5.170 / 48.2% | $9.656 / 48.0% | $10.769 / 48.4% |
| Operating expenses | $5.530 | $5.774 | $10.926 | $11.593 |
| Operating loss | $(0.941) | $(0.604) | $(1.270) | $(0.824) |
| Net loss | $(0.928) | $(0.632) | $(1.259) | $(0.894) |
| Basic and diluted loss per share | $(0.06) | $(0.04) | $(0.08) | $(0.06) |
- Cash flow: For the six months, operating cash use was $0.337 million, investing cash use was $0.103 million, and financing provided $0.013 million. Cash declined $0.427 million to $4.562 million.
- Liquidity: Working capital was $7.216 million at December 31, 2015, down from $7.889 million at June 30, 2015. Current assets were $15.863 million and current liabilities $8.647 million.
- Debt and credit: The company had $0.700 million outstanding on its revolving line of credit and $0.150 million in long-term capital lease obligations. The $4.0 million credit facility matures September 30, 2016; reported available borrowing capacity was $1.626 million. The minimum tangible net worth covenant was $6.0 million versus actual tangible net worth of $8.496 million.
- Balance sheet: Total assets were $27.091 million and stockholders’ equity was $17.984 million. Goodwill was $9.488 million.
Material changes and operating trends
- Quarterly revenue fell 11.1% year over year; six-month revenue fell 9.7%. Management attributed the declines mainly to lower sales of legacy products, partly offset by growth in certain newer products.
- Legacy-product revenue declined 15.2% for the quarter and 12.6% for the six-month period. New-product revenue increased 11.2% for the quarter and 6.4% year to date.
- For the quarter, revenue declined in the Americas, EMEA and Japan; Asia Pacific was nearly flat. Year to date, the largest regional decline was in the Americas, down 15.4%.
- Management cited lower xPort sales in EMEA, declines in SLC and UDS products, and lower repeat purchases of SLB2 and PremierWave XN. The SLC8000 contributed offsetting growth as customers transitioned from the legacy SLC.
- Quarterly gross margin was broadly stable; six-month margin eased to 48.0% from 48.4%, primarily due to higher manufacturing overhead. Operating expenses declined year over year, reflecting lower headcount-related and variable compensation costs, among other factors.
Outlook, risks and unusual items
- Management believed existing cash, credit availability and operating cash generation would be sufficient for working capital, capital expenditures and other requirements for at least the next 12 months. This is an expectation, not a guarantee.
- Management warned that continued losses could make compliance with the minimum tangible net worth covenant more difficult; a breach could restrict borrowing and potentially require repayment of outstanding amounts.
- In February 2016, the company initiated a strategic realignment. It expected approximately $0.2–$0.3 million of pretax charges for severance, lease termination and related costs, substantially incurred in the quarter ending March 31, 2016.
- The December 2015 separation agreement with the former CEO provided for a $0.271 million cash payment, paid in January 2016, and accelerated vesting of 50,000 restricted stock units. The company recorded a $0.052 million share-based compensation charge; reported quarterly SG&A also included $0.286 million of severance expense, including the cash payment and applicable payroll taxes.
- The company had cumulative losses and a full valuation allowance against net deferred tax assets. It reported no material changes to previously disclosed risk factors or legal proceedings. Disclosure controls were assessed as effective at the reasonable-assurance level.
- Revenue recognition guidance was under evaluation, with adoption expected in the fiscal year beginning July 1, 2018, or optionally one year earlier; the company had not selected a transition method or determined the impact.
Important facts for investors to verify
- Whether newer products, including the SLC8000 and xPico Wi-Fi, can offset ongoing legacy-product declines.
- Subsequent revenue, margins and cash generation, particularly given continuing net losses and cash use.
- Compliance with the tangible net worth covenant, borrowing availability and the September 2016 credit-facility maturity.
- Actual costs and results of the February 2016 strategic realignment compared with the announced $0.2–$0.3 million estimate.
- The potential effect of customer demand, product transitions, warranty costs and the forthcoming revenue-recognition standard.