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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/02/22 DZS Inc. 10-Q 6/30/22 79:10M Donnelley … Solutions/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 2.97M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 29K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 26K
10: R1 Document and Entity Information HTML 76K
11: R2 Unaudited Condensed Consolidated Balance Sheets HTML 137K
12: R3 Unaudited Condensed Consolidated Balance Sheets HTML 35K
(Parenthetical)
13: R4 Unaudited Condensed Consolidated Statements of HTML 122K
Comprehensive Income (Loss)
14: R5 Unaudited Condensed Consolidated Statements of HTML 82K
Stockholders' Equity
15: R6 Unaudited Condensed Consolidated Statements of HTML 141K
Cash Flows
16: R7 Organization and Summary of Significant Accounting HTML 169K
Policies
17: R8 Business Combinations HTML 89K
18: R9 Fair Value Measurement HTML 63K
19: R10 Cash, Cash Equivalents and Restricted Cash HTML 31K
20: R11 Balance Sheet Details HTML 140K
21: R12 Goodwill and Intangible Assets HTML 137K
22: R13 Debt HTML 64K
23: R14 Employee Benefit Plans HTML 40K
24: R15 Restructuring and Other Charges HTML 33K
25: R16 Related Party Transactions HTML 290K
26: R17 Net Income (Loss) Per Share HTML 123K
27: R18 Leases HTML 49K
28: R19 Commitments and Contingencies HTML 32K
29: R20 Income Taxes HTML 35K
30: R21 Enterprise-Wide Information HTML 61K
31: R22 Organization and Summary of Significant Accounting HTML 185K
Policies (Policies)
32: R23 Organization and Summary of Significant Accounting HTML 128K
Policies (Tables)
33: R24 Business Combinations (Tables) HTML 78K
34: R25 Fair Value Measurement (Tables) HTML 51K
35: R26 Balance Sheet Details (Tables) HTML 135K
36: R27 Goodwill and Intangible Assets (Tables) HTML 137K
37: R28 Debt (Tables) HTML 40K
38: R29 Related Party Transactions (Tables) HTML 280K
39: R30 Net Income (Loss) Per Share (Tables) HTML 123K
40: R31 Leases (Tables) HTML 45K
41: R32 Enterprise-Wide Information (Tables) HTML 55K
42: R33 Organization and Summary of Significant Accounting HTML 109K
Policies - Additional Information (Details)
43: R34 Organization and Summary of Significant Accounting HTML 33K
Policies - Schedule of Revenues by Source
(Details)
44: R35 Organization and Summary of Significant Accounting HTML 36K
Policies - Schedule of Information Revenues by
Geographical Concentration (Details)
45: R36 Organization and Summary of Significant Accounting HTML 35K
Policies - Schedule of Allowance for Doubtful
Accounts (Details)
46: R37 Business Combinations - Additional Information HTML 51K
(Details)
47: R38 Business Combinations - Summary of Provisional HTML 56K
Estimated Fair Values of Assets Acquired and
Liabilities Assumed (Details)
48: R39 Business Combinations - Schedule of Estimated Fair HTML 36K
Value and Useful Lives of Identifiable Intangible
Assets (Details)
49: R40 Fair Value Measurement - Schedule of HTML 34K
Reconciliation of Level 3 Contingent Liability
(Details)
50: R41 Cash, Cash Equivalents and Restricted Cash - HTML 37K
Additional Information (Details)
51: R42 Balance Sheet Details - Schedule of Inventories HTML 33K
(Details)
52: R43 Balance Sheet Details - Additional Information HTML 40K
(Details)
53: R44 Balance Sheet Details - Schedule of Property, HTML 44K
Plant and Equipment, Net (Details)
54: R45 Balance Sheet Details - Summary of Product HTML 32K
Warranty Liability (Details)
55: R46 Balance Sheet Details - Summary of Contract Assets HTML 32K
and Contract Liabilities Related to Contracts with
Customers (Details)
56: R47 Goodwill and Intangible Assets - Schedule of HTML 41K
Goodwill (Details)
57: R48 Goodwill and Intangible Assets - Additional HTML 40K
Information (Details)
58: R49 Goodwill and Intangible Assets - Schedule of HTML 42K
Intangible Assets (Details)
59: R50 Goodwill and Intangible Assets - Future HTML 39K
Amortization Expense of Intangible Assets
(Details)
60: R51 Debt - Additional Information (Details) HTML 96K
61: R52 Debt - Schedule of Future Principal Maturities of HTML 42K
Term Loan (Details)
62: R53 Employee Benefit Plans - Additional Information HTML 41K
(Details)
63: R54 Restructuring and Other Charges - Additional HTML 36K
Information (Details)
64: R55 Related Party Transactions - Additional HTML 34K
Information (Details)
65: R56 Related Party Transactions - Indebtedness And HTML 26K
Other Obligations Payment Guarantees (Details)
66: R57 Related Party Transactions - Sales and Purchases HTML 52K
To and From Related Parties (Details)
67: R58 Related Party Transactions - Balances of HTML 41K
Receivables and Payables with Related Parties
(Details)
68: R59 Net Income (Loss) Per Share - Reconciliation of HTML 60K
Basic and Diluted Net Income (Loss) per Share
(Details)
69: R60 Net Income (Loss) Per Share - Antidilutive HTML 31K
Securities Excluded from Computation of Earning
Per Share (Details)
70: R61 Leases - Additional Information (Details) HTML 25K
71: R62 Leases - Maturity of Operating Lease Liabilities HTML 42K
(Details)
72: R63 Commitments and Contingencies - Additional HTML 29K
Information (Details)
73: R64 Income Taxes - Additional Information (Details) HTML 37K
74: R65 Enterprise-Wide Information - Property, Plant and HTML 39K
Equipment, Net of Accumulated Depreciation
(Details)
77: XML IDEA XML File -- Filing Summary XML 147K
75: XML XBRL Instance -- dzsi-20220630_htm XML 2.81M
76: EXCEL IDEA Workbook of Financial Reports XLSX 136K
5: EX-101.CAL XBRL Calculations -- dzsi-20220630_cal XML 190K
8: EX-101.DEF XBRL Definitions -- dzsi-20220630_def XML 515K
7: EX-101.LAB XBRL Labels -- dzsi-20220630_lab XML 1.24M
6: EX-101.PRE XBRL Presentations -- dzsi-20220630_pre XML 878K
9: EX-101.SCH XBRL Schema -- dzsi-20220630 XSD 162K
78: JSON XBRL Instance as JSON Data -- MetaLinks 426± 659K
79: ZIP XBRL Zipped Folder -- 0000950170-22-013871-xbrl Zip 310K
| 10-Q |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
(Mark One)
i ☒ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i June 30, i 2022 /
OR
i ☐ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
(Commission File Number)
i DZS INC.
(Exact name of registrant as specified in its charter)
i Delaware |
|
i 22-3509099 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification Number) |
|
|
|
i 5700 Tennyson Parkway, Suite 400 i Plano, i Texas |
|
i 75024 |
(Address of principal executive offices) |
|
(Zip code) |
( i 469) i 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 |
|
|
|
i Common stock, $0.001 par value |
i DZSI |
i 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. i 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). i 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 |
☐ |
|
i Accelerated filer |
☒ |
Non-accelerated filer |
☐ |
|
Smaller reporting company |
i ☐ |
|
|
|
Emerging growth company |
i ☐ |
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 i ☒
As of July 25, 2022, there were i 27,893,797 shares outstanding of the registrant’s common stock, $0.001 par value. |
|
|
Page |
PART I. FINANCIAL INFORMATION |
||
|
|
|
Item 1. |
3 |
|
|
3 |
|
|
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) |
4 |
|
Unaudited Condensed Consolidated Statements of Stockholders' Equity |
5 |
|
6 |
|
|
Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
Item 3. |
29 |
|
Item 4. |
29 |
|
|
|
|
PART II. OTHER INFORMATION |
|
|
|
|
|
Item 1. |
31 |
|
Item 1A. |
31 |
|
Item 5. |
31 |
|
Item 6. |
31 |
|
|
33 |
|
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DZS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par value)
|
|
|
|
|
||||
Assets |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
i 17,125 |
|
|
$ |
i 46,666 |
|
Restricted cash |
|
|
i 5,862 |
|
|
|
i 6,808 |
|
Accounts receivable - trade, net of allowance for doubtful accounts of |
|
|
i 105,343 |
|
|
|
i 86,114 |
|
Other receivables |
|
|
i 12,988 |
|
|
|
i 10,621 |
|
Inventories |
|
|
i 69,457 |
|
|
|
i 56,893 |
|
Contract assets |
|
|
i 1,281 |
|
|
|
i 2,184 |
|
Prepaid expenses and other current assets |
|
|
i 12,525 |
|
|
|
i 5,690 |
|
Total current assets |
|
|
i 224,581 |
|
|
|
i 214,976 |
|
Property, plant and equipment, net |
|
|
i 9,849 |
|
|
|
i 9,842 |
|
Right-of-use assets from operating leases |
|
|
i 14,996 |
|
|
|
i 12,640 |
|
Goodwill |
|
|
i 28,977 |
|
|
|
i 6,145 |
|
Intangible assets, net |
|
|
i 23,156 |
|
|
|
i 5,115 |
|
Other assets |
|
|
i 10,264 |
|
|
|
i 8,950 |
|
Total assets |
|
$ |
i 311,823 |
|
|
$ |
i 257,668 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable - trade |
|
$ |
i 79,678 |
|
|
$ |
i 64,258 |
|
Current portion of long-term debt |
|
|
i 1,250 |
|
|
|
— |
|
Contract liabilities |
|
|
i 20,446 |
|
|
|
i 6,091 |
|
Operating lease liabilities |
|
|
i 4,445 |
|
|
|
i 4,097 |
|
Accrued and other liabilities |
|
|
i 19,166 |
|
|
|
i 16,032 |
|
Total current liabilities |
|
|
i 124,985 |
|
|
|
i 90,478 |
|
Long-term debt |
|
|
i 23,419 |
|
|
|
— |
|
Contract liabilities - non-current |
|
|
i 7,858 |
|
|
|
i 3,044 |
|
Operating lease liabilities - non-current |
|
|
i 13,410 |
|
|
|
i 12,103 |
|
Pension liabilities |
|
|
i 15,073 |
|
|
|
i 16,527 |
|
Other long-term liabilities |
|
|
i 2,990 |
|
|
|
i 3,609 |
|
Total liabilities |
|
|
i 187,735 |
|
|
|
i 125,761 |
|
Commitments and contingencies (Note 13) |
|
|
|
|
|
|
||
Stockholders’ equity: |
|
|
|
|
|
|
||
Common stock, i i 36,000 / shares authorized, i i 27,784 / and i i 27,505 / shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively, at $ i i 0.001 / par value |
|
|
i 27 |
|
|
|
i 27 |
|
Additional paid-in capital |
|
|
i 229,969 |
|
|
|
i 223,336 |
|
Accumulated other comprehensive loss |
|
|
( i 9,432 |
) |
|
|
( i 4,457 |
) |
Accumulated deficit |
|
|
( i 96,476 |
) |
|
|
( i 86,999 |
) |
Total stockholders’ equity |
|
|
i 124,088 |
|
|
|
i 131,907 |
|
Total liabilities and stockholders’ equity |
|
$ |
i 311,823 |
|
|
$ |
i 257,668 |
|
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, |
|
|
|
|||||||||||
|
|
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|||||
Net revenue |
|
$ |
i 91,080 |
|
|
$ |
i 82,700 |
|
|
$ |
i 168,120 |
|
|
$ |
i 163,731 |
|
Cost of revenue |
|
|
i 66,137 |
|
|
|
i 55,622 |
|
|
|
i 116,352 |
|
|
|
i 108,558 |
|
Gross profit |
|
|
i 24,943 |
|
|
|
i 27,078 |
|
|
|
i 51,768 |
|
|
|
i 55,173 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and product development |
|
|
i 12,348 |
|
|
|
i 11,962 |
|
|
|
i 24,192 |
|
|
|
i 23,081 |
|
Selling, marketing, general and administrative |
|
|
i 20,513 |
|
|
|
i 18,256 |
|
|
|
i 38,255 |
|
|
|
i 50,080 |
|
Restructuring and other charges |
|
|
i 356 |
|
|
|
( i 908 |
) |
|
|
i 792 |
|
|
|
i 5,344 |
|
Impairment of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 1,735 |
|
Amortization of intangible assets |
|
|
i 464 |
|
|
|
i 314 |
|
|
|
i 758 |
|
|
|
i 576 |
|
Total operating expenses |
|
|
i 33,681 |
|
|
|
i 29,624 |
|
|
|
i 63,997 |
|
|
|
i 80,816 |
|
Operating loss |
|
|
( i 8,738 |
) |
|
|
( i 2,546 |
) |
|
|
( i 12,229 |
) |
|
|
( i 25,643 |
) |
Interest income |
|
|
i 36 |
|
|
|
i 19 |
|
|
|
i 73 |
|
|
|
i 61 |
|
Interest expense |
|
|
( i 200 |
) |
|
|
( i 28 |
) |
|
|
( i 327 |
) |
|
|
( i 277 |
) |
Other income (expense), net |
|
|
( i 63 |
) |
|
|
( i 261 |
) |
|
|
( i 863 |
) |
|
|
i 711 |
|
Loss before income taxes |
|
|
( i 8,965 |
) |
|
|
( i 2,816 |
) |
|
|
( i 13,346 |
) |
|
|
( i 25,148 |
) |
Income tax provision (benefit) |
|
|
( i 2,937 |
) |
|
|
i 463 |
|
|
|
( i 4,270 |
) |
|
|
i 1,356 |
|
Net loss |
|
|
( i 6,028 |
) |
|
|
( i 3,279 |
) |
|
|
( i 9,076 |
) |
|
|
( i 26,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments |
|
|
( i 4,639 |
) |
|
|
i 216 |
|
|
|
( i 4,907 |
) |
|
|
( i 2,054 |
) |
Actuarial loss |
|
|
— |
|
|
|
i 83 |
|
|
|
— |
|
|
|
i 55 |
|
Comprehensive loss |
|
$ |
( i 10,667 |
) |
|
$ |
( i 2,980 |
) |
|
$ |
( i 13,983 |
) |
|
$ |
( i 28,503 |
) |
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( i 0.22 |
) |
|
$ |
( i 0.12 |
) |
|
$ |
( i 0.33 |
) |
|
$ |
( i 1.01 |
) |
Diluted |
|
$ |
( i 0.22 |
) |
|
$ |
( i 0.12 |
) |
|
$ |
( i 0.33 |
) |
|
$ |
( i 1.01 |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
i 27,657 |
|
|
|
i 26,982 |
|
|
|
i 27,593 |
|
|
|
i 26,120 |
|
Diluted |
|
|
i 27,657 |
|
|
|
i 26,982 |
|
|
|
i 27,593 |
|
|
|
i 26,120 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
DZS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
|
|
Common stock |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
loss |
|
|
deficit |
|
|
equity |
|
||||||
Six-months ended March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance as of December 31, 2021 |
|
|
i 27,505 |
|
|
$ |
i 27 |
|
|
$ |
i 223,336 |
|
|
$ |
( i 4,457 |
) |
|
$ |
( i 86,999 |
) |
|
$ |
i 131,907 |
|
Cumulative effect of ASC 326 adoption |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 401 |
) |
|
|
( i 401 |
) |
Exercise of stock awards and |
|
|
i 98 |
|
|
|
— |
|
|
|
i 156 |
|
|
|
— |
|
|
|
— |
|
|
|
i 156 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
i 2,671 |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,671 |
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 3,048 |
) |
|
|
( i 3,048 |
) |
Subsidiary dissolution |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 68 |
) |
|
|
— |
|
|
|
( i 68 |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 268 |
) |
|
|
— |
|
|
|
( i 268 |
) |
Balance as of March 31, 2022 |
|
|
i 27,603 |
|
|
$ |
i 27 |
|
|
$ |
i 226,163 |
|
|
$ |
( i 4,793 |
) |
|
$ |
( i 90,448 |
) |
|
$ |
i 130,949 |
|
Exercise of stock awards and |
|
|
i 181 |
|
|
|
— |
|
|
|
i 938 |
|
|
|
— |
|
|
|
— |
|
|
|
i 938 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
i 2,868 |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,868 |
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 6,028 |
) |
|
|
( i 6,028 |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 4,639 |
) |
|
|
— |
|
|
|
( i 4,639 |
) |
Balance as of June 30, 2022 |
|
|
i 27,784 |
|
|
$ |
i 27 |
|
|
$ |
i 229,969 |
|
|
$ |
( i 9,432 |
) |
|
$ |
( i 96,476 |
) |
|
$ |
i 124,088 |
|
Six-months ended March 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance as of December 31, 2020 |
|
|
i 21,958 |
|
|
$ |
i 22 |
|
|
$ |
i 147,997 |
|
|
$ |
( i 2,124 |
) |
|
$ |
( i 52,316 |
) |
|
$ |
i 93,579 |
|
Issuance of common stock in public |
|
|
i 4,600 |
|
|
|
i 5 |
|
|
|
i 59,520 |
|
|
|
|
|
|
|
|
|
i 59,525 |
|
||
Exercise of stock awards and |
|
|
i 325 |
|
|
|
— |
|
|
|
i 2,569 |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,569 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
i 1,352 |
|
|
|
— |
|
|
|
— |
|
|
|
i 1,352 |
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 23,225 |
) |
|
|
( i 23,225 |
) |
Other comprehensive (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 2,298 |
) |
|
|
— |
|
|
|
( i 2,298 |
) |
Balance as of March 31, 2021 |
|
|
i 26,883 |
|
|
$ |
i 27 |
|
|
$ |
i 211,438 |
|
|
$ |
( i 4,422 |
) |
|
$ |
( i 75,541 |
) |
|
$ |
i 131,502 |
|
Exercise of stock awards and |
|
|
i 309 |
|
|
|
— |
|
|
|
i 1,967 |
|
|
|
— |
|
|
|
— |
|
|
|
i 1,967 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
i 1,994 |
|
|
|
— |
|
|
|
— |
|
|
|
i 1,994 |
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 3,279 |
) |
|
|
( i 3,279 |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 299 |
|
|
|
— |
|
|
|
i 299 |
|
Balance as of June 30, 2021 |
|
|
i 27,192 |
|
|
$ |
i 27 |
|
|
$ |
i 215,399 |
|
|
$ |
( i 4,123 |
) |
|
$ |
( i 78,820 |
) |
|
$ |
i 132,483 |
|
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 |
|
|||||
|
|
|
||||||
|
|
|
|
2021 |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( i 9,076 |
) |
|
$ |
( i 26,504 |
) |
Adjustments to reconcile net income (loss) to net cash |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
i 2,442 |
|
|
|
i 2,443 |
|
Impairment of long-lived assets and non-cash restructuring |
|
|
— |
|
|
|
i 4,475 |
|
Amortization of deferred financing costs |
|
|
i 72 |
|
|
|
i 12 |
|
Stock-based compensation |
|
|
i 5,539 |
|
|
|
i 3,346 |
|
Provision for inventory write-down |
|
|
i 1,072 |
|
|
|
i 1,907 |
|
Bad debt expense, net of recoveries |
|
|
( i 896 |
) |
|
|
i 14,301 |
|
Provision for sales returns |
|
|
i 2,080 |
|
|
|
i 430 |
|
Provision for warranty |
|
|
i 183 |
|
|
|
i 469 |
|
Unrealized loss (gain) on foreign currency transactions |
|
|
i 711 |
|
|
|
( i 495 |
) |
Subsidiary dissolution |
|
|
( i 68 |
) |
|
|
— |
|
Gain on disposal of property, plant and equipment |
|
|
( i 68 |
) |
|
|
— |
|
Deferred taxes |
|
|
— |
|
|
|
i 111 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( i 21,167 |
) |
|
|
i 944 |
|
Other receivable |
|
|
( i 4,405 |
) |
|
|
( i 4,358 |
) |
Inventories |
|
|
( i 16,199 |
) |
|
|
( i 13,966 |
) |
Contract assets |
|
|
i 818 |
|
|
|
i 134 |
|
Prepaid expenses and other assets |
|
|
( i 6,884 |
) |
|
|
( i 1,333 |
) |
Accounts payable |
|
|
i 19,122 |
|
|
|
i 11,012 |
|
Contract liabilities |
|
|
( i 206 |
) |
|
|
( i 87 |
) |
Accrued and other liabilities |
|
|
( i 3,897 |
) |
|
|
( i 1,118 |
) |
Net cash used in operating activities |
|
|
( i 30,827 |
) |
|
|
( i 8,277 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Proceeds from disposal of property, plant and equipment and other assets |
|
|
i 65 |
|
|
|
— |
|
Purchases of property, plant and equipment |
|
|
( i 1,764 |
) |
|
|
( i 2,141 |
) |
Acquisition of business, net of cash acquired |
|
|
( i 22,297 |
) |
|
|
( i 4,459 |
) |
Net cash used in investing activities |
|
|
( i 23,996 |
) |
|
|
( i 6,600 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from issuance of common stock in public offerings, net of issuance costs |
|
|
— |
|
|
|
i 59,525 |
|
Proceeds from long-term borrowings |
|
|
i 25,000 |
|
|
|
— |
|
Repayments of short-term borrowings and line of credit |
|
|
— |
|
|
|
( i 13,278 |
) |
Repayments of related party term loan |
|
|
— |
|
|
|
( i 29,298 |
) |
Payments for debt issue costs |
|
|
( i 771 |
) |
|
|
— |
|
Proceeds from exercise of stock awards and employee stock plan purchases |
|
|
i 1,094 |
|
|
|
i 4,534 |
|
Net cash provided by (used in) financing activities |
|
|
i 25,323 |
|
|
|
i 21,483 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
( i 997 |
) |
|
|
( i 67 |
) |
Net increase in cash, cash equivalents and restricted cash |
|
|
( i 30,497 |
) |
|
|
i 6,539 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
i 53,639 |
|
|
|
i 54,587 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
i 23,142 |
|
|
$ |
i 61,126 |
|
|
|
|
|
|
|
|
||
Reconciliation of cash, cash equivalents and restricted cash to statement of |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
i 17,125 |
|
|
$ |
i 53,927 |
|
Restricted cash |
|
|
i 5,862 |
|
|
|
i 7,032 |
|
Long-term restricted cash |
|
|
i 155 |
|
|
|
i 167 |
|
|
|
$ |
i 23,142 |
|
|
$ |
i 61,126 |
|
|
|
|
|
|
|
|
||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
|
||
Interest - bank and trade facilities |
|
$ |
i 36 |
|
|
$ |
i 83 |
|
Interest - related party |
|
$ |
— |
|
|
$ |
i 108 |
|
Income taxes |
|
$ |
i 749 |
|
|
$ |
i 1,944 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
6
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
DZS Inc. (referred to, collectively with its subsidiaries, as “DZS” or the “Company”) is a global leader in access and optical networking infrastructure and cloud software solutions that enable the emerging hyper-connected, hyper-broadband world and broadband experiences. The Company provides a wide array of reliable, cost-effective networking technologies and software to a diverse customer base.
DZS was incorporated under the laws of the state of i Delaware in i June 1999. The Company is headquartered in Plano, Texas with flexible in-house production facilities in Seminole, Florida, and contract manufacturers located in China, India, Korea and Vietnam. The Company also maintains offices to provide sales and customer support at global locations.
(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 3 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements include the accounts of the Company and its wholly owned subsidiaries. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2022. For a complete description of what the Company believes to be the critical accounting policies and estimates used in the preparation of its unaudited condensed consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
All intercompany transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current-quarter presentation. The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period.
(c) Risks and Uncertainties
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, assuming the Company will continue as a going concern.
The COVID-19 pandemic continued to adversely affect significant portions of our business and our financial condition and results of operations in the first two quarters of 2022. The emergence of the Omicron variant in late 2021 with a resulting increase in COVID cases in 2022 resulted in re-implementation of various measures, including travel bans and restrictions, limitations on public and private gatherings, business and port closures or operating restrictions, social distancing, and shelter-in-place orders. The health effects of the pandemic and the above measures taken in response thereto have had an effect on the global economy in general and have materially impacted and will likely continue to impact the Company’s financial condition, results of operations and cash flows. Given the ongoing and dynamic nature of the virus and its variants, and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 pandemic on our business.
We have experienced and continue to experience disruptions in our supply chain due to the pandemic, which has also impacted and may adversely impact our operations (including, without limitation, logistical and other operational costs) and the operations of some of our key suppliers. Supply chain pricing, freight and logistics costs, product and component availability, and extended lead-times became a challenge in 2021 and continue into 2022 as the world economy recovers from the COVID-19 pandemic. As we continue to incur elevated costs for components and expedite fees, our supply chain and operations teams continue to focus on managing through a constrained environment, thereby enabling DZS to maximize shipments despite elongated lead times. We remain cautious about continued supply chain headwinds that challenge the industry and anticipate a constrained supply chain environment to persist throughout 2022.
For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A, Risk Factors of our 2021 Form 10-K.
(d) Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
7
(e) Disaggregation of Revenue
The following table presents revenues by source (in thousands):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|||||
Products |
|
$ |
i 83,335 |
|
|
$ |
i 77,920 |
|
|
$ |
i 155,797 |
|
|
$ |
i 154,172 |
|
Services and software |
|
|
i 7,745 |
|
|
|
i 4,780 |
|
|
|
i 12,323 |
|
|
|
i 9,559 |
|
Total |
|
$ |
i 91,080 |
|
|
$ |
i 82,700 |
|
|
$ |
i 168,120 |
|
|
$ |
i 163,731 |
|
The following table present revenues by geographical concentration (in thousands):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|||||
Americas |
|
$ |
i 28,417 |
|
|
$ |
i 26,513 |
|
|
$ |
i 51,341 |
|
|
$ |
i 46,682 |
|
Europe, Middle East, Africa |
|
|
i 12,976 |
|
|
|
i 16,701 |
|
|
|
i 31,802 |
|
|
|
i 34,619 |
|
Asia |
|
|
i 49,687 |
|
|
|
i 39,486 |
|
|
|
i 84,977 |
|
|
|
i 82,430 |
|
Total |
|
$ |
i 91,080 |
|
|
$ |
i 82,700 |
|
|
$ |
i 168,120 |
|
|
$ |
i 163,731 |
|
(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 using historical loss rates adjusted for customer-specific factors and current economic conditions. The Company determines historical loss rates on a rational and systematic basis. The Company performs periodic assessments of its customers’ liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement review and historical and current collection trends.
Activity under the Company’s allowance for doubtful accounts consists of the following (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
|
2021 |
|
|||
Balance at beginning of period |
|
$ |
i 17,735 |
|
|
$ |
i 3,954 |
|
Charged to expense, net of recoveries |
|
|
( i 896 |
) |
|
|
i 14,301 |
|
Utilization/write offs/exchange rate differences |
|
|
— |
|
|
|
( i 101 |
) |
Cumulative effect of ASC 326 adoption |
|
|
i 401 |
|
|
|
— |
|
Foreign exchange impact |
|
|
( i 936 |
) |
|
|
( i 336 |
) |
Balance at end of period |
|
$ |
i 16,304 |
|
|
$ |
i 17,818 |
|
For the three and six months ended June 30, 2022, i i one / customer accounted for i i 13 / % of net revenue. For the three months ended June 30, 2021, i two customers accounted for i 22% and i 14% of net revenue, respectively. For the six months ended June 30, 2021, i two customers accounted for i 20% and i 12% of net revenue, respectively.
As of June 30, 2022, i one customer represented i 10% of net accounts receivable. As of December 31, 2021, i two customers represented i 26% and i 10% of net accounts receivable, respectively.
As of June 30, 2022, and December 31, 2021, net accounts receivables from customers in countries other than the United States represented i 77% and i 79%, 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 substantially completed its obligations under the agreement in 2018. The Company billed the customer, which is a state government sponsored entity, approximately $ i 59.0 million and collected payments of approximately $ i 41.7 million by December 31, 2020. In late March 2021, the customer’s state government parent experienced difficulty passing a budget impacting the ability of the customer to make remaining agreed-upon payments to us. In light of this development, the Company recorded an allowance that covered the entire balance unpaid by the customer. Subsequent to March 2021, the Company recovered approximately $ i 1.9 million of accounts receivable related to the customer. As of June 30, 2022 the Company has a recorded allowance for doubtful accounts of $ i 14.4 million related to this receivable. The Company will continue to pursue collection of the entire outstanding balance and any amounts collected will be recognized in the period
8
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.
/
(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 recognizes one-time employee termination benefits when (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement in sufficient detail to enable employees to determine the type and amount of benefits they will receive, and (iv) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. These charges are included in restructuring and other charges in the unaudited condensed consolidated statement of comprehensive income (loss).
(i) Recent Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires the Company to apply ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. Before the update such balances were measured and recognized at fair value on the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods. The Company adopted these requirements prospectively, i effective on the first day of the second quarter of year 2022. There was i no material impact on our consolidated financial statements on the adoption date.
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 i adopted the updated guidance on i January 1, 2022, utilizing the modified retrospective transition method and recorded a cumulative-effect adjustment of $ i 0.4 million to retained earnings.
9
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 i 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 i not expected to have a material impact on our consolidated financial statements.
/(2) Business Combinations
Optelian Acquisition
On February 5, 2021, the Company acquired Optelian Access Networks Corporation (“Optelian”), a corporation incorporated under the laws of Canada and registered extra-provincially in the Province of Ontario, pursuant to an acquisition agreement whereby the Company purchased all the outstanding shares of Optelian. Following the closing of the transaction, Optelian became the Company’s wholly owned subsidiary.
Optelian was a leading optical networking solution provider. This acquisition introduced the “O-Series” to the DZS portfolio of carrier grade optical networking products with up to 400 gigabits per second (Gig) and above capability, expanding the DZS product portfolio by providing environmentally hardened, high capacity, and flexible solutions at the network edge.
The purchase price of $ i 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.
The payment to shareholders and option holders includes a $ i 0.3 million holdback and $ i 1.9 million contingent consideration based on a certain percentage of future revenue of certain Optelian products through the end of 2023. We completed the purchase price allocation for Optelian acquisition in 2021. The purchase price allocation resulted in the recognition of goodwill of approximately $ i 1.9 million, which primarily related to the expected synergies from combining operations.
RIFT Acquisition
On March 3, 2021, the Company acquired substantially all of the assets of RIFT, Inc., a network automation solutions company, and all the outstanding shares of RIFT.IO India Private Limited, a wholly owned subsidiary of RIFT, Inc. (collectively “RIFT”). RIFT developed a carrier-grade RIFT.ware software platform that simplifies the deployment of any slice, service, or application on any cloud. This acquisition introduced DZS Xtreme, a solution within the DZS Cloud portfolio, to the overall portfolio of DZS systems and software solutions. The total purchase consideration was $ i 0.5 million, including a $ i 0.2 million holdback that was released in April of 2021 following the fulfillment of certain requirements in the purchase agreement. We completed the purchase price allocation for RIFT acquisition in 2021. The purchase price allocation resulted in the recognition of goodwill of approximately $ i 0.2 million, which primarily related to the expected synergies from combining operations.
ASSIA Acquisition
On May 27, 2022, the Company acquired certain assets and liabilities of Adaptive Spectrum and Signal Alignment, Incorporated (“ASSIA”), an industry pioneer of broadband access quality-of-experience and service assurance software solutions (the “ASSIA Acquisition”). The core assets acquired include the CloudCheck® Wi-Fi experience management and Expresse® access network optimization software solutions. These software solutions add powerful data analytics and network intelligence capabilities to DZS Cloud, including cloud-managed WiFi solutions, access network optimization and intelligent automation tools. i The CloudCheck® and Expresse® solutions are currently deployed in over 125 million connected homes globally, and many of these connections now represent recurring software revenue opportunities for DZS.
The total purchase consideration was $ i 25.0 million, including a $ i 2.5 million holdback that will be released in 13 months following the transaction close date.
The acquisition was recorded as a business combination with valuation of the assets acquired and liabilities assumed recorded at their acquisition date fair value determined using level three inputs, defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Due to the complexity of the valuation of the assets acquired and the liabilities assumed, and the timing of these activities, certain amounts included in the unaudited condensed consolidated financial statements, including long-lived assets, intangible assets, deferred taxes and goodwill, are provisional and subject to additional adjustments within the measurement period as permitted by Topic 805.
The following summarizes the provisional estimated fair values of the assets acquired and liabilities assumed at the date of the ASSIA Acquisition (in thousands):
10
Provisional allocation of purchase consideration |
|
|
|
|
Cash and cash equivalents |
|
$ |
i 203 |
|
Accounts receivable |
|
|
i 2,578 |
|
Other assets |
|
|
i 364 |
|
Right-of-use assets |
|
|
i 2,612 |
|
Property, plant and equipment |
|
|
i 231 |
|
Intangible assets |
|
|
i 18,800 |
|
Accounts payable |
|
|
( i 106 |
) |
Contract liabilities |
|
|
( i 19,550 |
) |
Operating lease liabilities |
|
|
( i 2,612 |
) |
Accrued and other liabilities |
|
|
( i 323 |
) |
Goodwill |
|
|
i 22,803 |
|
Total purchase consideration |
|
$ |
i 25,000 |
|
The provisional purchase price allocation resulted in the recognition of goodwill of approximately $ i 22.8 million, which included the experienced workforce and the expected synergies from combining operations. The
Company expects that the goodwill recognized will be deductible for tax purposes.
The following table represents the preliminary estimated fair value and useful lives of identifiable intangible assets acquired (estimated fair value in thousands):
|
|
Estimated |
|
|
Estimated |
|
|
|
fair value |
|
|
useful life |
|
Intangible assets acquired |
|
|
|
|
|
|
Customer relationships |
|
$ |
i 12,500 |
|
|
i 15 years |
Developed technology |
|
|
i 5,800 |
|
|
i 5 years |
Tradenames |
|
|
i 500 |
|
|
i 10 years |
Total intangible assets |
|
$ |
i 18,800 |
|
|
|
(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 carrying value of the Company's debt approximates its fair values based on the current rates available to the Company for debt of similar terms and maturities.
The Company classifies its contingent liability from Optelian acquisition within Level 3 as it includes inputs not observable in the market. The Company estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using the revenue forecast for certain Optelian products through the end of 2023. The fair value of contingent liability is generally sensitive to changes in the revenue forecast during the payout period. The change in the respective fair value is included in selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss).
The following table reconciles the beginning and ending balances of the Company’s Level 3 contingent liability (in thousands):
11
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
|
2021 |
|
|||
Balance at beginning of period |
|
$ |
i 2,121 |
|
|
$ |
— |
|
Initial fair value of contingent liability |
|
|
— |
|
|
|
i 1,897 |
|
Cash payments |
|
|
( i 558 |
) |
|
|
— |
|
Net change in fair value |
|
|
( i 303 |
) |
|
|
i 201 |
|
Balance at end of period |
|
$ |
i 1,260 |
|
|
$ |
i 2,098 |
|
(4) Cash, Cash Equivalents and Restricted Cash
As of June 30, 2022 and December 31, 2021, the Company's cash, cash equivalents and restricted cash consisted of financial deposits. Cash, cash equivalents and restricted cash held within the U.S. totaled $ i 11.6 million and $ i 22.3 million as of June 30, 2022 and December 31, 2021, respectively. 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 $ i 11.5 million and $ i 31.3 million as of June 30, 2022 and December 31, 2021, respectively. Restricted cash consisted primarily of cash collateral for performance bonds and warranty bonds. Long-term restricted cash was $ i i 0.2 / million as of June 30, 2022 and December 31, 2021 and is included in other assets on the unaudited condensed consolidated balance sheets.
/(5) Balance Sheet Details
Balance sheet detail as of June 30, 2022 and December 31, 2021 is as follows (in thousands):
Inventories
|
|
|
|
|
||||
Raw materials |
|
$ |
i 46,954 |
|
|
$ |
i 34,512 |
|
Work in process |
|
|
i 1,075 |
|
|
|
i 1,427 |
|
Finished goods |
|
|
i 21,428 |
|
|
|
i 20,954 |
|
Total inventories |
|
$ |
i 69,457 |
|
|
$ |
i 56,893 |
|
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.
Property, plant and equipment
|
|
|
|
|
||||
Property, plant and equipment, net: |
|
|
|
|
|
|
||
Machinery and equipment |
|
$ |
i 16,600 |
|
|
$ |
i 14,278 |
|
Leasehold improvements |
|
|
i 5,284 |
|
|
|
i 5,219 |
|
Computers and software |
|
|
i 3,493 |
|
|
|
i 3,217 |
|
Furniture and fixtures |
|
|
i 1,645 |
|
|
|
i 1,771 |
|
Construction in progress and other |
|
|
i 1,000 |
|
|
|
i 2,937 |
|
|
|
|
i 28,022 |
|
|
|
i 27,422 |
|
Less: accumulated depreciation and amortization |
|
|
( i 18,063 |
) |
|
|
( i 17,394 |
) |
Less: government grants |
|
|
( i 110 |
) |
|
|
( i 186 |
) |
Total property, plant and equipment, net |
|
$ |
i 9,849 |
|
|
$ |
i 9,842 |
|
Depreciation expense associated with property, plant and equipment for the three and six months ended June 30, 2022 was $ i 0.9 million and $ i 1.7 million, respectively. Depreciation expense associated with property, plant and equipment for the three and six months ended June 30, 2021 was $ i 0.7 million and $ i 1.6 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.
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
12
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 |
|
|||
Balance at beginning of period |
|
$ |
i 1,980 |
|
|
$ |
i 1,522 |
|
Charged to cost of revenue |
|
|
i 183 |
|
|
|
i 469 |
|
Claims and settlements |
|
|
( i 229 |
) |
|
|
( i 491 |
) |
Foreign exchange impact |
|
|
( i 53 |
) |
|
|
i 63 |
|
Balance at end of period |
|
$ |
i 1,881 |
|
|
$ |
i 1,563 |
|
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. i 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 |
|
|
Contract |
|
||
|
$ |
i 2,184 |
|
|
$ |
i 9,135 |
|
|
|
|
i 1,281 |
|
|
|
i 28,304 |
|
|
Increase (decrease) |
|
$ |
( i 903 |
) |
|
$ |
i 19,169 |
|
The decrease in contract assets during the six months ended June 30, 2022 was primarily due to invoicing that occurred in 2022 from unbilled balances reflected as contract assets as of December 31, 2021.
The increase in contract liabilities during the six months ended June 30, 2022 was primarily due to the assumption of ASSIA contract liabilities in conjunction with the ASSIA Acquisition. Refer to Note 2 Business Combinations for further information. The amount of revenue recognized in the six months ended June 30, 2022 that was included in the prior period contract liability balance was $ i 4.5 million. This revenue consists of services provided to customers who had been invoiced prior to the current year. We expect to recognize approximately i 72% 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, 2022 and December 31, 2021 was $ i 0.9 million and $ i 0.8 million, respectively. During the six months ended June 30, 2022, the Company recorded $ i 0.5 million in amortization related to contract cost deferred as of December 31, 2021.
/(6) Goodwill and Intangible Assets
The following table summarizes the activity related to goodwill (in thousands):
|
|
|
||||||
|
|
|
|
2021 |
|
|||
Balance at beginning of period, gross |
|
$ |
i 7,148 |
|
|
$ |
i 4,980 |
|
Accumulated impairment at beginning of period |
|
|
( i 1,003 |
) |
|
|
( i 1,003 |
) |
Goodwill from acquisitions |
|
|
i 22,803 |
|
|
|
i 1,698 |
|
Foreign exchange impact |
|
|
i 29 |
|
|
|
— |
|
Balance at end of period |
|
$ |
i 28,977 |
|
|
$ |
i 5,675 |
|
During the six months ended June 30, 2022, the Company recorded goodwill of $ i 22.8 million related to the ASSIA Acquisition, which was allocated to the Americas reporting unit. Refer to Note 2 Business Combinations for further information.
13
Intangible assets consisted of the following (in thousands):
|
|
|
||||||||||
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
Developed technology |
|
$ |
i 10,807 |
|
|
$ |
( i 3,750 |
) |
|
$ |
i 7,057 |
|
Customer relationships |
|
|
i 18,230 |
|
|
|
( i 3,266 |
) |
|
|
i 14,964 |
|
In-process research and development |
|
|
i 890 |
|
|
|
( i 251 |
) |
|
|
i 639 |
|
Tradenames |
|
|
i 500 |
|
|
|
( i 4 |
) |
|
|
i 496 |
|
Total intangible assets, net |
|
$ |
i 30,427 |
|
|
$ |
( i 7,271 |
) |
|
$ |
i 23,156 |
|
|
|
|
||||||||||
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
Developed technology |
|
$ |
i 5,007 |
|
|
$ |
( i 3,464 |
) |
|
$ |
i 1,543 |
|
Customer relationships |
|
|
i 5,730 |
|
|
|
( i 2,886 |
) |
|
|
i 2,844 |
|
In-process research and development |
|
|
i 890 |
|
|
|
( i 162 |
) |
|
|
i 728 |
|
Total intangible assets, net |
|
$ |
i 11,627 |
|
|
$ |
( i 6,512 |
) |
|
$ |
i 5,115 |
|
During the six months ended June 30, 2022, the Company recorded $ i 12.5 million, $ i 5.8 million and $ i 0.5 million in customer relationships, developed technology, and tradenames, respectively, related to the ASSIA Acquisition. Refer to Note 2 Business Combinations for further information.
Amortization expense associated with intangible assets for the three and six months ended June 30, 2022 was $ i 0.5 million and $ i 0.8 million, respectively. Amortization expense associated with intangible assets for the three and six months ended June 30, 2021 was $ i 0.5 million and $ i 0.9 million, respectively.
The following table presents the future amortization expense of the Company’s intangible assets as of June 30, 2022 (in thousands):
Remainder of 2022 |
|
$ |
i 1,610 |
|
2023 |
|
|
i 3,220 |
|
2024 |
|
|
i 3,220 |
|
2025 |
|
|
i 3,220 |
|
2026 |
|
|
i 2,449 |
|
Thereafter |
|
|
i 9,437 |
|
Total |
|
$ |
i 23,156 |
|
(7) Debt
JPMorgan Credit Agreement
On February 9, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans (the "Revolving Credit Facility") in an aggregate principal amount of up to $ i 30.0 million, up to $ i 15.0 million of which is available for letters of credit, and was scheduled to mature on i February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments, plus $ i 10.0 million.
On May 27, 2022, the Company entered into a First Amendment to Credit Agreement (the “Amendment”), which amends the Credit Agreement dated February 9, 2022 with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.
The Amendment, among other things, (1) provides for a term loan (the “Term Loan”) in an aggregate principal amount of $ i 25.0 million with a maturity date of i May 27, 2027, (2) extends the maturity date of the $ i 30.0 million Revolving Credit Facility to i May 27, 2025, (3) permits the ASSIA Acquisition, (4) modifies the applicable margin for borrowings under the Credit Agreement to be, at the Company’s option, either (i) the adjusted term SOFR rate plus a margin ranging from i 3.0% to i 3.5% per year or (ii) the prime rate plus a margin ranging from i 2.0% to i 2.5% per year, in each case depending on the Company’s leverage ratio, (5) modifies the letter of credit fee such that it ranges from i 3.0% to i 3.5%, depending on the Company’s leverage ratio, (6) modifies the commitment fee on the unused portion of the Revolving Credit Facility to range from i 0.25% to i 0.35% per year, depending on the Company’s leverage ratio, (7) modifies the method of calculating the leverage ratio, and (8) i modifies the financial covenants to (i) increase the maximum permitted leverage ratio to i 3.00 to 1.00 through September 30, 2022, i 2.50 to 1.00 thereafter /
14
through September 30, 2023, and i 2.00 to 1.00 thereafter and (ii) replace the minimum liquidity requirement with a minimum permitted fixed charge coverage ratio of i 1.25 to 1.00.
On May 27, 2022, the Company borrowed the full amount of the Term Loan to finance the ASSIA Acquisition. In the first quarter of 2022, the Company capitalized $ i 0.4 million of debt issuance cost related to execution of the Credit Agreement. Such cost is presented within other assets on the Company’s unaudited condensed consolidated balance sheet. In the second quarter, the Company capitalized $ i 0.3 million of debt issuance cost related to execution of the Amendment. Such cost is presented as a direct deduction from the long-term debt obligation on the Company’s unaudited condensed consolidated balance sheet. As of June 30, 2022, the Company's long-term debt obligation was $ i 23.4 million, net of the current portion of $ i 1.3 million, and unamortized issuance cost of $ i 0.3 million. There was i no amount outstanding under the $ i 30.0 million Revolving Credit Facility as of June 30, 2022, and the full $ i 30.0 million was available to the Company. The Company had i no debt obligation as of December 31, 2021.
The future principal maturities of the Term Loan for each of the next five years are as follows (in thousands):
Remainder of 2022 |
|
$ |
i 625 |
|
2023 |
|
|
i 1,250 |
|
2024 |
|
|
i 1,563 |
|
2025 |
|
|
i 1,875 |
|
2026 |
|
|
i 2,188 |
|
Thereafter |
|
|
i 17,499 |
|
Total |
|
$ |
i 25,000 |
|
The Company was in compliance with all debt covenants as of June 30, 2022.
/(8) Employee Benefit Plans
Defined Contribution Plans
The Company maintains a 401(k) plan for its employees in the US whereby eligible employees may contribute up to a specified percentage of their earnings, on a pretax basis, subject to the maximum amount permitted by the Internal Revenue Code. Under the 401(k) plan, the Company made discretionary contributions to the plan in 2021. For the three and six months ended June 30, 2022, the Company recorded an expense of $ i 0.2 million and $ i 0.4 million, respectively. For the three and six months ended June 30, 2021, the Company recorded an expense of $ i 0.2 million and $ i 0.3 million, respectively.
The Company maintains a defined contribution plan for its employees in Korea. Under the defined contribution plan, the Company contributes the equivalent of i 8.3% of an employee's gross salary into the plan. For the three and six months ended June 30, 2022, the Company recorded an expense of $ i 0.3 million and $ i 0.6 million, respectively. For the three and six months ended June 30, 2021, the Company recorded an expense of $ i 0.3 million and $ i 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, 2022 and December 31, 2021 as a long-term liability on the unaudited condensed consolidated balance sheets. The accumulated benefit obligation for the plans in Germany and Japan was $ i 15.1 million and $ i 16.5 million as of June 30, 2022 and December 31, 2021, respectively. Periodic benefit costs for the three and six months ended June 30, 2022 were $ i 0.1 million and $ i 0.2 million, respectively. Periodic benefit costs for the three and six months ended June 30, 2021 were $ i 0.1 million and $ i 0.2 million, respectively.
The Company holds life insurance contracts, with the Company as beneficiary, in the amount of $ i 2.4 million as of June 30, 2022 and $ i 2.9 million as of December 31, 2021, respectively, related to individuals under the pension plans. The Company records these insurance contracts based on their cash surrender value at the balance sheet dates. These insurance contracts are classified as other assets on the 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
In 2021, the Company made the strategic decision to relocate manufacturing functions of DZS GmbH and Optelian to Seminole, Florida and to transition the above subsidiaries to sales and research and development centers. The Company incurred approximately $ i 13.1 million of restructuring and other charges since the beginning of its restructuring activities in the first quarter of 2021. For the three and six months ended June 30, 2022, the Company recorded $ i 0.4 million and $ i 0.8 million of restructuring related costs, respectively, consisting primarily of logistics costs and professional services related to legal and accounting support. For the three months ended June 30, 2021, the Company recorded a $ i 0.9 million reduction to restructuring related costs due to the negotiated decrease of the employee termination benefits. For the six months ended June 30, 2021 the Company recorded $ i 5.3 million of restructuring related costs, consisting primarily of severance and other termination related benefits of $ i 2.4 million, an impairment of long-lived assets charge of $ i 2.7 million primarily related to right-of-use assets from operating leases, and $ i 0.2 million of other charges. The Company paid in full its liability related to termination benefits as of June 30, 2022.
/(10) Related Party Transactions
Related Party Debt and Guarantees
The following table sets forth payment guarantees of the Company's obligations as of June 30, 2022 that have been provided by Dasan Networks, Inc. ("DNI"). DNI owns approximately i 36.3% 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 |
|
|
Description of Obligations Guaranteed |
|
Dasan Networks, Inc. |
|
$ |
i 5,031 |
|
|
Payment guarantee to Industrial Bank of Korea |
16
/
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, 2022 and 2021:
|
|
Three Months Ended June 30, 2022 |
|
|||||||||||||||||||||
Counterparty |
|
Sales |
|
|
Cost of |
|
|
Research |
|
|
Selling, |
|
|
Interest |
|
|
Other |
|
||||||
Dasan Networks, Inc. |
|
$ |
i 718 |
|
|
$ |
i 629 |
|
|
$ |
— |
|
|
$ |
i 316 |
|
|
|
— |
|
|
$ |
i 16 |
|
DS Commerce, Inc. |
|
|
— |
|
|
|
i 11 |
|
|
|
i 2 |
|
|
|
i 8 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
i 718 |
|
|
$ |
i 640 |
|
|
$ |
i 2 |
|
|
$ |
i 324 |
|
|
$ |
— |
|
|
$ |
i 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Three Months Ended June 30, 2021 |
|
|||||||||||||||||||||
Counterparty |
|
Sales |
|
|
Cost of |
|
|
Research |
|
|
Selling, |
|
|
Interest |
|
|
Other |
|
||||||
Dasan Networks, Inc. |
|
$ |
i 141 |
|
|
$ |
i 92 |
|
|
$ |
i 262 |
|
|
$ |
i 389 |
|
|
$ |
— |
|
|
$ |
i 53 |
|
Dasan Invest Co., Ltd. |
|
|
— |
|
|
|
i 10 |
|
|
|
i 45 |
|
|
|
i 20 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
i 141 |
|
|
$ |
i 102 |
|
|
$ |
i 307 |
|
|
$ |
i 409 |
|
|
$ |
— |
|
|
$ |
i 53 |
|
|
|
Six Months Ended June 30, 2022 |
|
|||||||||||||||||||||
Counterparty |
|
Sales |
|
|
Cost of |
|
|
Research |
|
|
Selling, |
|
|
Interest |
|
|
Other |
|
||||||
Dasan Networks, Inc. |
|
$ |
i 916 |
|
|
$ |
i 806 |
|
|
$ |
i 90 |
|
|
$ |
i 633 |
|
|
|
— |
|
|
$ |
i 33 |
|
DS Commerce, Inc. |
|
|
— |
|
|
|
i 22 |
|
|
|
i 3 |
|
|
|
i 19 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
i 916 |
|
|
$ |
i 828 |
|
|
$ |
i 93 |
|
|
$ |
i 652 |
|
|
$ |
— |
|
|
$ |
i 33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Six Months Ended June 30, 2021 |
|
|||||||||||||||||||||
Counterparty |
|
Sales |
|
|
Cost of |
|
|
Research |
|
|
Selling, |
|
|
Interest |
|
|
Other |
|
||||||
Dasan Networks, Inc. |
|
$ |
i 1,911 |
|
|
$ |
i 1,746 |
|
|
$ |
i 523 |
|
|
$ |
i 791 |
|
|
$ |
i 132 |
|
|
$ |
i 138 |
|
Dasan Invest Co., Ltd. |
|
|
— |
|
|
|
i 20 |
|
|
|
i 91 |
|
|
|
i 38 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
i 1,911 |
|
|
$ |
i 1,766 |
|
|
$ |
i 614 |
|
|
$ |
i 829 |
|
|
$ |
i 132 |
|
|
$ |
i 138 |
|
The Company has entered into sales agreements with DNI to sell certain services and finished goods produced by the Company. The Company also has an agreement with DNI in which DNI acts as a sales channel to third party customers. The above transactions are included in 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 Korea has a lease agreement with DNI related to the lease of a warehouse facility. DNS Korea also had a separate office lease agreement with DNI. In the first quarter of 2022, DNI sold the office building to the unrelated third party, and the respective lease was reassigned to the new landlord. Operating lease cost related to the DNI leases totaled $ i 0.1 million and $ i 0.4 million for the three and six months ended June 30, 2022, respectively. Operating lease cost related to the DNI leases totaled $ i 0.5 million and $ i 0.9 million for the three and six months ended June 30, 2021, 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). Deposits for the DNI office lease were included in other assets on the consolidated balance sheets as of December 31, 2021.
17
DNS Korea had an agreement with Dasan Invest Co., Ltd. to provide IT services for the Company. The agreement was terminated in the fourth quarter of 2021 and the new agreement was signed with DS Commerce, Inc. Both entities have an affiliation with DZS board members. The expense related to the above IT services is allocated between cost of revenue, research and product development, and selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss).
Interest expense represents interest paid to DNI for the related party debt. The respective debt was fully repaid in the first quarter of 2021.
Other expenses represent charges from DNI for its payment guarantees relating to the Company's borrowings. The Company pays DNI a guarantee fee which is calculated as i 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, 2022 and December 31, 2021 were included in the following balance sheet captions on the unaudited condensed consolidated balance sheets, as follows (in thousands):
|
|
As of June 30, 2022 |
|
|||||||||||||
Counterparty |
|
Account |
|
|
Other |
|
|
Other assets |
|
|
Accounts |
|
||||
Dasan Networks, Inc. |
|
$ |
i 761 |
|
|
$ |
i 466 |
|
|
$ |
— |
|
|
$ |
i 405 |
|
DS Commerce, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 16 |
|
|
|
$ |
i 761 |
|
|
$ |
i 466 |
|
|
$ |
— |
|
|
$ |
i 421 |
|
|
|
As of December 31, 2021 |
|
|||||||||||||
Counterparty |
|
Account |
|
|
Other |
|
|
Other assets |
|
|
Accounts |
|
||||
Dasan Networks, Inc. |
|
$ |
i 181 |
|
|
$ |
i 215 |
|
|
$ |
i 691 |
|
|
$ |
i 785 |
|
DS Commerce, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 46 |
|
|
|
$ |
i 181 |
|
|
$ |
i 215 |
|
|
$ |
i 691 |
|
|
$ |
i 831 |
|
(11) Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income (loss) per share gives effect to common stock equivalents; however, potential common stock equivalents are excluded if their effect is antidilutive. Potential common stock equivalents are composed of incremental shares of common stock issuable upon the exercise of stock options and the vesting of restricted stock units. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, basic and dilutive loss per share are the same.
The following table is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per share calculation (in thousands, except per share data) for the three and six months ended June 30, 2022, and 2021:
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|||||
Net income (loss) |
|
$ |
( i 6,028 |
) |
|
$ |
( i 3,279 |
) |
|
$ |
( i 9,076 |
) |
|
$ |
( i 26,504 |
) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
i 27,657 |
|
|
|
i 26,982 |
|
|
|
i 27,593 |
|
|
|
i 26,120 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options, restricted stock units and share awards |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Diluted |
|
|
i 27,657 |
|
|
|
i 26,982 |
|
|
|
i 27,593 |
|
|
|
i 26,120 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( i 0.22 |
) |
|
$ |
( i 0.12 |
) |
|
$ |
( i 0.33 |
) |
|
$ |
( i 1.01 |
) |
Diluted |
|
$ |
( i 0.22 |
) |
|
$ |
( i 0.12 |
) |
|
$ |
( i 0.33 |
) |
|
$ |
( i 1.01 |
) |
18
/
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 |
|
|
|
2022 |
|
|
|
2021 |
|
|||
Outstanding stock options |
|
|
i 948 |
|
|
|
i 703 |
|
|
|
i 943 |
|
|
|
i 673 |
|
Unvested restricted stock units |
|
|
i 214 |
|
|
|
i 228 |
|
|
|
i 236 |
|
|
|
i 212 |
|
(12) Leases
The Company leases certain properties and buildings (including manufacturing facilities, warehouses, and office spaces) and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists of operating leases which expire at various dates through 2028.
Assets and liabilities related to operating leases are included in the consolidated balance sheets as right-of-use assets from operating leases, operating lease liabilities - current and operating lease liabilities - non-current. The Company recognizes minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. The Company amortizes this expense over the term of the lease beginning with the date of initial possession, which is the date the lessor makes an underlying asset available for use. For the three and six months ended June 30, 2022, the Company recognized lease expense of $ i 0.9 million and $ i 2.0 million, respectively. For the three and six months ended June 30, 2021, the Company recognized lease expense of $ i 1.5 million and $ i 3.1 million, respectively.
The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2022 (in thousands):
Remainder of 2022 |
|
$ |
i 2,750 |
|
2023 |
|
|
i 5,237 |
|
2024 |
|
|
i 4,818 |
|
2025 |
|
|
i 3,453 |
|
2026 |
|
|
i 2,108 |
|
Thereafter |
|
|
i 1,699 |
|
Total operating lease payments |
|
|
i 20,065 |
|
Less: imputed interest |
|
|
( i 2,210 |
) |
Total operating lease liabilities |
|
$ |
i 17,855 |
|
(13) 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 or surety provides a financial guarantee that the Company will perform in accordance with contractual or legal obligations. As of June 30, 2022, the Company had $ i 9.8 million of performance bonds in the form of bank guarantees or surety bonds guaranteed by third parties.
Trade Compliance Matter
During the first quarter of 2022, the Company received a notice letter from the Office of the Commissioner of Customs of the India Department of Revenue (the “Notice”) claiming the Company had mis-declared and wrongly classified certain products imported to India by the Company at the time of clearance of customs. The Notice claims that due to such mis-declaration and wrong classification of the imported products, the Company and its contract manufacturer in India underpaid duties approximating $ i 3.9 million related to such products. The Company intends to vigorously defend itself in this matter. As we have not yet received the full contents of the Notice, we are unable to estimate a potential loss related to this matter, if any, which could range up to the full amount of the unpaid duties, plus penalties and interest.
In addition to the Notice discussed above, from time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal contingencies that it has determined to be probable to the extent that the amount of the loss can be reasonably estimated. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations and cash flows of the reporting period in which the ruling occurs, or future periods.
/19
(14) Income Taxes
Income tax benefit for the three and six months ended June 30, 2022 was approximately $ i 2.9 million and $ i 4.3 million on pre-tax loss of $ i 9.0 million and pre-tax loss of $ i 13.3 million, respectively. Income tax expense for the three and six months ended June 30, 2021 was approximately $ i 0.5 million and $ i 1.4 million respectively, on pre-tax loss of $ i 2.8 and pre-tax loss of $ i 25.1 million, respectively.
As of June 30, 2022, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America, EMEA and Asia, as well as foreign and state income tax rate differentials.
The total amount of unrecognized tax benefits as of June 30, 2022 was $ i 4.2 million. There were i no significant changes to unrecognized tax benefits during the six months ended June 30, 2022. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months.
/(15) Enterprise-Wide Information
The Company is a global provider of ultra-broadband network access solutions and communications platforms deployed by advanced Tier 1, national and regional service providers and enterprise customers. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single operating segment. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a consolidated basis accompanied with disaggregated revenues by geographic region for purposes of making operating decisions and assessing financial performance.
The Company attributes revenue from customers to individual countries based on location shipped. Refer to Note 1(e) Disaggregation of Revenue for the required disclosures on geographical concentrations and revenues by source.
The Company's property, plant and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands) as of June 30, 2022 and December 31, 2021:
|
|
|
|
|
||||
United States |
|
$ |
i 6,755 |
|
|
$ |
i 6,105 |
|
Korea |
|
|
i 1,913 |
|
|
|
i 2,367 |
|
Japan |
|
|
i 644 |
|
|
|
i 799 |
|
Canada |
|
|
i 232 |
|
|
|
i 280 |
|
Germany |
|
|
i 139 |
|
|
|
i 210 |
|
Other |
|
|
i 166 |
|
|
|
i 81 |
|
|
|
$ |
i 9,849 |
|
|
$ |
i 9,842 |
|
20
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, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items in future periods; anticipated growth and trends in our business, industry or key markets; cost synergies, growth opportunities and other potential financial and operating benefits of our acquisitions; future growth and revenues from our products; our plans and our ability to refinance or repay our existing indebtedness prior to the applicable maturity dates; our ability to access capital to fund our future operations; future economic conditions and performance; the impact of the global outbreak of COVID-19, also known as the coronavirus; the impact of interest rate and foreign currency fluctuations; anticipated performance of products or services; competition; plans, objectives and strategies for future operations, including our pursuit or strategic acquisitions and our continued investment in research and development; other characterizations of future events or circumstances; and all other statements that are not statements of historical fact, are forward-looking statements within the meaning of the Securities Act and the Exchange Act. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Readers are cautioned not to place undue reliance on such forward-looking statements, which are being made as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K, as well as factors described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (the “SEC”).
OVERVIEW
We are a global provider of access and optical networking infrastructure and cloud software solutions that enable the emerging hyper-connected, hyper-broadband world and broadband experiences. The Company provides a wide array of reliable, cost-effective networking technologies and software to a diverse customer base.
We research, develop, test, sell, manufacture and support platforms in the areas of mobile transport and fixed broadband access, as discussed below. We have extensive regional development and support centers around the world to support our customer needs.
Our solutions and platforms portfolio include products in the Access Edge, Subscriber Edge, Optical Edge, and Cloud Software.
21
Our key financial objectives include the following:
RECENT DEVELOPMENTS
On February 9, 2022, the Company entered into a Credit Agreement with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans in an aggregate principal amount of up to $30.0 million, up to $15.0 million of which is available for letters of credit, and was scheduled to mature on February 9, 2024. On May 27, 2022, the Company entered into a First Amendment to Credit Agreement, which amends the Credit Agreement dated February 9, 2022. The Amendment, among other things, provides for a Term Loan in an aggregate principal amount of $25.0 million with a maturity date of May 27, 2027 and extends the maturity date of the $30.0 million Revolving Credit Facility to May 27, 2025. On May 27, 2022, the Company borrowed the full amount of the Term Loan to finance the ASSIA Acquisition discussed below.
On May 27, 2022, the Company acquired certain assets and liabilities of ASSIA, an industry pioneer of broadband access quality-of-experience software solutions. The core assets acquired include the CloudCheck® Wi-Fi experience management and Expresse® access network optimization software solutions. These software solutions add powerful data analytics and network intelligence capabilities to DZS Cloud, including cloud-managed WiFi solutions, access network optimization and intelligent automation tools. The total purchase consideration was $25.0 million, including a $2.5 million holdback that will be released 13 months following the transaction close date.
RESULTS OF OPERATIONS
The table below presents the unaudited condensed consolidated statement of (loss) income with year-over-year changes (in thousands except percent change).
22
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
||||||||||||
|
|
|
|
2021 |
|
|
% change |
|
|
2022 |
|
|
2021 |
|
|
% change |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net revenue |
|
$ |
91,080 |
|
|
$ |
82,700 |
|
|
|
10.1 |
% |
|
$ |
168,120 |
|
|
$ |
163,731 |
|
|
|
2.7 |
% |
Cost of revenue |
|
|
66,137 |
|
|
|
55,622 |
|
|
|
18.9 |
% |
|
|
116,352 |
|
|
|
108,558 |
|
|
|
7.2 |
% |
Gross profit |
|
|
24,943 |
|
|
|
27,078 |
|
|
|
-7.9 |
% |
|
|
51,768 |
|
|
|
55,173 |
|
|
|
-6.2 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Research and product development |
|
|
12,348 |
|
|
|
11,962 |
|
|
|
3.2 |
% |
|
|
24,192 |
|
|
|
23,081 |
|
|
|
4.8 |
% |
Selling, marketing, general and administrative |
|
|
20,513 |
|
|
|
18,256 |
|
|
|
12.4 |
% |
|
|
38,255 |
|
|
|
50,080 |
|
|
|
-23.6 |
% |
Restructuring and other charges |
|
|
356 |
|
|
|
(908 |
) |
|
|
-139.2 |
% |
|
|
792 |
|
|
|
5,344 |
|
|
|
-85.2 |
% |
Impairment of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,735 |
|
|
|
-100.0 |
% |
Amortization of intangible assets |
|
|
464 |
|
|
|
314 |
|
|
|
47.8 |
% |
|
|
758 |
|
|
|
576 |
|
|
|
31.6 |
% |
Total operating expenses |
|
|
33,681 |
|
|
|
29,624 |
|
|
|
13.7 |
% |
|
|
63,997 |
|
|
|
80,816 |
|
|
|
-20.8 |
% |
Operating loss |
|
|
(8,738 |
) |
|
|
(2,546 |
) |
|
|
243.2 |
% |
|
|
(12,229 |
) |
|
|
(25,643 |
) |
|
|
-52.3 |
% |
Interest income |
|
|
36 |
|
|
|
19 |
|
|
|
89.5 |
% |
|
|
73 |
|
|
|
61 |
|
|
|
19.7 |
% |
Interest expense |
|
|
(200 |
) |
|
|
(28 |
) |
|
|
614.3 |
% |
|
|
(327 |
) |
|
|
(277 |
) |
|
|
18.1 |
% |
Other income (expense), net |
|
|
(63 |
) |
|
|
(261 |
) |
|
|
-75.9 |
% |
|
|
(863 |
) |
|
|
711 |
|
|
|
-221.4 |
% |
Loss before income taxes |
|
|
(8,965 |
) |
|
|
(2,816 |
) |
|
|
218.4 |
% |
|
|
(13,346 |
) |
|
|
(25,148 |
) |
|
|
-46.9 |
% |
Income tax provision (benefit) |
|
|
(2,937 |
) |
|
|
463 |
|
|
|
-734.3 |
% |
|
|
(4,270 |
) |
|
|
1,356 |
|
|
|
-414.9 |
% |
Net loss |
|
$ |
(6,028 |
) |
|
$ |
(3,279 |
) |
|
|
83.8 |
% |
|
$ |
(9,076 |
) |
|
$ |
(26,504 |
) |
|
|
-65.8 |
% |
The table below presents the unaudited condensed consolidated statement of (loss) income as a percentage of total net revenue for the periods indicated.
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|||||
Net revenue |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
73 |
% |
|
|
67 |
% |
|
|
69 |
% |
|
|
66 |
% |
Gross profit |
|
|
27 |
% |
|
|
33 |
% |
|
|
31 |
% |
|
|
34 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and product development |
|
|
14 |
% |
|
|
14 |
% |
|
|
14 |
% |
|
|
14 |
% |
Selling, marketing, general and administrative |
|
|
23 |
% |
|
|
22 |
% |
|
|
23 |
% |
|
|
31 |
% |
Restructuring and other charges |
|
|
— |
|
|
|
(1 |
)% |
|
|
1 |
% |
|
|
3 |
% |
Impairment of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
% |
Amortization of intangible assets |
|
|
1 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total operating expenses |
|
|
38 |
% |
|
|
35 |
% |
|
|
38 |
% |
|
|
49 |
% |
Operating income (loss) |
|
|
(11 |
)% |
|
|
(2 |
)% |
|
|
(7 |
)% |
|
|
(15 |
)% |
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other income (expense), net |
|
|
— |
|
|
|
— |
|
|
|
(1 |
)% |
|
|
— |
|
Income (loss) before income taxes |
|
|
(11 |
)% |
|
|
(2 |
)% |
|
|
(8 |
)% |
|
|
(15 |
)% |
Income tax provision (benefit) |
|
|
(3 |
)% |
|
|
1 |
% |
|
|
(3 |
)% |
|
|
1 |
% |
Net income (loss) |
|
|
(8 |
)% |
|
|
(3 |
)% |
|
|
(5 |
)% |
|
|
(16 |
)% |
Net Revenue
The following table presents our revenues by source (in millions):
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||||||||||
|
|
|
|
2021 |
|
|
% change |
|
|
2022 |
|
|
2021 |
|
|
% change |
|
|||||||
Products |
|
$ |
83.3 |
|
|
$ |
77.9 |
|
|
|
6.9 |
% |
|
$ |
155.8 |
|
|
$ |
154.2 |
|
|
|
1.0 |
% |
Services and software |
|
|
7.8 |
|
|
|
4.8 |
|
|
|
62.5 |
% |
|
|
12.3 |
|
|
|
9.5 |
|
|
|
29.5 |
% |
Total |
|
$ |
91.1 |
|
|
$ |
82.7 |
|
|
|
10.2 |
% |
|
$ |
168.1 |
|
|
$ |
163.7 |
|
|
|
2.7 |
% |
For the three months ended June 30, 2022, product revenue increased by 6.9% or $5.4 million to $83.3 million from $77.9 million in the same period last year. The increase in product revenue during the period was primarily attributable to higher spending levels from our major customers in Asia. Service and software revenue represents revenue from maintenance and other services associated with product shipments as well as software revenue from the date of the ASSIA Acquisition. The increase in service and software revenue was primarily due to the increased product sales and revenue related to the ASSIA Acquisition.
23
For the six months ended June 30, 2022, product revenue increased by 1.0% or $1.6 million to $155.8 million from $154.2 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. The increase in service and software revenue was primarily due to the increased product sales and revenue related to the ASSIA Acquisition.
The following table presents our revenues by geographical concentration (in millions):
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||||||||||
|
|
|
|
2021 |
|
|
% change |
|
|
2022 |
|
|
2021 |
|
|
% change |
|
|||||||
Americas |
|
$ |
28.4 |
|
|
$ |
26.5 |
|
|
|
7.2 |
% |
|
$ |
51.3 |
|
|
$ |
46.7 |
|
|
|
9.9 |
% |
Europe, Middle East, Africa |
|
|
13.0 |
|
|
|
16.7 |
|
|
|
(22.2 |
)% |
|
|
32 |
|
|
|
34.6 |
|
|
|
(8.1 |
)% |
Asia |
|
|
49.7 |
|
|
|
39.5 |
|
|
|
25.8 |
% |
|
|
85 |
|
|
|
82.4 |
|
|
|
3.2 |
% |
Total |
|
$ |
91.1 |
|
|
$ |
82.7 |
|
|
|
10.2 |
% |
|
$ |
168.1 |
|
|
$ |
163.7 |
|
|
|
2.7 |
% |
Our geographic diversification reflects the combination of market demand, a strategic focus on capturing market share through new customer wins and new product introductions.
From a geographical perspective, the increase in net revenue for the three and six months ended June 30, 2022 was attributable to increased revenue in Asia and Americas. Revenue fluctuation during the three and six months period is primarily attributable to the changes in the spending levels from our major customers in the respective regions.
For the three and six months ended June 30, 2022, one customer accounted for 13% of net revenue. For the three months ended June 30, 2021, two customers accounted for 22% and 14% of net revenue, respectively. For the six months ended June 30, 2021, two customers accounted for 20% and 12% of net revenue, respectively.
We anticipate that our results of operations in any given period may depend to a significant extent on sales to a small number of large customers. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.
Cost of Revenue and Gross Profit
Total cost of revenue increased by 18.9% to $66.1 million for the three months ended June 30, 2022, compared to $55.6 million for the three months ended June 30, 2021. Total cost of revenue was 72.6% of net revenue for the three months ended June 30, 2022, compared to 67.3% of net revenue for the three months ended June 30, 2021, which resulted in an decrease in gross profit percentage to 27.4% for the three months ended June 30, 2022 from 32.7% for the three months ended June 30, 2021. The increase in total cost of revenue was primarily due to an increase in revenue and fees paid to expedite certain product components, while the decrease in gross profit percentage was primarily due to the change in number and mix of products sold, including the geographic mix of those sales, negative exchange rate impacts on revenues and such expedite fees.
Total cost of revenue increased by 7.2% to $116.3 million for the six months ended June 30, 2022, compared to $108.6 million for the six months ended June 30, 2021. Total cost of revenue was 69.2% of net revenue for the six months ended June 30, 2022, compared to 66.3% of net revenue for the six months ended June 30, 2021, which resulted in an decrease in gross profit percentage to 30.8% for the six months ended June 30, 2022 from 33.7% for the six months ended June 30, 2021. The increase in total cost of revenue was primarily due to an increase in revenue and fees paid to expedite certain product components, while the decrease in gross profit percentage was primarily due to the change in number and mix of products sold, including the geographic mix of those sales, negative exchange rate impacts on revenues and such expedite fees.
Operating Expenses
Research and Product Development Expenses: Research and product development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations.
Research and product development expenses increased by 3.2% to $12.3 million for the three months ended June 30, 2022 compared to $12.0 million for the three months ended June 30, 2021. Research and product development expenses increased by 4.8% to $24.2 million for the six months ended June 30, 2022 compared to $23.1 million for the six months ended June 30, 2021. The increase in research and product development expenses was primarily due to strategic hiring decisions in research, development, and product line management with the intent to accelerate growth and capture market share and the ASSIA Acquisition.
We intend to continue to invest in research and product development to attain our strategic product development objectives, while seeking to manage the associated costs through expense controls.
Selling, Marketing, General and Administrative Expenses: Selling, marketing, general and administrative expenses include personnel costs for sales, marketing, administration, finance, information technology, human resources and general management as well as legal and accounting expenses, rent, utilities, trade show expenses and related travel costs.
24
Selling, marketing, general and administrative expenses increased by 12.4% to $20.5 million for the three months ended June 30, 2022 compared to $18.3 million for the three months ended June 30, 2021. The increase was primarily due to strategic hiring decisions across sales and administration with the intent to accelerate growth and capture market share.
Selling, marketing, general and administrative expenses decreased by 23.6% to $38.3 million for the six months ended June 30, 2022 compared to $50.1 million for the six months ended June 30, 2021. The decrease was primarily due to $14.2 million of bad debt expense recorded in the first quarter of 2021 for one customer in India. Refer to Note 1 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information on the bad debt expense. The above impact was partially offset by strategic hiring decisions across sales and administration with the intent to accelerate growth and capture market share.
Restructuring and Other Charges: Restructuring and other charges for the six months ended June 30, 2022 and 2021 relate primarily to the strategic decision to transition DZS GmbH and Optelian to sales and research and development centers. For the three and six months ended June 30, 2022, the Company recorded $0.4 million and $0.8 million of restructuring related costs, respectively, consisting primarily of logistics costs and professional services related to legal and accounting support. For the six months ended June 30, 2021, the Company recorded $5.3 million of restructuring related costs, consisting primarily of severance and other termination related benefits of $2.4 million, an impairment of long-lived assets charge of $2.7 million primarily related to right-of-use assets from operating leases, and $0.2 million of other charges. For the three months ended June 30, 2021, the Company recorded a $0.9 million reduction in restructuring related costs due to the negotiated decrease of the employee termination benefits. See Note 9 Restructuring and Other Charges of the Notes to Unaudited Condensed Consolidated Financial Statements, for further information.
Impairment of Long-lived Assets: Impairment of long-lived assets for the six months ended June 30, 2021 was $1.7 million for the right-of use assets from operating leases abandoned in connection with the relocation of the headquarters to Plano, Texas. No impairment was recorded during the six months ended June 30, 2022.
Interest Income (Expense), net: Interest income (expense) relates mainly to earnings from our cash and cash equivalents, interest expense associated with the credit facilities and amortization of debt issuance costs associated with obtaining such credit facilities. For the three and six months ended June 30, 2022, the Company recorded $0.2 million and $0.3 million of interest expense, net, respectively. For the three and six months ended June 30, 2021, the Company recorded $0.1 million and $0.2 million of interest expense, net, respectively.
Other Income (Expense), net: Other income (expense) relates mainly to realized and unrealized foreign exchange gains and losses. For the three and six months ended June 30, 2022, the Company recorded $0.1 million and $0.9 million of other expense, net, respectively. For the three and six months ended June 30, 2021, the Company recorded $0.3 million of other expense, net and $0.7 million of other income, net, respectively. The change in other income (expense), net was primarily due to foreign currency exchange rates fluctuation during the above periods.
Income Tax Provision: Income tax benefit for the three and six months ended June 30, 2022 was $2.9 million and $4.3 million on pre-tax loss of $9.0 million and pre-tax loss of $13.3 million, respectively. 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. As of June 30, 2022, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America, EMEA and Asia, as well as foreign and state income tax rate differentials.
NON-GAAP FINANCIAL MEASURES
In managing our business and assessing our financial performance, we supplement the information provided by our U.S. GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-U.S. GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) stock-based compensation, and (v) the impact of material transactions or events that we believe are not indicative of our core operating performance, such as acquisition costs, impairment of goodwill, intangibles or long-lived assets, loss on debt extinguishment, restructuring and other charges, including termination related benefits, headquarters and facilities relocation, executive transition, and bad debt expense primarily related to a large customer in India, any of which may or may not be recurring in nature. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.
25
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) or any other performance measures calculated in accordance with U.S. GAAP or as a measure of liquidity. Management understands these limitations and compensates for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplemental measure.
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 |
|
|
2022 |
|
|
2021 |
|
|||||
Net income (loss) |
|
$ |
(6,028 |
) |
|
$ |
(3,279 |
) |
|
$ |
(9,076 |
) |
|
$ |
(26,504 |
) |
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
164 |
|
|
|
9 |
|
|
|
254 |
|
|
|
216 |
|
Income tax provision (benefit) |
|
|
(2,937 |
) |
|
|
463 |
|
|
|
(4,270 |
) |
|
|
1,356 |
|
Depreciation and amortization |
|
|
1,361 |
|
|
|
1,178 |
|
|
|
2,442 |
|
|
|
2,443 |
|
Stock-based compensation |
|
|
2,868 |
|
|
|
1,994 |
|
|
|
5,539 |
|
|
|
3,346 |
|
Headquarters and facilities relocation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,920 |
|
Restructuring and other charges |
|
|
356 |
|
|
|
(908 |
) |
|
|
792 |
|
|
|
5,344 |
|
Acquisition costs |
|
|
571 |
|
|
|
37 |
|
|
|
622 |
|
|
|
680 |
|
Executive transition |
|
|
91 |
|
|
|
101 |
|
|
|
338 |
|
|
|
172 |
|
Bad debt expense, net of recoveries* |
|
|
317 |
|
|
|
— |
|
|
|
(910 |
) |
|
|
14,206 |
|
Adjusted EBITDA |
|
$ |
(3,237 |
) |
|
$ |
(405 |
) |
|
$ |
(4,269 |
) |
|
$ |
3,179 |
|
* See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our unaudited condensed consolidated financial statements, refer to Note 1 Organization and Summary of Significant Accounting Policies in the Notes to our Audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by Note 1 Organization and Summary of Significant Accounting Policies of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are financed through a combination of our existing cash, cash equivalents, available credit facilities, and issuance of equity or debt instruments, based on our operating requirements and market conditions.
The following table summarizes the information regarding our cash and cash equivalents and working capital (in thousands):
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
17,125 |
|
|
$ |
46,666 |
|
Working capital |
|
|
99,596 |
|
|
|
124,498 |
|
26
The Company had a net loss of $6.0 million and $9.1 million for the three and six months June 30, 2022, respectively. The Company had a net loss of $3.3 million and $26.5 million for the three months and six months ended June 30, 2021, respectively.
As of June 30, 2022, we had working capital of $99.6 million. As of June 30, 2022, we had $17.1 million in unrestricted cash and cash equivalents, which included $10.6 million in cash balances held by our international subsidiaries.
As of June 30, 2022, we had $30.0 million available under the Revolving Credit Facility. There was no amount outstanding under the Revolving Credit Facility as of June 30, 2022.
We continue to focus on cost management, operating efficiency and efficient discretionary spending. In addition, if necessary, we may leverage our Revolving Credit Facility or issue debt or equity securities. 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.
The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):
|
|
Six months ended June 30, |
|
|||||
|
|
|
|
2021 |
|
|||
Consolidated Statements of Cash Flows Data |
|
|
|
|
|
|
||
Net cash used in operating activities |
|
$ |
(30,827 |
) |
|
$ |
(8,277 |
) |
Net cash used in investing activities |
|
|
(23,996 |
) |
|
|
(6,600 |
) |
Net cash provided by (used in) financing activities |
|
|
25,323 |
|
|
|
21,483 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
(997 |
) |
|
|
(67 |
) |
Net increase in cash, cash equivalents and restricted cash |
|
|
(30,497 |
) |
|
|
6,539 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
53,639 |
|
|
|
54,587 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
23,142 |
|
|
$ |
61,126 |
|
Operating Activities
Net cash used in operating activities increased by $22.5 million to $30.8 million for the six months ended June 30, 2022 from net cash used in operating activities of $8.3 million for the six months ended June 30, 2021. The increase in cash used in operating activities was primarily due to an increase in accounts receivable as shipments were heavily weighted toward the last month of the second quarter 2022 due to component availability, and an increase in inventory purchases in anticipation of increased shipments later in the year and as a mitigation against long lead times.
Investing Activities
Net cash used in investing activities increased by $17.4 million to $24.0 million for the six months ended June 30, 2022 from $6.6 million for the six months ended June 30, 2021. This increase was primarily due to cash used in the ASSIA Acquisition in the second quarter of 2022.
Financing Activities
Net cash provided by financing activities totaled $25.3 million for the six months ended June 30, 2022 and consisted primarily of borrowing under the term loan to fund the ASSIA Acquisition and proceeds from exercise of stock awards, partially offset by payment of debt issuance cost. This is in comparison to cash provided by financing activities of $21.5 million for the six months ended June 30, 2021 which consisted primarily of proceeds from the equity offering and exercise of stock awards offset by repayments of our short-term borrowings and related party term loan.
Cash Management
Our primary source of liquidity comes from our cash, cash equivalents and restricted cash, which totaled $23.1 million at June 30, 2022. Our cash, cash equivalents and restricted cash as of June 30, 2022 included $11.5 million held by our international subsidiaries.
Debt Facilities
On February 9, 2022, the Company entered into a Credit Agreement with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans in an aggregate principal amount of up to $30.0 million, up to $15.0 million of which is available for letters of credit, and was scheduled to mature on February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments, plus $10.0 million.
27
On May 27, 2022, the Company entered into a First Amendment to Credit Agreement, which amends the Credit Agreement dated February 9, 2022. The Amendment, among other things, provides for the Term Loan in an aggregate principal amount of $25.0 million with a maturity date of May 27, 2027 and extends the maturity date of the $30.0 million Revolving Credit Facility to May 27, 2025. On May 27, 2022, the Company borrowed the full amount of the Term Loan to finance the ASSIA Acquisition.
As of June 30, 2022, the Company's long-term debt obligation was $23.4 million, net of the current portion of $1.3 million, and unamortized issuance costs of $0.3 million. There was no amount outstanding under the Revolving Credit Facility. The Company was in compliance with all debt covenants as of June 30, 2022.
Future Cash Requirements and Funding Sources
Our fixed commitments for cash expenditures consist primarily of payments under operating leases, inventory purchase commitments, and payments of principal and interest for debt obligations.
From time to time, we may provide or commit to extend credit or credit support to our customers. This financing may include extending the terms for product payments to customers. Any extension of financing to our customers will limit the capital that we have available for other uses.
Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of June 30, 2022, one customer represented 10% of net accounts receivable. 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, inventory purchase commitments and debt obligations.
Operating Leases
Future minimum operating lease obligations include primarily payments for our office locations and manufacturing, research and development locations, which expire at various dates through 2028. See Note 12 Leases of the Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding our operating leases.
Purchase Commitments
We may have short term purchase commitments related to the purchase orders for products and services, within the normal course of business. These arrangements typically have cancellation provisions that allow us to cancel with little to no penalty.
Debt obligations
Future debt obligations include scheduled principal repayments, and associated interest payments which may vary based on changes in market interest rates. See Note 7 Debt to Unaudited Condensed Consolidated Financial Statements for further information regarding our debt obligations.
U.S. Income Tax Changes
Effective January 1, 2022, the Tax Cuts and Jobs Act (TCJA) eliminates the option to immediately deduct research and development expenditures and requires taxpayers to capitalize and amortize these costs pursuant to IRC Section 174. Although Congress is considering legislation that would defer or repeal this provision, we have no assurance this will be enacted. If this provision of the TCJA is not repealed or otherwise modified, it is expected to negatively impact our operating cash flows in 2022 and future years.
28
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange risks. We do not hold or issue financial instruments for trading purposes.
Interest Rate Risk
We had unrestricted cash and cash equivalents of $17.1 million and $46.7 million at June 30, 2022 and December 31, 2021, respectively. We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with original maturities of three months or less.
Our exposure to interest rate risk includes the amount of interest we must pay on our borrowings under our JPMorgan Credit Agreement. At the Company’s option, amounts borrowed under the Credit Agreement, as amended, accrue interest at a per annum rate equal to either (i) the adjusted term SOFR rate plus a margin ranging from 3.0% to 3.5% per year or (ii) the prime rate plus a margin ranging from 2.0% to 2.5% per year, in each case depending on the Company’s leverage ratio.
As of June 30, 2022, the Company's contractual debt obligation under the Term Loan was $25.0 million. If the applicable variable interest rates changed by 100 basis points, our interest expense for the first six months of 2022 would have decreased or increased by less than $0.1 million.
Foreign Currency Exchange Risk
We have foreign currency risks related to certain of our foreign subsidiaries, primarily in Korea, Japan, Germany, and the UK. International net revenues and operating expense are typically denominated in the local currency of each country and result from transactions by our operations in these countries. The local currencies of these foreign subsidiaries are the South Korean Won ("KRW"), Japanese Yen ("JPY"), Euro ("EUR), and Pound Sterling ("GBP"), respectively. Fluctuations in foreign currencies create volatility in our reported results of operations. If the U.S. Dollar ("USD") had appreciated or depreciated by 10% relative to KRW, JPY, EUR and GBP our operating income for the first six months of 2022 would have decreased or increased by approximately $0.6 million, respectively.
Foreign exchange rate fluctuations may also adversely impact our financial position as the assets and liabilities of our foreign operations are translated into USD in preparing our unaudited condensed consolidated balance sheets. The effect of foreign exchange rate fluctuations on our consolidated financial position for the six months ended June 30, 2022 was a net translation loss of $4.9 million. This loss is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive loss. If USD had appreciated or depreciated by 10% relative to KRW, JPY, EUR, and GBP, our net assets as of June 30, 2022 would have decreased or increased by approximately $1.9 million, respectively.
We have certain assets and liabilities, primarily inter-company loans, that are denominated in currencies other than the relevant entity’s functional currency. Our intercompany loans are primarily denominated in USD and EUR. Changes in the functional currency value of these balances create fluctuations in our reported consolidated financial position, cash flows and results of operations. Transaction gains and losses on these foreign currency denominated assets and liabilities are recognized each period within “Other income (expense), net” in our unaudited condensed consolidated statement of comprehensive income (loss). During the six months ended June 30, 2022, we recognized approximately $1.6 million of expense related to the intercompany loans denominated in foreign currencies. If USD had appreciated or depreciated by 10% relative to EUR, our net income for the first six months of 2022 would have decreased or increased by approximately $1.9 million, respectively.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information required to be disclosed in our reports filed or submitted pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosures. Our disclosure controls and procedures include those components of our internal control over financial reporting intended to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financials in accordance with U.S. GAAP. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. The
29
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, 2022.
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. Legal Proceedings
In addition to the Notice discussed in Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements, from time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company 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 1A. Risk Factors
A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in the 2021 Form 10-K. There have been no material changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors” in the 2021 Form 10-K.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits required to be filed with this quarterly report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.
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EXHIBIT INDEX
Exhibit Number |
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Description |
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3.1 |
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3.2 |
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3.3 |
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10.1 |
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10.2 |
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31.1* |
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
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31.2* |
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
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32.1* |
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document |
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|
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101.SCH |
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Inline XBRL Taxonomy Extension Schema |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB |
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Inline XBRL Taxonomy Extension Labels Linkbase |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase |
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|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
|
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|
* |
|
|
+ |
|
Indicates management contract or compensatory plan, contract or arrangement. |
32
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.
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DZS INC. |
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Date: August 2, 2022 |
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By: |
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Name: |
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Title: |
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President and Chief Executive Officer |
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By: |
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/s/ Misty Kawecki |
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Name: |
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|
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Title: |
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Chief Financial Officer |
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(Principal Financial and |
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|
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Accounting Officer) |
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|
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33
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 5/27/27 | ||||
| 5/27/25 | ||||
| 2/9/24 | ||||
| 9/30/23 | ||||
| 12/31/22 | ||||
| 12/15/22 | ||||
| 9/30/22 | ||||
| Filed on: | 8/2/22 | |||
| 7/25/22 | ||||
| For Period end: | 6/30/22 | 4 | ||
| 5/27/22 | 8-K, SD | |||
| 3/31/22 | 10-Q, 4 | |||
| 3/9/22 | 10-K, S-8 | |||
| 2/9/22 | 8-K | |||
| 1/1/22 | ||||
| 12/31/21 | 10-K, 4, SD | |||
| 6/30/21 | 10-Q, NT 10-Q | |||
| 3/31/21 | 10-Q, 4 | |||
| 3/3/21 | ||||
| 2/5/21 | SC 13D/A | |||
| 12/31/20 | 10-K, SD | |||
| 9/30/03 | 10-Q | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/18/22 DZS Inc. 424B5 1:415K Donnelley … Solutions/FA 11/16/22 DZS Inc. 424B5 1:405K Donnelley … Solutions/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 6/01/22 DZS Inc. 8-K:1,2,9 5/27/22 11:2M Donnelley … Solutions/FA 2/10/22 DZS Inc. 8-K:1,2,9 2/09/22 11:1.5M ActiveDisclosure/FA 8/27/20 DZS Inc. 8-K:5,9 8/24/20 11:171K ActiveDisclosure/FA 9/27/17 DZS Inc. 10-K 12/31/16 9:3M 9/12/16 DZS Inc. 8-K:1,2,3,4 9/06/16 10:578K |