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9. Subsequent Events

9 Months Ended

Mar. 31, 2021

Subsequent Events [Abstract]

9. Subsequent Events

9.	Subsequent Events

Securities Purchase Agreement

On April 28, 2021, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Communications Systems, Inc., a Minnesota corporation (“CSI”), pursuant to which we agreed to purchase from CSI the Transition Networks and Net2Edge businesses of CSI (the “Transaction”). The Transaction will be effected by the sale to Lantronix of all outstanding shares of the common stock of Transition Networks. Inc. (“TNI”) and all of the outstanding ordinary shares of Transition Networks Europe Limited, both wholly-owned subsidiaries of CSI, (such securities, collectively, the “TN Securities” and such entity, together with TNI, the “TN Companies”) for an aggregate purchase price of up to $32,027,566, consisting of (i) $25,027,566 in cash, payable at closing, plus (ii) earnout payments of up to $7,000,000 (the “Earnout Amount”), payable following two successive 180-day intervals after the closing of the transaction based on revenue targets for the business of the TN Companies as specified in the Purchase Agreement, subject to certain adjustments and allocations as further described in the Purchase Agreement.

The Transaction is subject to customary closing conditions and CSI shareholder approval, and is expected to close in June or July of 2021.

The Purchase Agreement contains certain termination rights for each of CSI and Lantronix, and further provides that, upon termination of the Purchase Agreement, under specified circumstances, CSI may be required to pay Lantronix a termination fee of $875,000.

Concurrently with the closing of the Purchase Agreement, CSI and Lantronix will enter in a Transition Services Agreement under which CSI will perform administrative and IT services, and lease office, warehouse and production space to Lantronix for the transferred businesses for a period of up to twelve months.

Financing Arrangements

First Lien Commitment Letter

On April 28, 2021, we entered into a letter agreement (the “First Lien Commitment Letter”) with SVB, pursuant to which SVB committed to provide up to $20,000,000 in senior secured credit facilities (the “Senior Credit Facilities”), consisting of a term loan facility of $17,500,000 and a revolving credit facility of up to $2,500,000. The proceeds of the Senior Credit Facilities may be used to refinance the outstanding obligations of Lantronix and Lantronix Holding Company, a Delaware corporation and wholly-owned subsidiary of Lantronix (“Holdings”), owing to SVB under our existing Amended Agreement, to fund the purchase price payable pursuant to the Purchase Agreement, to pay related fees and expenses, and for working capital and general corporate purposes.

The Senior Credit Facilities would mature on the fourth anniversary of the closing date of the Senior Credit Facilities (which is expected to occur concurrently with the transactions contemplated by the Purchase Agreement).

Borrowings under the Senior Credit Facilities would bear interest at LIBOR plus a margin that ranges from 3.00% to 4.00% depending on the total leverage of Lantronix and its subsidiaries, subject to a LIBOR floor of 0.50%.

The Senior Credit Facilities would require us to comply with a maximum gross senior leverage ratio, a minimum fixed charge coverage ratio and a minimum liquidity test. In addition, the Senior Credit Facilities are expected to contain customary covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make certain restricted payments, merge or consolidate and enter into certain speculative hedging arrangements. The Senior Credit Facilities are also expected to include a number of events of default, including, among other things, non-payment defaults, covenant defaults, cross-defaults to other materials indebtedness, bankruptcy and insolvency defaults and material judgment defaults.

Second Lien Commitment Letter

On April 28, 2021, we entered into a letter agreement (the “Second Lien Commitment Letter”) with SVB Innovation Credit Fund VIII, L.P. (“SVBCF”), pursuant to which SVBCF committed to provide a $12,000,000 second lien term loan (the “Second Lien Term Loan Facility”). The proceeds of the Second Lien Term Loan Facility may be used to fund the purchase price payable pursuant to the Purchase Agreement, to pay related fees and expenses, and for working capital and general corporate purposes.

The principal amount outstanding under the Second Lien Term Loan Facility would bear interest at LIBOR plus a 9.0%, subject to a 1.0% LIBOR floor.

The Second Lien Term Loan Facility would be payable on an interest-only basis until the outstanding obligations under the Senior Credit Facilities are paid in full. Thereafter, the Second Lien Term Loan Facility would amortize 10% per year, payable quarterly together with accrued interest, and mature 54 months after the closing date of the Second Lien Term Loan Facility (which is expected to occur concurrently with the transactions contemplated by the Purchase Agreement).

The Second Lien Term Loan Facility would require us to comply with certain financial covenants and restrictions similar to those described above related to the First Lien Commitment Letter.