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Acquisition
 3 Months Ended
Sep. 30, 2021
Business Combination and Asset Acquisition [Abstract]  
Acquisition

3.        Acquisition

 

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 (“TNI”) and Net2Edge businesses of CSI (the “Transaction”). The Transaction closed on August 2, 2021 (the “Closing Date”), with Lantronix acquiring all outstanding shares of the common stock of TNI and all of the outstanding ordinary shares of Transition Networks Europe Limited (such entity, together with TNI, the “TN Companies”) for an aggregate purchase price of up to approximately $32,028,000 consisting of (i) $25,028,000 cash to be paid on the Closing Date, plus (ii) earnout payments of up to $7,000,000, payable following two successive 180-day intervals after the Closing Date 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. Based on preliminary working capital estimates of the TN Companies at the Closing Date, we paid $24,160,000 in cash consideration. In September 2021, pursuant to working capital adjustments as outlined in the Purchase Agreement, the net cash consideration paid as of the Closing Date was adjusted to approximately $23,651,000.

 

Concurrently with the closing of the Purchase Agreement, CSI and Lantronix entered 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 TN Companies for a period of up to twelve months.

  

The acquisition of the TN Companies provides Lantronix with complementary IoT connectivity products and capabilities, including switching, power over ethernet and media conversion and adapter products.

 

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

 

     
Cash consideration paid to CSI  $23,651 
Preliminary estimated fair value of earnout consideration   346 
Total purchase consideration  $23,997 

 

We recorded the TN Companies’ 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. Updates to the valuation of certain assets acquired and liabilities assumed, including our evaluation of certain income tax positions, may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill in subsequent periods. We expect to complete the purchase price allocation within 12 months of the Closing Date.

 

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

 

     
Cash and cash equivalents   22 
Accounts receivable, net   5,156 
Inventories, net   7,830 
Prepaid expense and other current assets   355 
Property and equipment, net   121 
Goodwill   2,460 
Amortizable intangible assets   11,234 
Accounts payable   (1,872)
Accrued Payroll   (9)
Other current liabilities   (1,300)
Total consideration  $23,997 

 

The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that the Transaction 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.

 

Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. We have determined that goodwill and identifiable intangible assets related to the Transaction are not deductible.

 

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 
   (In thousands)   (In years) 
Customer relationships  $7,678    3.5 
Developed technology   1,967    3.5 
Order backlog   737    1.0 
Trademarks and trade names   852    2.0 

 

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

 

 

Valuation Methodology

 

The customer relationships and order backlog were valued using the multi-period excess earnings method, which estimates revenues and cash flows derived from this asset and also considers portions of the cash flows that can be attributed to the use of other supporting assets. The useful lives of customer relationships are estimated based primarily upon customer turnover data. Order backlog was estimated to be substantially fulfilled within a year of the Closing Date.

 

Developed technology and trademarks and trades names were valued using the relief-from-royalty method. This method is an income approach that estimates the portion of a company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value.

 

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:

 

  · Historical performance including sales and profitability

 

  · Business prospects and industry expectations

 

  · Estimated economic life of asset

 

  · Development of new technologies

 

  · Acquisition of new customers

 

  · Attrition of existing customers

 

  · Obsolescence of technology over time

 

The fair value of earnout consideration was estimated based on applying a Monte Carlo simulation method to forecast achievement of the revenue targets. This method involves many possible value outcomes which are evaluated to establish an estimated value. Key inputs in the valuation include forecasted revenue, revenue volatility and discount rate.

 

Supplemental Pro Forma Information

 

The following supplemental pro forma data summarizes our results of operations for the periods presented, as if we completed the acquisition of the TN Companies as of the first day of our fiscal year ended June 30, 2021. The supplemental pro forma data reports actual operating results adjusted to include the pro forma effect and timing of the impact of 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 three months ended September 30, 2020 supplemental pro forma data (i) cost of goods sold from manufacturing profit in acquired inventory of $180,000, (ii) acquisition related restructuring costs of $392,000 and (iii) acquisition-related costs of $541,000, with a corresponding reduction in three months ended September 30, 2021 supplemental pro forma data. Additionally, we recorded $980,000 of amortization expense in the three months ended September 30, 2020 supplemental pro forma data, and additional amortization expense of $227,000 in the three months ended September 30, 2021 supplemental pro forma data to represent amortization for the full year-to-date period.

  

Net sales related to products from the acquisition of the TN Companies contributed approximately 26% to 29% of our net sales for the three months ended September 30, 2021. Post-acquisition net sales and earnings on a standalone basis are generally impracticable to determine, as on the Closing Date, we began to immediately integrate the acquisition into existing operations, engineering groups, sales distribution networks and management structure.

 

Supplemental pro forma data is as follows:

 

          
   Three Months Ended September 30, 
   2021   2020 
   (In thousands, except per share amounts) 
Pro forma net revenue  $30,492   $25,901 
Pro forma net loss  $(1,509)  $(1,685)
           
Pro forma net loss per share          
Basic and Diluted  $(0.05)  $(0.06)