8-K: DZS Sells Enterprise IoT Business to Lantronix for $6.5 Million

DZS has agreed to sell its industrial internet of things business to Lantronix for $6.5 million in cash, allowing DZS to focus on its core broadband networking and connectivity business.

Summary

• DZS has entered into an agreement to sell its industrial internet of things (IIoT) business to Lantronix for a cash purchase price of $6.5 million.
• The purchase price will be reduced by 70% of employee entitlements due to transferring employees.
• Lantronix will assume certain liabilities associated with the IIoT business and will offer employment to all employees primarily engaged in that business.
• DZS will receive 50% of the purchase price as pre-payments of loans to EdgeCo, and EdgeCo will release all liens on the assets being sold.
• DZS will continue to pay interest on the EdgeCo loans, including the principal balance pre-paid, until the prepayment penalty is paid in full.
• The maximum aggregate liability of DZS for any breach of warranties is capped at 35% of the purchase price, except for fundamental warranties, which are capped at the full purchase price.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. The sale allows DZS to focus on its core business and strengthens its balance sheet, which is good for investors. The acquisition is also positive for Lantronix, expanding its market presence. However, the divestiture of a business unit could be seen as a negative by some investors.

Positives

• The sale strengthens DZS's balance sheet and allows the company to focus on its core networking, connectivity, and cloud edge software portfolio.
• The transaction provides DZS with approximately $40 million in cash and reduces long-term debt.
• Lantronix will acquire an established IIoT business with approximately 60 customers, including several new marquee customers.
• The acquisition expands Lantronix's footprint across the United States, Europe, and Australia.

Negatives

• DZS is divesting a portion of its business, which may result in a reduction in overall revenue.
• The purchase price is subject to a reduction based on employee entitlements, which could lower the final amount received by DZS.
• DZS will continue to pay interest on the EdgeCo loans, even after the prepayment, until the prepayment penalty is paid in full.

Risks

• The closing of the sale is subject to the satisfaction or waiver of certain conditions, including obtaining counterparty consents to key commercial contracts.
• There is a risk that the actual results of DZS could differ materially and adversely from those expressed in forward-looking statements due to various factors, including those in the company's SEC filings.
• The COVID-19 pandemic and the global economic climate may give rise to or amplify many of the risks associated with the transaction.

Future Outlook

DZS intends to focus its development and sales resources on its core Networking, Connectivity and Cloud Edge Software portfolio after the sale. Lantronix expects the acquisition to strengthen its competitive offering and unlock growth opportunities in the Enterprise IoT Market.

Management Comments

• Charlie Vogt, President and CEO of DZS, stated that the investment thesis was centered around the technology, customers and development synergies aligned with its Fiber Extension, Fixed Wireless Access and Home Broadband solutions.
• Charlie Vogt also mentioned that the Lantronix and AXON Networks transactions bolster the balance sheet with approximately $40M of cash and reduction in long-term debt.
• Saleel Awsare, President and CEO of Lantronix, stated that the acquisition demonstrates their commitment to growing their global presence in the Enterprise IoT Market.

Industry Context

This announcement reflects a trend of companies focusing on core competencies and divesting non-core assets. The sale allows DZS to concentrate on its broadband networking and connectivity business, while Lantronix expands its presence in the IoT market. This is also a sign of consolidation in the IoT space, with larger players acquiring smaller portfolios to enhance their offerings.

Comparison to Industry Standards

• The sale of the IIoT business for $6.5 million is a relatively small transaction compared to major acquisitions in the technology sector, but it is significant for DZS as it allows them to streamline their operations.
• The valuation of the IIoT business is not explicitly detailed, but the purchase price suggests a focus on the strategic value of the customer base and technology rather than a high multiple of revenue or earnings.
• The deal structure, including the assumption of liabilities and the offer of employment to existing employees, is standard for business sales of this nature.
• The warranty liability cap of 35% is a common practice in M&A transactions, providing a level of protection for the buyer while limiting the seller's potential exposure.

Related Party Transactions

• The transaction includes a prepayment of loans to EdgeCo, a related party, with 50% of the purchase price being used for this purpose.

Stakeholder Impact

• Shareholders of DZS will benefit from the strengthened balance sheet and focus on core business.
• Employees of the IIoT business will be offered employment by Lantronix.
• Customers of the IIoT business will transition to Lantronix.
• Lantronix will gain a larger customer base and expanded market presence.

Next Steps

• The closing of the sale is subject to the satisfaction or waiver of certain conditions.
• DZS will focus on its core networking, connectivity, and cloud edge software portfolio.
• Lantronix will integrate the acquired IIoT business into its existing operations.

Key Dates

Keywords

Industrial IoT, Internet of Things, Business Sale, Lantronix, DZS, Divestiture, Networking, Connectivity, Cloud Edge Software, EdgeCo Loans