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DZSI DZS

Filed: 9 Aug 21, 8:00pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to

000-32743

(Commission File Number)

 

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 Number)

 

 

 

5700 Tennyson Parkway, Suite 400

Plano, Texas

 

75024

(Address of principal executive offices)

 

(Zip code)

 

(469) 327-1531

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

 

 

 

Common stock, $0.001 par value

DZSI

The Nasdaq Stock Market LLC

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

 

As of August 4, 2021, there were 27,198,212 shares outstanding of the registrant’s common stock, $0.001 par value.

 

 

 

 


 

 

TABLE OF CONTENTS

 

 

 

 

2


 

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)

 

 

 

June 30,

2021

 

 

December 31,

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,927

 

 

$

45,219

 

Restricted cash

 

 

7,032

 

 

 

9,200

 

Accounts receivable - trade, net of allowance for doubtful accounts of

     $17,800 as of June 30, 2021 and $4,000 as of December 31, 2020

 

 

80,338

 

 

 

97,253

 

Other receivables

 

 

11,632

 

 

 

9,165

 

Inventories

 

 

50,604

 

 

 

39,572

 

Contract assets

 

 

5,829

 

 

 

6,182

 

Prepaid expenses and other current assets

 

 

6,708

 

 

 

5,332

 

Total current assets

 

 

216,070

 

 

 

211,923

 

Property, plant and equipment, net

 

 

8,056

 

 

 

7,146

 

Right-of-use assets from operating leases

 

 

13,852

 

 

 

18,483

 

Goodwill

 

 

5,675

 

 

 

3,977

 

Intangible assets, net

 

 

6,293

 

 

 

3,377

 

Deferred tax assets

 

 

1,370

 

 

 

1,405

 

Other assets

 

 

7,449

 

 

 

5,919

 

Total assets

 

$

258,765

 

 

$

252,230

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable - trade

 

$

58,343

 

 

$

49,250

 

Short-term debt - bank, trade facilities and secured borrowings

 

 

 

 

 

13,787

 

Contract liabilities

 

 

4,187

 

 

 

4,400

 

Operating lease liabilities

 

 

4,493

 

 

 

4,494

 

Accrued and other liabilities

 

 

18,469

 

 

 

16,707

 

Total current liabilities

 

 

85,492

 

 

 

88,638

 

Long-term debt - related party

 

 

 

 

 

29,754

 

Contract liabilities - non-current

 

 

2,671

 

 

 

2,471

 

Operating lease liabilities - non-current

 

 

15,140

 

 

 

15,959

 

Pension liabilities

 

 

19,183

 

 

 

20,052

 

Other long-term liabilities

 

 

3,796

 

 

 

1,777

 

Total liabilities

 

 

126,282

 

 

 

158,651

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, 36,000 shares authorized, 27,192 and 21,958 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively, at $0.001 par value

 

 

27

 

 

 

22

 

Additional paid-in capital

 

 

215,399

 

 

 

147,997

 

Accumulated other comprehensive loss

 

 

(4,123

)

 

 

(2,124

)

Accumulated deficit

 

 

(78,820

)

 

 

(52,316

)

Total stockholders’ equity

 

 

132,483

 

 

 

93,579

 

Total liabilities and stockholders’ equity

 

$

258,765

 

 

$

252,230

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net revenue

 

$

82,700

 

 

$

70,532

 

 

$

163,731

 

 

$

118,012

 

Cost of revenue

 

 

55,622

 

 

 

46,764

 

 

 

108,558

 

 

 

78,249

 

Gross profit

 

 

27,078

 

 

 

23,768

 

 

 

55,173

 

 

 

39,763

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and product development

 

 

11,962

 

 

 

8,495

 

 

 

23,081

 

 

 

18,205

 

Selling, marketing, general and administrative

 

 

18,256

 

 

 

13,170

 

 

 

50,080

 

 

 

26,677

 

Restructuring and other charges

 

 

(908

)

 

 

 

 

 

5,344

 

 

 

 

Impairment of long-lived assets

 

 

 

 

 

 

 

 

1,735

 

 

 

 

Amortization of intangible assets

 

 

314

 

 

 

371

 

 

 

576

 

 

 

743

 

Total operating expenses

 

 

29,624

 

 

 

22,036

 

 

 

80,816

 

 

 

45,625

 

Operating income (loss)

 

 

(2,546

)

 

 

1,732

 

 

 

(25,643

)

 

 

(5,862

)

Interest income

 

 

19

 

 

 

14

 

 

 

61

 

 

 

84

 

Interest expense

 

 

(28

)

 

 

(414

)

 

 

(277

)

 

 

(1,057

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

(1,369

)

Other income (expense), net

 

 

(261

)

 

 

(650

)

 

 

711

 

 

 

110

 

Income (loss) before income taxes

 

 

(2,816

)

 

 

682

 

 

 

(25,148

)

 

 

(8,094

)

Income tax provision (benefit)

 

 

463

 

 

 

838

 

 

 

1,356

 

 

 

833

 

Net income (loss)

 

 

(3,279

)

 

 

(156

)

 

 

(26,504

)

 

 

(8,927

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

216

 

 

 

804

 

 

 

(2,054

)

 

 

(2,631

)

Actuarial gain (loss)

 

 

83

 

 

 

(1,171

)

 

 

55

 

 

 

285

 

Comprehensive income (loss)

 

$

(2,980

)

 

$

(523

)

 

$

(28,503

)

 

$

(11,273

)

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

(0.01

)

 

$

(1.01

)

 

$

(0.42

)

Diluted

 

$

(0.12

)

 

$

(0.01

)

 

$

(1.01

)

 

$

(0.42

)

Weighted average shares outstanding used to

   compute basic net income (loss) per share

 

 

26,982

 

 

 

21,529

 

 

 

26,120

 

 

 

21,502

 

Weighted average shares outstanding used to

   compute diluted net income (loss) per share

 

 

26,982

 

 

 

21,529

 

 

 

26,120

 

 

 

21,502

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Stockholders' Equity

(In thousands)

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

other

comprehensive

 

 

Accumulated

 

 

Total

stockholders'

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

deficit

 

 

equity

 

For the Six-Month Period Ended

   June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

325

 

 

 

 

 

 

2,569

 

 

 

 

 

 

 

 

 

2,569

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,352

 

 

 

 

 

 

 

 

 

1,352

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,225

)

 

 

(23,225

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(2,298

)

 

 

 

 

 

(2,298

)

Balance as of March 31, 2021

 

 

26,883

 

 

$

27

 

 

$

211,438

 

 

$

(4,422

)

 

$

(75,541

)

 

$

131,502

 

Exercise of stock awards and

   employee stock plan purchases

 

 

309

 

 

 

 

 

 

1,967

 

 

 

 

 

 

 

 

 

1,967

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,994

 

 

 

 

 

 

 

 

 

1,994

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,279

)

 

 

(3,279

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

299

 

 

 

 

 

 

299

 

Balance as of June 30, 2021

 

 

27,192

 

 

$

27

 

 

$

215,399

 

 

$

(4,123

)

 

$

(78,820

)

 

$

132,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six-Month Period Ended

   June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

94

 

 

 

 

 

 

709

 

 

 

 

 

 

 

 

 

709

 

Stock-based compensation

 

 

 

 

 

 

 

 

782

 

 

 

 

 

 

 

 

 

782

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,771

)

 

 

(8,771

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(1,979

)

 

 

 

 

 

(1,979

)

Balance as of March 31, 2020

 

 

21,513

 

 

$

21

 

 

$

141,191

 

 

$

(5,918

)

 

$

(38,005

)

 

$

97,289

 

Exercise of stock awards and

   employee stock plan purchases

 

 

46

 

 

 

 

 

 

284

 

 

 

 

 

 

 

 

 

284

 

Stock-based compensation

 

 

 

 

 

 

 

 

868

 

 

 

 

 

 

 

 

 

868

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(156

)

 

 

(156

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(367

)

 

 

 

 

 

(367

)

Balance as of June 30, 2020

 

 

21,559

 

 

$

21

 

 

$

142,343

 

 

$

(6,285

)

 

$

(38,161

)

 

$

97,918

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

5


 

 

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(26,504

)

 

$

(8,927

)

Adjustments to reconcile net income (loss) to net cash

  provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,443

 

 

 

2,549

 

Impairment of long-lived assets

 

 

4,475

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

1,343

 

Amortization of deferred financing costs

 

 

12

 

 

 

144

 

Stock-based compensation

 

 

3,346

 

 

 

1,650

 

Provision for inventory write-down

 

 

1,907

 

 

 

3,506

 

Allowance for doubtful accounts

 

 

14,877

 

 

 

118

 

Provision for sales returns

 

 

430

 

 

 

101

 

Provision for warranty

 

 

469

 

 

 

110

 

Unrealized gain on foreign currency transactions

 

 

(495

)

 

 

(698

)

Deferred taxes

 

 

111

 

 

 

(520

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

367

 

 

 

3,467

 

Inventories

 

 

(13,966

)

 

 

(16,799

)

Contract assets

 

 

134

 

 

 

5,357

 

Prepaid expenses and other assets

 

 

(5,690

)

 

 

(3,431

)

Accounts payable

 

 

11,012

 

 

 

6,995

 

Contract liabilities

 

 

(87

)

 

 

1,436

 

Accrued and other liabilities

 

 

(1,118

)

 

 

(389

)

Net cash used in operating activities

 

 

(8,277

)

 

 

(3,988

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(2,141

)

 

 

(1,580

)

Acquisition of business, net of cash acquired

 

 

(4,459

)

 

 

 

Net cash used in investing activities

 

 

(6,600

)

 

 

(1,580

)

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

 

 

 

 

 

8,228

 

Repayments of short-term borrowings and line of credit

 

 

(13,278

)

 

 

(6,145

)

Repayments of long-term borrowings

 

 

 

 

 

(13,125

)

Proceeds from related party term loan

 

 

 

 

 

18,361

 

Repayments of related party term loan

 

 

(29,298

)

 

 

 

Proceeds from factored accounts receivable

 

 

 

 

 

11,645

 

Deferred financing costs

 

 

 

 

 

(21

)

Proceeds from exercise of stock awards and employee stock plan purchases

 

 

4,534

 

 

 

993

 

Net cash provided by financing activities

 

 

21,483

 

 

 

19,936

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(67

)

 

 

(659

)

Net increase in cash, cash equivalents and restricted cash

 

 

6,539

 

 

 

13,709

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

54,587

 

 

 

33,635

 

Cash, cash equivalents and restricted cash at end of period

 

$

61,126

 

 

$

47,344

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash to statement of

   financial position

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

53,927

 

 

$

37,971

 

Restricted cash

 

 

7,032

 

 

 

9,211

 

Long-term restricted cash

 

 

167

 

 

 

162

 

 

 

$

61,126

 

 

$

47,344

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest - bank and trade facilities

 

$

83

 

 

$

507

 

Interest - related party

 

$

108

 

 

$

465

 

Income taxes

 

$

1,944

 

 

$

1,879

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Organization and Summary of Significant Accounting Policies

(a) Description of Business

DZS Inc. (referred to, collectively with its subsidiaries, as “DZS” or the “Company”) is a global provider of optical and packet-based mobile transport, broadband connectivity, and software defined networking solutions deployed by advanced Tier 1, national and regional service providers and enterprise customers. 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.

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 Hanover, Germany, and contract manufacturers located in China, India, Korea and Vietnam. The Company also maintains offices to provide sales and customer support at global locations.  

(b) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements include the accounts of the Company and its wholly owned subsidiaries. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 11, 2021. For a complete description of what the Company believes to be the critical accounting policies and estimates used in the preparation of its unaudited condensed consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

All intercompany transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current-quarter presentation. The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period.

(c) Risks and Uncertainties

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, assuming the Company will continue as a going concern.

In December 2019, a strain of coronavirus, now known as COVID-19, was reported to have 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 have recommended, and many countries and state, provincial and local governments have 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 global economy in general and have materially impacted and will likely continue to impact the Company’s financial condition, results of operations and cash flows. Given the ongoing and dynamic nature of the virus and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 pandemic on our business. Due to the uncertainty around the future economic impact of the pandemic, the fair value measurements used in the Company’s impairment assessments could be negatively impacted and could result in future impairments of goodwill, intangibles and other long-lived assets. During the six months ended June 30, 2021, the Company’s revenues increased by 38.7%, compared to the six months ended June 30, 2020, however the impact of a continued COVID-19 pandemic or sustained measures taken to limit or contain the outbreak could have a material and adverse effect on our business, financial condition, results of operations, and cash flows.

(d) Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

7


 

(e) Disaggregation of Revenue

The following table presents revenues by source (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue by source:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

77,920

 

 

$

66,203

 

 

$

154,172

 

 

$

108,922

 

Services

 

 

4,780

 

 

 

4,329

 

 

 

9,559

 

 

 

9,090

 

Total

 

$

82,700

 

 

$

70,532

 

 

$

163,731

 

 

$

118,012

 

The following table present revenues by geographical concentration (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue by geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

26,513

 

 

$

15,135

 

 

$

46,682

 

 

$

26,837

 

Europe, Middle East, Africa

 

 

16,701

 

 

 

16,437

 

 

 

34,619

 

 

 

27,776

 

Asia

 

 

39,486

 

 

 

38,960

 

 

 

82,430

 

 

 

63,399

 

Total

 

$

82,700

 

 

$

70,532

 

 

$

163,731

 

 

$

118,012

 

 

(f) Concentration of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash, accounts receivables, and contract assets. Cash, cash equivalents and restricted cash consist of financial deposits and money market accounts that are principally held with various domestic and international financial institutions with high credit standing.

The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts based upon the expected collectability of accounts receivable. The Company bases its allowance on periodic assessments of its customers’ liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement review and historical and current collection trends, as well as on specific balances where collectability may be uncertain.

For the three months ended June 30, 2021, 2 customers accounted for 22% and 14% of net revenue, respectively. For the six months ended June 30, 2021, 2 customers accounted for 20% and 12% of net revenue, respectively. For the three months ended June 30, 2020, 1 customer accounted for 19% of net revenue. For the six months ended June 30, 2020, 1 customer accounted for 11% of net revenue.

As of June 30, 2021, 1 customer represented 23% of net accounts receivable. As of December 31, 2020, 2 customers represented 17% and 16% of net accounts receivable, respectively.

As of June 30, 2021, and December 31, 2020, net accounts receivables from customers in countries other than the United States represented 77% and 89%, respectively.

In 2017, the Company entered into an agreement with a customer in India to supply product for a state sponsored broadband project. 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 of approximately $17.3 million as of December 31, 2020. The Company substantially completed its obligations under the agreement in 2018, and all amounts due were billed under the terms of the agreement by December 31, 2020. The remaining $17.3 million is substantially beyond the customers contractual payment terms, and the Company has been actively working with the customer and third parties in India to arrange payment of the entire remaining balance of $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 customer to make agreed-upon partial payments to us. In light of this development, the Company recognized an additional allowance of $14.2 million during the three months ended March 31, 2021, to bring the total allowance for the customer to $17.3 million, which is the total balance as of June 30, 2021. The Company will continue to pursue collection of the entire outstanding balance and any amounts collected will be recognized in the period which they are received. In the event the Company’s efforts to collect from this customer prove unsuccessful, DZS may seek payment through other means, including through legal action.

8


 

 

(g) Business Combinations

The Company allocates the fair value of purchase consideration to the tangible and identifiable intangible assets acquired and liabilities assumed 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.

Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (which cannot exceed one year from the acquisition date), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date.

When the consideration transferred by the Company in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the total consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are made retrospectively, with corresponding adjustments against goodwill. Changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments are made in the current period, with corresponding adjustments recognized in earnings.

(h) Restructuring and Other Charges

Restructuring and other charges primarily consists of severance and other termination benefits and non-cash impairment charges related to right-of-use assets from operating leases related to the restructuring activities in Hanover, Germany and Ottawa, Canada. The Company recognizes contractual termination benefits when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. The Company will recognize one-time employee termination benefits when (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement in sufficient detail to enable employees to determine the type and amount of benefits they will receive, and (iv) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. These charges are included in restructuring and other charges in the unaudited condensed consolidated statement of comprehensive income (loss). Refer to Note 9 Restructuring and Other Charges for further information.

(i) Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, which provided additional implementation guidance on the previously issued ASU. The Company expects to adopt the updated guidance on January 1, 2022, utilizing the modified retrospective transition method through a cumulative-effect adjustment to retained earnings. The ASU is not expected to have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04 (Topic 848), Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. The standard was effective upon issuance and may generally be applied through December 31, 2022, to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR. The ASU is not expected to have a material impact on our consolidated financial statements.

   

9


 

 

(2) Business Combinations

Optelian Acquisition

On February 5, 2021, the Company acquired Optelian Access Networks Corporation (“Optelian”), a corporation incorporated under the laws of Canada and registered extra-provincially in the Province of Ontario, pursuant to an acquisition agreement whereby the Company purchased all the outstanding shares of Optelian (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 end of 2023.

Allocation of purchase consideration

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. Due to the complexity of valuing the consideration paid and the purchase price allocation, and the timing of these activities, certain amounts included in the unaudited condensed consolidated financial statements, including long-lived assets, deferred taxes, and goodwill, are provisional and subject to additional adjustments within the measurement period as permitted by Topic 805.

The following summarizes the provisional estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the Optelian Acquisition (in thousands):

Provisional 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

 

 

3,630

 

Accounts payable - trade

 

 

(390

)

Contract liabilities

 

 

(169

)

Accrued and other liabilities

 

 

(123

)

Goodwill

 

 

1,478

 

Total purchase consideration

 

$

7,490

 

The provisional purchase price allocation resulted in the recognition of goodwill of approximately $1.5 million. The following table represents the preliminary estimated fair value and useful lives of identifiable intangible assets acquired (estimated fair value in thousands):

 

 

Estimated

 

 

Estimated

 

 

fair value

 

 

useful life

Intangible assets acquired

 

 

 

 

 

 

Developed technology

 

$

2,250

 

 

5 years

Customer relationships

 

 

500

 

 

5 years

    In-process research and development

 

 

880

 

 

5 years

Total intangible assets

 

$

3,630

 

 

 

There were no material differences between total revenue and net loss reported and pro forma total revenues and pro forma net loss that would have been reported for the financial periods presented. 

10


 

RIFT Acquisition

On March 3, 2021, the Company acquired substantially all of the assets of RIFT, Inc., a network automation solutions company, and all the outstanding shares of RIFTIO 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, RIFTIO India Private Limited became a wholly owned subsidiary of the Company.

(3) Fair Value Measurement

The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1 

Inputs are quoted prices in active markets for identical assets or liabilities.

Level 2 

Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

Level 3 

Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

The carrying values of financial instruments such as cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and accrued liabilities approximate their fair values based on their short-term nature.

The Company classifies its 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 expected contingent payments, determined using the revenue forecast for certain Optelian products through the end of 2023. The fair value of contingent liability is generally sensitive to changes in the revenue forecast.

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):

 

 

 

June 30, 2021

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash and cash equivalents

 

$

53,927

 

 

 

-

 

 

 

-

 

 

$

53,927

 

Restricted cash

 

 

7,032

 

 

 

-

 

 

 

-

 

 

 

7,032

 

Contingent liability

 

 

-

 

 

 

-

 

 

 

2,098

 

 

 

2,098

 

Total

 

$

60,959

 

 

$

-

 

 

$

2,098

 

 

$

63,057

 

 

 

 

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 unaudited condensed consolidated statement of comprehensive income (loss). The following table reconciles the beginning and ending balances of the Company’s Level 3 contingent liability (in thousands):

 

 

 

Six Months Ended

 

 

 

June 30,2021

 

Balance at the beginning of the period

 

$

-

 

Initial fair value of contingent liability

 

 

1,897

 

Net change in fair value

 

 

201

 

Balance at the end of the period

 

$

2,098

 

 

11


 

 

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 value of $0.2 million, resulting in an impairment charge of $4.5 million, which was included in earnings for the period. The impaired long-lived assets primarily consisted of right-of-use assets, and we used estimated sub-lease payment data to fair value the respective assets. We concluded that this fair value measurement should be categorized within Level 2.

(4) Cash, Cash Equivalents and Restricted Cash

As of June 30, 2021 and December 31, 2020, the Company's cash, cash equivalents and restricted cash consisted of financial deposits. Cash, cash equivalents and restricted cash held within the U.S. are held at FDIC insured depository institutions. Cash, cash equivalents and restricted cash held outside the U.S. totaled $24.4 million and $32.2 million as of June 30, 2021 and December 31, 2020, respectively. Restricted cash consisted primarily of cash restricted for performance bonds, warranty bonds and collateral for borrowings. Long-term restricted cash was $0.2 million as of June 30, 2021 and December 31, 2020 and is included in other assets on the unaudited condensed consolidated balance sheets.

(5) Balance Sheet Details

Balance sheet detail as of June 30, 2021 and December 31, 2020 is as follows (in thousands):

Inventories

 

 

June 30, 2021

 

 

December 31, 2020

 

Raw materials

 

$

25,960

 

 

$

16,962

 

Work in process

 

 

2,437

 

��

 

1,486

 

Finished goods

 

 

22,207

 

 

 

21,124

 

Total inventories

 

$

50,604

 

 

$

39,572

 

Inventories are stated at the lower of cost or net realizable value, with cost being computed based on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. The Company had 0 inventories provided as collateral for borrowings from Export-Import Bank of Korea as of June 30, 2021 compared to $9.6 million as of December 31, 2020.

Property, plant and equipment

 

 

June 30, 2021

 

 

December 31, 2020

 

Property, plant and equipment, net:

 

 

 

 

 

 

 

 

Machinery and equipment

 

$

14,245

 

 

$

13,656

 

Leasehold improvements

 

 

5,158

 

 

 

4,633

 

Computers and software

 

 

3,097

 

 

 

2,829

 

Furniture and fixtures

 

 

1,564

 

 

 

1,123

 

Other

 

 

941

 

 

 

716

 

 

 

 

25,005

 

 

 

22,957

 

Less: accumulated depreciation and amortization

 

 

(16,678

)

 

 

(15,445

)

Less: government grants

 

 

(271

)

 

 

(366

)

Total property, plant and equipment, net

 

$

8,056

 

 

$

7,146

 

Depreciation expense associated with property, plant and equipment for the three and six months ended June 30, 2021 was $0.7 million and $1.6 million, respectively. Depreciation expense associated with property, plant and equipment for the three and six months ended June 30, 2020 was $0.5 million and $1.0 million, respectively.

The Company receives grants from certain foreign government entities mainly to support capital expenditures in the region.  Such grants are deferred and are generally refundable to the extent the Company does not utilize the funds for qualifying expenditures. Once earned, the Company records the grants as a contra amount to the assets and amortizes such amount over the useful lives of the related assets as a reduction to depreciation expense.

12


 

Warranties

The Company accrues warranty costs based on historical trends for the expected material and labor costs to provide warranty services. The Company's standard warranty period is one year from the date of shipment with the ability for customers to purchase an extended warranty of up to five years from the date of shipment. The following table summarizes the activity related to the product warranty liability:

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

Balance at the beginning of the period

 

$

1,522

 

 

$

1,610

 

Charged to cost of revenue

 

 

469

 

 

 

110

 

Claims and settlements

 

 

(491

)

 

 

(771

)

Foreign exchange impact

 

 

63

 

 

 

(28

)

Balance at the end of the period

 

$

1,563

 

 

$

921

 

Contract Balances

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. The majority of the Company's performance obligations in its contracts with customers relate to contracts with duration of less than one year.

The opening and closing 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

 

June 30, 2021

 

 

6,065

 

 

 

6,858

 

Increase (decrease)

 

$

(117

)

 

$

(13

)

The decrease in contract assets during the six months ended June 30, 2021 was primarily due to invoicing that occurred in 2021 from unbilled balances reflected as contract assets as of December 31, 2020.

The decrease in contract liabilities during the six months ended June 30, 2021 was primarily due to the revenue recognition criteria being met for previously deferred revenue, partially offset by invoiced amounts that did not yet meet the revenue recognition criteria. The amount of revenue recognized in the six months ended June 30, 2021 that was included in the prior period contract liability balance was $2.9 million. This revenue consists of services provided to customers who had been invoiced prior to the current year. We expect to recognize approximately 61% of outstanding contract liabilities as revenue over the next 12 months and the remainder thereafter.

The balance of contract cost deferred as of June 30, 2021 and December 31, 2020 was $0.3 million and $0.5 million, respectively. During the six months ended June 30, 2021, the Company recorded $0.4 million in amortization related to contract cost deferred as of December 31, 2020.

 

(6) Goodwill and Intangible Assets

The following table summarizes the activity related to goodwill (in thousands):

 

 

 

June 30,

 

 

 

 

2021

 

 

 

2020

 

Balance at the beginning of the period, gross

 

$

4,980

 

 

$

4,980

 

Accumulated impairment at the beginning of the period

 

 

(1,003

)

 

 

(1,003

)

Goodwill from acquisitions

 

 

1,698

 

 

 

-

 

Balance at the end of the period

 

$

5,675

 

 

$

3,977

 

 

During the six months ended June 30, 2021, the Company recorded goodwill of $1.5 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. The accumulated impairment of goodwill was $1.0 million as of both June 30, 2021 and 2020.

13


 

Intangible assets consisted of the following (in thousands):

 

 

 

June 30, 2021

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Developed technology

 

$

5,477

 

 

$

(3,157

)

 

$

2,320

 

Customer relationships

 

 

5,740

 

 

 

(2,574

)

 

 

3,166

 

In-process research and development

 

 

880

 

 

 

(73

)

 

 

807

 

Total intangible assets, net

 

$

12,097

 

 

$

(5,804

)

 

$

6,293

 

 

 

 

December 31, 2020

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Developed technology

 

$

3,060

 

 

$

(2,652

)

 

$

408

 

Customer relationships

 

 

5,240

 

 

 

(2,271

)

 

 

2,969

 

Total intangible assets, net

 

$

8,300

 

 

$

(4,923

)

 

$

3,377

 

 

During the six months ended June 30, 2021, the Company recorded $2.4 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.

The following table summarizes the activity related to intangible assets, net (in thousands):

 

 

 

June 30, 2021

 

 

 

2021

 

 

2020

 

Balance at the beginning of the period

 

$

3,377

 

 

$

12,381

 

Intangible assets from acquisitions

 

 

3,797

 

 

 

-

 

Less: amortization expense

 

 

(881

)

 

 

(1,534

)

Foreign exchange impact

 

 

-

 

 

 

(9

)

Balance at the end of the period

 

$

6,293

 

 

$

10,838

 

 

Amortization expense associated with intangible assets for the six months ended June 30, 2021 and 2020 was $0.9 million and $1.5 million, respectively.

The following table presents the future amortization expense of the Company’s intangible assets as of June 30, 2021 (in thousands):

 

Remainder of 2021

 

$

744

 

2022

 

 

1,283

 

2023

 

 

1,283

 

2024

 

 

1,283

 

2025

 

 

1,283

 

Thereafter

 

 

417

 

Total

 

$

6,293

 

 

(7) Debt

As of June 30, 2021, the Company had 0 debt obligations. During the first half of 2021, the Company paid off the outstanding balance of debt with related parties, foreign banks and other lending institutions. The Company has no contractual principal payments due in the next five years.

14


 

The following tables summarize the Company’s debt as of the beginning of the period (in thousands):

 

 

 

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 entered into financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. As of December 31, 2020, the Company had an aggregate outstanding balance of $13.8 million under such financing arrangements. The weighted average borrowing rates as of December 31, 2020 was 1.8%. As of June 30, 2021, the Company had 0 outstanding balances under such financing arrangements.   

 As of June 30, 2021 and December 31, 2020, the Company had $12.0 million and $19.0 million, respectively, available to draw under its letter of credit facilities with NongHyup Bank and Korea Development Bank. As of June 30, 2021 and December 31, 2020, the Company had 0 outstanding borrowings under these credit facilities.

Related Party Debt

In February 2016, the Company borrowed $1.8 million from DASAN Networks, Inc. (“DNI”) for capital investment with an interest rate of 4.6% per annum, payable annually. In January 2021, the entire outstanding balance on this term loan was repaid.   

In March 2018, the Company borrowed KRW 6.5 billion ($5.8 million USD) from DNI of which KRW 5.0 billion ($4.5 million USD) was repaid in August 2018. In February 2021, the remaining outstanding balance on this term loan was repaid.   

In December 2018, the Company entered into a Loan Agreement with DNI for a $6.0 million term loan with an interest rate of 4.6% per annum. In January 2021, the entire outstanding balance on this term loan was repaid.    

On March 5, 2020, the Company entered into a loan transaction with DNI in the amount of KRW 22.4 billion ($18.5 million USD) with an interest rate of 4.6% per annum. In February 2021, the entire outstanding balance on this term loan was repaid. 

Interest expense on related party borrowings was $0.1 million and $0.4 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, the Company had 0 borrowings outstanding from related parties.

PNC Credit Facilities

On 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.

(8) 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 made discretionary contributions to the plan in 2021. For the three and six months ended June 30, 2021, the Company recorded an expense of $0.2 million and $0.3 million, respectively, compared to 0 expense for the three and six months ended June 30, 2020.

The Company maintains a defined contribution plan for its employees in Korea. Under the defined contribution plan, the Company contributes the equivalent of 8.3% of an employee's gross salary into the plan. For the three months ended June 30, 2021 and June 30, 2020, the Company recorded an expense of $0.3 million, respectively. For the six months ended June 30, 2021 and June 30, 2020, the Company recorded an expense of $0.6 million, respectively.   

15


 

Defined Benefit Plans

The Company sponsors defined benefit plans for its employees in Germany and Japan. Defined benefit plans provide pension benefits based on compensation and years of service. The Germany plans were frozen as of September 30, 2003 and have not been offered to new employees after that date. The Company has recorded the underfunded status as of June 30, 2021 and December 31, 2020, respectively, as a long-term liability on the unaudited condensed consolidated balance sheets. The accumulated benefit obligation for the plans in Germany and Japan was $19.2 million and $20.1 million as of June 30, 2021 and December 31, 2020, respectively. Periodic benefit costs for the three months ended June 30, 2021 and 2020 were $0.1 million, respectively. Periodic benefit costs for the six months ended June 30, 2021 and 2020 were $0.2 million, respectively.

 

The Company holds life insurance contracts, with the Company as beneficiary, in the amount of $3.4 million as of June 30, 2021 and $3.5 million as of December 31, 2020, respectively, related to individuals under the pension plans. These insurance contracts are classified as other assets on the Company’s unaudited condensed 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 assets.

 

(9) Restructuring and Other Charges

On March 8, 2021, the Company made the strategic decision to transition DZS GmbH to a sales and research and development center by the end of 2021. The Company incurred restructuring and other charges of approximately $5.3 million for the six months ended June 30, 2021, consisting primarily of termination related benefits of $2.4 million, an impairment charge of $2.5 million related to right-of-use assets from operating leases, and $0.4 million of other charges. On July 15, 2021, the Company came to an agreement with the works council and entered into a social plan that covers statutory benefits and one-time employee termination benefits. The Company accounted for the statutory benefit obligations in accordance with ASC 712, Nonretirement Postemployment Benefits, and recognized an initial liability of $3.5 million as of March 31, 2021, representing the best estimate of the statutory liability. As a result of the negotiations with the works council, the Company agreed to a reduced statutory benefit obligation, as reflected in the reduction to restructuring and other charges in the statement of operations during the three months ended June 30, 2021 of $0.9 million. The Company will account for the one-time employee termination benefits in accordance with ASC 420, Exit or Disposal Cost Obligations, and will recognize the respective liability when the final terms of the benefit arrangement are communicated to the affected employees in the third quarter of 2021.

In May, 2021, the Company made the strategic decision to relocate manufacturing function of Optelian to Seminole, Florida and eliminate redundant workforces. As part of the restructuring activity, the Company will move certain fixed assets, including manufacturing equipment, to the US. The Company incurred restructuring and other charges of approximately $0.3 million for the six months ended June 30, 2021, consisting primarily of termination related benefits.

The following table summarizes the activity related to the accrued restructuring costs for the six months ended June 30, 2021 (in thousands):

 

 

 

June 30,

 

 

 

2021

 

Balance at the beginning of the period

 

$

 

Restructuring charges

 

 

2,636

 

Cash payments

 

 

(139

)

Foreign exchange impact

 

 

51

 

Balance at the end of the period

 

$

2,548

 

 

(10) Related Party Transactions

Related Party Debt and Guarantees

As of June 30, 2021, the Company had 0 outstanding borrowings from related parties compared to $29.8 million as of December 31, 2020. See Note 7 Debt for further information about the Company’s related party debt.

16


 

The following table sets forth payment guarantees of the Company's obligations as of June 30, 2021 that have been provided by DNI. DNI owns approximately 37.1% of the outstanding shares of the Company's common stock. The amount guaranteed exceeds the principal amounts of outstanding obligations due to collateral requirements by the banks.

 

Guarantor

 

Amount Guaranteed

(in thousands)

 

 

Description of Obligations Guaranteed

DNI

 

 

6,000

 

 

Letter of credit facility with NongHyup Bank

DNI

 

 

8,400

 

 

Letter of credit facility with Korea Development Bank

DNI

 

 

6,372

 

 

Payment guarantee to Industrial Bank of Korea

DNI

 

 

4,699

 

 

Payment guarantee to Shinhan Bank

 

 

$

25,471

 

 

 

 

Other Related Party Transactions

Sales, cost of revenue, research and product development, selling, marketing, general and administrative, interest expense and other expenses to and from related parties were as follows (in thousands) for the three and six months ended June 30, 2021 and 2020:

 

 

 

 

Three Months Ended June 30, 2021

 

Counterparty

 

Sales

 

 

Cost of

revenue

 

 

Research

and product

development

 

 

Selling,

marketing,

general and

administrative

 

 

Interest

expense

 

 

Other

expenses

 

DNI

 

$

141

 

 

$

92

 

 

$

262

 

 

$

389

 

 

$

 

 

$

53

 

Dasan Invest*

 

 

 

 

 

10

 

 

 

45

 

 

 

20

 

 

 

 

 

 

 

 

 

$

141

 

 

$

102

 

 

$

307

 

 

$

409

 

 

$

 

 

$

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2020

 

Counterparty

 

Sales

 

 

Cost of

revenue

 

 

Research

and product

development

 

 

Selling,

marketing,

general and

administrative

 

 

Interest

expense

 

 

Other

expenses

 

DNI

 

$

1,363

 

 

$

1,220

 

 

$

192

 

 

$

330

 

 

$

288

 

 

$

84

 

Dasan Invest*

 

 

 

 

 

12

 

 

 

48

 

 

 

17

 

 

 

 

 

 

 

 

 

$

1,363

 

 

$

1,232

 

 

$

240

 

 

$

347

 

 

$

288

 

 

$

84

 

 

 

 

Six Months Ended June 30, 2021

 

Counterparty

 

Sales

 

 

Cost of

revenue

 

 

Research

and product

development

 

 

Selling,

marketing,

general and

administrative

 

 

Interest

expense

 

 

Other

expenses

 

DNI

 

$

1,911

 

 

$

1,746

 

 

$

523

 

 

$

791

 

 

$

132

 

 

$

138

 

Dasan Invest*

 

 

 

 

 

20

 

 

 

91

 

 

 

38

 

 

 

 

 

 

 

 

 

$

1,911

 

 

$

1,766

 

 

$

614

 

 

$

829

 

 

$

132

 

 

$

138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2020

 

Counterparty

 

Sales

 

 

Cost of

revenue

 

 

Research

and product

development

 

 

Selling,

marketing,

general and

administrative

 

 

Interest

expense

 

 

Other

expenses

 

DNI

 

$

1,525

 

 

$

1,402

 

 

$

384

 

 

$

660

 

 

$

439

 

 

$

170

 

Dasan Invest*

 

 

 

 

 

20

 

 

 

81

 

 

 

55

 

 

 

 

 

 

 

 

 

$

1,525

 

 

$

1,422

 

 

$

465

 

 

$

715

 

 

$

439

 

 

$

170

 

 

* Dasan Invest indirectly holds 3.8% of DNI’s shares.

The Company has entered into sales agreements with DNI to sell certain finished goods produced by the Company. The Company also has an agreement with DNI in which DNI acts as a sales channel to third party customers. The above transactions are included in sales and cost of revenue on the unaudited condensed consolidated statement of comprehensive income (loss). Sales to DNI are recorded net of royalty fees for a sales channel arrangement.

DNS California shares 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.

DNS Korea has two separate lease agreements with DNI related to the lease of office space and warehouse facilities. Operating lease cost related to these leases totaled 0.5 million and $0.4 million, for three months ended June 30, 2021 and 2020, respectively. Operating lease cost related to these leases totaled $0.9 million for the six months ended June 30, 2021 and 2020,

17


 

respectively. Operating lease expense is allocated between cost of revenue, research and product development, and selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss). As of June 30, 2021, the right-of-use asset and operating lease liability related to these leases were $7.5 million. As of December 31, 2020, the right-of-use asset and operating lease liability related to these leases were $8.6 million.

The Company has an agreement with Dasan Invest to provide IT services for the Company. The respective expense is allocated between cost of revenue, research and product development, and selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss).

Interest expense represents interest paid to DNI for the related party debt. Refer to Note 7 Debt for further information.

Other expenses represent expenses to DNI for its payment guarantees relating to the Company's borrowings. The Company pays DNI a guarantee fee which is calculated as 0.9% of the guaranteed amount. Refer to the table above for further information about obligations guaranteed by DNI.           

Balances of Receivables and Payables with Related Parties    

Balances of receivables and payables arising from sales and purchases of goods and services with related parties as of June 30, 2021 and December 31, 2020 were included in the following balance sheet captions on the unaudited condensed consolidated balance sheets, as follows (in thousands):

 

 

 

As of June 30, 2021

 

Counterparty

 

Account

receivables

 

 

Other

receivables

 

 

Other assets

 

 

Loans Payable

 

 

Accounts

payable

 

DNI

 

$

183

 

 

$

215

 

 

$

727

 

 

$

 

 

$

549

 

Dasan Invest*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

$

183

 

 

$

215

 

 

$

727

 

 

$

 

 

$

576

 

 

 

 

As of December 31, 2020

 

Counterparty

 

Account

receivables

 

 

Other

receivables

 

 

Other assets

 

 

Loans

Payable

 

 

Accounts

payable

 

DNI

 

$

2,278

 

 

$

247

 

 

$

755

 

 

$

29,754

 

 

$

1,552

 

Dasan Invest*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

$

2,278

 

 

$

247

 

 

$

755

 

 

$

29,754

 

 

$

1,584

 

 

* Dasan Invest indirectly holds 3.8% of DNI’s shares.      

(11) Common Stock

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 29, 2021 and resulted in gross proceeds to the Company of approximately $64.4 million and net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, of approximately $59.5 million. The Company used a portion of the net proceeds from the equity offering to pay off the remaining outstanding balance of debt with related parties. 

(12) Net Income Per Share

Basic net income per share is computed by dividing the net income for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income per share gives effect to common stock equivalents; however, potential common stock equivalents are excluded if their effect is antidilutive. Potential common stock equivalents are composed of incremental shares of common stock issuable upon the exercise of stock options and the vesting of restricted stock units. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, basic and dilutive loss per share are the same.

18


 

The following table is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per share calculation (in thousands, except per share data) for the three and six months ended June 30, 2021 and 2020:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$

(3,279

)

 

$

(156

)

 

$

(26,504

)

 

$

(8,927

)

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

26,982

 

 

 

21,529

 

 

 

26,120

 

 

 

21,502

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options, restricted stock units and share awards

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

26,982

 

 

 

21,529

 

 

 

26,120

 

 

 

21,502

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

(0.01

)

 

$

(1.01

)

 

$

(0.42

)

Diluted

 

$

(0.12

)

 

$

(0.01

)

 

$

(1.01

)

 

$

(0.42

)

The following table sets 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):

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Outstanding stock options

 

 

703

 

 

 

99

 

 

 

673

 

 

 

81

 

Unvested restricted stock units

 

 

228

 

 

 

3

 

 

 

212

 

 

 

7

 

 

(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.

In August 2020, the Company completed its relocation of its corporate headquarters from Alameda, California to Plano, Texas and establish a new U.S.-based Engineering Center of Excellence in Plano. In September 2020, the Company entered into a lease agreement for additional office space at its headquarters in Plano, TX. On the commencement date of this lease in March 2021, the Company recognized an aggregate of approximately $1.7 million in right-of-use assets and operating lease liabilities in connection with these leases.

During the six months ended June 30, 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. See Note 9 Restructuring and Other Charges for further information about the Company's restructuring activities in Hanover, Germany.

The components of lease expense were as follows (in thousands):

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating lease cost

 

$

987

 

 

$

1,358

 

 

$

2,349

 

 

$

2,768

 

Short-term lease cost

 

 

567

 

 

 

508

 

 

 

764

 

 

 

703

 

Total net lease cost

 

$

1,554

 

 

$

1,866

 

 

$

3,113

 

 

$

3,471

 

Variable lease cost was 0t significant for the three and six months ended June 30, 2021 and 2020.

Supplemental cash flow information related to the Company’s operating leases was as follows (in thousands):

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating cash outflows from operating leases

 

$

1,376

 

 

$

1,143

 

 

$

2,767

 

 

$

2,546

 

Right-of-use assets obtained in exchange for operating lease obligations

 

 

74

 

 

 

1,338

 

 

 

1,874

 

 

 

1,364

 

 

19


 

 

The following table presents the weighted average remaining lease term and weighted average discount rates related to the Company’s operating leases as of June 30, 2021 and December 31, 2020, respectively (in thousands, excluding years and percentages):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Lease Assets and Liabilities

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Right-of-use assets from operating leases

 

$

13,852

 

 

$

18,483

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities - current

 

$

4,493

 

 

$

4,494

 

Operating lease liabilities - non-current

 

 

15,140

 

 

 

15,959

 

Total operating lease liabilities

 

$

19,633

 

 

$

20,453

 

Weighted average remaining lease term

 

4.4 years

 

 

4.6 years

 

Weighted average discount rate

 

 

5.7

%

 

 

5.7

%

 

The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2021 (in thousands):

 

Remainder of 2021

 

$

2,779

 

2022

 

 

5,255

 

2023

 

 

4,834

 

2024

 

 

4,335

 

2025

 

 

2,579

 

Thereafter

 

 

2,457

 

Total operating lease payments

 

 

22,239

 

Less: imputed interest

 

 

(2,606

)

Total operating lease liabilities

 

$

19,633

 

 

(14) Commitments and Contingencies     

Performance Bonds

In the normal course of operations, from time to time, the Company arranges for the issuance of various types of performance bonds, such as performance, warranty, and bid bonds, in the form of bank guarantees or surety bonds. These instruments are arrangements under which the financial institution provides a financial guarantee that the Company will perform in accordance with contractual or legal obligations. As of June 30, 2021, the Company had $9.8 of performance bonds in the form of bank guarantees or surety bonds guaranteed by third parties.

Contingent Consideration

The Company has, as part of the Optelian purchase agreement, a contingent liability payable to the sellers. The contingent consideration is payable based on the achievement of certain future performance targets during the three-year period following the acquisition date. The Company records changes in the fair value of contingent consideration liabilities within operating expenses in the unaudited condensed consolidated statement of operations during the period in which a change in the estimate of fair value is made. Refer to Note 2 Business Combinations for further information.

Litigation

From time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal contingencies that it has determined to be probable to the extent that the amount of the loss can be reasonably estimated. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations and cash flows of the reporting period in which the ruling occurs, or future periods.

20


 

(15) Income Taxes

Income tax expense for the three and six months ended June 30, 2021 was approximately $0.5 million and $1.4 million respectively, on pre-tax loss of $2.8 and pre-tax loss of $25.1 million, respectively. Income tax expense for the three and six months ended June 30, 2020 was approximately $0.8 million and $0.8 million respectively, on pre-tax income of $0.7 million and pre-tax loss $8.1, respectively. 

As of June 30, 2021, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America and EMEA and taxable income generated by the Company’s wholly owned foreign subsidiaries in Asia.

The total amount of unrecognized tax benefits, including interest and penalties, at June 30, 2021 was $1.3 million. There were 0 significant changes to unrecognized tax benefits during the six months ended June 30, 2021. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months.

(16) Enterprise-Wide Information

The Company is a global provider of ultra-broadband network access solutions and communications platforms deployed by advanced Tier 1, national and regional service providers and enterprise customers. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single operating segment. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a consolidated basis accompanied with disaggregated revenues by geographic region for purposes of making operating decisions and assessing financial performance.

The Company attributes revenue from customers to individual countries based on location shipped. Refer to Note 1(e) Disaggregation of Revenue for the required disclosures on geographical concentrations and revenues by source.

The Company's property, plant and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands) as of June 30, 2021 and December 31, 2020:

 

 

June 30, 2021

 

 

December 31, 2020

 

United States

 

$

3,996

 

 

$

2,878

 

Korea

 

 

2,218

 

 

 

2,472

 

Japan

 

 

870

 

 

 

952

 

Canada

 

 

495

 

 

 

 

Germany

 

 

384

 

 

 

761

 

Other

 

 

93

 

 

 

83

 

 

 

$

8,056

 

 

$

7,146

 

 

(17) Subsequent Events

On July 15, 2021, the Company came to an agreement with the works council in Germany, related to the negotiations around the restructuring activities of DZS GmbH, as discussed in Note 9 Restructuring and other charges. On July 15, 2021, the Company and works council agreed to the terms of and entered into a social plan that includes employee termination benefits in conjunction with the restructuring in Germany. In accordance with the plan, the Company will pay employees approximately $5.4 million in one-time severance, and transition employees to a transfer company, in the second half of 2021. The Company will account for the one-time employee termination benefits in accordance with ASC 420, Exit or Disposal Cost Obligations, and will recognize the respective liability when the final terms of the benefit arrangement are communicated to the affected employees in the third quarter of 2021. The transition of employees to a transfer company also resulted in a reduction of the statutory liability payable to employees and a reduction of the statutory liability previously accrued as of March 31, 2021. Refer to Note 9 Restructuring and other charges, for further details.

 

21


 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Quarterly Report on Form 10-Q, unless the context suggests otherwise, the terms “DZS,” the “Company” “we,” “our” and “us” refer to DZS Inc. and its subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate, and reflect the beliefs and assumptions of our management as of the date hereof.  

We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, the negative of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items in future periods; our ability to satisfy our short- and long-term cash requirements; anticipated growth and trends in our business, industry or key markets; future growth and revenues from our products; our plans and our ability to refinance or repay our existing indebtedness prior to the applicable maturity dates; our ability to access other capital to fund our future operations; future economic conditions and performance; the impact of the global outbreak of COVID-19; the impact of interest rate and foreign currency fluctuations; anticipated performance of products or services; competition; plans, objectives and strategies for future operations, including our pursuit or strategic acquisitions and our continued investment in research and development; other characterizations of future events or circumstances; and all other statements that are not statements of historical fact, are forward-looking statements within the meaning of the Securities Act and the Exchange Act. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

 

the impact of the global COVID-19 pandemic on the Company’s business and operations, including as a result of travel bans related thereto, the health and wellbeing of our employees in affected areas and disruption of our supply chain;

 

 

our ability to realize the anticipated cost savings, synergies and other benefits of the Company’s acquisitions and any integration risks relating to the Company’s acquisitions;

 

 

our ability to generate sufficient revenue to achieve or sustain profitability;

 

 

our ability to raise additional capital to fund existing and future operations or to refinance or repay our future indebtedness;

 

 

our ability to hire and retain key management and other personnel;

 

 

defects or other performance problems in our products;

 

 

any economic slowdown in the telecommunications industry that restricts or delays the purchase of our products by our customers, or delays in payments of accounts receivable by our customers;

 

 

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 network needs as our products;

 

 

higher than anticipated expenses that we may incur;

 

 

any failure to comply with the periodic report filing and other requirements of The Nasdaq Stock Market for continued listing;

 

 

our ability to meet future customer demands, by utilizing outsourced manufacturers and based on the availability of raw material component parts; and

 

 

additional factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 and from time to time in our other reports filed with the SEC.

 

You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement.

22


 

OVERVIEW

We are a global provider of packet-based mobile transport, broadband access, network orchestration and cloud-native automation solutions deployed by advanced Tier I, national and regional service providers and enterprise customers. Our solutions are deployed worldwide. Our intelligent-edge solutions are focused on creating significant value for our customers by delivering innovative solutions that empower global communication advancement by shaping the internet connection experience.

We research, develop, test, sell, manufacture and support platforms in the areas of mobile transport and fixed broadband access, as discussed below. We have extensive regional development and support centers around the world to support our customer needs.

Our network access solutions and communications platforms include products in Mobile Transport and Fixed Broadband Access, which includes broadband access and connected premises.

 

Mobile Transport. Our DZS Chronos portfolio provide 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.

 

Fixed Broadband Access. Our DZS Velocity portfolio offer 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. Connected premises products 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 fiber to the “x” (“FTTx”) applications. The product feature set gives service providers an elegant migration path from legacy to softswitch architectures without replacing ONTs.

 

Network Orchestration. 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 O-RAN and 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.

 

Connected Premises. Our DZS Helix connected premises product portfolio offer a large collection of smart gateway platforms for any FTTx deployment.

Going forward, our key financial objectives include the following:

 

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.

RECENT DEVELOPMENTS

On August 2, 2021, we announced the appointment of Misty Kawecki as Chief Financial Officer. Ms. Kawecki brings over 24 years of progressive finance and accounting experience at Big 4 accounting firms and public, private and private equity-owned companies to the role and will serve as a strategic advisor to the chief executive officer and the board of directors. She succeeds Tom Cancro, who served as chief financial officer since 2019.

23


 

On July 15, 2021, we came to an agreement with the works council in Germany, related to the negotiations around the restructuring activities of DZS GmbH that was announced in March 2021. The Company and works council agreed to the terms of and entered into a social plan that includes employee termination benefits. In accordance with the social plan, the Company will incur approximately $5.4 million in one-time severance expenses, in the second half of 2021. Refer to Note 9 Restructuring and other charges, in the accompanying consolidated financial statements, for further details.

RESULTS OF OPERATIONS

We list in the table below the unaudited condensed consolidated statement of comprehensive (loss) income as a percentage of total net revenue for the periods indicated.

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net revenue

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

Cost of revenue

 

 

67

%

 

 

66

%

 

 

66

%

 

 

67

%

Gross profit

 

 

33

%

 

 

34

%

 

 

34

%

 

 

33

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and product development

 

 

14

%

 

 

12

%

 

 

14

%

 

 

15

%

Selling, marketing, general and administrative

 

 

22

%

 

 

19

%

 

 

31

%

 

 

23

%

Restructuring and other charges

 

 

(1

)%

 

 

 

 

 

3

%

 

 

 

Impairment of long-lived assets

 

 

 

 

 

 

 

 

1

%

 

 

 

Amortization of intangible assets

 

 

 

 

 

 

 

 

 

 

 

1

%

Total operating expenses

 

 

35

%

 

 

31

%

 

 

49

%

 

 

39

%

Operating income (loss)

 

 

(2

)%

 

 

3

%

 

 

(15

)%

 

 

(6

)%

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

(1

)%

 

 

 

 

 

(1

)%

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

(1

)%

Other income (expense), net

 

 

 

 

 

(1

)%

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(2

)%

 

 

1.0

%

 

 

(15

)%

 

 

(8

)%

Income tax provision (benefit)

 

 

1

%

 

 

1.0

%

 

 

1.0

%

 

 

 

Net income (loss)

 

 

(3

)%

 

 

(0

)%

 

 

(16

)%

 

 

(8

)%

Net Revenue

The following table presents our revenues by source (in millions):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

 

Increase/

(Decrease)

 

 

% change

 

 

2021

 

 

2020

 

 

Increase/ (Decrease)

 

 

% change

 

Products

 

$

77.9

 

 

$

66.2

 

 

$

11.7

 

 

 

17.7

%

 

$

154.2

 

 

$

108.9

 

 

$

45.3

 

 

 

41.6

%

Services

 

$

4.8

 

 

$

4.3

 

 

 

0.5

 

 

 

11.6

%

 

$

9.6

 

 

$

9.1

 

 

 

0.5

 

 

 

5.5

%

Total

 

$

82.7

 

 

$

70.5

 

 

$

12.2

 

 

 

17.3

%

 

$

163.8

 

 

$

118.0

 

 

$

45.8

 

 

 

38.8

%

For the three months ended June 30, 2021, product revenue increased by 17.7% or $11.7 million to $77.9 million from $66.2 million in the same period last year. The increase in product revenue during the period was primarily attributable to increased sales of our mobile transport and fixed broadband connectivity products and partly as a result of recovering from the impacts of the COVID-19 pandemic in the second quarter of 2020. For the three months ended June 30, 2021, service revenue of $4.8 million increased by 11.6% partly due to increased product sales.

For the six months ended June 30, 2021, product revenue increased by 41.6% or $45.3 million to $154.2 million from $108.9 million in the same period last year. The increase in product revenue during the period was primarily attributable to increased sales of our mobile transport and fixed broadband connectivity products and partly as a result of recovering from the impacts of the COVID-19 pandemic in the first half of 2020. For the six months ended June 30, 2021, service revenue of $9.6 million was consistent with the same period last year.

 

24


 

 

The following table presents our revenues by geographical concentration (in millions):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

 

Increase/

(Decrease)

 

 

% change

 

 

2021

 

 

2020

 

 

Increase/

(decrease)

 

 

% change

 

Revenue by geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

26.5

 

 

$

15.1

 

 

$

11.4

 

 

 

75.5

%

 

$

46.7

 

 

$

26.8

 

 

$

19.9

 

 

 

74.3

%

Europe, Middle East, Africa

 

$

16.7

 

 

$

16.4

 

 

 

0.3

 

 

 

1.8

%

 

$

34.6

 

 

$

27.8

 

 

 

6.8

 

 

 

24.5

%

Asia

 

$

39.5

 

 

$

39.0

 

 

 

0.5

 

 

 

1.3

%

 

$

82.4

 

 

$

63.4

 

 

 

19.0

 

 

 

30.0

%

Total

 

$

82.7

 

 

$

70.5

 

 

$

12.2

 

 

 

17.3

%

 

$

163.7

 

 

$

118.0

 

 

$

45.7

 

 

 

38.7

%

From a geographical perspective, the increase in net revenue for the three months ended June 30, 2021 was attributable to increased revenue in the Americas driven by the market share gains through innovation and strategic alignment with service providers and fiber overbuilders as well as U.S. Rural Digital Opportunity Fund (RDOF) and other government broadband incentive programs. The increase in net revenue for the six months ended June 30, 2021 was attributable to increased revenue in all regions driven by our enhanced go-to-market strategy and recovery from the impacts of the early onset of the COVID-19 pandemic in the first quarter of 2020.

For the three months ended June 30, 2021, two customers accounted for 22% and 14% of net revenue, respectively. For the six months ended June 30, 2021, two customers accounted for 20% and 12% of net revenue, respectively. For the three months ended June 30, 2020, one customer accounted for 19% of net revenue. For the six months ended June 30, 2020, one customer accounted for 11% of net revenue.

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 customers. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.

Cost of Revenue and Gross Profit

Total cost of revenue increased 18.8% to $55.6 million for the three months ended June 30, 2021, compared to $46.8 million for the three months ended June 30, 2020. Total cost of revenue was 67.3% of net revenue for the three months ended June 30, 2021, compared to 66.3% of net revenue for the three months ended June 30, 2020, which resulted in a decrease in gross profit percentage to 32.7% for the three months ended June 30, 2021 from 33.7% for the three months ended June 30, 2020. The increase in total cost of revenue was primarily due to the increase in number and mix of products sold, including the geographic mix of those sales.

Total cost of revenue increased 38.9% to $108.6 million for the six months ended June 30, 2021, compared to $78.2 million for the six months ended June 30, 2020. Total cost of revenue was 66.3% of net revenue for the six months ended June 30, 2021 and for the six months ended June 30, 2020, respectively, which resulted in gross profit percentage of 33.7% for both periods. The increase in total cost of revenue was primarily due to the increase in number and mix of products sold, including the geographic mix of those sales.

We expect that in the future our cost of revenue as a percentage of net revenue will vary depending on the geographic and product mix and average selling prices of products sold. In addition, continued competitive and economic pressures could cause us to reduce our prices, adjust the carrying values of our inventory, or recognize inventory expenses relating to discontinued products and excess or obsolete inventory.

Research and Product Development Expenses

Research and product development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations.

Research and product development expenses increased by 41.2% to $12.0 million for the three months ended June 30, 2021 compared to $8.5 million for the three months ended June 30, 2020. Research and product development expenses increased by 26.9% to $23.1 million for the six months ended June 30, 2021 compared to $18.2 million for the six months ended June 30, 2020. The increase in research and product development expenses was primarily due to strategic hiring decisions in research, development, and product line management in the second half of 2020 and into the first half of 2021 with the intent to accelerate growth and capture market share.

We intend to continue to invest in research and product development to attain our strategic product development objectives, while seeking to manage the associated costs through expense controls.

25


 

Selling, Marketing, General and Administrative Expenses

Selling, marketing, general and administrative expenses include personnel costs for sales, marketing, administration, finance, information technology, human resources and general management as well as legal and accounting expenses, rent, utilities, trade show expenses and related travel costs.

Selling, marketing, general and administrative expenses increased by $5.1 million or 38.6% to $18.3 million for the three months ended June 30, 2021 compared to $13.2 million for the three months ended June 30, 2020. The increase was due to strategic hiring decisions across sales and administration in the second half of 2020 and into the first half of 2021 with the intent to accelerate growth and capture market share and higher sales commissions due to overall revenue growth, along with the full quarter impact of the Optelian and Rift acquisitions.

Selling, marketing, general and administrative expenses increased by $23.4 million or 87.6% to $50.1 million for the six months ended June 30, 2021 compared to $26.7 million for the six months ended June 30, 2020. The increase in selling, marketing, general and administrative expenses was primarily due to the increase in allowance for doubtful accounts for one customer in India by $14.2 million in the first quarter of 2021. Refer to Note 1 in the Notes to Unaudited Condensed Consolidated Financial Statements, for further information on the bad debt expense. The increase was also partially due to strategic hiring decisions across sales and administration in the second half of 2020 and into the first half of 2021 with the intent to accelerate growth and capture market share and higher sales commissions due to overall revenue growth, along with the full quarter impact of the Optelian and Rift acquisitions.

Restructuring and Other Charges

Restructuring and other charges for the six months ended June 30, 2021 were $5.3 million, and relate primarily to the strategic decision to transition DZS GmbH to a sales and research and development center by the end of 2021. As a result of the negotiations with the works council in Germany, the Company agreed to a reduced statutory benefit obligation, as reflected in the reduction to restructuring and other charges in the statement of operations during the three months ended June 30, 2021 of $0.9 million. See Note 9 Restructuring and Other Charges of the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information.

Impairment of Long-lived Assets

Impairment of long-lived assets for the six months ended June 30, 2021 was $1.7 million, and related to the headquarters relocation to Plano, Texas. No impairment was recorded during the three months ended June 30, 2021. See Note 13 Leases of the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information.

Income Tax Provision

Income tax expense for the three and six months ended June 30, 2021 was $0.5 million and $1.4 million, respectively, on pre-tax loss of $2.8 million and $25.1 million, respectively. Income tax expense for the three and six months ended June 30, 2020 was $0.8 million for both periods, on pre-tax income of $0.7 million and pre-tax loss of $8.1 million, respectively. For the three and six months ended June 30, 2021, the effective income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America and EMEA and the mix of earnings generated by our wholly owned foreign subsidiaries in Asia.

OTHER PERFORMANCE MEASURES

In managing our business and assessing our financial performance, we supplement the information provided by our U.S. GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-U.S. GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) stock-based compensation, and (v) the impact of material transactions or events that we believe are not indicative of our core operating performance, such as acquisition costs, goodwill impairment, impairment of long-lived assets, loss on debt extinguishment, restructuring and other charges, headquarters relocation, executive transition, and 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.

26


 

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 as a supplemental measure.

Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA, which we consider to be the most directly comparable U.S. GAAP financial measure to Adjusted EBITDA (in thousands):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$

(3,279

)

 

$

(156

)

 

$

(26,504

)

 

$

(8,927

)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

9

 

 

 

400

 

 

 

216

 

 

 

973

 

Income tax provision (benefit)

 

 

463

 

 

 

838

 

 

 

1,356

 

 

 

833

 

Depreciation and amortization

 

 

1,178

 

 

 

1,293

 

 

 

2,443

 

 

 

2,549

 

Stock-based compensation

 

 

1,994

 

 

 

868

 

 

 

3,346

 

 

 

1,650

 

Headquarters relocation

 

 

-

 

 

 

-

 

 

 

1,920

 

 

 

-

 

Restructuring and other charges

 

 

(908

)

 

 

-

 

 

 

5,344

 

 

 

-

 

Acquisition costs

 

 

37

 

 

 

-

 

 

 

680

 

 

 

-

 

Executive transition

 

 

101

 

 

 

-

 

 

 

172

 

 

 

-

 

Bad debt expense*

 

 

-

 

 

 

-

 

 

 

14,206

 

 

 

-

 

Loss on debt extinguishment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,369

 

Adjusted EBITDA

 

$

(405

)

 

$

3,243

 

 

$

3,179

 

 

$

(1,553

)

* See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our unaudited condensed consolidated financial statements, refer to Note 1 Organization and Summary of Significant Accounting Policies in the notes to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020, as supplemented by Note 1 Organization and Summary of Significant Accounting Policies in the notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Our operations are financed through a combination of our existing cash, cash equivalents, available credit facilities, and sales of equity and debt instruments, based on our operating requirements and market conditions.

The following table summarizes the information regarding our cash and cash equivalents and working capital (in thousands):

 

 

June 30, 2021

 

 

December 31, 2020

 

Cash and cash equivalents

 

$

53,927

 

 

$

45,219

 

Working capital

 

 

130,578

 

 

 

123,285

 

27


 

 

The Company had a net loss of $3.3 million and $26.5 million for the three months and six months ended June 30, 2021, respectively. The Company had a net loss of $0.2 million and $8.9 million for the three months and six months ended June 30, 2020, respectively.

As of June 30, 2021, we had an accumulated deficit of $78.8 million and working capital of $130.6 million. As of June 30, 2021, we had $53.9 million in cash and cash equivalents, which included $24.4 million in cash balances held by our international subsidiaries.

On January 29, 2021, we closed an equity offering which 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 outstanding balance of debt with related parties.

We continue to focus on cost management, operating efficiency and efficient discretionary spending. In addition, if necessary, we may sell assets, issue debt or equity securities or purchase credit insurance. We may also rationalize the number of products we sell, adjust our manufacturing footprint, and reduce our operations in low margin regions, including reductions in headcount. Based on our current plans and current business conditions, we believe that these measures along with our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months from the date of this Quarterly Report on Form 10-Q.

In December 2019, a strain of coronavirus, now known as COVID-19, was reported to have 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 have recommended, and many countries and state, provincial and local governments have 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 global economy in general and have materially impacted and may continue to impact on our financial condition, results of operations and cash flows. Given the ongoing and dynamic nature of the virus and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 pandemic on our business. Due to the uncertainty around the future economic impact of the pandemic, the fair value measurements used in our impairment assessments could be negatively impacted and could result in future impairments of goodwill, intangibles and other long-lived assets. During the six months ended June 30, 2021, our revenues increased by 38.7%, compared to the six months ended June 30, 2020, however the impact of a continued COVID-19 pandemic or sustained measures taken to limit or contain the outbreak could have a material and adverse effect on our business, financial condition, results of operations, and cash flows.

In 2017, we entered into an agreement with a customer in India to supply product for a state sponsored broadband project. We 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 of approximately $17.3 million as of December 31, 2020. We substantially completed our obligations under the agreement in 2018, and all amounts due were billed under the terms of the agreement by December 31, 2020. The remaining $17.3 million is substantially beyond the customers contractual payment terms, and we have been actively working with the customer and third parties in India to arrange payment of the entire remaining balance of $17.3 million. We recorded an allowance for doubtful accounts of $3.1 million on December 31, 2020, and we recognized an additional allowance of $14.2 million on March 31, 2021, to bring the total allowance for the customer to $17.3 million, which is the total balance as of June 30, 2021. We will continue to pursue collection of the entire outstanding balance and any amounts collected will be recognized in the period which they are received. In the event our efforts to collect from this customer prove unsuccessful, DZS may seek payment through other means, including through legal action.

Operating Activities

Net cash used in operating activities increased by $4.3 million to $8.3 million for the six months ended June 30, 2021 from net cash used in operating activities of $4.0 million for the six months ended June 30, 2020. The increase in cash used in operating activities was primarily due to changes in operating assets and liabilities due to increases in inventory, prepaid expenses and other assets, partially offset by decreases in accounts payable.

Investing Activities

Net cash used in investing activities increased by $5.0 million to $6.6 million for the six months ended June 30, 2021 from $1.6 million for the six months ended June 30, 2020. This increase was primarily due to cash used in the Optelian and RIFT acquisitions.

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Financing Activities

Net cash provided by financing activities totaled $21.5 million for the six months ended June 30, 2021 and consisted primarily of proceeds from the equity offering offset by repayments of our short-term borrowings and related party term loan. This is in comparison to cash provided by financing activities of $19.9 million for the six months ended June 30, 2020 and consisted primarily of proceeds from a related party loan, factored accounts receivable accounted for as a secured borrowing, and proceeds from short-term borrowings, partially offset by a net outflow associated with the repayment of the PNC Credit Facilities and other short-term borrowings.

Cash Management

Our primary source of liquidity comes from our cash, cash equivalents and restricted cash, which totaled $61.0 million at June 30, 2021. Our cash, cash equivalents and restricted cash as of June 30, 2021 included $24.4 million held by our international subsidiaries.

Debt Facilities

Bank and Trade Facilities - Foreign Operations

As of June 30, 2021, we had no outstanding balances with banks and other lending institutions. As of December 31, 2020, we had an aggregate outstanding balance of $13.8 million under financing arrangements with foreign banks and other lending institutions. During the first half of 2021, we paid off the outstanding balance of debt under such financing arrangements.

Related Party Debt

As of June 30, 2021, we had no related party debt outstanding. As of December 31, 2020, we had an aggregate outstanding balance of $29.8 million of related party debt with DNI. In January and February 2021, we paid off the outstanding balance of debt with related parties with proceeds from the issuance of shares of our common stock during January 2021.

Future Cash Requirements and Funding Sources

Our fixed commitments for cash expenditures consist primarily of payments under operating leases, and inventory purchase commitments.

From time to time, we may provide or commit to extend credit or credit support to our customers. This financing may include extending the terms for product payments to customers. Any extension of financing to our customers will limit the capital that we have available for other uses.

Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of June 30, 2021, one customer represented 23% of net accounts receivable and net receivables from customers in countries other than the United States represented 77%. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, and inventory purchase commitments.

Operating Leases

Future minimum operating lease obligations include primarily payments for our office locations and manufacturing, research and development locations, which expire at various dates through 2028. See Note 13 Leases of the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding our operating leases.

Purchase Commitments

We may have short term purchase commitments related to the purchase orders for products and services, within the normal course of business. These arrangements typically have cancellation provisions that allow us to cancel with little to no penalty.

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

We are required to maintain disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information required to be disclosed in our reports filed or submitted pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosures. Our disclosure controls and procedures include those components of our internal control over financial reporting intended to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financials in accordance with U.S. GAAP. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q. The evaluation was done under the supervision and with the participation of management, including our principal executive officer and principal financial officer. In the course of the evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer concluded our disclosure controls and procedures were effective as of June 30, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 

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PART II. OTHER INFORMATION

Item 1.

The Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the unaudited condensed consolidated financial position or results of operations. 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 financial position, results of operations and cash flows of the period in which the ruling occurs, or future periods.

Item 5.

Other Information

None.

Item 6.

Exhibits

The exhibits required to be filed with this quarterly report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

 

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EXHIBIT INDEX

 

Exhibit

Number

 

Description

 

 

 

 3.1

 

Restated Certificate of Incorporation of DASAN Zhone Solutions, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the SEC on September 27, 2017).

 

 

 

 3.2

 

Certificate of Amendment to the Restated Certificate of Incorporation of DZS Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 27, 2020).

 

 

 

 3.3

 

Amended and Restated Bylaws of DZS Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021).

 

 

 

10.1+

 

 

First Amendment to Employment Agreement effective June 1, 2021 by and between DZS Inc. and Charles Vogt (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2021).  

 

 

 

10.2+

 

Second Amendment to Employment Agreement effective April 7, 2021 by and between DZS Inc. and Thomas Cancro (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2021).

 

 

 

10.3+

 

Third Amendment to Employment Agreement effective June 1, 2021 by and between DZS Inc. and Thomas Cancro (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2021).

 

 

 

31.1*

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

 

 

 

31.2*

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

 

 

 

32.1*

 

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Labels Linkbase

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)

 

 

 

*

 

Filed herewith.

+

 

Indicates management contract or compensatory plan, contract or arrangement.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

DZS INC.

 

 

 

Date: August 9, 2021

 

 

 

 

By:

 

/s/ Charles Daniel Vogt

 

Name:

 

Charles Daniel Vogt

 

Title:

 

President and Chief Executive Officer

 

 

 

 

 

By:

 

/s/ Misty Kawecki

 

Name:

 

Misty Kawecki

 

Title:

 

Chief Financial Officer

 

 

 

(Principal Financial and

 

 

 

Accounting Officer)

 

 

 

 

 

 

33