XML 24 R7.htm IDEA: XBRL DOCUMENT

2. Business Combinations

9 Months Ended

Mar. 31, 2020

2.	Business Combinations

Acquisition of Maestro

On July 5, 2019 (the "Acquisition Date"), Lantronix acquired all outstanding shares of Maestro Wireless Solutions Limited, a Hong Kong private company limited by shares (“MWS”), Fargo Telecom Asia Limited, a Hong Kong private company limited by shares (“FTA” and together with MWS and their respective subsidiaries, the “Acquired Companies” or “Maestro”) for $5,355,000 in cash. The acquisition provides complementary cellular connectivity technologies to our portfolio of IoT solutions.

We recorded Maestro’s tangible and intangible assets and liabilities based on their estimated fair values as of the Acquisition Date and allocated the remaining purchase consideration to goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets. The consideration allocation set forth herein is preliminary and may be revised as additional information becomes available during the measurement period which could be up to 12 months from the Acquisition Date. During the current quarter we adjusted the preliminary purchase price allocation to reduce certain amounts allocated to other assets, accounts payable, and other liabilities, with offsetting adjustments to goodwill. Any additional revisions or changes may be material. The preliminary purchase price allocation is as follows (in thousands):

	July 5, 2019 (provisional)
Cash and cash equivalents	$	282
Accounts receivable		1,320
Inventories, net		1,611
Other assets		600
Purchased intangible assets		1,910
Goodwill		2,876
Accounts payable		(1,536	)
Other liabilities		(1,708	)
Total consideration	$	5,355

The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that the acquisition will create a more diverse IoT company with respect to product offerings and our belief that we are committed to improving cost structures in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of overall efficiencies.

Acquisition-related costs were expensed in the periods in which the costs were incurred.

The valuation of identifiable intangible assets and their estimated useful lives are as follows:

	Asset Fair Value		Weighted-Average Useful Life (years)
	(In thousands)
Developed technology	$	1,530		5.0
Customer relationship		100		2.0
Order backlog		110		1.0
Non-compete agreements		30		2.0
Trade name		140		1.0

The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.

Acquisition of Intrinsyc

On January 16, 2020 (the “Closing Date”), we completed the previously announced acquisition of Intrinsyc Technologies Corporation (“Intrinsyc”), a company existing under the laws of British Columbia, Canada. Pursuant to the terms of the agreement, dated October 30, 2019 (the “Agreement”), by and between Lantronix and Intrinsyc, all of the outstanding common shares of Intrinsyc were acquired by Lantronix. Under the Agreement, we paid $0.50 and 0.2275 of a share of our common stock for each issued and outstanding common share of Intrinsyc. Pursuant to the Agreement, we paid, in the aggregate, approximately $11,519,000 in cash and issued approximately 4,279,000 shares of Lantronix common stock to Intrinsyc shareholders. Following the acquisition, Intrinsyc shareholders owned just under 16% of the outstanding shares of Lantronix common stock. Pursuant to the Agreement, Lantronix agreed to exchange certain options to purchase Intrinsyc shares and restricted stock units (“RSUs”) for cash payments, Lantronix common stock options or RSUs or a combination thereof, as further outlined in the Agreement.

The acquisition provides us with complementary IoT computing and embedded product development capabilities and expands our IoT market opportunity.

We recorded Intrinsyc’s tangible and intangible assets and liabilities based on their estimated fair values as of the Closing Date and allocated the remaining purchase consideration to goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets. The consideration allocation set forth herein is preliminary and may be revised as additional information becomes available during the measurement period which could be up to 12 months from the Closing Date. Any such revisions or changes may be material.

A summary of the purchase consideration for Intrinsyc is as follows (in thousands):

Cash consideration to selling shareholders	$	11,022
Cash consideration for vested equity awards		497
Share consideration		15,574
Total purchase consideration	$	27,093

The preliminary purchase price allocation is as follows (in thousands):

	January 16, 2020 (provisional)
Cash and cash equivalents	$	3,190
Accounts receivable		5,524
Inventories, net		5,281
Other assets		2,624
Purchased intangible assets		12,576
Goodwill		3,449
Accounts payable		(1,552	)
Other liabilities		(3,999	)
Total Consideration	$	27,093

Acquisition-related costs were expensed in the periods in which the costs were incurred.

The valuation of identifiable intangible assets and their estimated useful lives are as follows:

	Asset Fair Value		Weighted Average Useful Life (years)
	(In thousands)
Developed technology	$	2,311		5.0
Customer relationship		8,930		6.0
Order backlog		730		1.2
Non-compete agreements		370		1.0
Trademarks and trade name		235		1.0

The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives.

Supplemental Pro Forma Information

The following supplemental pro forma data summarizes the Company’s results of operations for the periods presented, as if we completed the acquisitions of Maestro and Intrinsyc as of the first day of fiscal 2019. The supplemental pro forma data reports actual operating results adjusted to include the pro forma effect and timing of the impact in amortization expense of identified intangible assets, restructuring costs, the purchase accounting effect on inventories acquired, and transaction costs. In accordance with the pro forma acquisition date, we recorded in the fiscal 2019 supplemental pro forma data (i) cost of goods sold from manufacturing profit in acquired inventory of $262,000, (ii) acquisition related restructuring costs of $2,477,000 and (iii) acquisition-related costs of $2,246,000, with a corresponding reduction in the fiscal 2020 supplemental proforma data. Additionally, we recorded $2,947,000 of amortization expense in the fiscal 2019 supplemental pro-forma data, and additional amortization expense of $862,000 in the fiscal 2020 supplemental pro forma data to represent the amount related to assets that would have been fully amortized.

Net sales related to products and services from the acquisitions of Maestro and Intrinsyc contributed approximately 31% to 35% of net sales for the nine months ended March 31, 2020. Post-acquisition net sales and earnings on a standalone basis are generally impracticable to determine, as on the Acquisition Date and Closing Date, we implemented a plan developed prior to the completion of the acquisitions and began to immediately integrate the acquisition into existing operations, engineering groups, sales distribution networks and management structure.

Supplemental pro forma data is as follows:

	Nine Months Ended March 31,
	2020			2019
		(In thousands, except per share amounts)
Pro forma net revenue	$	56,486		$	63,787
Pro forma net loss	$	(4,752	)	$	(8,207	)

Pro forma net loss per share
Basic	$	(0.18	)	$	(0.32	)
Diluted	$	(0.18	)	$	(0.32	)