LANTRONIX INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the three months ended September 30, 2024 (this “Report”). This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. See the section of this Report entitled “ Cautionary Note Regarding Forward-Looking Statements ” for additional information. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in “ Risk Factors ” in Part II, Item 1A of this Report. Unless otherwise indicated by the context, all references to the “Company”, “Lantronix”, “we”, “us”, and “our” in this Quarterly Report on Form 10-Q include Lantronix, Inc. and its consolidated subsidiaries. Overview Lantronix, Inc. is a global leader in compute and connectivity solutions, targeting high-growth industries such as Smart Cities, Automotive, and Enterprise markets. Our products and services empower companies to capitalize on the expanding internet of things (“IoT”) market by delivering customizable solutions that address each layer of the IoT stack. We conduct our business globally and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific Japan (“APJ”). Products and Solutions Overview We organize our portfolio services and products into the following product lines: Embedded IoT Modules, IoT Systems Solutions, and Software and Engineering Services. Embedded IoT Modules Our portfolio of embedded products provides a comprehensive range of options, including Compute System-on-Module (“SOM”) and System-in-Package (“SIP”) solutions, complemented by wired and wireless network connectivity products. As the level of silicon integration continues to advance, our compute modules offer the capability to collect, analyze, and interpret digital information (e.g., Video, Audio or Sensor data) using specialized artificial intelligence (“AI”)/machine learning algorithms. IoT System Solutions Our IoT Systems Solutions portfolio offers a wide range of fully functional standalone systems that provide routing, switching or gateway functionalities as well as telematics and media conversion. These products include wired and wireless connections that enhance the value and utility of modern electronic systems and equipment by providing secure network connectivity, power for IoT end devices through Power over Ethernet (“PoE”), application hosting, protocol conversion, media conversion, secure access for distributed IoT deployments and many other functions. By offering pre-certified products across multiple regions, Lantronix significantly reduces original equipment manufacturer customers’ regulatory certification costs and speeds up their time-to-market. 21 Software and Services Our SaaS platform offers comprehensive single-pane-of-glass management for out-of-band (“OOB”) and IoT deployments. Our platform enables customers to easily deploy, monitor, manage and automate across their global deployments, all from a single platform login, virtually and seamlessly connected as if located directly on each device. Our platform eliminates the need to have 24/7 personnel on site and makes it easy to observe and address issues quickly, even in large-scale deployments. We leverage our deep engineering expertise and product development best practices to deliver high-quality, innovative products cost-effectively and on schedule. Our engineering services model is flexible, offering either turnkey product development or team augmentation to accelerate complex product development challenges, such as camera tuning, voice control, machine learning, AI, computer vision, augmented/virtual reality, and more. We also provide extended warranty, support and maintenance services related to our OOB and certain other product families. Recent Accounting Pronouncements Refer to Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of recent accounting pronouncements. Critical Accounting Policies and Estimates The accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to revenue recognition, sales returns and allowances, inventory valuation, restructuring charges, valuation of deferred income taxes, business combinations, valuation of goodwill and long-lived and intangible assets, stock-based compensation, litigation and other contingencies. These policies are described in further detail in our Annual Report on Form 10-K for the year ended June 30, 2024 and filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2024 (the “Form 10-K”) and have not changed significantly during the three months ended September 30, 2024 as compared to what was previously disclosed in the Form 10-K. Results of Operations – Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023 Summary In the three months ended September 30, 2024, our net revenue increased by $1,392,000 or 4.2%, compared to the three months ended September 30, 2023. The increase in net revenue was driven by a 17.7% increase in net revenue in our Embedded IoT Solutions product line, partially offset by a 13.2% decrease in net revenue in our Software & Services product line and a 1.5% decrease in our IoT System Solutions product line. We had a net loss of $2,502,000 for the three months ended September 30, 2024 compared to a net loss of $1,886,000 for the three months ended September 30, 2023. The increase in net loss was primarily driven by an increase in operating expenses of $932,000 for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, which mostly related to an increase in restructuring and severance charges. These changes were partially offset by the increase in revenue. 22 Net Revenue The following tables present our net revenue by product line and by geographic region: Three Months Ended September 30, % of Net % of Net Change 2024 Revenue 2023 Revenue $ % (In thousands, except percentages) Embedded IoT Solutions $ 13,387 38.9% $ 11,373 34.4% $ 2,014 17.7% IoT System Solutions 18,759 54.5% 19,036 57.6% (277 ) (1.5% ) Software & Services 2,277 6.6% 2,622 8.0% (345 ) (13.2% ) $ 34,423 100.0% $ 33,031 100.0% $ 1,392 4.2% Three Months Ended September 30, % of Net % of Net Change 2024 Revenue 2023 Revenue $ % (In thousands, except percentages) Americas $ 17,420 50.6% $ 22,933 69.4% $ (5,513 ) (24.0% ) EMEA 10,484 30.5% 6,591 20.0% 3,893 59.1% APJ 6,519 18.9% 3,507 10.6% 3,012 85.9% $ 34,423 100.0% $ 33,031 100.0% $ 1,392 4.2% Embedded IoT Solutions Net revenue increased primarily due to higher unit sales of our embedded compute product line in the APJ and Americas regions. This was partially offset by lower unit sales of our embedded ethernet connectivity products and network interface cards across all regions. IoT System Solutions Net revenue decreased primarily due to (i) decreased unit sales of our OOB products in the Americas and EMEA regions and (ii) decreased unit sales of our network switches in the Americas and APJ regions. These reductions were mostly offset by sales of our custom solutions to a European smart energy grid provider that we ramped production for in the second half of the prior fiscal year. Software & Services Net revenue decreased primarily due to a decrease in our engineering services revenue in the EMEA region as two of our large design services projects transitioned in the prior year from the design phase to full production. 23 Gross Profit Gross profit represents net revenue less cost of revenue. Cost of revenue consists primarily of the cost of raw material components, subcontract labor assembly from contract manufacturers, direct and indirect personnel expenses related to professional services, manufacturing overhead, inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties and share-based compensation. The following table presents our gross profit: Three Months Ended September 30, % of Net % of Net Change 2024 Revenue 2023 Revenue $ % (In thousands, except percentages) Gross profit $ 14,475 42.1% $ 14,097 42.7% $ 378 2.7% Gross profit as a percent of revenue (referred to as “gross margin”) decreased slightly due primarily to our product sales mix as embedded compute products contribute to a larger portion of revenues in the current period. Selling, General and Administrative Selling, general and administrative expenses consist of personnel-related expenses, including salaries and commissions, share-based compensation, facility expenses, information technology, trade show expenses, advertising, and legal and accounting fees. The following table presents our selling, general and administrative expenses: Three Months Ended September 30, % of Net % of Net Change 2024 Revenue 2023 Revenue $ % (In thousands, except percentages) Personnel-related expenses $ 5,321 $ 4,837 $ 484 10.0% Professional fees and outside services 1,521 1,540 (19 ) (1.2% ) Advertising and marketing 466 482 (16 ) (3.3% ) Facilities and insurance 411 514 (103 ) (20.0% ) Share-based compensation 1,126 1,273 (147 ) (11.5% ) Depreciation 351 334 17 5.1% Other 300 190 110 57.9% Selling, general and administrative $ 9,496 27.6% $ 9,170 27.8% $ 326 3.6% Selling, general and administrative expenses increased primarily due to an increase in personnel-related costs resulting from year-over-year compensation increases and changes in headcount. The increase was partially offset by (i) reduced share-based compensation costs mostly from reversals of certain forfeited awards and (ii) lower facilities and related costs from previous restructurings of certain non-essential operations. 24 Research and Development Research and development expenses consist of personnel-related expenses, including share-based compensation, as well as expenditures to third-party vendors for research and development activities and product certification costs. Our quarterly costs related to outside services and product certifications vary from period to period depending on our level of development activities. The following table presents our research and development expenses: Three Months Ended September 30, % of Net % of Net Change 2024 Revenue 2023 Revenue $ % (In thousands, except percentages) Personnel-related expenses $ 3,272 $ 3,259 $ 13 0.4% Facilities 648 619 29 4.7% Outside services 176 176 – 0.0% Product certifications 138 347 (209 ) (60.2% ) Share-based compensation 410 428 (18 ) (4.2% ) Other 312 277 35 12.6% Research and development $ 4,956 14.4% $ 5,106 15.5% $ (150 ) (2.9% ) Research and development expenses decreased primarily due to lower product certification expenses resulting from the timing of costs incurred on various ongoing development projects. Restructuring, Severance and Related Charges During the three months ended September 30, 2024, we incurred charges of $900,000 related to headcount reductions. During the three months ended September 30, 2023, we incurred $20,000 of restructuring, severance and related charges. We may incur additional restructuring, severance and related charges in future periods as we continue to identify cost savings and efficiencies related to our business. Interest Expense, Net For the three months ended September 30, 2024 and September 30, 2023, we incurred net interest expense due to borrowings on our credit facilities. We also earn interest income on our domestic cash balance. 25 Other Income (Expense), Net Our other income (expense), net, is comprised primarily of foreign currency remeasurement and transaction adjustments related to our foreign subsidiaries whose functional currency is the U.S. dollar. Provision for Income Taxes Refer to Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion regarding our provision for income taxes. Liquidity and Capital Resources Liquidity The following table presents details of our working capital and cash and cash equivalents: September 30, June 30, 2024 2024 Change (In thousands) Working capital $ 57,115 $ 58,794 $ (1,679 ) Cash and cash equivalents $ 26,395 $ 26,237 $ 158 Our principal sources of cash and liquidity include our existing cash and cash equivalents, borrowings and amounts available under our existing term loan and revolving credit facility (together, the “Senior Credit Facilities”), and cash generated from operations. We are subject to a variable amount of interest on the principal balance of our Senior Credit Facilities and could be adversely impacted by rising interest rates in the future. We believe that our current cash holdings and net cash flows from operations are sufficient to satisfy our current obligations for the foreseeable future, and, assuming continued access to the undrawn amounts available under our Senior Credit Facilities, these combined sources will be sufficient to fund our material requirements for working capital, capital expenditures and other financial commitments for at least the next 12 months and beyond. We continue to monitor our existing banking relationships and the availability of potential alternate sources of credit based on market conditions and our ongoing capital requirements. There can be no guarantee that we would be able to obtain any needed alternate financing on acceptable terms, or at all, or that such a financing would not result in a default under the Loan Agreement (as defined in Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report). We anticipate that the primary factors affecting our cash and liquidity are net revenue, working capital requirements and capital expenditures. We define cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. We maintain cash and cash equivalents balances at certain financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (“FDIC”). There can be no assurance that our deposits in excess of the FDIC limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis. As of the date of this Report, we have full access to and control of our cash and cash equivalents balance at Silicon Valley Bank and our other banking institutions. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds. As of the date of this Report, we are in compliance with all covenants of the Loan Agreement. 26 Our future working capital requirements will depend on many factors, including the following: timing and amount of our net revenue; our product mix and the resulting gross margins; research and development expenses; selling, general and administrative expenses; and expenses associated with any strategic partnerships, acquisitions or infrastructure investments. From time to time, we may seek additional capital from public or private offerings of our capital stock, borrowings under our existing or future credit lines or other sources in order to (i) develop or enhance our products, (ii) take advantage of strategic opportunities, (iii) respond to competition or (iv) continue to operate our business. We currently have a Form S-3 shelf registration statement on file with the SEC. If we issue equity securities to raise additional funds, our existing stockholders may experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of our existing stockholders. If we issue debt securities to raise additional funds, we may incur debt service obligations, become subject to additional restrictions that limit or restrict our ability to operate our business, or be required to further encumber our assets. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all. Bank Loan Agreements Refer to Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of our loan agreements. Cash Flows The following table presents the major components of the unaudited condensed consolidated statements of cash flows: Three Months Ended September 30, 2024 2023 Change (In thousands) Net cash provided by operating activities $ 2,663 $ 7,498 $ (4,835 ) Net cash used in investing activities (157 ) (486 ) 329 Net cash used in financing activities (2,348 ) (985 ) (1,363 ) Operating Activities Cash provided by operating activities during the three months ended September 30, 2024 decreased compared to the prior year period. Cash from operations increased in the prior year period due to our reduction of inventories and receipt of customer deposits relating to the delivery to our European smart grid provider customer. In the current year period, inventories increased slightly, and we also made payments against previously accrued variable compensation balances, as discussed further below. For the three months ended September 30, 2024, our net loss included $3,418,000 of non-cash charges, while the changes in operating assets and liabilities provided net cash of $1,747,000. Our net inventories increased by $1,835,000, or 6.6%, from June 30, 2024 to September 30, 2024. The increase resulted primarily due to the timing of various material receipts during the current quarter as compared to our shipments to customers. Accounts payable increased by $6,802,000, or 65.7%, from June 30, 2024 to September 30, 2024. The increase is primarily due to the timing of inventory receipts near the end of the current quarter, as well as payments made to our vendors. 27 Contract manufacturers’ receivables increased by $1,321,000, or 94.3%, from June 30, 2024 to September 30, 2024. The increase is primarily due to timing of shipments of components to contract manufacturers during the current quarter. Accrued payroll and related expenses decreased by $2,396,000 or 41.1% from June 30, 2024 to September 30, 2024. The decrease is primarily due to accrued variable compensation paid out during the current quarter. Investing Activities Net cash used in investing activities for the three months ended September 30, 2024 consisted of purchases of equipment totaling $157,000, primarily for tooling at our contract manufacturers and certain research and development projects. Cash used during the three months ended September 30, 2023 consisted of purchases of plant and equipment of $486,000 primarily for research and development and certain business analysis tools. Financing Activities Net cash used in financing activities during the three months ended September 30, 2024 and the three months ended September 30, 2023 resulted primarily from tax withholdings paid on behalf of employees for restricted shares as well as principal payments on the Senior Credit Facilities. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, we are not required to provide the information required by this Item 3.