UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
toCommission File Number: 000-32743
DZS INC.
(Exact name of registrant as specified in its charter)
Delaware | 22-3509099 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5700 Tennyson Parkway, Suite 400
Plano, Texas 75024
(Address of principal executive office)
Registrant’s telephone number, including area code: (510) 777-7000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, $0.001 Par Value | DZSI | The Nasdaq | ||
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 (Check one):
Large accelerated filer | ☐ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of September 20, 2017,March 4, 2022, there were 16,385,455 27,553,992shares outstanding of the registrant’s common stock, $0.001 par value. As of June 30, 20162021 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $34,173,915.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2022 Annual Meeting of Stockholders are incorporated by reference into Part III where indicated.
TABLE OF CONTENTS
Page | ||||
PART I | ||||
Item 1. | 1 | |||
Item 1A. | 8 | |||
Item 1B. | 20 | |||
Item 2. | 20 | |||
Item 3. | 20 | |||
Item 4. | 21 | |||
PART II | ||||
Item 5. | 22 | |||
Item 6. | 22 | |||
Item 7. | 23 | |||
Item 7A. | 31 | |||
Item 8. | 32 | |||
Item 9. | 66 | |||
Item 9A. | 66 | |||
Item 9B. | 68 | |||
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 68 | ||
PART III | ||||
Item 10. | 69 | |||
Item 11. | 69 | |||
Item 12. | 69 | |||
Item 13. | 69 | |||
Item 14. | 69 | |||
PART IV | ||||
Item 15. | 70 | |||
Item 16. | 70 | |||
71 | ||||
74 |
Forward-looking Statements
This report,Annual Report on Form 10-K, 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 or the Exchange Act.(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. 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;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 the Merger (as defined below);our acqusitions; future growth and revenues from our products; our ability to refinance or repayaccess capital to fund our existing indebtedness prior to the applicable maturity date;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 fluctations; anticipated performance of products or services; competition; plans, objectives and strategies for future operations;operations, including our pursuit or strategic acquisiitons and our continued investment in research and development; other characterizations of future events or circumstances,circumstances; and all other statements that are not statements of historical fact, are forward-looking statements.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 that thesenot to place undue reliance on such forward-looking statements, which are only predictionsbeing made as of the date of this Annual Report on Form 10-K. 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 are subjectfuture prospects or which could cause actual results to risks, uncertainties and assumptions that are difficult to predict, including those identified under the headingdiffer materially from our expectations include factors discussed in Part I, Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K, as well as factors described from time to time in Item 1A, elsewhere in this report and our other filingsfuture reports filed with the U.S. Securities and Exchange Commission (the SEC)“SEC”). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to realize the anticipated cost savings, synergies and other benefits of the Merger and any integration risks relating to the Merger, the ability to generate sufficient revenue to achieve or sustain profitability, the ability to raise additional capital to fund existing and future operations or to refinance or repay our existing indebtedness, defects or other performance problems in our products, any economic slowdown in the telecommunications industry that restricts the ability of our customers to purchase our products, commercial acceptance of our products, intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same networks needs as our products, higher than anticipated expenses that we may incur, any failure to comply with the periodic filing and other requirements of The Nasdaq Stock Market, or Nasdaq, for continued listing, material weaknesses or other deficiencies in our internal control over financial reporting, the initiation of any civil litigation, regulatory proceedings, government enforcement actions or other adverse effects relating to the Audit Committee investigation or errors in the consolidated financial statements of Legacy Zhone (as defined below) and other factors identified elsewhere in this report. We undertake no obligation to revise or update any forward-looking statements for any reason.
PART I
ITEM 1. | BUSINESS |
DZS Inc. (DZS, formerly known as Zhone Technologies, Inc.(“DZS” or the “Company,”) was incorporated under the laws of the state of Delaware in June 1999. On September 9, 2016, we acquired Dasan Network Solutions, Inc. (DNS) through the merger of a wholly owned subsidiary of Zhone Technologies, Inc. with and into DNS, with DNS surviving as our wholly owned subsidiary (the Merger). At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by its sole shareholder, DASAN Networks, Inc. (DNI), were canceled and converted into the right to receive shares of ourThe Company’s common stock in an amount equal to 58% of the issued and outstanding shares of our common stock immediately following the Merger. In connection with the Merger, Zhone Technologies, Inc. changed its name to DASAN Zhone Solutions, Inc. Our common stock continues to beis traded on The Nasdaq Global Select Market (”Nasdaq") under the Nasdaq Capital Market, and our ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016. “DZSI”. The mailing address of our worldwide headquarters is 7195 Oakport Street, Oakland, California 94621,5700 Tennyson Parkway, Suite 400, Plano, Texas 75024, and our telephone number at that location is (510) 777-7000.
Company Overview
DZS is Enabling a Hyper-Connected World, supporting the context suggests otherwise,transformation of technology providers into experience providers and driving the terms "we," "us" or "our" refernext generation of Broadband Connectivity, Mobile & Optical Edge and Cloud Software solutions. Our next generation fiber broadband platforms enable customers to (i) DNSexpand their services, upgrade their technology and its consolidated subsidiaries for periods through September 8, 2016leverage software to improve their efficiency, insights and (ii) DZScustomer experience.
Our solutions have been deployed by over 750 active customers, including advanced Tier 1, national and its consolidated subsidiaries for periods on or after September 9, 2016, the effective date of the Merger. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone."
We research, develop, test, sell, manufacture and support communications equipmentplatforms in five major areas:the areas of mobile transport and fixed broadband access, Ethernet switching, mobile backhaul, passive optical LAN (POLAN)as discussed below. We have regional development and software defined networks (SDN)support centers around the world to support our customer needs. As of December 31, 2021, we employed over 840 personnel worldwide.
Our Solutions and Platforms
Our solutions and platforms portfolio include products in Broadband Connectivity, Connected Home & Business, Mobile & Optical Edge, and Cloud Software.
• | Broadband Connectivity. Our DZS Velocity portfolio offers a variety of solutions for carriers and service providers to connect residential and business customers, either using high-speed fiber or leveraging their existing deployed copper networks to offer broadband services to customer premises. Once our broadband access products are deployed, the service provider can offer voice, high-definition and ultra-high-definition video, highspeed internet access and business class services to their customers. In addition, the switching and routing products we provide in this space offer a high-performance and manageable solution that bridges the gap from carrier access technologies to the core network. XCelerate by DZS increases the velocity with which service providers can leap to multi-gigabit services at scale by enabling rapid transition from Gigabit Ethernet Passive Optical Network (“GPON”) to 10 Gigabit Symmetrical Passive Optical Network (“XGS-PON”) and Gigabit Ethernet to 10 Gigabit Ethernet via any service port across a range of existing DZS Velocity chassis and 10 gig optimized stackable fixed form factor units. |
• | Connected Home & Business. Our DZS Helix connected premises product portfolio offer a large collection of smart gateway platforms for any fiber to the “x” (“FTTx”) deployment. DZS Smart Gateway platforms are designed for high bandwidth services being deployed to the home or business. Our connected premises portfolio consists of indoor/outdoor optical network terminal (“ONT”) gateways delivering best-in-class data throughout to support the most demanding FTTx applications. The product feature set gives service providers an elegant migration path from legacy to softswitch architectures without replacing ONTs. |
• | Mobile & Optical Edge. Our DZS Chronos portfolio provides a robust, manageable and scalable solution for mobile operators that enable them to upgrade their mobile fronthaul/midhaul/backhaul (“xHaul”) systems and migrate to fifth generation wireless technologies (“5G”) and beyond. DZS Chronos provides a full range of 5G-ready xHaul solutions that are open, software-defined, and field proven. Our mobile xHaul products may be collocated at the radio access node base station and can aggregate multiple radio access node base stations into a single backhaul for delivery of mobile traffic to the radio access node network controller. Our products support pure Ethernet switching as well as layer 3 IP and Multiprotocol Label Switching (“MPLS”), and we interoperate with other vendors in these networks. |
• | Cloud Software. Our DZS Cloud solution accelerates our software capabilities specifically in the areas of network orchestration, application slicing, automation, analytics, and service assurance. We offer a commercial, carrier-grade network-slicing enabled orchestration platform complementing our position with physical network devices supporting Open RAN (“O-RAN”) and 4G/5G networks. Communications service providers are implementing software defined networking (“SDN”) and network functions virtualization (“NFV”) architectures to reduce reliance on proprietary systems and hardware, which increase service agility, flexibility, and deployment of new network services while lowering costs. |
Industry Background
We research, developbelieve that expansion in our worldwide business is driven by the increased demand of subscribers and test products and technologies for our customers to purchase and deploy in their networks. We have development and test capabilities in five countries around the world. We are a global company with over 1,000 customers in more than 50 countries worldwide. We use a combination of both in-house and outsourced manufacturing of our products.
Furthermore, increased competition between service providers for subscriber business has resulted in significant investment pressure to upgrade network infrastructure to meet growing bandwidth needs. Broadband access networks must be multiservice in nature and proliferationmust have extensive quality of bandwidth-intensive applicationsservice guarantees in order to support 5G, mobile xHaul, symmetric business services and residential services, leading to increasing demandsas well as virtual overlay networks for high-bandwidth communications networks. The broad adoption of new technologies such as smartphones, digital video camerasalternative operators and high definition and ultra high definition televisions allow music, pictures, user-generated content (as found on the many video-sharing sites) and high definition video to be a growing part of consumers’ regular exchange of information. wholesale access.
In recent years, the growth of social communications and social networking has continued to placeplaced significant demands on existinglegacy access infrastructure, which was exacerbated in 2020 by the global COVID-19 pandemic which drove a dramatic rise in remote work and new consumer demands arelearning as well as entertainment streaming. This increased demand has been challenging for the industry, even for the newest and most advanced infrastructures.providers. Increased subscriber usage of smartphone, video streaming services, PC gaming services and high definition and ultra-high-definition televisions has increased the network throughput demand driven by music, pictures, user-generated content (as found on many video-sharing sites) and high-definition video, which have all become a growing part of subscribers’ regular exchange of information.
Trends such as software-as-a-service (SaaS), Cloud-based services, Internet of Things (IoT), and 5G have also increased the demand for broadband network access and customer premises solutions. All of these new technologies share a common dependency on high-bandwidth communication networks and sophisticated traffic management tools. However, network service providers have struggled to meet the increased demand for high-speed broadband access due to the cost of network infrastructure upgrades. As bandwidth demands continue to increase, carriers need to continue to upgrade their network infrastructure to support such demand. The infrastructure upgrade cycle typically has the effect of moving bandwidth bottlenecks from one part of the network to another (such as a carrier’s access network, core network or datacenters)data centers), depending on the selection of technology selection and cost.
It is widely believedacknowledged in the industry that a fiber-optic connection that runs from customers’ premises all the way to the carrier’s datacentersbroadband access network is the bestpreferred network architecture for a broadband fixed network. This network architecture is commonly called Fiber to the Premises (FTTP). However, FTTP is also typically the most expensive network solution, due to the associated build-out and equipment cost. Although many carriers have, to different degrees, adopted FTTP as their primary network architecture, many limit their use of FTTP to new greenfield builds and rely on hybrid fiber-copper topologies in their existing network in order to reduce cost. For example, popular and less costly alternatives to FTTP include Fiber to the Curb (FTTC)(“FTTP”) for business subscribers or Fiber to the Home (“FTTH”) for residential subscribers. With FTTH, all services are generally delivered at the premise through smart optical networking terminal units (“ONT”). The Fiber to the Node (FTTN) network architecture. In these architectures,(“FTTN”) architecture is also deployed where the carrier lays a fiber-optic cable toterminates at a street cabinet and then uses DSLAMswhich contains a Digital Subscriber Line Access Multiplexer (“DSLAM”) or Multiple Service Access Node (MSAN) to provide(“MSAN”) that then provides higher speed services to their customers over the last mile legacy copper wire. Another trend in network access iswireline infrastructure. With the shift away from the legacy copper telephone Time-division Multiplexing (“TDM”) switches (used in carrier networks from the 1980’s to the early 2000’s):, many carriers that continue to provide services over copper wirewireline networks are decommissioning their legacy telephone switches and moving services over to Voice over Internet Protocol (VoIP)(“VoIP”) platforms onvia an MSAN.MSAN/Softswitch solution. Our broadband access products and solutions are designed to address all these market trendsfiber configurations, commonly referred to as FTTx, by allowing carriers and service providers to either use fiber-optic networks or leverage their existing deployed copper networks to offer broadband services to customer premises. The demand for FTTx is also driven by various government sponsored broadband stimulus funding programs. These initiatives cultivate broadband opportunities around the world. Several of the most prominent initiatives are in North America, including American Rescue Plan Act (ARPA), the CARES Act, the Consolidated Appropriations Act, the Rural Digital Opportunity Fund (RDOF) and the Infrastructure Investment and Jobs Act most recently signed into law by President Biden in November 2021. Global government sponsored broadband stimulus initiatives are less commonly known, though equally important in their contributions to the investment in fiber-optic broadband access network. We are benefitting from several customers that have accelerated their network investment because of government broadband stimulus programs.
With respect to mobile wireless networks, the popularity of mobile smartphones and increasing demand for mobile data has forced mobile network operators to upgrade their mobile access technologies from 3rd generation wireless (3G)(“3G”) to 4th generation wireless (4G(“4G” or LTE)“LTE”) and to plan for 5th generation wireless technologies (5G).5G. These technology upgrades are typically accompanied by network infrastructure upgrades, including upgrades to the carriers’ access networks (referred to as mobile backhaul)“mobile xHaul”), core networks and datacenters.data centers. Our mobile backhaulxHaul products, which have features for time sensitive networks, provide a robust, manageable and scalable solution for mobile network operators that enable them to upgrade their mobile fronthaul/backhaul systems and migrate from 3G networks to LTE4G and beyond.
Another growing industry trend is the desire of carriers and service providers to simplify network operation and reduce costs. Increasingly, we see network operators seeking to reduce the number of active components in their networks and to centralize network data and control in datacenters,data centers, both of which require network redesigns and upgrades. Our FiberLAN portfolio of POLANPassive Optical LAN (“POL”) products, as well as our Ethernet switching products and SDN and NFV tools and building blocks, are designed to address these market trends, with POLANPOL emerging as a popular customer choice for network upgrades.
Our Strategy
We strive to be a leading global provider of network access solutionsbalance growth with financial discipline that specifically focuses on improving product margins, increasing recurring software and communications equipment.service revenue, and managing expenses to drive profitability. The principal elements of our strategy include:
• | Global Presence. We have a diversified customer base that includes more than 750 active customers in more than 100 countries worldwide. We provide our network access solutions to Tier 1, national, and regional carriers in the Asia-Pacific region, the Middle East region and Europe, as well as in North America and Latin America. We leverage our global infrastructure, which includes sales offices all over the world, research and development centers in the United States of America (“United States” or “U.S.”), the Republic of Korea (“South Korea”), Vietnam, India, and Canada and inhouse and contract manufacturing capabilities in the United States, South Korea, Vietnam, and China, to support our customer base. |
• | Leading FTTx Market Position. We hold a strong leadership position in the FTTx network access space. We offer customers an extensive choice of indoor and outdoor fiber demarcation and fully integrated smart gateways with telephone data, Power over Ethernet (“POE”), Wi-Fi and over-the-top set-top box (“OTT STB”) capabilities and other service interfaces. In the FTTx optical line terminal (“OLT”) category, we offer the industry’s largest portfolio of modular chassis, single platforms, and software for deployment in datacenter, central office, extended temperature environments and multi-dwelling unit (“MDU”) scenarios. |
• | Technology Leadership. We believe that our future success is built upon our investment in the development of advanced communications technologies. We continue to focus on research and development to maintain our leadership position in broadband network access solutions and communications equipment. These development efforts include innovating around 5G mobile xHaul technology in collaboration with our leading Tier 1 carriers, developing a new generation of SDN/NFV solutions for unified wired and wireless networks, upgrading our broadband access technology for 10 and 25/50/100 gigabyte access speeds, and introducing our cloud managed Wi-Fi solutions and data analytics offerings.We also continue to expand and differentiate our portfolio through software investments in network orchestration, automation and slicing, a unified operating system and a subscriber experience software-as-a-service (SaaS) platform. Our software expansion and vision are designed to improve our long-term margin profile while differentiating DZS in the marketplace. |
• | Strategic Mergers and Acquisitions. In addition to organic growth, we may from time to time seek to expand our operations and capabilities through strategic acquisitions. |
On March 3, 2021, the expanded geographic reachCompany acquired substantially all of the combinedassets of RIFT, Inc., a network automation solutions company, and all the enhanced functionalityoutstanding shares of RIFT.IO India Private Limited, a wholly owned subsidiary of RIFT, Inc. (collectively “RIFT”). RIFT developed a carrier-grade software platform that simplifies the deployment of any slice, service, or application on any cloud.
On February 5, 2021, we acquired Optelian Access Networks Corporation (“Optelian”), a leading optical networking solution provider based in Ottawa, Ontario, Canada, and rangeits portfolio of our product offerings followingoptical transport solutions. This acquisition introduced the Merger represent attractive opportunities for growth in our business. Prior“O-Series” to the Merger, DNS provided communications equipment primarilyDZS portfolio of carrier grade optical networking products with 100 gigabits per second and above capability, expanding DZS product portfolios by providing environmentally hardened, high capacity, and flexible solutions at the network edge.
On January 3, 2019, we acquired Keymile to expand our business efforts in the Asia-Pacific region with a particular focusEMEA. The acquired Multi-service Access Nodes (MSAN) portfolio complemented the DZS existing portfolio by offering leading class point-to-point active FTTx Ethernet and copper-based access technology based on Korea, Japan and Vietnam, and Legacy Zhone provided communications equipment primarily in the Americas and EMEA region. DNS and Legacy Zhone had complementary product portfolios prior to the Merger, with both DNS and Legacy Zhone offering broadband access solutions and
• | Ecosystem Partners. We believe there is further opportunity to grow sales through our channel partners, particularly with distributors, value-added resellers, system integrators, as well as with municipalities and government organizations. We have a track record of building a diverse but targeted network of partners to help drive growth in specific segments of our business or in specific geographies. For FiberLAN, we are working with distributors, value added resellers, and system integrators to broaden our enterprise go to market presence. In India, we are working closely with municipalities to deploy their initial fiber-to-the-home vision and help deliver high speed broadband access to residents. |
Customers
We expect the combination of DNS and Legacy Zhone products will enhance the functionality and range of our product offerings and create increased sales opportunities worldwide.
We also sell our POLAN solutions directly andindirectly to end customers through system integrators and distributors to the service providers, hospitality, education, stadiums, manufacturing and business enterprises as well as to the government and military. Our global FiberLAN customer base includes hotels, universities, sports arenas, military bases, government institutions, manufacturing facilities and Fortune 500 businesses.
For the year ended December 31, 2016, three2021, two customers SK Broadband, Inc., DNIrepresented 19% and LG Uplus Corp. represented 16%, 14% and 10%12% of net revenue, respectively. For the year ended December 31, 2015, four2020, two customers KT Corporation, LG Uplus Corp., DNI (a related-party)represented 14% and SK Broadband, Inc., represented 26%, 21%, 17% and 10%13% of net revenue, respectively. For the year ended December 31, 2014, four customers, KT Corporation, LG Uplus Corp., SK Broadband, Inc. and DNI (a related-party) represented 17%, 14%, 13% and 12% of net revenue, respectively. No other customers accounted for 10% or more of net revenue during these periods.
Research and Development
The industry in which we compete is subject to rapid technological developments, evolving industry standards, changes in customer requirements, and continuing developments in communications service offerings. Our continuing ability to adapt to these changes, and to develop new and enhanced products, is a significant factor in maintaining or improving our competitive position and our prospects for growth. Therefore, we continue to make significant investments in product development.
We have core research and product development facilities at our headquarters in Oakland, California, as well as in research and product development centersteams located in Seminole, Floridathe United States, South Korea, Vietnam, India and Alpharetta, Georgia, and in Korea, India, China and Vietnam.Canada. In all of these facilitiescenters, we develop and test both our hardware and software.software solutions. We have investedcontinue to invest heavily in both automated and scale testing capabilities for our products to better emulate our customers’ networks.
Our product development activities focus on products to support both existing and emerging technologies in the segments of the communications industry that we consider represent viable revenue opportunities. We are actively engaged in continuing to refine our solution architecture, introducing new products using the various solutions we support, and in creating additional interfaces and protocols for both domestic and international markets.
We continue our commitmentare committed to invest in leading edge technology research and development.development for new products and innovative solutions that align with our business strategy. Our research and product development expenses were $25.4 million, $21.3$47.0 million and $22.8$38.0 million in 2016, 20152021 and 2014,2020, respectively. We plan to continue to support the development of new products and features, while seeking to carefully manage associated costs through expense controls.
Intellectual Property
We seek to establish, maintain and maintainprotect our proprietary rights in our technology and products through the use of patents, copyrights, trademarks and trade secret laws.secrets. We also seek to maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality agreements. We have obtained a number of patents and trademarks in the United States of America (“United States”) and in other countries. There can be no assurance, however, that these rights can be successfully enforced against competitive products in every jurisdiction or any particular jurisdiction. Although we believe the protection afforded by our patents, copyrights, trademarks and trade secrets has value, the rapidly changing technology in the networking industry and uncertainties in the
Many of our products are designed to include intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe, based upon past experience and standard industry practice, that such licenses generally could be obtained on commercially reasonable terms. Nonetheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all. Our inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results and financial condition.
Sales and Marketing
We have a global sales presence in various domestic and foreign locations,with customers from over 100 countries, and we sell our products and services both directly and indirectly through channel partners with support from our sales force. Channel partners include distributors, value added resellers, system integrators and service providers. These partners sell directly to and service end customers and often provide additional value-added services such as system installation, technical support, and professional services and support services in addition to the network equipment sale. sales. Our sales efforts are generally organized and sized according to geographical regions:
• | Americas Sales. Our Americas Sales organization includes coverage of North America and Latin America regions. The organization establishes and maintains direct and indirect relationships with customers in the Americas, which includes carriers and service providers, cable operators, utilities and enterprises. In addition, this organization is responsible for managing our distribution channel and also manages our inside sales and sales engineering activities. |
• | EMEA Sales. This organization establishes and maintains direct and indirect relationships with customers in the EMEA region, which includes carriers and service providers, cable operators, utilities and enterprises. |
• | Asia Pacific Sales. This sales organization establishes and maintains direct and indirect relationships with customers in the Asia Pacific region, which includes carriers and service providers, cable operators, utilities and enterprises, in particular, with our South Korean customers, consisting primarily of Tier 1 carriers. These carriers have historically been early innovators across various telecommunications industry upgrade cycles, including broadband access technology and mobile fronthaul/backhaul technology. We partner with such carriers from the early phases of technology development to ensure our products are carrier-grade and purpose-built for the most rigorous of environments. |
• | Enterprise Sales. Our Enterprise Sales organization includes global geographic coverage and is primarily focused on coverage of our FiberLAN solutions. The organization establishes and maintains direct and indirect relationships with enterprise customers for both greenfield (i.e., projects that do not follow a prior work) and brownfield (i.e., projects that modify or upgrade existing infrastructure or products) projects targeting enterprise customers in several industry verticals, including education (i.e., K-12, universities and colleges, etc.), hospitality, healthcare, stadiums, corporate campuses, and others. |
Our marketing team works closely with our sales, research and product development organizations, and our customers by providing communications that keep the market current on our products and features. Marketing also identifies and sizes new target markets for our products, creates awareness of our company and products, generates contacts and leads within these targeted markets, and performs outbound education and public relations.
Our backlog consists of purchase orders for products and services that we expect to ship or perform within the next year. Our backlog may fluctuate based on the timing of when purchase orders are received. AtAs of December 31, 2016,2021, our backlog was $28.8approximately $225.0 million, as compared to $2.6$71.0 million at December 31, 2015.2020. We consider backlog to be an indicator, but not the sole predictor, of future sales because our customers may cancel or defer orders without penalty.
Competition
We compete in communications equipment markets, providing products and services for the delivery of voice, databroadband connectivity, connected home and videobusiness, mobile and optical edge transport, and cloud software-based services. These markets are characterized by rapid change, converging technologies and a migration to solutions that offer superior advantages.advantages in both operational efficiency and service performance. These market factors represent both an opportunity and a competitive threat to us. We compete with numerous vendors in our core broadband connectivity and connected home and business markets, including ADTRAN, Calix, Huawei, Nokia, Calix, Adtran, Huawei,Ubiquoss, and ZTE, among others. In our FiberLAN business, which is a subset of our broadband connectivity and connected home and business market, our competitors include TellabsCisco, Nokia, and Cisco,Tellabs, among others. In our mobile and optical edge transport business, our competitors include Ciena, Cisco and Juniper Networks, among others. In our cloud software business, our competitors include solutions from ADTRAN, Calix, Ciena, Nokia, and Solarwinds. In addition, a number of companies have introduced products that address the same network needs that our products and solutions address, both domestically and abroad.internationally. The overall number of our competitors may increase, and the identity and composition of competitors may change. As we continue to expand our sales globally, we may see new competition in different geographic regions. Barriers to entry are relatively low, and new ventures to create products that do or could compete with our products are regularly formed. Many of our competitors have greater financial, technical, sales and marketing resources than we do.
The principal competitive factors in the markets in which we presently compete and may compete in the future include:
• | product performance; |
• | feature capabilities; |
• | manufacturing capacity; |
• | interoperability with existing products; |
• | scalability and upgradeability; |
• | conformance to standards; |
• | breadth of services; |
• | reliability; |
• | ease of installation and use; |
• | geographic footprints for products; |
• | ability to provide customer financing; |
• | pricing; |
• | technical support and customer service; and |
• | brand recognition. |
While we believe that we compete successfully with respect to each of these factors, we currently face and expect we will continue to face intense competition in our markets. In addition, the inherent nature of communications networking requires interoperability. As such, we must cooperate and at the same time compete with many companies.
Manufacturing
Operationally, we use a global sourcing procurement program to purchase and manage key raw materials and subassemblies through qualified suppliers, sub-contractors, original equipment and design manufacturers and electronic manufacturing service vendors. The manufacturing process uses a strategic combination of procurement from qualified suppliers and in-house manufacturing atmanufacturing. Throughout the process we manage the assembly, quality assurance, customer testing, final inspection and shipping of our facility in Florida, and the use of original equipment manufacturers (OEMs) located in the Far East. products.
We manufacture many of our more complexlow volume, high mix products at our manufacturing facility in Florida.
Some completed products are procured to our specifications and shipped directly to our customers. We also acquire completed products from certain suppliers, andwhich we configure and ship from our facility. Some of these purchases are significant. We purchase both standard off-the-shelf parts and components, which are generally available from more than one supplier, and single-source parts and components. We have generally been able to obtain adequate supplies to meet customer demand in a timely manner from our current vendors, or, when necessary, from alternate vendors. We believe that alternate vendors can be identified if current vendors are unable to fulfill our needs, or design changes can be made to employ alternate parts.
The recent outbreak of the coronavirus in China and other countries has negatively impacted our supply chain in recent months. Supply chain pricing, freight and logistics costs, availability, and extended lead-times became a challenge in 2021 as the world economy recovered 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.
We design, specify, and monitor all of the tests that are required to meet our quality standards. Our manufacturing and test engineers work closely with our design engineers to ensure manufacturability and testability of our products, and to ensure that manufacturing and testing processes evolve asalong with our technologies evolve.technologies. Our manufacturing engineers specify, build, or procure our test stations, establish quality standards and protocols, and develop comprehensive test procedures and processes to assure the reliability and quality of our products. Products that are procured complete or partially complete are inspected, tested, or audited for quality control.
Our Quality Management System is compliant with, ISO-9001:2008 and we are certified to, ISO-9001:20082015 by our external registrar, National Standards Authority of Ireland (NSAI).Ireland. ISO-9001:20082015 requires that our processes arebe documented, followed and continuously improved. Internal audits are conducted on a regular schedule by our quality assurance personnel, and external audits are conducted by our external registrar each year. Our quality system is based upon our model for quality assurance in production and service to ensure our products meet rigorous quality standards.
Compliance with Regulatory and Industry Standards
Our products must comply with a significant number of voice and data regulations and standards which vary by jurisdiction. Standards for new services continue to evolve, and we may need to modify our products or develop new versions to meet these standards. Standards setting and compliance verification in the U.S.United States are determined by the Federal Communications Commission, or FCC, Underwriters Laboratories (a global safety certification company), Quality Management Institute Telcordia Technologies, Inc.(a management training and leadership company), Telecordia (an operations management and fraud prevention solutions company which is a subsidiary of Ericsson), and other communications companies. In international markets, our products must comply with standards issued, by the European
Environmental Matters
Our operations and manufacturing processes are subject to federal, state, local and foreign environmental protection laws and regulations. TheseSuch laws and regulations relate to the presence, use, handling, storage, discharge and disposal of certain hazardous materials and wastes, the pre-treatment and discharge of process waste waters and the control of process air pollutants.
Our operations in 2003 the European Union enactedare subject to the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE), for implementation in European Union member states.Directive. We are aware of similar legislation that is currently in force or is being consideredand are taking suitable action to comply with the new European Union Restriction of Hazardous Substances standards. Our operations in the United States as well asor other countries, such as Japan and China.China are subject to similar legislation. Our failure to comply with any of such regulatory requirements or contractual obligations relating to environmental matters or hazardous materials could result in ourus being liable for costs, fines, penalties and third-party claims, and could jeopardize our ability to conduct business in countries in the jurisdictions where thesesuch laws or the regulations apply.
Employees
As of December 31, 2016,2021, we employed 622 individualsover 840 personnel worldwide. We consider the relationships with our employees to be positive. Competition for technical personnel in our industry is intense. We believe that our future success depends in part on our continued ability to hire, assimilate and retain qualified personnel. To date, we believe that we have been successful in recruiting qualified employees, but there is no assurance that we will continue to be successful in the future.
Website and Available Information
Our investor website address is
ITEM 1A. | RISK FACTORS |
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this Annual Report on Form 10-K and in other filings we make with the SEC before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other documents we file with the SEC arepublic filings. The trading price of our common stock could decline due to any of these risks, and, uncertainties that could cause actual resultsas a result, you may lose all or part of your investment.
Risks Directly Related to differ materially from the results contemplated by the forward-looking statements contained in this report.
The reportCOVID-19 pandemic has previously adversely affected significant portions of our independent registered public accounting firm expresses substantial doubt about our ability to continue asbusiness and could have a going concern.
We have experienced and continue to experience disruptions in our supply chain due to the impact of the COVID-19 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. If our vendors for product components are unable to meet our cost, quality, supply and transportation requirements, continue to remain financially viable or fulfill their contractual commitments and obligations, we could experience disruption in our supply chain, including shortages in supply or increases in production costs, which would materially adversely affect our results of operations. The current worldwide shortage of semiconductors may exacerbate these risks.
The pandemic has caused us to modify our business practices, including with respect to employee travel; employee work locations; limitations on physical participation in meetings, events, and competeconferences; and social distancing measures. Future vaccine mandates in the countries in which we operate could adversely affect our workforce retention and hiring. We may take
further actions as required by government authorities or others, or that we determine are in the best interests of our employees, customers, suppliers, and partners. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our product development, validation, and qualification, customer support, and other activities, which could have a material adverse effect on our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.
The pandemic has significantly increased economic and demand uncertainty and has led to volatility in capital markets and credit markets. Adverse changes in economic conditions related to the COVID-19 pandemic can significantly harm demand for our products and make it more challenging to forecast our operating results. Given the continued and substantial economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of impacts on demand for our products.
The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including the duration and severity of the pandemic; the actions taken to contain the virus or treat its impact; other actions taken by governments, businesses, and individuals in response to the virus and resulting economic disruption; and how quickly and to what extent normal economic and operating conditions can resume. Additional impacts and risks may arise that we are not aware of or able to respond to effectively.
Risks Related to our Liquidity
We may not have the liquidity to support our future operations and capital requirements.
As of December 31, 2016,2021, we had approximately $17.9$46.7 million in unrestricted cash and cash equivalents, and $24.4 million in aggregate principal amount of our total outstanding indebtedness, which comprised $17.6 million in aggregate principal amount of outstanding borrowings under our short-term debt obligations and $6.8 million in related party borrowings. Our cash and cash equivalents as of December 31, 2016 included $9.8including $30.1 million in cash balances held by our Korean subsidiary.international subsidiaries. If we are unable to raise additional capital, we may be unable to adequately fund our existing operations. Our current lack of liquidity could harmcondition exposes us by:
Our current liquidity condition could be further harmed, and we may incur significant losses or expend significant amounts of capital if: (i) the market for our products develops more slowly than anticipated or if it retracts; (ii) we fail to establish market share or generate revenue at anticipated levels; (iii) our capital expenditure forecasts change or prove to be inaccurate; or (iv) we fail to respond to unforeseen challenges or take advantage of unanticipated opportunities; or (v) the on-going COVID-19 pandemic continues to negatively impact our business or further exacerbates any of the foregoing risks.
To meet our liquidity needs and to finance our capital expenditures and working capital needs for our business, we may be required to sell assets, issue debt or equity securities, purchase credit insurance, or borrow on potentially unfavorable terms or reduce costs which could impact new product innovation. In addition, we may be required toraise substantial additional capital, reduce our operations in low margin regions, including reductions in headcount. We may be unable to sell assets, access additional indebtedness or undertake other actions to meet these needs. As a result, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis. If additional capital is raised(including through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. Likewise, any equity financing could result in additional dilution of our stockholders. Moreover, we may be required to include audited annual and unaudited interim historical financial statements of Legacy Zhone in any registration statement for the sale of shares of our common stockassets) or other securities, which may make it more costly and time consuming for us to raise additional capital through a public offering of securities. If we are unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis and may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. In addition, we may not be able to fund our business expansion, take
We have experienced significant losses and we may incur losses in the future. If we fail to generate sufficient revenue to sustain our profitability, our stock price could decline.
We had a net loss of $34.7 million and $23.1 million for the years ended December 31, 2021 and 2020, respectively. Additionally, we have incurred significant losses to date and expect that our operating losses and negative cash flows from operations may continue. Our net loss was $15.3 million for the year ended December 31, 2016 and we hadin prior years. We have an accumulated deficit of $19.9$87.0 million atas of December 31, 2016.2021. We have significant fixed expenses and expect that we will continue to incur substantial manufacturing, research and product development, sales and marketing, customer support, administrative and other expenses in connection with the ongoing development of our business. In addition, we may be required to spend more on research and product development than originally budgeted to respond to industry trends. We may also incur significant new costs related to acquisitions and the integration of new technologies and other acquisitions that may occur in the future. We may not be able to adequately controlmanage costs and expenses or achieve or maintain adequate operating margins. As a result, our ability to sustain profitability in future periods will depend on our ability to generate and sustain higher revenue while maintaining reasonable costcosts and expense levels. If we fail to generate sufficient revenue to sustain profitability in future periods, we may continue to incur operating losses, which could be substantial, and our stock price could decline.
In connection with the Keymile acquisition, we assumed certain of indebtednessKeymile’s liabilities, which could adversely affectharm our business, operating resultsoperations, financial condition, and financial condition.
Pursuant to the definitive agreement for the acquisition of Keymile GmbH, now DZS GmbH (“Keymile” or “DZS GmbH”), we assumed certain of Keymile’s liabilities, including tax and pension liabilities, and any liabilities that may arise related to breaches of representations and warranties made by Keymile in connection with a significantprior sale of assets by Keymile that survive through 2022. Although the definitive agreement for the Keymile acquisition entitles us to indemnification for certain losses
incurred related to those assumed liabilities, our right to indemnification from the Keymile sellers is limited by the survival period of the representations and warranties included in the Keymile acquisition definitive agreement and recovery is limited in amount to the purchase price of indebtedness. As of December 31, 2016, the aggregate principal amount ofKeymile, or EUR 10.3 million (approximately $11.7 million). Additionally, our total outstanding indebtedness was $24.4 million, which comprised $17.6 million in aggregate principal amount of outstanding borrowingsrights to recovery against such losses is limited under our short-term debt obligations and $6.8third party provided warranty and indemnity liability insurance coverage of up to EUR 35.3 million in related party borrowings. We may incur additional indebtedness in(approximately $40.2 million). If such claims or losses exceed such amount, or if they are not indemnifiable under the future, including additional borrowings underKeymile acquisition definitive agreement, any such losses could negatively impact our credit facility with Wells Fargo Bank (the WFB Facility). The level of indebtedness could have important consequences and could materially and adversely affect us in a number of ways, including:
Customer and attempt to take appropriate measures to protect ourselves, including factoring credit arrangements to financial institutions, it is possible that we may have to defer revenue until cash is collected or write-down or write-off uncollectible accounts. Such write-downs or write-offs, if large, could have a material adverse effect on our results of operationsProduct Risk
The long and financial condition. If our customers become insolvent due to market and economic conditions or otherwise, it could have a material adverse impact on our business, financial condition and results of operations.
The target customers for our products have substantial and complex networks that they traditionally expand in large increments on a periodic basis. Accordingly, our marketing efforts are focused primarily on prospective customers that may purchase our products as part of a large-scale network service providers that operate voice, datadeployment. Our target customers typically require a lengthy evaluation, testing and video communications networks. Thereproduct qualification process. Throughout this process, we are a limited number of potentialoften required to spend considerable time and incur significant expenses educating and providing information to prospective customers in our target market. Forabout the year ended December 31, 2016, three customers represented 16%, 14%uses and 10% of net revenue, respectively. For the year ended December 31, 2015, four customers represented 26%, 21% (a related-party), 15% and 10% of net revenue, respectively. We expect that a significant portionfeatures of our future revenue will depend on salesproducts. Even after a company makes the final decision to purchase our products, it could deploy our products over extended periods of time. The timing of deployment of our products tovaries widely, and depends on a limited number of customers.factors, including our customers’ skill sets, geographic density of potential subscribers, the degree of configuration and integration required to deploy our products, and our customers’ ability to finance their purchase of our products as well as their operations. The impact of the COVID-19 pandemic on our supply chain has increased the volatility of our deployment timeframes. As a result of any of these factors, our revenue for anyand operating results could vary significantly from quarter may be subject to significant volatility based on changes in orders from one or a small number of key customers. Any failure of one or more customers to purchase products from us for any reason, including any downturn in their businesses, would seriously harm our business, financial condition and results of operations. See Note 1(n) to the consolidated financial statements set forth in Part II, Item 8 of this report for additional information.
The market we serve is highly competitive and we may not be able to compete successfully.
Competition in communications equipment markets is intense. These markets are characterized by rapid change, converging technologies and a migration to networking solutions that offer superior advantages. We are aware of many companies in related markets that address particular aspects of the features and functions that our products provide. Currently, our primary competitors in our core business include Nokia,ADTRAN, Calix, Adtran, Huawei, Nokia and ZTE, among others. In our FiberLAN business, our competitors include TellabsCisco, Nokia and Cisco.Tellabs. In our Ethernet switching business, our competitors include Cisco, and Juniper. We also may face competition from other large communications equipment companies or other companies that may enter our markets in the future. In addition, a number of companies have introduced products that address the same network needs that our products and solutions address, both domestically and abroad.internationally. Many of our competitors have longer operating histories, greater name recognition, larger customer bases and greater financial, technical, sales and marketing resources than we do and may be able to undertake more extensive marketing efforts, adopt more aggressive pricing policies and provide more customer financing than we can. In particular, we are encountering price-focused competitors from Asia, especially China, which places pressure on us to reduce our prices. If we are forced to reduce prices in order to secure customers, we may be unable to sustain gross margins at desired levels or achieve profitability. Competitive pressures could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which could reduce our revenue and adversely affect our financial results. Moreover, our competitors may foresee the course of market developments more accurately than we do and could develop new technologies that render our products less valuable or obsolete.
In our markets, principal competitive factors include:
If we are unable to compete successfully against our current and future competitors, we may have difficulty obtaining or retaining customers, and we could experience price reductions, order cancellations, increased expenses and reduced gross margins, any of which could have a material adverse effect on our business, operations, financial condition, and liquidity.
We depend upon the development of new products and enhancements to existing products, and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results of operations.
The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in end-user requirements, frequent new product introductions and changes in communications offerings from network service provider customers. Our future success largely depends on our ability to retainanticipate or adapt to such changes and recruit key personnel,to offer, on a timely and any failurecost-effective basis, products that meet changing customer demands and industry standards. We may not have sufficient resources to do so would harm our ability to meet key objectives.
Because our products are complex and are deployed in complex environments, our products may have defects that we discover only after full deployment by our customers, which could have a material adverse effect on our business.
We produce highly complex products that incorporate leading-edge technology, including both hardware and software. Software often contains defects or programming flaws that can unexpectedly interfere with expected operations. In addition, our products are complex and are designed to be deployed in large quantities across complex networks. Because of operations. Moreover,the nature of these products, they can only be fully tested when completely deployed in large networks with high amounts of traffic, and there is no assurance that our inabilitypre-shipment testing programs will be adequate to detect all defects. As a result, our customers may discover errors or defects in our hardware or software, or our products may not operate as expected. If we are unable to cure a product defect, we could experience damage to our reputation, reduced customer satisfaction, loss of existing customers and failure to attract new customers, failure to achieve market acceptance, reduced sales opportunities, loss of revenue and retain sufficient qualified accounting personnel with expertise in U.S. GAAP following the Merger may adversely affect our ability to maintain an effective system of internal controls or our ability to produce reliable financial reports, which may materiallymarket share, increased service and adversely affect our business.
Sales to communications service providers are especially volatile, and weakness in sales orders from this industry maycould harm our operating resultsbusiness, operations, financial condition and financial condition.
Sales activity in the service provider industry depends upon the stage of completion of expanding network infrastructures, the availability of funding, and the extent to which service providers are affected by regulatory, economic and business conditions in the country of operations. Although some service providers may be increasing capital expenditures over the depressed levels that have prevailed over the last few years, weakness in orders from this industry could have a material adverse effect on our business, operating resultsoperations, financial condition and financial condition. Slowdownsliquidity. Changes in the general economy,technology, competition, overcapacity, changes in the service provider market, regulatory developments, adverse economic effects caused by the COVID-19 pandemic and constraints on capital availability have had a material adverse effect on many of our service provider customers, with many of these customers going out of business or substantially reducing their expansion plans. These conditions have materially harmed our business and operating results, and we expect that some or all of these conditions may continue for the foreseeable future. Finally, service provider customers typically have longer implementation cycles; require a broader range of serviceservices including design services; demand that vendors take on a larger share of risks; often require acceptance provisions, which can lead to a delay in revenue recognition; and expect financing from vendors. All these factors can add further risk to business conducted with service providers.
We depend on a limited source of suppliers for several key components. If we are unable to obtain these components on a timely basis, we will be unable to meet our customers’ product delivery requirements, which would harm our business.
We currently purchase several key components from a limited number of suppliers. If any of our limited source of suppliers become insolvent, cease business or theexperience capacity constraints, work stoppages or any other reduction or disruption in output, they may be unable to meet our delivery schedules. Our suppliers may enter into exclusive arrangements with our competitors, be acquired by our competitors, stop selling their products or components to us at commercially reasonable prices, refuse to sell their products or components to us at any price or be unable to obtain or have difficulty obtaining components for their products from their suppliers. If we do not receive critical components from our limited source of suppliers in a timely manner, we will be unable to meet our customers’ product delivery requirements. Any failure to comply withmeet a customer’s delivery requirements could materially adversely affect our business, operations, and financial condition and liquidity and could materially damage customer relationships.The current and future environmental regulations could cause us significant expense.
We are subject to a variety of federal, state, local and foreign environmental regulations. If we fail to comply with any present and future regulations, we could be subject to future liabilities, the suspension of production or a prohibitionrely on the saleavailability of third-party licenses.
Many of our products are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various elements of the technology used to develop these products. In addition, such regulations
We cannot assure you that our existing or future third-party licenses will be available to us on commercially reasonable terms, if at all. Our inability to maintain or obtain any third-party license required to sell or develop our products and product enhancements could require us to incur other significant expenses to comply with environmental regulations, including expenses associated with the redesignobtain substitute technology of any non-compliant product. From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. For example, in 2003 the European Union enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE), for implementation in European Union member states. We are aware of similar legislation that is currently in forcelower quality or is being considered in the United States, as well as other countries, such as Japan and China. Our failure to comply with any of such regulatory requirementsperformance standards, or contractual obligations could result in our being liable for costs, fines, penalties and third-party claims, and could jeopardize our ability to conduct business in countries in the jurisdictions where these regulations apply.
Our intellectual property rights maycould prove difficult to protect and enforce.
We generally rely on a combination of copyrights, patents, trademarks and trade secret laws and commercial agreements containing restrictions on disclosure and other appropriate terms to protect our intellectual property rights. We also enter into confidentiality, or licenseemployee, contractor and commercial agreements with our employees, consultants and corporate partners, and control access to and distribution of our proprietary information.information and use of our intellectual property and technology. Despite our efforts to protect our proprietary rights, unauthorized parties, including those affiliated with foreign governments, may attempt to copy or otherwise obtain and use our products, technology or technology.intellectual property. Monitoring unauthorized use of our technology and intellectual property is difficult, and we do not know whether the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries or jurisdictions where the laws may not protect our proprietary rights as extensively as in the United States. We cannot assure you that our pending, or any future, patent applications will be granted, that any existing or future patents will not be challenged, invalidated, or circumvented, or that any existing or future patents will be enforceable.enforceable or that infringement by third parties will even be detected. While we are not dependent on any individual patents, if we are unable to protect our proprietary rights, we may find ourselves at a competitive disadvantage to others who need not incur the substantial expense, time and effort required to create the innovative products.
There are additional risks to our intellectual property as a result of our international business operations.
We may face risks to our technology and intellectual property as a result of our conducting strategic business discussions outside of the United States, and particularly in jurisdictions that do not have comparable levels of protection of corporate proprietary information and assets such as intellectual property, trademarks, trade secrets, know-how and customer information and records. While these risks are common to many companies, conducting business in certain foreign jurisdictions, housing technology, data and intellectual property abroad, or licensing technology to joint ventures with foreign partners may have more significant exposure. For example, we have shared intellectual properties with entities in China, South Korea, India, Thailand, and Vietnam pursuant to confidentiality agreements in connection with discussions on potential strategic collaborations, which may expose us to material risks of theft of our proprietary information and other intellectual property, including technical data, manufacturing processes, data sets or other sensitive information. Our technology may be reverse engineered by the parties or other parties, which could result in our patents being infringed or our know-how or trade secrets stolen. The risk can be by direct intrusion wherein technology and intellectual property is stolen or compromised through cyber intrusions or physical theft through corporate espionage, including with the assistance of insiders, or via more indirect routes.
Claims that our current or future products or components contained in our products infringe the intellectual property rights of others may be costly and time consuming to defend and could adversely affect our ability to sell our products.
The telecommunicationscommunications equipment industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent, copyright, trademark and other intellectual property rights, whichthat may relate to technologies and related standards that are relevant to us. From time to time, we receive correspondence from companies claiming that our products are using technology covered by or related to the intellectual property rights of these companies and inviting us to discuss or demanding licensing or royalty arrangements for the use of the technology or seeking payment for damages, injunctive relief and other available legal remedies through litigation. These companies also include third-party non-practicing entities (also known as patent trolls) that focus on extracting royalties and settlements by enforcing patent rights.rights through litigation or the threat of litigation. These companies typically have little or no product revenues and therefore our patents maycould provide little or no deterrence against such companies filing patent infringement lawsuits against us. In addition, third parties have initiated and maycould continue to initiate litigation against our manufacturers, suppliers, distributors or even our customers alleging infringement or misappropriation of their proprietary rights with respect to existing or future products, or components of our products. For example, various proceedings have been commenced against Broadcom Corporation and other parties alleging patent infringement are routinely commenced in various jurisdictions against manufacturers and consumers of products in the wireless and broadband communications industry. In some cases, the courts have issued rulings adverse to Broadcom enjoining Broadcomsuch manufacturers and customers, which can result in monetary damages that we are obligated to indemnify or that may impact the cost and availability of components or sales of our products. Courts may also issue injunctions preventing manufacturers from offering, distributing, using or importing products that include the challenged intellectual property. Although we are not party to these proceedings, adverseAdverse rulings or injunctive relief awarded against Broadcom or other key suppliers of components for our products maycould result in delays or stoppages in the shipment of affected components, or require us to recall, modify or redesign our products containing such components. Regardless of the merit of claims against us or our manufacturers, suppliers, distributors or customers, intellectual property litigation can be time consuming and costly, and result in the diversion of the attention of technical and management personnel. Any such litigation could force us to stop manufacturing, selling, distributing, exporting, incorporating or using products or components that include the challenged intellectual property, or to recall, modify or redesign such products. In addition, if a party accuses us of infringing upon its proprietary rights, we may have to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all. If we are unsuccessful in any such litigation, we could be subject to significant liability for damages and loss of our proprietary rights. Any of these events or results could have a material adverse effect on our business, operations, financial condition and results of operations.liquidity.
Due to the availability of third party licenses.
We cannot assure you that our existingcurrently have significant operations in Canada, South Korea, India and future third-party licenses will be available to us on commercially reasonable terms, if at all. Our inability to maintain or obtain any third-party license required to sell or develop our products and product enhancements could require us to obtain substitute technology of lower quality or performance standards, or at greater cost.
In addition, some of our customer purchase agreements are governed by foreign laws and regulations, which may differ significantly from the laws and regulations of the United States. We may be limited in our ability to enforce our rights under these agreements and to collect damages, if awarded. Any of these factors could harm our existing international operations and business or attract prospective employees. Difficulties relatingimpair our ability to obtaining stockholder approvalcontinue expanding into international markets.
We face exposure to foreign currency exchange rate fluctuations.
We conduct significant business in South Korea, Japan, India, Vietnam, Europe, Middle East and Latin America, all of equity compensation plans could also make it harderwhich subject us to foreign currency exchange rate risk.
We have in the past and may in the future undertake a hedging program to mitigate the impact of foreign currency exchange rate fluctuations. The use of such hedging activities may not offset any or more expensive for usthan a portion of the adverse financial effects of unfavorable movements in foreign currency exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to grant share-based paymentsstructure effective hedges with such instruments, which could adversely affect our business, operations, financial condition, and liquidity.
As such, our results of operations and our cash flows could be impacted by changes in foreign currency exchange rates.
Risks Related to employeesour Industry
The telecommunications networking business requires the application of complex revenue and expense recognition rules and the regulatory environment affecting generally accepted accounting principles is uncertain. Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our business.
The nature of our business requires the future.
Changes in government regulations whichrelated to our business could harm our business.
Our operations are subject to various laws and regulations, including those regulations promulgated by the FCC.Federal Communications Commission (“FCC”). The FCC has jurisdiction over the entire communications industry in the United States and, as a result, our existing and future products and our customers’ products are subject to FCC rules and regulations. Changes to current FCC rules and regulations and future FCC rules and regulations could negatively affect our business. Non-compliance with the FCC’s rules and regulations would expose us to potential enforcement actions, including monetary
forfeitures, and could damage our reputation among potential customers.The uncertainty associated with future FCC decisions may cause network service providers to delay decisions regarding their capital expenditures for equipment for broadband services. In addition, international regulatory bodies establish standards that may govern our products in foreign markets. The SEC has adopted disclosure rules regarding the use of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries (DRC) and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals. These rules may have the effect of reducing the pool of suppliers who can supply DRC “conflict free” components and parts, and we may not be able to obtain DRC conflict free“conflict free” products or supplies in sufficient quantities for our operations. Also, we may face reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the origins for the conflict minerals used in our products. In addition, governments and regulators in many jurisdictions have implemented or are evaluating regulations relating to cyber security, privacy and data protection, which can affect the markets and requirements for networking and communications equipment. We are unable to predict the scope, pace or financial impact of government regulations and other policy changes that could be adopted in the future, any of which could negatively impact our operations and costs of doing business. Because of our smaller size, legislation or governmental regulations can significantly increase our costs and affect our competitive position. Changes to or future domestic and international regulatory requirements could result in postponements or cancellations of customer orders for our products and services, which wouldcould harm our business, operations, financial condition and results of operations.liquidity. Further, we cannot be certain that we will be successful in obtaining or maintaining regulatory approvals that may,could, in the future, be required to operate our business.
Industry consolidation may lead to increased competition and could harm our operating results.
There has been a trend toward industry consolidation in the communications equipment market for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could have a material adverse effect on our business, operations, financial condition, and liquidity. Furthermore, rapid consolidation could result in a decrease in the number of customers we serve. The loss of a major customer could have a material adverse effect on our business, operations, financial condition, and liquidity.
Risks Related to our Common Stock
DASAN Networks, Inc. (“DNI”) owns a significant amount of our outstanding common stock and has the ability to exert significant influence or control over any matters that require stockholder approval, including the election of directors and the approval of certain transactions, and DNI’s interests may conflict with our interests and the interests of other stockholders.
As of December 31, 2021, DNI owned approximately 36.7% of the outstanding shares of our common stock, representing a significant amount of the votes entitled to be cast by the holders of our outstanding common stock at a stockholder meeting. Due to its significant ownership percentage of our common stock, DNI has the ability to substantially influence or control the outcome of any matter submitted for the vote of our stockholders, including the election of directors and the approval of certain transactions. The interests of DNI may conflict with the interests of our other stockholders or with holders of our indebtedness and may cause us to take actions that our other stockholders or holders of our indebtedness do not view as beneficial.
DNI’s large concentration of stock ownership may make it more difficult for a third party to acquire us or discourage a third party from seeking to acquire us. Any potential third-party acquirer would most likely need to negotiate any such transaction with DNI, and the interests of DNI with respect to such transaction may be different from the interests of our other stockholders or with holders of our indebtedness.
Additionally, two of the Company’s directors serve as executive officers of DNI – Min Woo Nam is the Chief Executive Officer and Chairman of the Board of Directors of DNI and Choon Yul Yoo is the Chief Operating Officer of DNI. Messrs. Nam and Yoo owe fiduciary duties to us and, in addition, have duties to DNI. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and DNI.
There is a limited public market of our common stock.
There is a limited public market for our common stock. The average daily trading volume in our common stock during the 12 months ended December 31, 2021 was approximately 125,000 shares per day. We cannot provide assurances that a more active trading market will develop or be sustained. As a result of low trading volume in our common stock, the purchase or sale of a relatively small number of shares of our common stock could result in significant price fluctuations and it may be difficult for holders to sell their shares without depressing the market price of our common stock.
DNI, our largest stockholder, owned approximately 10.1 million shares of our common stock as of December 31, 2021 and such shares are registered with the SEC for resale. Its shares became eligible for resale without restriction as to volume limitations. Our stock price could suffer a significant decline as a result of any sudden increase in the number of shares sold in
the public market or market perception that the increased number of shares available for sale will exceed the demand for our common stock.
We do not expect to declare or pay dividends in the foreseeable future.
We do not expect to declare or pay dividends in the foreseeable future, as we anticipate that we will invest future earnings in the development and growth of our business. Therefore, holders of our common stock will not receive any return on their investment unless they sell their securities, and holders may be unable to sell their securities on favorable terms or at all.
General Risk Factors
We may need additional capital, and we cannot be certain that additional financing will be available.
In January 2021, we raised approximately $59.5 million in an equity offering. Refer to Note 9 Stockholders’ Equity, in the Notes to Consolidated Financial Statements, for more detail. We need sufficient capital to fund our ongoing operations and may require additional financing in the future to expand our business, acquire assets or repay or refinance our existing debt. Our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. We cannot assure you that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution.
If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things: (i) maintain existing operations; (ii) pay ordinary expenses; (iii) fund our business expansion or product innovation; (iv) pursue future business opportunities, including acquisitions; (v) respond to unanticipated capital requirements; (vi) repay or refinance our existing debt; (vii) hire, train and retain employees; or (viii) respond to competitive pressures or unanticipated working capital requirements.
Our failure to do any of these things could seriously harm our business, financial condition, liquidity and operating results. In addition, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions that we have previously taken, and reduce operations in low margin regions, including reductions in headcount, which could have a material adverse effect on our business, operations, financial condition and liquidity.
Our future operating results are difficult to predict and our stock price may continue to be volatile.
As a result of a variety of factors discussed in this Annual Report on Form 10-K, our revenues for a particular quarter are difficult to predict. Our revenue and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. The primary factors that could affect our results of operations include the following: (i) commercial acceptance of our products and services; (ii) fluctuations in demand for network access products; (iii) fluctuation in gross margin; (iv) our ability to attract and retain qualified and key personnel; (v) the timing and size of orders from customers; (vi) the ability of our customers to finance their purchase of our products as well as their own operations; (vii) new product introductions, enhancements or announcements by our competitors; (viii) our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; (ix) changes in our pricing policies or the pricing policies of our competitors; (x) the loss of or failure to renew on commercially reasonable terms any third-party licenses necessary for or relating to our products; (xi) the ability of our company and our contract manufacturers to attain and maintain production volumes and quality levels for our products; (xii) our ability to obtain sufficient supplies of sole or limited source components; (xiii) increases in the prices of the components we purchase, or quality problems associated with these components; (xiv) unanticipated changes in regulatory requirements which may require us to redesign portions of our products; (xv) changes in accounting rules; (xvi) integrating and operating any acquired businesses; (xvii) our ability to achieve targeted cost reductions; (xviii) how well we execute on our strategy and operating plans; (xix) general economic conditions as well as those specific to the communications, internet and related industries; and (xx) the economic uncertainty created by the ongoing COVID-19 pandemic, including its potentially adverse impact on all the foregoing factors.
Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, operations, financial condition and liquidity that could adversely affect our stock price. Further, the ongoing COVID-19 pandemic has resulted in severe disruption and volatility in the financial markets. We anticipate that our stock price and trading volume may continue to be volatile in the future, whether due to the factors described above, volatility in public stock markets generally (particularly in the technology sector) or otherwise.
Strategic acquisitions or investments that we have made or that we could pursue or make in the future may disrupt our operations and harm our business, operations, financial condition, and liquidity.
As part of our business strategy, we have made investments in and acquired other companies, including Optelian and RIFT in 2021, that we believe are complementary to our core business. In the future we may continue to make investments in or acquire
other companies or complementary solutions or technologies. Any such acquisition or investment may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable opportunities, whether or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. These transactions could also result in dilutive issuances of equity securities, the incurrence of debt or assumption of liabilities, and increase our risk of litigation exposure, which could adversely affect our operating results. In addition, if the resulting business from such a transaction fails to meet our expectations, our operating results, business, and financial condition may suffer or we may be exposed to unknown risks or liabilities.
Additionally, any significant acquisition would require the consent of our lenders. Any failure to receive such consent could delay or prohibit us from acquiring companies that we believe could enhance our business. Furthermore, we may dedicate significant time and capital resources in the pursuit of acquisition opportunities and may be unable to find and identify desirable acquisition targets or business opportunities or be successful in entering into an agreement with any particular strategic partner.
Upon the closing of any acquisition transaction, we will need to integrate the acquired organization and its products and services with our legacy operations. The integration process may be expensive, time-consuming and a strain on our resources and our relationships with employees, customers, distributors and suppliers, and ultimately may not be successful. The benefits or synergies we may expect from the acquisition of complementary or supplementary businesses may not be realized to the extent or in the time frame we initially anticipated. Mergers and acquisitions of high-technology companies are inherently subject to increased risk and to many factors outside of our control, and we cannot be certain that our previous or future acquisitions will be successful and will not materially adversely affect our business, operations, financial condition, and liquidity. Any failure to successfully acquire and integrate acquired organizations and their products and services could seriously harm our business, operations, financial condition, and liquidity.
Some of the risks that could affect our ability to successfully integrate acquired businesses, including Optelian and Rift’s telecommunication systems business, include those associated with: (i) failure to successfully further develop the acquired products or technology; (ii) insufficient revenues to offset increased expenses associated with acquisitions and where competitors in such markets have stronger market positions; (iii) conforming the acquired company’s standards, policies, processes, procedures and controls with our operations; (iv) difficulties in entering markets in which we have no or limited prior experience; (v) difficulties in integrating the operations, technologies, products and personnel of the acquired companies; (vi) coordinating new product and process development, especially with respect to highly complex technologies; (vii) potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after the announcement of acquisition plans or transactions; (viii) hiring and training additional management and other critical personnel; (ix) in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries; (x) increasing the scope, geographic diversity and complexity of our operations; (xi) diversion of management’s time and attention away from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions; (xii) consolidation of facilities, integration of the acquired company’s accounting, human resource and other administrative functions and coordination of product, engineering and sales and marketing functions; (xiii) the geographic distance between the companies; (xiv) failure to comply with covenants related to the acquired business; (xv) unknown, underestimated, and/or undisclosed liabilities for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, employment claims, pension liabilities, commercial disputes, tax liabilities and other known and unknown liabilities; (xvi) litigation or other claims in connection with the acquired company, including claims for terminated employees, customers, former stockholders or other third parties; and (xvii) the disruption, economic and otherwise, created by the on-going COVID-19 pandemic, including its potentially compounding effect on all the foregoing factors.
If demand for our products and solutions does not develop as we anticipate, then our business operations, financial condition, and liquidity will be adversely affected.
Our future revenue depends significantly on our ability to successfully develop, enhance and market our products and solutions to our target markets. Most network service providers have made substantial investments in their current infrastructure, and they may elect to remain with their current architectures or to adopt new architectures in limited stages or over extended periods of time. A decision by a customer to purchase our products will involve a significant capital investment. We must convince our service provider customers that they will achieve substantial benefits by deploying our products for future upgrades or expansions. We may experience difficulties with product reliability, partnering, and sales and marketing efforts that could adversely affect our business and divert management attention and resources from our core business. We do not know whether a viable market for our products and solutions will develop or be sustainable in our businesses. If these markets do not develop or develop more slowly than we expect, including as a result of conditions created by the ongoing COVID-19 pandemic, our business, operations, financial condition and liquidity will be materially harmed.
Increased tariffs on products and goods that we purchase from off-shore sources (particularly Chinese sources) and changes in international trade policies and relations could have an adverse effect on our customers and operating results.
The pricing of our products to customers and our ability to conduct business with certain customers can be affected by changes in U.S. and other countries’ trade policies. For example, before the trade deal was signed between the U.S. and China on January 15, 2020, the United States had imposed tariffs on a wide-range of products and goods manufactured in China that are directly or indirectly imported into the United States. In response, various countries and economic regions announced plans or intentions to impose retaliatory tariffs on a wide-range of products they import from the United States. Any newly imposed, announced and threatened U.S. tariffs and retaliatory tariffs could have the effect of increasing the cost of materials we use to manufacture certain products, which could result in lower margins. The tariffs could also result in disruptions to our supply chain, as suppliers struggle to fill orders from companies trying to purchase goods in bulk ahead of announced tariffs. Although we believe that the incremental costs to us of these tariffs were immaterial, if new tariffs are imposed or if new tariffs apply to additional categories of components used in our manufacturing activities, and if we are unable to pass on the costs of tariffs to our customers, our operating results would be harmed.
Changes in political environments, governmental policies, international trade policies and relations, including as a result of tensions between the United States and China regarding the COVID-19 pandemic, trade practices and the protection of intellectual property rights, could result in revisions to laws or regulations or their interpretation and enforcement, trade sanctions, or retaliatory actions by China in response to U.S. actions, which could have an adverse effect on our customers, business plans and operating results.
We rely on contract manufacturers for a portion of our manufacturing requirements.
We rely on contract manufacturers to perform a portion of the manufacturing operations for our products. These contract manufacturers build products for other companies, including our competitors. In addition, we do not have contracts in place with some of these providers and may not be able to effectively manage those relationships. We cannot be certain that our contract manufacturers will be able to fill our orders in a timely manner. We face a number of risks associated with this dependence on contract manufacturers including reduced control over delivery schedules, the potential lack of adequate capacity during periods of excess demand, poor manufacturing yields and high costs, quality assurance, increases in prices, and the potential misappropriation of our intellectual property. We have experienced in the past, and may experience in the future, problems with our contract manufacturers, such as inferior quality, insufficient quantities and late delivery of products.
We face supply chain risk, and our failure to estimate customer demand properly could result in excess or obsolete component inventories that could adversely affect our gross margins.
Occasionally, we may experience a supply shortage, or a delay in receiving, certain component parts as a result of strong demand for the component parts and/or capacity constraints or other problems experienced by suppliers. If shortages or delays persist, the price of these components may increase, or the components may not be available at all, and we may also encounter shortages if we do not accurately anticipate our needs. Conversely, we may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenue and gross margins could suffer until other sources can be developed. During 2021, we experienced disruptions in our supply chain, and we anticipate that such disruptions will continue in 2022. These supply issues have limited our ability to supply demand of certain customers. It is difficult to predict the future impact of these ongoing supply issues. Our operating results would also be adversely affected if, anticipating greater demand than actually develops, we commit to the purchase of more components than we need. Furthermore, as a result of binding price or purchase commitments with suppliers, we may be obligated to purchase components at prices that are higher than those available in the current market. In the event that we become committed to purchase components at prices in excess of the current market price, our gross margins could decrease. In the past we experienced component shortages that adversely affected our financial results and, in the future, may continue to experience component shortages.
The loss of a key customer or a significant deterioration in the financial condition of a key customer could have a material adverse effect on the Company’s results of operations.
The Company’s revenue is dependent on several key customers. A loss of one or more of the Company’s key customers, or a dispute or litigation with one of these key customers could affect adversely our revenue and results of operations. A significant deterioration in the financial condition or bankruptcy filing of a key customer could affect adversely the Company’s business, results of operations, and financial condition.
In addition, the Company is subject to credit risk associated with the concentration of accounts receivable from its key customers. As of December 31, 2021, two customers represented 26% and 10% of net accounts receivable. As of December 31, 2021, the Company has an allowance for doubtful account of $16.7 million related to one customer. If one or more of the Company’s top customers were to become bankrupt or insolvent or otherwise were unable to pay for the products and services provided by the Company, including as a result of conditions created by the on-going COVID-19 pandemic, the Company may incur significant write-offs of accounts receivable or incur other impairment charges, which may have a material adverse effect on the Company’s results of operations.
We have experienced significant turnover with respect to our executives and our board, and our business could be adversely affected by these and other transitions in our senior management team or if any future vacancies cannot be filled with qualified replacements in a timely manner.
We have experienced significant turnover on our executive team and board since 2018. As a result of this turnover, our remaining management team has been required to take on increased responsibilities, which could divert attention from key business areas. If we continue to experience similar turnover in the future, we may be unable to timely replace the talent and skills of our management team and directors.
Management transitions are often difficult and inherently cause some loss of institutional knowledge, which could negatively affect our results of operations and financial condition. Our ability to execute our business strategies may be adversely affected by the uncertainty associated with these transitions and the time and attention from the board and management needed to fill any future vacant roles could disrupt our business. If we are unable to successfully identify and attract adequate replacements for future vacancies in our management roles in a timely manner, we could experience increased employee turnover and harm to our business, growth, financial condition, results of operations and cash flows. We face significant competition for executives with the qualifications and experience we seek.
Further, we cannot guarantee that we will not face similar turnover in the future. Our senior management’s knowledge of our business and industry would be difficult to replace, and any further turnover could negatively affect our business, growth, financial conditions, results of operations and cash flows.
Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.
We have historically used equity incentives, including stock options, as a key component of our employee compensation program in order to align the interests of our employees with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit packages. If the trading price of our common stock declines, this would reduce the value of our share-based compensation to our present employees and could adversely affect our ability to retain existing or attract prospective employees. Difficulties relating to obtaining stockholder approval of equity compensation plans could also make it harder or more expensive for us to grant share-based payments to employees in the future.
Our success largely depends on our ability to retain and recruit key personnel, and any failure to do so could harm our ability to meet key objectives.
Our future success depends upon the continued services of our Chief Executive Officer and other key employees, and our ability to identify, attract and retain highly skilled technical, managerial, sales and marketing personnel who have critical industry experience and relationships that we rely on to build and operate our business. As discussed elsewhere in these Risk Factors, we have experienced significant turnover on our executive team and board since 2018, including the departures of our former Chief Executive Officer and Chief Financial Officer. The loss of the services of any of our key employees or executive officers could delay the development and production of our products and negatively impact our ability to maintain customer relationships, which could harm our business, operations, financial condition and liquidity.
Our collection, processing, storage, use, and transmission of personal data could give rise to liabilities as a result of governmental regulation, increasing legal requirements.
We collect, process, store, use, and transmit personal data on a daily basis. Personal data is increasingly subject to legal and regulatory protections around the world, which vary widely in approach and which possibly conflict with one another. In recent years, for example, U.S. legislators and regulatory agencies, such as the Federal Trade Commission, as well as U.S. states have increased their focus on protecting personal data by law and regulation and have increased enforcement actions for violations of privacy and data protection requirements. The State of California recently adopted the California Consumer Protection Act (“CCPA”), which went into effect on January 1, 2020. The European Commission also approved and adopted the General Data Protection Regulation (GDPR), a data protection law, which became effective in May 2018. These data protection laws and regulations are intended to protect the privacy and security of personal data that is collected, processed, and transmitted in or from the relevant jurisdiction. Both the CCPA and the GDPR established new requirements applicable to the processing of personal data, afford new data protection rights to individuals and impose significant penalties for data breaches. Individuals also have a right to compensation under the GDPR for financial or non-financial losses. In July 2020, the EU-U.S. Privacy Shield framework which allowed U.S. companies that self-certify to the U.S. Department of Commerce and publicly commit to comply with specified requirements to import personal data from the EU was invalidated as a GDPR compliance mechanism by the European Court of Justice (“ECJ”). These developments create some uncertainty. Ensuring compliance with these laws is an ongoing commitment that involves substantial costs, which could otherwise adversely affect our business operations and negatively impact our financial position or cash flows. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us, subject us to negative publicity and significant penalties and ultimately cause an adverse effect on our business.
If we experience a significant disruption in, or breach in security of, our information technology systems, our business could be adversely affected.
We rely on several centralized information technology systems to provide products and services, maintain financial records, process orders, manage inventory, process shipments to customers and operate other critical functions. If we experience a prolonged system disruption in the information technology systems that involve our interactions with customers or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In addition, our information technology systems maycould be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. Furthermore, security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to the company or our employees, partners, customers or suppliers, which could result in significant financial, legal or reputational damage to the company.
Compliance or the failure to comply with current and future environmental regulations could cause us significant expense.
We are subject to a variety of federal, state, local and foreign environmental regulations. If we fail to comply with any present or future regulations, we could be subject to liabilities, the suspension of production or prohibitions on the sale of our products. In addition, such regulations could require us to incur other significant expenses to comply with environmental regulations, including expenses associated with the redesign of any non-compliant product. From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced and the impact that they could have on our operations or results. For example, in 2003 the European Union enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive and the Waste Electrical and Electronic Equipment Directive, for implementation in European Union member states. We are aware of similar legislation that is currently in force or has been considered in the U. S., as well as other countries, such as cybersecurity attacks, computer virusesJapan and China. Implementation of and compliance with these laws may be costly or terrorism may disrupt our operations and harmcould otherwise adversely affect our business reputationoperations, which could negatively impact our financial position or cash flows. Our failure to comply with any such regulatory requirements or contractual obligations could result in us being liable for costs, fines, penalties or third-party claims, and operating results
Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our international activities could subject us to significant civil or criminal penalties.
Failure to comply with the Foreign Corrupt Practices Act could subject us to significant civil or criminal penalties. A significant portion of network security measures, our networkrevenues is generated from sales outside of the United States. As a result, we are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”). The FCPA generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be vulnerableheld liable for the corrupt actions taken by employees, strategic or local partners or other representatives. If we or our intermediaries fail to cybersecurity attacks, computer viruses, break-inscomply with the requirements of the FCPA or similar legislation, governmental authorities in the U.S. and similar disruptions. Cybersecurity attacks,elsewhere could seek to impose civil and/or criminal fines and penalties which could have an adverse effect on our results of operations, financial condition and cash flow.
Our business and future operating results are subject to global economic and market conditions.
Market turbulence and weak economic conditions, including those caused by the on-going COVID-19 pandemic, as well as concerns about energy costs, geopolitical issues, inflation, the availability and cost of credit, business and consumer confidence, and unemployment could impact our business in particular, are evolvinga number of ways, including:
Potential deferment of purchases and include, but are not limitedorders by customers: Uncertainty about global economic conditions could cause consumers, businesses and governments to malicious software, attemptsdefer purchases in response to gain unauthorizedflat revenue budgets, tighter credit, decreased cash availability and weak consumer confidence. Accordingly, future demand for our products could differ materially from our current expectations.
Customers’ inability to obtain financing to make purchases and/or maintain their business: Some of our customers require substantial financing in order to finance their business operations, including capital expenditures on new equipment and equipment upgrades, and make purchases from us. The potential inability of these customers to access the capital needed to data,finance purchases of our products and other electronic security breachesmeet their payment obligations to us could adversely impact our business, operations, financial condition, and liquidity. While we monitor these situations carefully and attempt to take appropriate measures to protect ourselves, including factoring credit arrangements to financial institutions, it is possible that could leadwe may have to disruptions in systems, unauthorized release of confidentialdefer
revenue until cash is collected or otherwise protected information and corruption of data. Any such eventwrite-down or write-off uncollectible accounts. Such write-downs or write-offs, if large, could have a material adverse effect on our business, operating resultsoperations, financial condition, and financial condition.
Negative impact from increased financial condition. The continued threatpressures on third-party dealers, distributors and retailers: We make sales in certain regions through third-party dealers, distributors and retailers. These third parties may be impacted, among other things, by a significant decrease in available credit. If credit pressures or other financial difficulties result in insolvency for these third parties and we are unable to successfully transition end customers to purchase our products from other third parties, or from us directly, it could adversely impact our business, operations, financial condition, and liquidity.
Negative impact from increased financial pressures on key suppliers: Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of terrorismquality materials, parts and heightened security and military actioncomponents from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity constrained or insolvent, it could result in response to this threat,a reduction or any future acts of terrorism, may cause further disruption to the economy and create further uncertaintiesinterruption in supplies or a significant increase in the economy. Energyprice of supplies and adversely impact our financial condition and results of operations. In addition, credit constraints of key suppliers could result in accelerated payment of accounts payable by us, impacting our cash flow.
We may experience material adverse impacts on our business, operations, financial condition, and liquidity as a result of weak or recessionary economic or market conditions in the United States, South Korea, Germany, or the rest of the world.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may damage our facilities or the facilities of third parties on which we depend, and could materially impact our supply chain and the operations of our customers and suppliers.
Our global headquarters is located in Plano, Texas and our U.S. manufacturing facility is located in Seminole, Florida. These facilities are subject to disruption from natural causes beyond our control, including physical risks from tornados, severe storms, floods, other natural disaster or power shortages such as gas or electricity shortages,outages that could have similar negative impacts. To the extent that suchdisrupt operations or impair critical systems. Any of these disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipmentother events outside of our products,control could affect our business negatively, harming our operating results and financial condition could be materially and adversely affected.
Any of the outstanding shares of our common stock. Accordingly, until such time as DNI and its affiliates hold shares representing less than a majority of the votes entitled to be cast by the holders of our outstanding common stock at a stockholder meeting, DNI generally will have the ability to control the outcome of any matter submitted for the vote of our stockholders, except in certain circumstances set forth in our certificate of incorporation or bylaws. In addition, pursuant to our bylaws, we are subject to certain requirements and limitations regarding the composition of our board of directors until September 2018. Thereafter, for so long as DNI and its affiliates hold shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of our common stock at a stockholder meeting, DNI will be able to freely nominate and elect all the members of our board of directors, subject only to a requirement that a certain number of directors qualify as "independent directors" under Nasdaq listing rules and applicable laws. We have elected to be treated as a “controlled company” under Nasdaq Marketplace Rules because more than 50% of the voting power for the election of directors is held by DNI. As a “controlled company,” we may rely on exemptions from certain corporate governance requirements under Nasdaq Marketplace Rules, including the requirement that we have a majority of independent directors on the Board of Directors and requirements with respect to compensation and nominating and corporate governance committees. The directors elected by DNI will have the authority to make decisions affecting our capital structure, including the issuance of additional capital stock or options, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the declaration of dividends. The interests of DNI may not coincide with the interests of our other stockholders or with holders of our indebtedness. DNI’s ability, subject to the limitations in our certificate of incorporation and bylaws, to control all matters submitted to our stockholders for approval limits the ability of other stockholders to influence corporate matters and, as a result, we may take actions that our stockholders or holders of our indebtedness do not view as beneficial. In addition, the existence of a controlling stockholderforegoing events may have the effect of making it more difficult fordisrupting our supply chain, which could harm our business, financial condition results of operations. Illness, travel restrictions, absenteeism, or other workforce disruptions could negatively affect our supply chain, manufacturing, distribution, or other business processes. We may face additional production disruptions in the future, which may place constraints on our ability to produce products in a third party to acquire,timely manner or discouraging a third party from seeking to acquire, us. A third party would be required to negotiate any such transaction with DNI, and the interestsmay increase our costs.
Future issuances of DNI with respect to such transactionadditional equity securities could result in dilution of existing stockholders’ equity ownership.
We may be different from the interests of our other stockholders or with holders of our indebtedness. In addition, provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to certain stockholders.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
ITEM 2. | PROPERTIES |
In 2020, the Company moved its headquarter and established its Engineering Center of Excellence in Plano, Texas, U.S, where we lease our worldwide headquarters, which are located in Oakland, California.the office spaces. We also lease facilities for manufacturing research and development purposes at locations includingin Seminole, Florida, U.S., where we manufacture our low volume, high mix products. We also lease facilities for office and Alpharetta, Georgia,warehouse space in South Korea and in Korea, India, China and Vietnam. We maintain smaller offices to provide sales and customer support at various domestic and international locations. We manufacture many of our more complex products at our manufacturing facility in Florida. We believe that our existing facilities are suitable and adequate for our present purposes.
ITEM 3. | LEGAL PROCEEDINGS |
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, we dothe 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 ourits consolidated
financial position, or results of operations.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 4. | MINE SAFETY DISCLOSURES |
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Set forth below is information concerning our executive officers as of December 31, 2021.
Name | Age | Office | ||||
Charles Daniel Vogt | 58 | Chief Executive Officer, President | ||||
Misty Kawecki | 48 | Chief Financial Officer | ||||
Justin Ferguson | 44 | Chief Legal Officer and Corporate Secretary |
Charlie Vogt was appointed as the President and Chief Executive Officer of the DZS Inc., effective August 1, 2020. In addition, Mr. Vogt was elected as a member of the Board of Directors, also effective August 1, 2020. In connection with Mr. Vogt’s appointment, Il Yung Kim ceased to serve as President and Chief Executive Officer of DZS Inc. and as a member of the Board effective July 31, 2020. Prior to joining the Company, Mr. Vogt was most recently President and Chief Executive Officer of ATX Networks, a leader in broadband access and media distribution, where he led the company through extensive transformation and growth since February 2018 and will remain a member of the board. From July 2013 to January 2018, Mr. Vogt served as President and Chief Executive Officer of Imagine Communications, where he directed the company through change as it evolved its core technology, including large-scale restructuring and rebranding and multiple technology acquisitions as he implemented a vision and growth strategy. Before joining Imagine Communications, Mr. Vogt was President and Chief Executive Officer of GENBAND (today known as Ribbon Communications), where he transformed the company from a startup to a global leader in voice over IP and real-time IP communications solutions. His professional career has also included leadership roles at Taqua (Tekelec), Lucent Technology (Nokia), Ascend Communications (Lucent), ADTRAN, Motorola and IBM.
Misty Kawecki was appointed to the position of Chief Financial Officer on August 2, 2021. Ms. Kawecki recently served as Chief Financial Officer and Head of Operations at MediaKind, Inc., a large-scale media platform. Prior roles include Chief Accounting Officer at Imagine Communications, Inc., and executive roles at GENBAND (today known as Ribbon Communications) and McAfee (today is a subsidiary of Intel Corporation). She began her career at Ernst & Young LLP. She is a Certified Public Accountant and holds a Master’s Degree in accounting from Texas Tech University.
Justin K. Ferguson has served as Chief Legal Officer and Corporate Secretary since September 2020. Prior to joining DZS, from 2018 to 2020, Mr. Ferguson was the Executive Vice President, General Counsel and Corporate Secretary of Ribbon Communications Inc., a Nasdaq listed company that provides real time communications software and packet and optical transport solutions. Prior to joining Ribbon, from 2015 to 2018, Mr. Ferguson was the Vice President, General Counsel and Corporate Secretary of Zix Corporation, a Nasdaq listed company that provides email security solutions. From 2011 to 2015, Mr. Ferguson served as Senior Vice President—Director of Legal for GENBAND. Prior to GENBAND, he was an attorney at the law firms of Weil, Gotshal & Manges LLP and Baker Botts L.L.P. Mr. Ferguson received a Juris Doctorate degree from Texas Tech University School of Law and a Bachelor's degree in Business Administration from Texas Tech University. He is a member of the State Bar of Texas.
PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed on the Nasdaq Capital Market under the symbol “DZSI” (formerly "ZHNE" prior to the Merger). The following table sets forth, for the periods indicated, the high and low per share sales prices of our common stock as reported on Nasdaq. All per share prices reflect the one-for-five reverse stock split effected on February 28, 2017.
2016: | |||||||
High | Low | ||||||
Fourth Quarter ended December 31, 2016 | $ | 5.95 | $ | 4.65 | |||
Third Quarter ended September 30, 2016 | 7.10 | 5.25 | |||||
Second Quarter ended June 30, 2016 | 8.25 | 5.60 | |||||
First Quarter ended March 31, 2016 | 8.10 | 5.00 |
2015: | |||||||
High | Low | ||||||
Fourth Quarter ended December 31, 2015 | $ | 7.50 | $ | 4.70 | |||
Third Quarter ended September 30, 2015 | 11.20 | 6.80 | |||||
Second Quarter ended June 30, 2015 | 14.75 | 6.25 | |||||
First Quarter ended March 31, 2015 | 8.75 | 6.05 |
As of September 20, 2017, there were 596March 4, 2022, we had 376 registered stockholders of record. A substantially greater number of holders of DZS common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and otheror financial institutions.
Dividend Policy
We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the Board of Directors, subject to any applicable restrictions under our debt and credit agreements, and will be dependent upon our financial condition, results of operations, capital requirements, general business condition and such other factors as the Board of Directors may deem relevant.
ITEM 6. | [RESERVED] |
12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | ||||||
DASAN Zhone Solutions, Inc. | $100 | $53 | $601 | $199 | $113 | $111 | |||||
S&P 500 Index - Total Returns | $100 | $116 | $154 | $175 | $177 | $198 | |||||
NASDAQ Telecommunications Index | $100 | $105 | $134 | $150 | $142 | $167 |
Year Ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(As restated) | (As restated) | ||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Statement of Comprehensive Income (Loss) Data: | |||||||||||||||||||
Net revenue | $ | 121,670 | $ | 114,421 | $ | 108,634 | $ | 108,046 | $ | 102,761 | |||||||||
Net revenue - related parties | 28,634 | 24,775 | 30,760 | 10,164 | 5,610 | ||||||||||||||
Total net revenue | 150,304 | 139,196 | 139,394 | 118,210 | 108,371 | ||||||||||||||
Cost of revenue | |||||||||||||||||||
Products and services | 84,415 | 81,420 | 70,361 | 66,821 | 58,689 | ||||||||||||||
Products and services - related parties | 24,738 | 21,890 | 28,191 | 10,436 | 6,002 | ||||||||||||||
Amortization of intangible assets | 204 | — | — | — | — | ||||||||||||||
Gross profit | 40,947 | 35,886 | 40,842 | 40,953 | 43,680 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Research and product development | 25,396 | 21,331 | 22,805 | 18,774 | 18,019 | ||||||||||||||
Selling, marketing, general and administrative | 27,348 | 17,528 | 14,834 | 14,040 | 18,438 | ||||||||||||||
Amortization of intangible assets | 1,556 | 4 | — | — | — | ||||||||||||||
Gain from sale of assets | (304 | ) | — | — | — | — | |||||||||||||
Total operating expenses | 53,996 | 38,863 | 37,639 | 32,814 | 36,457 | ||||||||||||||
Operating income (loss) | (13,049 | ) | (2,977 | ) | 3,203 | 8,139 | 7,223 | ||||||||||||
Interest income | 183 | 136 | 418 | 550 | 1,314 | ||||||||||||||
Interest expense | (830 | ) | (532 | ) | (526 | ) | (629 | ) | (523 | ) | |||||||||
Other income (expense), net | (145 | ) | 266 | 122 | 656 | (691 | ) | ||||||||||||
Income (loss) before income taxes | (13,841 | ) | (3,107 | ) | 3,217 | 8,716 | 7,323 | ||||||||||||
Income tax provision | 1,487 | 232 | 1,380 | 2,208 | 2 | ||||||||||||||
Net income (loss) | (15,328 | ) | (3,339 | ) | 1,837 | 6,508 | 7,321 | ||||||||||||
Net loss attributable to non-controlling interest | (2 | ) | — | — | — | — | |||||||||||||
Net income (loss) attributable to DASAN Zhone Solutions, Inc. | $ | (15,326 | ) | $ | (3,339 | ) | $ | 1,837 | $ | 6,508 | $ | 7,321 | |||||||
Foreign currency translation adjustments | (1,047 | ) | (2,790 | ) | (1,997 | ) | 905 | 2,570 | |||||||||||
Comprehensive income (loss) | (16,375 | ) | (6,129 | ) | (160 | ) | 7,413 | 9,891 | |||||||||||
Comprehensive income attributable to non-controlling interest | 1 | — | — | — | — | ||||||||||||||
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc. | $ | (16,376 | ) | $ | (6,129 | ) | $ | (160 | ) | $ | 7,413 | $ | 9,891 | ||||||
Basic and diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc. (1) (2) | $ | (1.32 | ) | $ | (0.36 | ) | $ | 0.20 | $ | 0.71 | $ | 0.80 | |||||||
Weighted average shares outstanding used to compute basic and diluted net income (loss) per share (1) | 11,637 | 9,314 | 9,199 | 9,146 | 9,126 | ||||||||||||||
As of December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(As restated) | (As restated) | ||||||||||||||||||
(in thousands) | |||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 18,886 | $ | 9,095 | $ | 7,150 | $ | 24,719 | $ | 11,581 | |||||||||
Working capital | 56,819 | 33,159 | 40,033 | 37,987 | 28,082 | ||||||||||||||
Total assets | 145,447 | 83,226 | 103,279 | 88,384 | 62,135 | ||||||||||||||
Stockholders’ equity and non-controlling interest | 66,868 | 41,465 | 48,633 | 47,124 | 36,102 |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
We are a global provider of networkleading-edge access, 5G transport, and enterprise communications platforms that enable the emerging hyper-connected, hyper-broadband world. Our solutions are deployed by over 750 active customers, including advanced Tier 1, national and regional service providers and enterprise customers in more than 100 countries worldwide.Our solutions and communications equipment for service provider and enterprise networks. We research, develop, test, sell, manufacture and support communications equipment in five major areas: broadband access, Ethernet switching, mobile backhaul, POLAN and SDN:
Our SDN and NFV tools and building blocks to allow service providers to migrate their networks’ full complement of legacy control plane and data plane devices to a centralized intelligent controller that can reconfigure the services of the hundreds of network elements in real time for more controlled and efficient provision of bandwidth and latency across the network. This move to SDN and NFV provides better service for end customers and a more efficient and cost-effective use of hardware resources for service providers. Our SDN and NFV tools reflect the combined experience and technologies of DNS and Legacy Zhone.
• | Increasing revenue while continuing to carefully control costs; |
• | Continuing investments in strategic research and product development activities that will provide the maximum potential return on investment; and |
• | Minimizing consumption of our cash and cash equivalents. |
2021 Highlights and Recent Developments
During 2021, the Company appointed several industry leaders to new roles within the DZS executive team. These appointments, among others, include Misty Kawecki as Chief Financial Officerand Jennifer Yohe as Chief Operations Officer. Each brings a deep history of experience in our markets.
In the first quarter of 2021, the Company made the strategic decision to transition DZS GmbH, formerly Keymile GmbH, a subsidiary of the Company located in Germany, to a sales and research and product development activitiescenter. On July 15, 2021, the Company came to an agreement with the works council and entered into a social plan that will providecovers statutory benefits and one-time severance obligations. The Company incurred related restructuring and other charges of approximately $11.9 million in 2021, consisting primarily of termination-related benefits and impairment of long-lived assets. DZS GmbH reduced headcount by approximately 100 employees. The restructuring was essentially completed in the maximum potential return on investment; and
On September 9, 2016, weMarch 3, 2021, the Company acquired DNS throughsubstantially all of the mergerassets of RIFT, Inc., a network automation solutions company, including all the outstanding shares of RIFT.IO India Private Limited, a wholly owned subsidiary of Zhone Technologies,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. The total purchase consideration was $0.5 million, including a $0.2 million holdback that was released in April of 2021 following the fulfillment of certain requirements in the purchase agreement.
On February 5, 2021, we acquired all the outstanding stock of Optelian Access Networks Corporation (“Optelian”), a leading optical networking solution provider based in Ottawa, Ontario, Canada, and its portfolio of optical transport solutions. This acquisition introduced the “O-Series” to the DZS portfolio of carrier grade optical networking products with 100 gigabits per second and above capability, expanding DZS product portfolios by providing environmentally hardened, high capacity, and flexible solutions at the network edge. The purchase price of $7.5 million included cash paid to the shareholders and option holders of Optelian, cash paid to retire Optelian's outstanding debt on the date of acquisition, and contingent payments to shareholders.
On January 26, 2021, we entered into DNS,an underwriting agreement to sell 4.6 million shares of Common Stock (including 0.6 million shares issued pursuant to the underwriters’ option to purchase additional shares) at a price of $14.00 per share in an underwritten public offering. The equity offering closed on January 29, 2021 and resulted in gross proceeds of approximately $64.4 million and net proceeds, after deducting underwriting discounts and commissions and offering expenses, of approximately $59.5 million. We used a portion of the net proceeds from the equity offering to pay off the entire outstanding balance of debt with DNS survivingrelated parties.
2021 Key Product Developments
Streamlined Product Portfolio. Our focus on product rationalization during 2021 produced a streamlined, simplified, and strategically aligned global product portfolio. Our research and development investment scale has been enhanced through product rationalization efforts and further accelerated by our pivot to a platform-based development approach for our Software and Systems solutions. These platforms give our research and development teams the capacity to increase product innovation with reuse of technology modules across multiple products, improving our ability to bring innovative and differentiated products to market quickly. In 2021 we completed the development of 29 new products across all our technology pillars.
Fiber-Fueled Broadband Connectivity Drives Innovation. We are heavily engaged in and benefiting from the unprecedented and accelerated upgrade cycle from legacy copper and first generation PON technologies to 10 gigabit broadband connectivity solutions. We are enabling the next wave of network deployments fueled by HD video collaboration, augmented and virtual
reality, interactive gaming, and the interactive and collaborative world now known as our wholly owned subsidiary. In connectionthe Metaverse. The DZS Velocity Broadband Connectivity portfolio accelerates and simplifies the network wide deployment of future-proof next generation, multi-gigabit services over fiber, which are punctuated by new product introductions that simplify the evolution from sub-gigabit PON to 10 Gbps PON, OLTs and next generation G.fast distribution point units (“DPUs”) that deliver multi-gigabit service over legacy copper in MDUs and offer a simplified path to disaggregated network architectures.
Software-Driven Connected Home & Business Experience. The unprecedented drive from service providers to deliver multi-gigabit services to subscribers creates a market opportunity for DZS to complement those advanced services with systems and software to extend those services from the network to connected subscribers’ devices. DZS has responded to this opportunity with the Merger, Zhone Technologies, Inc. changedintroduction of Intelligent 10Gbps capable Fiber Termination Points, Wi-Fi 6 Residential Gateways and Access Points, and DZS Xperience Software. We accelerated our software strategy and roadmap throughout 2021, building upon the DZS Cloud feature set and announcing a launch of DZS Xperience software that optimizes the management of Wi-Fi services (including Wi-Fi 6).
Differentiated Converged Network Edge. The DZS Helix portfolio focuses on growing service provider opportunities to serve the unique needs of the Connected Home & Business. Featuring one of the industry’s largest collections of feature-rich fiber termination points as well as residential and enterprise gateways and Wi-Fi systems, the DZS portfolio includes support for multi-gigabit capable services, Wi-Fi 6 and managed access network support all the way to the premises edge and beyond. DZS Helix portfolio is also differentiated for its namesupport for new converged network service opportunities in Enterprises and MDUs.
Mobile & Optical Edge. The adoption of 5G and O-RAN technologies have dramatically increased the requirement for bandwidth at the edge of the mobile network and disrupted the way mobile operators are architecting mobile networks. During 2021, we extended our product offerings in the midhaul and backhaul areas of the network with the following:
• | Transformational new products for the edge of the mobile network with packet-based fronthaul, enablement of non-traditional cell sites and deployment of transport and management solutions for in-building 5G small cells. |
• | Modular, compact and environmentally hardened 100G-400G Optical Edge products that enable the deployment of technologies traditionally associated with core optical transport to the very edge of the mobile and fixed access networks. |
Trends and Uncertainties
In December 2019, a strain of coronavirus, now known to DASAN Zhone Solutions, Inc. Our common stock continuescause COVID-19, was reported to be tradedhave surfaced in Wuhan, China. Since that time, the widespread and sustained transmission of the virus has reached global pandemic status. In response to the pandemic, many national and international health agencies recommended, and many countries and state, provincial and local governments implemented various measures, including travel bans and restrictions, limitations on public and private gatherings, business 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 Nasdaq Capital Market,global economy in general and our ticker symbol was changed from "ZHNE"have materially impacted and will likely continue to "DZSI" effective September 12, 2016.
Impact of Inflation and Changing Prices
The financial statements whichand related data presented herein have been prepared in accordance with generally accepted accounting principlesU.S. GAAP, which requires the measurement of financial position and operating results in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The policies discussed below are considered by management to be critical because changes in such estimates can materially affect the amount of our reported net income or loss. For all of these policies, management cautions that actual results may differ materially from these estimates under different assumptions or conditions.
FINANCIAL PERFORMANCE
Consolidated Results of Operations
The table below presents the fair valuehistorical consolidated statement of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especiallycomprehensive income (loss) with respect to intangible assets and certain tangible assets such as inventory acquired as part of the Merger.
|
| Years ended December 31, |
|
|
|
|
| |||||
|
| 2021 |
|
| 2020 |
|
| % change |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
| $ | 350,206 |
|
| $ | 300,640 |
|
|
| 16 | % |
Cost of revenue |
|
| 229,938 |
|
|
| 203,761 |
|
|
| 13 | % |
Gross profit |
|
| 120,268 |
|
|
| 96,879 |
|
|
| 24 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and product development |
|
| 47,052 |
|
|
| 37,957 |
|
|
| 24 | % |
Selling, marketing, general and administrative |
|
| 90,241 |
|
|
| 63,543 |
|
|
| 42 | % |
Restructuring and other charges |
|
| 12,310 |
|
|
| - |
|
|
| 100 | % |
Impairment of long-lived assets |
|
| 1,735 |
|
|
| 6,472 |
|
|
| -73 | % |
Amortization of intangible assets |
|
| 1,182 |
|
|
| 1,432 |
|
|
| -17 | % |
Total operating expenses |
|
| 152,520 |
|
|
| 109,404 |
|
|
| 39 | % |
Operating loss |
|
| (32,252 | ) |
|
| (12,525 | ) |
|
| 158 | % |
Interest income |
|
| 107 |
|
|
| 77 |
|
|
| 39 | % |
Interest expense |
|
| (345 | ) |
|
| (2,035 | ) |
|
| -83 | % |
Loss on extinguishment of debt |
|
| — |
|
|
| (1,369 | ) |
|
| -100 | % |
Other income (expense), net |
|
| 1,020 |
|
|
| (3,729 | ) |
|
| -127 | % |
Loss before income taxes |
|
| (31,470 | ) |
|
| (19,581 | ) |
|
| 61 | % |
Income tax provision |
|
| 3,213 |
|
|
| 3,501 |
|
|
| -8 | % |
Net loss |
| $ | (34,683 | ) |
| $ | (23,082 | ) |
|
| 50 | % |
The table below presents the historical consolidated statement of comprehensive income (loss) as a percentage of total net revenue for the periods indicated.revenues.
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
|
|
|
Net revenue |
|
| 100 | % |
|
| 100 | % |
Cost of revenue |
|
| 66 | % |
|
| 68 | % |
Gross profit |
|
| 34 | % |
|
| 32 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
Research and product development |
|
| 13 | % |
|
| 12 | % |
Selling, marketing, general and administrative |
|
| 26 | % |
|
| 21 | % |
Restructuring and other charges |
|
| 4 | % |
|
| — |
|
Impairment of long-lived assets |
|
| 1 | % |
|
| 2 | % |
Amortization of intangible assets |
|
| — |
|
|
| 1 | % |
Total operating expenses |
|
| 44 | % |
|
| 36 | % |
Operating income (loss) |
|
| (10 | )% |
|
| (4 | )% |
Interest income |
|
| — |
|
|
| — |
|
Interest expense |
|
| — |
|
|
| (1 | )% |
Loss on extinguishment of debt |
|
| — |
|
|
| (1 | )% |
Other income (expense), net |
|
| 1 | % |
|
| (1 | )% |
Income (loss) before income taxes |
|
| (9 | )% |
|
| (7 | )% |
Income tax provision (benefit) |
|
| 1 | % |
|
| 1 | % |
Net income (loss) |
|
| (10 | )% |
|
| (8 | )% |
Year ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
(As restated) | (As restated) | |||||||
Net revenue: | ||||||||
Net revenue | 81 | % | 82 | % | 78 | % | ||
Net revenue - related parties | 19 | % | 18 | % | 22 | % | ||
Total net revenue | 100 | % | 100 | % | 100 | % | ||
Cost of revenue: | ||||||||
Products and services | 56 | % | 58 | % | 50 | % | ||
Products and services - related parties | 16 | % | 16 | % | 20 | % | ||
Amortization of intangible assets | — | % | — | % | — | % | ||
Total cost of revenue | 73 | % | 74 | % | 71 | % | ||
Gross profit | 27 | % | 26 | % | 29 | % | ||
Operating expenses: | ||||||||
Research and product development | 17 | % | 15 | % | 16 | % | ||
Selling, marketing, general and administrative | 18 | % | 13 | % | 11 | % | ||
Amortization of intangible assets | 1 | % | — | % | — | % | ||
Gain from sale of assets | — | % | — | % | — | % | ||
Total operating expenses | 36 | % | 28 | % | 27 | % | ||
Operating income (loss) | (9 | )% | (2 | )% | 2 | % | ||
Interest income | 0 | % | 0 | % | 0 | % | ||
Interest expense | (1 | )% | 0 | % | 0 | % | ||
Other income (expense), net | 0 | % | 0 | % | 0 | % | ||
Income (loss) before income taxes | (9 | )% | (2 | )% | 2 | % | ||
Income tax provision | 1 | % | 0 | % | 1 | % | ||
Net income (loss) | (10 | )% | (2 | )% | 1 | % | ||
Net loss attributable to non-controlling interest | 0 | % | 0 | % | 0 | % | ||
Net income (loss) attributable to DASAN Zhone Solutions, Inc. | (10 | )% | (2 | )% | 1 | % | ||
Foreign currency translation adjustments | (1 | )% | (2 | )% | (1 | )% | ||
Comprehensive loss | (11 | )% | (4 | )% | — | % | ||
Comprehensive income attributable to non-controlling interest | — | % | — | % | — | % | ||
Comprehensive loss attributable to DASAN Zhone Solutions, Inc. | (11 | )% | (4 | )% | — | % |
Net Revenue
The following the Merger, with growth opportunities for the combined company to expand sales of legacy DNS products in the geographic regions where Legacy Zhone had a strong presence.
|
| Years ended December 31, |
|
|
|
|
| |||||
|
| 2021 |
|
| 2020 |
|
| % change |
| |||
Products |
| $ | 330.1 |
|
| $ | 281.0 |
|
|
| 17.5 | % |
Services and other |
|
| 20.1 |
|
|
| 19.6 |
|
|
| 2.6 | % |
Total |
| $ | 350.2 |
|
| $ | 300.6 |
|
|
| 16.5 | % |
2016 | 2015 | Increase (Decrease) | % change | |||||||||||
(As restated) | ||||||||||||||
Products | $ | 142.2 | $ | 133.0 | $ | 9.2 | 7 | % | ||||||
Services | 8.1 | 6.2 | 1.9 | 31 | % | |||||||||
$ | 150.3 | $ | 139.2 | $ | 11.1 | 8 | % |
2016 | 2015 | Increase (Decrease) | % change | |||||||||||
(As restated) | ||||||||||||||
Revenue by geography: | ||||||||||||||
United States | $ | 16.9 | $ | 4.4 | $ | 12.5 | 284 | % | ||||||
Canada | 2.0 | — | 2.0 | N/A | ||||||||||
Total North America | 18.9 | 4.4 | 14.5 | 330 | % | |||||||||
Latin America | 9.6 | 2.5 | 7.1 | 284 | % | |||||||||
Europe, Middle East, Africa | 13.6 | 9.4 | 4.2 | 45 | % | |||||||||
Korea | 77.9 | 114.7 | (36.8 | ) | (32 | )% | ||||||||
Other Asia Pacific | 30.3 | 8.2 | 22.1 | 270 | % | |||||||||
Total International | 131.4 | 134.8 | (3.4 | ) | (3 | )% | ||||||||
Total | $ | 150.3 | $ | 139.2 | $ | 11.1 | 8 | % |
Our revenues increased 8%16.5% or $11.1$49.6 million to $150.3$350.2 million for 20162021 compared to $139.2$300.6 million for 2015.2020. The increase in netproduct revenue during the period was primarily attributable to increased sales of our mobile and optical edge and broadband connectivity products and partly as a result of recovering from the impacts of the COVID-19 pandemic in 2021. Service revenue represents revenue from maintenance and other services associated with product shipments. The increase in service revenue was primarily due to the consummation of the Merger in September 2016, which resulted in the inclusion of net revenue from the Legacy Zhone business in 2016 for the period from and after the consummation of the Merger. This increase was partially offset by a decrease inincreased product revenue resulting from the decreasesales. In 2021, we generated $504 million in sales to certain customers in Korea.
Information about our revenues by geography is summarized below (in millions):
|
| Years ended December 31, |
|
|
|
|
| |||||
|
| 2021 |
|
| 2020 |
|
| % change |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 101.5 |
|
| $ | 61.9 |
|
|
| 64.0 | % |
Europe, Middle East, Africa |
|
| 70.0 |
|
|
| 64.6 |
|
|
| 8.4 | % |
Asia |
|
| 178.7 |
|
|
| 174.1 |
|
|
| 2.6 | % |
Total |
| $ | 350.2 |
|
| $ | 300.6 |
|
|
| 16.5 | % |
Our geographic diversification reflects the prior year period. This decrease was partially offset by the consummationcombination of the Merger in September 2016, which resulted in the inclusion of international netmarket demand, a strategic focus on capturing market share through new customer wins and new product introductions. As we have strategically expanded our revenue from the Legacy Zhone business in 2016 for the period from and after the consummation of the Merger, primarily relating to sales in Latin America, Europe and the Middle East. Net revenue from North America increased 330% or $14.5 million to $18.9 million in 2016 compared to $4.4 million in 2015. This increase was primarily due to the consummation of the Merger in September 2016, which resulted in the inclusion of net revenue related to the Legacy Zhone businessmix in North America over the past year, we continue to leverage our strength in 2016 for the period fromAsia market, particularly with Tier 1 customers in South Korea and afterJapan. We anticipate North America will continue to increase as a percentage of total revenue driven by the consummation of the Merger.
• | Americas Region: For full year 2021, revenue from the Americas increased 64.0% to $101.5 million. Our strategic emphasis on the Americas region and focus on innovation and strategic alignment with service providers and fiber overbuilders has resulted in market share gains and new customers. Our new customer traction is benefitting from government-sponsored broadband incentive programs. For example, our recently announced broadband project in Mississippi with strategic partner Irby Utilities is a beneficiary of multiple broadband stimulus programs. |
• | EMEA Region: For the full year 2021, revenue from the EMEA region increased 8.4% year-over-year to $70.0 million. Revenue from the EMEA region reflects typical fluctuations of customer deployment timeframes. For 2021, revenue from the EMEA region was largely driven by customers deploying GPON solutions in the Middle East. Throughout the year, sales activity in the region has expanded to record levels. |
• | Asia Region: For the full year 2021, regional revenue increased 2.6% to $178.7 million. The Asia region experienced strong year-end spending from several marquee customers in world leading broadband markets of South Korea and Japan across both our Broadband Connectivity and Mobile Transport segments. The 2021 revenue increase was led by our Mobile and Optical Edge product line. We anticipate more diverse customer revenue within the Asia region in 2022 as customer programs from both existing and recent wins ramp into production. |
We anticipate that our results of operations in any given period may depend to a large extent on sales to a small number of large accounts. 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 6% or $6.0 million12.8% to $109.4$229.9 million for 2016,2021, compared to $103.3$203.8 million for 2015. The increase in cost of revenue was primarily due to the consummation of the Merger in September 2016, which resulted in the inclusion of cost of revenue related to the Legacy Zhone business in 2016 for the period from and after the consummation of the Merger. This increase was partially offset by lower cost of revenue resulting from decreased sales in Korea in 2016
sales volume. The gross profit improvement was primarily due to our strategic investments and geographic diversification decisions directed towards the higher margin business following the consummation of the MergerNorth America region, despite increased supply chain costs.
Our 29 new product introductions throughout 2021 provided synergy and simplification to our next generation product portfolio, and also improved product margins. Price adjustments implemented in September 2016.
We expectanticipate that in the future our cost of revenue as a percentage of net revenuenew pricing strategy, combined with our aforementioned geographic mix diversification, new product introductions and DZS Cloud software expansion strategy, will vary depending on the mix and average selling prices of products sold, with longer term gross margin expansion expected to come from product cost reductions and manufacturing economies of scale resulting from the Merger. In addition, continued competitive and economic pressures could causeallow us to reduce our prices, adjust the carrying values of our inventory, or record inventorydeliver both revenue growth and margin expansion.
Operating expenses relating to discontinued products and excess or obsolete inventory.
Research and Product Development Expenses
Research and product development expenses increased 19% or $4.1 millionby 24.0% to $25.4$47.0 million for 20162021 compared to $21.3$38.0 million for 2015.2020. The increase was primarily due to the consummation of the Merger in September 2016, which resulted in the inclusion of $5.1 million in research and product development expense relating to the Legacy Zhone business in 2016 for the period from and after the consummation of the Merger. This increase was partially offset by a decrease during the period prior to the Merger in research and product development expenses of $0.8 million resulting from lower personnel related expenseswas primarily due to a lower headcount. We intend to continue to investstrategic hiring decisions in research, development, and product developmentline management in the second half of 2020 and into the first half of 2021 with the intent 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 increased 56% or $9.8 million42.0% to $27.3$90.2 million for 20162021 compared to $17.5$63.5 million for 2015. The increase was primarily due to the consummation of the Merger in September 2016, which resulted in the inclusion of $10.7 million in selling, marketing, general and administrative expense relating to the Legacy Zhone business in 2016 for the period from and after the consummation of the Merger. This increase was partially offset by a decrease during the period prior to the Merger of sales expenses of $2.6 million due primarily to higher bad debt expenses in 2015 and reduced commission expenses in 2016. We expect selling, marketing, general and administrative expenses to increase in 2017, primarily driven by an increase in sales commission expense resulting from expected additional sales opportunities primarily related to the combined company's mobile backhaul and FiberLAN POLAN products.
2015 | 2014 | Increase (Decrease) | % change | |||||||||||
(As restated) | (As restated) | |||||||||||||
Products | $ | 133.0 | $ | 132.3 | $ | 0.7 | 1 | % | ||||||
Services | 6.2 | 7.1 | (0.9 | ) | (13 | )% | ||||||||
$ | 139.2 | $ | 139.4 | $ | (0.2 | ) | — | % |
2015 | 2014 | Increase (Decrease) | % change | |||||||||||
(As restated) | (As restated) | |||||||||||||
Revenue by geography: | ||||||||||||||
United States | $ | 4.4 | $ | 12.5 | $ | (8.1 | ) | (65 | )% | |||||
Canada | — | — | — | — | % | |||||||||
Total North America | 4.4 | 12.5 | (8.1 | ) | (65 | )% | ||||||||
Latin America | 2.5 | 1.3 | 1.2 | 92 | % | |||||||||
Europe, Middle East, Africa | 9.4 | 20.9 | (11.5 | ) | (55 | )% | ||||||||
Korea | 114.7 | 99.6 | 15.1 | 15 | % | |||||||||
Other Asia Pacific | 8.2 | 5.1 | 3.1 | 61 | % | |||||||||
Total International | 134.8 | 126.9 | 7.9 | 6 | % | |||||||||
Total | $ | 139.2 | $ | 139.4 | $ | (0.2 | ) | — | % |
Restructuring and Other Charges:Restructuring and other administrative services.
Impairment of Long-Lived Assets:During 2021, the Company recorded an impairment charge of $1.7 million for the right-of use assets from operating leases related to completion of the headquarters relocation to Plano, Texas. During 2020, the Company recorded an impairment charge of $6.5 million for DZS GmbH intangible assets as part of the Company’s evaluation for impairment, based on a triggering event for potential impairment.
Loss on Extinguishment of Debt: During March 2020, the Company paid the outstanding term loan borrowings in full and terminated the PNC Credit Facilities. In association with this debt repayment, the Company recorded a loss on extinguishment of debt of $1.4 million. There was no debt extinguishment related charge in 2021.
Other Income (Expense), net: Other income (expense) relates mainly to realized and unrealized foreign exchange gains and losses. Other income, net
Income Tax Provision
Information about our recurring operating losses and the significant uncertainty regarding the realization of our net deferredeffective tax assets we have continued to record a full valuation allowance.rate is summarized below (in thousands except tax rate):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Loss before income taxes |
| $ | (31,470 | ) |
| $ | (19,581 | ) |
Total tax provision |
|
| 3,213 |
|
|
| 3,501 |
|
Effective tax rate |
|
| -10.2 | % |
|
| -17.9 | % |
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-GAAPnon-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 non-recurring transactions or events that we believe are not indicative of our core operating performance, such as Mergermerger and acquisition transaction costs, or ainventory valuation step-up amortization, purchase price adjustments, restructuring and other charges, goodwill impairment, bargain purchase gain, gain (loss) on sale of assets, or impairment of fixed assets.long-lived assets or loss on debt extinguishment, bad debt expense 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:
• | Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual requirements; |
• | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
• | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; |
• | Although depreciation and amortization are non-cash expenses, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
• | Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and |
• | Other companies in our industry may calculate Adjusted EBITDA and similar measures differently than we do, limiting its usefulness as a comparative measure. |
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 supplementally.
Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA, which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Net income (loss) |
| $ | (34,683 | ) |
| $ | (23,082 | ) |
Add (deduct): |
|
|
|
|
|
|
|
|
Interest expense, net |
|
| 238 |
|
|
| 1,958 |
|
Income tax provision (benefit) |
|
| 3,213 |
|
|
| 3,501 |
|
Depreciation and amortization |
|
| 4,551 |
|
|
| 5,143 |
|
Stock-based compensation |
|
| 8,990 |
|
|
| 4,613 |
|
Acquisition costs |
|
| 675 |
|
|
| — |
|
Loss on debt extinguishment |
|
| — |
|
|
| 1,369 |
|
Headquarters and facilities relocation |
|
| 1,114 |
|
|
| 61 |
|
Executive transition |
|
| 372 |
|
|
| 2,047 |
|
Intangibles Impairment |
|
| — |
|
|
| 6,472 |
|
Bad debt expense, net of recoveries* |
|
| 13,957 |
|
|
| 3,119 |
|
Restructuring and other charges |
|
| 12,310 |
|
|
| — |
|
Adjusted EBITDA |
| $ | 10,737 |
|
| $ | 5,201 |
|
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(As restated) | |||||||||||
Net income (loss) | $ | (15,328 | ) | $ | (3,339 | ) | $ | 1,837 | |||
Add: | |||||||||||
Interest expense, net | 647 | 396 | 108 | ||||||||
Income tax provision | 1,487 | 232 | 1,380 | ||||||||
Depreciation and amortization | 3,173 | 1,404 | 1,936 | ||||||||
Stock-based compensation | 336 | — | — | ||||||||
Merger transaction costs | 1,273 | — | — | ||||||||
Adjusted EBITDA | $ | (8,412 | ) | $ | (1,307 | ) | $ | 5,261 |
* Refer to Note 1, in the Notes to Consolidated Financial Statements, for further details on the bad debt expense.
LIQUIDITY AND CAPITAL RESOURCES
Our operations arehave historically and continue to be financed through a combination of our existing cash and cash equivalents, available credit facilities,cash generated in the business, borrowings, and sales of equity and debt instruments, based onequity.
The following table summarizes the information regarding our operating requirements and market conditions.
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Unrestricted cash and cash equivalents |
| $ | 46,666 |
|
| $ | 45,219 |
|
Working capital |
|
| 124,498 |
|
|
| 123,285 |
|
The Company had a net loss of $34.7 million compared to $9.1 million atfor the year ended December 31, 2015. Our2021 and net loss of $23.1 million for the year ended December 31, 2020.
As of December 31, 2021, we had an accumulated deficit of $87.0 million and working capital of $124.5 million. As of December 31, 2021, we had $46.7 million in unrestricted cash and cash equivalents, as of December 31, 2016which included $9.8$30.1 million in cash balances held by our Korean subsidiary.international subsidiaries. On January 29, 2021, the Company closed an equity offering which resulted in net proceeds to the Company of approximately $59.5 million. The increase in cash and cash equivalentsCompany used a portion of $8.8 million was attributable tothe net cash provided by operating activities, financing activities and investing activities of $3.5 million, $2.8 million and $2.7 million, respectively.
We continue to provide us with the required liquidity to remove the substantial doubt as to our ability to continue as a going concern. If we are unable to amend, replace, refinance our short-term debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, we may experience material adverse impacts on our business, operating results and financial condition.
Our ability to meet our obligations as they become due in the ordinary course of business for the next 12 months will depend on our ability (i) to achieve forecasted results of operations, and (ii) continue asto effectively manage working capital requirements. While we believe that we are likely to achieve forecasted results of operations if we are successful in implementing our business strategies, the impact of the COVID-19 pandemic provides great uncertainty with respect to a going concern.potential impact on our future operations.
The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Consolidated Statements of Cash Flows Data |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
| $ | (14,326 | ) |
| $ | 5,064 |
|
Net cash used in investing activities |
|
| (9,483 | ) |
|
| (2,270 | ) |
Net cash provided by financing activities |
|
| 23,778 |
|
|
| 17,624 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| (917 | ) |
|
| 534 |
|
Net change in cash, cash equivalents and restricted cash |
|
| (948 | ) |
|
| 20,952 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
| 54,587 |
|
|
| 33,635 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 53,639 |
|
| $ | 54,587 |
|
Operating Activities
Net cash used in operating activities during 2021 was $14.3 million compared with $5.1 million net cash provided by operating activities consisted of a net loss of $15.3 million, adjusted for non-cash expenses totaling $4.7 million and a net decrease in operating assets totaling $14.1 million. The most significant components of the changes in net operating assets were an increase in accounts receivable of $2.1 million, an increase in accounts payable of $4.5 million and an increase in accrued and other liabilities of $9.8 million.during 2020. The increase in accounts receivable was related to the timing of cash collections. The increaseused in accounts payable and accrued and other liabilitiesoperating activities was primarily due to timing of payments.
Investing Activities
Net cash used in investing activities during 2021 was $9.5 million compared with $2.3 million of $2.1 millionnet cash used in investing activities during 2020. The increase in cash used in investing activities was primarily due to cash used for the Optelian and the acquisition of property and equipment of $1.3 million.RIFT acquisitions.
Financing Activities
Net cash provided by investingfinancing activities consisted of net proceeds from disposal of property and equipment and other assets of $2.2during 2021 was $23.8 million partially offset by purchases of short-term investments of $1.9 million.
Debt Facilities
On February 9, 2022, the Company entered into Credit Agreement with JPMorgan Chase Bank, N.A., that provides for $30.0 million and decrease in other capital of $3.0 million, offset by proceeds from short-term borrowings of $18.0 million and proceeds of issuance of common stock of $1.8 million.
Future 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.
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 December 31, 2016,2021, two customers accounted for 12% (a related-party)26% and 10%, respectively, of our net accounts receivable, respectively,receivable. As of December 31, 2021, the Company has an allowance for doubtful account of $16.7 million related to one customer. Refer to Refer to Note 1 Organization and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, for further detail. Our receivables from customers in countries other than the United StatesU.S. represented 87%79% of net accounts receivable. 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.
Contractual Commitments and Off-Balance Sheet Arrangements
As of December 31, 2016,2021, our future contractual commitments by fiscal year were as follows (in thousands):
Total | Payments due by period | ||||||||||||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2121 | Thereafter | ||||||||||||||||||||||
Operating leases | $ | 21,420 | $ | 3,633 | $ | 2,916 | $ | 2,335 | $ | 2,192 | $ | 2,178 | $ | 8,166 | |||||||||||||
Purchase commitments | 10,327 | 6,441 | 1,398 | 1,382 | 1,106 | — | — | ||||||||||||||||||||
Short-term debt | 17,599 | 17,599 | — | — | — | — | — | ||||||||||||||||||||
Related-party debt | 6,800 | — | 1,800 | — | — | — | 5,000 | ||||||||||||||||||||
Total future contractual commitments | $ | 56,146 | $ | 27,673 | $ | 6,114 | $ | 3,717 | $ | 3,298 | $ | 2,178 | $ | 13,166 |
The Company’s pension plan obligations are excluded from the contractual commitments assince the plan is unfunded, and the timing and amount of December 31, 2016.
Critical Accounting Estimates
The methods, assumptions, and estimates that we reacheduse in applying our accounting policies may require us to apply judgments regarding matters that are inherently uncertain. We consider an agreement withaccounting policy to be a supplier to cancelcritical estimate if: (1) we must make assumptions that were uncertain when the judgment was made, and (2) changes in the estimate assumptions, or selection of a purchase arrangement for certain inventory which was committed to through 2020. Under the settlement, we are no longer required to fulfill our commitment to purchase $4.3 million in inventory. In connection with the settlement, we also entered intodifferent estimate methodology, could have a technical support services arrangement with the supplier through April 30, 2021.
Refer to Note 1 Accounting Policies, in market interest rates. At December 31, 2016, the interest rate per annum applicableNotes to outstanding borrowings under the trade facilities of our foreign subsidiaries ranged from 1.92% to 4.08%. See above under “Cash Management”Consolidated Financial Statements, for further information about these facilities.
Revenue Recognition – the calculation of December 31, 2016,transaction price, net of variable consideration. Our sales arrangements to certain distributors provide our distributors with volume discounts, price adjustments, and other allowances under certain circumstances. For contracts with customers that contain multiple performance obligations, we had borrowed an aggregateaccount for the promises separately as individual performance obligations if they are distinct.
Inventories – the capitalization of $6.8 million from DNI. The amounts listedmanufacturing costs in inventory, excluding factory excess capacity costs. Inventory reflected at the table above reflectlower of cost or net realizable value considering future demand and market conditions.
Goodwill and Long-lived Assets– the amendmentvaluation methods and assumptions used in February 2017assessing the impairment of property, plant and equipment, identified intangibles, and goodwill, including the determination of asset groupings and the identification and allocation of goodwill to reporting units.
Business Combination –the valuation methods and assumptions used in assessing the fair value of assets and liabilities on the acquisition date.
Income Tax– the determination of deferred tax assets and liabilities based on differences between the financial reporting and the income tax bases of assets and liabilities. Valuation allowances are established, when necessary, to reduce deferred tax assets to the DNS capital investment loan, which among other matters extendedamount expected to be realized.
Allowances for Doubtful Accounts– the repayment datedetermination of expected credit losses through analysis of information obtained from credit rating agencies, financial statement review, and historical and current collection trends.
Pension Benefit Obligation – the loan from March 2017. The table does not includevaluation methods and assumptions used to measure the $3.5 million borrowed from Solueta, an affiliate of DNI, in June 2017. See above under “Cash Management” for further information about our related party debt.
Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
Not required.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
DZS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
(PCAOB ID: 42) | 33 |
(PCAOB ID: 248) | 35 |
36 | |
37 | |
38 | |
39 | |
40 |
No financial statement schedules are required because all the relevant data is included elsewhere in this Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Stockholders of DASAN Zhone Solutions,DZS Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of DZS Inc. and subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of comprehensive income (loss), of stockholders’ equity and non-controlling interestcash flows for the year then ended, and of cash flowsthe related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of DASAN Zhone Solutions, Inc. and its subsidiaries as ofthe Company at December 31, 20162021, and the results of theirits operations and theirits cash flows for the year then ended December 31, 2016 in conformity with accounting principlesU.S. generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. accounting principles.
We conducted our audit of these financial statementsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 9, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. Our audit includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audit providesprovide a reasonable basis for our opinion.
Critical Audit Matter
The accompanying consolidatedcritical audit matter communicated below is a matter arising from the current period audit of the financial statements have been prepared assuming that was communicated or required to be communicated to the Company will continue as a going concern. As discussedaudit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in Note 1(b) toany way our opinion on the consolidated financial statements, the Company has a significant amount of debt that is due within twelve months and experienced recurring losses from operations, which raises substantial doubt about its ability to continuetaken as a going concern. Management's plans in regard whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosureto these matters are also described in Note 1(b). The financial statements do not include any adjustments that might result from the outcome of this uncertainty.which it relates.
Deferred Tax Asset Valuation Allowance
Description of the Matter | As more fully described in Note 11, Income Taxes, as of December 31, 2021, the Company had deferred tax assets of $49.8 million before a valuation allowance of $46.0 million in the U.S. and foreign jurisdictions. Deferred tax assets are reduced by a valuation allowance if, based upon the weight of all available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Management’s analysis of the realizability of its deferred tax assets was critical to our audit because the assessment process by jurisdiction is complex, involves judgment, and includes assumptions that may be affected by future market or economic conditions. |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s income tax process, including the Company’s assessment of the realizability of deferred tax assets. This included testing controls over management’s review of the valuation allowance position and the deferred tax rollforward by jurisdiction. We evaluated the Company’s assessment of the realizability of deferred tax assets, including management’s evaluation of the sources of taxable income considered in determining whether a valuation allowance is required and management’s assessment of all available evidence, both positive and negative, to determine the amount of the valuation allowance. Among other audit procedures performed, we involved our tax professionals to evaluate the application of tax law in the Company’s assessment and the resulting valuation allowance. We also tested the Company’s scheduling of the reversal of existing taxable temporary differences and evaluated the adequacy of the Company’s financial statement disclosure in Note 11 to the consolidated financial statements related to this tax matter. |
/s/ PricewaterhouseCoopersErnst & Young LLP
We have served as the Company’s auditor since2021.
Dallas, Texas
March 9, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board ofDirectors andStockholders
DZS Inc.
Opinion onthefinancial statements
We have audited the Board of Directors and Shareholder of
Basisfor opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits.audit. We conducted our audits of these statementsare a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the auditingU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. Our audit includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We served as the Company’s auditor from 2019 to2021.
Dallas, Texas
March 11, 2021
DZS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value)
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 46,666 |
|
| $ | 45,219 |
|
Restricted cash |
|
| 6,808 |
|
|
| 9,200 |
|
Accounts receivable - trade, net of allowance for doubtful accounts of $17,735 as of December 31, 2021 and $3,954 as of December 31, 2020 |
|
| 86,114 |
|
|
| 97,253 |
|
Other receivables |
|
| 10,621 |
|
|
| 9,165 |
|
Inventories |
|
| 56,893 |
|
|
| 39,572 |
|
Contract assets |
|
| 2,184 |
|
|
| 6,182 |
|
Prepaid expenses and other current assets |
|
| 5,690 |
|
|
| 5,332 |
|
Total current assets |
|
| 214,976 |
|
|
| 211,923 |
|
Property, plant and equipment, net |
|
| 9,842 |
|
|
| 7,146 |
|
Right-of-use assets from operating leases |
|
| 12,640 |
|
|
| 18,483 |
|
Goodwill |
|
| 6,145 |
|
|
| 3,977 |
|
Intangible assets, net |
|
| 5,115 |
|
|
| 3,377 |
|
Deferred tax assets, net |
|
| - |
|
|
| 1,405 |
|
Other assets |
|
| 8,950 |
|
|
| 5,919 |
|
Total assets |
| $ | 257,668 |
|
| $ | 252,230 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable - trade |
| $ | 64,258 |
|
| $ | 49,250 |
|
Short-term debt - bank, trade facilities and secured borrowings |
|
| - |
|
|
| 13,787 |
|
Contract liabilities |
|
| 6,091 |
|
|
| 4,400 |
|
Operating lease liabilities |
|
| 4,097 |
|
|
| 4,494 |
|
Accrued and other liabilities |
|
| 16,032 |
|
|
| 16,707 |
|
Total current liabilities |
|
| 90,478 |
|
|
| 88,638 |
|
Long-term debt - related party |
|
| - |
|
|
| 29,754 |
|
Contract liabilities - non-current |
|
| 3,044 |
|
|
| 2,471 |
|
Operating lease liabilities - non-current |
|
| 12,103 |
|
|
| 15,959 |
|
Pension liabilities |
|
| 16,527 |
|
|
| 20,052 |
|
Other long-term liabilities |
|
| 3,609 |
|
|
| 1,777 |
|
Total liabilities |
|
| 125,761 |
|
|
| 158,651 |
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, 36,000 shares authorized, 27,505 and 21,958 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively, at $0.001 par value |
|
| 27 |
|
|
| 22 |
|
Additional paid-in capital |
|
| 223,336 |
|
|
| 147,997 |
|
Accumulated other comprehensive loss |
|
| (4,457 | ) |
|
| (2,124 | ) |
Accumulated deficit |
|
| (86,999 | ) |
|
| (52,316 | ) |
Total stockholders’ equity |
|
| 131,907 |
|
|
| 93,579 |
|
Total liabilities and stockholders’ equity |
| $ | 257,668 |
|
| $ | 252,230 |
|
December 31, 2016 | December 31, 2015 | ||||||
(As restated) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 17,893 | $ | 9,095 | |||
Restricted cash | 6,650 | 4,764 | |||||
Short-term investments | 993 | — | |||||
Accounts receivable, net of allowances for sales returns and doubtful accounts of $1,143 in 2016 and $868 in 2015 | |||||||
Trade receivables | 38,324 | 17,712 | |||||
Related parties | 13,311 | 14,575 | |||||
Other receivables | |||||||
Others | 12,068 | 11,268 | |||||
Related parties | 171 | 1,742 | |||||
Current deferred tax assets | — | 327 | |||||
Inventories | 31,032 | 13,976 | |||||
Prepaid expenses and other current assets | 4,131 | 951 | |||||
Total current assets | 124,573 | 74,410 | |||||
Property and equipment, net | 6,288 | 2,251 | |||||
Goodwill | 3,977 | 693 | |||||
Intangible assets, net | 8,767 | 3 | |||||
Non-current deferred tax assets | — | 1,058 | |||||
Other assets | 1,842 | 4,811 | |||||
Total assets | $ | 145,447 | $ | 83,226 | |||
Liabilities, Stockholders’ Equity and Non-controlling Interest | |||||||
Current liabilities: | |||||||
Accounts payable | |||||||
Others | 30,681 | 14,936 | |||||
Related parties | 430 | — | |||||
Short-term debt | 17,599 | 21,848 | |||||
Other payables | |||||||
Others | 2,040 | 1,352 | |||||
Related parties | 6,940 | 133 | |||||
Deferred revenue | 1,901 | — | |||||
Accrued and other liabilities | 8,163 | 2,982 | |||||
Total current liabilities | 67,754 | 41,251 | |||||
Long-term debt - related parties | 6,800 | — | |||||
Deferred revenue | 1,674 | — | |||||
Other long-term liabilities | 2,351 | 510 | |||||
Total liabilities | 78,579 | 41,761 | |||||
Commitments and contingencies (Note 14) | |||||||
Stockholders’ equity and non-controlling interest | |||||||
Common stock, authorized 36,000 shares, 16,375 shares and 9,493 shares outstanding as of December 31, 2016 and December 31, 2015 at $0.001 par value (1) | 16 | 9 | |||||
Additional paid-in capital | 89,174 | 47,680 | |||||
Other comprehensive loss | (2,815 | ) | (1,765 | ) | |||
Accumulated deficit | (19,923 | ) | (4,597 | ) | |||
Total stockholders' equity | 66,452 | 41,327 | |||||
Non-controlling interest | 416 | 138 | |||||
Total stockholders' equity and non-controlling interest | 66,868 | 41,465 | |||||
Total liabilities, stockholders’ equity and non-controlling interest | $ | 145,447 | $ | 83,226 |
See accompanying notes to consolidated financial statements.
DZS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share data)
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
|
|
|
Net revenue |
| $ | 350,206 |
|
| $ | 300,640 |
|
Cost of revenue |
|
| 229,938 |
|
|
| 203,761 |
|
Gross profit |
|
| 120,268 |
|
|
| 96,879 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and product development |
|
| 47,052 |
|
|
| 37,957 |
|
Selling, marketing, general and administrative |
|
| 90,241 |
|
|
| 63,543 |
|
Restructuring and other charges |
|
| 12,310 |
|
|
| - |
|
Impairment of long-lived assets |
|
| 1,735 |
|
|
| 6,472 |
|
Amortization of intangible assets |
|
| 1,182 |
|
|
| 1,432 |
|
Total operating expenses |
|
| 152,520 |
|
|
| 109,404 |
|
Operating loss |
|
| (32,252 | ) |
|
| (12,525 | ) |
Interest income |
|
| 107 |
|
|
| 77 |
|
Interest expense |
|
| (345 | ) |
|
| (2,035 | ) |
Loss on extinguishment of debt |
|
| - |
|
|
| (1,369 | ) |
Other income (expense), net |
|
| 1,020 |
|
|
| (3,729 | ) |
Loss before income taxes |
|
| (31,470 | ) |
|
| (19,581 | ) |
Income tax provision |
|
| 3,213 |
|
|
| 3,501 |
|
Net loss |
|
| (34,683 | ) |
|
| (23,082 | ) |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (4,046 | ) |
|
| 2,796 |
|
Actuarial gain (loss) |
|
| 1,713 |
|
|
| (981 | ) |
Comprehensive loss |
| $ | (37,016 | ) |
| $ | (21,267 | ) |
Net loss per share |
|
|
|
|
|
|
|
|
Basic |
| $ | (1.30 | ) |
| $ | (1.07 | ) |
Diluted |
| $ | (1.30 | ) |
| $ | (1.07 | ) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
| 26,692 |
|
|
| 21,588 |
|
Diluted |
|
| 26,692 |
|
|
| 21,588 |
|
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(As restated) | (As restated) | ||||||||||
Net revenue: | |||||||||||
Net revenue | $ | 121,670 | $ | 114,421 | $ | 108,634 | |||||
Net revenue - related parties | 28,634 | 24,775 | 30,760 | ||||||||
Total net revenue | 150,304 | 139,196 | 139,394 | ||||||||
Cost of revenue: | |||||||||||
Products and services | 84,415 | 81,420 | 70,361 | ||||||||
Products and services - related parties | 24,738 | 21,890 | 28,191 | ||||||||
Amortization of intangible assets | 204 | — | — | ||||||||
Total cost of revenue | 109,357 | 103,310 | 98,552 | ||||||||
Gross profit | 40,947 | 35,886 | 40,842 | ||||||||
Operating expenses: | |||||||||||
Research and product development | 25,396 | 21,331 | 22,805 | ||||||||
Selling, marketing, general and administrative | 27,348 | 17,528 | 14,834 | ||||||||
Amortization of intangible assets | 1,556 | 4 | — | ||||||||
Gain from sale of assets | (304 | ) | — | — | |||||||
Total operating expenses | 53,996 | 38,863 | 37,639 | ||||||||
Operating income (loss) | (13,049 | ) | (2,977 | ) | 3,203 | ||||||
Interest income | 183 | 136 | 418 | ||||||||
Interest expense | (830 | ) | (532 | ) | (526 | ) | |||||
Other income (expense), net | (145 | ) | 266 | 122 | |||||||
Income (loss) before income taxes | (13,841 | ) | (3,107 | ) | 3,217 | ||||||
Income tax provision | 1,487 | 232 | 1,380 | ||||||||
Net income (loss) | (15,328 | ) | (3,339 | ) | 1,837 | ||||||
Net loss attributable to non-controlling interest | (2 | ) | — | — | |||||||
Net income (loss) attributable to DASAN Zhone Solutions, Inc. | $ | (15,326 | ) | $ | (3,339 | ) | $ | 1,837 | |||
Foreign currency translation adjustments | (1,047 | ) | (2,790 | ) | (1,997 | ) | |||||
Comprehensive loss | (16,375 | ) | (6,129 | ) | (160 | ) | |||||
Comprehensive income attributable to non-controlling interest | 1 | — | — | ||||||||
Comprehensive loss attributable to DASAN Zhone Solutions, Inc. | $ | (16,376 | ) | $ | (6,129 | ) | $ | (160 | ) | ||
Basic and diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc. (1) | $ | (1.32 | ) | $ | (0.36 | ) | $ | 0.20 | |||
Weighted average shares outstanding used to compute basic and diluted net income (loss) per share (1) | 11,637 | 9,314 | 9,199 |
See accompanying notes to consolidated financial statements.
DZS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Non-controlling Interest
Years ended December 31, 2016, 20152021 and 2014
(In thousands)
|
| Common stock |
|
| Additional paid-in |
|
| Accumulated other comprehensive |
|
| Accumulated |
|
| Total stockholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| capital |
|
| loss |
|
| deficit |
|
| equity |
| ||||||
Balance as of December 31, 2019 |
|
| 21,419 |
|
| $ | 21 |
|
| $ | 139,700 |
|
| $ | (3,939 | ) |
| $ | (29,234 | ) |
| $ | 106,548 |
|
Exercise of stock awards and employee stock plan purchases |
|
| 539 |
|
|
| 1 |
|
|
| 3,684 |
|
|
| — |
|
|
| — |
|
|
| 3,685 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 4,613 |
|
|
| — |
|
|
| — |
|
|
| 4,613 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (23,082 | ) |
|
| (23,082 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,815 |
|
|
| — |
|
|
| 1,815 |
|
Balance as of December 31, 2020 |
|
| 21,958 |
|
|
| 22 |
|
|
| 147,997 |
|
|
| (2,124 | ) |
|
| (52,316 | ) |
|
| 93,579 |
|
Issuance of common stock in public offering, net of issuance costs |
|
| 4,600 |
|
|
| 5 |
|
|
| 59,520 |
|
|
| — |
|
|
| — |
|
|
| 59,525 |
|
Exercise of stock awards and employee stock plan purchases |
|
| 947 |
|
|
| — |
|
|
| 6,829 |
|
|
| — |
|
|
| — |
|
|
| 6,829 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 8,990 |
|
|
| — |
|
|
| — |
|
|
| 8,990 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (34,683 | ) |
|
| (34,683 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,333 | ) |
|
| — |
|
|
| (2,333 | ) |
Balance as of December 31, 2021 |
|
| 27,505 |
|
| $ | 27 |
|
| $ | 223,336 |
|
| $ | (4,457 | ) |
| $ | (86,999 | ) |
| $ | 131,907 |
|
Common stock | Additional paid-in capital | Other comprehensive income (loss) | Accumulated deficit | Total stockholders' equity | Non-controlling interest | Total stockholders' equity and non-controlling interest | ||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||
Balances as of December 31, 2013 | 9,173 | $ | 9 | $ | 47,188 | $ | 3,022 | $ | (3,095 | ) | $ | 47,124 | $ | — | $ | 47,124 | ||||||||||||||
Issuance of common stock | 48 | — | 1,800 | — | — | 1,800 | — | 1,800 | ||||||||||||||||||||||
Increase in parent company investment | — | — | (131 | ) | — | — | (131 | ) | — | (131 | ) | |||||||||||||||||||
Net income | — | — | — | — | 1,837 | 1,837 | — | 1,837 | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | (1,997 | ) | — | (1,997 | ) | — | (1,997 | ) | |||||||||||||||||||
Balances as of December 31, 2014 | 9,221 | 9 | 48,857 | 1,025 | (1,258 | ) | 48,633 | — | 48,633 | |||||||||||||||||||||
Issuance of common stock | 272 | — | 1,800 | — | — | 1,800 | — | 1,800 | ||||||||||||||||||||||
Net increase in parent company investment | — | — | (2,977 | ) | — | — | (2,977 | ) | — | (2,977 | ) | |||||||||||||||||||
Net loss | — | — | — | — | (3,339 | ) | (3,339 | ) | — | (3,339 | ) | |||||||||||||||||||
Other comprehensive loss | — | — | — | (2,790 | ) | — | (2,790 | ) | — | (2,790 | ) | |||||||||||||||||||
Acquisition of controlling interest | — | — | — | — | — | — | 138 | 138 | ||||||||||||||||||||||
Balances as of December 31, 2015 (As restated) | 9,493 | 9 | 47,680 | (1,765 | ) | (4,597 | ) | 41,327 | 138 | 41,465 | ||||||||||||||||||||
Stock-based compensation | 8 | — | 336 | — | — | 336 | — | 336 | ||||||||||||||||||||||
Shares of Legacy Zhone stock as of September 8, 2016 acquired through business combination | 6,874 | 7 | 41,435 | — | — | 41,442 | — | 41,442 | ||||||||||||||||||||||
Net loss | — | — | — | — | (15,326 | ) | (15,326 | ) | (2 | ) | (15,328 | ) | ||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (1,050 | ) | — | (1,050 | ) | 3 | (1,047 | ) | |||||||||||||||||||
Acquisition of additional interest | — | — | (277 | ) | — | — | (277 | ) | 277 | — | ||||||||||||||||||||
Balances as of December 31, 2016 | 16,375 | $ | 16 | $ | 89,174 | $ | (2,815 | ) | $ | (19,923 | ) | $ | 66,452 | $ | 416 | $ | 66,868 |
See accompanying notes to consolidated financial statements.
DZS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
| $ | (34,683 | ) |
| $ | (23,082 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 4,551 |
|
|
| 5,143 |
|
Impairment of long-lived assets and non-cash restructuring |
|
| 4,425 |
|
|
| 6,472 |
|
Gain on lease termination |
|
| (908 | ) |
|
| — |
|
Loss on extinguishment of debt |
|
| — |
|
|
| 1,343 |
|
Amortization of deferred financing costs |
|
| 12 |
|
|
| 149 |
|
Stock-based compensation |
|
| 8,990 |
|
|
| 4,613 |
|
Provision for inventory write-down |
|
| 4,064 |
|
|
| 5,531 |
|
Bad debt expense, net of recoveries |
|
| 14,491 |
|
|
| 3,833 |
|
Provision for sales returns |
|
| 1,132 |
|
|
| 1,303 |
|
Provision for warranty |
|
| 798 |
|
|
| 1,072 |
|
Loss on foreign currency transactions |
|
| 335 |
|
|
| 2,875 |
|
Loss (gain) of disposal of property, plant and equipment |
|
| (468 | ) |
|
| 18 |
|
Deferred taxes |
|
| 1,329 |
|
|
| 316 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (6,624 | ) |
|
| (18,782 | ) |
Other receivable |
|
| (4,780 | ) |
|
| 822 |
|
Inventories |
|
| (23,241 | ) |
|
| (6,916 | ) |
Contract assets |
|
| 3,915 |
|
|
| 11,341 |
|
Prepaid expenses and other assets |
|
| (2,965 | ) |
|
| 703 |
|
Accounts payable |
|
| 19,092 |
|
|
| 11,136 |
|
Contract liabilities |
|
| 2,215 |
|
|
| 13 |
|
Accrued and other liabilities |
|
| (6,006 | ) |
|
| (2,839 | ) |
Net cash provided by (used in) operating activities |
|
| (14,326 | ) |
|
| 5,064 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from disposal of property, plant and equipment and other assets |
|
| 561 |
|
|
| — |
|
Purchases of property, plant and equipment |
|
| (5,585 | ) |
|
| (2,270 | ) |
Acquisition of business, net of cash acquired |
|
| (4,459 | ) |
|
| — |
|
Net cash used in investing activities |
|
| (9,483 | ) |
|
| (2,270 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock in public offerings, net of issuance costs |
|
| 59,525 |
|
|
| — |
|
Proceeds from short-term borrowings and line of credit |
|
| — |
|
|
| 13,774 |
|
Repayments of short-term borrowings and line of credit |
|
| (13,278 | ) |
|
| (16,696 | ) |
Repayments of long-term borrowings |
|
| — |
|
|
| (13,125 | ) |
Proceeds from related party term loan |
|
| — |
|
|
| 18,341 |
|
Repayments of related party term loan |
|
| (29,298 | ) |
|
| — |
|
Proceeds from factored accounts receivable |
|
| — |
|
|
| 11,645 |
|
Proceeds from exercise of stock awards and employee stock plan purchases |
|
| 6,829 |
|
|
| 3,685 |
|
Net cash provided by financing activities |
|
| 23,778 |
|
|
| 17,624 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| (917 | ) |
|
| 534 |
|
Net increase in cash, cash equivalents and restricted cash |
|
| (948 | ) |
|
| 20,952 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
| 54,587 |
|
|
| 33,635 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 53,639 |
|
| $ | 54,587 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash to balance sheets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 46,666 |
|
| $ | 45,219 |
|
Restricted cash |
|
| 6,808 |
|
|
| 9,200 |
|
Long-term restricted cash |
|
| 165 |
|
|
| 168 |
|
|
| $ | 53,639 |
|
| $ | 54,587 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest - bank and trade facilities |
| $ | 83 |
|
| $ | 788 |
|
Interest - related party |
| $ | 108 |
|
| $ | 981 |
|
Income taxes |
| $ | 3,029 |
|
| $ | 2,645 |
|
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(As restated) | (As restated) | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (15,328 | ) | $ | (3,339 | ) | $ | 1,837 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | 3,173 | 1,404 | 1,936 | ||||||||
Gain from sale of assets | (304 | ) | — | — | |||||||
Stock-based compensation | 336 | — | — | ||||||||
Unrealized gain on foreign currency transactions | 62 | (1,301 | ) | (2,066 | ) | ||||||
Deferred taxes | 1,408 | (86 | ) | (432 | ) | ||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | (2,092 | ) | 11,442 | (16,554 | ) | ||||||
Inventories | (1,080 | ) | 6,026 | (4,792 | ) | ||||||
Prepaid expenses and other current assets | 3,074 | 196 | (9,412 | ) | |||||||
Accounts payable | 4,488 | (6,676 | ) | 8,432 | |||||||
Accrued expenses | 9,759 | (3,415 | ) | 1,541 | |||||||
Net cash provided by (used in) operating activities | 3,496 | 4,251 | (19,510 | ) | |||||||
Cash flows from investing activities: | |||||||||||
Cash acquired through the Merger | 7,013 | — | — | ||||||||
(Increase) decrease in restricted cash | (2,128 | ) | 1,479 | 278 | |||||||
Decrease in short-term and long-term loans to others | 516 | 88 | 209 | ||||||||
Increase in short-term and long-term loans to others | (214 | ) | �� | (446 | ) | — | |||||
Proceeds from disposal of property and equipment and other assets | 10 | 2,230 | 2,678 | ||||||||
Purchases of short-term investments | (1,034 | ) | (1,856 | ) | (1,899 | ) | |||||
Purchases of property and equipment | (1,311 | ) | (794 | ) | (1,137 | ) | |||||
Purchases of intangible assets | (61 | ) | — | — | |||||||
Payment for purchase of shares of HandySoft, net of cash acquired | — | (548 | ) | — | |||||||
Net cash provided by (used in) investing activities | 2,791 | 153 | 129 | ||||||||
Cash flows from financing activities: | |||||||||||
Repayments of borrowings | (27,336 | ) | (17,796 | ) | (31,384 | ) | |||||
Proceeds from short-term borrowings | 25,069 | 17,950 | 38,349 | ||||||||
Proceeds from long-term borrowings - related party | 5,000 | — | — | ||||||||
Government grants received | — | 217 | 156 | ||||||||
Proceeds from issuance of common stock | — | 1,800 | 1,800 | ||||||||
Decrease in other capital | — | (2,977 | ) | (131 | ) | ||||||
Net cash provided by (used in) financing activities | 2,733 | (806 | ) | 8,790 | |||||||
Effect of exchange rate changes on cash | (222 | ) | (510 | ) | (256 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 8,798 | 3,088 | (10,847 | ) | |||||||
Cash and cash equivalents at beginning of period | 9,095 | 6,007 | 16,854 | ||||||||
Cash and cash equivalents at end of period | $ | 17,893 | $ | 9,095 | $ | 6,007 | |||||
Supplemental disclosure of cash flow information: | |||||||||||
Shares of the Company's common stock held in escrow | 949 | — | — | ||||||||
Cash paid during the period for: | |||||||||||
Interest | $ | 663 | $ | 570 | $ | 474 | |||||
Income taxes | 353 | 1,496 | 2,430 |
See accompanying notes to consolidated financial statements.
DZS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
DZS Inc. (formerly known as Zhone Technologies, Inc. and referred(referred to, collectively with its subsidiaries, as "DZS"“DZS” or the "Company"“Company”) is a global provider of networkleading-edge access, solutions and communications equipment for service provider5G transport, and enterprise networks.communications platforms that enable the emerging hyper-connected, hyper-broadband world. The Company provides a wide array of reliable, cost-effective networking technologies, including broadband access, Ethernet switching, mobile backhaul, Passive Optical LAN and software-defined networks, to a diverse customer base that includes more than 1,000 customers in more than 50 countries worldwide.
DZS was incorporated under the laws of the state of Delaware in June 1999. The Company is headquartered in Plano, Texas with flexible in-house production facilities in Seminole, Florida, and contract manufacturers located in China, India, Korea and Vietnam. The Company also maintains offices to provide sales and customer support at global locations.
On September 9, 2016,August 26, 2020, the Company acquiredfiled a Certificate of Amendment to its Restated Certificate of Incorporation with the Delaware Secretary of State reflecting a company name change from Dasan NetworkZhone Solutions, Inc. ("DNS") throughto DZS Inc.
(b) Basis of Presentation
The consolidated financial statements are prepared in accordance with U.S. GAAP and include the merger of a wholly owned subsidiaryaccounts of the Company with and into DNS, with DNS surviving as aits wholly owned subsidiarysubsidiaries. All inter-company transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current-year presentation.
(c) Related Party Transactions
The financial statements include disclosures of material related party transactions. However, disclosure of transactions that are eliminated in the Company (the "Merger"preparation of consolidated financial statements are not required to be disclosed. As of December 31, 2021, Dasan Networks, Inc. (“DNI”). At the effective time owned approximately 36.7% of the Merger, all issued and outstanding shares of capital stock of DNS held by DASAN Networks, Inc. ("DNI") were canceled and converted into the right to receive shares of the Company's common stock in an amount equal to 58% of the issued and outstanding shares of the Company's common stock immediately following the Merger. In connection with the Merger, the Company changed its name from Zhone Technologies, Inc. to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone." The Company’s common stock continues to be traded on the Nasdaq Capital Market,stock. See Note 12 Related Party Transactions for additional information about related party transactions.
(d) Risks and the Company’s ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016. The Company is headquartered in Oakland, California.
The accompanying consolidated financial statements have been prepared in conformity with generally accepted
The Company has incurred significant losses to date and losses from operations may continue. The Company incurredhad a net lossesloss of $15.3 million and $3.3$34.7 million for the yearsyear ended December 31, 20162021 and 2015, respectively. Thenet loss of $23.1 million for the year ended December 31, 2020. As of December 31, 2021, the Company had an accumulated deficit of $19.9$87.0 million and working capital of $56.8 million as of December 31, 2016.$124.5 million. As of December 31, 2016,2021, the Company had approximately $17.9$46.7 million in cash and cash equivalents, which included $9.8$30.1 million in cash balances held by the Company's Korean subsidiary, and $24.4 million in aggregate principal amount of outstanding borrowings under the Company's short-term debt obligations and the Company's loans from DNI. In addition,its international subsidiaries. On January 29, 2021, the Company had $4.2closed an equity offering which resulted in net proceeds to the Company of approximately $59.5 million in aggregate borrowing availability under its. The Company used a portion of the net proceeds from the Equity Offering to pay off the entire remaining outstanding balance of debt with related parties, banks, and other lending institutions. Refer to Note 8 Debt and Note 9 Stockholder's Equity for more details. On February 9, 2022, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A., that provides for $30.0 million of revolving credit facilities as of December 31, 2016. The Company had $14.6 million committed as security for letters of credit under these facilities as of December 31, 2016. Due to the amount of short-term debt obligations maturing within the next 12 months and the Company's recurring operating losses, the Company's cash resources may not be sufficient to settle these debt obligations. The Company's ability to continue as a "going concern" is dependent on many factors, including, among other things, its ability to comply with the covenants in its existing debt agreements, its ability to cure any defaults that occur under its debt agreements or to obtain waivers or forbearances with respect to any such defaults, and its ability to pay, retire, amend, replace or refinance its indebtedness as defaults occur or as interest and principal payments come due. Although the process of amending, replacing or refinancing the Company’s short-term debt obligations is ongoing andcommitment.On February 10, 2022, the Company is in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficientfiled a “shelf” registration statement on Form S-3 to provide theregister up to $150 million of Company with the required liquidity to remove the substantial doubtcommon stock, representing an indeterminate number of shares of common stock as to its ability to continue as a going concern. If the Company is unable to amend, replace, refinance its debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, the Company may experience material adverse impacts on its business, operating results and financial condition.
Based on the Company's current plans and current business conditions, the Company believes that its focused operating
The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next 12 months will depend on its ability (i) to achieve forecasted results of operations, and (ii) continue asto effectively manage working capital requirements. Management’s belief that it will achieve forecasted results of operations assumes that, among other things, the Company will continue to be successful in implementing its business strategy.
In December 2019, a going concern. The accompanying consolidated financial statements do not include any adjustmentsstrain of coronavirus, now known to cause COVID-19, was reported to have surfaced in Wuhan, China. Since that may result fromtime, the outcomewidespread and sustained transmission of the uncertainties set forth above.
results of operations and cash flows. Given the ongoing and dynamic nature of the outstanding sharesvirus and its variants, and the worldwide response related thereto, it is difficult to predict the full impact of the Company's common stock as of December 31, 2016. Thereafter, for so long as DNI and its affiliates hold sharesCOVID-19 pandemic on our business. Due to the uncertainty around the future economic impact of the Company's common stock representing at least a majority ofpandemic, the votes, DNI will be able to freely nominate and elect all the members of the Company's board of directors. The directors elected by DNI will have the authority to make decisions affecting the Company's capital structure, including the issuance of additional capital stock or options, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the declaration of dividends. The interests of DNI may not coincide with the interests of the Company's other stockholders or with holders of the Company's indebtedness. DNI’s ability to control all matters submitted to the Company's stockholders for approval limits the ability of other stockholders to influence corporate matters and, as a result, the Company may take actions that the Company's other stockholders or holders of our indebtedness do not view as beneficial. See Note 2, Note 13 and Note 14 to the consolidated financial statements for additional information.
The recent outbreak of the coronavirus in this filing.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, accounts receivable and contract assets. Cash and cash equivalents consist principally of financial deposits and money market accounts that are principally held with various domestic and international financial institutions with high credit standing.
The following schedules reconcileCompany’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 amounts as previously reported in the consolidated financial statements forexpected collectability of accounts receivable.
For the year ended December 31, 20152021, 2 customers represented 19% and December 31, 2014 to the corresponding restated amounts (in thousands, except per share data):
Consolidated Balance Sheet | ||||||||||||
December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Cash and cash equivalents (1) | $ | 10,015 | $ | (920 | ) | $ | 9,095 | |||||
Restricted cash (1) | 3,844 | 920 | 4,764 | |||||||||
Accounts receivable - Trade | 27,084 | (9,372 | ) | 17,712 | ||||||||
Accounts receivable - Related Party | 5,644 | 8,931 | 14,575 | |||||||||
Inventories | 13,900 | 76 | 13,976 | |||||||||
Total current assets | 74,775 | (365 | ) | 74,410 | ||||||||
Total assets | 83,591 | (365 | ) | 83,226 | ||||||||
Other comprehensive loss (1) | (1,775 | ) | 10 | (1,765 | ) | |||||||
Accumulated deficit | (4,222 | ) | (375 | ) | (4,597 | ) | ||||||
Total stockholders' equity | 41,692 | (365 | ) | 41,327 | ||||||||
Total liabilities and stockholders' equity and non-controlling interest | 83,591 | (365 | ) | 83,226 |
Consolidated Statement of Comprehensive Loss | ||||||||||||
December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Net revenue | $ | 127,890 | $ | (13,469 | ) | $ | 114,421 | |||||
Net revenue - Related Party(1) | 12,135 | 12,640 | 24,775 | |||||||||
Total revenue | 140,025 | (829 | ) | 139,196 | ||||||||
Cost of revenue | 92,664 | (11,244 | ) | 81,420 | ||||||||
Cost of revenue - Related Party | 10,722 | 11,168 | 21,890 | |||||||||
Total cost of revenue | 103,386 | (76 | ) | 103,310 | ||||||||
Gross Profit | 36,639 | (753 | ) | 35,886 | ||||||||
Selling, marketing, general and administrative expense (1) | 17,919 | (391 | ) | 17,528 | ||||||||
Operating income (loss) | (2,615 | ) | (362 | ) | (2,977 | ) | ||||||
Other income (expense), net | 279 | (13 | ) | 266 | ||||||||
Income (loss) before income taxes | (2,732 | ) | (375 | ) | (3,107 | ) | ||||||
Net loss | (2,964 | ) | (375 | ) | (3,339 | ) | ||||||
Comprehensive loss | (5,764 | ) | (365 | ) | (6,129 | ) | ||||||
Basic and diluted net loss per share | (0.32 | ) | (0.04 | ) | (0.36 | ) |
Consolidated Statement of Comprehensive Loss | ||||||||||||
December 31, 2014 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Net revenue | $ | 124,648 | $ | (16,014 | ) | $ | 108,634 | |||||
Net revenue - Related Party (1) | 15,226 | 15,534 | 30,760 | |||||||||
Total revenue | 139,874 | (480 | ) | 139,394 | ||||||||
Cost of revenue | 84,598 | (14,237 | ) | 70,361 | ||||||||
Cost of revenue - Related Party | 13,954 | 14,237 | 28,191 | |||||||||
Total cost of revenue | 98,552 | — | 98,552 | |||||||||
Gross Profit | 41,322 | (480 | ) | 40,842 | ||||||||
Selling, marketing, general and administrative expense (1) | 15,314 | (480 | ) | 14,834 |
Consolidated Statement of Cash Flows | ||||||||||||
December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Net cash provided by (used in) operating activities (1) | $ | 4,261 | $ | (10 | ) | $ | 4,251 | |||||
Net cash provided by (used in) investing activities (1) | 294 | (141 | ) | 153 |
Consolidated Statement of Cash Flows | |||||||||
December 31, 2014 | |||||||||
As Previously Reported | Restatement Adjustments | As Restated | |||||||
Net cash provided by (used in) investing activities (1) | 908 | (779 | ) | 129 |
As of December 31, 2021, 2 customers represented 26% and 10% of net accounts receivable, respectively. As of December 31, 2020, 2 customers represented 17% and 16% of net accounts receivable, respectively.
As of December 31, 2021, and December 31, 2020, net accounts receivable from customers in countries other than the consolidated financial statements reflectUnited States represented 79% and 89%, respectively.
In 2017, the operating results of DNSCompany 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, and its consolidated subsidiaries forall amounts due were billed under the period commencing on the first dayterms of the applicable period through September 8, 2016 and the operating results of both DNS and Legacy Zhone and their respective consolidated subsidiaries for the period September 9 throughagreement by December 31, 2016.2020. The Company billed the customer, which is a state government sponsored entity, approximately $59.0 million and collected payments of approximately $41.7 million, leaving a balance sheet of the Companyapproximately $17.3 million as of December 31, 2016 includes2020. The remaining $17.3 million balance is substantially beyond the fair valuecustomers contractual payment terms, and the Company has been actively working with the customer and third parties in India to arrange payment of the assets and liabilitiesentire remaining balance of Legacy Zhone as$17.3 million. The Company recorded an allowance for doubtful accounts of $3.1 million on December 31, 2020, for a partial payment promised but not received. In late March 2021, the customer’s state government parent experienced difficulty passing a budget further impacting the ability of the effective datecustomer to make agreed-upon partial payments to us. In light of this development, the Merger. Those assets includeCompany recognized an additional allowance of $14.2 million during the fair valuethree months ended March 31, 2021. During the fourth quarter 2021, the Company recovered approximately $0.3 million of acquired intangible assets and goodwill. Dueaccounts receivable related to the foregoing, the Company’s financial results for the year ended December 31, 2016 are not comparable to its financial results for prior years.
Percentage of ownership (%) | ||||||||
Location | December 31, 2016 | December 31, 2015 | ||||||
Dasan Network Solutions, Inc. (U.S. subsidiary) | US | 100 | % | 100 | % | |||
Dasan Network Solutions, Inc. (Korean subsidiary) | Korea | 100 | % | 100 | % | |||
DASAN Network Solutions Japan Co., Ltd. (formerly: HandySoft Japan Co., Ltd.) | Japan | 69.06 | % | 50.25 | % | |||
DASAN Vietnam Co., Ltd | Vietnam | 100 | % | N/A |
(e) Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of AmericaU.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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
(f) Revenue Recognition
Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company filedexpects to be entitled to in exchange for those goods or services.
The Company generates revenue primarily from sales of products and services, including, extended warranty service, software and customer support. Revenue from product sales is recognized at a Certificate of Amendment with the Delaware Secretary of State to amend the Company's Restated Certificate of Incorporation, which amendment effected a one-for-five reverse stock splitpoint in time when control of the Company's common stock and reducedgoods is transferred to the authorized sharescustomer, generally occurring upon shipment or delivery, dependent upon the terms of the Company's common stock from 180 million to 36 million. As a resultunderlying contract. Many of the reverse stock split, the number of shares of the Company’s common stock then issued and outstanding was reduced from approximately 81.9 million to approximately 16.4 million. References to shares of the Company's common stock, stock options (and associated exercise price) and restricted stock units in this Annual Report on Form 10-K are provided on a post-reverse stock split basis.
Revenue from services is generally recognized over time on a ratable basis over the contract term, using an output measure of progress, as the contracts usually provide the customer equal benefit throughout the contract period. The Company typically invoices customers for support contracts in advance, for periods ranging from one to five years.
Transaction price is calculated as selling price net of variable consideration. Sales to certain distributors are made under arrangements which provide the distributors with volume discounts, price adjustments, and other allowances under certain circumstances. These adjustments and allowances are accounted for as variable consideration. To estimate variable consideration, the Company analyzes historical data and current economic trends, and changes in customer demand for the Company's products, among other factors. Historically, variable consideration has not been a significant component of the Company’s contracts with customers.
For contracts with customers that contain multiple performance obligations, the Company accounts for the promised performance obligations separately as individual performance obligations if they are distinct. In determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, including the degree of interrelation and interdependence between obligations and whether or not the good or service significantly modifies or transforms another good or service in the contract. After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices for products are determined using either an adjusted market assessment or expected cost-plus margin. For customer support and extended warranty services, standalone selling price is primarily based on the prices charged to customers, when sold separately. Unsatisfied and partially unsatisfied performance obligations as of the end of the reporting period primarily consist of products and services for which customer purchase orders have been accepted and that are in the process of being delivered.
The Company records contract assets when it satisfies a performance obligation but does not have an unconditional right to consideration and records accounts receivable when it satisfies a performance obligation and has an unconditional right to consideration. The Company records contract liabilities when cash payments (or unconditional rights to receive cash) are received in advance of fulfilling its performance obligations.
The Company’s payment terms vary by the type and location of its customer and the products or services offered. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.
Other related policies and revenue information
Warranties
Products sold to customers include standard warranties, typically for one year, covering physical operation and software bug fixes and minor updates such that the product continues to function according to published technical specifications. These standard warranties are assurance type warranties and do not offer any services in addition to the assurance that the product will continue working as specified. Therefore, standard warranties are not considered separate performance obligations. Instead, the expected cost of warranty is accrued as expense as discussed below. Optional extended warranties, typically between one and three years, and for up to five years, are sold with certain products and include additional support services. The transaction price for extended warranties is accounted for as service revenue and recognized ratably over the period duringlife of the contract.
The Company records estimated costs related to standard warranties upon product shipment or upon identification of a specific product failure. The Company recognizes estimated warranty costs when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. The estimates are based upon historical and projected product failure and claim rates, historical costs incurred in correcting product failures and information available related to any specifically identified product failures. Significant judgment is required in estimating costs associated with warranty activities and the Company's estimates are limited to information available to the Company at the time of such estimates. In some cases, such as when a specific product failure is first identified or a new product is introduced, the Company may initially have limited information and
limited historical failure and claim rates upon which to base its estimates, and such estimates may require revision in future periods. The recorded amount is adjusted from time to time for specifically identified warranty exposure.
Contract Costs
The Company recognizes an asset for certain costs to fulfill a contract if it is determined that such costs relate directly to a contract or anticipated contracts, can be determined to generate or enhance resources that will be used in satisfying related performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods to which the servicesasset relates. Contract costs primarily consist of sales commissions that are amortized as sales and marketing expense.
Financing
The Company applies the practical expedient not to be performed.
Shipping and Handling
The Company has elected to establish VSOEaccount for all deliverables inshipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than as an arrangement with multiple elements. This may be due to infrequently selling each element separately, not pricing products withinadditional promised service. As a narrow range, or only having a limited sales history. When VSOE cannot be established,result, the Company attempts to establish accrues the selling pricecosts of each element based on TPE. Generally,shipping and handling when the Company’s marketing strategy differs from thatrelated revenue is recognized.
Unsatisfied Performance Obligations
The majority of the Company’s peers andCompany's performance obligations in its contracts with customers relate to contracts with duration of less than one year. The Company does not disclose the Company’s offerings contain a significant levelvalue of customization and differentiation such that the comparable pricingunsatisfied performance obligations for contracts with an original expected length of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company is typically not able to determine TPE for the Company’s products.
Disaggregation of Revenue
The following table presents the revenues by source (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Products |
| $ | 330,093 |
|
| $ | 280,988 |
|
Services and other |
|
| 20,113 |
|
|
| 19,652 |
|
Total |
| $ | 350,206 |
|
| $ | 300,640 |
|
The following table present revenues by geographical region (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Americas |
| $ | 101,473 |
|
| $ | 61,900 |
|
Europe, Middle East, Africa |
|
| 70,046 |
|
|
| 64,580 |
|
Asia |
|
| 178,687 |
|
|
| 174,160 |
|
Total |
| $ | 350,206 |
|
| $ | 300,640 |
|
(g) Allowances for Doubtful Accounts and Sales Returns
The Company records an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments for amounts owed to the Company’s gross margin objectivesCompany. The allowance for doubtful accounts is recorded as an expense under general and pricing practices plus customer and market specific considerations.
Activity under the Company’s allowance for similar deliverables when sold separately. These service arrangements are typically short term in nature and are largely completed shortly after delivery of the product. Training and education services are based on a daily rate per person and vary according to the type of class offered. Installation services are based on daily rate per person and vary according to the complexity of the products being installed.doubtful accounts is comprised as follows (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance at beginning of period |
| $ | 3,954 |
|
| $ | 393 |
|
Charged to expense, net of recoveries |
|
| 14,491 |
|
|
| 3,833 |
|
Utilization/write offs/exchange rate differences |
|
| (710 | ) |
|
| (272 | ) |
Balance at end of period |
| $ | 17,735 |
|
| $ | 3,954 |
|
The Company records an allowance for sales returns for estimated future product returns related to current period product revenue. The allowance for sales returns is recorded as a reduction of revenue and an allowance against accounts receivable.increase to accrued and other liabilities. The Company bases its allowance for sales returns on periodic assessments of historical trends in product return rates and current approved returned products. If the actual future returns were to deviate from the historical data on which the reserve had been established, the Company’s future revenue could be adversely affected.
Activity under the Company’s allowance for sales returns and doubtful accounts wasis comprised as follows (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance at beginning of period |
| $ | 390 |
|
| $ | 343 |
|
Charged to revenue |
|
| 1,132 |
|
|
| 1,303 |
|
Utilization/write offs/exchange rate differences |
|
| (649 | ) |
|
| (1,256 | ) |
Balance at end of period |
| $ | 873 |
|
| $ | 390 |
|
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Balance at beginning of year | $ | 868 | $ | 136 | $ | 589 | |||||
Charged to revenue | 466 | 767 | — | ||||||||
Utilization/write offs | (149 | ) | — | (450 | ) | ||||||
Exchange differences | (42 | ) | (35 | ) | (3 | ) | |||||
Balance at end of year | $ | 1,143 | $ | 868 | $ | 136 |
(h) Inventories
Inventories are stated at the lower of cost or market,net realizable value, with cost being determined using thecomputed based on an adjusted standard basis,which approximates actual cost on an average or first-in, first-out (FIFO) method.basis. In assessing the net realizable value of inventories, the Company is required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. Once inventory has been written down to its estimated net realizable value, its carrying value cannot be increased due to subsequent changes in demand. To the extent that a severe decline in forecasted demand occurs, or the Company experiences a higher incidence of inventory obsolescence due to rapidly changing technology and customer requirements, the Company may incur significant expenses for excess and obsolete inventory.
(i) Foreign Currency Translation
For operations outside the United States, the Company translates assets and liabilities of foreign subsidiaries, whose functional currency is the applicable local currency, at end of period exchange rates. Revenues and expenses are translated at periodic average rates. The adjustment resulting from translating the financial statements of such foreign subsidiaries is included in accumulated other comprehensive loss,income (loss), which is reflected as a separate component of stockholders’ equity. GainsRealized and unrealized gains and losses on foreign currency transactions are included in other income (expense) in the accompanying consolidated statementstatements of comprehensive income (loss).
(j) Comprehensive Income (Loss)
There have been no material items reclassified out of accumulated other comprehensive income (loss) and into net income (loss). The Company’s other comprehensive lossincome (loss) for the years ended December 31, 2016, 2015,2021 and 20142020 is comprised of only foreign currency translations.
(k) Property, Plant and video communications networks. There are a limited number of potential customers in this target market. The Company expects that a significant portion of the Company’s future revenue will depend on sales of its products to a limited number of customers. Any failure of one or more customers to purchase products from the Company for any reason, including any downturn in their businesses, would seriously harm the Company’s business, financial condition and results of operations.
Property, and Equipment
Asset Category | Useful Life | |
Furniture and fixtures | 3 to 4 years | |
Machinery and equipment | 2 to | |
Computers and software | 3 to 5 years | |
Leasehold improvements | Shorter of remaining lease term |
Upon retirement or sale, the cost and related accumulated depreciation of the asset are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses.
(l) Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable based on expected undiscounted cash flows attributablerecoverable. Factors the Company considers important which could trigger an impairment review, include, but are not limited to, significant changes in the manner of use the assets, significant changes in the strategy for the Company's overall business or significant negative economic trends. If this evaluation indicates that the value of an intangible asset ormay be impaired an assessment of the recoverability of the net carrying value of the asset group.over its remaining useful life is made. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future net undiscounted cash flows, an impairment expense is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. If this assessment indicates that the cost of an intangible asset is not recoverable, based on the estimated undiscounted future cash flows or other comparable market valuations of the entity or technology acquired over the remaining amortization period, the net carrying value of the related intangible asset will be reduced to fair value and the remaining amortization period may be adjusted. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
In the application of impairment testing, the Company is required to make estimates of future operating trends and resulting cash flows and judgments on discount rates and other variables. Actual future results and other assumed variables could differ from these estimates.
Any assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
(m) Goodwill and Other Intangible Assets
Goodwill and other acquisition-related intangible assets not subject to amortization are tested annually for impairment and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Company estimatesquantitative goodwill impairment test is a two-step process with step one requiring the comparison of the reporting unit's estimated fair value with the carrying amount of its long-livednet assets. If necessary, step two of the impairment test determines the amount of goodwill impairment to be recorded when the reporting unit's recorded net assets based on a combinationexceed its fair value. In 2021, the Company changed its annual impairment testing date to October 31 to ensure the completion of market information primarily obtained from third-party quotes and online markets. its annual goodwill impairment test prior to the end of its annual reporting period, thereby aligning impairment testing procedures with its year-end financial reporting.
In the application of the impairment testing, the Company is required to make estimates of future operating trends and resulting cash flows and judgments on discount rates and other variables. Actual future results and other assumed variables could differ from these estimates. During the years ended December 31, 2016, 2015, and 2014, the Company recorded no impairment expenses related to the impairment of long-lived assets.
(n) Business Combination
The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets and certain tangible assets such as inventory.
Critical estimates in valuing certain tangible and intangible assets include but are not limited to future expected cash flows from the underlying assets and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
(o) Stock-Based Compensation
Stock-based compensation cost is measured at the grant date of the awards based on the estimated fair value of the awards. The Company determines the fair value of restricted stock units based on the Company’s stock price on the date of grant. The Company uses the Black Scholes model to estimate the fair value of options, which is affected by the Company's stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Company's expected stock price volatility over the expected term of the awards, actual and projected employee option exercise behaviors, risk-free interest rates and expected dividends. The expected stock price volatility is based on the weighted average of the historical volatility of the Company's common stock over the most recent period commensurate with the estimated expected life of the Company's stock options. The Company based its expected life assumption on its historical experience and on the terms and conditions of the stock awards granted. Risk-free interest rates reflect the yield on zero-coupon U.S.United States Treasury securities.
The Company amortizes the value of the stock-based compensation to expense using the straight-line method. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statementstatements of comprehensive income (loss). The Company attributes the values of the stock-based compensation to expense using the straight-line method.
(p) Income Taxes
The Company uses the asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and the income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Based
The Company does not recognize a tax benefit unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the cumulative losses incurred,technical merits of the associated tax position. If the recognition threshold is met, the Company has recordedrecognizes a full valuation allowance against its net deferred tax assetsbenefit measured at December 31, 2016 duethe largest amount of the tax benefit that, in the Company’s judgment, is greater than 50 percent likely to the significant uncertainty regarding whether the deferred tax assets will be realized.
(q) Net Income (Loss) per Share Attributable to DASAN Zhone Solutions, Inc.
Basic net income (loss) per share attributable to DASAN Zhone Solutions, Inc. is computed by dividing the net income (loss) attributable to DASAN Zhone Solutions, Inc. for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc. gives effect to common stock equivalents; however, potential common equivalent shares are excluded if their effect is antidilutive. Potential common stock equivalent shares are composed of restricted stock units, unvested restricted shares and incremental shares of common equivalent sharesstock issuable upon the exercise of stock options.
(r) Research and Development Cost
Costs related to research and development, which primarily consists of labor and benefits, supplies, facilities, consulting, and outside service fees, are expensed as incurred.
(s) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments (if any) with original maturities of less than three months.
(t) Leases
The Company offersdetermines if an arrangement is a standard warranty for its hardware productslease at inception. The Company’s lease agreements generally contain lease and non-lease components. Payments under the Company’s lease arrangements are primarily fixed. Lease assets and liabilities are recognized at the present value of one year,the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable. The Company’s incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments. The Company’s lease terms include periods under options to extend the option to purchase an extended warranty of up to five years, depending on the product type. The Company recognizes estimated costs related to warranty activities upon product shipment or upon identification of a specific product failure. The Company recognizes estimated warranty costslease when it is probablereasonably certain that a liability has been incurred and the amount of loss is reasonably estimable. The estimates are based upon historical and projected product failure and claim rates, historical costs incurred in correcting product failures and information available related to any specifically identified product failures. Significant judgment is required in estimating costs associated with warranty activities and the Company estimates are limited to information available to the Company at the time of such estimates. In some cases, such as when a specific product failure is first identified or a new product is introduced, the Company may initially have limited information and limited historical failure and claim rates upon which to base its estimates, and such estimates may require revision in future periods. The recorded amount is adjusted from time to time for specifically identified warranty exposure.
(u) Recent Accounting Pronouncements
In August 2015,December 2019, the FASB issued ASU 2015-14,2019-12: Simplifying the Accounting for Income Taxes (Topic 740), which defersremoves certain exceptions to the effective dategeneral principles in Topic 740 and improves consistent application of the guidance inand simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU No. 2014-09, Revenue from Contracts with Customer, for all entities by one year. With the deferral, the new standard is effective for thefiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company onadopted this new accounting standard effective January 1, 2018. Early adoption is permitted, but not before the original effective date of January 1, 2017. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients,2021 which provides clarification on how to assess collectibility, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of transition of ASU 2014-09. The effective date of this updated guidance for the Company is the same as the effective date of ASU 2014-09, which is January 1, 2018. The Company does not plan to early adopt this guidance. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements.
In February 2016,March 2020, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The updated guidance is effective for the Company on January 1, 2019, and early adoption is permitted. The Company does not plan to early adopt this guidance. The Company expects its assets and liabilities to increase as a resultNo. 2020-04 (Topic 848), Reference Rate Reform - Facilitation of the adoptionEffects of this standard. The Company is currently assessingReference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the potential impact of adopting this newexisting guidance on its consolidatedcontract modifications and hedge accounting to ease the financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative informationreporting burdens related to the impact ofexpected 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 effective upon issuance and may generally be applied through December 31, 2022, to any new standard on its consolidated financial statements at this time.
In NovemberJune 2016, FASB issued ASU 2016-18, Statement2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Cash Flows, Restricted Cash,Credit Losses on Financial Instruments, which require that a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. The updated guidance is effective forrequires the Company beginning on January 1, 2018. Early adoption is permitted. Adoption of this ASU is applied using a retrospective approach. As a result, the Company will no longer present transfers between cashto measure and cash equivalentsrecognize expected credit losses for financial assets held and restricted cash in the consolidated cash flow statements.
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 718)326): Scope of modification accounting.Targeted Transition Relief, and ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which provided additional implementation guidance on the previously issued ASU. The purpose ofCompany adopted the amendment is to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance is effective for the Company beginning on January 1, 2018.2022. The CompanyASU is currently assessing the potentialnot expected to have a material impact of adopting this new guidance on itsour consolidated financial statements.
(2) Merger
Optelian Acquisition
On September 9, 2016,February 5, 2021, the Company acquired DNSOptelian 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 (the “Optelian Acquisition”). Following the closing of the Optelian Acquisition, 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 100 gigabits per second (Gig) and above capability, expanding DZS product portfolios by providing environmentally hardened, high capacity, and flexible solutions at the network edge.
The purchase price of $7.5 million included cash paid to the shareholders and option holders of Optelian, cash paid to retire Optelian's outstanding debt on the date of acquisition, and contingent payments to shareholders (in thousands):
Purchase consideration |
|
|
|
|
Retirement of Optelian debt |
| $ | 4,929 |
|
Payment to shareholders and option holders |
|
| 664 |
|
Contingent payment to shareholders |
|
| 1,897 |
|
Total purchase consideration |
| $ | 7,490 |
|
The payment to shareholders and option holders includes a $0.3 million holdback and $1.9 million contingent consideration based on a certain percentage of future revenue of certain Optelian products through the Mergerend of 2023. The maximum amount of payment under contingent consideration provision is not limited per the acquisition agreement.
The acquisition was recorded as a business combination with valuations of the assets acquired and liabilities assumed at their acquisition date fair value 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. In the first quarter of 2021, the Company recorded fair values of assets acquired and liabilities assumed as provisional. In the third quarter of 2021, we recorded a measurement-period adjustment of $0.5 million to reduce the value of intangible assets acquired with a corresponding offset to goodwill. The adjustment did not have a material impact on the amortization expense recorded in the previous quarters. We completed the purchase price allocation for Optelian acquisition in the fourth quarter of 2021.
The following summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition for the Optelian Acquisition (in thousands):
Allocation of purchase consideration |
|
|
|
|
Cash and cash equivalents |
| $ | 1,236 |
|
Accounts receivable - trade |
|
| 460 |
|
Other receivables |
|
| 153 |
|
Inventories |
|
| 448 |
|
Prepaid expenses and other current assets |
|
| 49 |
|
Property, plant and equipment |
|
| 718 |
|
Intangible assets |
|
| 3,160 |
|
Accounts payable - trade |
|
| (390 | ) |
Contract liabilities |
|
| (169 | ) |
Accrued and other liabilities |
|
| (123 | ) |
Goodwill |
|
| 1,948 |
|
Total purchase consideration |
| $ | 7,490 |
|
The purchase price allocation resulted in the recognition of goodwill of approximately $1.9 million, which primarily related to the expected synergies from combining operations. Of this amount, approximately $0.9 million is expected to be deductible for
tax purposes. The following table represents the final estimated fair value and useful lives of identifiable intangible assets acquired (in thousands):
|
| Estimated |
|
| Estimated | ||||
|
| fair value |
|
| useful life | ||||
Intangible assets acquired |
|
|
|
|
|
| |||
Developed technology |
| $ | 1,780 |
|
| 5 years | |||
Customer relationships |
|
| 490 |
|
| 5 years | |||
In-process research and development |
|
| 890 |
|
| 5 years | |||
Total intangible assets |
| $ | 3,160 |
|
|
| |||
|
|
|
|
|
RIFT Acquisition
On March 3, 2021, the Company acquired substantially all of the assets of RIFT, Inc., a network automation solutions company, including 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. The total purchase consideration was $0.5 million, including a $0.2 million holdback that was released in April of 2021 following the fulfillment of certain requirements in the purchase agreement. The Company allocated the purchase price to $0.1 million in net tangible assets, $0.2 million in developed technologies, and $0.2 million in goodwill. As a result of the acquisition, RIFT.IO India Private Limited became a wholly owned subsidiary of the Company with and into DNS, with DNS surviving as a wholly owned subsidiary of the Company. The Merger combines leading technology platforms with a broadened customer base.
Shares | Estimated Fair Value | ||||||
Shares of Legacy Zhone stock as of September 8, 2016 (1) | 6,874 | $ | 40,902 | ||||
Legacy Zhone stock options (1) | 198 | 540 | |||||
Total purchase consideration | $ | 41,442 |
Preliminary Fair Value as of September 9, 2016 | Correction of Errors (1) | Fair Value as of December 31, 2016 | ||||||||||
Cash and cash equivalents | $ | 7,013 | $ | — | $ | 7,013 | ||||||
Accounts receivable | 18,847 | (337 | ) | 18,510 | ||||||||
Inventory | 16,456 | — | 16,456 | |||||||||
Prepaid expenses and other current assets | 2,436 | (245 | ) | 2,191 | ||||||||
Property and equipment | 4,339 | — | 4,339 | |||||||||
Other assets | 125 | — | 125 | |||||||||
Identifiable intangible assets | 10,479 | — | 10,479 | |||||||||
Goodwill | 2,820 | 464 | 3,284 | |||||||||
Accounts payable | (11,021 | ) | — | (11,021 | ) | |||||||
Accrued and other liabilities | (7,272 | ) | 183 | (7,089 | ) | |||||||
Other long-term liabilities | (2,780 | ) | (65 | ) | (2,845 | ) | ||||||
Total Indicated Fair Value of Assets | $ | 41,442 | $ | — | $ | 41,442 |
Useful life (in Years) | Fair Value | |||||
Developed technology | 5 | $ | 3,060 | |||
Customer relationships | 10 | 5,240 | ||||
Backlog | 1 | 2,179 | ||||
$ | 10,479 |
Years Ended December 31, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Pro forma total net revenue | $ | 202,321 | $ | 240,342 | ||||
Pro forma net loss | (29,514 | ) | (11,369 | ) |
(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 valueFair Value on the Company’s consolidated balance sheet as of December 31, 2016 and 2015, but require disclosure of their fair values: cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. a Recurring Basis
The carrying values of financial instruments such as cash and cash equivalents, short-term investments,restricted cash, accounts receivable and other receivables, accounts payable and accrued liabilities approximate their fair values based on their short-term nature.
The carryingCompany classifies its contingent liability 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 Company's debt approximatesexpected 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. Refer to Note 2 Business Combinations for further information.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):
|
| December 31, 2021 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Cash and cash equivalents |
| $ | 46,666 |
|
| $ | - |
|
| $ | - |
|
| $ | 46,666 |
|
Restricted cash |
|
| 6,808 |
|
|
| - |
|
|
| - |
|
|
| 6,808 |
|
Contingent liability |
|
| - |
|
|
| - |
|
|
| 2,121 |
|
|
| 2,121 |
|
Total |
| $ | 53,474 |
|
| $ | - |
|
| $ | 2,121 |
|
| $ | 55,595 |
|
|
| December 31, 2020 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Cash and cash equivalents |
| $ | 45,219 |
|
| $ | - |
|
| $ | - |
|
| $ | 45,219 |
|
Restricted cash |
|
| 9,200 |
|
|
| - |
|
|
| - |
|
|
| 9,200 |
|
Total |
| $ | 54,419 |
|
| $ | - |
|
| $ | - |
|
| $ | 54,419 |
|
The change in fair value of the Company’s contingent liability is included in selling, marketing, general and administrative expenses on the consolidated statements of comprehensive income (loss). The following table reconciles the beginning and ending balances of the Company’s Level 3 contingent liability (in thousands):
|
| Year ended December 31, |
| |
|
| 2021 |
| |
Balance at beginning of period |
| $ | - |
|
Initial fair value of contingent liability |
|
| 1,897 |
|
Net change in fair value |
|
| 224 |
|
Balance at end of period |
| $ | 2,121 |
|
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
In conjunction with the restructuring in Hanover, Germany and the headquarters relocation to Plano, Texas, we wrote down certain long-lived assets held and used to their fair values based onvalue of $0.2 million, resulting in an impairment charge of $4.5 million, which was included in earnings for the current rates availableperiod. The impaired long-lived assets primarily consisted of right-of-use assets, and we used estimated sub-lease payment data to fair value the Company for debt of similar termsrespective assets. We concluded that this fair value measurement should be categorized within Level 2.
(4) Cash and maturities.
As of December 31, 20162021 and 2020, the Company's cash, cash equivalents, and restricted cash consisted of financial deposits. Cash and cash equivalents held within the U.S. are held at FDIC insured depository institutions. Cash and cash equivalents held outside the U.S. totaled $31.3 million and $32.2 million as of December 31, 2021 and December 31, 2015, the Company's cash and cash equivalents comprised financial deposits.2020, respectively. Restricted cash comprisedconsisted primarily of cash restricted for researchperformance and development activitieswarranty bonds. Long term restricted cash was $0.2 million as of December 31, 2021 and collateral for borrowings.
(5) Balance Sheet Detail
Balance sheet detail as of December 31, 20162021 and 20152020 is as follows (in thousands):
Inventories
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Raw materials |
| $ | 34,512 |
|
| $ | 16,962 |
|
Work in process |
|
| 1,427 |
|
|
| 1,486 |
|
Finished goods |
|
| 20,954 |
|
|
| 21,124 |
|
Total inventories |
| $ | 56,893 |
|
| $ | 39,572 |
|
2016 | 2015 | ||||||
(As restated) | |||||||
Inventories: | |||||||
Raw materials | $ | 13,547 | $ | 5,519 | |||
Work in process | 3,705 | 2,074 | |||||
Finished goods | 13,780 | 6,383 | |||||
$ | 31,032 | $ | 13,976 |
As of December 31, 2021, the Company had 0 inventories provided as collateral for borrowings from Export-Import Bank of Korea amountedcompared to $14.4$9.6 million as of December 31, 2016.
2016 | 2015 | ||||||
Property and equipment, net: | |||||||
Furniture and fixtures | $ | 20,040 | $ | 20,456 | |||
Machinery and equipment | 4,530 | 3,173 | |||||
Leasehold improvements | 3,573 | 688 | |||||
Computers and software | 411 | 16 | |||||
Other | 922 | 438 | |||||
29,476 | 24,771 | ||||||
Less accumulated depreciation and amortization | (22,922 | ) | (22,121 | ) | |||
Less government grants | (266 | ) | (399 | ) | |||
$ | 6,288 | $ | 2,251 |
Property, plant and amortizationequipment
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Property, plant and equipment, net: |
|
|
|
|
|
|
|
|
Machinery and equipment |
| $ | 14,278 |
|
| $ | 13,656 |
|
Leasehold improvements |
|
| 5,219 |
|
|
| 4,633 |
|
Computers and software |
|
| 3,217 |
|
|
| 2,829 |
|
Furniture and fixtures |
|
| 1,771 |
|
|
| 1,123 |
|
Construction in progress and other |
|
| 2,937 |
|
|
| 716 |
|
|
|
| 27,422 |
|
|
| 22,957 |
|
Less: accumulated depreciation and amortization |
|
| (17,394 | ) |
|
| (15,445 | ) |
Less: government grants |
|
| (186 | ) |
|
| (366 | ) |
Total property, plant and equipment, net |
| $ | 9,842 |
|
| $ | 7,146 |
|
Depreciation expense associated with property, plant and equipment was $1.3 million, $1.4$2.9 million and $1.9$2.2 million for the years ended December 31, 2016, 20152021 and 2014,2020, respectively.
The Company receives grants from thecertain foreign government entities mainly to support capital expenditures.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.
As of December 31, 2021, other assets included $4.2 million of capitalized cloud computing implementation costs related to the Company's enterprise resource planning and reporting software. The Company had 0 capitalized cloud computing implementation costs as of December 31, 2020.
Accrued and other liabilities
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Accrued and other liabilities: |
|
|
|
|
|
|
|
|
Accrued warranty |
| $ | 1,981 |
|
| $ | 1,522 |
|
Accrued compensation |
|
| 7,230 |
|
|
| 5,692 |
|
Accrued taxes payable |
|
| 2,306 |
|
|
| 4,736 |
|
Other accrued expenses |
|
| 4,515 |
|
|
| 4,757 |
|
|
| $ | 16,032 |
|
| $ | 16,707 |
|
2016 | 2015 | ||||||
Accrued and other liabilities (in thousands): | |||||||
Accrued warranty | $ | 878 | $ | 441 | |||
Accrued compensation | 2,834 | — | |||||
Other Accrued expenses | 4,451 | 2,541 | |||||
$ | 8,163 | $ | 2,982 |
The Company accrues for 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 (in thousands):
Balance at December 31, 2013 | $ | 312 | |
Charged to cost of revenue | 401 | ||
Claims and settlements | (324 | ) | |
Balance at December 31, 2014 | 389 | ||
Charged to cost of revenue | 578 | ||
Claims and settlements | (526 | ) | |
Balance at December 31, 2015 | 441 | ||
Balance assumed with the Merger | 652 | ||
Charged to cost of revenue | 717 | ||
Claims and settlements | (925 | ) | |
Foreign exchange impact | (7 | ) | |
Balance at December 31, 2016 | $ | 878 |
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance at beginning of period |
| $ | 1,522 |
|
| $ | 1,611 |
|
Charged to cost of revenue |
|
| 798 |
|
|
| 1,072 |
|
Claims, settlements, and pending returns |
|
| (404 | ) |
|
| (1,189 | ) |
Foreign exchange impact |
|
| 65 |
|
|
| 28 |
|
Balance at end of period |
| $ | 1,981 |
|
| $ | 1,522 |
|
Contract Balances
The opening and Intangible Assetsclosing balances of current and long-term contract assets and contract liabilities related to contracts with customers are as follows:
|
| Contract assets |
|
| Contract liabilities |
| ||
December 31, 2020 |
| $ | 6,182 |
|
| $ | 6,871 |
|
December 31, 2021 |
|
| 2,184 |
|
|
| 9,135 |
|
Increase (decrease) |
| $ | (3,998 | ) |
| $ | 2,264 |
|
The decrease in contract assets during the year ended December 31, 2021 was primarily due to the invoicing of certain unbilled balances where revenue recognition criteria have been met as of December 31, 2016 and December 31, 2015 was as follows (in thousands):
December 31, 2016 | December 31, 2015 | ||||||
Beginning balance | $ | 693 | $ | — | |||
Goodwill from Merger | 2,820 | 693 | |||||
Correction of errors | 464 | — | |||||
Less: accumulated impairment | — | — | |||||
Ending balance | $ | 3,977 | $ | 693 |
The Company did not recognize impairment loss on goodwillincrease in contract liabilities during the yearsyear ended December 31, 2016, 20152021 was primarily due to amounts being invoiced for certain customers that did not yet meet the revenue recognition criteria. The amount of revenue recognized during the year ended December 31, 2021 that was included in the prior period contract liability balance was $4.4 million. This revenue consists of services provided to customers who had been invoiced prior to the current year. We expect to recognize approximately 67% of outstanding contract liabilities as revenue over the next 12 months and 2014.
The balance of contract cost deferred at December 31, 2021 and 2020 was $0.8 million and $0.5 million, respectively. During the year ended December 31, 2021, the Company recorded $0.5 million in amortization related to contract cost deferred as of December 31, 20162020.
(6) Restructuring and other charges
In March 2021, the Company made the strategic decision to transition DZS GmbH to a sales and research and development center by the end of 2021. In July 2021, the Company came to an agreement with the works council and entered into a social plan that covers statutory benefits and one-time severance obligations. The Company recognized expense for the statutory benefit obligations when such amounts were probable and estimable and the Company recognized expense for the one-time severance when the final terms of the benefit arrangement were communicated to the affected employees. The Company recorded related restructuring and other charges of approximately $11.9 million for the year December 31, 2015 were as follows (in thousands):
December 31, 2016 | ||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Government Grant | Net | |||||||||||||
Developed Technology | $ | 3,060 | $ | (203 | ) | $ | — | $ | 2,857 | |||||||
Customer Relationships | 5,240 | (321 | ) | — | 4,919 | |||||||||||
Backlog | 2,179 | (1,236 | ) | — | 943 | |||||||||||
Other | 105 | (34 | ) | (23 | ) | 48 | ||||||||||
Total intangible assets, net | $ | 10,584 | $ | (1,794 | ) | $ | (23 | ) | $ | 8,767 |
December 31, 2015 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Government Grant | Net | |||||||||
Other | 40 | (37 | ) | — | 3 | |||||||
Total intangible assets, net | 40 | (37 | ) | — | 3 |
In May 2021, the Company made the strategic decision to relocate manufacturing function of Optelian to Seminole, Florida and eliminate redundant workforces. The Company incurred restructuring and other charges of approximately $0.4 million for the year ended December 31, 2016 and 2015 amounted to $1.8 million and $10.0 thousand, respectively. 2021, consisting primarily of termination-related benefits.
As of December 31, 2016,2021, the Company had $0.8 million of accrued liabilities related to the restructuring costs.
(7) Goodwill and Intangible Assets
The following table summarizes the activity related to Goodwill (in thousands):
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance at beginning of period, gross |
| $ | 4,980 |
|
| $ | 4,980 |
|
Accumulated impairment at beginning of period |
|
| (1,003 | ) |
|
| (1,003 | ) |
Goodwill from acquisitions |
|
| 2,168 |
|
|
| - |
|
Balance at end of period |
| $ | 6,145 |
|
| $ | 3,977 |
|
The accumulated impairment of goodwill was $1.0 million as of both December 31, 2021 and 2020. The Company recognized 0 impairment loss for goodwill for the years ended December 31, 2021 and 2020.
During the year ended December 31, 2021, the Company recorded goodwill of $1.9 million related to the acquisition of Optelian and $0.2 million related to the acquisition of RIFT, which was allocated to the Americas reporting unit. Refer to Note 2 Business Combinations for further information.
Intangible assets consisted of the following (in thousands):
|
| As of December 31, 2021 | ||||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
|
| Weighted Average Remaining Useful Life | |||
Developed technology |
| $ | 5,007 |
|
| $ | (3,464 | ) |
| $ | 1,543 |
|
| 4.1 years |
Customer relationships |
|
| 5,730 |
|
|
| (2,886 | ) |
|
| 2,844 |
|
| 4.6 years |
In-process research and development |
|
| 890 |
|
|
| (162 | ) |
|
| 728 |
|
| 4.1 years |
Total intangible assets, net |
| $ | 11,627 |
|
| $ | (6,512 | ) |
| $ | 5,115 |
|
| 4.4 years |
|
| As of December 31, 2020 | ||||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
|
| Weighted Average Remaining Useful Life | |||
Developed technology |
| $ | 3,060 |
|
| $ | (2,652 | ) |
| $ | 408 |
|
| 0.7 years |
Customer relationships |
|
| 5,240 |
|
|
| (2,271 | ) |
|
| 2,969 |
|
| 5.7 years |
Total intangible assets, net |
| $ | 8,300 |
|
| $ | (4,923 | ) |
| $ | 3,377 |
|
| 5.1 years |
During the year ended December 31, 2021, the Company recorded $1.9 million, $0.5 million and $0.9 million in developed technology, customer relationships and in-process research and development, respectively, related to the acquisitions of Optelian and RIFT. Refer to Note 2 Business Combinations for further information.
During 2020, the Company recorded an impairment charge of $6.5 million for DZS GmbH intangible assets as part of the Company’s evaluation for impairment, utilizing a present value cash flow model to determine the fair value of the intangible assets. The Company determined that the intangible assets related to DZS GmbH were impaired, due to the financial performance of the reporting unit and loss of a significant customer. The impairment expense was comprised of $3.3 million for developed technology, $2.3 million for customer relationships, and $0.9 million for trade names, respectively. The impairment charge is included in impairment of long-lived assets on the consolidated statements of comprehensive income (loss). The Company did not identify any triggering events for potential impairment of intangible assets in 2021.
The following table summarizes the activity related to intangible assets, net (in thousands):
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance at beginning of period |
| $ | 3,377 |
|
| $ | 12,381 |
|
Intangible assets from acquisitions |
|
| 3,327 |
|
|
| - |
|
Less: amortization expense |
|
| (1,589 | ) |
|
| (2,959 | ) |
Less: impairment charge |
|
| - |
|
|
| (6,472 | ) |
Foreign exchange impact |
|
| - |
|
|
| 427 |
|
Balance at end of period |
| $ | 5,115 |
|
| $ | 3,377 |
|
As of December 31, 2021, expected future amortization expense for the years indicated was as follows (in thousands):
2022 |
| $ | 1,177 |
|
2023 |
|
| 1,177 |
|
2024 |
|
| 1,177 |
|
2025 |
|
| 1,177 |
|
Thereafter |
|
| 407 |
|
Total |
| $ | 5,115 |
|
Period | Expected Amortization Expense | |||
2017 | $ | 2,087 | ||
2018 | 1,145 | |||
2019 | 1,166 | |||
2020 | 1,136 | |||
2021 | 933 | |||
Thereafter | 2,300 | |||
Total | $ | 8,767 |
(8) Debt
As of December 31, 2016,2021, the Company had a $25.0 million revolving line0 debt obligations. During the first half of credit and letter of credit facility (the "WFB Facility") with Wells Fargo Bank ("WFB"). Under the WFB Facility,2021, the Company paid off the outstanding balance of debt with related parties, foreign banks and other lending institutions. The Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company is able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as definedno contractual principal payments due in the agreement, as long asnext five years.
The following tables summarize the aggregate amount outstanding does not exceed $25.0
|
| As of December 31, 2020 |
| |||||||||
|
| Short-term |
|
| Long-term |
|
| Total |
| |||
Bank and Trade Facilities - Foreign Operations |
| $ | 13,787 |
|
| $ | — |
|
| $ | 13,787 |
|
Related party |
|
| — |
|
|
| 29,766 |
|
|
| 29,766 |
|
|
|
| 13,787 |
|
|
| 29,766 |
|
|
| 43,553 |
|
Less: unamortized deferred financing costs |
|
| — |
|
|
| (12 | ) |
|
| (12 | ) |
|
| $ | 13,787 |
|
| $ | 29,754 |
|
| $ | 43,541 |
|
Bank and Trade Facilities - Foreign Operations
During prior periods, certain of the Company's foreign subsidiaries have entered into various financing arrangementsarrangement with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries. Payments under such facilities are made in accordance with the given lender’s amortization schedules.
As of December 31, 2016 | |||||||||
Interest rate (%) | Amount | ||||||||
Industrial Bank of Korea | Credit facility | 2.16 - 2.76 | $ | 1,106 | |||||
Shinhan Bank | General loan | 4.08 | 3,310 | ||||||
Shinhan Bank | Trade finance | 3.28 - 3.44 | 1,752 | ||||||
NongHyup Bank | Credit facility | 1.92 - 2.66 | 482 | ||||||
KEB Hana Bank | Comprehensive credit loan | 2.79 | 3,501 | * | |||||
The Export-Import Bank of Korea | Export development loan | 3.10 | 7,448 | ||||||
$ | 17,599 |
As of December 31, 2015 | ||||||||||
Interest rate (%) | Amount | |||||||||
Industrial Bank of Korea | Credit facility | 2.04 - 2.34 | $ | 3,431 | ||||||
Shinhan Bank | General loan | 2.94 | 3,413 | |||||||
Shinhan Bank | Trade finance | 2.80 | 329 | |||||||
NongHyup Bank | Credit facility | 1.60 - 1.95 | 1,574 | |||||||
KEB Hana Bank | Comprehensive credit loan | 3.55 | 5,421 | |||||||
The Export-Import Bank of Korea | Export development loan | 2.94 | 7,680 | |||||||
$ | 21,848 |
As of December 31, 2020, the Company had $19.0 million in outstanding borrowings and $9.3 million committed as security for lettersavailable to draw under its letter of credit underfacilities with NongHyup Bank and Korea Development Bank. These letter of credit facilities expired in the third quarter of 2021.
Related Party Debt
During prior periods, certain of the Company's $12.0subsidiaries entered into term loan arrangements with DNI. As of December 31, 2020, the Company had an aggregate outstanding balance of $29.8 million credit facility with certain foreign banks.
PNC Credit Facilities
On September 9, 2016, in connection with the consummation of the Merger,February 27, 2019, the Company entered into a Revolving Credit, Term Loan, Guaranty and Security Agreement with PNC Bank, National Association (“PNC”) and Citibank, N.A. as lenders, and PNC as agent for the lenders (the “PNC Credit Facilities”). On March 26, 2020, the Company paid the outstanding term loan borrowings in full and terminated the PNC Credit Facilities. In association with this debt repayment, the Company recorded a loss on extinguishment of debt of $1.4 million during the three months ended March 31, 2020.
JPMorgan Credit Facility
On February 9, 2022, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A., that provides for revolving loans in an amended and restated employment agreement with James Norrod and employment agreements with eachaggregate principal amount of Il Yung Kim and Kirk Misaka, in the respective forms approved by the Board of Directors, eachup to $30 million, up to $15 million of which superseded their respective existing employment arrangements, and eachis available for letters of which had an initial term of one year,credit. Refer to be automatically extendedNote 17 Subsequent Events for additional successive one year terms unless either party elects not to extend the term.more details.
(9) Stockholders’ Equity
General
The Company has reimbursed Mr. Kim for $30,000 in relocation expenses and provides a monthly housing allowanceauthorized the issuance of up to $6,000. Mr. Kim is also entitled to an additional $30,000 in relocation expenses in the event that his employment is terminated. All such relocation expenses provided to Mr. Kim will be grossed up for taxes. Mr. Kim is also eligible to participate in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements generally available to the Company’s other officers.
On January 26, 2021, the Company sold 4.6 million shares of common stock (including 0.6 million shares issued pursuant to the underwriters’ option to purchase additional shares) at a price of $14.00 per share in an underwritten public offering. The equity offering closed on January 2017. As of December 31, 2016,29, 2021 and resulted in gross proceeds to the Company had one significant stock-based compensation plan relatedof approximately $64.4 million and net proceeds to equity compensation (including equity compensationthe Company, after deducting underwriting discounts and commissions and offering expenses, of approximately $59.5 million.
Changes in Accumulated Other Comprehensive Income (Loss)
The table below summarizes the formchanges in accumulated other comprehensive income (loss) by component, net of stock options, restricted stock and restricted stock units) and employee stock purchases.tax (in thousands):
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Beginning accumulated other comprehensive loss |
| $ | (2,124 | ) |
| $ | (3,939 | ) |
Actuarial income (loss) for pension plan |
|
| 1,713 |
|
|
| (981 | ) |
Foreign currency translation adjustments, net |
|
| (4,046 | ) |
|
| 2,796 |
|
Ending accumulated other comprehensive loss |
| $ | (4,457 | ) |
| $ | (2,124 | ) |
During the year ended December 31, 2016 (in thousands):
Year ended December 31, | |||
2016 | |||
Compensation expense relating to employee stock options, restricted stock units and restricted stock | $ | 336 |
Stock Incentive Plans
The Company’s stock-based compensation plans are designed to attract, motivate, retain and reward employees, directors and consultants and align stockholder and employee interests. As
The Company’s DASAN Zhone Solutions, Inc. 2017 Incentive Award Plan (“2017 Plan”) authorizes the issuance of December 31, 2016, the Company had one active stock incentive plan, the Amended and Restated 2001 Stock Incentive Plan ("2001 Plan"). The 2001 Plan provided for the grant of incentive stock options, non-statutory stock options, restricted stock, unitrestricted stock units, dividend equivalents, stock payment awards, restricted stock appreciation rights, performance bonus awards and other stock-basedincentive awards. The 2017 Plan authorizes the grant of awards to officers, employees, non-employee directors and consultants of the Company.Company and its subsidiaries. Under the 20012017 Plan, stock options were permitted tomay be granted at an exercise price less than, equal to or greater than the fair market value on the date of grant, except that any stock options granted to a 10% stockholder must have an exercise price equal to at least 110% of the fair market value of the Company’s common stock on the date of grant. The Board of Directors determineddetermine the term of each stock option, the option exercise price and the vesting terms. Stock options wereare generally granted at an exercise price equal to the fair market value on the date of grant, expiring seven to ten years from the date of grant and vesting over a period of four years. On January 1 of each year, if the number of shares available for grant under the 2001 Plan was less than 5% of the total number of shares of common stock outstanding as of that date, the shares available for grant under the plan were automatically increased by the amount necessary to make the total number of shares available for grant equal to 5% of the total number of shares of common stock outstanding, or by a lesser amount as determined by the Board of Directors.
The maximum number of shares of the Company’s common stock for which grants may be madegranted under the 2017 Plan is the sum of (i) 600,0001,174,359 shares, plus (ii) any shares subject to awards granted under the Amended and Restated 2001 Stock Incentive Planprior plan to the extent such shares become available for issuance under the 2017 Plan pursuant to its terms, plus (iii) any shares subject to an annual increase on each January 1 during the 10 year term of the 2017 Plan equal to the lesser of (x) 4% of the total
In 2020, the Compensation Committee of the Company’s Board of Directors andapproved the Compensation Committee granted an award of 100,000 optionsgrant to purchase common stock ofCharles Daniel Vogt, the Company under the 2017 Plan, subject to stockholder approval of the 2017 Plan, to Il Yung Kim, theCompany’s Chief Executive Officer, of the Company. Thenonqualified stock options have a ten-year term and an exercise price of $4.82 per share, adjusted for the subsequent one-for-five reverse stock splitto purchase 518,518 shares of the Company’s common stock effectedat an exercise price of $10.11 per share, which equaled the closing price of the Company’s common stock on February 28, 2017. Provided that Mr. Kim continues to render servicesAugust 1, 2020, the effective date of grant. The vesting commencement date is the grant date of options. The shares subject to the Company through the applicable vesting date, the optionsoption shall vest as to 25% of the shares on the firstthird anniversary of the vesting commencement date, subject to Mr. Vogt's continuous service as an employee, director or consultant through such vesting date. The grant was a part of the Inducement Option Agreements with Mr. Vogt and was not covered by 2017 Plan.
Stock Options
Options issued under the Company’s stock incentive plans are exercisable for periods not to exceed ten years, and vest and contain such other terms and conditions as specified in the applicable award document. Options to the remaining shares in 36 equal monthly installments thereafter. Between January 4, 2017 and September 15, 2017, the Company’s Board of Directors (or its designee) granted to 55 other employees an aggregate of 262,999buy common stock optionsare issued under the 2017 Plan, subjectwith exercise prices equal to obtaining stockholder approvalthe closing price of shares of the 2017 Plan, with a weighted average exercise priceCompany’s common on the date of $4.75. award.
The following table sets forth the summary of option activity under the stock options granted tooption program for the year ended December 31, 2021 (in thousands, except per share data):
|
| Options Outstanding |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at beginning of period |
|
| 2,442 |
|
| $ | 9.02 |
|
|
| 5.69 |
|
| $ | 15,761 |
|
Granted |
|
| 846 |
|
|
| 17.90 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (713 | ) |
|
| 7.68 |
|
|
|
|
|
|
|
|
|
Canceled/Forfeited |
|
| (477 | ) |
|
| 10.69 |
|
|
|
|
|
|
|
|
|
Expired |
|
| (110 | ) |
|
| 10.20 |
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
| 1,988 |
|
|
| 12.81 |
|
|
| 8.42 |
|
|
| 8,259 |
|
Vested and expected to vest at end of period |
|
| 1,988 |
|
|
| 12.81 |
|
|
| 8.42 |
|
|
| 8,259 |
|
Vested and exercisable at end of period |
|
| 505 |
|
| $ | 9.05 |
|
|
| 6.92 |
|
| $ | 3,624 |
|
The aggregate intrinsic value represents the total pretax intrinsic value, based on the Company’s employees will vestclosing stock price as to 25% of the shares on the first anniversaryDecember 31, 2021 of the grant date and as to the remaining shares in 36 equal monthly installments thereafter. If the 2017 Plan is not approved$16.22 per share which would have been received by the Company’s stockholders atoption holders had the 2017 annual meeting,option holders exercised their options as of that date. The aggregate intrinsic value of awards exercised during the foregoing stock option awards will be automatically canceledyears ended December 31, 2021 and become null2020 were $6.2 million and void. The Company may grant further awards to employees, including executive officers, and consultants under the 2017 Plan prior to the annual meeting in the ordinary course of business, which awards will also be contingent options that are subject to stockholder approval of the 2017 Plan.
The Company has estimated the fair value of stock-based payment awardsstock options on the date of grant using the Black Scholes pricing model, which is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, actual and projected employee option exercise behaviors, risk-free interest rate and expected dividends. The estimated expected term of options granted was determined based on SAB 107 simplified method because the Company does not have adequate historical option exercises.data for newly issued stock options. Estimated volatility was based on the historical volatility of the Company and the risk freerisk-free interest rate was based on the U.S. Treasury yield in effect at the time of grant for the expected life of the options. The Company does not anticipate paying any cash dividends in the foreseeable future, and therefore used an expected dividend yield of zero in the option valuation model. Forfeitures are recognized as they occur.
The Company is also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data was used to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Expected term (years) |
|
| 6.0 |
|
|
| 6.2 |
|
Volatility |
|
| 59.5 | % |
|
| 60.5 | % |
Risk free interest rate |
|
| 1.1 | % |
|
| 0.4 | % |
Dividend yield |
|
| 0 | % |
|
| 0 | % |
Fair value of underlying stock options |
| $ | 9.84 |
|
| $ | 5.40 |
|
For the yearyears ended December 31, 2016 was $4.08. There were no exercises2021 and 2020, the Company recorded compensation expense related to stock options of options during the year ended$3.7 million and $3.2 million, respectively. As of December 31, 2016.
Restricted Stock Units
The following table sets forth the summary of optionrestricted stock units activity under the stock option program for the year ended December 31, 20162021 (in thousands, except per share data):
|
| RSU Outstanding |
|
| Weighted Average Grant Date Fair Value |
| ||
Outstanding at beginning of period |
|
| 416 |
|
| $ | 10.65 |
|
Granted |
|
| 1,243 |
|
|
| 17.74 |
|
Cancelled/Forfeited |
|
| (206 | ) |
|
| 14.67 |
|
Vested and issued |
|
| (143 | ) |
|
| 11.63 |
|
Outstanding at end of period |
|
| 1,310 |
|
|
| 16.65 |
|
Vested and unissued at end of period |
| 7 |
|
|
| 11.76 |
| |
Non-vested at end of period |
|
| 1,303 |
|
| $ | 16.67 |
|
Options Outstanding (1) | Weighted Average Exercise Price (1) | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||
Outstanding as of December 31, 2015 | — | $ | — | |||||||||
Options assumed as part of the Merger | 265 | $ | 8.68 | |||||||||
Granted | 530 | $ | 5.95 | |||||||||
Canceled/Forfeited | (8 | ) | $ | 11.75 | ||||||||
Exercised | — | $ | — | |||||||||
Outstanding as of December 31, 2016 | 787 | $ | 6.84 | 8.56 | $ | 60 | ||||||
Vested and expected to vest at December 31, 2016 | 684 | $ | 7.01 | 8.39 | $ | 52 | ||||||
Vested and exercisable at December 31, 2016 | 233 | $ | 8.34 | 5.85 | $ | 14 |
The fair value of restricted stock split effected on February 28, 2017.
For the option holders exercised their options asyears ended December 31, 2021 and 2020, the Company recorded compensation expense related to restricted stock units of that date.
2018 Employee Stock Purchase Plan
On May 22, 2018, the stockholders of the Company approved the adoption of the DASAN Zhone Solutions, Inc. 2018 Employee Stock Purchase Plan (the “ESPP”). The ESPP replaced the DASAN Zhone Solutions, Inc. 2002 Employee Stock Purchase Plan.
The ESPP authorizes the issuance of up to 250,000 shares of the Company’s common stock. In addition, the ESPP provides for an annual increase on the first day of each calendar year beginning on January 1, 2019, and ending on and including January 1, 2028, equal to the lesser of (i) 1% of the shares outstanding on the last day of the immediately preceding calendar year and (ii) such smaller number of shares as may be determined by the Board of Directors in its sole discretion. Notwithstanding the foregoing, the number of shares of stock that may be issued or transferred pursuant to awards under the ESPP may not exceed an aggregate of 2,000,000 shares. These 2,000,000 shares have been registered pursuant to a registration statement on Form S-8 filed with the SEC on November 8, 2018. The purchase price of the shares will be 85% of the lower of the fair market value of our common stock on (a) the first trading day of the offering period or (b) the final trading day of the offering period, which would be the applicable purchase date.
The weighted average assumptions used to value the ESPP shares for the year ended December 31, 2021 included an expected term of 0.5 years, volatility of 53.7% and a risk free interest rate of 0.3%. The Company recorded $0.7 million and $0.3 million of expense related to the ESPP for the year ended December 31, 2021 and 2020, respectively.
Stock-based Compensation
The following table summarizes total stock-based compensation expense for stock options, restricted stock units, and ESPP.
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cost of revenue |
| $ | 276 |
|
| $ | 86 |
|
Research and product development |
|
| 1,074 |
|
|
| 395 |
|
Selling, marketing, general and administrative |
|
| 7,640 |
|
|
| 4,132 |
|
|
| $ | 8,990 |
|
| $ | 4,613 |
|
(10) Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Net income (loss) |
| $ | (34,683 | ) |
| $ | (23,082 | ) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
| 26,692 |
|
|
| 21,588 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options, restricted stock units and share awards |
|
| — |
|
|
| — |
|
Diluted |
|
| 26,692 |
|
|
| 21,588 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | (1.30 | ) |
| $ | (1.07 | ) |
Diluted |
| $ | (1.30 | ) |
| $ | (1.07 | ) |
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(As restated) | |||||||||||
Numerator: | |||||||||||
Net income (loss) attributable to DASAN Zhone Solutions, Inc. | $ | (15,326 | ) | $ | (3,339 | ) | $ | 1,837 | |||
Denominator: | |||||||||||
Weighted average number of shares outstanding: | |||||||||||
Basic (1) | 11,637 | 9,314 | 9,199 | ||||||||
Effect of dilutive securities: | |||||||||||
Stock options, restricted stock units and share awards | — | — | — | ||||||||
Diluted (1) | 11,637 | 9,314 | 9,199 | ||||||||
Net income (loss) per share attributable to DASAN Zhone Solutions Inc.: | |||||||||||
Basic (1) | $ | (1.32 | ) | $ | (0.36 | ) | $ | 0.20 | |||
Diluted (1) | $ | (1.32 | ) | $ | (0.36 | ) | $ | 0.20 |
The following tables set forth potential common stock that is not included in the diluted net income (loss) per share calculation above because their effect would be anti-dilutive for the periods indicated (in thousands, except exercise price per share data)thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Outstanding stock options |
|
| 448 |
|
|
| 277 |
|
Unvested restricted stock units |
|
| 269 |
|
|
| 20 |
|
2016 | Weighted average option exercise price | |||||
Outstanding stock options, restricted stock units and unvested restricted shares | 796 | $ | 6.84 |
As of December 31, 2016, 20152021 and 2014, no2020, 0 shares of issued common stock were subject to repurchase.
(11) Income Taxes
The geographical breakdown of income (loss) before income taxes is as follows (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Loss before income taxes - Domestic |
| $ | (6,031 | ) |
| $ | (19,276 | ) |
Loss before income taxes - Foreign |
|
| (25,439 | ) |
|
| (305 | ) |
Loss before income taxes |
| $ | (31,470 | ) |
| $ | (19,581 | ) |
The following is a summary of the components of income tax expense applicable to lossincome (loss) before income taxes (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Current: |
|
|
|
|
|
|
|
|
Federal |
| $ | - |
|
| $ | - |
|
State |
|
| 29 |
|
|
| 28 |
|
Foreign |
|
| 1,779 |
|
|
| 3,256 |
|
Total current tax provision |
| $ | 1,808 |
|
| $ | 3,284 |
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
| $ | - |
|
| $ | - |
|
State |
|
| - |
|
|
| - |
|
Foreign |
|
| 1,405 |
|
|
| 217 |
|
Total deferred tax provision (benefit) |
| $ | 1,405 |
|
| $ | 217 |
|
Total tax provision (benefit) |
| $ | 3,213 |
|
| $ | 3,501 |
|
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Current: | |||||||||||
Federal | $ | — | $ | — | $ | — | |||||
State | (9 | ) | — | — | |||||||
Foreign | 88 | 318 | 1,812 | ||||||||
Total current tax expense | $ | 79 | $ | 318 | $ | 1,812 | |||||
Deferred: | |||||||||||
Federal | $ | — | $ | — | $ | — | |||||
State | — | — | — | ||||||||
Foreign | 1,408 | (86 | ) | (432 | ) | ||||||
Total deferred tax expense | $ | 1,408 | $ | (86 | ) | $ | (432 | ) | |||
Total tax expense | $ | 1,487 | $ | 232 | $ | 1,380 |
A reconciliation of the expected tax expenseprovision (benefit) to the actual tax expenseprovision (benefit) is as follows (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Expected tax provision (benefit) at statutory rate |
| $ | (6,609 | ) |
| $ | (4,112 | ) |
State taxes, net of Federal effect |
|
| 23 |
|
|
| 22 |
|
State change in deferred taxes |
|
| 304 |
|
|
| (325 | ) |
Foreign taxes |
|
| 166 |
|
|
| 3,472 |
|
Foreign rate differential |
|
| (1,946 | ) |
|
| (65 | ) |
Valuation allowance |
|
| 11,341 |
|
|
| 2,550 |
|
Change in reserves |
|
| 2,696 |
|
|
| - |
|
Permanent differences |
|
| (2,150) |
|
|
| 1,950 |
|
Tax credit carry-forwards |
|
| (1,102 | ) |
|
| (202 | ) |
Miscellaneous |
|
| 490 |
|
|
| 211 |
|
Total tax provision |
| $ | 3,213 |
|
| $ | 3,501 |
|
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Expected tax expense (benefit) at statutory rate (e.g. 34%) | $ | (4,644 | ) | $ | (929 | ) | $ | 1,094 | |||
State taxes, net of Federal effect | (348 | ) | — | — | |||||||
Foreign rate differential | 391 | 328 | (386 | ) | |||||||
Valuation allowance | 7,004 | 218 | 260 | ||||||||
Permanent differences | 687 | 40 | 237 | ||||||||
Tax credit carry-forwards | (896 | ) | (674 | ) | — | ||||||
Tax on accumulated earnings from prior year | 29 | 1,348 | — | ||||||||
Tax paid to overseas | 71 | — | — | ||||||||
Tax expense adjustments after tax return for prior | (837 | ) | — | — | |||||||
Foreign currency translation | 124 | — | — | ||||||||
Other | (94 | ) | (99 | ) | 175 | ||||||
Total tax expense | $ | 1,487 | $ | 232 | $ | 1,380 |
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, 20162021 and 20152020 are as follows (in thousands):
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss, capital loss, and tax credit carryforwards |
| $ | 26,512 |
|
| $ | 24,071 |
|
Fixed assets and intangible assets |
|
| 4,043 |
|
|
| 2,689 |
|
Inventory and other reserves |
|
| 4,863 |
|
|
| 1,554 |
|
Operating lease liability |
|
| 3,958 |
|
|
| 1,725 |
|
Other (mainly accrued expenses) |
|
| 10,410 |
|
|
| 4,792 |
|
Gross deferred tax assets |
|
| 49,786 |
|
|
| 34,831 |
|
Less valuation allowance |
|
| (46,027 | ) |
|
| (31,994 | ) |
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets and intangible assets |
|
| (856 | ) |
|
| - |
|
Operating lease right-of-use-asset |
|
| (2,903 | ) |
|
| (1,432 | ) |
Gross deferred tax liabilities |
|
| (3,759 | ) |
|
| (1,432 | ) |
Total net deferred tax assets |
| $ | - |
|
| $ | 1,405 |
|
2016 | 2015 | ||||||
Deferred tax assets: | |||||||
Net operating loss, capital loss, and tax credit carryforwards | $ | 14,243 | $ | 1,907 | |||
Reduction of gross deferred tax assets due to built-in loss limitation | (4,402 | ) | — | ||||
Fixed assets and intangible assets | 3,775 | 217 | |||||
Inventory and other reserves | 4,573 | 513 | |||||
Other | 2,661 | 197 | |||||
Gross deferred tax assets | 20,850 | 2,834 | |||||
Less valuation allowance | (20,850 | ) | (1,449 | ) | |||
Total net deferred tax assets | $ | — | $ | 1,385 |
For the years ended December 31, 20162021 and 2015,2020, the net changes in the valuation allowance were an increase of $19.4$14.0 million, and $0.2an increase of $5.2 million, respectively. The Company recorded a full valuation allowance againstincrease during the current year is primarily due to the increase of U.S. net deferred tax assets at December 31, 2016and increase of the valuation allowance on certain foreign deferred tax assets, including $5.6 million of deferred tax assets obtained in the acquisition of Optelian. 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 due toin the lack of previously paid taxes and anticipated taxable income.
As of December 31, 2016,2021, the Company had net operating loss carryforwards for federal state, and foreignstate income tax purposes of approximately $29.0 million, $43.9$43.4 million and $2.1$28.8 million, respectively. The federal losses begin to expire in 2025.various years beginning in 2030. The state losses begin to expire in 2017.various years beginning in 2022. The foreignfederal net operating loss carryforward includes $17.9 million that has an indefinite carryforward period. As of December 31, 2021, the Company had federal and state net operating losses for German tax purposes of approximately $25.3 million and $25.2 million respectively, which do not expire and are carried forward indefinitely, and net operating losses from Canada of approximately $6.3 million which may be carried forward for 20 years and begin to expire in 2026.
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.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 lossesloss and tax credit carryforwardscarry forward which arose prior to that date that the Company can utilize.
As of December 31, 2021, the Company had research credit carryforwards of approximately $2.0 million and $2.0 million for federal and state purposes, respectively, as well as Canadian research and investment credits of approximately $3.3 million and $2.2 million, 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. The Canadian research and investment credits begin to expire in 2031 and 2031 respectively.
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 the remaining 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 requirenot 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. AtAfter 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. Accordingly, the Company increased the reserve for those positions by approximately $2.3 million in the current year. As of December 31, 2016,2021, the Company had gross unrecognized tax benefits of $0.1$4.2 million, noneNaN of which if recognized, would reduce the effective tax rate in a future period, due to the Company's full valuation allowance.
A reconciliation of the beginning and ending unrecognized tax benefit amounts for 20162021 and 20152020 are as follows (in thousands):
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance at beginning of period |
| $ | 1,255 |
|
| $ | 1,036 |
|
Increases related to prior year’s tax positions |
|
| 2,252 |
|
|
| - |
|
Increases related to current year tax positions |
|
| 681 |
|
|
| 219 |
|
Balance at end of period |
| $ | 4,188 |
|
| $ | 1,255 |
|
Balance at December 31, 2014 | $ | — | |
Increases related to prior year tax positions | — | ||
Decreases related to prior year tax positions | — | ||
Increases related to current year tax positions | — | ||
Settlements | — | ||
Lapse of statute of limitations | — | ||
Balance at December 31, 2015 | — | ||
Increases related to prior year tax positions | — | ||
Decreases related to prior year tax positions | — | ||
Increases related to current year tax positions | 77 | ||
Settlements | — | ||
Lapse of statute of limitations | — | ||
Balance at December 31, 2016 | $ | 77 |
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 its statementthe consolidated statements of operations. comprehensive income (loss).
The Company did not0t record any interest andor penalty (benefit) expenseprovision during the yearyears ended December 31, 20162021 and 2015.
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 | 2018 - 2021 | |
California | 2017 - 2021 | |
Canada | 2017 - | |
Brazil | 2017 - | |
Germany | 2016 - 2021 | |
Japan | 2016 - 2021 | |
Korea | 2016 - 2021 | |
United Kingdom | 2017 - 2021 | |
Vietnam | 2011 - | |
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.
(12) Non-Controlling Interests
Years Ended December 31, | ||||||||
2016 | 2015 | |||||||
Beginning non-controlling interests | $ | 138 | $ | — | ||||
Acquisition of additional interest in a subsidiary | 277 | — | ||||||
Net loss attributable to non-controlling interests | (2 | ) | — | |||||
Foreign currency translation adjustments (OCI) | 3 | — | ||||||
Acquisition of controlling interest | — | 138 | ||||||
Ending non-controlling interests | $ | 416 | $ | 138 |
Related Party Debt
As of December 31, 2016, $5.0 million in term loans was outstanding under the facility. Such term loans mature in September 2021, and are pre-payable at any time by the Company without premium or penalty. The interest rate had 0 outstanding borrowings from related parties compared to $29.8 million as of December 31, 2016 under this facility was 4.6% per annum.
The following table sets forth payment guarantees of certain of the Company's performance obligations as of December 31, 2016. This loan matured in March 2017 with an option2021 that have been provided by DNI. DNI owns approximately 36.7% of renewalthe outstanding shares of the Company's common stock. The amount guaranteed exceeds the principal amounts of outstanding obligations due to collateral requirements by mutual agreement, and bore interest at a rate of 6.9% per annum, payable annually. Effective February 27, 2017, the Company amended the terms of this loan to extend the repayment date from March 2017 to March 2018, and to reduce the interest rate from 6.9% to 4.6% per annum.banks.
Guarantor |
| Amount Guaranteed (in thousands) |
|
| Description of Obligations Guaranteed | |
Dasan Networks, Inc. |
|
| 6,056 |
|
| Payment guarantee to Industrial Bank of Korea |
Dasan Networks, Inc. |
|
| 1,615 |
|
| Payment guarantee to Shinhan Bank |
|
| $ | 7,671 |
|
|
|
Other Related Party Transactions
Sales, and Purchases to and from Related Parties
|
| For the year ended December 31, 2021 |
| |||||||||||||||||||||
Counterparty |
| Sales |
|
| Cost of revenue |
|
| Research and product development |
|
| Selling, marketing, general and administrative |
|
| Interest expense |
|
| Other expenses |
| ||||||
Dasan Networks, Inc. |
| $ | 2,103 |
|
| $ | 1,940 |
|
| $ | 1,019 |
|
| $ | 1,620 |
|
| $ | 132 |
|
| $ | 197 |
|
Dasan Invest Co., Ltd.* |
|
| — |
|
|
| 30 |
|
|
| 134 |
|
|
| 57 |
|
|
| — |
|
|
| — |
|
|
| $ | 2,103 |
|
| $ | 1,970 |
|
| $ | 1,153 |
|
| $ | 1,677 |
|
| $ | 132 |
|
| $ | 197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, 2020 |
| |||||||||||||||||||||
Counterparty |
| Sales |
|
| Cost of revenue |
|
| Research and product development |
|
| Selling, marketing, general and administrative |
|
| Interest expense |
|
| Other expenses |
| ||||||
Dasan Networks, Inc. |
| $ | 4,362 |
|
| $ | 3,843 |
|
| $ | 953 |
|
| $ | 1,579 |
|
| $ | 1,047 |
|
| $ | 355 |
|
Dasan Invest Co., Ltd.* |
|
| — |
|
|
| 22 |
|
|
| 100 |
|
|
| 42 |
|
|
| — |
|
|
| — |
|
|
| $ | 4,362 |
|
| $ | 3,865 |
|
| $ | 1,053 |
|
| $ | 1,621 |
|
| $ | 1,047 |
|
| $ | 355 |
|
For the year ended December 31, 2016 | ||||||||||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Sales | Cost of revenue | Manufacturing (Cost of revenue) | Research and product development | Selling, marketing, general and administrative | Other income | Other expenses | ||||||||||||||||||||||
DNI (Parent Company) | N/A | $ | 21,214 | $ | 18,173 | $ | — | $ | — | $ | 5,079 | $ | — | $ | 389 | |||||||||||||||
ABLE | 61.99% | 50 | — | — | — | — | — | — | ||||||||||||||||||||||
CHASAN Networks Co., Ltd. | 100% | — | — | 720 | 149 | — | — | — | ||||||||||||||||||||||
DASAN France | 100% | 19 | 18 | — | — | — | — | |||||||||||||||||||||||
DASAN INDIA Private Limited | 100% | 2,710 | 2,080 | — | — | — | — | — | ||||||||||||||||||||||
DMC | 100% | 1 | 1 | — | — | — | — | — | ||||||||||||||||||||||
D-Mobile | 100% | 4,431 | 3,610 | — | — | 421 | — | — | ||||||||||||||||||||||
DTS | 81.56% | — | — | — | — | — | 1 | — | ||||||||||||||||||||||
HANDYSOFT, Inc. | 17.64% | 155 | 136 | — | — | — | — | |||||||||||||||||||||||
J-Mobile Corporation | 68.56% | 54 | — | — | — | 634 | 25 | — | ||||||||||||||||||||||
PANDA Media, Inc. | 90% | — | — | — | — | 2 | — | 1 | ||||||||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 750 | — | — | — | ||||||||||||||||||||||
$ | 28,634 | $ | 24,018 | $ | 720 | $ | 899 | $ | 6,136 | $ | 26 | $ | 390 |
For the year ended December 31, 2015 | ||||||||||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Sales (1) (2) | Cost of revenue (2) | Manufacturing (Cost of revenue) | Research and product development | Selling, marketing, general and administrative (1) | Other income | Other expenses | ||||||||||||||||||||||
As Restated | As Restated | As Restated | ||||||||||||||||||||||||||||
DNI (Parent Company) | N/A | $ | 23,365 | $ | 19,822 | $ | — | $ | — | $ | 7,230 | $ | 24 | $ | 363 | |||||||||||||||
CHASAN Networks Co., Ltd. | 100% | — | — | 731 | 358 | — | — | — | ||||||||||||||||||||||
DASAN RND Co., LTD | 100% | — | — | — | — | 605 | — | — | ||||||||||||||||||||||
D-Mobile | 100% | — | — | — | — | 91 | — | — | ||||||||||||||||||||||
HANDYSOFT, Inc. | 17.64% | 1,410 | 1,337 | — | — | — | — | 184 | ||||||||||||||||||||||
J-Mobile Corporation | 68.56% | — | — | — | — | 1,511 | 15 | — | ||||||||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 631 | — | — | — | ||||||||||||||||||||||
$ | 24,775 | $ | 21,159 | $ | 731 | $ | 989 | $ | 9,437 | $ | 39 | $ | 547 |
For the year ended December 31, 2014 | ||||||||||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Sales (1) (2) | Cost of revenue (2) | Manufacturing (Cost of revenue) | Research and product development | Selling, marketing, general and administrative (1) | Other income | Other expenses | ||||||||||||||||||||||
As Restated | As Restated | As Restated | ||||||||||||||||||||||||||||
DNI (Parent Company) | N/A | $ | 30,760 | $ | 27,353 | $ | — | $ | — | $ | 7,098 | $ | — | $ | — | |||||||||||||||
CHASAN Networks Co., Ltd. | 100% | — | — | 838 | 471 | — | — | — | ||||||||||||||||||||||
DASAN RND Co., LTD | 100% | — | — | — | — | 1,214 | — | — | ||||||||||||||||||||||
J-Mobile Corporation | 68.56% | — | — | — | — | 766 | — | — | ||||||||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 575 | — | — | — | ||||||||||||||||||||||
$ | 30,760 | $ | 27,353 | $ | 838 | $ | 1,046 | $ | 9,078 | $ | — | $ | — |
* Dasan Invest Co., the Company corrected errors in the classificationLtd. indirectly holds 3.1% of certain brand royalty fee of $0.4 million and $0.5 million which should have been treated as a reduction of revenue for the years ended December 31, 2015 and December 31, 2014.
The Company has entered into certain sales agreements with DNI andto sell certain of its subsidiaries. Salesservices and cost of revenue to DNI, DASAN France, DASAN INDIA Private Limited, and D-Mobile represent finished goods produced by the Company that are sold to these related parties who sell the Company's products in Korea, France, India and Taiwan, respectively.
DNS California, a subsidiary of the Company, shares office space with DNI and certain of DNI's subsidiaries. Prior to the Merger, DNS, then a wholly owned subsidiary of DNI, shared human resources, treasury and other administrative support with DNI. As such, the Company entered into certain service sharing agreements with DNI and certain of its subsidiaries for the shared office space and shared administrative services. Expenses
DNS Korea, a subsidiary of the Company, has two separate lease agreements with DNI related to rentthe lease of office space and warehouse facilities. Operating lease cost related to these leases totaled $1.8 million and $1.7 million for the years ended December 31, 2021 and 2020, respectively. Operating lease expense is allocated between cost of revenue, research and product development, and selling, marketing, general and administrative expenses on the consolidated statements of comprehensive income (loss). As of December 31, 2021, the right-of-use asset and operating lease liability related to these leases were $6.4 million. As of December 31, 2020, the right-of-use asset and operating lease liability related to these leases were $8.6 million. Deposits for these leases are included in other assets on the consolidated balance sheets as of December 31, 2021 and 2020.
The Company had an agreement with Dasan Invest Co., Ltd. to provide IT services arefor the Company. The agreement was terminated in the fourth quarter of 2021. The respective expense was allocated tobetween cost of revenue, research and product development, and selling, marketing, general and administrative expenses on the Company based on square footage occupied and headcount, respectively.
Other expenses to related parties represent expenses to DNI for its payment guarantees relating to the Company's borrowings.performance obligations. The Company pays DNI a guarantee fee which is calculated as 0.9% of the guaranteed amount.
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 December 31, 20162021 and 20152020 were as follows (in thousands):
|
| As of December 31, 2021 |
| |||||||||||||||||
Counterparty |
| Account receivables |
|
| Other receivables |
|
| Other assets |
|
| Loans Payable |
|
| Accounts payable |
| |||||
Dasan Networks, Inc. |
| $ | 181 |
|
| $ | 215 |
|
| $ | 691 |
|
| $ | — |
|
| $ | 785 |
|
Dasan Invest Co., Ltd.* |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| $ | 181 |
|
| $ | 215 |
|
| $ | 691 |
|
| $ | — |
|
| $ | 785 |
|
|
| As of December 31, 2020 |
| |||||||||||||||||
Counterparty |
| Account receivables |
|
| Other receivables |
|
| Other assets |
|
| Loans Payable |
|
| Accounts payable |
| |||||
Dasan Networks, Inc. |
| $ | 2,278 |
|
| $ | 247 |
|
| $ | 755 |
|
| $ | 29,754 |
|
| $ | 1,552 |
|
Dasan Invest Co., Ltd.* |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 32 |
|
|
| $ | 2,278 |
|
| $ | 247 |
|
| $ | 755 |
|
| $ | 29,754 |
|
| $ | 1,584 |
|
As of December 31, 2016 | ||||||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Account receivables | Other receivables | Deposits for lease* | Accounts payable | Other payables | Loans | |||||||||||||||||||
DNI (Parent Company) | N/A | $ | 6,679 | $ | 171 | $ | 690 | $ | 360 | $ | 6,861 | $ | 6,800 | |||||||||||||
ABLE | 61.99% | 53 | — | 9 | — | — | — | |||||||||||||||||||
DASAN France | 100% | 23 | — | — | — | — | — | |||||||||||||||||||
DASAN INDIA Private Limited | 100% | 2,606 | — | — | — | — | — | |||||||||||||||||||
D-Mobile | 100% | 3,943 | — | — | — | — | — | |||||||||||||||||||
HANDYSOFT, Inc. | 17.64% | 2 | — | — | — | — | — | |||||||||||||||||||
J-Mobile Corporation | 68.56% | 5 | — | — | — | — | — | |||||||||||||||||||
Tomato Soft Ltd. | 100% | — | — | — | — | 16 | — | |||||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 70 | 63 | — | |||||||||||||||||||
$ | 13,311 | $ | 171 | $ | 699 | $ | 430 | $ | 6,940 | $ | 6,800 |
As of December 31, 2015 | ||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Account receivables (As Restated) | Other receivables | Deposits for lease* | Other payables | Loans | ||||||||||||||||
DNI (Parent Company) | N/A | $ | 14,553 | $ | 1,431 | $ | 3,137 | $ | — | $ | — | |||||||||||
CHASAN Networks Co., Ltd. | 100% | — | — | — | 62 | — | ||||||||||||||||
DMC, Inc. | 100% | — | 1 | — | — | — | ||||||||||||||||
HANDYSOFT, Inc. | 17.64% | 22 | — | — | — | — | ||||||||||||||||
J-Mobile Corporation | 68.56% | — | 310 | — | 430 | |||||||||||||||||
Tomato Soft Ltd. | 100% | — | — | — | 16 | — | ||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 55 | — | ||||||||||||||||
$ | 14,575 | $ | 1,742 | $ | 3,137 | $ | 133 | $ | 430 |
* IncludedDasan Invest Co., Ltd. holds 3.1% of DNI’s shares
The related party receivable and payable balances are reflected in other assets related to deposits for lease inthe respective balance sheet captions on the consolidated balance sheets as of December 31, 20162021 and 2015.2020.
(13) 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.
The Company determines if an arrangement contains a lease at inception. The Company evaluates each service contract upon inception to determine whether it is, or contains, a lease. Such determination is made by applying judgment in evaluating each service contract within the context of the 5-step decision making process under ASC 842. The key concepts of the 5-step decision making process that the Company evaluated can be summarized as: (1) is there an identified physical asset; (2) does the Company have the right to substantially all the economic benefits from the asset throughout the contract period; (3) does the Company control how and for what purpose the asset is used; (4) does the Company operate the asset; and (5) did the Company design the asset in a way that predetermines how it will be used.
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.
Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Many of the Company’s lease agreements contain renewal options; however, the Company does not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that the Company is reasonably certain of renewing the lease at inception or when a triggering event occurs. Some of the Company’s lease agreements contain rent escalation clauses, rent holidays, capital improvement funding or other lease concessions.
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 lessor makes an underlying asset available for use. Variable lease components represent amounts that are not fixed in nature, are not tied to an index or rate, and are recognized as incurred.
In determining its right-of-use assets and lease liabilities, the Company applies a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires the Company to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company determines the incremental borrowing rate for each lease based primarily on its lease term and the economic environment of the applicable country or region.
The components of lease expense were as follows for the years ended December 31, 2021 and 2020 (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Operating lease cost |
| $ | 4,201 |
|
| $ | 5,393 |
|
Short-term lease cost |
|
| 1,302 |
|
|
| 264 |
|
Total net lease cost |
| $ | 5,503 |
|
| $ | 5,657 |
|
Short-term lease costs related to the short-term rent of office spaces and office equipment leases. Variable lease cost was 0t significant for the years ended December 31, 2021 and 2020.
During the year ended December 31, 2021, the Company recorded $4.2 million in impairment charges on the right-of-use assets, including $2.5 million related to the restructuring in Hanover, Germany and $1.7 million related to the headquarters relocation to Plano, Texas. These charges were included into restructuring and other charges and impairment of long-lived assets, respectively, on the consolidated statements of comprehensive income (loss).
Supplemental cash flow information related to the Company’s operating leases was as follows for the years ended December 31, 2021 and 2020 (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Operating cash outflows from operating leases |
| $ | 5,936 |
|
| $ | 5,307 |
|
Right-of-use assets obtained in exchange for operating lease obligations |
|
| 2,783 |
|
|
| 1,405 |
|
The following table presents the lease balances within the Company’s consolidated balance sheets, weighted average remaining lease term, and weighted average discount rates related to the Company’s operating leases as of December 31, 2021 and 2020 (in thousands):
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Lease Assets and Liabilities |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Right-of-use assets from operating leases |
| $ | 12,640 |
|
| $ | 18,483 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Operating lease liabilities - current |
| $ | 4,097 |
|
| $ | 4,494 |
|
Operating lease liabilities - non-current |
|
| 12,103 |
|
|
| 15,959 |
|
Total operating lease liabilities |
| $ | 16,200 |
|
| $ | 20,453 |
|
Weighted average remaining lease term |
| 4.2 years |
|
| 4.6 years |
| ||
Weighted average discount rate |
|
| 5.6 | % |
|
| 5.7 | % |
The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2021 (in thousands):
2022 |
| $ | 4,866 |
|
2023 |
|
| 4,468 |
|
2024 |
|
| 3,899 |
|
2025 |
|
| 2,596 |
|
2026 |
|
| 1,698 |
|
Thereafter |
|
| 835 |
|
Total operating lease payments |
|
| 18,362 |
|
Less: imputed interest |
|
| (2,162 | ) |
Total operating lease liabilities |
| $ | 16,200 |
|
(14) Commitments and Contingencies
Minimum Future Lease Payments | |||
Year ending December 31: | |||
2017 | $ | 3,633 | |
2018 | 2,916 | ||
2019 | 2,335 | ||
2020 | 2,192 | ||
2021 | 2,178 | ||
Thereafter | 8,166 | ||
Total minimum lease payments | $ | 21,420 |
Performance Bonds
In the normal course of operations, from time to time, the Company arranges for the issuance of various types of suretyperformance bonds, such as performance, warranty, and bid and performance bonds, whichin the form of bank guarantees or surety bonds. These instruments are agreementsarrangements under which the financial institution or surety company guaranteesprovides a financial guarantee that the Company will perform in accordance with contractual or legal obligations. As of December 31, 2016,2021, the Company had $0.5$8.9 million of surety bonds guaranteed by third parties.
Purchase Commitments
The Company’s inventory purchase commitments typically allow for cancellation of orders 30 days in advance of the required inventory availability date as set by the Company at time of order. However, the Company has agreements with various contract manufacturers and semiconductor companies which include non-cancellable inventory purchase commitments. The amount of our long-term non-cancellable purchase commitments outstanding net of reserve, was $10.3$3.2 million as of December 31, 2016.
Litigation
From time to time, the Company reached an agreement with a supplier to cancel a purchase arrangement for certain inventory which was committed through 2020. Under the settlement, the Company is no longer required to fulfill its commitment to purchase $4.3 million in inventory. In connection with the settlement, the Company also entered into a technical support services arrangement with the supplier through April 30, 2021.
Guarantor | Amount Guaranteed | Description of Obligations Guaranteed | ||||
DNI | $ | 3,972 | Borrowings from Shinhan Bank | |||
DNI | 1,986 | Purchasing card from Shinhan Bank | ||||
DNI | 4,800 | Borrowings from KEB Hana Bank | ||||
DNI | 11,379 | Credit facility and purchasing card from Industrial Bank of Korea | ||||
DNI | 6,000 | Credit facility from NongHyup Bank | ||||
DNI | 993 | Purchasing card from NongHyup Bank | ||||
Industrial Bank of Korea | 6,881 | Credit facility | ||||
Industrial Bank of Korea | 286 | Credit facility (local) | ||||
NongHyup Bank | 3,678 | Credit facility | ||||
Shinhan Bank | 299 | Purchasing card | ||||
KEB Hana Bank | 59 | Performance bonds | ||||
State Bank of India | 37 | Performance bonds | ||||
Seoul Guarantee Insurance Co. | 403 | Performance payment guarantee | ||||
$ | 40,773 |
(15) Employee Benefit Plans
Defined Contribution Plans
In the U.S., the Company maintains a 401(k) plan for its employees 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 may makemade discretionary contributions. The 401(k)contributions to the plan is a Legacy Zhone plan.in 2021. The Company made no discretionary contributions to the plan in 2016.
The Company also maintains a defined contribution plan for its employees in Korea. Under the defined contribution plan, the Company contributes 8.33%the equivalent of 8.3% of an employee's gross salary into the plan. For each of the years ended December 31, 2021 and 2020, the Company recorded an expense of $1.3 million for the plan.
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 following provides a reconciliation of the changes in benefit obligation, and the funded status at the end of the years (in thousand):
| Years ended December 31, |
| |||||
| 2021 |
|
| 2020 |
| ||
Benefit obligation at beginning of period | $ | 20,052 |
|
| $ | 17,671 |
|
Service cost |
| 115 |
|
|
| 95 |
|
Interest cost |
| 82 |
|
|
| 191 |
|
Benefits paid |
| (592 | ) |
|
| (568 | ) |
Actuarial (gain) loss |
| (1,606 | ) |
|
| 1,002 |
|
Foreign currency exchange rate change |
| (1,524 | ) |
|
| 1,661 |
|
Benefit obligation at end of period |
| 16,527 |
|
|
| 20,052 |
|
Underfunded status at end of period | $ | 16,527 |
|
| $ | 20,052 |
|
The Company has recorded the 2021 and 2020 underfunded status as a long-term liability on the consolidated balance sheets.The Company holds pension insurance contracts, with the Company as beneficiary, in the amount of $2.9 million and $3.5 million as of December 31, 2021 and 2020, respectively, related to individuals under the pension plans. The Company records these insurance contracts based on their cash surrender value at the balance sheet dates. These insurance contracts are classified as other assets on the consolidated balance sheet. The Company intends to use any proceeds from these policies to fund the pension plans. However, since the Company is the beneficiary on these policies, these assets have not been designated pension plan every quarter.assets.
The net periodic benefit cost related to the plans consisted of the following components during the years ended December 31, 2021 and 2020 (in thousands):
| Years ended December 31, |
| |||||
Net Periodic Benefit Cost | 2021 |
|
| 2020 |
| ||
Service Cost | $ | 115 |
|
| $ | 95 |
|
Interest Cost |
| 82 |
|
|
| 170 |
|
Net amortization of net gain (loss) |
| 107 |
|
|
| 21 |
|
Net periodic benefit cost | $ | 304 |
|
| $ | 286 |
|
The service cost component of net benefit cost is presented within cost of revenue or selling, marketing, general and administrative expense on the accompanying consolidated statements of comprehensive income (loss), in accordance with where compensation cost for the related associate is reported. All other components of net benefit cost, including interest cost and net amortization noted above, are presented within other income/expense, net in the accompanying consolidated statements of comprehensive income (loss).
The following table presents changes in benefit obligations recognized net of tax in other comprehensive income during the years ended December 31, 2021 and 2020 (in thousands):
| Years ended December 31, |
| |||||
| 2021 |
|
| 2020 |
| ||
Amortization of net (gain) loss | $ | (107 | ) |
| $ | (21 | ) |
Actuarial (gain) loss in the current period |
| (1,606 | ) |
|
| 1,002 |
|
Net change during the period | $ | (1,713 | ) |
| $ | 981 |
|
The increase in the actuarial gain during the year ended December 31, 2021, compared to the year ended December 31, 2020 was mainly due to the increase in the discount rate, resulting from an increase in the implicit rate of high-quality fixed income investments. The estimated net loss and prior service cost for the plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is not significant. The Company expects to make no contributions to the plans in 2022.
The weighted average assumptions used in determining the periodic net cost and benefit obligation information related to the plans are as follows:
| Years ended December 31, |
| |||||
| 2021 |
|
| 2020 |
| ||
Discount rate |
| 1.0 | % |
|
| 0.4 | % |
Rate of compensation increase |
| 1.7 | % |
|
| 1.7 | % |
The following benefit payments, which are funded by the Company, are expected to be paid (in thousands):
2022 |
| $ | 687 |
|
2023 |
|
| 713 |
|
2024 |
|
| 717 |
|
2025 |
|
| 720 |
|
2026 |
|
| 730 |
|
2027 - 2031 |
| $ | 3,695 |
|
(16) Enterprise-Wide Information
The Company is a global provider of ultra-broadband network access solutions and communications equipment forplatforms deployed by advanced Tier 1, national and regional service providerproviders and enterprise networks.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 reporting segment and operating unit structure.segment. The Company’s chief operating decision makers aremaker is the Company’s Co-ChiefChief Executive Officers,Officer, who reviewreviews financial information presented on a consolidated basis accompanied bywith disaggregated information about 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. The following summarizesRefer to Note 1(f) Revenue Recognition for the required disclosures about geographicon geographical concentrations and revenuerevenues by products and services (in thousands):
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Revenue by geography: | As Restated | As Restated | |||||||||
United States | $ | 16,872 | $ | 4,426 | $ | 12,526 | |||||
Canada | 1,967 | 7 | — | ||||||||
Total North America | 18,839 | 4,433 | 12,526 | ||||||||
Latin America | 9,604 | 2,510 | 1,318 | ||||||||
Europe, Middle East, Africa | 13,611 | 9,383 | 20,865 | ||||||||
Korea | 77,979 | 114,676 | 99,646 | ||||||||
Other Asia Pacific | 30,271 | 8,194 | 5,039 | ||||||||
Total International | 131,465 | 134,763 | 126,868 | ||||||||
Total | $ | 150,304 | $ | 139,196 | $ | 139,394 |
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Revenue by products and services: | As Restated | As Restated | |||||||||
Products | $ | 142,238 | $ | 133,036 | $ | 132,282 | |||||
Services | 8,066 | 6,160 | 7,112 | ||||||||
Total | $ | 150,304 | $ | 139,196 | $ | 139,394 |
The Company's property, plant and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands) as of December 31, 20162021 and 2015 (in thousands):2020:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
United States |
| $ | 6,105 |
|
| $ | 2,878 |
|
Korea |
|
| 2,367 |
|
|
| 2,472 |
|
Japan |
|
| 799 |
|
|
| 952 |
|
Canada |
|
| 280 |
|
|
| — |
|
Germany |
|
| 210 |
|
|
| 761 |
|
Other |
|
| 81 |
|
|
| 83 |
|
|
| $ | 9,842 |
|
| $ | 7,146 |
|
As of December 31, | |||||||
2016 | 2015 | ||||||
United States | $ | 4,094 | $ | 113 | |||
Korea | 1,455 | 2,138 | |||||
Japan and Vietnam | 739 | — | |||||
$ | 6,288 | $ | 2,251 |
Year ended December 31, 2016 | |||||||||||||||
Q1 (1) | Q2 (1) | Q3 (1) (2) | Q4 (2) | ||||||||||||
(in thousands, except per share data) | |||||||||||||||
Net revenue | $ | 25,340 | $ | 34,252 | $ | 31,240 | $ | 59,472 | |||||||
Gross profit | 4,611 | 9,002 | 9,300 | 18,034 | |||||||||||
Operating loss | (4,341 | ) | (165 | ) | (5,114 | ) | (3,429 | ) | |||||||
Net loss | (3,761 | ) | (533 | ) | (4,789 | ) | (6,245 | ) | |||||||
Net income (loss) attributable to non-controlling interest | 6 | 33 | (56 | ) | 15 | ||||||||||
Net loss attributable to DASAN Zhone Solutions, Inc. | (3,767 | ) | (566 | ) | (4,733 | ) | (6,260 | ) | |||||||
Net loss per share attributable to DASAN Zhone Solutions, Inc.: | |||||||||||||||
Basic | $ | (0.40 | ) | $ | (0.06 | ) | $ | (0.42 | ) | $ | (0.38 | ) | |||
Diluted | (0.40 | ) | (0.06 | ) | (0.42 | ) | (0.38 | ) | |||||||
Weighted-average shares outstanding: | |||||||||||||||
Basic | 9,493 | 9,493 | 11,139 | 16,375 | |||||||||||
Diluted | 9,493 | 9,493 | 11,139 | 16,375 |
(17) Subsequent Events
Equity Offering
On February 10, 2022, the Company identified and recorded immaterial errors related to the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016. The immaterial errors resulted from overstatement of net revenue and the associated related costs. The overall impact of the errors on the Company's consolidated financial position and results of operations is not material and as such, previously filed Quarterly Reporta “shelf” registration statement on Form 10-Q affectedS-3 to register up to $150 million of Company common stock, representing an indeterminate number of shares of common stock as may be issued from time to time pursuant to underwritten public offerings, negotiated transactions, block trades or a combination of these methods at indeterminate prices. Included on this registration statement as a secondary offering are 10,093,015 shares of Company common stock held by the errors has not been amended.
Revolving Credit Agreement
On February 9, 2016.
Year ended December 31, 2015 | |||||||||||||||||||||||
Q1 | Q2 | ||||||||||||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | As Previously Reported | Restatement Adjustments | As Restated | ||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||
Net revenue | $ | 38,727 | $ | (322 | ) | $ | 38,405 | $ | 32,021 | $ | (188 | ) | $ | 31,833 | |||||||||
Gross profit | 9,755 | (322 | ) | 9,433 | 8,480 | (188 | ) | 8,292 | |||||||||||||||
Operating income (loss) | 137 | (103 | ) | 34 | (2,108 | ) | (170 | ) | (2,278 | ) | |||||||||||||
Net income (loss) | 389 | (103 | ) | 286 | (2,547 | ) | (170 | ) | (2,717 | ) | |||||||||||||
Net income (loss) per share: | |||||||||||||||||||||||
Basic | $ | 0.04 | $ | (0.01 | ) | $ | 0.03 | $ | (0.28 | ) | $ | (0.01 | ) | $ | (0.29 | ) | |||||||
Diluted | 0.04 | (0.01 | ) | 0.03 | (0.28 | ) | (0.01 | ) | (0.29 | ) | |||||||||||||
Weighted-average shares outstanding: | |||||||||||||||||||||||
Basic | 9,222 | 9,222 | 9,222 | 9,233 | 9,233 | 9,233 | |||||||||||||||||
Diluted | 9,222 | 9,222 | 9,222 | 9,233 | 9,233 | 9,233 |
Year ended December 31, 2015 | |||||||||||||||||||||||
Q3 | Q4 | ||||||||||||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | As Previously Reported | Restatement Adjustments | As Restated | ||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||
Net revenue | $ | 22,591 | $ | (68 | ) | $ | 22,523 | $ | 46,686 | $ | (251 | ) | $ | 46,435 | |||||||||
Gross profit | 5,817 | (18 | ) | 5,799 | 12,587 | (225 | ) | 12,362 | |||||||||||||||
Operating income (loss) | (2,981 | ) | (18 | ) | (2,999 | ) | 2,337 | (71 | ) | 2,266 | |||||||||||||
Net income (loss) | (2,779 | ) | (18 | ) | (2,797 | ) | 1,973 | (84 | ) | 1,889 | |||||||||||||
Net income (loss) per share: | |||||||||||||||||||||||
Basic | $ | (0.30 | ) | $ | — | $ | (0.30 | ) | $ | 0.21 | $ | (0.01 | ) | $ | 0.20 | ||||||||
Diluted | (0.30 | ) | — | (0.30 | ) | 0.21 | (0.01 | ) | 0.20 | ||||||||||||||
Weighted-average shares outstanding: | |||||||||||||||||||||||
Basic | 9,331 | 9,331 | 9,331 | 9,459 | 9,459 | 9,459 | |||||||||||||||||
Diluted | 9,331 | 9,331 | 9,331 | 9,459 | 9,459 | 9,459 |
Loans under the Credit Agreement bear interest at the Company’s option at (i) the prime rate plus 2.00%, (ii) the adjusted term SOFR rate plus 2.90% or (iii) the adjusted daily simple SOFR rate plus 2.90%. We pay a per annum fee of 2.90% on all letters of credit issued under the Company.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We 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 Securities Exchange Act of 1934 (the Exchange Act)“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 Co-ChiefChief Executive OfficersOfficer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. 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.
As required by SEC Rule 13a-15(b), of the Exchange Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2016,2021, the end of the period covered by this report. The evaluation was done under the supervision and with the participation ofAnnual Report on Form 10-K. Our management, including our Co-ChiefChief Executive OfficersOfficer and our Chief Financial Officer. Based upon this evaluationOfficer, supervised and participated in the results of the independent investigation conducted by the Audit Committee (as discussed above, under "Business - Audit Committee Investigation"), our Co-Chief Executive Officers and Chief Financial Officerevaluation. They concluded that because of the material weaknesses in our internal control over financial reporting described below under “Management’s Annual Report on Internal Control over Financial Reporting,” our disclosure controls and procedures were not effective as of December 31, 2016.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016,2021, the end of our fiscal year.the period covered by this Annual Report on Form 10-K. In making this assessment, management used the criteria established in
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting that occurred during our lastthe most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. Merger-related integration activities may lead us to modify certain internal controls in future periods.
Inherent Limitations on Effectiveness of Controls
Our management, including our Co-ChiefChief Executive OfficersOfficer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the companyCompany have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of DZS Inc.
Opinion on Internal Control Over Financial Reporting
We have audited the internal control over financial reporting of DZS Inc. and subsidiaries (the Company) as of December 31, 2021 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2021, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and our report dated March 9, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
March 9, 2022
ITEM 9B. | OTHER INFORMATION |
None.
ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. |
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required in this item relating to our corporate governance, directors and nominees, and the compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the sections of our definitive proxy statement for our 2021 Annual Meeting of Stockholders to be filed with SEC within 120 days of the end of our fiscal year (the “Proxy Statement”) entitled “Corporate Governance Principles and Board Matters,” “Ownership of Securities” and “Proposal 1: Election of Directors.” Since our last Annual Report on Form 10-K, we have not made any material changes to the procedures by which our stockholders may recommend nominees to the Board of Directors.
Information relating to our executive officers is included under the caption "Executive Officers"“Information About our Executive Officers” in Part I of this Annual Report on Form 10-K, pursuant to General Instruction G(3) of Form 10-K.
Name | Age | Position | Term Expires | Class | ||||
Min Woo Nam | 54 | Chairman of the Board of Directors | 2019 | III | ||||
Michael Connors | 75 | Director | 2017 | I | ||||
Il Yung Kim | 60 | President, Chief Executive Officer, Acting Chief Financial Officer and Director | 2019 | III | ||||
Seong Gyun Kim | 50 | Director | 2017 | I | ||||
Sung-Bin Park | 50 | Director | 2018 | II |
Director | Audit Committee | Compensation Committee | Corporate Governance and Nominating Committee | |||
Michael Connors (1) | Member | |||||
Robert Dahl (2) | Chair | Member | Member | |||
Morteza Ejabat (3) | ||||||
Il Yung Kim | ||||||
Seong Gyun Kim(2) | Chair | |||||
C. Richard Kramlich (1) (4) | Member | Member | Member | |||
Min Woo Nam (2)(4) | Chair | Chair | ||||
James Norrod (5) | ||||||
Sung-Bin Park (4)(6) | Member | Member | Member | |||
Mahvash Yazdi (7) | ||||||
Number of Meetings in 2016 | 6 | 4 | 4 |
We have adopted a Code of Conduct and Ethics applicable to all of our employees, directors and officers (including our principal executive officer, principal financial officer, principal accounting officer and controller). The Code of Conduct and Ethics is designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The full text of our Code of Conduct and Ethics can be found in the "Corporate Governance" section ofis published on our website at
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item is incorporated herein by reference to the compensation of our executive officers and senior managers, including how we determine the elements and amounts of compensation. The Compensation Committeesections of the Board of Directors is responsible for determining, establishingProxy Statement entitled “Executive Compensation” and approving each element of compensation including salary and all bonus, incentive, equity and other compensation for the company’s executive officers and
“Director Compensation.”
Name and Principal Position | Year | Salary ($) | Bonus ($) (1) | Stock Awards($) | Option Awards ($) (2) | Non - Equity Incentive Plan Compensation ($) | Change in Pension Value and Non- qualified Deferred Compensation Earnings($) | All Other Compensation ($) (3) | Total ($) | ||||||||||||||||||
Il Yung Kim | 2016 | 113,711 | (5) | — | — | 739,907 | 33,095 | (6) | 886,713 | ||||||||||||||||||
President, Chief Executive Officer and Acting Chief Financial Officer (4) | |||||||||||||||||||||||||||
James Norrod | 2016 | 320,000 | 1,000,000 | — | 707,535 | — | — | 71,380 | (7) | 2,098,915 | |||||||||||||||||
Former Co-Chief Executive Officer (4) | 2015 | 396,923 | 100,000 | — | — | — | — | 86,248 | (8) | 583,171 | |||||||||||||||||
2014 | 172,306 | — | — | 2,826,383 | — | — | 49,738 | 3,048,427 | |||||||||||||||||||
Kirk Misaka | 2016 | 292,000 | 500,000 | — | 411,850 | — | — | 20,954 | (9) | 1,224,804 | |||||||||||||||||
Corporate Treasurer and Secretary and Former Chief Financial Officer (4) | 2015 | 362,192 | 267,237 | — | — | — | — | 17,631 | (10) | 647,060 | |||||||||||||||||
2014 | 365,000 | — | — | — | — | — | 15,039 | 380,039 |
Name | Grant Date | Estimated Possible Payouts under Non-Equity Incentive Plan Awards Target ($) | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) (1) | Exercise or base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) | |||||||||||||
Il Yung Kim | 9/9/2016 | 400,000 | — | 200,000 | 5.95 | $ | 739,907 | ||||||||||||
James Norrod | 9/9/2016 | 400,000 | — | 200,000 | 5.95 | $ | 707,535 | ||||||||||||
Kirk Misaka | 9/9/2016 | 200,000 | — | 100,000 | 5.95 | $ | 411,850 |
Option Awards (1) | |||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | (2) | Number of Securities Underlying Unexercised Options (#) Unexercisable | (2) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($)(2) | Option Expiration Date | ||||||||||
Il Yung Kim | — | 200,000 | (3) | $ | 5.95 | 9/9/2027 | |||||||||||
James Norrod | 12,499 | 187,500 | — | 5.95 | 9/9/2027 | ||||||||||||
Kirk Misaka | 17,999 | — | — | 6.16 | 9/1/2017 | ||||||||||||
17,999 | — | — | 7.55 | 9/1/2018 | |||||||||||||
6,249 | 93,751 | — | 5.95 | 9/9/2027 |
Name | Fees Earned or Paid in Cash ($) (1) | Stock Awards ($) (2) | Option Awards ($) (3) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) (4) | Total ($) | ||||||||||||||
Michael Connors (5) | 30,000 | — | 42,501 | — | — | — | 72,501 | ||||||||||||||
Robert Dahl (6) | 12,000 | — | — | — | — | — | 12,000 | ||||||||||||||
Morteza Ejabat (7) | — | 640,000 | — | — | — | — | 640,000 | ||||||||||||||
Seong Gyun Kim (8) | 24,000 | 17,850 | — | — | — | — | 41,850 | ||||||||||||||
C. Richard Kramlich (9) | 8,000 | 17,850 | — | — | — | — | 25,850 | ||||||||||||||
Min Woo Nam (10) | 20,000 | — | 37,822 | — | — | — | 57,822 | ||||||||||||||
Sung-Bin Park (11) | 22,000 | — | 37,822 | — | — | — | 59,822 | ||||||||||||||
Mahvash Yazdi (12) | 20,000 | — | — | — | — | — | 20,000 |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information knownrequired by this item relating to us regardingsecurity ownership of our common stock on September 15, 2017 by (1) each person who beneficially owned more than 5% of our common stock, (2) each current director, (3) each of our named executive officerscertain beneficial owners and (4) all directors, named executive officersmanagement, and their affiliates as a group. We are not aware of any arrangements, including any pledge of our common stock that could result in a change in control.
Name of Beneficial Owner (1) | Number of Shares Beneficially Owned (2) | Percent Owned (3) | |||||
DASAN Networks, Inc. | 9,493,015 | (4) | 57.9 | % | |||
New Enterprise Associates | 956,254 | (5) | 5.8 | % | |||
Il Yung Kim | 58,332 | (6) | * | ||||
James Norrod | 70,324 | (7) | * | ||||
Kirk Misaka | 136,472 | (8) | * | ||||
Min Woo Nam | 2,914 | (9) | * | ||||
Michael Connors | 78,802 | (10) | * | ||||
Seong Gyun Kim | 750 | (11) | * | ||||
Sung-Bin Park | 2,914 | (12) | * | ||||
All directors, named executive officers and their affiliates as a group (8 persons) | 10,802,025 | 65.1 | % |
(a) | (b) | (c) | |||||||||||
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (1)(2) | Weighted average exercise price of outstanding options, warrants and rights(2) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(2) | ||||||||||
Equity compensation plans approved by security holders | 910,245 | $ | 6.84 | 120,104 | (3)(4) | ||||||||
Equity compensation plans not approved by security holders | — | — | — |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item is incorporated herein by reference to the company and our directors and executive officers or their immediate family members are participants are reviewed by our Audit Committee or another independent bodysection of the Board of Directors, such as the independentProxy Statement entitled “Certain Relationships and disinterested members of the Board of Directors. As set forth in the Audit Committee charter, the members of the Audit Committee, all of whom are independent directors, review and approve related party transactions for which such approval is required under applicable law, including SEC and Nasdaq rules. In the course of its review and approval or ratification of a disclosable related party transaction, the Audit Committee or the independent and disinterested members of the Board of Directors may consider:
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The followinginformation required by this item is a summaryincorporated herein by reference to the section of the fees billed by PricewaterhouseCoopers LLP (PwC) and Samil PricewaterhouseCoopers (Samil PwC) for professional services rendered to DZS and DNS, respectively, for the year ended December 31, 2016, and billed by Samil PwC to DNS for the year ended December 31, 2015:
2016 | 2015 | ||||||||
Audit Fees | $ | 1,893,194 | (1) | $ | 661,144 | ||||
Audit-Related Fees | 60,274 | (2) | 116,878 | ||||||
Tax Fees | 77,043 | — | |||||||
All Other Fees | — | 2,244 | |||||||
Total | $ | 2,030,511 | $ | 780,266 |
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
1. | Financial Statements |
The Index to Consolidated Financial Statements on page 4232 is incorporated herein by reference as the list of financial statements required as part of this report.
2. | Exhibits |
The Exhibit Index on page 106exhibits required to be filed by Item 601 of Regulation S-K are listed in the “Index to Exhibits” immediately preceding the exhibits hereto and such listing is incorporated herein by reference as the list of exhibits required as part of this report.
ITEM 16. | FORM 10-K SUMMARY |
None.
INDEX TO EXHIBITS
|
|
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| Incorporated by Reference |
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| ||||
Exhibit Number |
| Exhibit Description |
| Form |
| Exhibit |
| Filing Date |
| Filed or Furnished Herewith |
|
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|
2.1 |
|
| 8-K |
| 10.1 |
| January 1, 2019 |
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| |
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2.2 |
|
| 8-K |
| 10.3 |
| January 1, 2019 |
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| |
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2.3 |
|
| 8-K |
| 2.1 |
| August 5, 2019 |
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| |
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|
3.1 |
|
| 10-K |
| 3.1 |
| September 27, 2017 |
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| |
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|
3.1.1 |
| Certificate of Amendment to the Restated Certificate of Incorporation of DZS Inc. |
| 8-K |
| 3.1 |
| August 27, 2020 |
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3.2 |
|
| 10-K |
| 3.2 |
| March 11, 2021 |
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| |
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4.1 |
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| X | |
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10.1# |
|
| 8-K |
| 10.1 |
| January 10, 2017 |
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| |
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|
10.1.1# |
| Amendment to DASAN Zhone Solutions, Inc. 2017 Incentive Award Plan |
| 10-K |
| 10.1.1 |
| March 12, 2019 |
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10.1.2# |
| Form of Stock Option Agreement for the DASAN Zhone Solutions, Inc. 2017 Incentive Award Plan |
| 8-K |
| 10.2 |
| January 10, 2017 |
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10.1.3# |
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| 10-K |
| 10.1 |
| September 27, 2017 |
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| |
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10.2# |
| DASAN Zhone Solutions, Inc. Amended and Restated 2001 Stock Incentive Plan, as amended |
| 8-K |
| 10.6 |
| September 13, 2016 |
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10.2.1# |
|
| 8-K |
| 10.7 |
| September 13, 2016 |
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| |
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10.2.2# |
|
| 8-K |
| 10.2 |
| May 17, 2007 |
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| |
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10.2.3# |
|
| 10-Q |
| 10.3 |
| November 14, 2016 |
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| |
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10.3# |
| DASAN Zhone Solutions, Inc. 2018 Employee Stock Purchase Plan |
| S-8 |
| 10.1 |
| November 8, 2018 |
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10.4# |
| DASAN Zhone Solutions, Inc. Non-Employee Director Compensation Program |
| 10-K |
| 10.4 |
| April 4, 2018 |
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10.5# |
|
| 10-Q |
| 10.20 |
| May 14, 2004 |
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10.6# |
|
| 10-Q |
| 10.2 |
| November 6, 2020 |
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| Incorporated by Reference |
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Exhibit Number |
| Exhibit Description |
| Form |
| Exhibit |
| Filing Date |
| Filed or Furnished Herewith |
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10.6.1# |
|
| 8-K |
| 10.1 |
| June 4, 2021 |
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10.7# |
|
| 10-Q |
| 10.3 |
| November 6, 2020 |
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10.8# |
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| 10-Q |
| 10.4 |
| November 6, 2020 |
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10.9# |
| Employment Agreement dated as of August 2, 2021, by and between DZS Inc. and Misty D. Kawecki |
| 8-K |
| 10.1 |
| August 2, 2021 |
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10.10# |
| Employment Agreement dated as of September 28, 2020 by and between DZS Inc. and Justin L. Ferguson |
| 10-K |
| 10.10 |
| March 11, 2021 |
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10.11# |
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| 8-K |
| 10.1 |
| November 25, 2019 |
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10.11.1# |
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| 8-K |
| 10.1 |
| December 4, 2020 |
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10.11.2# |
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| 8-K |
| 10.1 |
| April 13, 2021 |
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10.11.3# |
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| 8-K |
| 10.2 |
| June 4, 2021 |
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10.12 |
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| 8-K |
| 10.3 |
| September 12, 2016 |
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10.13 |
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| 8-K |
| 10.1 |
| April 2, 2018 |
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10.13.1 |
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| 10-Q |
| 10.3 |
| May 10, 2019 |
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10.14 |
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| 8-K |
| 10.2 |
| January 3, 2019 |
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10.14.1 |
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| 10-Q |
| 10.4 |
| May 10, 2019 |
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10.15 |
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| 10-Q |
| 10.1 |
| May 10, 2019 |
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10.16 |
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| 10-Q |
| 10.2 |
| May 10, 2019 |
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| Incorporated by Reference |
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Exhibit Number |
| Exhibit Description |
| Form |
| Exhibit |
| Filing Date |
| Filed or Furnished Herewith |
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10.17 |
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| 10-Q |
| 10.1 |
| August 14, 2019 |
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10.18 |
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| 10-Q |
| 10.2 |
| August 14, 2019 |
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10.19 |
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| 10-Q |
| 10.3 |
| November 13, 2019 |
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10.20 |
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| 8-K |
| 10.1 |
| March 10, 2020 |
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10.21 |
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| 8-K |
| 10.2 |
| March 10, 2020 |
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10.22 |
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| 8-K |
| 10.3 |
| March 10, 2020 |
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10.23 |
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| 8-K |
| 10.1 |
| February 10, 2022 |
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21.2 |
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| X | |
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23.1 |
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| X | |
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23.2 |
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| X | |
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31.1 |
| Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
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| X |
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31.2 |
| Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
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| X |
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32.1 |
| Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
|
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| X |
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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 |
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| X |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema |
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| X |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase |
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| X |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase |
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| X |
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101.LAB |
| Inline XBRL Taxonomy Extension Labels Linkbase |
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| X |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase |
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Incorporated by Reference | ||||||||||
Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date | Filed or Furnished Herewith | |||||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) | X |
# | Management contract or compensatory plan or arrangement in which one or more executive officers or directors participates. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 9, 2022 | By: | /s/ Charles Daniel Vogt | ||||
Charles Daniel Vogt | ||||||
President, Chief Executive Officer and | ||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||||
/s/ Charles Daniel Vogt | ||||||
President, Chief Executive Officer (Principal Executive Officer) and | March 9, 2022 | |||||
Charles Daniel Vogt | ||||||
/s/ Misty Kawecki | Chief Financial Officer (Principal Financial Officer and | March 9, 2022 | ||||
Misty Kawecki | ||||||
/ | Chairman of the Board of Directors | March 9, 2022 | ||||
Min Woo Nam | ||||||
/ | Director | March 9, 2022 | ||||
Matt Bross | ||||||
/ | Director | March 9, 2022 | ||||
Barbara Carbone | ||||||
/ | Director | March 9, 2022 | ||||
Joon Kyung Kim | ||||||
/s/ David Schopp | Director | March 9, 2022 | ||||
David Schopp | ||||||
/s/ Choon Yul Yoo | Director | March 9, 2022 | ||||
Choon Yul Yoo |
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed or Furnished Herewith | ||||||||
Form | File Number | Exhibit | Filing Date | ||||||||
3.1 | X | ||||||||||
3.2 | 8-K | 000-32743 | 3.2 | September 12, 2016 | |||||||
10.1# | 8-K | 000-32743 | 10.1 | January 10, 2017 | |||||||
10.1.1# | 8-K | 000-32743 | 10.2 | January 10, 2017 | |||||||
10.1.2# | X | ||||||||||
10.2 # | 8-K | 000-32743 | 10.6 | September 13, 2016 | |||||||
10.2.1# | 8-K | 000-32743 | 10.7 | September 13, 2016 | |||||||
10.2.2# | 8-K | 000-32743 | 10.2 | May 17, 2007 | |||||||
10.2.3# | 10-Q | 000-32743 | 10.3 | November 14, 2016 | |||||||
10.3# | 8-K | 000-32743 | 10.1 | May 17, 2006 | |||||||
10.5# | X | ||||||||||
10.5# | 10-Q | 000-32743 | 10.20 | May 14, 2004 | |||||||
10.6# | 10-Q | 000-32743 | 10.1 | August 9, 2012 | |||||||
10.7# | 10-Q | 000-32743 | 10.1 | November 8, 2013 | |||||||
10.8# | 8-K | 000-32743 | 10.1 | September 13, 2016 | |||||||
10.9# | 8-K | 000-32743 | 10.2 | September 13, 2016 |
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed or Furnished Herewith | ||||||||
Form | File Number | Exhibit | Filing Date | ||||||||
10.10# | 8-K | 000-32743 | 10.3 | September 13, 2016 | |||||||
10.11# | 8-K | 000-32743 | 10.4 | September 13, 2016 | |||||||
10.12# | 8-K | 000-32743 | 10.5 | September 13, 2016 | |||||||
10.13# | 8-K | 000-32743 | 10.1 | November 14, 2016 | |||||||
10.14# | 8-K | 000-32743 | 10.1 | April 5, 2016 | |||||||
10.15# | 10-K | 000-32743 | 10.17 | March 23, 2016 | |||||||
10.16 | 8-K | 000-32743 | 10.1 | September 12, 2016 | |||||||
10.17 | 8-K | 000-32743 | 10.2 | September 12, 2016 | |||||||
10.18 | 8-K | 000-32743 | 10.3 | September 12, 2016 | |||||||
10.19 | 8-K | 000-32743 | 10.4 | September 12, 2016 | |||||||
10.20 | 10-K | 000-32743 | 10.16 | March 15, 2012 |
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed or Furnished Herewith | ||||||||
Form | File Number | Exhibit | Filing Date | ||||||||
10.21.1 | 10-K | 000-32743 | 10.12.1 | March 15, 2013 | |||||||
10.21.2 | 8-K | 000-32743 | 10.1 | October 1, 2013 | |||||||
10.21.3 | 10-K | 000-32743 | 10.13.3 | March 5, 2014 | |||||||
10.21.4 | 10-K | 000-32743 | 10.14.4 | March 6, 2015 | |||||||
10.21.5 | 10-K | 000-32743 | 10.14.5 | March 23, 2016 | |||||||
10.2.6 | 8-K | 000-32743 | 10.5 | September 12, 2016 |
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed or Furnished Herewith | ||||||||
Form | File Number | Exhibit | Filing Date | ||||||||
10.21.7 | 10-Q | 000-32743 | 10.15 | November 14, 2016 | |||||||
10.21.8 | 8-K | 000-32743 | 10.1 | May 9, 2017 | |||||||
10.21.9 | 8-K | 000-32743 | 10.1 | July 6, 2017 | |||||||
10.22 | 10-K | 000-32743 | 10.17 | March 15, 2012 | |||||||
10.23 | 8-K | 000-32743 | 10.1 | February 23, 2016 | |||||||
10.23.1 | 10-Q | 000-32743 | 10.1 | August 9, 2016 | |||||||
21.2 | X | ||||||||||
23.1 | X | ||||||||||
23.2 | X | ||||||||||
31.1 | X |
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