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Acquisition | 9 Months Ended
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Mar. 31, 2023
Business Combination and Asset Acquisition [Abstract] |
Acquisition |
| 3. | Acquisition
On September 12, 2022 (the “Closing Date”), we entered into a Merger Agreement with Uplogix, Inc. (“Uplogix”) pursuant to which Uplogix became a wholly-owned subsidiary of Lantronix. Pursuant to the Merger Agreement, all of the issued and outstanding shares of Uplogix were cancelled and converted into the right to receive an applicable portion of the Consideration Pool Amount (as defined in the Merger Agreement). In addition, the holders of promissory notes issued by Uplogix entered into note termination agreements with Uplogix, which provided, among other things, that the issued and outstanding promissory notes were cancelled and terminated upon the closing of the Merger. Holders of Company Junior-Only Notes (as defined in the Merger Agreement) received, in connection with their cancellation and termination of such notes, the full payment of principal and interest. Holders of Company Senior Notes (as defined in the Merger Agreement), including those holders of Company Senior Notes and Company Junior Notes (as defined in the Merger Agreement) (the “Company Senior Noteholders”), received the applicable portions of the Estimated Merger Consideration (as defined in the Merger Agreement). The aggregate consideration payable by Lantronix under the Merger Agreement was equal to $8,000,000 (inclusive of payments to satisfy the Company Junior-Only Notes), subject to certain adjustments, including, without limitation, for cash, debt, transaction expenses (including the Bonus Amount (as defined below)) and net working capital. Prior to the Closing Date, Uplogix entered into an amended and restated bonus plan, which provided that certain of its employees would be entitled to receive, in the aggregate, 15% of the consideration otherwise payable to the holders of Company Senior Notes (the “Bonus Amount”) under the Merger Agreement, with the terms of such bonus payments (including the amounts per employee and the timing of such payments) as specified in such bonus plan. In addition, the Company Senior Noteholders and former Uplogix employees have the right to receive up to an additional $4,000,000 in the aggregate (the “Earnout Amount”), payable after the closing of the Merger based on revenue targets for the business of Uplogix as specified in the Merger Agreement. The Earnout Amount will be based on Uplogix achieving revenue (subject to certain adjustments as specified in the Merger Agreement) of $7,000,000 to $14,000,000 for the period beginning at the Closing Date and ending on September 30, 2023. The Company Senior Noteholders are entitled to an advance of the Earnout Amount if the revenue of the Uplogix business for the period beginning at the closing of the Merger and ending on March 31, 2023 is between $7,000,000 to $14,000,000, but in no event will the Earnout Amount, together with any such advance of the Earnout Amount, exceed $4,000,000. The acquisition of Uplogix brings immediate scale to our out-of-band remote management solutions, adding a complementary high-end product offering that includes high-margin maintenance and licensing revenues. A summary of the purchase consideration for the Uplogix acquisition is as follows (in thousands):
Summary of purchase consideration |  |  |  |
Cash paid, including initial working capital adjustments |  | $ | 8,754 |
Preliminary estimated fair value of earnout consideration |  |  | 1,718 |
Total purchase consideration |  | $ | 10,472 |
We recorded Uplogix’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. Updates to the valuation of certain assets acquired and liabilities assumed 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. In March 2023, based on additional analysis and refinements to our estimates, we adjusted the preliminary purchase price allocation as of the Closing Date to (i) decrease the estimated fair value of intangible assets acquired by $660,000 and (ii) increase the fair value of other current liabilities by $47,000. These adjustments resulted in an increase to goodwill of $707,000. The updated purchase price allocation is as follows (in thousands):
Schedule of purchase price allocation |  |  |
Cash and cash equivalents |  | $ | 4,104 |
Accounts receivable, net |  |  | 1,900 |
Inventories, net |  |  | 3,590 |
Prepaid expense and other current assets |  |  | 288 |
Lease right-of-use asset |  |  | 778 |
Other non-current assets |  |  | 129 |
Amortizable intangible assets |  |  | 1,810 |
Goodwill |  |  | 7,091 |
Accounts payable |  |  | (278 | )
Accrued payroll |  |  | (262 | )
Deferred revenue |  |  | (4,096 | )
Other current liabilities |  |  | (3,102 | )
Notes payable |  |  | (900 | )
Other noncurrent liabilities |  |  | (580 | )
Total consideration |  | $ | 10,472 |
As discussed above, the purchase consideration and resulting purchase price allocation for this acquisition included various adjustments for transaction expenses, the Bonus Amount, payment of Company Junior-Only Notes and certain other accrued expenses paid shortly after the Closing Date. Pursuant to the Merger Agreement, substantially all of the $4,104,000 cash acquired was to be utilized for these items. The purchase price allocation above reflects both this cash acquired and the applicable accrued liabilities and notes payable that were substantially all disbursed on or shortly after the Closing Date. The factors that contributed to a purchase price resulting in the recognition of goodwill include our belief that this 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. Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. We have preliminarily determined that goodwill and identifiable intangible assets related to this acquisition are 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:
Schedule of intangible assets of useful lives |  |  |  |  |  |  |  |
|  | Asset Fair Value |  |  | Weighted Average Useful Life |
|  | (In thousands) |  |  | (In years) |
Customer relationships |  | $ | 1,030 |  |  |  | 5.0 |
Developed technology |  |  | 600 |  |  |  | 5.0 |
Trademarks and trade names |  |  | 180 |  |  |  | 1.0 |
The intangible assets are amortized on a straight-line basis over the estimated weighted-average useful lives. Valuation Methodology The customer relationships 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 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 the 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. Remeasurement of Earnout Consideration During the three months ended March 31, 2023, we remeasured the estimated fair value of the earnout consideration to a total of $1,185,000 based on our updated expectations of achieving the revenue targets for the business of Uplogix. As compared to the previously recorded estimate of $1,045,000 as of December 31, 2022, this resulted in an upward adjustment of $140,000 that was recorded within our operating expenses in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2023. Additionally, the accompanying unaudited condensed consolidated statement of operations for the nine months ended March 31, 2023 includes a downward adjustment of $673,000 that was recorded in the prior quarter based on our expectations as of December 31, 2022 of achieving revenue targets for the business of Uplogix. 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 Uplogix as of the first day of our fiscal year ended June 30, 2022. 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 nine months ended March 31, 2022 supplemental pro forma data (i) cost of goods sold from manufacturing profit in acquired inventory of $181,000, (ii) acquisition related restructuring costs of $310,000 and (iii) acquisition-related costs of $315,000, with a corresponding reduction in the nine months ended March 31, 2023 supplemental pro forma data. Additionally, we recorded $380,000 of amortization expense in the nine months ended March 31, 2022 supplemental pro forma data, and a reduction of amortization expense of $33,000 in the nine months ended March 31, 2023 supplemental pro forma data to represent amortization for the full fiscal year-to-date period. Net revenue related to products and services from the acquisition of Uplogix contributed just under 4% of our total net revenue for the nine months ended March 31, 2023. As of the Closing Date, we began to immediately integrate the acquisition into existing operations, engineering groups, sales distribution networks and management structure, making it generally impracticable to determine the post-acquisition earnings on a standalone basis. Supplemental pro forma data is as follows:
Schedule of supplemental pro forma data |  |  |  |  |  |  |  |
|  | Nine Months Ended March 31, |
|  | 2023 |  |  | 2022 |
|  | (In thousands, except per share amounts) |
Pro forma net revenue |  | $ | 98,300 |  |  | $ | 100,593 |
Pro forma net loss |  | $ | (5,986 | ) |  | $ | (8,380 | )
Pro forma net loss per share: |  |  |  |  |  |  |  |
Basic and Diluted |  | $ | (0.17 | ) |  | $ | (0.26 | )

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- Definition The entire disclosure for asset acquisition. + References Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef -Topic 805 -SubTopic 50 -Name Accounting Standards Codification -Section 15 -Paragraph 3 -Publisher FASB -URI https://asc.fasb.org//1943274/2147480123/805-50-15-3 + Details
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