Lantronix, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2023; filed May 10, 2023. The financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and results
Lantronix provides industrial and enterprise IoT products and services, including embedded computing and connectivity, IoT systems, software, engineering, and support. Its fiscal third quarter is the three months ended March 31, 2023.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $32.964 | $32.324 | $96.265 | $93.710 |
| Gross profit | $14.636 | $13.616 | $42.466 | $40.519 |
| Gross margin | 44.4% | 42.1% | 44.1% | 43.2% |
| Operating loss | $(2.431) | $(2.080) | $(5.913) | $(5.579) |
| Net loss | $(3.065) | $(3.190) | $(7.327) | $(7.868) |
| Net loss per share | $(0.08) | $(0.09) | $(0.20) | $(0.25) |
Cash flow, debt and liquidity
- For the nine months, operating cash use was $0.956 million, compared with $6.066 million used a year earlier. Investing cash use was $6.975 million, including $4.650 million net cash paid for Uplogix and $2.325 million for property and equipment. Financing provided $3.505 million.
- Cash declined to $12.795 million at March 31, 2023 from $17.221 million at June 30, 2022. Working capital was $49.937 million, down $4.575 million from June 30.
- Term-loan borrowings were $19.713 million gross and $19.456 million net of issuance costs; $2.484 million was current. There were no revolving-credit borrowings at quarter-end. The term loan matures August 2, 2025.
- Lantronix reported compliance with its financial covenants. The credit agreement requires minimum liquidity of $4 million, a maximum leverage ratio and a minimum fixed-charge coverage ratio.
Material changes versus comparable periods
- Quarterly revenue increased 2.0%; nine-month revenue increased 2.7%. In Q3, Embedded IoT Solutions grew 4.6% and Software & Services grew 36.1%, while IoT System Solutions declined 5.6%. Nine-month Software & Services revenue rose 31.4%.
- Gross margin improved year over year, which management attributed mainly to sales mix, including higher-margin extended warranty revenue and certain OOB products. Quarterly operating expenses rose 8.7%, contributing to a larger operating loss despite higher revenue and gross profit.
- SG&A and R&D increased, reflecting Uplogix-related headcount, higher professional and compliance costs, new facilities, depreciation, product certifications and share-based compensation.
- Inventory rose $14.046 million from June 2022 to $51.725 million, including inventory acquired with Uplogix. Management cited long-lead components and materials purchased to support expected demand under a new customer supply agreement.
- Other current liabilities increased to $25.206 million from $8.477 million, principally reflecting customer deposits for expected future shipments, deferred revenue and Uplogix earnout consideration.
Outlook, commentary and risks
- No quantitative revenue or earnings guidance is provided. Management said existing cash, operating cash flows and assumed continued access to undrawn credit facilities should fund requirements for at least the next 12 months and beyond; it cautioned that alternate financing may not be available on acceptable terms.
- Lantronix acquired Uplogix in September 2022. The stated consideration was $8 million, subject to adjustments, plus a potential earnout of up to $4 million tied to revenue targets through September 30, 2023. Recorded purchase consideration was $10.472 million, including estimated earnout value. Uplogix contributed just under 4% of nine-month revenue.
- SVB was closed in March 2023; the company reported full access to its cash. An April 3, 2023 letter agreement reduced the required share of company-wide cash held at SVB from 85% to 50% and waived certain prior covenant noncompliance. Lantronix warned that banking-sector disruption could affect access to deposits or credit.
- Supply constraints, semiconductor availability, manufacturing concentration in Asia, inventory forecasting, customer and distributor concentration, long sales cycles, competition, and cybersecurity are among the disclosed risks. COVID-related supply uncertainty continued, including uncertainty associated with infections in China.
- The company recorded $0.664 million of restructuring charges for the nine months and said further restructuring charges may occur. The filing reports disclosure controls were effective at March 31, 2023; it also notes ongoing evaluation of controls following implementation of a new ERP system in October 2022.
Key facts for investors to verify
- Whether the elevated inventory converts to sales without significant obsolescence or write-downs, and whether customer deposits correspond to shipments and revenue recognition as expected.
- Cash availability, SVB-related covenant terms, compliance with leverage and fixed-charge tests, and continued access to credit.
- Uplogix performance against earnout revenue targets, final acquisition accounting, and expected integration benefits and costs.
- Whether supply constraints, customer concentration and order timing affect future revenue and gross margins; the filing provides no quantitative forecast.
- Ongoing ERP control testing and any effect of implementation or restructuring on operating performance.