Business Context and Reporting Period
This Form 8-K, dated April 28, 2021, reports that Lantronix, Inc. (LTRX) entered into a definitive agreement to acquire the Transition Networks and Net2Edge businesses from Communications Systems, Inc. (CSI). The transaction is expected to close in June or July 2021, subject to CSI shareholder approval and customary closing conditions.
Key Financial Metrics and Transaction Structure
Acquisition Terms
- Total Purchase Price: Up to $32,027,566.
- Cash Consideration: $25,027,566 payable at closing.
- Earnout Consideration: Up to $7.0 million contingent on revenue targets over two successive 180-day periods post-closing.
- Earnout Triggers:
- First 180 days: $1.0M to $3.0 million based on revenue meeting or exceeding $18 million.
- Second 180 days: $1.0M to $4.0 million based on revenue meeting or exceeding $19 million.
Financing Arrangements
Lantronix secured financing commitments to fund the transaction and refinance existing obligations:
- First Lien Facility (Silicon Valley Bank): Up to $20.0 million total.
- Term Loan: $17.5 million.
- Revolving Credit: Up to $2.5 million.
- Interest Rate: LIBOR + 3.00% to 4.00% (subject to 0.50% floor).
- Maturity: 4 years from closing.
- Second Lien Facility (SVB Innovation Credit Fund VIII): $12.0 million term loan.
- Interest Rate: LIBOR + 9.0% (subject to 1.0% floor).
- Amortization: Interest-only until senior debt is paid; then 10% per year.
- Maturity: 54 months from closing.
Financial Metrics
The filing does not provide current revenue, profit, cash flow, or margin data for Lantronix. It references the company's existing debt obligations to SVB which are to be refinanced.
Material Changes and Agreements
- Acquisition: Lantronix will acquire all outstanding shares of Transition Networks, Inc. and Transition Networks Europe Limited.
- Transition Services: CSI will provide administrative, IT, and facility leasing services for up to 12 months post-closing.
- Termination Fee: CSI may be required to pay Lantronix $875,000 if the agreement is terminated under specified circumstances.
- Debt Restructuring: The new credit facilities will refinance Lantronix's existing Second Amended and Restated Loan and Security Agreement dated November 12, 2019.
Outlook, Risks, and Contingencies
Management Commentary and Outlook
Management anticipates the transaction will be accretive and generate synergies. An investor conference call was scheduled for April 29, 2021, to discuss the deal.
Risks and Contingencies
- Closing Conditions: The deal requires CSI shareholder approval, regulatory approvals, and satisfaction of customary closing conditions.
- Financing Risk: The commitment letters are subject to the negotiation and execution of definitive documentation.
- Covenants: The new debt facilities impose financial covenants including maximum gross senior leverage ratios, minimum fixed charge coverage ratios, and minimum liquidity tests.
- Operational Risks: Risks include integration challenges, unforeseen liabilities of the acquired businesses, and the impact of the COVID-19 pandemic on supply chains and operations.
- Superior Proposal: CSI retains a "fiduciary out" allowing the board to change its recommendation if a superior acquisition proposal is received, subject to specific conditions.
Investor Verification Checklist
- Verify the status of CSI shareholder approval for the transaction.
- Review the definitive credit agreements to confirm final interest rates, covenants, and fees.
- Assess Lantronix's ability to meet the new leverage and liquidity covenants immediately post-closing.
- Monitor the revenue performance of the Transition Networks business against the $18M and $19M earnout thresholds.
- Confirm the timeline for the closing of the transaction (expected June/July 2021).