Lantronix(US:LTRX)2023-02-09 21:50PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and six months ended December 31, 2022, including balance sheets, statements of operations, and cash flows Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | June 30, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $6,805 | $17,221 | | Inventories, net | $49,156 | $37,679 | | Total current assets | $90,045 | $90,033 | | Goodwill | $27,151 | $20,768 | | Total assets | $147,785 | $137,374 | | Total current liabilities | $39,475 | $35,521 | | Long-term debt, net | $17,723 | $14,274 | | Total liabilities | $68,267 | $57,478 | | Total stockholders' equity | $79,518 | $79,896 | Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $31,506 | $33,681 | $63,301 | $61,386 | | Gross profit | $13,794 | $14,440 | $27,830 | $26,903 | | Loss from operations | $(2,111) | $(1,739) | $(3,482) | $(3,499) | | Net loss | $(2,609) | $(2,395) | $(4,262) | $(4,678) | | Net loss per share | $(0.07) | $(0.08) | $(0.12) | $(0.15) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(9,951) | $(5,405) | | Net cash used in investing activities | $(6,644) | $(24,189) | | Net cash provided by financing activities | $6,179 | $56,219 | | Increase (decrease) in cash | $(10,416) | $26,625 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed information on significant accounting policies, revenue recognition, the Uplogix acquisition, debt agreements, and stockholders' equity Net Revenue by Product Line (in thousands) | Product Line | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Embedded IoT Solutions | $13,668 | $15,604 | $28,763 | $27,980 | | IoT System Solutions | $14,913 | $16,366 | $29,534 | $29,524 | | Software & Services | $2,925 | $1,711 | $5,004 | $3,882 | | Total | $31,506 | $33,681 | $63,301 | $61,386 | - On September 12, 2022, the company acquired Uplogix, Inc. for $8.0 million, subject to adjustments, plus a potential earnout of up to $4.0 million based on revenue targets. The acquisition aims to scale the company's out-of-band remote management solutions454748 - In September 2022, the company amended its loan agreement with Silicon Valley Bank (SVB), securing an additional term loan of $5.0 million and borrowing $2.0 million on its revolving credit facility. The company was in compliance with all financial covenants as of December 31, 2022747579 - Share-based compensation expense for the three and six months ended December 31, 2022, was $1.9 million and $3.7 million, respectively. As of December 31, 2022, there was $10.8 million of total remaining unrecognized share-based compensation expense8889 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a net revenue decrease for Q2 FY2023, improved gross margin, and a significant decrease in cash primarily due to the Uplogix acquisition and inventory build-up Results of Operations – Q2 FY2023 vs. Q2 FY2022 Net revenue for Q2 FY2023 decreased by 6.5% due to declines in IoT solutions, partially offset by a 71.0% increase in Software & Services, leading to a net loss of $2.6 million - Net revenue for Q2 FY2023 decreased by 6.5% year-over-year, driven by declines in Embedded IoT Solutions and IoT System Solutions, which were partially offset by a 71.0% increase in Software & Services revenue113114 - Gross margin improved to 43.8% from 42.9% in the prior year quarter, primarily due to a sales mix shift towards higher-margin extended warranty services from the Uplogix acquisition and certain NICs and optics products118 - Selling, general and administrative (SG&A) expenses increased by 9.8% to $9.8 million, mainly due to higher facilities costs for a new warehouse, increased depreciation, and higher share-based compensation120 - Research and development (R&D) expenses increased by 18.0% to $5.1 million, driven by higher personnel costs from acquisitions and internal growth, increased product certification costs, and higher share-based compensation121 Liquidity and Capital Resources The company's cash and cash equivalents decreased by $10.4 million during the six months ended December 31, 2022, primarily due to cash used in operating and investing activities, partially offset by financing activities - Cash and cash equivalents decreased by $10.4 million in the first six months of fiscal 2023, from $17.2 million to $6.8 million137 - Net cash used in operating activities was $9.9 million, an increase from $5.4 million in the prior year period, mainly due to a $7.9 million increase in inventories to manage long-lead time components and fulfill a new customer agreement21144145 - Net cash used in investing activities was $6.6 million, consisting of $4.7 million for the Uplogix acquisition and $2.0 million for property and equipment purchases147 - Net cash provided by financing activities was $6.2 million, primarily from $7.0 million in gross proceeds from credit facilities with SVB148 Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk - The company is not required to provide quantitative and qualitative disclosures about market risk because it qualifies as a smaller reporting company149 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, following the implementation of a new ERP system - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022151 - In October 2022, the company implemented a new enterprise resource planning (ERP) system, which led to modifications of existing internal controls and the implementation of new control activities152 PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, but does not anticipate a material adverse effect on its financial condition or operations - The company states that while it is involved in various legal proceedings from time to time, it does not currently believe the outcome of these matters will have a material adverse effect on its business or financial condition92 Risk Factors This section details the risks and uncertainties facing the company, including supply chain constraints, cybersecurity threats, and the increasing focus on ESG matters - The business faces risks from the ongoing COVID-19 pandemic, which could impact demand, distribution, and manufacturing capabilities159161 - The company is experiencing supply chain constraints, particularly for semiconductor chips, which has led to increased lead times and costs. Reliance on single-source suppliers and contract manufacturers in Asia presents further risk162163164 - Cybersecurity breaches pose a significant risk, potentially compromising sensitive data, exposing the company to liability, and damaging its reputation. Products, especially SaaS offerings like ConsoleFlow™, are vulnerable to cyberattacks186187188 - A new risk factor has been added regarding the increasing attention on Environmental, Social, and Governance (ESG) matters, which may impose additional costs, impact the ability to attract talent and investors, and expose the company to new risks210 - The implementation of a new company-wide ERP system in October 2022 carries risks of business disruption, higher-than-anticipated costs, and potential failures in internal controls over financial reporting215 Exhibits This section lists the exhibits filed with the Form 10-Q, including required certifications and Inline XBRL documents