Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

(11) Income Taxes

The geographical breakdown of loss before income taxes is as follows (in thousands):

	Years ended December 31,
	2023			2022
Loss before income taxes - Domestic	$	(99,060	)	$	(34,906	)
Loss before income taxes - Foreign		(35,379	)		(5,400	)
Loss before income taxes	$	(134,439	)	$	(40,306	)

The following is a summary of the components of income tax provision applicable to loss before income taxes (in thousands):

	Years ended December 31,
	2023		2022
Current:
Federal	$	306	$	32
State		68		88
Foreign		405		844
Total current tax provision		779		964
Deferred:
Federal		—		—
State		—		—
Foreign		—		—
Total deferred tax provision		—		—
Total tax provision	$	779	$	964

A reconciliation of the expected tax provision (benefit) to the actual tax provision (benefit) is as follows (in thousands):

	Years ended December 31,
	2023			2022
Expected tax benefit at statutory rate	$	(27,134	)	$	(8,465	)
Current state taxes, net of federal benefit		53			69
Deferred state taxes, net of federal benefit		—			—
Foreign taxes		203			107
Foreign rate differential		(491	)		(449	)
Valuation allowance		18,393			3,744
Uncertain tax positions		—			—
Global intangible low taxed income		878			5,676
Share-based compensation		3,520			1,835
Permanent differences		192			111
Tax credits		(575	)		945
Net operating loss adjustment		—			(2,177	)
Impairment charges		4,390			—
Other		1,350			(432	)
Total tax provision	$	779		$	964

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022 are as follows (in thousands):

	As of December 31,
	2023			2022
Deferred tax assets:
Net operating loss carryforwards	$	33,063		$	22,873
Tax credit carryforwards		5,364			4,702
Fixed assets and intangible assets		3,574			2,815
Inventory and other reserves		13,010			8,295
Operating lease liability		2,407			3,889
Capitalized research and experimental expenditures		11,001			6,182
Other		8,030			8,568
Gross deferred tax assets		76,449			57,324
Less valuation allowance		(74,338	)		(53,401	)
Net deferred tax assets		2,111			3,923
Deferred tax liabilities:		—			—
Fixed assets and intangible assets		—			(771	)
Operating lease right-of-use-asset		(1,641	)		(2,907	)
Other assets		(470	)		(245	)
Gross deferred tax liabilities		(2,111	)		(3,923	)
Total net deferred tax assets	$	—		$	—

For the years ended December 31, 2023 and 2022, the net changes in the valuation allowance were an increase of $20.9 million and $7.4 million, respectively. The increase during the current year is primarily due to capitalized research and experimental expenditures and deferred revenue assumed in conjunction with the ASSIA Acquisition. The Company maintains a valuation allowance on its global net deferred tax assets since it is more likely than not that the net deferred tax assets will not be realized in the foreseeable future.

As of December 31, 2023, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $52.6 million and $44.5 million, respectively. Approximately $10.9 million of the federal losses expire beginning in 2037, whereas approximately $41.7 million of the losses have an indefinite life. Approximately $32.7 million of the state losses begin to expire in various years beginning in 2026, whereas approximately $11.8 million of the loss carryforwards have an indefinite life. As of December 31, 2023, the Company had German federal and state net operating losses of approximately $37.5 million and $36.8 million respectively, which do not expire and are carried forward indefinitely, and Canadian net operating losses of approximately $13.1 million which may be carried forward for 20 years and begin to expire in 2039.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, or IRC, annual use of the Company's net operating losses and tax credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company had an ownership change in September 2016, which has resulted in an annual limitation on the amount of net operating loss and tax credit carryforwards which arose prior to that date that the Company can utilize in a future year. In addition, some of the pre-acquisition NOLs were written off in a prior year due to the limitation.

It is possible that the Company experienced a second ownership change subsequent to the above mentioned ownership change in September 2016 which could significantly limit the use of its remaining NOL carryforwards. The company intends to complete a thorough analysis with the assistance of a subject matter expert to determine if in fact a second ownership change has occurred and to what extent the Company’s NOL carryforwards are impacted.

As of December 31, 2023, the Company had U.S. research and development tax credit carryforwards of approximately $2.9 million and $2.1 million for federal and state purposes, respectively. If not utilized, the federal carryforwards will expire beginning in 2036. The California credit carryforwards do not expire, the Georgia credit carryforwards will expire beginning in 2026, and the Texas credit carryforwards will expire beginning in 2040. In addition, the Company has Canadian research and investment credits of approximately $2.8 million and $1.8 million, respectively. The Canadian research and investment credits begin to expire in 2031.

The Company does not intend to distribute the earnings from its foreign subsidiaries and has not recorded any deferred tax liability related to such amounts. The Company considers any excess of the amount for financial reporting over the tax basis of our investments in our foreign subsidiaries to be indefinitely reinvested and the determination of any deferred tax liability on this amount is not practicable.

On January 5, 2024, the Company and DZS California Inc. (“DZS California”), a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with DNI. Pursuant to the Stock Purchase Agreement, DZS California sold to DNI all of the equity interests in DASAN Network Solutions, Inc., a Korean company (“DNS Korea”), D-Mobile Limited, a Chinese company, DZS Vietnam Company Limited, a Vietnamese company, Dasan India Private Limited, an Indian company, and DZS Japan, Inc., a Japanese company (the “Asia Sale”). The purchase price for the divestiture consisted of $3.8 million cash, net of certain adjustments, and the elimination of approximately $34 million in debt owed to DNI as of the transaction date. DNI also assumed all DNS Korea's debt obligations to foreign banks outstanding as of the transaction date. The Asia Sale closed on April 5, 2024. As of December 31, 2023 the difference between the inside and outside basis of the shares of the subsidiaries would result in a deferred tax asset. Since it is more likely than not that the deferred tax asset will be utilized in the foreseeable future, the Company did not record the deferred tax asset.

With the exception of those subsidiaries mentioned above, the Company does not intend to distribute the earnings from its foreign subsidiaries and has not recorded any deferred tax liability related to such amount. The Company considers any excess of the amount for financial reporting over the tax basis of our investments in our foreign subsidiaries to be indefinitely reinvested and the determination of any deferred tax liability on this amount is not practicable.

The Company is required to inventory, evaluate, and measure all uncertain tax positions taken or to be taken on tax returns, and to record liabilities for the amount of such positions that may not be sustained, or may only be partially sustained, upon examination by the relevant taxing authorities. After reviewing the documentation maintained in support of uncertain tax positions taken in prior years, the Company concluded that it will be unlikely to sustain those positions should they be audited by the relevant tax authorities. As of December 31, 2023, the Company had gross unrecognized tax benefits of $5.2 million, none of which if recognized, would reduce the effective tax rate in a future period, due to the Company's full valuation allowance on U.S. net deferred tax assets.

A reconciliation of the beginning and ending unrecognized tax benefit amounts for 2023 and 2022 are as follows (in thousands):

	As of December 31,
	2023		2022
Balance at beginning of year	$	5,213	$	4,188
Increases (decreases) related to prior year’s tax positions		—		—
Increases related to current year tax positions		—		1,025
Balance at end of year	$	5,213	$	5,213

It is the Company's policy to account for interest and penalties related to uncertain tax positions as interest expense and general administrative expense, respectively in the consolidated statements of comprehensive income (loss).

The Company did not record any interest or penalties during the years ended December 31, 2023 and 2022.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The open tax years for the major jurisdictions are as follows:

Federal	2019 - 2022
California	2018 - 2022
Canada	2018 - 2022
Brazil	2018 - 2022
Germany	2017 - 2022
Japan	2017 - 2022
Korea	2017 - 2022
United Kingdom	2018 - 2022
Vietnam	2012 - 2022

However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to technically closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried forward to open years.