UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
(Mark One)
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
(Commission File Number)
(Exact name of registrant as specified in its charter)
|
||
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification Number) |
|
|
|
|
||
(Address of principal executive offices) |
|
(Zip code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
|
☒ |
|
Non-accelerated filer |
☐ |
|
Smaller reporting company |
|
|
|
|
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No
As of July 22, 2024, there were |
EXPLANATORY NOTE
On November 9, 2023, the Company disclosed that although the Review was still ongoing, based on preliminary findings, management had determined that the Company’s previously issued audited condensed consolidated financial statements as of and for the year ended December 31, 2022 (the “2022 Annual Financial Statements”), as well as the Company’s previously issued unaudited condensed consolidated financial statements as of and for each of the three months ended March 31, 2022, the three and six months ended June 30, 2022 and the three and nine months ended September 30, 2022 (collectively, the “2022 Interim Financial Statements” and, together with the 2022 Annual Financial Statements, the “2022 Financial Statements” and, together with the Q1 2023 Financial Statements, the “Affected Financial Statements”), should no longer be relied upon and should be restated due to accounting errors in each of the 2022 Financial Statements relating to revenue recognition.
During the course of the Review, and during the Company's subsequent assessment of its accounting practices, accounting and financial reporting errors were identified. Specifically, errors in timing of revenue recognition relating to incorrect shipping dates, incorrect or unapproved shipping terms, incorrect timing of the transfer of control, and incorrect evaluation of the existence of contracts. As a result, revenue, accounts receivable, contract assets and liabilities, and inventory and cost of sales contained errors which resulted in corrections in accounting under U.S. GAAP related to the timing of revenue recognition under certain customer projects. See Restatement Note 1 to this Quarterly Report on Form 10-Q/A.
We are filing this Amendment No. 1 to the Quarterly Report on Form 10-Q (“Form 10-Q/A”) for the quarterly period ended June 30, 2022, which was filed with the United States Securities and Exchange Commission (“SEC”) on August 2, 2022 (the “Original Filing”), to reflect restatements of the Condensed Consolidated Balance Sheet at June 30, 2022, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2022, and Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2022, and the related notes thereto.
The following sections in the Original Filing are revised in this Form 10-Q/A, solely as a result of, and to reflect, the restatement:
Part I – Item. Financial Statements
Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part I - Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part I - Item 4. Controls and Procedures
Part II - Item 1. Legal Proceedings
Part II - Item 1A. Risk Factors
Part II - Item 6. Exhibits
Pursuant to the rules of the SEC, Part II, Item 6 of the Original Filing has been amended to include the currently-dated certifications from our principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the principal executive officer and principal financial officer are included to this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.1.
For the convenience of the reader, this Form 10-Q/A sets forth the information in the Original Filing in its entirety, as such information is modified and superseded where necessary to reflect the restatement. This Form 10-Q/A should be read in conjunction with our filings with the SEC subsequent to the date of the Original Filing, in each case as those filings may have been, or with respect to filings for the Non-Reliance Periods will be, superseded or amended.
1
TABLE OF CONTENTS
|
|
Page |
PART I. FINANCIAL INFORMATION |
||
|
|
|
Item 1. |
3 |
|
|
3 |
|
|
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) |
4 |
|
Unaudited Condensed Consolidated Statements of Stockholders' Equity |
5 |
|
6 |
|
|
Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
Item 3. |
35 |
|
Item 4. |
35 |
|
|
|
|
PART II. OTHER INFORMATION |
|
|
|
|
|
Item 1. |
39 |
|
Item 1A. |
39 |
|
Item 5. |
44 |
|
Item 6. |
44 |
|
|
46 |
|
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DZS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par value)
|
|
June 30, |
|
|
December 31, |
|
||
Assets |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
||
Accounts receivable - trade, net of allowance for credit losses of |
|
|
|
|
|
|
||
Other receivables |
|
|
|
|
|
|
||
Inventories |
|
|
|
|
|
|
||
Contract assets |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
|
|
|
|
|
||
Right-of-use assets from operating leases |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable - trade |
|
$ |
|
|
$ |
|
||
Current portion of long-term debt |
|
|
|
|
|
— |
|
|
Contract liabilities |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
|
|
|
|
||
Accrued and other liabilities |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Long-term debt |
|
|
|
|
|
— |
|
|
Contract liabilities - non-current |
|
|
|
|
|
|
||
Operating lease liabilities - non-current |
|
|
|
|
|
|
||
Pension liabilities |
|
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Stockholders’ equity: |
|
|
|
|
|
|
||
Common stock, |
|
|
|
|
|
|
||
Preferred stock, $ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Total stockholders’ equity |
|
|
|
|
|
|
||
Total liabilities and stockholders’ equity |
|
$ |
|
|
$ |
|
||
See accompanying notes to unaudited condensed consolidated financial statements.
3
DZS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Comprehensive Income Loss
(In thousands, except per share data)
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and product development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, marketing, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restructuring and other charges |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Impairment of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other income (expense), net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Loss before income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income tax provision |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Actuarial loss |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
DZS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
|
|
Common stock |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
loss |
|
|
deficit |
|
|
equity |
|
||||||
Six-months ended March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance as of December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Cumulative effect of ASC 326 adoption |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Exercise of stock awards and |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss (As Restated) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Subsidiary dissolution |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance as of March 31, 2022 (As Restated) |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Exercise of stock awards and |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss (As Restated) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Other comprehensive loss (As Restated) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance as of June 30, 2022 (As Restated) |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Six-months ended March 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance as of December 31, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Issuance of common stock in public |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Exercise of stock awards and |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance as of March 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Exercise of stock awards and |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Balance as of June 30, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
DZS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
|
|
Six months ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Impairment of long-lived assets and non-cash restructuring |
|
|
— |
|
|
|
|
|
Amortization of deferred financing costs |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Provision for inventory write-down |
|
|
|
|
|
|
||
Provision for credit losses, net of recoveries |
|
|
( |
) |
|
|
|
|
Provision for sales returns |
|
|
|
|
|
|
||
Provision for warranty expense |
|
|
|
|
|
|
||
Unrealized loss (gain) on foreign currency transactions |
|
|
|
|
|
( |
) |
|
Subsidiary dissolution |
|
|
( |
) |
|
|
— |
|
Gain on disposal of property, plant and equipment |
|
|
( |
) |
|
|
— |
|
Deferred taxes |
|
|
— |
|
|
|
|
|
Changes in operating assets and liabilities excluding effects of acquisition: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( |
) |
|
|
|
|
Other receivable |
|
|
( |
) |
|
|
( |
) |
Inventories |
|
|
( |
) |
|
|
( |
) |
Contract assets |
|
|
|
|
|
|
||
Prepaid expenses and other assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
|
|
|
|
||
Contract liabilities |
|
|
|
|
|
( |
) |
|
Accrued and other liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Proceeds from disposal of property, plant and equipment and other assets |
|
|
|
|
|
— |
|
|
Purchases of property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
Acquisition of business, net of cash acquired |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from issuance of common stock in public offerings, net of issuance costs |
|
|
— |
|
|
|
|
|
Proceeds from long-term borrowings |
|
|
|
|
|
— |
|
|
Repayments of short-term borrowings and line of credit |
|
|
— |
|
|
|
( |
) |
Repayments of related party term loan |
|
|
— |
|
|
|
( |
) |
Payments for debt issue costs |
|
|
( |
) |
|
|
— |
|
Proceeds from exercise of stock awards and employee stock plan purchases |
|
|
|
|
|
|
||
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
||
Long-term restricted cash |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
|
||
Interest - bank and trade facilities |
|
$ |
|
|
$ |
|
||
Interest - related party |
|
$ |
— |
|
|
$ |
|
|
Income taxes |
|
$ |
|
|
$ |
|
||
See accompanying notes to unaudited condensed consolidated financial statements.
6
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
DZS Inc. (referred to, collectively with its subsidiaries, as “DZS” or the “Company”) is a global leader in access and optical networking infrastructure and cloud software solutions that enable the emerging hyper-connected, hyper-broadband world and broadband experiences. The Company provides a wide array of reliable, cost-effective networking technologies and software to a diverse customer base.
DZS was incorporated under the laws of the state of
(b) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q/A and Article 3 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements include the accounts of the Company and its wholly owned subsidiaries. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2022. For a complete description of what the Company believes to be the critical accounting policies and estimates used in the preparation of its unaudited condensed consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
All intercompany transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current-quarter presentation. The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period.
(c) Risks and Uncertainties
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, assuming the Company will continue as a going concern.
The COVID-19 pandemic continued to adversely affect significant portions of our business and our financial condition and results of operations in the first two quarters of 2022. The emergence of the Omicron variant in late 2021 with a resulting increase in COVID cases in 2022 resulted in re-implementation of various measures, including travel bans and restrictions, limitations on public and private gatherings, business and port closures or operating restrictions, social distancing, and shelter-in-place orders. The health effects of the pandemic and the above measures taken in response thereto have had an effect on the global economy in general and have materially impacted and will likely continue to impact the Company’s financial condition, results of operations and cash flows. Given the ongoing and dynamic nature of the virus and its variants, and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 pandemic on our business.
We have experienced and continue to experience disruptions in our supply chain due to the pandemic, which has also impacted and may adversely impact our operations (including, without limitation, logistical and other operational costs) and the operations of some of our key suppliers. Supply chain pricing, freight and logistics costs, product and component availability, and extended lead-times became a challenge in 2021 and continue into 2022 as the world economy recovers from the COVID-19 pandemic. As we continue to incur elevated costs for components and expedite fees, our supply chain and operations teams continue to focus on managing through a constrained environment, thereby enabling DZS to maximize shipments despite elongated lead times. We remain cautious about continued supply chain headwinds that challenge the industry and anticipate a constrained supply chain environment to persist throughout 2022.
For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A, Risk Factors of our 2021 Form 10-K.
(d) Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
7
(e) Restatement
Subsequent to the issuance of the unaudited condensed consolidated financial statements as of March 31, 2023 and as previously disclosed on June 1, 2023, Management determined that the Company’s previously issued unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2023 (the “Q1 2023 Financial Statements”) contained an accounting error relating to the timing of revenue recognition with respect to certain customer projects. As a result of this error, the Audit Committee determined that the Company’s Q1 2023 Financial Statements should no longer be relied upon and should be restated. In addition, as a result of the error, the Audit Committee initiated a review of the Company’s accounting for revenue recognition and the extent to which these matters affect the Company’s internal controls over financial reporting (the “Review”).
On November 9, 2023, the Company disclosed that although the Review was still ongoing, based on preliminary findings, management had determined that the Company’s previously issued audited condensed consolidated financial statements as of and for the year ended December 31, 2022 (the “2022 Annual Financial Statements”), as well as the Company’s previously issued unaudited condensed consolidated financial statements as of and for each of the three months ended March 31, 2022, the three and six months ended June 30, 2022 and the three and nine months ended September 30, 2022 (collectively, the “2022 Interim Financial Statements” and, together with the 2022 Annual Financial Statements, the “2022 Financial Statements” and, together with the Q1 2023 Financial Statements, the “Affected Financial Statements”), should no longer be relied upon and should be restated due to accounting errors in each of the 2022 Financial Statements relating to revenue recognition.
During the course of the Review, and during the Company's subsequent assessment of its accounting practices, accounting and financial reporting errors were identified. Specifically, errors in timing of revenue recognition relating to incorrect shipping dates, incorrect or unapproved shipping terms, incorrect timing of the transfer of control, and incorrect evaluation of the existence of contracts. As a result, revenue, accounts receivable, contract assets and liabilities, inventory and cost of sales, goodwill, and the tax provision contained errors which resulted in corrections in accounting under U.S. GAAP related to the timing of revenue recognition under certain customer projects. Accordingly, the Company is restating its unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022, to correct these errors which are described below.
The amounts in the "As Previously Reported" columns are amounts derived from the Company's previously filed financial statements in its Quarterly Report on Form 10-Q, originally filed with the Securities and Exchange Commission on August 2, 2022. The amounts in the "Adjustments" columns present the impact of the accounting error corrections relating to the timing of revenue recognition with respect to certain customer projects along with other corrections to the Company's previously filed financial statements. The description of the corrections is referenced by (a) through (c) in the tables below. The amounts in the "As Restated" columns are the updated amounts including the impacts from the adjustments.
8
The following table presents the effect of the restatement on the Company's previously reported unaudited condensed consolidated balance sheet as of June 30, 2022 (in thousands, except par value).
|
|
June 30, 2022 |
|
||||||||||
|
|
As Previously |
|
|
Adjustments |
|
As Restated |
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents |
|
$ |
|
|
$ |
— |
|
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
— |
|
|
|
|
|
||
Accounts receivable - trade, net |
|
|
|
|
|
( |
) |
(a) |
|
|
|
||
Other receivables |
|
|
|
|
|
— |
|
|
|
|
|
||
Inventories |
|
|
|
|
|
|
(a) |
|
|
|
|||
Contract assets |
|
|
|
|
|
— |
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
( |
) |
(b) |
|
|
|
||
Total current assets |
|
|
|
|
|
( |
) |
|
|
|
|
||
Property, plant and equipment, net |
|
|
|
|
|
— |
|
|
|
|
|
||
Right-of-use assets from operating leases |
|
|
|
|
|
— |
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
( |
) |
(c) |
|
|
|
||
Intangible assets, net |
|
|
|
|
|
— |
|
|
|
|
|
||
Other assets |
|
|
|
|
|
— |
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
( |
) |
|
|
$ |
|
||
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|||
Accounts payable - trade |
|
$ |
|
|
$ |
— |
|
|
|
$ |
|
||
Current portion of long-term debt |
|
|
|
|
|
— |
|
|
|
|
|
||
Contract liabilities |
|
|
|
|
|
( |
) |
(a)(c) |
|
|
|
||
Operating lease liabilities |
|
|
|
|
|
— |
|
|
|
|
|
||
Accrued and other liabilities |
|
|
|
|
|
|
(b) |
|
|
|
|||
Total current liabilities |
|
|
|
|
|
( |
) |
|
|
|
|
||
Long-term debt |
|
|
|
|
|
— |
|
|
|
|
|
||
Contract liabilities - non-current |
|
|
|
|
|
|
|
|
|
|
|||
Operating lease liabilities - non-current |
|
|
|
|
|
— |
|
|
|
|
|
||
Pension liabilities |
|
|
|
|
|
— |
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
— |
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
( |
) |
|
|
|
|
||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|||
Common stock |
|
|
|
|
|
— |
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
— |
|
|
|
|
|
||
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
|
(a) |
|
|
( |
) |
|
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
(a)(b) |
|
|
( |
) |
Total stockholders’ equity |
|
|
|
|
|
( |
) |
|
|
|
|
||
Non-controlling interest |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Total stockholders’ equity and non-controlling interest |
|
|
|
|
|
( |
) |
|
|
|
|
||
Total liabilities and stockholders’ equity |
|
$ |
|
|
$ |
( |
) |
|
|
$ |
|
||
The impact of each error for the corresponding period in the above table is described below:
(a)
(b)
(c)
9
The following table presents the effect of the restatement on the Company's previously reported unaudited condensed consolidated statement of comprehensive income (loss) for the three months ended June 30, 2022 (in thousands, except per share data).
|
|
Three Months Ended June 30, 2022 |
|
||||||||||
|
|
As Previously |
|
|
Adjustments |
|
As Restated |
|
|||||
Net revenue |
|
$ |
|
|
$ |
( |
) |
(a) |
|
$ |
|
||
Cost of revenue |
|
|
|
|
|
( |
) |
(a) |
|
|
|
||
Gross profit |
|
|
|
|
|
( |
) |
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|||
Research and product development |
|
|
|
|
|
— |
|
|
|
|
|
||
Selling, marketing, general and administrative |
|
|
|
|
|
— |
|
|
|
|
|
||
Restructuring and other charges |
|
|
|
|
|
— |
|
|
|
|
|
||
Amortization of intangible assets |
|
|
|
|
|
— |
|
|
|
|
|
||
Total operating expenses |
|
|
|
|
|
— |
|
|
|
|
|
||
Operating loss |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Interest income |
|
|
|
|
|
— |
|
|
|
|
|
||
Interest expense |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Other expense, net |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Loss before income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Income tax provision (benefit) |
|
|
( |
) |
|
|
|
(b) |
|
|
|
||
Net loss |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Foreign currency translation adjustments |
|
|
( |
) |
|
|
|
(a) |
|
|
( |
) |
|
Comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|||
Basic |
|
|
|
|
|
|
|
|
|
|
|||
Diluted |
|
|
|
|
|
|
|
|
|
|
|||
The impact of each error for the corresponding period in the above table is described below:
(a)
(b)
10
The following table presents the effect of the restatement on the Company's previously reported unaudited condensed consolidated statement of comprehensive income (loss) for the six months ended June 30, 2022 (in thousands, except per share data).
|
|
Six Months Ended June 30, 2022 |
|
||||||||||
|
|
As Previously |
|
|
Adjustments |
|
As Restated |
|
|||||
Net revenue |
|
$ |
|
|
$ |
( |
) |
(a) |
|
$ |
|
||
Cost of revenue |
|
|
|
|
|
( |
) |
(a) |
|
|
|
||
Gross profit |
|
|
|
|
|
( |
) |
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|||
Research and product development |
|
|
|
|
|
— |
|
|
|
|
|
||
Selling, marketing, general and administrative |
|
|
|
|
|
— |
|
|
|
|
|
||
Restructuring and other charges |
|
|
|
|
|
— |
|
|
|
|
|
||
Amortization of intangible assets |
|
|
|
|
|
— |
|
|
|
|
|
||
Total operating expenses |
|
|
|
|
|
— |
|
|
|
|
|
||
Operating loss |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Interest income |
|
|
|
|
|
— |
|
|
|
|
|
||
Interest expense |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Other expense, net |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Loss before income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Income tax provision (benefit) |
|
|
( |
) |
|
|
|
(b) |
|
|
|
||
Net loss |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Foreign currency translation adjustments |
|
|
( |
) |
|
|
|
(a) |
|
|
( |
) |
|
Comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|||
Basic |
|
|
|
|
|
|
|
|
|
|
|||
Diluted |
|
|
|
|
|
|
|
|
|
|
|||
The impact of each error for the corresponding period in the above table is described below:
(a)
(b)
11
The following table presents the effect of the restatement on the Company's previously reported unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2022 (in thousands).
|
|
Six Months Ended June 30, 2022 |
|
||||||||||
|
|
As Previously Reported |
|
|
Adjustments |
|
As Restated |
|
|||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
(a)(b) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
— |
|
|
|
|
|
||
Amortization of deferred financing costs |
|
|
|
|
|
— |
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
— |
|
|
|
|
|
||
Provision for inventory write-down |
|
|
|
|
|
— |
|
|
|
|
|
||
Provision for credit losses, net of recoveries |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Provision for sales returns |
|
|
|
|
|
— |
|
|
|
|
|
||
Provision for warranty expense |
|
|
|
|
|
— |
|
|
|
|
|
||
Unrealized loss (gain) on foreign currency transactions |
|
|
|
|
|
— |
|
|
|
|
|
||
Subsidiary dissolution |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Gain on disposal of property, plant and equipment |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Changes in operating assets and liabilities excluding effects of acquisition: |
|
|
|
|
|
|
|
|
|
|
|||
Accounts receivable |
|
|
( |
) |
|
|
|
(a) |
|
|
( |
) |
|
Other receivable |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Inventories |
|
|
( |
) |
|
|
( |
) |
(a) |
|
|
( |
) |
Contract assets |
|
|
|
|
|
— |
|
|
|
|
|
||
Prepaid expenses and other assets |
|
|
( |
) |
|
|
|
(b) |
|
|
( |
) |
|
Accounts payable |
|
|
|
|
|
— |
|
|
|
|
|
||
Contract liabilities |
|
|
( |
) |
|
|
|
(a) |
|
|
|
||
Accrued and other liabilities |
|
|
( |
) |
|
|
|
(b) |
|
|
( |
) |
|
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|||
Proceeds from disposal of property, plant and equipment and other assets |
|
|
|
|
|
— |
|
|
|
|
|
||
Purchases of property, plant and equipment |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Acquisition of business, net of cash acquired |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|||
Proceeds from long-term borrowings |
|
|
|
|
|
— |
|
|
|
|
|
||
Payments for debt issue costs |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Proceeds from exercise of stock awards and employee stock plan purchases |
|
|
|
|
|
— |
|
|
|
|
|
||
Net cash provided by (used in) financing activities |
|
|
|
|
|
— |
|
|
|
|
|
||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
(a) |
|
|
( |
) |
|
Net increase in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
— |
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
— |
|
|
|
$ |
|
||
The impact of each error for the corresponding period in the above table is described below:
(a)
(b)
12
(f) Disaggregation of Revenue
The following table presents revenues by source (in thousands):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Products |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Services and software |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe, Middle East, Africa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(g) Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash, accounts receivables, and contract assets. Cash, cash equivalents and restricted cash consist of financial deposits and money market accounts that are principally held with various domestic and international financial institutions with high credit standing. As of June 30, 2022, the Company had cash accounts in excess of Federal Deposit Insurance Corporation ("FDIC") insured limits.
The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts based upon the expected collectability of accounts receivable using historical loss rates adjusted for customer-specific factors and current economic conditions. The Company determines historical loss rates on a rational and systematic basis. The Company performs periodic assessments of its customers’ liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement review and historical and current collection trends.
Activity under the Company’s allowance for credit losses consists of the following (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
|
||
Charged to expense, net of recoveries |
|
|
( |
) |
|
|
|
|
Utilization/write offs/exchange rate differences |
|
|
— |
|
|
|
( |
) |
Cumulative effect of ASC 326 adoption |
|
|
|
|
|
— |
|
|
Foreign currency exchange impact |
|
|
( |
) |
|
|
( |
) |
Balance at end of period |
|
$ |
|
|
$ |
|
||
For the three months ended June 30, 2022,
As of June 30, 2022,
As of June 30, 2022, and December 31, 2021, net accounts receivables from customers in countries other than the United States represented
13
In 2017, the Company entered into an agreement with a customer in India to supply product for a state sponsored broadband project. The Company substantially completed its obligations under the agreement in 2018. The Company billed the customer, which is a state government sponsored entity, approximately $
(h) Business Combinations
We account for business combinations using the acquisition method, which requires the identification of the acquirer, the determination of the acquisition date and the allocation of the purchase price paid by the acquirer to the identifiable tangible and intangible assets acquired, the liabilities assumed, including any contingent consideration and any noncontrolling interest in the acquiree at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their expected useful lives. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.
(i) Restructuring and Other Charges
Restructuring and other charges primarily consists of severance and other termination benefits and non-cash impairment charges related to right-of-use assets from operating leases related to the restructuring activities in Hanover, Germany and Ottawa, Canada. The Company recognizes contractual termination benefits when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. The Company recognizes one-time employee termination benefits when (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement in sufficient detail to enable employees to determine the type and amount of benefits they will receive, and (iv) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. These charges are included in restructuring and other charges in the unaudited condensed consolidated statement of comprehensive income (loss).
(j) Recent Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires the Company to apply ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. Before the update such balances were measured and recognized at fair value on the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods. The Company adopted these requirements prospectively,
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, which provided additional implementation guidance on the previously issued ASU. The Company
14
In , the FASB issued ASU No. 2020-04 (Topic 848), Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. The standard was
(2) Business Combinations
Optelian Acquisition
On February 5, 2021, the Company acquired Optelian Access Networks Corporation (“Optelian”), a corporation incorporated under the laws of Canada and registered extra-provincially in the Province of Ontario, pursuant to an acquisition agreement whereby the Company purchased all the outstanding shares of Optelian. Following the closing of the transaction, Optelian became the Company’s wholly owned subsidiary.
Optelian was a leading optical networking solution provider. This acquisition introduced the “O-Series” to the DZS portfolio of carrier grade optical networking products with up to 400 gigabits per second (Gig) and above capability, expanding the DZS product portfolio by providing environmentally hardened, high capacity, and flexible solutions at the network edge.
The purchase price of $
The payment to shareholders and option holders includes a $
RIFT Acquisition
On March 3, 2021, the Company acquired substantially all of the assets of RIFT, Inc., a network automation solutions company, and all the outstanding shares of RIFT.IO India Private Limited, a wholly owned subsidiary of RIFT, Inc. (collectively “RIFT”). RIFT developed a carrier-grade RIFT.ware software platform that simplifies the deployment of any slice, service, or application on any cloud. This acquisition introduced DZS Xtreme, a solution within the DZS Cloud portfolio, to the overall portfolio of DZS systems and software solutions. The total purchase consideration was $
ASSIA Acquisition
On May 27, 2022, the Company acquired certain assets and liabilities of Adaptive Spectrum and Signal Alignment, Incorporated (“ASSIA”), an industry pioneer of broadband access quality-of-experience and service assurance software solutions (the “ASSIA Acquisition”). The core assets acquired include the CloudCheck® Wi-Fi experience management and Expresse® access network optimization software solutions. These software solutions add powerful data analytics and network intelligence capabilities to DZS Cloud, including cloud-managed WiFi solutions, access network optimization and intelligent automation tools.
The total purchase consideration was $
The acquisition was recorded as a business combination with valuation of the assets acquired and liabilities assumed recorded at their acquisition date fair value determined using level three inputs, defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company used a combination of income approach and market approach to determine the fair value of intangible assets acquired. Significant unobservable inputs included estimated future cash flows and a discount rate. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, EBITDA margins, consideration of industry and market conditions, terminal growth rates and management’s estimates of working capital requirements. The discount rate of
15
Due to the complexity of the valuation of the assets acquired and the liabilities assumed, and the timing of these activities, certain amounts included in the unaudited condensed consolidated financial statements, including long-lived assets, intangible assets, deferred taxes and goodwill, are provisional and subject to additional adjustments within the measurement period as permitted by Topic 805.
The following summarizes the provisional estimated fair values of the assets acquired and liabilities assumed at the date of the ASSIA Acquisition (in thousands):
Provisional allocation of purchase consideration |
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Other assets |
|
|
|
|
Right-of-use assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Accounts payable |
|
|
( |
) |
Contract liabilities (As Restated) |
|
|
( |
) |
Operating lease liabilities |
|
|
( |
) |
Accrued and other liabilities |
|
|
( |
) |
Goodwill (As Restated) |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
The provisional purchase price allocation resulted in the recognition of goodwill of approximately $
The following table represents the preliminary estimated fair value and useful lives of identifiable intangible assets acquired (estimated fair value in thousands):
|
|
Estimated |
|
|
Estimated |
|
|
|
fair value |
|
|
useful life |
|
Intangible assets acquired |
|
|
|
|
|
|
Customer relationships |
|
$ |
|
|
||
Developed technology |
|
|
|
|
||
Tradenames |
|
|
|
|
||
Total intangible assets |
|
$ |
|
|
|
|
(3) Fair Value Measurement
The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1 |
|
Inputs are quoted prices in active markets for identical assets or liabilities. |
|
|
|
Level 2 |
|
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
|
|
|
Level 3 |
|
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable |
Assets and Liabilities Measured at Fair Value on a Recurring Basis:
The carrying values of financial instruments such as cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The Company classifies its cash and cash equivalents and restricted cash within Level 1 and other short-term assets and liabilities within Level 2. The carrying value of the Company's debt approximates its fair values based on the current rates available to the Company for debt of similar terms and maturities. The Company classifies its debt within Level 2.
16
The Company classifies its contingent liability from Optelian acquisition within Level 3 as it includes inputs not observable in the market. The Company estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using the revenue forecast for certain Optelian products through the end of 2023. The fair value of contingent liability is generally sensitive to changes in the revenue forecast during the payout period. The change in the respective fair value is included in selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive loss.
The following table reconciles the beginning and ending balances of the Company’s Level 3 contingent liability (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
— |
|
|
Initial fair value of contingent liability |
|
|
— |
|
|
|
|
|
Cash payments |
|
|
( |
) |
|
|
— |
|
Net change in fair value |
|
|
( |
) |
|
|
|
|
Balance at end of period |
|
$ |
|
|
$ |
|
||
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company recorded assets acquired and liabilities assumed in conjunction with the ASSIA acquisition. At their acquisition date fair value was determined using primarily level three inputs, defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. See Note 2 Business Combinations for further information about significant unobservable inputs used in the fair value measurement.
(4) Cash, Cash Equivalents and Restricted Cash
As of June 30, 2022 and December 31, 2021, the Company's cash, cash equivalents and restricted cash consisted of financial deposits. Cash, cash equivalents and restricted cash held within the U.S. totaled $
(5) Balance Sheet Details
Balance sheet detail as of June 30, 2022 and December 31, 2021 is as follows (in thousands):
Inventories
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total inventories |
|
$ |
|
|
$ |
|
||
Inventories are stated at the lower of cost or net realizable value, with cost being computed based on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. Finished goods include deferred cost of revenue of $
17
Provision for inventory write-down was $
Property, plant and equipment
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Property, plant and equipment, net: |
|
|
|
|
|
|
||
Machinery and equipment |
|
$ |
|
|
$ |
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Computers and software |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Construction in progress and other |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Less: government grants |
|
|
( |
) |
|
|
( |
) |
Total property, plant and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation expense associated with property, plant and equipment for the three and six months ended June 30, 2022 was $
The Company receives grants from certain foreign government entities mainly to support capital expenditures in the region. Such grants are deferred and are generally refundable to the extent the Company does not utilize the funds for qualifying expenditures. Once earned, the Company records the grants as a contra amount to the assets and amortizes such amount over the useful lives of the related assets as a reduction to depreciation expense.
Warranties
The Company accrues warranty costs based on historical trends for the expected material and labor costs to provide warranty services. The Company's standard warranty period is one year from the date of shipment with the ability for customers to purchase an extended warranty of up to five years from the date of shipment. The following table summarizes the activity related to the product warranty liability:
|
|
Six Months Ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
|
||
Charged to cost of revenue |
|
|
|
|
|
|
||
Claims and settlements |
|
|
( |
) |
|
|
( |
) |
Foreign exchange impact |
|
|
( |
) |
|
|
|
|
Balance at end of period |
|
$ |
|
|
$ |
|
||
Contract Balances
The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations.
The opening and closing balances of current and long-term contract assets and contract liabilities related to contracts with customers are as follows:
|
|
Contract |
|
|
Contract |
|
||
December 31, 2021 |
|
$ |
|
|
$ |
|
||
June 30, 2022 (As Restated) |
|
|
|
|
|
|
||
Increase (decrease) (As Restated) |
|
$ |
( |
) |
|
$ |
|
|
The decrease in contract assets during the six months ended June 30, 2022 was primarily due to invoicing that occurred in 2022 from unbilled balances reflected as contract assets as of December 31, 2021.
18
The increase in contract liabilities during the six months ended June 30, 2022 was primarily due to the assumption of ASSIA contract liabilities in conjunction with the ASSIA Acquisition. Refer to Note 2 Business Combinations for further information. The amount of revenue recognized in the six months ended June 30, 2022 that was included in the prior period contract liability balance was $
The balance of contract cost deferred as of June 30, 2022 and December 31, 2021 was $
(6) Goodwill and Intangible Assets
The following table summarizes the activity related to goodwill (in thousands):
|
|
June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Balance at beginning of period, gross |
|
$ |
|
|
$ |
|
||
Accumulated impairment at beginning of period |
|
|
( |
) |
|
|
( |
) |
Goodwill from acquisitions |
|
|
|
|
|
|
||
Foreign exchange impact |
|
|
|
|
|
— |
|
|
Balance at end of period |
|
$ |
|
|
$ |
|
||
During the six months ended June 30, 2022, the Company recorded goodwill of $
Intangible assets consisted of the following (in thousands):
|
|
June 30, 2022 |
|
|||||||||
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
Developed technology |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
|
||
In-process research and development |
|
|
|
|
|
( |
) |
|
|
|
||
Tradenames |
|
|
|
|
|
( |
) |
|
|
|
||
Total intangible assets, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
December 31, 2021 |
|
|||||||||
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
Developed technology |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
|
||
In-process research and development |
|
|
|
|
|
( |
) |
|
|
|
||
Total intangible assets, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
During the six months ended June 30, 2022, the Company recorded $
19
Amortization expense associated with intangible assets for the three and six months ended June 30, 2022 was $
The following table presents the future amortization expense of the Company’s intangible assets as of June 30, 2022 (in thousands):
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
(7) Debt
JPMorgan Credit Agreement
On February 9, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans (the "Revolving Credit Facility") in an aggregate principal amount of up to $
On May 27, 2022, the Company entered into a First Amendment to Credit Agreement (the “Amendment”), which amends the Credit Agreement dated February 9, 2022 with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.
The Amendment, among other things, (1) provides for a term loan (the “Term Loan”) in an aggregate principal amount of $
On May 27, 2022, the Company borrowed the full amount of the Term Loan to finance the ASSIA Acquisition. In the first quarter of 2022, the Company capitalized $
The future principal maturities of the Company's debt obligations for each of the next five years are as follows (in thousands):
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
The Company was in compliance with all debt covenants as of June 30, 2022.
20
(8) Employee Benefit Plans
Defined Contribution Plans
The Company maintains a 401(k) plan for its employees in the US whereby eligible employees may contribute up to a specified percentage of their earnings, on a pretax basis, subject to the maximum amount permitted by the Internal Revenue Code. Under the 401(k) plan, the Company made discretionary contributions to the plan in 2021. For the three and six months ended June 30, 2022, the Company recorded an expense of $
The Company maintains a defined contribution plan for its employees in Korea. Under the defined contribution plan, the Company contributes the equivalent of
Defined Benefit Plans
The Company sponsors defined benefit plans for its employees in Germany and Japan. Defined benefit plans provide pension benefits based on compensation and years of service. The Germany plans were frozen as of September 30, 2003 and have not been offered to new employees after that date. The Company has recorded the underfunded status as of June 30, 2022 and December 31, 2021 as a long-term liability on the unaudited condensed consolidated balance sheets. The accumulated benefit obligation for the plans in Germany and Japan was $
The Company holds life insurance contracts, with the Company as beneficiary, in the amount of $
(9) Restructuring and Other Charges
In 2021, the Company made the strategic decision to relocate manufacturing functions of DZS GmbH and Optelian to Seminole, Florida and to transition the above subsidiaries to sales and research and development centers. The Company incurred approximately $
(10) Related Party Transactions
Related Party Debt and Guarantees
The following table sets forth payment guarantees of the Company's obligations as of June 30, 2022 that have been provided by Dasan Networks, Inc. ("DNI"). DNI owns approximately
Guarantor |
|
Amount Guaranteed |
|
|
Description of Obligations Guaranteed |
|
Dasan Networks, Inc. |
|
$ |
|
|
Payment guarantee to Industrial Bank of Korea |
|
21
Other Related Party Transactions
Net revenue
|
|
Three Months Ended June 30, 2022 |
|
|||||||||||||||||||||
Counterparty |
|
Net revenue |
|
|
Cost of |
|
|
Research |
|
|
Selling, |
|
|
Interest |
|
|
Other |
|
||||||
Dasan Networks, Inc. |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
— |
|
|
$ |
|
||||
DS Commerce, Inc. |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Three Months Ended June 30, 2021 |
|
|||||||||||||||||||||
Counterparty |
|
Net revenue |
|
|
Cost of |
|
|
Research |
|
|
Selling, |
|
|
Interest |
|
|
Other |
|
||||||
Dasan Networks, Inc. |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||||
Dasan Invest Co., Ltd. |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||||
|
|
Six Months Ended June 30, 2022 |
|
|||||||||||||||||||||
Counterparty |
|
Net revenue |
|
|
Cost of |
|
|
Research |
|
|
Selling, |
|
|
Interest |
|
|
Other |
|
||||||
Dasan Networks, Inc. |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
|
$ |
|
|||||
DS Commerce, Inc. |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Six Months Ended June 30, 2021 |
|
|||||||||||||||||||||
Counterparty |
|
Net revenue |
|
|
Cost of |
|
|
Research |
|
|
Selling, |
|
|
Interest |
|
|
Other |
|
||||||
Dasan Networks, Inc. |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Dasan Invest Co., Ltd. |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The Company has entered into sales agreements with DNI to sell certain services and finished goods produced by the Company. The Company also has an agreement with DNI in which DNI acts as a sales channel to third party customers. The above transactions are included in net revenue and cost of revenue on the unaudited condensed consolidated statement of comprehensive income (loss). Net revenue from DNI is recorded net of royalty fees for a sales channel arrangement.
DNS Korea has a lease agreement with DNI related to the lease of a warehouse facility. DNS Korea also had a separate office lease agreement with DNI. In the first quarter of 2022, DNI sold the office building to the unrelated third party, and the respective lease was reassigned to the new landlord. Operating lease cost related to the DNI leases totaled $
DNS Korea had an agreement with Dasan Invest Co., Ltd. to provide IT services for the Company. The agreement was terminated in the fourth quarter of 2021 and the new agreement was signed with DS Commerce, Inc. Both entities have an affiliation with DZS board members. The expense related to the above IT services is allocated between cost of revenue, research and product development, and selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss).
22
Interest expense represents interest paid to DNI for the related party debt. The respective debt was fully repaid in the first quarter of 2021.
Other expenses represent charges from DNI for its payment guarantees relating to the Company's borrowings. The Company pays DNI a guarantee fee which is calculated as
Balances of Receivables and Payables with Related Parties
Balances of receivables and payables arising from sales and purchases of goods and services with related parties as of June 30, 2022 and December 31, 2021 were included in the following balance sheet captions on the unaudited condensed consolidated balance sheets, as follows (in thousands):
|
|
As of June 30, 2022 |
|
|||||||||||||
Counterparty |
|
Account |
|
|
Other |
|
|
Other assets |
|
|
Accounts |
|
||||
Dasan Networks, Inc. |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
DS Commerce, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
|
|
As of December 31, 2021 |
|
|||||||||||||
Counterparty |
|
Account |
|
|
Other |
|
|
Other assets |
|
|
Accounts |
|
||||
Dasan Networks, Inc. |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
DS Commerce, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(11) Net Loss Per Share
Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common stock equivalents are excluded if their effect is antidilutive. Potential common stock equivalents are composed of incremental shares of common stock issuable upon the exercise of stock options and the vesting of restricted stock units. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, basic and dilutive loss per share are the same.
The following table is a reconciliation of the numerator and denominator in the basic and diluted net loss per share calculation (in thousands, except per share data) for the three and six months ended June 30, 2022, and 2021:
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options, restricted stock units and share awards |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The following table sets forth potential common stock that is not included in the diluted net loss per share calculation above because their effect would be anti-dilutive for the periods indicated (in thousands):
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
||
Outstanding stock options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unvested restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
23
(12) Leases
The Company leases certain properties and buildings (including manufacturing facilities, warehouses, and office spaces) and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists of operating leases which expire at various dates through 2028.
Assets and liabilities related to operating leases are included in the consolidated balance sheets as right-of-use assets from operating leases, operating lease liabilities - current and operating lease liabilities - non-current. The Company recognizes minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. The Company amortizes this expense over the term of the lease beginning with the date of initial possession, which is the date the lessor makes an underlying asset available for use. For the three and six months ended June 30, 2022, the Company recognized lease expense of $
The following table presents the future contractual rent obligations as of June 30, 2022 (in thousands):
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total operating lease payments |
|
|
|
|
Less: imputed interest |
|
|
( |
) |
Total operating lease liabilities |
|
$ |
|
(13) Commitments and Contingencies
Performance Guarantees
In the normal course of operations, from time to time, the Company arranges for the issuance of various types of performance guarantees, such as standby letters of credit or surety bonds. These instruments are arrangements under which the financial institution or surety provides a financial guarantee that the Company will perform in accordance with contractual or legal obligations. As of June 30, 2022, the Company had $
Trade Compliance Matter
During the first quarter of 2022, the Company received a notice letter from the Office of the Commissioner of Customs of the India Department of Revenue (the “Notice”) claiming the Company had mis-declared and wrongly classified certain products imported to India by the Company at the time of clearance of customs. The Notice claims that due to such mis-declaration and wrong classification of the imported products, the Company and its contract manufacturer in India underpaid duties approximating $
In addition to the matter discussed above, from time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal contingencies that it has determined to be probable to the extent that the amount of the loss can be reasonably estimated. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations and cash flows of the reporting period in which the ruling occurs, or future periods.
24
(14) Income Taxes
Income tax provision for the three and six months ended June 30, 2022 was approximately $
As of June 30, 2022, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America, EMEA and Asia, as well as foreign and state income tax rate differentials.
The total amount of unrecognized tax benefits as of June 30, 2022 was $
(15) Enterprise-Wide Information
The Company is a global provider of ultra-broadband network access solutions and communications platforms deployed by advanced Tier 1, national and regional service providers and enterprise customers. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single operating segment. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a consolidated basis accompanied with disaggregated revenues by geographic region for purposes of making operating decisions and assessing financial performance.
The Company attributes revenue from customers to individual countries based on location shipped. Refer to Note 1(e) Disaggregation of Revenue for the required disclosures on geographical concentrations and revenues by source.
The Company's property, plant and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands) as of June 30, 2022 and December 31, 2021:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
United States |
|
$ |
|
|
$ |
|
||
Korea |
|
|
|
|
|
|
||
Japan |
|
|
|
|
|
|
||
Canada |
|
|
|
|
|
|
||
Germany |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this Quarterly Report on Form 10-Q/A, unless the context suggests otherwise, the terms “DZS,” the “Company” “we,” “our” and “us” refer to DZS Inc. and its subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q/A, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate, and reflect the beliefs and assumptions of our management as of the date hereof.
We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items in future periods; anticipated growth and trends in our business, industry or key markets; cost synergies, growth opportunities and other potential financial and operating benefits of our acquisitions; future growth and revenues from our products; our plans and our ability to refinance or repay our existing indebtedness prior to the applicable maturity dates; our ability to access capital to fund our future operations; future economic conditions and performance; the impact of the global outbreak of COVID-19, also known as the coronavirus; the impact of interest rate and foreign currency fluctuations; anticipated performance of products or services; competition; plans, objectives and strategies for future operations, including our pursuit or strategic acquisitions and our continued investment in research and development; other characterizations of future events or circumstances; and all other statements that are not statements of historical fact, are forward-looking statements within the meaning of the Securities Act and the Exchange Act. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Readers are cautioned not to place undue reliance on such forward-looking statements, which are being made as of the date of this Quarterly Report on Form 10-Q/A. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K/A, as well as factors described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (the “SEC”).
OVERVIEW
We are a global provider of access and optical networking infrastructure and cloud software solutions that enable the emerging hyper-connected, hyper-broadband world and broadband experiences. The Company provides a wide array of reliable, cost-effective networking technologies and software to a diverse customer base.
We research, develop, test, sell, manufacture and support platforms in the areas of mobile transport and fixed broadband access, as discussed below. We have extensive regional development and support centers around the world to support our customer needs.
Our solutions and platforms portfolio include products in the Access Edge, Subscriber Edge, Optical Edge, and Cloud Software.
26
Our key financial objectives include the following:
RECENT DEVELOPMENTS
On February 9, 2022, the Company entered into a Credit Agreement with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans in an aggregate principal amount of up to $30.0 million, up to $15.0 million of which is available for letters of credit, and was scheduled to mature on February 9, 2024. On May 27, 2022, the Company entered into a First Amendment to Credit Agreement, which amends the Credit Agreement dated February 9, 2022. The Amendment, among other things, provides for a Term Loan in an aggregate principal amount of $25.0 million with a maturity date of May 27, 2027 and extends the maturity date of the $30.0 million Revolving Credit Facility to May 27, 2025. On May 27, 2022, the Company borrowed the full amount of the Term Loan to finance the ASSIA Acquisition discussed below.
On May 27, 2022, the Company acquired certain assets and liabilities of ASSIA, an industry pioneer of broadband access quality-of-experience software solutions. The core assets acquired include the CloudCheck® Wi-Fi experience management and Expresse® access network optimization software solutions. These software solutions add powerful data analytics and network intelligence capabilities to DZS Cloud, including cloud-managed WiFi solutions, access network optimization and intelligent automation tools. The total purchase consideration was $25.0 million, including a $2.5 million holdback that will be released 13 months following the transaction close date.
27
RESTATEMENT
The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement adjustments made to the previously reported unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022. For additional information and a detailed discussion of the restatement, see Note 1 (e) Restatement in the Notes to Unaudited Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
The table below presents the unaudited condensed consolidated statement of (loss) income with year-over-year changes (in thousands except percent change).
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
||||||||||||
|
|
2022 |
|
|
2021 |
|
|
% change |
|
|
2022 |
|
|
2021 |
|
|
% change |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net revenue |
|
$ |
82,948 |
|
|
$ |
82,700 |
|
|
|
0.3 |
% |
|
$ |
154,938 |
|
|
$ |
163,731 |
|
|
|
(5.4 |
)% |
Cost of revenue |
|
|
59,663 |
|
|
|
55,622 |
|
|
|
7.3 |
% |
|
|
106,262 |
|
|
|
108,558 |
|
|
|
(2.1 |
)% |
Gross profit |
|
|
23,285 |
|
|
|
27,078 |
|
|
|
(14.0 |
)% |
|
|
48,676 |
|
|
|
55,173 |
|
|
|
(11.8 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Research and product development |
|
|
12,348 |
|
|
|
11,962 |
|
|
|
3.2 |
% |
|
|
24,192 |
|
|
|
23,081 |
|
|
|
4.8 |
% |
Selling, marketing, general and administrative |
|
|
20,513 |
|
|
|
18,256 |
|
|
|
12.4 |
% |
|
|
38,255 |
|
|
|
50,080 |
|
|
|
(23.6 |
)% |
Restructuring and other charges |
|
|
356 |
|
|
|
(908 |
) |
|
|
(139.2 |
)% |
|
|
792 |
|
|
|
5,344 |
|
|
|
(85.2 |
)% |
Impairment of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,735 |
|
|
|
(100.0 |
)% |
Amortization of intangible assets |
|
|
464 |
|
|
|
314 |
|
|
|
47.8 |
% |
|
|
758 |
|
|
|
576 |
|
|
|
31.6 |
% |
Total operating expenses |
|
|
33,681 |
|
|
|
29,624 |
|
|
|
13.7 |
% |
|
|
63,997 |
|
|
|
80,816 |
|
|
|
(20.8 |
)% |
Operating loss |
|
|
(10,396 |
) |
|
|
(2,546 |
) |
|
|
308.3 |
% |
|
|
(15,321 |
) |
|
|
(25,643 |
) |
|
|
(40.3 |
)% |
Interest income |
|
|
36 |
|
|
|
19 |
|
|
|
89.5 |
% |
|
|
73 |
|
|
|
61 |
|
|
|
19.7 |
% |
Interest expense |
|
|
(200 |
) |
|
|
(28 |
) |
|
|
614.3 |
% |
|
|
(327 |
) |
|
|
(277 |
) |
|
|
18.1 |
% |
Other income (expense), net |
|
|
(63 |
) |
|
|
(261 |
) |
|
|
(75.9 |
)% |
|
|
(863 |
) |
|
|
711 |
|
|
|
(221.4 |
)% |
Loss before income taxes |
|
|
(10,623 |
) |
|
|
(2,816 |
) |
|
|
277.2 |
% |
|
|
(16,438 |
) |
|
|
(25,148 |
) |
|
|
(34.6 |
)% |
Income tax provision |
|
|
1,941 |
|
|
|
463 |
|
|
|
319.2 |
% |
|
|
3,712 |
|
|
|
1,356 |
|
|
|
173.7 |
% |
Net loss |
|
$ |
(12,564 |
) |
|
$ |
(3,279 |
) |
|
|
283.2 |
% |
|
$ |
(20,150 |
) |
|
$ |
(26,504 |
) |
|
|
(24.0 |
)% |
The table below presents the unaudited condensed consolidated statement of (loss) income as a percentage of total net revenue for the periods indicated.
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net revenue |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
72 |
% |
|
|
67 |
% |
|
|
69 |
% |
|
|
66 |
% |
Gross profit |
|
|
28 |
% |
|
|
33 |
% |
|
|
31 |
% |
|
|
34 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and product development |
|
|
15 |
% |
|
|
14 |
% |
|
|
16 |
% |
|
|
14 |
% |
Selling, marketing, general and administrative |
|
|
25 |
% |
|
|
22 |
% |
|
|
25 |
% |
|
|
31 |
% |
Restructuring and other charges |
|
|
— |
|
|
|
(1 |
)% |
|
|
2 |
% |
|
|
3 |
% |
Impairment of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
% |
Amortization of intangible assets |
|
|
1 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total operating expenses |
|
|
41 |
% |
|
|
35 |
% |
|
|
43 |
% |
|
|
49 |
% |
Operating loss |
|
|
(13 |
)% |
|
|
(2 |
)% |
|
|
(12 |
)% |
|
|
(15 |
)% |
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other income (expense), net |
|
|
— |
|
|
|
— |
|
|
|
(1 |
)% |
|
|
— |
|
Loss before income taxes |
|
|
(13 |
)% |
|
|
(2 |
)% |
|
|
(13 |
)% |
|
|
(15 |
)% |
Income tax provision |
|
|
2 |
% |
|
|
1 |
% |
|
|
2 |
% |
|
|
1 |
% |
Net loss |
|
|
(15 |
)% |
|
|
(3 |
)% |
|
|
(15 |
)% |
|
|
(16 |
)% |
28
Net Revenue
The following table presents our revenues by source (in millions):
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
% change |
|
|
2022 |
|
|
2021 |
|
|
% change |
|
||||||
Products |
|
$ |
75.2 |
|
|
$ |
77.9 |
|
|
|
(3.5 |
)% |
|
$ |
142.6 |
|
|
$ |
154.2 |
|
|
|
(7.5 |
)% |
Services and software |
|
|
7.8 |
|
|
|
4.8 |
|
|
|
62.5 |
% |
|
|
12.3 |
|
|
|
9.5 |
|
|
|
29.5 |
% |
Total |
|
$ |
83.0 |
|
|
$ |
82.7 |
|
|
|
0.4 |
% |
|
$ |
154.9 |
|
|
$ |
163.7 |
|
|
|
(5.4 |
)% |
For the three months ended June 30, 2022, product revenue decreased by 3.5% or $2.7 million to $75.2 million from $77.9 million in the same period last year. The decrease in product revenue during the period was primarily attributable to lower spending levels from our major customers in Asia. Service and software revenue represents revenue from maintenance and other services associated with product shipments as well as software revenue from the date of the ASSIA Acquisition. The increase in service and software revenue was primarily due to the revenue related to the ASSIA Acquisition.
For the six months ended June 30, 2022, product revenue decreased by 7.5% or $11.6 million to $142.6 million from $154.2 million in the same period last year. The decrease in product revenue during the period was primarily attributable to lower spending levels from our major customers in Asia. The increase in service and software revenue was primarily due to the revenue related to the ASSIA Acquisition.
The following table presents our revenues by geographical concentration (in millions):
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
% change |
|
|
2022 |
|
|
2021 |
|
|
% change |
|
||||||
Americas |
|
$ |
28.4 |
|
|
$ |
26.5 |
|
|
|
7.2 |
% |
|
$ |
51.3 |
|
|
$ |
46.7 |
|
|
|
9.9 |
% |
Europe, Middle East, Africa |
|
|
13.4 |
|
|
|
16.7 |
|
|
|
(19.8 |
)% |
|
|
30 |
|
|
|
34.6 |
|
|
|
(14.2 |
)% |
Asia |
|
|
41.2 |
|
|
|
39.5 |
|
|
|
4.3 |
% |
|
|
74 |
|
|
|
82.4 |
|
|
|
(10.3 |
)% |
Total |
|
$ |
83.0 |
|
|
$ |
82.7 |
|
|
|
0.4 |
% |
|
$ |
154.9 |
|
|
$ |
163.7 |
|
|
|
(5.4 |
)% |
Our geographic diversification reflects the combination of market demand, a strategic focus on capturing market share through new customer wins and new product introductions.
From a geographical perspective, the change in net revenue for the three and six months ended June 30, 2022 was attributable to decreased product revenue in Asia and EMEA partially offset by increased software revenue in the US related to the ASSIA Acquisition. Revenue fluctuation during the three and six months period is primarily attributable to the changes in the spending levels from our major customers in the respective regions.
For the three months ended June 30, 2022, two customers accounted for 10% and 13% of net revenue. For the six months ended June 30, 2022, two customers accounted for 12% and 13% of net revenue. For the three months ended June 30, 2021, two customers accounted for 22% and 14% of net revenue, respectively. For the six months ended June 30, 2021, two customers accounted for 20% and 12% of net revenue, respectively.
We anticipate that our results of operations in any given period may depend to a significant extent on sales to a small number of large customers. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.
Cost of Revenue and Gross Profit
Total cost of revenue increased by 7.3% to $59.7 million for the three months ended June 30, 2022, compared to $55.6 million for the three months ended June 30, 2021. Total cost of revenue was 71.9% of net revenue for the three months ended June 30, 2022, compared to 67.3% of net revenue for the three months ended June 30, 2021, which resulted in a decrease in gross profit percentage to 28.1% for the three months ended June 30, 2022 from 32.7% for the three months ended June 30, 2021. The increase in total cost of revenue was primarily due to an increase in revenue and fees paid to expedite certain product components, while the decrease in gross profit percentage was primarily due to the change in number and mix of products sold, including the geographic mix of those sales, negative exchange rate impacts on revenues and such expedite fees.
29
Total cost of revenue decreased by 2.1% to $106.3 million for the six months ended June 30, 2022, compared to $108.6 million for the six months ended June 30, 2021. Total cost of revenue was 68.6% of net revenue for the six months ended June 30, 2022, compared to 66.3% of net revenue for the six months ended June 30, 2021, which resulted in an decrease in gross profit percentage to 31.4% for the six months ended June 30, 2022 from 33.7% for the six months ended June 30, 2021 The decrease in total cost of revenue was primarily due to a decrease in revenue and fees paid to expedite certain product components, while the decrease in gross profit percentage was primarily due to the change in number and mix of products sold, including the geographic mix of those sales, negative exchange rate impacts on revenues and such expedite fees.
Operating Expenses
Research and Product Development Expenses: Research and product development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations.
Research and product development expenses increased by 3.2% to $12.3 million for the three months ended June 30, 2022 compared to $12.0 million for the three months ended June 30, 2021. Research and product development expenses increased by 4.8% to $24.2 million for the six months ended June 30, 2022 compared to $23.1 million for the six months ended June 30, 2021 The increase in research and product development expenses was primarily due to strategic hiring decisions in research, development, and product line management with the intent to accelerate growth and capture market share and the ASSIA Acquisition.
We intend to continue to invest in research and product development to attain our strategic product development objectives, while seeking to manage the associated costs through expense controls.
Selling, Marketing, General and Administrative Expenses: Selling, marketing, general and administrative expenses include personnel costs for sales, marketing, administration, finance, information technology, human resources and general management as well as legal and accounting expenses, rent, utilities, trade show expenses and related travel costs.
Selling, marketing, general and administrative expenses increased by 12.4% to $20.5 million for the three months ended June 30, 2022 compared to $18.3 million for the three months ended June 30, 2021. The increase was primarily due to strategic hiring decisions across sales and administration with the intent to accelerate growth and capture market share.
Selling, marketing, general and administrative expenses decreased by 23.6% to $38.3 million for the six months ended June 30, 2022 compared to $50.1 million for the six months ended June 30, 2021. The decrease was primarily due to $14.2 million of provision for credit losses recorded in the first quarter of 2021 for one customer in India. Refer to Note 1 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information on the provision for credit losses. The above impact was partially offset by strategic hiring decisions across sales and administration with the intent to accelerate growth and capture market share.
Restructuring and Other Charges: Restructuring and other charges for the six months ended June 30, 2022 and 2021 relate primarily to the strategic decision to transition DZS GmbH and Optelian to sales and research and development centers. For the three and six months ended June 30, 2022, the Company recorded $0.4 million and $0.8 million of restructuring related costs, respectively, consisting primarily of logistics costs and professional services related to legal and accounting support. For the six months ended June 30, 2021, the Company recorded $5.3 million of restructuring related costs, consisting primarily of severance and other termination related benefits of $2.4 million, an impairment of long-lived assets charge of $2.7 million primarily related to right-of-use assets from operating leases, and $0.2 million of other charges. For the three months ended June 30, 2021, the Company recorded a $0.9 million reduction in restructuring related costs due to the negotiated decrease of the employee termination benefits. See Note 9 Restructuring and Other Charges of the Notes to Unaudited Condensed Consolidated Financial Statements, for further information.
Impairment of Long-lived Assets: Impairment of long-lived assets for the six months ended June 30, 2021 was $1.7 million for the right-of use assets from operating leases abandoned in connection with the relocation of the headquarters to Plano, Texas. No impairment was recorded during the six months ended June 30, 2022.
Interest Income (Expense), net: Interest income (expense) relates mainly to earnings from our cash and cash equivalents, interest expense associated with the credit facilities and amortization of debt issuance costs associated with obtaining such credit facilities. For the three and six months ended June 30, 2022, the Company recorded $0.2 million and $0.3 million of interest expense, net, respectively. For the three and six months ended June 30, 2021, the Company recorded $0.1 million and $0.2 million of interest expense, net, respectively.
Other Income (Expense), net: Other income (expense), net relates mainly to realized and unrealized foreign currency exchange gains and losses. For the three and six months ended June 30, 2022, the Company recorded $0.1 million and $0.9 million of other expense, net, respectively. For the three and six months ended June 30, 2021, the Company recorded $0.3 million of other expense, net and $0.7 million of other income, net, respectively. The change in other income (expense), net was primarily due to foreign currency exchange rates fluctuation during the above periods.
30
Income Tax Provision: Income tax provision for the three and six months ended June 30, 2022 was $1.9 million and $4.3 million on pre-tax loss of $10.6 million and pre-tax loss of $16.4 million, respectively. Income tax provision for the three and six months ended June 30, 2021 was approximately $0.5 million and $1.4 million respectively, on pre-tax loss of $2.8 and pre-tax loss of $25.1 million, respectively. As of June 30, 2022, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America, EMEA and Asia, as well as foreign and state income tax rate differentials.
NON-GAAP FINANCIAL MEASURES
In managing our business and assessing our financial performance, we supplement the information provided by our U.S. GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-U.S. GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) stock-based compensation, and (v) the impact of material transactions or events that we believe are not indicative of our core operating performance, such as acquisition costs, impairment of goodwill, intangibles or long-lived assets, loss on debt extinguishment, restructuring and other charges, including termination related benefits, headquarters and facilities relocation, executive transition, and provision for credit losses primarily related to a large customer in India, any of which may or may not be recurring in nature. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) or any other performance measures calculated in accordance with U.S. GAAP or as a measure of liquidity. Management understands these limitations and compensates for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplemental measure.
31
Set forth below is a reconciliation of net loss to Adjusted EBITDA, which we consider to be the most directly comparable U.S. GAAP financial measure to Adjusted EBITDA (in thousands):
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net loss |
|
$ |
(12,564 |
) |
|
$ |
(3,279 |
) |
|
$ |
(20,150 |
) |
|
$ |
(26,504 |
) |
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
164 |
|
|
|
9 |
|
|
|
254 |
|
|
|
216 |
|
Income tax provision |
|
|
1,941 |
|
|
|
463 |
|
|
|
3,712 |
|
|
|
1,356 |
|
Depreciation and amortization |
|
|
1,361 |
|
|
|
1,178 |
|
|
|
2,442 |
|
|
|
2,443 |
|
Stock-based compensation |
|
|
2,868 |
|
|
|
1,994 |
|
|
|
5,539 |
|
|
|
3,346 |
|
Headquarters and facilities relocation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,920 |
|
Restructuring and other charges |
|
|
356 |
|
|
|
(908 |
) |
|
|
792 |
|
|
|
5,344 |
|
Acquisition costs |
|
|
571 |
|
|
|
37 |
|
|
|
622 |
|
|
|
680 |
|
Executive transition |
|
|
91 |
|
|
|
101 |
|
|
|
338 |
|
|
|
172 |
|
Provision for credit losses, net of recoveries* |
|
|
317 |
|
|
|
— |
|
|
|
(910 |
) |
|
|
14,206 |
|
Adjusted EBITDA |
|
$ |
(4,895 |
) |
|
$ |
(405 |
) |
|
$ |
(7,361 |
) |
|
$ |
3,179 |
|
* See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our unaudited condensed consolidated financial statements, refer to Note 1 Organization and Summary of Significant Accounting Policies in the Notes to our Audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by Note 1 Organization and Summary of Significant Accounting Policies of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q/A.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are financed through a combination of our existing cash, cash equivalents, available credit facilities, and issuance of equity or debt instruments, based on our operating requirements and market conditions.
The following table summarizes the information regarding our cash and cash equivalents and working capital (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Cash and cash equivalents |
|
$ |
17,125 |
|
|
$ |
46,666 |
|
Working capital (As Restated) |
|
$ |
95,988 |
|
|
$ |
124,498 |
|
The Company had a net loss of $12.6 million and $20.2 million for the three and six months ended June 30, 2022, respectively. The Company had a net loss of $3.3 million and $26.5 million for the three months and six months ended June 30, 2021, respectively.
As of June 30, 2022, we had working capital of $96.0 million. As of June 30, 2022, we had $17.1 million in unrestricted cash and cash equivalents, which included $10.6 million in cash balances held by our international subsidiaries.
As of June 30, 2022, we had $30.0 million available under the Revolving Credit Facility. There was no amount outstanding under the Revolving Credit Facility as of June 30, 2022.
We continue to focus on cost management, operating efficiency and efficient discretionary spending. In addition, if necessary, we may issue debt or equity securities, rationalize the number of products we sell, adjust our manufacturing footprint, and reduce our operations in low margin regions, including reductions in headcount. Based on our current plans and current business conditions, we believe that these measures along with our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months from the date of this Quarterly Report on Form 10-Q/A.
32
The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):
|
|
Six months ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Consolidated Statements of Cash Flows Data |
|
|
|
|
|
|
||
Net cash used in operating activities |
|
$ |
(30,935 |
) |
|
$ |
(8,277 |
) |
Net cash used in investing activities |
|
|
(23,996 |
) |
|
|
(6,600 |
) |
Net cash provided by (used in) financing activities |
|
|
25,323 |
|
|
|
21,483 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
(889 |
) |
|
|
(67 |
) |
Net increase in cash, cash equivalents and restricted cash |
|
$ |
(30,497 |
) |
|
$ |
6,539 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
$ |
53,639 |
|
|
$ |
54,587 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
23,142 |
|
|
$ |
61,126 |
|
Operating Activities
Net cash used in operating activities increased by $22.7 million to $30.9 million for the six months ended June 30, 2022 from net cash used in operating activities of $8.3 million for the six months ended June 30, 2021. The increase in cash used in operating activities was primarily due to an increase in accounts receivable as shipments were heavily weighted toward the last month of the second quarter 2022 due to component availability, and an increase in inventory purchases in anticipation of increased shipments later in the year and as a mitigation against long lead times.
Investing Activities
Net cash used in investing activities increased by $17.4 million to $24.0 million for the six months ended June 30, 2022 from $6.6 million for the six months ended June 30, 2021. This increase was primarily due to cash used in the ASSIA Acquisition in the second quarter of 2022.
Financing Activities
Net cash provided by financing activities totaled $25.3 million for the six months ended June 30, 2022 and consisted primarily of borrowing under the term loan to fund the ASSIA Acquisition and proceeds from exercise of stock awards, partially offset by payment of debt issuance cost. This is in comparison to cash provided by financing activities of $21.5 million for the six months ended June 30, 2021 which consisted primarily of proceeds from the equity offering and exercise of stock awards offset by repayments of our short-term borrowings and related party term loan.
Cash Management
Our primary source of liquidity comes from our cash, cash equivalents and restricted cash, which totaled $23.1 million at June 30, 2022. Our cash, cash equivalents and restricted cash as of June 30, 2022 included $11.5 million held by our international subsidiaries.
Debt Facilities
On February 9, 2022, the Company entered into a Credit Agreement with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans in an aggregate principal amount of up to $30.0 million, up to $15.0 million of which is available for letters of credit, and was scheduled to mature on February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments, plus $10.0 million.
On May 27, 2022, the Company entered into a First Amendment to Credit Agreement, which amends the Credit Agreement dated February 9, 2022. The Amendment, among other things, provides for the Term Loan in an aggregate principal amount of $25.0 million with a maturity date of May 27, 2027 and extends the maturity date of the $30.0 million Revolving Credit Facility to May 27, 2025. On May 27, 2022, the Company borrowed the full amount of the Term Loan to finance the ASSIA Acquisition.
As of June 30, 2022, the Company's long-term debt obligation was $23.4 million, net of the current portion of $1.3 million, and unamortized issuance costs of $0.3 million. There was no amount outstanding under the Revolving Credit Facility. The Company was in compliance with all debt covenants as of June 30, 2022.
Future Cash Requirements and Funding Sources
Our fixed commitments for cash expenditures consist primarily of payments under operating leases, inventory purchase commitments, and payments of principal and interest for debt obligations.
33
From time to time, we may provide or commit to extend credit or credit support to our customers. This financing may include extending the terms for product payments to customers. Any extension of financing to our customers will limit the capital that we have available for other uses.
Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of June 30, 2022, one customer represented 11% of net accounts receivable. Net accounts receivable from customers in countries other than the United States represented 75%. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt obligations.
Operating Leases
Future minimum operating lease obligations include primarily payments for our office locations and manufacturing, research and development locations, which expire at various dates through 2028. See Note 12 Leases of the Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding our operating leases.
Purchase Commitments
We may have short term purchase commitments related to the purchase orders for products and services, within the normal course of business. These arrangements typically have cancellation provisions that allow us to cancel with little to no penalty.
Debt obligations
Future debt obligations include scheduled principal repayments, and associated interest payments which may vary based on changes in market interest rates. See Note 7 Debt to Unaudited Condensed Consolidated Financial Statements for further information regarding our debt obligations.
U.S. Income Tax Changes
Effective January 1, 2022, the Tax Cuts and Jobs Act (TCJA) eliminates the option to immediately deduct research and development expenditures and requires taxpayers to capitalize and amortize these costs pursuant to IRC Section 174. Although Congress is considering legislation that would defer or repeal this provision, we have no assurance this will be enacted. If this provision of the TCJA is not repealed or otherwise modified, it is expected to negatively impact our operating cash flows in 2022 and future years.
34
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange risks. We do not hold or issue financial instruments for trading purposes.
Interest Rate Risk
We had unrestricted cash and cash equivalents of $17.1 million and $46.7 million at June 30, 2022 and December 31, 2021, respectively. We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with original maturities of three months or less.
Our exposure to interest rate risk includes the amount of interest we must pay on our borrowings under our JPMorgan Credit Agreement. At the Company’s option, amounts borrowed under the Credit Agreement, as amended, accrue interest at a per annum rate equal to either (i) the adjusted term SOFR rate plus a margin ranging from 3.0% to 3.5% per year or (ii) the prime rate plus a margin ranging from 2.0% to 2.5% per year, in each case depending on the Company’s leverage ratio.
As of June 30, 2022, the Company's contractual debt obligation under the Term Loan was $25.0 million. If the applicable variable interest rates changed by 100 basis points, our interest expense for the first six months of 2022 would have decreased or increased by less than $0.1 million.
Foreign Currency Exchange Risk
We have foreign currency risks related to certain of our foreign subsidiaries, primarily in Korea, Japan, Germany, and the UK. International net revenues and operating expense are typically denominated in the local currency of each country and result from transactions by our operations in these countries. The local currencies of these foreign subsidiaries are the South Korean Won ("KRW"), Japanese Yen ("JPY"), Euro ("EUR), and Pound Sterling ("GBP"), respectively. Fluctuations in foreign currencies create volatility in our reported results of operations. If the U.S. Dollar ("USD") had appreciated or depreciated by 10% relative to KRW, JPY, EUR and GBP our operating income for the first six months of 2022 would have decreased or increased by approximately $0.6 million, respectively.
Foreign exchange rate fluctuations may also adversely impact our financial position as the assets and liabilities of our foreign operations are translated into USD in preparing our unaudited condensed consolidated balance sheets. The effect of foreign exchange rate fluctuations on our consolidated financial position for the six months ended June 30, 2022 was a net translation loss of$4.8 million This loss is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive loss. If USD had appreciated or depreciated by 10% relative to KRW, JPY, EUR, and GBP, our net assets as of June 30, 2022 would have decreased or increased by approximately $1.9 million, respectively.
We have certain assets and liabilities, primarily inter-company loans, that are denominated in currencies other than the relevant entity’s functional currency. Our intercompany loans are primarily denominated in USD and EUR. Changes in the functional currency value of these balances create fluctuations in our reported consolidated financial position, cash flows and results of operations. Transaction gains and losses on these foreign currency denominated assets and liabilities are recognized each period within “Other income (expense), net” in our unaudited condensed consolidated statement of comprehensive income (loss). During the six months ended June 30, 2022, we recognized approximately $1.6 million of expense related to the intercompany loans denominated in foreign currencies. If USD had appreciated or depreciated by 10% relative to EUR, our net income for the first six months of 2022 would have decreased or increased by approximately $1.9 million, respectively.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information required to be disclosed in our reports filed or submitted pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosures. Our disclosure controls and procedures include those components of our internal control over financial reporting intended to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financials in accordance with U.S. GAAP. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
35
As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q/A. The evaluation was done under the supervision and with the participation of management, including our principal executive officer and principal financial officer. In the course of the evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2022, due to the existence of unremediated material weaknesses in internal control over financial reporting described below.
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.
Notwithstanding the existence of the material weaknesses described below, management believes that the condensed consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q/A fairly present, in all material respects, our financial position, results of operations and cash flows as of and for the periods presented, in conformity with generally accepted accounting principles in the United States of America ("GAAP").
Based on the assessment, management determined that the Company did not maintain effective internal control over financial reporting as of June 30, 2022, as a result of material weaknesses in the following areas:
Control Environment, Risk Assessment, Monitoring Activities, Information and Communication of Policies and Procedures
We did not maintain appropriately designed entity-level controls impacting the control environment and effective monitoring controls to prevent or detect material misstatements to the consolidated financial statements. These deficiencies were attributed to (i) inadequate oversight and accountability over the performance of control activities primarily in the Asia geographic region, (ii) ineffective identification and assessment of risks to properly design, implement, and maintain relevant controls for revenue recognition, (iii) inadequate education and training in certain areas important to financial reporting, and (iv) ineffective controls over ensuring consistent commitment to integrity and ethical values.
Control Activities Related to Certain Business Processes
These material weaknesses contributed to the following additional material weaknesses related to the control activities within certain business processes:
Remediation Plan and Status for Reported Material Weaknesses
We have been working and are currently working to remediate the material weaknesses described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses. The Company is committed to a strong internal control environment as well as integrity and ethical values to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls to ensure strict compliance with GAAP and 2013 COSO framework.
36
As part of our commitment to strengthening our internal control over financial reporting, we have initiated or completed various personnel actions and remedial actions under the oversight of the Audit Committee, including:
To address certain control activities related to material weakness in Revenue Recognition:
In addition to the remedial actions planned and undertaken under the oversight of the Audit Committee, we are in the process of, and continue to focus on, strengthening our internal controls over financial reporting to remediate the material weaknesses. Management’s additional initiated and completed remediation efforts for each identified material weakness include the following:
On April 5, 2024, the Company consummated the sale of its Asia operations to Korea-based DASAN Networks Inc. (DNI) and therefore, no longer needs to maintain internal controls over financial reporting for operations in the Asia region.
Subsequent to the discovery of the revenue recognition material weakness, we initiated or completed the following remedial actions starting in the third quarter of 2023:
37
The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.
We can give no assurance that the measures we take will remediate the material weaknesses that we identified or that any additional material weaknesses will not arise in the future. We will continue to monitor the effectiveness of these and other processes, procedures and controls and will make any further changes management determines appropriate.
Changes in Internal Control over Financial Reporting
Except for the material weaknesses described above, no other changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Plume
On October 10, 2022, Plume Design, Inc. (“Plume”) filed suit against DZS in the Superior Court of the State of Delaware, alleging that DZS breached a reseller contract with Plume and seeking $24.75 million in damages. The parties have completed briefing on dispositive motions, and a trial is currently set for October 7, 2024. DZS intends to vigorously defend this lawsuit.
Class Action
In June and August of 2023, DZS shareholders filed three putative securities class actions related to DZS’s June 1, 2023 Form 8-K announcing the Company’s intention to restate its financial statements for the first quarter of 2023. Each suit was filed in the Eastern District of Texas. All three cases allege violations of Sections 10(b) and 20(a) of the Exchange Act against DZS, its Chief Executive Officer and its Chief Financial Officer. The cases are: (1) Shim v. DZS et al., filed June 14, 2023; (2) Link v. DZS et al., filed June 27, 2023; and (3) Cody v. DZS et al., filed August 9, 2023.
Three potential lead plaintiffs filed applications for appointment on August 14, 2023. On September 12, 2023, the cases were consolidated under the lead case Shim v. DZS et al. The plaintiffs are seeking unspecified damages, interest, fees, costs and interest. As of July 31, 2024, the court has not yet ruled on the appointment of a lead plaintiff and the Defendants have not yet responded to any complaint. DZS intends to vigorously defend these lawsuits.
In light of the events giving rise to the restatement, DZS began cooperating, and intends to continue to cooperate, with the U.S. Securities and Exchange Commission (the “SEC”), which has informed DZS that it is investigating potential violations of the federal securities laws related to DZS.
On June 3, 2024, counsel for a shareholder of the Company sent the Company a demand for certain books and records related to events related to the Company’s June 1, 2023 Form 8-K. The demand was made pursuant to Section 220 of the Delaware General Corporation Law. While the Company does not concede the demand is proper, it has produced certain records to the shareholder.
In addition to the matters discussed above and in Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements, from time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal contingencies that it has determined to be probable to the extent that the amount of the loss can be reasonably estimated. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations and cash flows of the reporting period in which the ruling occurs, or future periods.
Item 1A. Risk Factors
Risks Related to the Restatement of our Consolidated Financial Statements
The restatement of our previously issued financial statements has been time-consuming and expensive and could expose us to additional risks that could materially adversely affect our financial position, results of operations and cash flows.
As discussed in the Explanatory Note to this Quarterly Report and in Note 1(e), “Restatement” to the Notes to our Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report, we have restated our previously issued financial statements for the quarterly and year-to-date period ended March 31, 2022 and are restating our previously issued financial statements for the quarterly and year-to-date periods ended June 30, September 30, and December 31, 2022, and March 31, 2023. These restatements, and the remediation efforts we have undertaken and are continuing to undertake, have been time-consuming and expensive and could expose us to a number of additional risks that could materially adversely affect our financial position, results of operations and cash flows.
39
In particular, we have incurred significant expenses, including audit, legal, consulting and other professional fees and lender fees, in connection with the restatement of our previously issued financial statements and the ongoing remediation of material weaknesses in our internal control over financial reporting. We have taken a number of steps, including adding significant internal resources and implementing a number of additional procedures, in order to strengthen our accounting and compliance functions and attempt to reduce the risk of additional misstatements in our financial statements. To the extent these steps are not successful, we could be forced to incur additional time and expense. Our management’s attention has also been diverted from the operation of our business in connection with the restatements and ongoing remediation of material weaknesses in our internal controls.
We are also subject to a securities class action arising out of certain of the misstatements in our financial statements. For additional discussion see Part II, Item 1. Legal Proceedings and Note 13 Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements.
The restatement of our previously issued financial results has resulted in securities class action, as well as government investigations that could result in government enforcement actions that could have a material adverse impact on our results of operations, financial condition, liquidity and cash flows.
We are subject to securities class actions relating to our previous public disclosures and there is a risk that additional litigation is initiated or that the scope of the previously-filed class actions is expanded. In addition, we are subject to government investigations. For additional discussion see Item 3. Legal Proceedings and Note 13 Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements. In June and August of 2023, DZS shareholders filed three putative securities class actions related to DZS’s June 1, 2023 Form 8-K announcing the Company’s intention to restate its financial statements for the first quarter of 2023. Each suit was filed in the Eastern District of Texas. All three cases allege violations of Sections 10(b) and 20(a) of the Exchange Act against DZS, its Chief Executive Officer and its Chief Financial Officer. The cases are: (1) Shim v. DZS et al., filed June 14, 2023; (2) Link v. DZS et al., filed June 27, 2023; and (3) Cody v. DZS et al., filed August 9, 2023. Three potential lead plaintiffs filed applications for appointment on August 14, 2023. On September 12, 2023, the cases were consolidated under the lead case Shim v. DZS et al. The plaintiffs are seeking unspecified damages, interest, fees, costs and interest. Furthermore, the Company voluntarily contacted the Fort Worth office of the SEC Division of Enforcement regarding the restatement and independent investigation, is providing information and documents to the SEC and will continue to cooperate with the SEC’s investigation into these matters. We could become subject to additional private litigation or investigations, or one or more government enforcement actions, arising out of the misstatements in our previously issued financial statements. Our management may be required to devote significant time and attention to these matters, and these and any additional matters that arise could have a material adverse impact on our results of operations, financial condition, liquidity and cash flows. While we cannot estimate our potential exposure to these matters at this time, we have already expended significant amounts investigating the claims underlying and defending this litigation and expect to continue to need to expend significant amounts to defend this litigation.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q/A. In Part I, Item 4, “Controls and Procedures” of this Quarterly Report, management identified material weaknesses in our internal control over financial reporting.
As a result of the material weaknesses, our management concluded that our internal control over financial reporting was not effective as of June 30, 2022. We are actively engaged in developing a remediation plan designed to address the material weaknesses, but our remediation efforts are not complete and are ongoing. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, it may materially adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner. If we are unable to report our results in a timely and accurate manner, we may not be able to comply with the applicable covenants in our financing arrangements, and may be required to seek additional waivers or repay amounts under these financing arrangements earlier than anticipated, which could adversely impact our liquidity and financial condition. Although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls over financial reporting, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. The next time we evaluate our internal control over financial reporting, if we identify one or more new material weaknesses or are unable to timely remediate our existing
40
material weaknesses, we may be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion or expresses an adverse opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock and possibly impact our ability to obtain future financing on acceptable terms. We may also lose assets if we do not maintain adequate internal controls.
If our internal controls are not effective, there may be errors in our financial information that could require a restatement or delay our SEC filings. Such material weaknesses could materially and adversely affect our operations, financial condition, reputation and stock price.
We have, in the past, experienced issues with our internal control over financial reporting related to revenue recognition. It is possible that we may discover significant deficiencies or material weaknesses in our internal control over financial reporting in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could cause us to fail to meet our periodic reporting obligations, or result in material misstatements in our financial information. If we are unable to effectively remediate and adequately manage our internal control over financial reporting in the future, we may be unable to produce accurate or timely financial information. As a result, we may be unable to meet our ongoing reporting obligations or comply with applicable legal requirements, which could lead to the imposition of sanctions or further investigation by regulatory authorities. Any such action or other negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory requirements could lead investors and others to lose confidence in our financial data and could adversely affect our business and our stock price. Significant deficiencies or material weaknesses in our internal control over financial reporting could also reduce our ability to obtain financing or could increase the cost of available financing. Internal control over financial reporting may not prevent or detect all errors or acts of fraud.
Internal control over financial reporting may not achieve, and in some cases have not achieved, their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management override of such controls. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis. The failure of our controls to be effective could have a material adverse effect on our business, financial condition, results of operations, and market for our common stock, and could subject us to regulatory scrutiny and penalties.
Matters relating to or arising from our Audit Committee investigations, including regulatory investigations and proceedings, litigation matters and potential additional expenses, may adversely affect our business and results of operations.
We have incurred, and may continue to incur, significant expenses related to legal, accounting, and other professional services in connection with the Audit Committee investigations and related legal matters, as previously disclosed in our public filings, including the review of our accounting, the audit of our financial statements and the ongoing remediation of deficiencies in our internal control over financial reporting. As described in Part I, Item 4, “Controls and Procedures” of this report, we have taken a number of steps in order to strengthen our accounting function and attempt to reduce the risk of future recurrence and errors in accounting determinations. The validation of the efficacy of these remedial steps will result in us incurring near term expenses, and to the extent these steps are not successful, we could be forced to incur significant additional time and expense. The incurrence of significant additional expense, or the requirement that management devote significant time that could reduce the time available to execute on our business strategies, could have a material adverse effect on our business, results of operations and financial condition. These expenses, the delay in timely filing our periodic reports, and the diversion of the attention of the management team that has occurred, and is expected to continue, has adversely affected, and could continue to adversely affect, our business and financial condition. As a result, we are exposed to greater risks associated with litigation, regulatory proceedings and government enforcement actions. Any future investigations or additional lawsuits may adversely affect our business, financial condition, results of operations and cash flows.
41
We have not been in compliance with Nasdaq’s requirements for continued listing and as a result our common stock has been suspended from trading on Nasdaq, and in the future it may be delisted from trading on the Nasdaq, which has had and will have a material effect on us and our stockholders.
We are currently delinquent in the filing of certain of our periodic reports with the SEC. As a result, we are not in compliance with listing requirements of Nasdaq Listing Rule 5250(c)(1) which requires timely filing of periodic financial reports with the SEC. As a result of our failure to file our periodic reports with the SEC in a timely manner or within any extension periods prescribed by Nasdaq, on August 8, 2024 trading of our common stock on Nasdaq was suspended, and we are subject to delisting from trading on Nasdaq. There can be no assurance whether or when the suspension of trading on Nasdaq will be lifted. If our common stock is delisted, there can be no assurance whether or when it would again be listed for trading on Nasdaq or any other exchange. Since the announcement that trading of our common stock on Nasdaq would be suspended, the market price of our common stock has declined and become more volatile, and our stockholders may find that their ability to trade in our common stock will be affected. If our common stock is delisted, the market price of our shares will likely decline further and become more volatile, and our stockholders may find that their ability to trade in our stock will be adversely affected. Furthermore, institutions whose charters do not allow them to hold securities in unlisted companies might sell our shares, which could have a further adverse effect on the price of our stock. In addition, our ability to hire and retain key personnel and employees may be adversely affected by volatility or reductions in the price of our common stock, since these employees are generally granted equity-based awards. We have previously experienced and may continue to experience employee attrition and difficulty attracting talent as a result of these issues. We may not be successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs, nor may we be successful in keeping the qualified personnel we currently have.
The delayed filing of some of our periodic SEC reports has made us currently ineligible to use a registration statement on Form S-3 to register the offer and sale of securities, which could adversely affect our ability to raise future capital or complete acquisitions.
As a result of the delayed filing of some of our periodic reports with the SEC, we will not be eligible to register the offer and sale of our securities using a registration statement on Form S-3 until one year from the date we regained and maintain status as a current filer. Should we wish to register the offer and sale of our securities to the public prior to the time we are eligible to use Form S-3, both our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.
Furthermore, the Company has several employee and director equity plans that are registered under the Securities Act of 1933, as amended, pursuant to Form S-8. Under SEC regulations, the Company’s failure to timely file its periodic and annual reports with the SEC resulted in the suspension of the availability of these insider equity plans. For that reason, employees and directors have not been permitted to liquidate any preexisting holdings of the Company’s common stock, nor has the Company been able to issue equity retention or incentive awards.
Litigation and government investigations could result in significant legal expenses and settlement payments, fines or damage awards.
From time to time, we are subject to litigation regarding intellectual property rights or other claims and have indemnification clauses in most of our customer contracts that may require us to indemnify customers. We have also been named as a defendant in securities class action lawsuit, litigation with Plume and are subject to an investigation by the government. For more information on currently pending litigation, please see Part II, Item 1. Legal Proceedings. We are generally obligated, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these lawsuits. Defending against litigation or government investigation may require significant attention and resources of management. Regardless of the outcome, such litigation or investigation could result in significant legal expenses. At this time, it is not possible to predict the outcome of the ongoing lawsuits, including whether or not any proceedings will continue, and when or how these matters will be resolved or whether we will ultimately receive, and in what sum, amounts previously awarded as a result of these proceedings. Regardless of whether we are ultimately successful in these lawsuits, we will likely continue to incur substantial legal fees in connection with these matters.
If the defenses we claim in our material litigation matters are ultimately unsuccessful, or if we are unable to achieve a favorable settlement with an adverse party or a government agency, we could be liable for large settlement payments, damage awards or fines that could have a material adverse effect on our business and results of operations.
42
Cyberattacks or other security incidents that disrupt our operations or compromise data, may expose us to liability, harm our reputation or otherwise adversely affect our business.
We rely on hardware, software, technology infrastructure, data centers, digital networks and online sites and services for both internal and customer-facing operations that are critical to our business, or collectively, IT Systems. In addition, as part of our business operations, we collect, store, process, use and/or disclose information, including sensitive data relating to our business and personal information about individuals such as our employees and our customers’ subscribers, or collectively, Confidential Information. We process Confidential Information to operate our business, including in connection with the provision of our cloud services and by relying on our and our providers’ IT Systems and data centers, including third-party data centers. We also engage third-party providers to support various internal functions, such as human resources, finance, information technology and electronic communications, as well as the development and delivery of our customer-facing products and cloud services, which includes collecting, handling, processing and/or storage of data on our behalf. These internal and external functions involve an array of software and systems, including cloud-based, that enable us to conduct, monitor and/or protect our business, operations, systems and information technology assets. Our cloud-based solutions enable us to host our customers’ subscriber data in third-party data centers.
We face evolving cybersecurity risks that threaten the confidentiality, integrity and availability of our IT Systems and Confidential Information, including from diverse threat actors such as state-sponsored organizations, opportunistic hackers and hacktivists, as well as through diverse attack vectors such as social engineering/phishing, malware (including ransomware), malfeasance by insiders, human or technological error and, as a result of bugs, misconfigurations or exploited vulnerabilities in software or hardware. Threat actors could steal Confidential Information related to our business, products, employees, customers and our customers’ subscribers; hold data ransom; and/or disrupt our systems and services or those of our supply chain partners, vendors, customers or others. We expect cybersecurity attacks and security breaches to accelerate in the future, including sophisticated supply chain attacks. As we and our third-party providers continue to increase our reliance on virtual environments and communications systems and cloud-based solutions to support our work-from-anywhere culture and overall business needs, our exposures to third-party vulnerabilities and security risks also increase. Because threat actors are increasingly sophisticated and aggressive, our efforts may be inadequate to prevent, detect or recover from future attacks due, for example, to the increased use by attackers of tools and techniques (including artificial intelligence) that are specifically designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence. We may also experience security breaches that may remain undetected for an extended period.
We and certain of our third-party providers have been subject to cyberattacks and other security incidents, and we expect such attacks and incidents to continue in varying degrees. There can be no assurance that our cybersecurity risk management program and processes, including our policies, controls or procedures, will be fully implemented, complied with or effective in protecting our IT Systems and Confidential Information. Accordingly, while to date no cybersecurity incidents have had a material impact on our operations or financial results, we cannot guarantee that material incidents will not occur in the future. A cyberattack or incident that affects the confidentiality, integrity or availability of our IT Systems or Confidential Information could result in significant investigative, security and remediation costs, regulatory fines and penalties and/or litigation costs and other liability. Even if we and our third-party providers allocate, implement and manage reasonable security and data protection measures, we could still experience significant data loss, unauthorized data disclosure or a breach of our IT Systems, products or those of our third-party providers (for example, data centers) that materially impact our business. The continued growth of our cloud-based platform and managed services portfolio and increased reliance on third-party development partners and third-party software and cloud-based solutions increases the likely risks arising from security breaches or data loss. Any data loss or compromise of our systems that collect and process personal information (including personal information of our customers’ subscribers), or third-party data centers where that personal information is stored, could result in loss of confidence in the security of our offerings and loss of customers or customer goodwill. Further, security incidents could subject us to obligations under privacy and data security laws and regulations around the world (including to notify governmental authorities, regulatory bodies and/or affected individuals), lead to liability given the increasing development of such strict laws and regulations, increase the risk of litigation and governmental or regulatory investigation, require us to notify our customers or other counterparties in relation to such incidents, damage our reputation and adversely affect our business, financial condition, operating results and cash flows. Although we maintain insurance that may apply to cybersecurity risks and liabilities, there can be no guarantee that any or all costs or losses incurred will be partially or fully insured or that we will be able to procure applicable insurance in the future on reasonable terms or at all.
43
Restructuring activities could disrupt our business and affect our results of operations.
We have taken steps, including reductions in force, office closures, and internal reorganizations to reduce the cost of our operations, improve efficiencies, or realign our organization and staffing to better match our market opportunities and our technology development initiatives. We may take similar steps in the future as we seek to realize operating synergies, to achieve our target operating model and profitability objectives, or to reflect more closely changes in the strategic direction of our business or the evolution of our site strategy and workplace. These changes could be disruptive to our business, including our research and development efforts, and could result in significant expense, including accounting charges for inventory and technology-related write-offs, workforce reduction costs and charges relating to consolidation of excess facilities. Substantial expense or charges resulting from restructuring activities could adversely affect our results of operations and use of cash in those periods in which we undertake such actions.
Competition to attract highly skilled technical, engineering and other personnel with experience in our industry is intense. We may experience difficulty attracting qualified personnel to fill key positions. In addition, labor shortages and employee mobility may make it more difficult to hire and retain employees. There can be no assurance we will be successful in attracting and retaining the talent necessary to execute on our business plans.
A list of other factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in the 2021 Form 10-K. Besides the risk factors discussed above, there have been no material changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors” in the 2021 Form 10-K.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits required to be filed with this quarterly report on Form 10-Q/A are listed in the Exhibit Index attached hereto and are incorporated herein by reference.
44
EXHIBIT INDEX
Exhibit Number |
|
Description |
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
3.3 |
|
|
|
|
|
10.1 |
|
|
|
|
|
10.2 |
|
|
|
|
|
31.1* |
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
31.2* |
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
32.1* |
|
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
|
|
|
* |
|
Filed herewith. |
+ |
|
Indicates management contract or compensatory plan, contract or arrangement. |
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
DZS INC. |
||
|
|
|
|
Date: August 13, 2024 |
|
|
|
|
By: |
|
/s/ Charles Daniel Vogt |
|
Name: |
|
Charles Daniel Vogt |
|
Title: |
|
President and Chief Executive Officer |
|
|
|
|
|
By: |
|
/s/ Misty Kawecki |
|
Name: |
|
Misty Kawecki |
|
Title: |
|
Chief Financial Officer |
|
|
|
(Principal Financial and Officer) |
|
|
|
|
|
By: |
|
/s/ Brian Chesnut |
|
Name: |
|
Brian Chesnut |
|
Title: |
|
Chief Accounting Officer |
|
|
|
(Principal Accounting Officer) |
|
|
|
|
|
|
|
|
46