3. Business Combination

3 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Business Combination

3. Business Combination

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 various additional and 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. The Company’s 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. Any such 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, net		1,320
Inventories, net		1,611
Prepaid expense and other current assets		283
Property and equipment, net		108
Amortizable intangible assets		1,910
Other non-current assets		214
Goodwill		2,969
Accounts payable		(1,568	)
Accrued payroll and related expenses		(249	)
Other current liabilities		(1,361	)
Other non-current liabilities		(164	)
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 are expensed in the periods in which the costs are 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, except for useful life)
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.

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 acquisition of Maestro 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 $171,000, (ii) Maestro related restructuring costs of $469,000 and (iii) acquisition-related costs of $581,000, with a corresponding reduction in the fiscal 2020 supplemental proforma data. Additionally, we recorded $144,000 of amortization expense in the fiscal 2019 supplemental pro-forma data, and reversed amortization expense of $51,000 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 from the acquisition of Maestro contributed approximately 25% to 29% of net sales for the three months ended September 30, 2019. Post-acquisition net sales and earnings on a standalone basis are generally impracticable to determine, as on the Acquisition Date, we implemented a plan developed prior to the completion of the acquisition 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:

	Three Months Ended September 30,
	2019			2018
	(In thousands)
Pro forma net revenue	$	12,741		$	15,799
Pro forma net loss	$	(1,198	)	$	(1,576	)
Pro forma net loss per share
Basic	$	(0.05	)	$	(0.08	)
Diluted	$	(0.05	)	$	(0.08	)