Assets and Liabilities Held for Sale and Discontinued Operations

3 Months Ended

Mar. 31, 2024

Discontinued Operations and Disposal Groups [Abstract]

Assets and Liabilities Held for Sale and Discontinued Operations

During the first quarter of 2024, the Company made a strategic decision to divest certain entities in Asia with the intention, among other things, to focus its market strategy, technology and innovation on the Americas, EMEA and ANZ regions. On January 5, 2024, the Company and DZS California Inc. (“DZS California”), a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with DASAN Networks, Inc. (“DNI”). Pursuant to the Stock Purchase Agreement, DZS California sold to DNI all of the equity interests in DASAN Network Solutions, Inc., a Korean company (“DNS Korea”), D-Mobile Limited, a Taiwan company, DZS Vietnam Company Limited, a Vietnamese company, Dasan India Private Limited, an Indian company, and DZS Japan, Inc., a Japanese company (the “Asia Sale”). The purchase price for the divestiture consisted of $3.8 million cash, net of certain adjustments, and the elimination of approximately $34 million in debt owed to DNI as of the transaction date. DNI also assumed all DNS Korea's debt obligations to foreign banks outstanding as of the transaction date. The Asia Sale closed on April 5, 2024. As of March 31, 2024, DNI owns approximately 24.1% of the outstanding shares of the Company's common stock.

As of March 31, 2024, the Company determined that its business divested with the Asia Sale met the criteria to be classified as held for sale. The disposition of the operations represented a major strategic shift in the business and met the criteria of discontinued operations. The Company has classified the assets and liabilities of the Asia business as held for sale as of March 31, 2024.

Loss from discontinued operations, net of tax, of the Asia business, which is presented in total in the Unaudited Condensed Consolidated Statement of Comprehensive Loss for the three months ended March 31, 2024, and 2023, respectively, are as follows:


	Three Months Ended March 31,
	2024		2023
Net revenue	$	25,324	$	25,446
Cost of revenue	21,201		20,116
Gross profit	4,123		5,330
Operating expenses	8,801		10,452
Operating loss from discontinued operations	(4,678)		(5,122)
Interest expense, net	(981)		(168)
Other income, net	959		247
Loss from discontinuing operations before income taxes	(4,700)		(5,043)
Income tax provision (benefit)	471		(1,261)
Net loss from discontinued operations	$	(5,171)	$	(3,782)

For the three months ended March 31, 2024, net revenue and cost of revenue from discontinued operations included $0.4 million and $0.3 million of related party transactions with DNI, respectively. For the three months ended March 31, 2023, net revenue and cost of revenue from discontinued operations included $0.2 million and $0.1 million of related party transactions with DNI, respectively.

The following table presents the amounts reported in the Unaudited Condensed Consolidated Balance Sheets as held for sale related to the APAC assets as of March 31, 2024, and December 31, 2023, respectively.


	March 31, 2024		December 31, 2023
Assets
Current assets:
Cash, cash equivalents and restricted cash	$	3,812	$	5,657
Accounts receivable - trade, net of allowance for doubtful accounts	29,435		25,661
Other receivables	10,121		12,765
Inventories	44,172		49,114
Prepaid expenses and other current assets	1,838		1,178
Total current assets of discontinued operations	89,378		94,375
Property, plant and equipment, net	2,185		2,615
Right-of-use assets from operating leases	2,819		3,475
Intangible assets, net	419		419
Other assets	1,151		1,299
Total assets of discontinued operations	$	95,952	$	102,183
Liabilities
Current liabilities:
Accounts payable - trade	$	30,450	$	37,911
Short-term debt – bank, trade facilities and secured borrowings	25,622		19,633
Contract liabilities	785		1,041
Operating lease liabilities	1,595		1,858
Accrued and other liabilities	12,752		8,984
Total current liabilities of discontinued operations	71,204		69,427
Long-term debt	29,457		30,600
Contract liabilities - non-current	721		878
Operating lease liabilities - non-current	1,219		1,617
Other long-term liabilities	452		479
Total liabilities of discontinued operations	$	103,053	$	103,001

As of March 31, 2024, the held for sale liabilities included a total of $34.0 million of the related party borrowings from DNI. The respective borrowings were settled in conjunction with the Asia Sale.

Agreements with divested entities

In connection with the completion of the Asia Sale on April 5, 2024, the Company entered into several agreements with certain divested entities (collectively referred to as "DNS") that, among other things, provide a framework for the Company’s relationship with these entities after the Asia Sale. The following summarizes some of the most significant agreements and relationships that the Company continues to have with DNS.

Transition Services Agreement

The Company entered into a transition services agreement pursuant to which the Company and DNS provide various services to each other. The services provided include human resources, information technology, certain accounting, tax and other financial functions. The transition services agreement will terminate on the expiration of the term of the last service provided under it, which the Company anticipates to be on or around April 5, 2025.

Master Engineering Services Agreement

The Company and DNS entered into a master engineering services agreement pursuant to which DNS will provide engineering, research and development and other professional services to the Company. The agreement provides for a minimum annual purchase commitment of $2.5 million. The term of the agreement is seven years and may be renewed for an additional 12 month term, upon mutual agreement of both parties. After the expiration of a period of three years, either party shall have the right to terminate this agreement at any time upon 180 days prior written notice to the other party.

Master Supply Agreement

The Company and DNS entered into master supply agreement pursuant to which DNS will provide contract product manufacturing and engineering services to the Company, and the Company will engage DNS to manufacture certain of its products. The term of the agreement is three years and will renew automatically for successive one year periods unless terminated in writing by both parties.

Intellectual Property License Agreement

The Company and DNS entered into an intellectual property matters agreement pursuant to which each party granted to the other party a generally irrevocable, non-exclusive, worldwide, and royalty-free license to use certain intellectual property rights retained by the other party. Under the intellectual property matters agreement, the term for the licensed or sublicensed know-how is perpetual and the term for each licensed or sublicensed patent is until expiration of the last valid claim of such patent. The intellectual property matters agreement will terminate only if the Company and DNS agree in writing to terminate it.

Reseller Agreement

The Company and DNS entered into reseller agreements pursuant to which each party can use the other party assistance with identified business opportunities in the specific regions. The party acting as a Reseller will be eligible for certain revenue sharing. The term of the agreement is seven years and may be renewed for an additional 12 month term, upon mutual agreement of both parties.

Master Services Agreement

The Company and DNS entered into master service agreements pursuant to which each party can use the other party to provide services, parts and licensed software to support customers in the specific regions. The party acting as the vendor will be eligible for payment for such services. The term of the agreement is one year and will be automatically renewed for an additional 12-month term, unless the other party provides notice of non-renewal 60 days prior to renewal