2021 ANNUAL REPORT
To Our Shareholders:
The communications industry is in the early phase of a long-term
infrastructure upgrade cycle where sub gigabit-class and legacy
copper infrastructures for the connected home and business are being
rapidly replaced by 10 gigabit technologies for symmetric optical
broadband services. Concurrently, the proliferation of 5G networks is
creating demand for fiber-connected densification and packet-based
network transport.
This physical reshaping of the global communications landscape is also
fueling a wave of experience-driven innovation in high-speed fixed
and mobile broadband services for homes, buildings and cities. DZS
is a key enabler of this transformation, providing the next generation
platforms, software and services that empower communications
service providers to upgrade their infrastructure and launch the new
services that are redefining broadband connectivity. In fact, our
customers, ranging from tier I service providers in the world’s most
advanced broadband markets to agile alternative providers, are leading
the way in shaping the future of the communications industry and
creating a hyper-connected world.
Our innovative and differentiated broadband solutions for both fixed
and mobile service providers, as well as our world-class software
solutions, have enabled DZS to become a change-agent for our
customers.
Just as we drove change for our customers, we were deeply engaged
in transforming our company in 2021.
Our new branding, upgraded leadership team, disciplined
rationalization, accelerated systems and software innovation,
and strong execution in 2021 enabled us to capitalize on this
unprecedented market opportunity created by the evolution taking
place in our industry. It empowered us to deliver consistent results and
establish a strategic foundation for the future.
Charlie Vogt
DZS President & CEO
2021 ANNUAL REPORT
DZS is Enabling a Hyper-Connected World,
transforming Technology Providers into Experience
Providers and unleashing the next generation of
Broadband Connectivity, Mobile & Optical Edge
and Cloud Software solutions. As DZS enables the
deployment of hyper-fast broadband across an
expanding customer base, we are creating new
opportunities in the communities our customers
reach and enhancing value-added solutions in the
homes and businesses they serve. Providing next-
level connectivity within these communities is just
the beginning. Our next generation fiber broadband
platforms enable customers to expand their
services, upgrade their technology and leverage
software to improve their efficiency, insights and
customer experience.
We continue to expand and differentiate our
portfolio through investments in network
orchestration, automation and slicing, a unified
operating system and enhanced network-as-a-
service (Naas) and software-as-a-service (SaaS)
platforms. Our software expansion and vision are
designed to improve our long-term margin profile
while differentiating DZS in the marketplace.
We have laid a strong foundation in 2021 that we
believe will enable us to capture market share in
2022 and beyond spanning our four growth pillars:
the multi-gigabit broadband upgrade cycle fueled
by ~$100 billion of global government stimulus,
5G and Open RAN adoption, North America and
EMEA share capture and Chinese vendor
cap-and-replacement.
2021 was quite a journey, and I am proud of how
DZS employees around the globe responded to the
challenges of a tumultuous year in our industry. Our
OneDZS culture and unwavering commitment to our
customer-first philosophy inspired us to overcome
the challenges and seize the opportunities of this
turbulent year and consistently achieve record
setting orders, revenue, and backlog. In 2022,
I look forward to our continued transformation as
a company and continued progress in capitalizing
on the long-term infrastructure cycles impacting
our industry.
2021 ANNUAL REPORT
2021 Performance
Highlights
2021 ANNUAL REPORT
2021 ANNUAL REPORTPeopleDZS continued to reshape our executive leadership team and global employee base across research & development (R&D), product line management (PLM), sales, marketing, supply chain, finance, and IT in 2021. We also successfully assimilated the strong R&D resources of our RIFT and Optelian acquisitions into our DZS culture while integrating their products into our portfolio. Customer GrowthOur Broadband Connectivity, Connected Home & Business, Mobile & Optical Edge and Cloud Software solutions resonated with customers, prospects and partners around the world in 2021. We continued to expand the footprint of our platforms with 105 new customers secured during the year. Building upon our strong historical foundation in Asia, we captured market share in 2021 that included 86 new customers across North America and Europe, Middle East and Africa (EMEA) – balancing our geographic mix. In addition, we expanded our presence among Tier 1 service providers, with 16 of the world’s top 30 service providers now DZS customers. Financial Highlights
In 2021 DZS set a new orders record for the company of $504 million, an increase of 62% year-over-year.
This represented double digit growth year-over-year across all geographic regions, especially in North
America where orders doubled in 2021. Orders from the EMEA region also increased 34% highlighting our
customer geographic diversification efforts. DZS ended 2021 with record backlog, which increased 217%
year-over-year to $225 million. For the full year 2021, revenue increased 16% to $350 million.
Orders
1 0 % C A G R
Annual Revenues
($ in millions)
Revenue for our Broadband Connectivity products increased 16% to $258 million, while revenue for the
Mobile Transport products increased 18% to $92 million. Cash (including cash equivalents and restricted
cash) ended 2021 at $53 million compared with $54 million at the close of 2020. Our balance sheet has
supported the ongoing supply chain sourcing constraints that have impacted our industry.
9
, 2022, we entered into a strategic global banking relationship with J.P. Morgan that includes a
On Feb.
$30 million credit facility. Additionally, with our existing S-3 shelf registration expiring in April 2022, we filed
a new three-year shelf registration statement for continued financial flexibility.
2021 ANNUAL REPORT
Products and Margins
Our focus on product rationalization during 2021 produced
a streamlined, simplified and strategically aligned global
product portfolio. R&D investment scale has been enhanced
through product rationalization efforts and further accelerated
by our pivot to a platform-based development approach for
our Software and Systems solutions. These platforms give
DZS R&D teams the capacity to increase product innovation
with reuse of technology across multiple products, improving
our ability to bring innovative and differentiated products to
market quickly. This not only synergized and simplified our next
generation product portfolio, but also improved product margin.
Adjusted Gross Margin* in 2021 increased by 175 basis points
to 34.6% reflecting the geographic expansion in North America,
product simplification efforts and business optimization.
Operations and Supply Chain
Supply chain pricing, freight and logistics costs, availability
and extended lead-times remained a headwind throughout
2021 as anticipated. We continued to incur elevated costs for
components and expedite fees throughout the year, but our
supply chain and operations teams continued to outperform
in managing through a constrained environment, 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.
*DZS defines Adjusted Gross Margin as GAAP Gross Margin adjusted to exclude
(i) depreciation and amortization, (ii) stock-based compensation, and (iii) the
impact of material transactions or events that we believe are not indicative of
our core operating performance and may or may not be recurring in nature.
2021 ANNUAL REPORT
Product & Technology
Innovation
2021 ANNUAL REPORT
Streamlining Platform Development
A streamlined innovation process and the expansion of DZS engineering resources driven by two strategic
acquisitions resulted in exceptional productivity from our R&D teams globally. In 2021 alone we completed
the development of 29 new products across our technology pillars.
Cloud
SOFTWARE
3 NEW PRODUCTS
Service Orchestrator
Network Slicing
Subscriber Experience
Perience
Mobile & Optical
EDGE
Connected
HOME & BUSINESS
5 NEW PRODUCTS
10 NEW PRODUCTS
Small Cell POE Switches
ORAN 5G In-Building Switches
Backhaul Aggregation
100G Coherent Optical Transport
Fiber Termination Points (ONT
Wi-Fi Residential Gateways
Wi-Fi 6 Access Points
Enterprise ONTs
Broadband
CONNECTIVITY
11 NEW PRODUCTS
XGSPON
100G Uplink Switch Fabric
P2P Ethernet/Fiber Swithces
G.Fast DPU
2021 ANNUAL REPORT
Fiber-Fueled Broadband Connectivity
Drive Innovation
We are an early market leader in the unprecedented
upgrade cycle from legacy copper and first generation PON
technologies to 10 gigabit broadband connectivity solutions.
We are enabling the next wave of network deployments fueled
by HD video collaboration, augmented and virtual reality,
interactive gaming, and the interactive and collaborative world
now known as the Metaverse.
The DZS Velocity Broadband Connectivity
portfolio accelerates and simplifies the
network wide deployment of future-proof
next generation, multi-gigabit services
over fiber, which are punctuated by new product introductions
that simplify the evolution from sub-gig PON to 10 Gbps PON
(COMBO technology), disaggregated optical line terminals
(OLTs) and next generation G.fast DPUs that deliver multi-
gigabit service over legacy copper in Multi Dwelling Units
(MDUs). These developments open the door for DZS and
service providers to deliver the advanced services expected by
their customers:
• Maximum Flexibility: Any Topology (PON, P2P), Any Media
(Multi-Gigabit services over fiber and copper) and Any
Service (Residential, Business, Mobile xHaul) delivered
by platform-based products with common software and
hardware optimized for deployment at any network location
(Central Offices, Multi Dwelling Units and Outdoor Remote
Terminals).
• Architectural Headroom: Supported by a revolutionary
System-on-a-Card design capable of supporting next-gen
Class Services (such as 25G/50G PON) and the sdNOS
open Network Operating System allowing traditional and
disaggregated deployments.
• Operational Simplicity: Vendor-neutral access orchestration,
automation and customer experience software will simplify
the process of adding equipment from different vendors in
the network, accelerates the creation and delivery of new
services, and ensures the optimal service performance with
AI-driven analytics.
2021 ANNUAL REPORT
A Differentiated Converged
Network Edge
The DZS Helix portfolio focuses on
growing service provider opportunities
to serve the unique needs of the
Connected Home & Business.
Featuring one of the industry’s largest collections
of feature-rich fiber termination points as well as
residential and enterprise gateways and Wi-Fi
systems, the DZS portfolio includes support
for multi-gigabit capable services, Wi-Fi 6 and
managed access network support all the way to
the premises edge and beyond.
A New Software-Driven
Connected Home & Business
Experience
The unprecedented drive from service providers to
deliver multi-gigabit services to subscribers creates
the perfect opportunity for DZS to complement
those advanced services with the right systems
and software to extend services from the network
to the connected subscribers’ devices. DZS has
responded to this opportunity with the introduction
of Intelligent 10 Gbps capable Fiber Termination
Points, Wi-Fi 6 Residential Gateways and Access
Points, and DZS Cloud Software.
We accelerated our software strategy and roadmap
throughout 2021, building upon the DZS Cloud
feature set and announcing a launch of Wi-Fi
6-enabled DZS Xperience software. DZS Xperience
transforms subscriber devices
in the home/business from
traditional managed network
points of presence into full
business transformation catalysts that enable
service providers to deliver
the following:
• Exceptional customer experiences with AI driven
self-optimized Wi- Fi performance and real time
service performance analytics.
• Revenue growth with new value-added
services that address the needs of 21st century
subscribers like cybersecurity, home automation
and home security.
Lower operational and support costs with predictive
service performance analytics and self-serve mobile
app-based service management tools.
2021 ANNUAL REPORT
Mobile & Optical Edge: Driving Deployment of 5G Worldwide
The adoption of 5G and Open RAN technologies have dramatically increased the requirement for bandwidth
at the edge of the mobile network and disrupted the way wireless operators are architecting mobile
networks. This has created an ideal opportunity for companies like DZS to deliver unique innovation.
During 2021, we extended our leadership in the midhaul and backhaul areas of the network with
the following:
• Transformational new products for the edge of the mobile network with packet-based fronthaul,
enablement of non-traditional cell sites and deployment of in-building 5G small cells.
• Modular, compact and environmentally hardened 100G-400G Optical Edge products that enable the
deployment of technologies traditionally associated with core optical transport to the very edge of the
mobile and fixed access networks.
DZS now offers a Comprehensive Solutions Portfolio Across the Converged Broadband Connectivity and
Mobile & Optical Edge.
2021 ANNUAL REPORT
Transformative Acquisitions and
Balance Sheet
9
• On Jan. 2 , 2021, DZS closed a $64 million follow-on equity
offering, reducing debt and strengthening the balance
sheet to support future growth initiatives.
• On Feb. 5, 2021, DZS acquired Optelian, a coherent optics
technology innovator specializing in 5G mobile transport
solutions with marquee customers in North America.
• On March
3
, 2021, DZS acquired network orchestration
and automation solutions innovator RIFT. The acquisition
included the award-winning, carrier-grade network
orchestration and software automation platform that
simplifies the deployment of any slice, service or application
on any cloud. This acquisition builds upon the 20 million
mobile and fixed broadband products DZS has deployed in
more than 100 countries, providing a powerful platform for
the new DZS Cloud portfolio, with end-to-end intelligence
for software and network orchestration and automation,
advanced data analytics and service management.
• On Feb. 9, 2022, we entered into a strategic global banking
relationship with J.P. Morgan that includes a $30 million
credit facility for general corporate purposes.
• With our existing S-3 shelf registration expiring in April
2022, we filed a new three-year shelf registration
statement for continued financial flexibility.
2021 ANNUAL REPORT
2021 ANNUAL REPORTMarquee Customer Spotlight Backed by our entrepreneurial mindset, DZS has become an integral technology partner to some of the highest profile, most disruptive, and most respected service providers in the world:4th Utility is a UK-based alternative fiber broadband provider delivering ultrafast connectivity to homes and businesses across the country, contracted to serve over 300,000 units over the next 5 years.“By working with world-class partners like DZS, we have been able to quickly differentiate ourselves from big broadband by providing a better experience and new subscriber turn-ups in less than 60 seconds.“ — Tony Hughes, CEO of 4th UtilitySaudi Arabia-based BTC Networks is one of the largest systems integrators in the Middle East, serving many business sectors including a communications unit that serves Tier 1 operators STC, Mobily, and Dawiyat.“We believe that DZS Xperience is going to be a game-changer for our major customers.”—Ibrahim Kharboush, Executive Vice PresidentCanada-based TELUS is a dynamic, world-leading communications and information technology company with $16 billion in annual revenue and 15.2 million customer connections.“The DZS Team has been amazing to work with—improving our speed by like 3x to 4x on delivery of new features and services onboarding.”—Ibrahim Gedeon, CTO U.S.-based Hosted America is a
carrier grade open access fiber
broadband provider delivering
managed, fiber, and carrier
services and cloud integration
for homes and business across
America. They plan to invest $1
billion in their fiber deployments
over the next five years.
“DZS has become a staple for
homes we deploy and for how
we manage networks in fiber
buildouts. We’ve set aside $1
billion to build out fiber assets
throughout the US over the
next 3–5 years...DZS is the right
partner for us as we take things
to a whole new level.”
—Phillip Watkins, CEO
2021 ANNUAL REPORT
DZS performed exceptionally well in 2021. We
delivered record orders, record revenue and record
backlog, and secure over 100 new customer
design wins. We navigated the global supply
chain dynamics over the past 18 months through
a disciplined forecasting and operational process.
During our 2021 investor day last May, we amplified
our investment thesis focused on long term
sustainable results versus quarter to quarter.
We have laid a strong foundation for 2022 that
we believe will enable us to capture market share
spanning our four growth pillars: the next generation
multi-gigabit broadband upgrade cycle partially
fueled by $100 billion of global government stimulus,
5G and Open RAN adoption, North American and
EMEA share capture, and Chinese vendor cap-and-
replacement. The 10 Gigabit last mile access and
5G upgrade cycle that began in 2020, will evolve
towards 50 Gigabit last mile access, 6G and Open
RAN in the years to come. We believe this dual
super cycle will last 10+ years.
Positioned for the Future
The broadband industry remains in the best demand
environment in its history as communications
service providers invest in last mile access and
improving the consumer and business experience.
We believe that our industry is entering into a dual
super cycle fueled by a surge in network usage
and internet traffic derived from applications and
services like telecommuting, remote learning,
remote healthcare and an increase in e-gaming and
streaming video.
We are capitalizing on this market opportunity
as demonstrated by our transformational 2021
initiatives that have strengthened our foundation
and are yielding results. We continue to experience
record performances across backlog and orders
along with an encouraging number of new customer
wins and continued elevated proposal activity. DZS
is well positioned with market leading Broadband
Connectivity, Connected Home & Business,
Mobile & Optical Edge and Network & Experience
Software solutions.
We strive to balance growth with financial
discipline that specifically focuses on improving
product margins, increasing recurring software
and service revenue, and managing expenses to
drive profitability.
2021 ANNUAL REPORT
2021 ANNUAL REPORTCharlie Vogt DZS President & CEOApril 19, 2022Words of AppreciationIn closing, I want to thank our customers who placed their trust and confidence in DZS to position them to meet the challenges of 2021 and the new opportunities that are emerging for them as we continue to accelerate. I also want to commend our talented employees for their “all-in” commitment, contribution and performance in 2021. Even in the face of some enormously challenging circumstances, they still found a way to deliver on our customer-first philosophy, both in meeting their requirements and delivering an outstanding service experience. I also want to express my gratitude to our board of directors for their guidance, support and governance throughout 2021. And, finally, I would like to express my sincere appreciation to our shareholders for your continued confidence and commitment to supporting DZS. The leadership team and I are fully committed to delivering the best financial performance possible, balancing short term and long-term strategic decisions with the goal of creating and sustainably growing shareholder value.Sincerely,“...I would like to express my sincere appreciation to our shareholders for your continued confidence and commitment to supporting DZS.”— Charlie Vogt, DZS President & CEO UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
For the transition period from to
Commission File Number: 000-32743
DZS INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
22-3509099
(I.R.S. Employer
Identification No.)
5700 Tennyson Parkway, Suite 400
Plano, Texas 75024
(Address of principal executive office)
Registrant’s telephone number, including area code: (469) 327-1531
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Common Stock, $0.001 Par Value
Trading Symbol
DZSI
Name of each exchange
on which registered
The Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Non-accelerated filer
☐
☐
☒
Accelerated filer
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 4, 2022, there were 27,553,992 shares outstanding of the registrant’s common stock, $0.001 par value. As of June 30, 2021 (the
last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the common stock held by non-
affiliates of the registrant was approximately $353,106,651.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2022 Annual Meeting of Stockholders are incorporated by reference into Part III
where indicated.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Index to Exhibits
Signatures
Exhibits and Financial Statement Schedules
Form 10-K Summary
Page
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22
23
31
32
66
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74
Forward-looking Statements
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe
harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (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 acqusitions; future growth and revenues from our products; 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 fluctations; anticipated
performance of products or services; competition; plans, objectives and strategies for future operations, including our pursuit or
strategic acquisiitons 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 Annual Report on Form 10-K.
Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise.
Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to
differ materially from our expectations include factors discussed in Part I, Item 1A “Risk Factors” and Part II, Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-
K, as well as factors described from time to time in our future reports filed with the U.S. Securities and Exchange Commission
(the “SEC”).
ITEM 1.
BUSINESS
PART I
DZS Inc. (“DZS” or the “Company,”) was incorporated under the laws of the state of Delaware in June 1999. The Company’s
common stock is traded on The Nasdaq Global Select Market (”Nasdaq") under the symbol “DZSI”. The mailing address of our
worldwide headquarters is 5700 Tennyson Parkway, Suite 400, Plano, Texas 75024, and our telephone number at that location
is (469) 327-1531.
Company Overview
DZS is Enabling a Hyper-Connected World, supporting the transformation of technology providers into experience providers
and driving the next generation of Broadband Connectivity, Mobile & Optical Edge and Cloud Software solutions. Our next
generation fiber broadband platforms enable customers to expand their services, upgrade their technology and leverage
software to improve their efficiency, insights and customer experience.
Our solutions have been deployed by over 750 active customers, including advanced Tier 1, national and regional service
providers and enterprise customers in more than 100 countries worldwide. Our intelligent-edge solutions are focused on
creating significant value for our customers by delivering innovative solutions that empower global communication
advancement by shaping the internet connection experience.
We research, develop, test, sell, manufacture and support platforms in the areas of mobile transport and fixed broadband access,
as discussed below. We have regional development and support centers around the world to support our customer needs. As of
December 31, 2021, we employed over 840 personnel worldwide.
Our Solutions and Platforms
Our solutions and platforms portfolio include products in Broadband Connectivity, Connected Home & Business, Mobile &
Optical Edge, and Cloud Software.
•
•
Broadband Connectivity. Our DZS Velocity portfolio offers a variety of solutions for carriers and service providers to
connect residential and business customers, either using high-speed fiber or leveraging their existing deployed copper
networks to offer broadband services to customer premises. Once our broadband access products are deployed, the
service provider can offer voice, high-definition and ultra-high-definition video, highspeed internet access and
business class services to their customers. In addition, the switching and routing products we provide in this space
offer a high-performance and manageable solution that bridges the gap from carrier access technologies to the core
network. XCelerate by DZS increases the velocity with which service providers can leap to multi-gigabit services at
scale by enabling rapid transition from Gigabit Ethernet Passive Optical Network (“GPON”) to 10 Gigabit
Symmetrical Passive Optical Network (“XGS-PON”) and Gigabit Ethernet to 10 Gigabit Ethernet via any service port
across a range of existing DZS Velocity chassis and 10 gig optimized stackable fixed form factor units.
Connected Home & Business. Our DZS Helix connected premises product portfolio offer a large collection of smart
gateway platforms for any fiber to the “x” (“FTTx”) deployment. DZS Smart Gateway platforms are designed for high
bandwidth services being deployed to the home or business. Our connected premises portfolio consists of
indoor/outdoor optical network terminal (“ONT”) gateways delivering best-in-class data throughout to support the
most demanding FTTx applications. The product feature set gives service providers an elegant migration path from
legacy to softswitch architectures without replacing ONTs.
1
• Mobile & Optical Edge. Our DZS Chronos portfolio provides a robust, manageable and scalable solution for mobile
operators that enable them to upgrade their mobile fronthaul/midhaul/backhaul (“xHaul”) systems and migrate to fifth
generation wireless technologies (“5G”) and beyond. DZS Chronos provides a full range of 5G-ready xHaul solutions
that are open, software-defined, and field proven. Our mobile xHaul products may be collocated at the radio access
node base station and can aggregate multiple radio access node base stations into a single backhaul for delivery of
mobile traffic to the radio access node network controller. Our products support pure Ethernet switching as well as
layer 3 IP and Multiprotocol Label Switching (“MPLS”), and we interoperate with other vendors in these networks.
•
Cloud Software. Our DZS Cloud solution accelerates our software capabilities specifically in the areas of network
orchestration, application slicing, automation, analytics, and service assurance. We offer a commercial, carrier-grade
network-slicing enabled orchestration platform complementing our position with physical network devices supporting
Open RAN (“O-RAN”) and 4G/5G networks. Communications service providers are implementing software defined
networking (“SDN”) and network functions virtualization (“NFV”) architectures to reduce reliance on proprietary
systems and hardware, which increase service agility, flexibility, and deployment of new network services while
lowering costs.
Industry Background
We believe that expansion in our worldwide business is driven by the increased demand of subscribers and cloud service
providers for mobile and fixed network access solutions and communications equipment that enable or support access to higher
speed bandwidth access to the internet.
Furthermore, increased competition between service providers for subscriber business has resulted in significant investment
pressure to upgrade network infrastructure to meet growing bandwidth needs. Broadband access networks must be multiservice
in nature and must have extensive quality of service guarantees in order to support 5G, mobile xHaul, symmetric business
services and residential services, as well as virtual overlay networks for alternative operators and wholesale access.
In recent years, the growth of social communications and networking has placed significant demands on legacy access
infrastructure, which was exacerbated in 2020 by the global COVID-19 pandemic which drove a dramatic rise in remote work
and learning as well as entertainment streaming. This increased demand has been challenging for the industry, even for the
newest and most advanced providers. Increased subscriber usage of smartphone, video streaming services, PC gaming services
and high definition and ultra-high-definition televisions has increased the network throughput demand driven by music,
pictures, user-generated content (as found on many video-sharing sites) and high-definition video, which have all become a
growing part of subscribers’ regular exchange of information.
Trends such as software-as-a-service (SaaS), Cloud-based services, Internet of Things (IoT), and 5G have also increased the
demand for broadband network access and customer premises solutions. All of these new technologies share a common
dependency on high-bandwidth communication networks and sophisticated traffic management tools. As bandwidth demands
continue to increase, carriers need to continue to upgrade their network infrastructure to support such demand. The
infrastructure upgrade cycle typically has the effect of moving bandwidth bottlenecks from one part of the network to another
(such as a carrier’s access network, core network or data centers), depending on the selection of technology and costs.
It is widely acknowledged in the industry that a fiber-optic broadband access network is the preferred network architecture for a
broadband fixed network. This network architecture is commonly called Fiber to the Premises (“FTTP”) for business
subscribers or Fiber to the Home (“FTTH”) for residential subscribers. With FTTH, all services are generally delivered at the
premise through smart optical networking terminal units (“ONT”). The Fiber to the Node (“FTTN”) architecture is also
deployed where the fiber-optic cable terminates at a street cabinet which contains a Digital Subscriber Line Access Multiplexer
(“DSLAM”) or Multiple Service Access Node (“MSAN”) that then provides higher speed services to their customers over the
last mile legacy copper wireline infrastructure. With the shift away from the legacy copper telephone Time-division
Multiplexing (“TDM”) switches (used in carrier networks from the 1980’s to the early 2000’s), many carriers that continue to
provide services over copper wireline networks are decommissioning their legacy telephone switches and moving services over
to Voice over Internet Protocol (“VoIP”) platforms via an MSAN/Softswitch solution. Our broadband access products and
solutions are designed to address all these fiber configurations, commonly referred to as FTTx, by allowing carriers and service
providers to either use fiber-optic networks or leverage their existing deployed copper networks to offer broadband services to
customer premises. The demand for FTTx is also driven by various government sponsored broadband stimulus funding
programs. These initiatives cultivate broadband opportunities around the world. Several of the most prominent initiatives are in
North America, including American Rescue Plan Act (ARPA), the CARES Act, the Consolidated Appropriations Act, the
Rural Digital Opportunity Fund (RDOF) and the Infrastructure Investment and Jobs Act most recently signed into law by
President Biden in November 2021. Global government sponsored broadband stimulus initiatives are less commonly known,
though equally important in their contributions to the investment in fiber-optic broadband access network. We are benefitting
from several customers that have accelerated their network investment because of government broadband stimulus programs.
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With respect to mobile wireless networks, the popularity of mobile smartphones and increasing demand for mobile data has
forced mobile network operators to upgrade their mobile access technologies from 3rd generation wireless (“3G”) to 4th
generation wireless (“4G” or “LTE”) and to 5G. These technology upgrades are typically accompanied by network
infrastructure upgrades, including upgrades to the carriers’ access networks (referred to as “mobile xHaul”), core networks
and data centers. Our mobile xHaul products, which have features for time sensitive networks, provide a robust, manageable
and scalable solution for mobile network operators that enable them to upgrade their mobile fronthaul/backhaul systems and
migrate to 4G and 5G.
Another growing industry trend is the desire of carriers and service providers to simplify network operation and reduce costs.
Increasingly, we see network operators seeking to reduce the number of active components in their networks and to centralize
network data and control in data centers, both of which require network redesigns and upgrades. Our FiberLAN portfolio of
Passive Optical LAN (“POL”) products, as well as our Ethernet switching products and SDN and NFV tools and building
blocks, are designed to address these market trends, with POL emerging as a popular customer choice for network upgrades.
Our Strategy
We strive to balance growth with financial discipline that specifically focuses on improving product margins, increasing
recurring software and service revenue, and managing expenses to drive profitability. The principal elements of our strategy
include:
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Global Presence. We have a diversified customer base that includes more than 750 active customers in more than 100
countries worldwide. We provide our network access solutions to Tier 1, national, and regional carriers in the Asia-
Pacific region, the Middle East region and Europe, as well as in North America and Latin America. We leverage our
global infrastructure, which includes sales offices all over the world, research and development centers in the United
States of America (“United States” or “U.S.”), the Republic of Korea (“South Korea”), Vietnam, India, and Canada
and inhouse and contract manufacturing capabilities in the United States, South Korea, Vietnam, and China, to support
our customer base.
Leading FTTx Market Position. We hold a strong leadership position in the FTTx network access space. We offer
customers an extensive choice of indoor and outdoor fiber demarcation and fully integrated smart gateways with
telephone data, Power over Ethernet (“POE”), Wi-Fi and over-the-top set-top box (“OTT STB”) capabilities and other
service interfaces. In the FTTx optical line terminal (“OLT”) category, we offer the industry’s largest portfolio of
modular chassis, single platforms, and software for deployment in datacenter, central office, extended temperature
environments and multi-dwelling unit (“MDU”) scenarios.
Technology Leadership. We believe that our future success is built upon our investment in the development of
advanced communications technologies. We continue to focus on research and development to maintain our leadership
position in broadband network access solutions and communications equipment. These development efforts include
innovating around 5G mobile xHaul technology in collaboration with our leading Tier 1 carriers, developing a new
generation of SDN/NFV solutions for unified wired and wireless networks, upgrading our broadband access
technology for 10 and 25/50/100 gigabyte access speeds, and introducing our cloud managed Wi-Fi solutions and data
analytics offerings. We also continue to expand and differentiate our portfolio through software investments in
network orchestration, automation and slicing, a unified operating system and a subscriber experience software-as-a-
service (SaaS) platform. Our software expansion and vision are designed to improve our long-term margin profile
while differentiating DZS in the marketplace.
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Strategic Mergers and Acquisitions. In addition to organic growth, we may from time to time seek to expand our
operations and capabilities through strategic acquisitions.
On March 3, 2021, the 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 software platform that simplifies the deployment of any slice,
service, or application on any cloud.
On February 5, 2021, we acquired Optelian Access Networks Corporation (“Optelian”), a leading optical networking
solution provider based in Ottawa, Ontario, Canada, and its portfolio of optical transport solutions. This acquisition
introduced the “O-Series” to the DZS portfolio of carrier grade optical networking products with 100 gigabits per
second and above capability, expanding DZS product portfolios by providing environmentally hardened, high
capacity, and flexible solutions at the network edge.
On January 3, 2019, we acquired Keymile to expand our business efforts in the EMEA. The acquired Multi-service
Access Nodes (MSAN) portfolio complemented the DZS existing portfolio by offering leading class point-to-point
active FTTx Ethernet and copper-based access technology based on G. Fast technology as well as VoIP gateway
features.
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Ecosystem Partners. We believe there is further opportunity to grow sales through our channel partners, particularly
with distributors, value-added resellers, system integrators, as well as with municipalities and government
organizations. We have a track record of building a diverse but targeted network of partners to help drive growth in
specific segments of our business or in specific geographies. For FiberLAN, we are working with distributors, value
added resellers, and system integrators to broaden our enterprise go to market presence. In India, we are working
closely with municipalities to deploy their initial fiber-to-the-home vision and help deliver high speed broadband
access to residents.
Customers
We generally sell our products and services directly to carriers and service providers that offer voice, data and video services to
businesses, governments, utilities and residential subscribers. Our global customer base includes regional, national and
international carriers and service providers. To date, our products have been deployed by hundreds of carriers and service
providers worldwide.
We also sell solutions indirectly to end customers through system integrators and distributors to the service providers,
hospitality, education, stadiums, manufacturing and business enterprises as well as to the government and military.
For the year ended December 31, 2021, two customers represented 19% and 12% of net revenue, respectively. For the year
ended December 31, 2020, two customers represented 14% and 13% of net revenue, respectively
Research and Development
The industry in which we compete is subject to rapid technological developments, evolving industry standards, changes in
customer requirements, and continuing developments in communications service offerings. Our continuing ability to adapt to
these changes, and to develop new and enhanced products, is a significant factor in maintaining or improving our competitive
position and our prospects for growth. Therefore, we continue to make significant investments in product development.
We have core research and development teams located in the United States, South Korea, Vietnam, India and Canada. In all of
these centers, we develop and test both our hardware and software solutions. We continue to invest heavily in automated and
scale testing capabilities for our products to better emulate our customers’ networks.
Our product development activities focus on products to support both existing and emerging technologies in the segments of
the communications industry that we consider viable revenue opportunities. We are continuing to refine our solution
architecture, introducing new products using the various solutions we support, and creating additional interfaces and protocols
for both domestic and international markets.
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We are committed to invest in leading edge technology research and development for new products and innovative solutions
that align with our business strategy. Our research and product development expenses were $47.0 million and $38.0 million in
2021 and 2020, respectively.
Intellectual Property
We seek to establish, maintain and protect our proprietary rights in our technology and products through the use of patents,
copyrights, trademarks and trade secrets. We also seek to maintain our trade secrets and confidential information by
nondisclosure policies and through the use of appropriate confidentiality agreements. We have obtained a number of patents
and trademarks in the United States of America (“United States”) and in other countries. There can be no assurance, however,
that these rights can be successfully enforced against competitive products in every jurisdiction or any particular jurisdiction.
Although we believe the protection afforded by our patents, copyrights, trademarks and trade secrets has value, the rapidly
changing technology in the networking industry and uncertainties in the legal process, both domestically and internationally,
make our future success dependent primarily on the innovative skills, technological expertise, and management abilities of our
employees rather than on the protection afforded by patent, copyright, trademark, and trade secret laws.
Many of our products include intellectual property licensed from third parties. While it may be necessary in the future to seek
or renew licenses relating to various aspects of our products, we believe, based upon past experience and standard industry
practice, that such licenses generally could be obtained on commercially reasonable terms. Nonetheless, there can be no
assurance that the necessary licenses would be available on acceptable terms, if at all. Our inability to obtain certain licenses or
other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters,
could have a material adverse effect on our business, operating results and financial condition. The communications industry is
characterized by rapidly changing technology, a large number of patents, and frequent claims and related litigation regarding
patent and other intellectual property rights. We cannot assure you that our patents or other proprietary rights will not be
challenged, invalidated or circumvented, that others will not assert intellectual property rights to technologies that are relevant
to us, or that our rights will give us a competitive advantage. In addition, the laws of some foreign countries may not protect
our proprietary rights to the same extent as the laws of the United States.
Sales and Marketing
We have a global sales presence with customers from over 100 countries, and we sell our products and services both directly
and indirectly through channel partners with support from our sales force. Channel partners include distributors, value added
resellers, system integrators and service providers. These partners sell directly to and service end customers and often provide
additional value-added services such as system installation, technical support, and professional support services in addition to
equipment sales. Our sales efforts are generally organized and sized according to geographical regions for target carriers,
service providers, municipalities and enterprise customers.
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Americas Sales. Our Americas Sales organization includes coverage of North America and Latin America
regions. The organization establishes and maintains direct and indirect relationships with customers in the Americas,
which includes carriers and service providers, cable operators, utilities and enterprises. In addition, this organization is
responsible for managing our distribution channel and also manages our inside sales and sales engineering activities.
EMEA Sales. This organization establishes and maintains direct and indirect relationships with customers in the
EMEA region, which includes carriers and service providers, cable operators, utilities and enterprises.
Asia Pacific Sales. This sales organization establishes and maintains direct and indirect relationships with customers
in the Asia Pacific region, which includes carriers and service providers, cable operators, utilities and enterprises, in
particular, with our South Korean customers, consisting primarily of Tier 1 carriers. These carriers have historically
been early innovators across various telecommunications industry upgrade cycles, including broadband access
technology and mobile fronthaul/backhaul technology. We partner with such carriers from the early phases of
technology development to ensure our products are carrier-grade and purpose-built for the most rigorous of
environments.
Enterprise Sales. Our Enterprise Sales organization includes global geographic coverage and is primarily focused on
coverage of our FiberLAN solutions. The organization establishes and maintains direct and indirect relationships with
enterprise customers for both greenfield (i.e., projects that do not follow a prior work) and brownfield (i.e., projects
that modify or upgrade existing infrastructure or products) projects targeting enterprise customers in several industry
verticals, including education (i.e., K-12, universities and colleges, etc.), hospitality, healthcare, stadiums, corporate
campuses, and others.
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Our marketing team works closely with our sales, research and product development organizations, and our customers by
providing communications that keep the market current on our products and features. Marketing also identifies and sizes new
target markets for our products, creates awareness of our company and products, generates contacts and leads within these
targeted markets, performs outbound education and public relations, and participates in industry associations and standard
industry bodies to promote the growth of the overall industry.
Our backlog consists of purchase orders for products and services that we expect to ship or perform within the next year. Our
backlog may fluctuate based on the timing of when purchase orders are received. As of December 31, 2021, our backlog was
approximately $225.0 million, compared to $71.0 million at December 31, 2020. We consider backlog to be an indicator, but
not the sole predictor, of future sales because our customers may cancel or defer orders without penalty.
Competition
We compete in communications equipment markets, providing products and services for the delivery of broadband
connectivity, connected home and business, mobile and optical edge transport, and cloud software-based services. These
markets are characterized by rapid change, converging technologies and a migration to solutions that offer advantages in both
operational efficiency and service performance. These market factors represent both an opportunity and a competitive threat to
us. We compete with numerous vendors in our core broadband connectivity and connected home and business markets,
including ADTRAN, Calix, Huawei, Nokia, Ubiquoss, and ZTE, among others. In our FiberLAN business, which is a subset of
our broadband connectivity and connected home and business market, our competitors include Cisco, Nokia, and Tellabs,
among others. In our mobile and optical edge transport business, our competitors include Ciena, Cisco and Juniper Networks,
among others. In our cloud software business, our competitors include solutions from ADTRAN, Calix, Ciena, Nokia, and
Solarwinds. In addition, a number of companies have introduced products that address the same network needs that our
products and solutions address, both domestically and internationally. The overall number of our competitors may increase, and
the identity and composition of competitors may change. As we continue to expand our sales globally, we may see new
competition in different geographic regions. Barriers to entry are relatively low, and new ventures to create products that do or
could compete with our products are regularly formed. Many of our competitors have greater financial, technical, sales and
marketing resources than we do.
The principal competitive factors in the markets in which we presently compete and may compete in the future include:
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product performance;
feature capabilities;
• manufacturing capacity;
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interoperability with existing products;
scalability and upgradeability;
conformance to standards;
breadth of services;
reliability;
ease of installation and use;
geographic footprints for products;
ability to provide customer financing;
pricing;
technical support and customer service; and
brand recognition.
While we believe that we compete successfully with respect to each of these factors, we currently face and expect we will
continue to face intense competition in our markets. In addition, the inherent nature of communications networking requires
interoperability. As such, we must cooperate and at the same time compete with many companies.
Manufacturing and Operations
Operationally, we use a global sourcing procurement program to purchase and manage key raw materials and subassemblies
through qualified suppliers, sub-contractors, original equipment and design manufacturers and electronic manufacturing service
vendors. The manufacturing process uses a strategic combination of procurement from qualified suppliers and in-house
manufacturing. Throughout the process we manage the assembly, quality assurance, customer testing, final inspection and
shipping of our products.
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We manufacture our low volume, high mix products at our manufacturing facility in Seminole, Florida, USA. For certain
products, we rely on contract manufacturers, primarily located in Vietnam and China, and original design manufacturers for
high volume, low mix products. We have generally been able to have sufficient production capacity to meet demand for our
product offerings through a combination of existing and added capacity, additional employees and the outsourcing of products
or components.
Some completed products are procured to our specifications and shipped directly to our customers. We also acquire completed
products from certain suppliers, which we configure and ship from our facility. Some of these purchases are significant. We
purchase both standard off-the-shelf parts and components, which are generally available from more than one supplier, and
single-source parts and components. We have generally been able to obtain adequate supplies to meet customer demand in a
timely manner from our current vendors, or, when necessary, from alternate vendors. We believe that alternate vendors can be
identified if current vendors are unable to fulfill our needs, or design changes can be made to employ alternate parts.
The recent outbreak of the coronavirus in China and other countries has negatively impacted our supply chain in recent months.
Supply chain pricing, freight and logistics costs, availability, and extended lead-times became a challenge in 2021 as the world
economy recovered from the COVID-19 pandemic. As we continue to incur elevated costs for components and expedite fees,
our supply chain and operations teams continue to focus on managing through a constrained environment, thereby enabling
DZS to maximize shipments despite elongated lead times. We remain cautious about continued supply chain headwinds that
challenge the industry and anticipate a constrained supply chain environment to persist throughout 2022.
We design, specify, and monitor all of the tests that are required to meet our quality standards. Our manufacturing and test
engineers work closely with our design engineers to ensure manufacturability and testability of our products, and to ensure that
manufacturing and testing processes evolve along with our technologies. Our manufacturing engineers specify, build, or
procure our test stations, establish quality standards and protocols, and develop comprehensive test procedures and processes to
assure the reliability and quality of our products. Products that are procured complete or partially complete are inspected,
tested, or audited for quality control.
Our Quality Management System is compliant with, and we are certified to, ISO-9001:2015 by our external registrar, National
Standards Authority of Ireland. ISO-9001:2015 requires that our processes be documented, followed and continuously
improved. Internal audits are conducted on a regular schedule by our quality assurance personnel, and external audits are
conducted by our external registrar each year. Our quality system is based upon our model for quality assurance in production
and service to ensure our products meet rigorous quality standards.
Compliance with Regulatory and Industry Standards
Our products must comply with a significant number of voice and data regulations and standards which vary by jurisdiction.
Standards for new services continue to evolve, and we may need to modify our products or develop new versions to meet these
standards. Standards setting and compliance verification in the United States are determined by the Federal Communications
Commission, Underwriters Laboratories (a global safety certification company), Quality Management Institute (a management
training and leadership company), Telecordia (an operations management and fraud prevention solutions company which is a
subsidiary of Ericsson), and other communications companies. In international markets, our products must comply with
standards issued, implemented and enforced by the regulatory authorities of foreign jurisdictions, as applicable, such as the
European Telecommunications Standards Institute (“ETSI”), among others.
Environmental Matters
Our operations and manufacturing processes are subject to federal, state, local and foreign environmental protection laws and
regulations. Such laws and regulations relate to the presence, use, handling, storage, discharge and disposal of certain
hazardous materials and wastes, the pre-treatment and discharge of process waste waters and the control of process air
pollutants. Under certain laws of the United States, we can be held responsible for cleanup costs at currently or formerly owned
or operated locations or at third party sites to which our wastes were sent for disposal. To date, liabilities relating to
contamination have not been significant, and have not had a material impact on our operations or results. We believe that our
operations and manufacturing processes currently comply in all material respects with applicable environmental protection laws
and regulations. If we fail to comply with any present or future laws or regulations, we could be subject to liabilities, the
suspension of production or a prohibition on the sale of our products. In addition, such regulations could require us to incur
significant expenses to comply with environmental laws or regulations, including expenses associated with the redesign of any
non-compliant product or the development or installation of additional pollution control technology. From time to time new
laws or regulations are enacted, and it is difficult to anticipate how such laws or regulations will be implemented and enforced,
or the impact they will have on our operations or results.
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Our operations in the European Union are subject to the Restriction on the Use of Certain Hazardous Substances in Electrical
and Electronic Equipment Directive and the Waste Electrical and Electronic Equipment Directive. We are aware of and are
taking suitable action to comply with the new European Union Restriction of Hazardous Substances standards. Our operations
in the United States or other countries, such as Japan and China are subject to similar legislation. Our failure to comply with
any regulatory requirements or contractual obligations relating to environmental matters or hazardous materials could result in
us being liable for costs, fines, penalties and third-party claims, and could jeopardize our ability to conduct business in the
jurisdictions where such laws or the regulations apply.
Employees
As of December 31, 2021, we employed over 840 personnel worldwide. We consider the relationships with our employees to
be positive. Competition for technical personnel in our industry is intense. We believe that our future success depends in part
on our continued ability to hire, assimilate and retain qualified personnel. To date, we believe that we have been successful in
recruiting qualified employees, but there is no assurance that we will continue to be successful in the future.
Website and Available Information
Our investor website address is http://investor-dzsi.com. The information on, or accessible through, our website does not
constitute part of this Annual Report on Form 10-K, or any other report, schedule or document we file or furnish to the SEC.
On our investor website, we make available the following filings available free of charge as soon as reasonably practicable after
they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act. The SEC maintains an internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at http://www.sec.gov.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and
the other information in this Annual Report on Form 10-K and in other filings we make with the SEC before making an
investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as
well as other risks not currently known to us or that we currently consider immaterial. If any of such risks and uncertainties
actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and
other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and elsewhere in this report and in our other public filings. The trading price of our common stock
could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
Risks Directly Related to the ongoing COVID-19 Pandemic
The COVID-19 pandemic has previously adversely affected significant portions of our business and could have a material
adverse effect on our financial condition and results of operations. Authorities have imposed, and businesses and individuals
have implemented, numerous measures to try to contain the virus or treat its impact, such as travel bans and restrictions,
quarantines, shelter-in-place/stay-at-home and social distancing orders, shutdowns, and vaccine requirements. These measures
have impacted and may further impact our workforce and operations, the operations of our customers, and those of our
respective suppliers and partners. We have experienced, and could in the future experience, reduced workforce availability at
some of our sites, construction delays, and reduced capacity at some of our suppliers. We have operations in the US, Canada,
South Korea, Japan, Vietnam, India, as well as in other countries in Europe, Asia-Pacific, Middle East and Latin America, and
each of these countries is taking measures in response to the pandemic. Restrictions on our manufacturing or support operations
or workforce, similar limitations for our suppliers, and transportation restrictions or disruptions can limit our ability to meet
customer demand and could have a material adverse effect on our financial condition and results of operations. Our customers
have experienced, and may in the future experience, disruptions in their operations and supply chains, which can result in
delayed, reduced, or cancelled orders, or collection risks, and which may adversely affect our results of operations.
We have experienced and continue to experience disruptions in our supply chain due to the impact of the COVID-19 pandemic,
which has also impacted and may adversely impact our operations (including, without limitation, logistical and other
operational costs) and the operations of some of our key suppliers. If our vendors for product components are unable to meet
our cost, quality, supply and transportation requirements, continue to remain financially viable or fulfill their contractual
commitments and obligations, we could experience disruption in our supply chain, including shortages in supply or increases in
production costs, which would materially adversely affect our results of operations. The current worldwide shortage of
semiconductors may exacerbate these risks.
The pandemic has caused us to modify our business practices, including with respect to employee travel; employee work
locations; limitations on physical participation in meetings, events, and conferences; and social distancing measures. Future
vaccine mandates in the countries in which we operate could adversely affect our workforce retention and hiring. We may take
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further actions as required by government authorities or others, or that we determine are in the best interests of our employees,
customers, suppliers, and partners. Work-from-home and other measures introduce additional operational risks, including
cybersecurity risks, and have affected the way we conduct our product development, validation, and qualification, customer
support, and other activities, which could have a material adverse effect on our operations. There is no certainty that such
measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to
unavailability of key personnel and harm our ability to perform critical functions.
The pandemic has significantly increased economic and demand uncertainty and has led to volatility in capital markets and
credit markets. Adverse changes in economic conditions related to the COVID-19 pandemic can significantly harm demand for
our products and make it more challenging to forecast our operating results. Given the continued and substantial economic
uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of impacts on demand for our
products.
The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot
be predicted, including the duration and severity of the pandemic; the actions taken to contain the virus or treat its impact; other
actions taken by governments, businesses, and individuals in response to the virus and resulting economic disruption; and how
quickly and to what extent normal economic and operating conditions can resume. Additional impacts and risks may arise that
we are not aware of or able to respond to effectively. We are similarly unable to predict the extent of the impact of the
pandemic on our customers, suppliers, and other partners, but a material effect on these parties could also materially adversely
affect us. The impact of COVID-19 can also exacerbate other risks discussed in this Risk Factors section and throughout this
report.
Risks Related to our Liquidity
We may not have the liquidity to support our future operations and capital requirements.
As of December 31, 2021, we had approximately $46.7 million in unrestricted cash and cash equivalents, including
$30.1 million in cash balances held by our international subsidiaries. If we are unable to raise additional capital, we may be
unable to adequately fund our existing operations. Our current liquidity condition exposes us to the following risks: (i)
vulnerability to adverse economic conditions in our industry or the economy in general; (ii) limitations on our ability to
adequately plan for, or react to, changes in our business and industry; and (ii) negative investor and customer perceptions about
our financial stability, which could limit our ability to obtain financing or acquire customers.
Our current liquidity condition could be further harmed, and we may incur significant losses or expend significant amounts of
capital if: (i) the market for our products develops more slowly than anticipated or if it retracts; (ii) we fail to establish market
share or generate revenue at anticipated levels; (iii) our capital expenditure forecasts change or prove to be inaccurate; or (iv)
we fail to respond to unforeseen challenges or take advantage of unanticipated opportunities; or (v) the on-going COVID-19
pandemic continues to negatively impact our business or further exacerbates any of the foregoing risks.
To meet our liquidity needs and to finance our capital expenditures and working capital needs for our business, we may be
required to raise substantial additional capital, reduce our operations (including through the sale of assets) or both.
We have experienced significant losses and we may incur losses in the future. If we fail to generate sufficient revenue to
sustain our profitability, our stock price could decline.
We had a net loss of $34.7 million and $23.1 million for the years ended December 31, 2021 and 2020, respectively.
Additionally, we have incurred significant losses in prior years. We have an accumulated deficit of $87.0 million as of
December 31, 2021. We expect that we will continue to incur substantial manufacturing, research and product development,
sales and marketing, customer support, administrative and other expenses in connection with the ongoing development of our
business. In addition, we may be required to spend more on research and product development than originally budgeted to
respond to industry trends. We may also incur significant new costs related to acquisitions and the integration of new
technologies and other acquisitions that may occur in the future. We may not be able to adequately manage costs and expenses
or achieve or maintain adequate operating margins. As a result, our ability to sustain profitability in future periods will depend
on our ability to generate and sustain higher revenue while maintaining reasonable costs and expense levels. If we fail to
generate sufficient revenue to sustain profitability in future periods, we may continue to incur operating losses, which could be
substantial, and our stock price could decline.
In connection with the Keymile acquisition, we assumed certain of Keymile’s liabilities, which could harm our business,
operations, financial condition, and liquidity.
Pursuant to the definitive agreement for the acquisition of Keymile GmbH, now DZS GmbH (“Keymile” or “DZS GmbH”), we
assumed certain of Keymile’s liabilities, including tax and pension liabilities, and any liabilities that may arise related to
breaches of representations and warranties made by Keymile in connection with a prior sale of assets by Keymile that survive
through 2022. Although the definitive agreement for the Keymile acquisition entitles us to indemnification for certain losses
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incurred related to those assumed liabilities, our right to indemnification from the Keymile sellers is limited by the survival
period of the representations and warranties included in the Keymile acquisition definitive agreement and recovery is limited in
amount to the purchase price of Keymile, or EUR 10.3 million (approximately $11.7 million). Additionally, our rights to
recovery against such losses is limited under our and third party provided warranty and indemnity liability insurance coverage
of up to EUR 35.3 million (approximately $40.2 million). If such claims or losses exceed such amount, or if they are not
indemnifiable under the Keymile acquisition definitive agreement, any such losses could negatively impact our financial
situation. In addition, our closing of the Keymile acquisition could give rise to substantial tax liabilities under German law,
which could negatively impact our financial condition and liquidity.
Customer and Product Risk
The long and variable sales cycles for our products could cause revenue and operating results to vary significantly from
quarter to quarter.
The target customers for our products have substantial and complex networks that they traditionally expand in large increments
on a periodic basis. Accordingly, our marketing efforts are focused primarily on prospective customers that may purchase our
products as part of a large-scale network deployment. Our target customers typically require a lengthy evaluation, testing and
product qualification process. Throughout this process, we are often required to spend considerable time and incur significant
expenses educating and providing information to prospective customers about the uses and features of our products. Even after
a company makes the final decision to purchase our products, it could deploy our products over extended periods of time. The
timing of deployment of our products varies widely, and depends on a number of factors, including our customers’ skill sets,
geographic density of potential subscribers, the degree of configuration and integration required to deploy our products, and our
customers’ ability to finance their purchase of our products as well as their operations. The impact of the COVID-19 pandemic
on our supply chain has increased the volatility of our deployment timeframes. As a result of any of these factors, our revenue
and operating results could vary significantly from quarter to quarter.
The market we serve is highly competitive and we may not be able to compete successfully.
Competition in communications equipment markets is intense. These markets are characterized by rapid change, converging
technologies and a migration to networking solutions that offer superior advantages. We are aware of many companies in
related markets that address particular aspects of the features and functions that our products provide. Currently, our primary
competitors in our core business include ADTRAN, Calix, Huawei, Nokia and ZTE, among others. In our FiberLAN business,
our competitors include Cisco, Nokia and Tellabs. In our Ethernet switching business, our competitors include Cisco, and
Juniper. We also may face competition from other communications equipment companies or other companies that may enter
our markets in the future. In addition, a number of companies have introduced products that address the same network needs
that our products and solutions address, both domestically and internationally. Many of our competitors have longer operating
histories, greater name recognition, larger customer bases and greater financial, technical, sales and marketing resources than
we do and may be able to undertake more extensive marketing efforts, adopt more aggressive pricing policies and provide more
customer financing than we can. In particular, we are encountering price-focused competitors from Asia, especially China,
which places pressure on us to reduce our prices. If we are forced to reduce prices in order to secure customers, we may be
unable to sustain gross margins at desired levels or achieve profitability. Competitive pressures could result in increased pricing
pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share,
any of which could reduce our revenue and adversely affect our financial results. Moreover, our competitors may foresee the
course of market developments more accurately than we do and could develop new technologies that render our products less
valuable or obsolete.
In our markets, principal competitive factors include: (i) product performance; (ii) interoperability with existing products; (iii)
scalability and upgradeability; (iv) conformance to standards; (v) breadth of services; (vi) reliability; (vii) ease of installation
and use; (viii) geographic footprints for products; (ix) ability to provide customer financing; (x) pricing; (xi) technical support
and customer service; and (xii) brand recognition.
If we are unable to compete successfully against our current and future competitors, we may have difficulty obtaining or
retaining customers, and we could experience price reductions, order cancellations, increased expenses and reduced gross
margins, any of which could have a material adverse effect on our business, operations, financial condition, and liquidity.
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We depend upon the development of new products and enhancements to existing products, and if we fail to predict and
respond to emerging technological trends and customers’ changing needs, our operating results and market share may
suffer.
The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in end-
user requirements, frequent new product introductions and changes in communications offerings from network service provider
customers. Our future success depends on our ability to anticipate or adapt to such changes and to offer, on a timely and cost-
effective basis, products that meet changing customer demands and industry standards. We may not have sufficient resources to
successfully and accurately anticipate customers’ changing needs and technological trends, manage long development cycles or
develop, introduce and market new products and enhancements. The process of developing new technology is complex and
uncertain, and if we fail to develop new products or enhancements to existing products on a timely and cost-effective basis, or
if our new products or enhancements fail to achieve market acceptance, our business, operations, financial condition and
liquidity would be materially adversely affected.
Because our products are complex and are deployed in complex environments, our products may have defects that we
discover only after full deployment by our customers, which could have a material adverse effect on our business.
We produce highly complex products that incorporate leading-edge technology, including both hardware and software.
Software often contains defects or programming flaws that can unexpectedly interfere with expected operations. In addition,
our products are complex and are designed to be deployed in large quantities across complex networks. Because of the nature
of these products, they can only be fully tested when completely deployed in large networks with high amounts of traffic, and
there is no assurance that our pre-shipment testing programs will be adequate to detect all defects. As a result, our customers
may discover errors or defects in our hardware or software, or our products may not operate as expected. If we are unable to
cure a product defect, we could experience damage to our reputation, reduced customer satisfaction, loss of existing customers
and failure to attract new customers, failure to achieve market acceptance, reduced sales opportunities, loss of revenue and
market share, increased service and warranty costs, diversion of development resources, legal actions by our customers, and
increased insurance costs. Defects, integration issues or other performance problems in our products could also result in
damages to our customers, financial or otherwise. Our customers could seek damages for related losses from us, which could
seriously harm our business, operations, financial condition and liquidity. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly. The occurrence of any of these problems would seriously harm our
business, operations, financial condition and liquidity.
Sales to communications service providers are especially volatile, and weakness in sales orders from this industry could
harm our business, operations, financial condition and liquidity.
Sales activity in the service provider industry depends upon the stage of completion of expanding network infrastructures, the
availability of funding, and the extent to which service providers are affected by regulatory, economic and business conditions
in the country of operations. Although some service providers may be increasing capital expenditures over the depressed levels
that have prevailed over the last few years, weakness in orders from this industry could have a material adverse effect on our
business, operations, financial condition and liquidity. Changes in technology, competition, overcapacity, changes in the
service provider market, regulatory developments, adverse economic effects caused by the COVID-19 pandemic and
constraints on capital availability have had a material adverse effect on many of our service provider customers, with many of
these customers going out of business or substantially reducing their expansion plans. These conditions have materially harmed
our business and operating results, and we expect that some or all of these conditions may continue for the foreseeable future.
Finally, service provider customers typically have longer implementation cycles; require a broader range of services including
design services; demand that vendors take on a larger share of risks; often require acceptance provisions, which can lead to a
delay in revenue recognition; and expect financing from vendors. All these factors can add further risk to business conducted
with service providers.
We depend on a limited source of suppliers for several key components. If we are unable to obtain these components on
a timely basis, we will be unable to meet our customers’ product delivery requirements, which would harm our
business.
We currently purchase several key components from a limited number of suppliers. If any of our limited source of suppliers
become insolvent, cease business or experience capacity constraints, work stoppages or any other reduction or disruption in
output, they may be unable to meet our delivery schedules. Our suppliers may enter into exclusive arrangements with our
competitors, be acquired by our competitors, stop selling their products or components to us at commercially reasonable prices,
refuse to sell their products or components to us at any price or be unable to obtain or have difficulty obtaining components for
their products from their suppliers. If we do not receive critical components from our limited source of suppliers in a timely
manner, we will be unable to meet our customers’ product delivery requirements. Any failure to meet a customer’s delivery
requirements could materially adversely affect our business, operations, and financial condition and liquidity and could
materially damage customer relationships. The current worldwide shortage of semiconductors may exacerbate these risks.
We rely on the availability of third-party licenses.
Many of our products are designed to include software or other intellectual property licensed from third parties. It may be
necessary in the future to seek or renew licenses relating to various elements of the technology used to develop these products.
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We cannot assure you that our existing or future third-party licenses will be available to us on commercially reasonable terms,
if at all. Our inability to maintain or obtain any third-party license required to sell or develop our products and product
enhancements could require us to obtain substitute technology of lower quality or performance standards, or at greater cost.
Our intellectual property rights could prove difficult to protect and enforce.
We generally rely on a combination of copyrights, patents, trademarks and trade secret laws and commercial agreements
containing restrictions on disclosure and other appropriate terms to protect our intellectual property rights. We enter into
confidentiality, employee, contractor and commercial agreements with our employees, consultants and corporate partners, and
control access to and distribution of our proprietary information and use of our intellectual property and technology. Despite
our efforts to protect our proprietary rights, unauthorized parties, including those affiliated with foreign governments, may
attempt to copy or otherwise obtain and use our products, technology or intellectual property. Monitoring unauthorized use of
our technology and intellectual property is difficult, and we do not know whether the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries or jurisdictions where laws may not protect our proprietary
rights as extensively as in the United States. We cannot assure you that our pending, or any future, patent applications will be
granted, that any existing or future patents will not be challenged, invalidated, or circumvented, or that any existing or future
patents will be enforceable or that infringement by third parties will even be detected. While we are not dependent on any
individual patents, if we are unable to protect our proprietary rights, we may find ourselves at a competitive disadvantage to
others who need not incur the substantial expense, time and effort required to create the innovative products.
There are additional risks to our intellectual property as a result of our international business operations.
We may face risks to our technology and intellectual property as a result of our conducting strategic business discussions
outside of the United States, and particularly in jurisdictions that do not have comparable levels of protection of corporate
proprietary information and assets such as intellectual property, trademarks, trade secrets, know-how and customer information
and records. While these risks are common to many companies, conducting business in certain foreign jurisdictions, housing
technology, data and intellectual property abroad, or licensing technology to joint ventures with foreign partners may have
more significant exposure. For example, we have shared intellectual properties with entities in China, South Korea, India,
Thailand, and Vietnam pursuant to confidentiality agreements in connection with discussions on potential strategic
collaborations, which may expose us to material risks of theft of our proprietary information and other intellectual property,
including technical data, manufacturing processes, data sets or other sensitive information. Our technology may be reverse
engineered by the parties or other parties, which could result in our patents being infringed or our know-how or trade secrets
stolen. The risk can be by direct intrusion wherein technology and intellectual property is stolen or compromised through cyber
intrusions or physical theft through corporate espionage, including with the assistance of insiders, or via more indirect routes.
Claims that our current or future products or components contained in our products infringe the intellectual property
rights of others may be costly and time consuming to defend and could adversely affect our ability to sell our products.
The communications equipment industry is characterized by the existence of a large number of patents and frequent claims and
related litigation regarding patent, copyright, trademark and other intellectual property rights, that may relate to technologies
and related standards that are relevant to us. From time to time, we receive correspondence from companies claiming that our
products are using technology covered by or related to the intellectual property rights of these companies and inviting us to
discuss or demanding licensing or royalty arrangements for the use of the technology or seeking payment for damages,
injunctive relief and other available legal remedies through litigation. These companies also include third-party non-practicing
entities (also known as patent trolls) that focus on extracting royalties and settlements by enforcing patent rights through
litigation or the threat of litigation. These companies typically have little or no product revenues and therefore our patents could
provide little or no deterrence against such companies filing patent infringement lawsuits against us. In addition, third parties
have initiated and could continue to initiate litigation against our manufacturers, suppliers, distributors or even our customers
alleging infringement or misappropriation of their proprietary rights with respect to existing or future products, or components
of our products. For example, proceedings alleging patent infringement are routinely commenced in various jurisdictions
against manufacturers and consumers of products in the wireless and broadband communications industry. In some cases,
courts have issued rulings adverse to such manufacturers and customers, which can result in monetary damages that we are
obligated to indemnify or that may impact the cost and availability of components or sales of our products. Courts may also
issue injunctions preventing manufacturers from offering, distributing, using or importing products that include the challenged
intellectual property. Adverse rulings or injunctive relief awarded against key suppliers of components for our products could
result in delays or stoppages in the shipment of affected components, or require us to recall, modify or redesign our products
containing such components. Regardless of the merit of claims against us or our manufacturers, suppliers, distributors or
customers, intellectual property litigation can be time consuming and costly, and result in the diversion of the attention of
technical and management personnel. Any such litigation could force us to stop manufacturing, selling, distributing, exporting,
incorporating or using products or components that include the challenged intellectual property, or to recall, modify or redesign
such products. In addition, if a party accuses us of infringing upon its proprietary rights, we may have to enter into royalty or
licensing agreements, which may not be available on terms acceptable to us, if at all. If we are unsuccessful in any such
litigation, we could be subject to significant liability for damages and loss of our proprietary rights. Any of these events or
results could have a material adverse effect on our business, operations, financial condition and liquidity.
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Due to the international nature of our business, political or economic changes or other factors in a specific country or
region could harm our future revenue, costs and expenses, and financial condition.
We currently have significant operations in Canada, South Korea, India and Vietnam, as well as sales and technical support
teams in various locations around the world. We continue to consider opportunities to expand our international operations in the
future. The successful management and expansion of our international operations requires significant human effort and the
commitment of substantial financial resources. Further, our international operations may be subject to certain risks, disruptions
and challenges that could materially harm our business, operations, financial condition, and liquidity, including: (i) unexpected
changes in laws, policies and regulatory requirements, including but not limited to regulations related to import-export control;
(ii) trade protection measures, tariffs, embargoes and other regulatory requirements which could affect our ability to import or
export our products into or from various countries; (iii) political unrest or instability, acts of terrorism or war in countries where
we or our suppliers or customers have operations, including heightened security concerns stemming from North Korea in
relation to our operations in South Korea; (iv) political considerations that affect service provider and government spending
patterns; (v) heightened political tensions between the U.S. and China regarding the COVID-19 pandemic, trade practices and
intellectual property rights; (vi) differing technology standards or customer requirements; (vii) developing and customizing our
products for foreign countries; (viii) fluctuations in currency exchange rates, foreign exchange controls and restrictions on cash
repatriation; (ix) longer accounts receivable collection cycles and financial instability of customers; (x) requirements for
additional liquidity to fund our international operations; (xi) pandemics, epidemics and other public health crises, such as the
COVID-19 pandemic; (xii) difficulties and excessive costs for staffing and managing foreign operations; (xiii) ineffective legal
protection of our intellectual property rights in certain countries; (xiv) potentially adverse tax consequences; and (xv) changes
in a country’s or region’s political and economic conditions.
In addition, some of our customer purchase agreements are governed by foreign laws and regulations, which may differ
significantly from the laws and regulations of the United States. We may be limited in our ability to enforce our rights under
these agreements and to collect damages, if awarded. Any of these factors could harm our existing international operations and
business or impair our ability to continue expanding into international markets.
We face exposure to foreign currency exchange rate fluctuations.
We conduct significant business in South Korea, Japan, India, Vietnam, Europe, Middle East and Latin America, all of which
subject us to foreign currency exchange rate risk.
We have in the past and may in the future undertake a hedging program to mitigate the impact of foreign currency exchange
rate fluctuations. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of
unfavorable movements in foreign currency exchange rates over the limited time the hedges are in place. Moreover, the use of
hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments, which
could adversely affect our business, operations, financial condition, and liquidity.
As such, our results of operations and our cash flows could be impacted by changes in foreign currency exchange rates.
Risks Related to our Industry
The telecommunications networking business requires the application of complex revenue and expense recognition rules
and the regulatory environment affecting generally accepted accounting principles is uncertain. Changes in financial
accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our
business.
The nature of our business requires the application of complex revenue and expense recognition rules and the current regulatory
environment affecting U.S. GAAP is uncertain. Significant changes in U.S. GAAP could affect our financial statements going
forward and may cause adverse, unexpected financial reporting fluctuations and harm our operating results. U.S. GAAP is
subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission (SEC) and
various bodies formed to promulgate and interpret appropriate accounting principles. In addition, we have in the past and may
in the future need to significantly change our customer contracts, accounting systems and processes when we adopt future or
proposed changes in accounting principles. The cost and effect of these changes may negatively impact our results of
operations during the periods of transition.
Changes in government regulations related to our business could harm our operations, financial condition, and
liquidity.
Our operations are subject to various laws and regulations, including those regulations promulgated by the Federal
Communications Commission (“FCC”). The FCC has jurisdiction over the entire communications industry in the United States
and, as a result, our existing and future products and our customers’ products are subject to FCC rules and regulations. Changes
to current FCC rules and regulations and future FCC rules and regulations could negatively affect our business. Non-
compliance with the FCC’s rules and regulations would expose us to potential enforcement actions, including monetary
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forfeitures, and could damage our reputation among potential customers. The uncertainty associated with future FCC decisions
may cause network service providers to delay decisions regarding their capital expenditures for equipment for broadband
services. In addition, international regulatory bodies establish standards that may govern our products in foreign markets. The
SEC has adopted disclosure rules regarding the use of “conflict minerals” mined from the Democratic Republic of Congo and
adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals. These
rules may have the effect of reducing the pool of suppliers who can supply “conflict free” components and parts, and we may
not be able to obtain “conflict free” products or supplies in sufficient quantities for our operations. Also, we may face
reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the
origins for the conflict minerals used in our products. In addition, governments and regulators in many jurisdictions have
implemented or are evaluating regulations relating to cyber security, privacy and data protection, which can affect the markets
and requirements for networking and communications equipment. We are unable to predict the scope, pace or financial impact
of government regulations and other policy changes that could be adopted in the future, any of which could negatively impact
our operations and costs of doing business. Because of our smaller size, legislation or governmental regulations can
significantly increase our costs and affect our competitive position. Changes to or future domestic and international regulatory
requirements could result in postponements or cancellations of customer orders for our products and services, which could
harm our business, operations, financial condition and liquidity. Further, we cannot be certain that we will be successful in
obtaining or maintaining regulatory approvals that could, in the future, be required to operate our business.
Industry consolidation may lead to increased competition and could harm our operating results.
There has been a trend toward industry consolidation in the communications equipment market for several years. We expect
this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as
companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger
competitors that are better able to compete as sole-source vendors for customers. This could have a material adverse effect on
our business, operations, financial condition, and liquidity. Furthermore, rapid consolidation could result in a decrease in the
number of customers we serve. The loss of a major customer could have a material adverse effect on our business, operations,
financial condition, and liquidity.
Risks Related to our Common Stock
DASAN Networks, Inc. (“DNI”) owns a significant amount of our outstanding common stock and has the ability to exert
significant influence or control over any matters that require stockholder approval, including the election of directors
and the approval of certain transactions, and DNI’s interests may conflict with our interests and the interests of other
stockholders.
As of December 31, 2021, DNI owned approximately 36.7% of the outstanding shares of our common stock, representing a
significant amount of the votes entitled to be cast by the holders of our outstanding common stock at a stockholder meeting.
Due to its significant ownership percentage of our common stock, DNI has the ability to substantially influence or control the
outcome of any matter submitted for the vote of our stockholders, including the election of directors and the approval of certain
transactions. The interests of DNI may conflict with the interests of our other stockholders or with holders of our indebtedness
and may cause us to take actions that our other stockholders or holders of our indebtedness do not view as beneficial.
DNI’s large concentration of stock ownership may make it more difficult for a third party to acquire us or discourage a third
party from seeking to acquire us. Any potential third-party acquirer would most likely need to negotiate any such transaction
with DNI, and the interests of DNI with respect to such transaction may be different from the interests of our other stockholders
or with holders of our indebtedness.
Additionally, two of the Company’s directors serve as executive officers of DNI – Min Woo Nam is the Chief Executive
Officer and Chairman of the Board of Directors of DNI and Choon Yul Yoo is the Chief Operating Officer of DNI. Messrs.
Nam and Yoo owe fiduciary duties to us and, in addition, have duties to DNI. As a result, these directors may face real or
apparent conflicts of interest with respect to matters affecting both us and DNI.
There is a limited public market of our common stock.
There is a limited public market for our common stock. The average daily trading volume in our common stock during the 12
months ended December 31, 2021 was approximately 125,000 shares per day. We cannot provide assurances that a more active
trading market will develop or be sustained. As a result of low trading volume in our common stock, the purchase or sale of a
relatively small number of shares of our common stock could result in significant price fluctuations and it may be difficult for
holders to sell their shares without depressing the market price of our common stock.
DNI, our largest stockholder, owned approximately 10.1 million shares of our common stock as of December 31, 2021 and
such shares are registered with the SEC for resale. Its shares became eligible for resale without restriction as to volume
limitations. Our stock price could suffer a significant decline as a result of any sudden increase in the number of shares sold in
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the public market or market perception that the increased number of shares available for sale will exceed the demand for our
common stock.
We do not expect to declare or pay dividends in the foreseeable future.
We do not expect to declare or pay dividends in the foreseeable future, as we anticipate that we will invest future earnings in
the development and growth of our business. Therefore, holders of our common stock will not receive any return on their
investment unless they sell their securities, and holders may be unable to sell their securities on favorable terms or at all.
General Risk Factors
We may need additional capital, and we cannot be certain that additional financing will be available.
In January 2021, we raised approximately $59.5 million in an equity offering. Refer to Note 9 Stockholders’ Equity, in the
Notes to Consolidated Financial Statements, for more detail. We need sufficient capital to fund our ongoing operations and may
require additional financing in the future to expand our business, acquire assets or repay or refinance our existing debt. Our
ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance
and condition of the capital markets at the time we seek financing. We cannot assure you that additional financing will be
available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-
linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock,
and our stockholders may experience dilution.
If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things: (i) maintain
existing operations; (ii) pay ordinary expenses; (iii) fund our business expansion or product innovation; (iv) pursue future
business opportunities, including acquisitions; (v) respond to unanticipated capital requirements; (vi) repay or refinance our
existing debt; (vii) hire, train and retain employees; or (viii) respond to competitive pressures or unanticipated working capital
requirements.
Our failure to do any of these things could seriously harm our business, financial condition, liquidity and operating results. In
addition, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond
the reductions that we have previously taken, and reduce operations in low margin regions, including reductions in headcount,
which could have a material adverse effect on our business, operations, financial condition and liquidity.
Our future operating results are difficult to predict and our stock price may continue to be volatile.
As a result of a variety of factors discussed in this Annual Report on Form 10-K, our revenues for a particular quarter are
difficult to predict. Our revenue and operating results may vary significantly from quarter to quarter due to a number of factors,
many of which are outside of our control. The primary factors that could affect our results of operations include the following:
(i) commercial acceptance of our products and services; (ii) fluctuations in demand for network access products; (iii)
fluctuation in gross margin; (iv) our ability to attract and retain qualified and key personnel; (v) the timing and size of orders
from customers; (vi) the ability of our customers to finance their purchase of our products as well as their own operations; (vii)
new product introductions, enhancements or announcements by our competitors; (viii) our ability to develop, introduce and
ship new products and product enhancements that meet customer requirements in a timely manner; (ix) changes in our pricing
policies or the pricing policies of our competitors; (x) the loss of or failure to renew on commercially reasonable terms any
third-party licenses necessary for or relating to our products; (xi) the ability of our company and our contract manufacturers to
attain and maintain production volumes and quality levels for our products; (xii) our ability to obtain sufficient supplies of sole
or limited source components; (xiii) increases in the prices of the components we purchase, or quality problems associated with
these components; (xiv) unanticipated changes in regulatory requirements which may require us to redesign portions of our
products; (xv) changes in accounting rules; (xvi) integrating and operating any acquired businesses; (xvii) our ability to achieve
targeted cost reductions; (xviii) how well we execute on our strategy and operating plans; (xix) general economic conditions as
well as those specific to the communications, internet and related industries; and (xx) the economic uncertainty created by the
ongoing COVID-19 pandemic, including its potentially adverse impact on all the foregoing factors.
Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our
business, operations, financial condition and liquidity that could adversely affect our stock price. Further, the ongoing COVID-
19 pandemic has resulted in severe disruption and volatility in the financial markets. We anticipate that our stock price and
trading volume may continue to be volatile in the future, whether due to the factors described above, volatility in public stock
markets generally (particularly in the technology sector) or otherwise.
Strategic acquisitions or investments that we have made or that we could pursue or make in the future may disrupt our
operations and harm our business, operations, financial condition, and liquidity.
As part of our business strategy, we have made investments in and acquired other companies, including Optelian and RIFT in
2021, that we believe are complementary to our core business. In the future we may continue to make investments in or acquire
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other companies or complementary solutions or technologies. Any such acquisition or investment may divert the attention of
management and cause us to incur various expenses in identifying, investigating, and pursuing suitable opportunities, whether
or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. These transactions
could also result in dilutive issuances of equity securities, the incurrence of debt or assumption of liabilities, and increase our
risk of litigation exposure, which could adversely affect our operating results. In addition, if the resulting business from such a
transaction fails to meet our expectations, our operating results, business, and financial condition may suffer or we may be
exposed to unknown risks or liabilities.
Additionally, any significant acquisition would require the consent of our lenders. Any failure to receive such consent could
delay or prohibit us from acquiring companies that we believe could enhance our business. Furthermore, we may dedicate
significant time and capital resources in the pursuit of acquisition opportunities and may be unable to find and identify desirable
acquisition targets or business opportunities or be successful in entering into an agreement with any particular strategic partner.
Upon the closing of any acquisition transaction, we will need to integrate the acquired organization and its products and
services with our legacy operations. The integration process may be expensive, time-consuming and a strain on our resources
and our relationships with employees, customers, distributors and suppliers, and ultimately may not be successful. The benefits
or synergies we may expect from the acquisition of complementary or supplementary businesses may not be realized to the
extent or in the time frame we initially anticipated. Mergers and acquisitions of high-technology companies are inherently
subject to increased risk and to many factors outside of our control, and we cannot be certain that our previous or future
acquisitions will be successful and will not materially adversely affect our business, operations, financial condition, and
liquidity. Any failure to successfully acquire and integrate acquired organizations and their products and services could
seriously harm our business, operations, financial condition, and liquidity.
Some of the risks that could affect our ability to successfully integrate acquired businesses, including Optelian and Rift’s
telecommunication systems business, include those associated with: (i) failure to successfully further develop the acquired
products or technology; (ii) insufficient revenues to offset increased expenses associated with acquisitions and where
competitors in such markets have stronger market positions; (iii) conforming the acquired company’s standards, policies,
processes, procedures and controls with our operations; (iv) difficulties in entering markets in which we have no or limited
prior experience; (v) difficulties in integrating the operations, technologies, products and personnel of the acquired companies;
(vi) coordinating new product and process development, especially with respect to highly complex technologies; (vii) potential
loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and
continuing after the announcement of acquisition plans or transactions; (viii) hiring and training additional management and
other critical personnel; (ix) in the case of foreign acquisitions, the need to integrate operations across different cultures and
languages and to address the particular economic, currency, political and regulatory risks associated with specific countries; (x)
increasing the scope, geographic diversity and complexity of our operations; (xi) diversion of management’s time and attention
away from normal daily operations of the business and the challenges of managing larger and more widespread operations
resulting from acquisitions; (xii) consolidation of facilities, integration of the acquired company’s accounting, human resource
and other administrative functions and coordination of product, engineering and sales and marketing functions; (xiii) the
geographic distance between the companies; (xiv) failure to comply with covenants related to the acquired business; (xv)
unknown, underestimated, and/or undisclosed liabilities for activities of the acquired company before the acquisition, including
patent and trademark infringement claims, violations of laws, employment claims, pension liabilities, commercial disputes, tax
liabilities and other known and unknown liabilities; (xvi) litigation or other claims in connection with the acquired company,
including claims for terminated employees, customers, former stockholders or other third parties; and (xvii) the disruption,
economic and otherwise, created by the on-going COVID-19 pandemic, including its potentially compounding effect on all the
foregoing factors.
If demand for our products and solutions does not develop as we anticipate, then our business operations, financial
condition, and liquidity will be adversely affected.
Our future revenue depends significantly on our ability to successfully develop, enhance and market our products and solutions
to our target markets. Most network service providers have made substantial investments in their current infrastructure, and
they may elect to remain with their current architectures or to adopt new architectures in limited stages or over extended periods
of time. A decision by a customer to purchase our products will involve a significant capital investment. We must convince our
service provider customers that they will achieve substantial benefits by deploying our products for future upgrades or
expansions. We may experience difficulties with product reliability, partnering, and sales and marketing efforts that could
adversely affect our business and divert management attention and resources from our core business. We do not know whether
a viable market for our products and solutions will develop or be sustainable in our businesses. If these markets do not develop
or develop more slowly than we expect, including as a result of conditions created by the ongoing COVID-19 pandemic, our
business, operations, financial condition and liquidity will be materially harmed.
16
Increased tariffs on products and goods that we purchase from off-shore sources (particularly Chinese sources) and
changes in international trade policies and relations could have an adverse effect on our customers and operating
results.
The pricing of our products to customers and our ability to conduct business with certain customers can be affected by changes
in U.S. and other countries’ trade policies. For example, before the trade deal was signed between the U.S. and China on
January 15, 2020, the United States had imposed tariffs on a wide-range of products and goods manufactured in China that are
directly or indirectly imported into the United States. In response, various countries and economic regions announced plans or
intentions to impose retaliatory tariffs on a wide-range of products they import from the United States. Any newly imposed,
announced and threatened U.S. tariffs and retaliatory tariffs could have the effect of increasing the cost of materials we use to
manufacture certain products, which could result in lower margins. The tariffs could also result in disruptions to our supply
chain, as suppliers struggle to fill orders from companies trying to purchase goods in bulk ahead of announced tariffs. Although
we believe that the incremental costs to us of these tariffs were immaterial, if new tariffs are imposed or if new tariffs apply to
additional categories of components used in our manufacturing activities, and if we are unable to pass on the costs of tariffs to
our customers, our operating results would be harmed.
Changes in political environments, governmental policies, international trade policies and relations, including as a result of
tensions between the United States and China regarding the COVID-19 pandemic, trade practices and the protection of
intellectual property rights, could result in revisions to laws or regulations or their interpretation and enforcement, trade
sanctions, or retaliatory actions by China in response to U.S. actions, which could have an adverse effect on our customers,
business plans and operating results.
We rely on contract manufacturers for a portion of our manufacturing requirements.
We rely on contract manufacturers to perform a portion of the manufacturing operations for our products. These contract
manufacturers build products for other companies, including our competitors. In addition, we do not have contracts in place
with some of these providers and may not be able to effectively manage those relationships. We cannot be certain that our
contract manufacturers will be able to fill our orders in a timely manner. We face a number of risks associated with this
dependence on contract manufacturers including reduced control over delivery schedules, the potential lack of adequate
capacity during periods of excess demand, poor manufacturing yields and high costs, quality assurance, increases in prices, and
the potential misappropriation of our intellectual property. We have experienced in the past, and may experience in the future,
problems with our contract manufacturers, such as inferior quality, insufficient quantities and late delivery of products.
We face supply chain risk, and our failure to estimate customer demand properly could result in excess or obsolete
component inventories that could adversely affect our gross margins.
Occasionally, we may experience a supply shortage, or a delay in receiving, certain component parts as a result of strong
demand for the component parts and/or capacity constraints or other problems experienced by suppliers. If shortages or delays
persist, the price of these components may increase, or the components may not be available at all, and we may also encounter
shortages if we do not accurately anticipate our needs. Conversely, we may not be able to secure enough components at
reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed.
Accordingly, our revenue and gross margins could suffer until other sources can be developed. During 2021, we experienced
disruptions in our supply chain, and we anticipate that such disruptions will continue in 2022. These supply issues have limited
our ability to supply demand of certain customers. It is difficult to predict the future impact of these ongoing supply issues. Our
operating results would also be adversely affected if, anticipating greater demand than actually develops, we commit to the
purchase of more components than we need. Furthermore, as a result of binding price or purchase commitments with suppliers,
we may be obligated to purchase components at prices that are higher than those available in the current market. In the event
that we become committed to purchase components at prices in excess of the current market price, our gross margins could
decrease. In the past we experienced component shortages that adversely affected our financial results and, in the future, may
continue to experience component shortages.
The loss of a key customer or a significant deterioration in the financial condition of a key customer could have a
material adverse effect on the Company’s results of operations.
The Company’s revenue is dependent on several key customers. A loss of one or more of the Company’s key customers, or a
dispute or litigation with one of these key customers could affect adversely our revenue and results of operations. A significant
deterioration in the financial condition or bankruptcy filing of a key customer could affect adversely the Company’s business,
results of operations, and financial condition.
In addition, the Company is subject to credit risk associated with the concentration of accounts receivable from its key
customers. As of December 31, 2021, two customers represented 26% and 10% of net accounts receivable. As of December 31,
2021, the Company has an allowance for doubtful account of $16.7 million related to one customer. If one or more of the
Company’s top customers were to become bankrupt or insolvent or otherwise were unable to pay for the products and services
provided by the Company, including as a result of conditions created by the on-going COVID-19 pandemic, the Company may
incur significant write-offs of accounts receivable or incur other impairment charges, which may have a material adverse effect
on the Company’s results of operations.
17
We have experienced significant turnover with respect to our executives and our board, and our business could be
adversely affected by these and other transitions in our senior management team or if any future vacancies cannot be
filled with qualified replacements in a timely manner.
We have experienced significant turnover on our executive team and board since 2018. As a result of this turnover, our
remaining management team has been required to take on increased responsibilities, which could divert attention from key
business areas. If we continue to experience similar turnover in the future, we may be unable to timely replace the talent and
skills of our management team and directors.
Management transitions are often difficult and inherently cause some loss of institutional knowledge, which could negatively
affect our results of operations and financial condition. Our ability to execute our business strategies may be adversely affected
by the uncertainty associated with these transitions and the time and attention from the board and management needed to fill
any future vacant roles could disrupt our business. If we are unable to successfully identify and attract adequate replacements
for future vacancies in our management roles in a timely manner, we could experience increased employee turnover and harm
to our business, growth, financial condition, results of operations and cash flows. We face significant competition for
executives with the qualifications and experience we seek.
Further, we cannot guarantee that we will not face similar turnover in the future. Our senior management’s knowledge of our
business and industry would be difficult to replace, and any further turnover could negatively affect our business, growth,
financial conditions, results of operations and cash flows.
Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.
We have historically used equity incentives, including stock options, as a key component of our employee compensation
program in order to align the interests of our employees with the interests of our stockholders, encourage employee retention
and provide competitive compensation and benefit packages. If the trading price of our common stock declines, this would
reduce the value of our share-based compensation to our present employees and could adversely affect our ability to retain
existing or attract prospective employees. Difficulties relating to obtaining stockholder approval of equity compensation plans
could also make it harder or more expensive for us to grant share-based payments to employees in the future.
Our success largely depends on our ability to retain and recruit key personnel, and any failure to do so could harm our
ability to meet key objectives.
Our future success depends upon the continued services of our Chief Executive Officer and other key employees, and our
ability to identify, attract and retain highly skilled technical, managerial, sales and marketing personnel who have critical
industry experience and relationships that we rely on to build and operate our business. As discussed elsewhere in these Risk
Factors, we have experienced significant turnover on our executive team and board since 2018, including the departures of our
former Chief Executive Officer and Chief Financial Officer. The loss of the services of any of our key employees or executive
officers could delay the development and production of our products and negatively impact our ability to maintain customer
relationships, which could harm our business, operations, financial condition and liquidity.
Our collection, processing, storage, use, and transmission of personal data could give rise to liabilities as a result of
governmental regulation, increasing legal requirements.
We collect, process, store, use, and transmit personal data on a daily basis. Personal data is increasingly subject to legal and
regulatory protections around the world, which vary widely in approach and which possibly conflict with one another. In recent
years, for example, U.S. legislators and regulatory agencies, such as the Federal Trade Commission, as well as U.S. states have
increased their focus on protecting personal data by law and regulation and have increased enforcement actions for violations of
privacy and data protection requirements. The State of California recently adopted the California Consumer Protection Act
(“CCPA”), which went into effect on January 1, 2020. The European Commission also approved and adopted the General Data
Protection Regulation (GDPR), a data protection law, which became effective in May 2018. These data protection laws and
regulations are intended to protect the privacy and security of personal data that is collected, processed, and transmitted in or
from the relevant jurisdiction. Both the CCPA and the GDPR established new requirements applicable to the processing of
personal data, afford new data protection rights to individuals and impose significant penalties for data breaches. Individuals
also have a right to compensation under the GDPR for financial or non-financial losses. In July 2020, the EU-U.S. Privacy
Shield framework which allowed U.S. companies that self-certify to the U.S. Department of Commerce and publicly commit to
comply with specified requirements to import personal data from the EU was invalidated as a GDPR compliance mechanism by
the European Court of Justice (“ECJ”). These developments create some uncertainty. Ensuring compliance with these laws is
an ongoing commitment that involves substantial costs, which could otherwise adversely affect our business operations and
negatively impact our financial position or cash flows. Any failure to comply with applicable regulations could also result in
regulatory enforcement actions against us, subject us to negative publicity and significant penalties and ultimately cause an
adverse effect on our business.
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If we experience a significant disruption in, or breach in security of, our information technology systems, our business
could be adversely affected.
We rely on several centralized information technology systems to provide products and services, maintain financial records,
process orders, manage inventory, process shipments to customers and operate other critical functions. If we experience a
prolonged system disruption in the information technology systems that involve our interactions with customers or suppliers, it
could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In
addition, our information technology systems could be susceptible to damage, disruptions or shutdowns due to power outages,
hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other
unforeseen events. Furthermore, security breaches of our information technology systems could result in the misappropriation
or unauthorized disclosure of confidential information belonging to the company or our employees, partners, customers or
suppliers, which could result in significant financial, legal or reputational damage to the Company. In response to the COVID-
19 pandemic, a large portion of our workforce worked remotely, and future remote working could exacerbate any of the
foregoing risks.
Compliance or the failure to comply with current and future environmental regulations could cause us significant
expense.
We are subject to a variety of federal, state, local and foreign environmental regulations. If we fail to comply with any present
or future regulations, we could be subject to liabilities, the suspension of production or prohibitions on the sale of our products.
In addition, such regulations could require us to incur other significant expenses to comply with environmental regulations,
including expenses associated with the redesign of any non-compliant product. From time to time new regulations are enacted,
and it is difficult to anticipate how such regulations will be implemented and enforced and the impact that they could have on
our operations or results. For example, in 2003 the European Union enacted the Restriction on the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment Directive and the Waste Electrical and Electronic Equipment Directive, for
implementation in European Union member states. We are aware of similar legislation that is currently in force or has been
considered in the U. S., as well as other countries, such as Japan and China. Implementation of and compliance with these laws
may be costly or could otherwise adversely affect our business operations, which could negatively impact our financial position
or cash flows. Our failure to comply with any such regulatory requirements or contractual obligations could result in us being
liable for costs, fines, penalties or third-party claims, and could jeopardize our ability to conduct business in countries or
jurisdictions where such regulations apply.
Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our international
activities could subject us to significant civil or criminal penalties.
Failure to comply with the Foreign Corrupt Practices Act could subject us to significant civil or criminal penalties. A
significant portion of our revenues is generated from sales outside of the United States. As a result, we are subject to the U.S.
Foreign Corrupt Practices Act (the “FCPA”). The FCPA generally prohibits U.S. companies and their intermediaries from
making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable
treatment and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect
the transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under
the FCPA, U.S. companies may be held liable for the corrupt actions taken by employees, strategic or local partners or other
representatives. If we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation,
governmental authorities in the U.S. and elsewhere could seek to impose civil and/or criminal fines and penalties which could
have an adverse effect on our results of operations, financial condition and cash flow.
Our business and future operating results are subject to global economic and market conditions.
Market turbulence and weak economic conditions, including those caused by the on-going COVID-19 pandemic, as well as
concerns about energy costs, geopolitical issues, inflation, the availability and cost of credit, business and consumer confidence,
and unemployment could impact our business in a number of ways, including:
Potential deferment of purchases and orders by customers: Uncertainty about global economic conditions could cause
consumers, businesses and governments to defer purchases in response to flat revenue budgets, tighter credit, decreased cash
availability and weak consumer confidence. Accordingly, future demand for our products could differ materially from our
current expectations.
Customers’ inability to obtain financing to make purchases and/or maintain their business: Some of our customers require
substantial financing in order to finance their business operations, including capital expenditures on new equipment and
equipment upgrades, and make purchases from us. The potential inability of these customers to access the capital needed to
finance purchases of our products and meet their payment obligations to us could adversely impact our business, operations,
financial condition, and liquidity. While we monitor these situations carefully and attempt to take appropriate measures to
protect ourselves, including factoring credit arrangements to financial institutions, it is possible that we may have to defer
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revenue until cash is collected or write-down or write-off uncollectible accounts. Such write-downs or write-offs, if large, could
have a material adverse effect on our business, operations, financial condition, and liquidity. If our customers become insolvent
due to market and economic conditions or otherwise, it could have a material adverse effect on our business, operations,
financial condition and liquidity.
Negative impact from increased financial pressures on third-party dealers, distributors and retailers: We make sales in certain
regions through third-party dealers, distributors and retailers. These third parties may be impacted, among other things, by a
significant decrease in available credit. If credit pressures or other financial difficulties result in insolvency for these third
parties and we are unable to successfully transition end customers to purchase our products from other third parties, or from us
directly, it could adversely impact our business, operations, financial condition, and liquidity.
Negative impact from increased financial pressures on key suppliers: Our ability to meet customers’ demands depends, in part,
on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of
our components are available only from a single source or limited sources. If certain key suppliers were to become capacity
constrained or insolvent, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies
and adversely impact our financial condition and results of operations. In addition, credit constraints of key suppliers could
result in accelerated payment of accounts payable by us, impacting our cash flow.
We may experience material adverse impacts on our business, operations, financial condition, and liquidity as a result of weak
or recessionary economic or market conditions in the United States, South Korea, Germany, or the rest of the world.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control
may damage our facilities or the facilities of third parties on which we depend, and could materially impact our supply
chain and the operations of our customers and suppliers.
Our global headquarters is located in Plano, Texas and our U.S. manufacturing facility is located in Seminole, Florida. These
facilities are subject to disruption from natural causes beyond our control, including physical risks from tornados, severe
storms, floods, other natural disaster or power shortages or outages that could disrupt operations or impair critical systems. Any
of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In
addition, in the event any of our facilities or the facilities of our suppliers, contract manufacturers, third-party service providers,
or customers, is affected by natural disasters, such as hurricanes, earthquakes, tsunamis, power shortages or outages, floods or
monsoons, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic to the extent not
already occurring, political crises, such as terrorism, war, political instability or other conflict, or other events outside of our
control, our business and operating results could suffer. Disasters occurring at our or our vendors’ facilities also could impact
our reputation.
Any of the foregoing events may have the effect of disrupting our supply chain, which could harm our business, financial
condition results of operations. Illness, travel restrictions, absenteeism, or other workforce disruptions could negatively affect
our supply chain, manufacturing, distribution, or other business processes. We may face additional production disruptions in
the future, which may place constraints on our ability to produce products in a timely manner or may increase our costs.
Future issuances of additional equity securities could result in dilution of existing stockholders’ equity ownership.
We may determine from time to time to issue additional equity securities to raise additional capital, to support growth, or, as we
have in recent years, to make acquisitions. Further, we may issue stock options, grant restricted stock awards or other equity
awards to retain, compensate and/or motivate our employees and directors. These issuances of our securities could dilute the
voting and economic interests of existing stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
PROPERTIES
In 2020, the Company moved its headquarter and established its Engineering Center of Excellence in Plano, Texas, U.S, where
we lease the office spaces. We lease facilities for manufacturing in Seminole, Florida, U.S., where we manufacture our low
volume, high mix products. We also lease facilities for office and warehouse space in South Korea and India, and maintain
offices to provide sales and customer support at various domestic and international locations. We believe that our existing
facilities are suitable and adequate for our present purposes.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of
business. While the outcome of these matters is currently not determinable, 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
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financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable
rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the
results of operations and cash flows of the reporting period in which the ruling occurs, or future periods.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Set forth below is information concerning our executive officers as of December 31, 2021.
Name
Charles Daniel Vogt
Misty Kawecki
Justin Ferguson
Age
58
48
44
Office
Chief Executive Officer, President
Chief Financial Officer
Chief Legal Officer and Corporate Secretary
Charlie Vogt was appointed as the President and Chief Executive Officer of the DZS Inc., effective August 1, 2020. In addition,
Mr. Vogt was elected as a member of the Board of Directors, also effective August 1, 2020. In connection with Mr. Vogt’s
appointment, Il Yung Kim ceased to serve as President and Chief Executive Officer of DZS Inc. and as a member of the Board
effective July 31, 2020. Prior to joining the Company, Mr. Vogt was most recently President and Chief Executive Officer of
ATX Networks, a leader in broadband access and media distribution, where he led the company through extensive
transformation and growth since February 2018 and will remain a member of the board. From July 2013 to January 2018, Mr.
Vogt served as President and Chief Executive Officer of Imagine Communications, where he directed the company through
change as it evolved its core technology, including large-scale restructuring and rebranding and multiple technology
acquisitions as he implemented a vision and growth strategy. Before joining Imagine Communications, Mr. Vogt was President
and Chief Executive Officer of GENBAND (today known as Ribbon Communications), where he transformed the company
from a startup to a global leader in voice over IP and real-time IP communications solutions. His professional career has also
included leadership roles at Taqua (Tekelec), Lucent Technology (Nokia), Ascend Communications (Lucent), ADTRAN,
Motorola and IBM.
Misty Kawecki was appointed to the position of Chief Financial Officer on August 2, 2021. Ms. Kawecki recently served as
Chief Financial Officer and Head of Operations at MediaKind, Inc., a large-scale media platform. Prior roles include Chief
Accounting Officer at Imagine Communications, Inc., and executive roles at GENBAND (today known as Ribbon
Communications) and McAfee (today is a subsidiary of Intel Corporation). She began her career at Ernst & Young LLP. She is
a Certified Public Accountant and holds a Master’s Degree in accounting from Texas Tech University.
Justin K. Ferguson has served as Chief Legal Officer and Corporate Secretary since September 2020. Prior to joining DZS,
from 2018 to 2020, Mr. Ferguson was the Executive Vice President, General Counsel and Corporate Secretary of Ribbon
Communications Inc., a Nasdaq listed company that provides real time communications software and packet and optical
transport solutions. Prior to joining Ribbon, from 2015 to 2018, Mr. Ferguson was the Vice President, General Counsel and
Corporate Secretary of Zix Corporation, a Nasdaq listed company that provides email security solutions. From 2011 to 2015,
Mr. Ferguson served as Senior Vice President—Director of Legal for GENBAND. Prior to GENBAND, he was an attorney at
the law firms of Weil, Gotshal & Manges LLP and Baker Botts L.L.P. Mr. Ferguson received a Juris Doctorate degree from
Texas Tech University School of Law and a Bachelor's degree in Business Administration from Texas Tech University. He is a
member of the State Bar of Texas.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the Nasdaq Capital Market under the symbol “DZSI”.
As of March 4, 2022, we had 376 registered stockholders of record. A substantially greater number of holders of DZS common
stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers or financial institutions.
Dividend Policy
We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash
dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the Board of
Directors, subject to any applicable restrictions under our debt and credit agreements, and will be dependent upon our financial
condition, results of operations, capital requirements, general business condition and such other factors as the Board of
Directors may deem relevant.
ITEM 6.
[RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We are a global provider of leading-edge access, 5G transport, and enterprise communications platforms that enable the
emerging hyper-connected, hyper-broadband world. Our solutions are deployed by over 750 active customers, including
advanced Tier 1, national and regional service providers and enterprise customers in more than 100 countries worldwide. Our
solutions and platforms portfolio include products in Broadband Connectivity, Connected Home & Business, Mobile & Optical
Edge, and Network & Experience Software.
Our key financial objectives include the following:
•
•
Increasing revenue while continuing to carefully control costs;
Continuing investments in strategic research and product development activities that will provide the maximum
potential return on investment; and
• Minimizing consumption of our cash and cash equivalents.
2021 Highlights and Recent Developments
During 2021, the Company appointed several industry leaders to new roles within the DZS executive team. These
appointments, among others, include Misty Kawecki as Chief Financial Officer and Jennifer Yohe as Chief Operations Officer.
Each brings a deep history of experience in our markets.
In the first quarter of 2021, the Company made the strategic decision to transition DZS GmbH, formerly Keymile GmbH, a
subsidiary of the Company located in Germany, to a sales and research and development center. On July 15, 2021, the
Company came to an agreement with the works council and entered into a social plan that covers statutory benefits and one-
time severance obligations. The Company incurred related restructuring and other charges of approximately $11.9 million in
2021, consisting primarily of termination-related benefits and impairment of long-lived assets. DZS GmbH reduced headcount
by approximately 100 employees. The restructuring was essentially completed in the fourth quarter of 2021.
On March 3, 2021, the Company acquired substantially all of the assets of RIFT, Inc., a network automation solutions
company, including all the outstanding shares of RIFT.IO India Private Limited, a wholly owned subsidiary of RIFT, Inc.
(collectively “RIFT”). RIFT developed a carrier-grade RIFT.ware software platform that simplifies the deployment of any slice,
service, or application on any cloud. The total purchase consideration was $0.5 million, including a $0.2 million holdback that
was released in April of 2021 following the fulfillment of certain requirements in the purchase agreement.
On February 5, 2021, we acquired all the outstanding stock of Optelian Access Networks Corporation (“Optelian”), a leading
optical networking solution provider based in Ottawa, Ontario, Canada, and its portfolio of optical transport solutions. This
acquisition introduced the “O-Series” to the DZS portfolio of carrier grade optical networking products with 100 gigabits per
second and above capability, expanding DZS product portfolios by providing environmentally hardened, high capacity, and
flexible solutions at the network edge. The purchase price of $7.5 million included cash paid to the shareholders and option
holders of Optelian, cash paid to retire Optelian's outstanding debt on the date of acquisition, and contingent payments to
shareholders.
On January 26, 2021, we entered into an underwriting agreement to sell 4.6 million shares of Common Stock (including 0.6
million shares issued pursuant to the underwriters’ option to purchase additional shares) at a price of $14.00 per share in an
underwritten public offering. The equity offering closed on January 29, 2021 and resulted in gross proceeds of approximately
$64.4 million and net proceeds, after deducting underwriting discounts and commissions and offering expenses, of
approximately $59.5 million. We used a portion of the net proceeds from the equity offering to pay off the entire outstanding
balance of debt with related parties.
2021 Key Product Developments
Streamlined Product Portfolio. Our focus on product rationalization during 2021 produced a streamlined, simplified, and
strategically aligned global product portfolio. Our research and development investment scale has been enhanced through
product rationalization efforts and further accelerated by our pivot to a platform-based development approach for our Software
and Systems solutions. These platforms give our research and development teams the capacity to increase product innovation
with reuse of technology modules across multiple products, improving our ability to bring innovative and differentiated
products to market quickly. In 2021 we completed the development of 29 new products across all our technology pillars.
Fiber-Fueled Broadband Connectivity Drives Innovation. We are heavily engaged in and benefiting from the unprecedented
and accelerated upgrade cycle from legacy copper and first generation PON technologies to 10 gigabit broadband connectivity
solutions. We are enabling the next wave of network deployments fueled by HD video collaboration, augmented and virtual
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reality, interactive gaming, and the interactive and collaborative world now known as the Metaverse. The DZS Velocity
Broadband Connectivity portfolio accelerates and simplifies the network wide deployment of future-proof next generation,
multi-gigabit services over fiber, which are punctuated by new product introductions that simplify the evolution from sub-
gigabit PON to 10 Gbps PON, OLTs and next generation G.fast distribution point units (“DPUs”) that deliver multi-gigabit
service over legacy copper in MDUs and offer a simplified path to disaggregated network architectures.
Software-Driven Connected Home & Business Experience. The unprecedented drive from service providers to deliver multi-
gigabit services to subscribers creates a market opportunity for DZS to complement those advanced services with systems and
software to extend those services from the network to connected subscribers’ devices. DZS has responded to this opportunity
with the introduction of Intelligent 10Gbps capable Fiber Termination Points, Wi-Fi 6 Residential Gateways and Access Points,
and DZS Xperience Software. We accelerated our software strategy and roadmap throughout 2021, building upon the DZS
Cloud feature set and announcing a launch of DZS Xperience software that optimizes the management of Wi-Fi services
(including Wi-Fi 6).
Differentiated Converged Network Edge. The DZS Helix portfolio focuses on growing service provider opportunities to serve
the unique needs of the Connected Home & Business. Featuring one of the industry’s largest collections of feature-rich fiber
termination points as well as residential and enterprise gateways and Wi-Fi systems, the DZS portfolio includes support for
multi-gigabit capable services, Wi-Fi 6 and managed access network support all the way to the premises edge and beyond. DZS
Helix portfolio is also differentiated for its support for new converged network service opportunities in Enterprises and MDUs.
Mobile & Optical Edge. The adoption of 5G and O-RAN technologies have dramatically increased the requirement for
bandwidth at the edge of the mobile network and disrupted the way mobile operators are architecting mobile networks. During
2021, we extended our product offerings in the midhaul and backhaul areas of the network with the following:
•
Transformational new products for the edge of the mobile network with packet-based fronthaul, enablement of non-
traditional cell sites and deployment of transport and management solutions for in-building 5G small cells.
• Modular, compact and environmentally hardened 100G-400G Optical Edge products that enable the deployment of
technologies traditionally associated with core optical transport to the very edge of the mobile and fixed access
networks.
Trends and Uncertainties
In December 2019, a strain of coronavirus, now known to cause COVID-19, was reported to have surfaced in Wuhan, China.
Since that time, the widespread and sustained transmission of the virus has reached global pandemic status. In response to the
pandemic, many national and international health agencies recommended, and many countries and state, provincial and local
governments implemented various measures, including travel bans and restrictions, limitations on public and private gatherings,
business closures or operating restrictions, social distancing, and shelter-in-place orders. The health effects of the pandemic and
the above measures taken in response thereto have had an effect on the 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. Due to the uncertainty around the future economic impact of the pandemic,
the fair value measurements used in the Company’s impairment assessments could be negatively impacted and could result in
future impairments of goodwill, intangibles and other long-lived assets. During the year ended December 31, 2021, our
revenues increased by 16% compared to the year ended December 31, 2020, however the impact of a continued COVID-19
pandemic or sustained measures taken to limit or contain the outbreak could continue to have a material and adverse effect on
our business, financial condition, results of operations, and cash flows.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires
the measurement of financial position and operating results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Although our operations are influenced by general economic
conditions, we do not believe that inflation had a material effect on our results of operations during our fiscal year ended
December 31, 2021.
24
FINANCIAL PERFORMANCE
Consolidated Results of Operations
The table below presents the historical consolidated statement of comprehensive income (loss) with year-over-year changes (in
thousands except percent change).
Years ended December 31,
2021
2020
% change
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Research and product development
Selling, marketing, general and administrative
Restructuring and other charges
Impairment of long-lived assets
Amortization of intangible assets
Total operating expenses
Operating loss
Interest income
Interest expense
Loss on extinguishment of debt
Other income (expense), net
Loss before income taxes
Income tax provision
Net loss
$
$
350,206 $
229,938
120,268
47,052
90,241
12,310
1,735
1,182
152,520
(32,252)
107
(345)
—
1,020
(31,470)
3,213
(34,683) $
300,640
203,761
96,879
37,957
63,543
-
6,472
1,432
109,404
(12,525)
77
(2,035)
(1,369)
(3,729)
(19,581)
3,501
(23,082)
16%
13%
24%
24%
42%
100%
-73%
-17%
39%
158%
39%
-83%
-100%
-127%
61%
-8%
50%
The table below presents the historical consolidated statement of comprehensive income (loss) as a percentage of revenues.
Years ended December 31,
2021
2020
100%
66%
34%
13%
26%
4%
1%
—
44%
(10)%
—
—
—
1%
(9)%
1%
(10)%
100%
68%
32%
12%
21%
—
2%
1%
36%
(4)%
—
(1)%
(1)%
(1)%
(7)%
1%
(8)%
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Research and product development
Selling, marketing, general and administrative
Restructuring and other charges
Impairment of long-lived assets
Amortization of intangible assets
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Loss on extinguishment of debt
Other income (expense), net
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
25
Net Revenue
The following table presents our revenues by source (in millions):
Products
Services and other
Total
Years ended December 31,
2021
2020
% change
$
$
330.1
20.1
350.2
$
$
281.0
19.6
300.6
17.5%
2.6%
16.5%
Our revenues increased 16.5% or $49.6 million to $350.2 million for 2021 compared to $300.6 million for 2020. The increase
in product revenue during the period was primarily attributable to increased sales of our mobile and optical edge and broadband
connectivity products and partly as a result of recovering from the impacts of the COVID-19 pandemic in 2021. Service
revenue represents revenue from maintenance and other services associated with product shipments. The increase in service
revenue was primarily due to the increased product sales. In 2021, we generated $504 million in sales orders as compared to
$310 million in orders in 2020 and our backlog as of December 31, 2021 was approximately $225 million as compared to
$71 million as of December 31, 2020.
Information about our revenues by geography is summarized below (in millions):
Years ended December 31,
2021
2020
% change
Americas
Europe, Middle East, Africa
Asia
Total
$
$
101.5
70.0
178.7
350.2
$
$
61.9
64.6
174.1
300.6
64.0%
8.4%
2.6%
16.5%
Our geographic diversification reflects the combination of market demand, a strategic focus on capturing market share through
new customer wins and new product introductions. As we have strategically expanded our revenue mix in North America over
the past year, we continue to leverage our strength in the Asia market, particularly with Tier 1 customers in South Korea and
Japan. We anticipate North America will continue to increase as a percentage of total revenue driven by the 53 new customers
captured during 2021.
•
•
•
Americas Region: For full year 2021, revenue from the Americas increased 64.0% to $101.5 million. Our strategic
emphasis on the Americas region and focus on innovation and strategic alignment with service providers and fiber
overbuilders has resulted in market share gains and new customers. Our new customer traction is benefitting from
government-sponsored broadband incentive programs. For example, our recently announced broadband project in
Mississippi with strategic partner Irby Utilities is a beneficiary of multiple broadband stimulus programs.
EMEA Region: For the full year 2021, revenue from the EMEA region increased 8.4% year-over-year to
$70.0 million. Revenue from the EMEA region reflects typical fluctuations of customer deployment timeframes. For
2021, revenue from the EMEA region was largely driven by customers deploying GPON solutions in the Middle
East. Throughout the year, sales activity in the region has expanded to record levels.
Asia Region: For the full year 2021, regional revenue increased 2.6% to $178.7 million. The Asia region experienced
strong year-end spending from several marquee customers in world leading broadband markets of South Korea and
Japan across both our Broadband Connectivity and Mobile Transport segments. The 2021 revenue increase was led
by our Mobile and Optical Edge product line. We anticipate more diverse customer revenue within the Asia region in
2022 as customer programs from both existing and recent wins ramp into production.
We anticipate that our results of operations in any given period may depend to a large extent on sales to a small number of large
accounts. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one
or a small number of key customers.
Cost of Revenue and Gross Profit
Total cost of revenue increased 12.8% to $229.9 million for 2021, compared to $203.8 million for 2020. Total cost of revenue
was 65.7% of net revenue for 2021, compared to 67.8% of net revenue for 2020, which resulted in an increase in gross profit
percentage to 34.3% for 2021 from 32.2% for 2020. The increase in total cost of revenue was primarily due to the increase in
26
sales volume. The gross profit improvement was primarily due to our strategic investments and geographic diversification
decisions directed towards the higher margin North America region, despite increased supply chain costs.
Our 29 new product introductions throughout 2021 provided synergy and simplification to our next generation product
portfolio, and also improved product margins. Price adjustments implemented in 2021 are designed to offset increased
semiconductor, component, logistics and expedite costs, which have generally been understood and accepted by our customers.
We anticipate that our new pricing strategy, combined with our aforementioned geographic mix diversification, new product
introductions and DZS Cloud software expansion strategy, will allow us to deliver both revenue growth and margin expansion.
Operating expenses
Research and Product Development Expenses: Research and 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 24.0% to $47.0 million for 2021 compared to $38.0 million for 2020.
The increase in research and product development expenses was primarily due to strategic hiring decisions in research,
development, and product line management in the second half of 2020 and into the first half of 2021 with the intent to
accelerate growth and capture market share.
Selling, Marketing, General and Administrative Expenses: Selling, marketing, general and administrative expenses include
personnel costs for sales, marketing, administration, finance, information technology, human resources and general
management as well as legal and accounting expenses, rent, utilities, trade show expenses and related travel costs.
Selling, marketing, general and administrative expenses increased 42.0% to $90.2 million for 2021 compared to $63.5 million
for 2020. The increase in selling, marketing, general and administrative expenses was primarily due to the increase in
allowance for doubtful accounts for one customer in India of $14.2 million in the first quarter of 2021. Refer to Note 1, in the
Notes to Consolidated Financial Statements, for further information on the bad debt expense. The increase was also partially
due to strategic hiring decisions across sales and administration in the second half of 2020 and into the first half of 2021 with
the intent to accelerate growth and capture market share, along with the impact of the Optelian and Rift acquisitions.
Restructuring and Other Charges: Restructuring and other charges for 2021 were $12.3 million and relate primarily to the
strategic decision to transition DZS GmbH to a sales and research and development center. The restructuring and other charges
consisting of termination-related benefits of $8.5 million, an impairment of long-lived assets charge of $2.7 million mainly
related to right-of-use assets from operating leases, professional services of $0.9 million, and $0.2 million of other charges. See
Note 6 Restructuring and Other Charges, in the Notes to Consolidated Financial Statements, for further information.
Impairment of Long-Lived Assets: During 2021, the Company recorded an impairment charge of $1.7 million for the right-of
use assets from operating leases related to completion of the headquarters relocation to Plano, Texas. During 2020, the
Company recorded an impairment charge of $6.5 million for DZS GmbH intangible assets as part of the Company’s evaluation
for impairment, based on a triggering event for potential impairment.
Loss on Extinguishment of Debt: During March 2020, the Company paid the outstanding term loan borrowings in full and
terminated the PNC Credit Facilities. In association with this debt repayment, the Company recorded a loss on extinguishment
of debt of $1.4 million. There was no debt extinguishment related charge in 2021.
Other Income (Expense), net: Other income (expense) relates mainly to realized and unrealized foreign exchange gains and
losses. Other income, net was $1.0 million for 2021 compared to other expense, net of $3.7 million in 2020. The main reason
for the increase in other income, net was due to foreign currency exchange gains in 2021.
Income Tax Provision (Benefit): We recorded an income tax expense of $3.2 million for 2021 as compared to $3.5 million
expense incurred in 2020. Despite consolidated net losses, we incur income tax expense due to taxable income generated in
South Korea and Japan.
Information about our effective tax rate is summarized below (in thousands except tax rate):
Loss before income taxes
Total tax provision
Effective tax rate
$
Years ended December 31,
2021
2020
(31,470) $
3,213
-10.2%
(19,581)
3,501
-17.9%
27
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 merger and acquisition
transaction costs, inventory valuation step-up amortization, purchase price adjustments, restructuring and other charges,
goodwill impairment, bargain purchase gain, gain (loss) on sale of assets, impairment of long-lived assets or loss on debt
extinguishment, bad debt expense related to a large customer in India, any of which may or may not be recurring in nature. We
believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure
that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our
business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across
reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating
performance.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
• Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or
contractual requirements;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or
principal payments, on our debts;
• Although depreciation and amortization are non-cash expenses, the assets being depreciated and amortized will often
have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
• Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package,
although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and
• Other companies in our industry may calculate Adjusted EBITDA and similar measures differently than we do,
limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) or
any other performance measures calculated in accordance with U.S. GAAP or as a measure of liquidity. Management
understands these limitations and compensates for these limitations by relying primarily on our U.S. GAAP results and using
Adjusted EBITDA only 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 GAAP financial measure to Adjusted EBITDA (in thousands):
Net income (loss)
Add (deduct):
Interest expense, net
Income tax provision (benefit)
Depreciation and amortization
Stock-based compensation
Acquisition costs
Loss on debt extinguishment
Headquarters and facilities relocation
Executive transition
Intangibles Impairment
Bad debt expense, net of recoveries*
Restructuring and other charges
Years ended December 31,
2021
2020
$
(34,683) $
(23,082)
238
3,213
4,551
8,990
675
—
1,114
372
—
13,957
12,310
10,737 $
1,958
3,501
5,143
4,613
—
1,369
61
2,047
6,472
3,119
—
5,201
Adjusted EBITDA
$
* Refer to Note 1, in the Notes to Consolidated Financial Statements, for further details on the bad debt expense.
28
LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically and continue to be financed through a combination of our existing cash and cash equivalents,
cash generated in the business, borrowings, and sales of equity.
The following table summarizes the information regarding our cash and cash equivalents and working capital (in thousands):
Unrestricted cash and cash equivalents
Working capital
December 31, 2021
$
46,666 $
124,498
December 31, 2020
45,219
123,285
The Company had a net loss of $34.7 million for the year ended December 31, 2021 and net loss of $23.1 million for the year
ended December 31, 2020.
As of December 31, 2021, we had an accumulated deficit of $87.0 million and working capital of $124.5 million. As of
December 31, 2021, we had $46.7 million in unrestricted cash and cash equivalents, which included $30.1 million in cash
balances held by our international subsidiaries. On January 29, 2021, the Company closed an equity offering which resulted in
net proceeds to the Company of approximately $59.5 million. The Company used a portion of the net proceeds from the Equity
Offering to pay off the entire remaining outstanding balance of debt with related parties, banks, and other lending institutions.
We continue to focus on cost management, operating efficiency and restrictions on discretionary spending. In addition, if
necessary, we may sell assets, issue debt or equity securities or purchase credit insurance. We may also rationalize the number
of products we sell, adjust our manufacturing footprint, and reduce our operations in low margin regions, including reductions
in headcount. Based on our current plans and current business conditions, we believe that these measures along with our
existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months
from the date of this Annual Report on Form 10-K.
Our ability to meet our obligations as they become due in the ordinary course of business for the next 12 months will depend on
our ability (i) to achieve forecasted results of operations, and (ii) continue to effectively manage working capital requirements.
While we believe that we are likely to achieve forecasted results of operations if we are successful in implementing our
business strategies, the impact of the COVID-19 pandemic provides great uncertainty with respect to a potential impact on our
future operations.
The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):
Consolidated Statements of Cash Flows Data
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
$
$
Operating Activities
Years ended December 31,
2021
2020
(14,326) $
(9,483)
23,778
(917)
(948)
54,587
53,639 $
5,064
(2,270)
17,624
534
20,952
33,635
54,587
Net cash used in operating activities during 2021 was $14.3 million compared with $5.1 million net cash provided by operating
activities during 2020. The increase in cash used in operating activities was primarily due to restructuring activities related to
our Hanover location, an increase in research and development expenses, along with an increase in selling, general and
administrative expenses, partially offset by an increase in gross margin.
Investing Activities
Net cash used in investing activities during 2021 was $9.5 million compared with $2.3 million of net cash used in investing
activities during 2020. The increase in cash used in investing activities was primarily due to cash used for the Optelian and
RIFT acquisitions.
29
Financing Activities
Net cash provided by financing activities during 2021 was $23.8 million compared with $17.6 million net cash provided by
financing activities during 2020. Net cash provided by financing activities during 2021 consisted primarily of proceeds from
the equity offering of $59.5 million and proceeds from exercise of stock options and employee stock purchases of $6.8 million
partially offset by repayments of our short-term borrowings and related party term loans of $42.5 million. Net cash provided by
financing activities during 2020 consisted primarily of proceeds from borrowings of $32.1 million, proceeds from factored
accounts receivable of $11.6 million and proceeds from exercise of stock options and employee stock purchases of $3.7
million, partially offset by a net outflow associated with the repayment of short-term borrowings and long-term debt of $29.8
million.
Debt Facilities
On February 9, 2022, the Company entered into Credit Agreement with JPMorgan Chase Bank, N.A., that provides for
$30.0 million of revolving credit commitment. Refer to Note 8 Debt, in the Notes to Consolidated Financial Statements, for
more detail about our current and past debt obligations.
Future Requirements and Funding Sources
Our fixed commitments for cash expenditures consist primarily of payments under operating leases, inventory purchase
commitments, and payments of principal and interest for debt obligations.
From time to time, we may provide or commit to extend credit or credit support to our customers. This financing may include
extending the terms for product payments to customers. Any extension of financing to our customers will limit the capital that
we have available for other uses.
Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a
significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of
customer account balances. As of December 31, 2021, two customers accounted for 26% and 10%, respectively, of our net
accounts receivable. As of December 31, 2021, the Company has an allowance for doubtful account of $16.7 million related to
one customer. Refer to Refer to Note 1 Organization and Summary of Significant Accounting Policies, in the Notes to
Consolidated Financial Statements, for further detail. Our receivables from customers in countries other than the U.S.
represented 79% of accounts receivable. We do not currently have any material commitments for capital expenditures, or any
other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt.
Contractual Commitments and Off-Balance Sheet Arrangements
As of December 31, 2021, our future contractual commitments were $31.7 million and included operating lease obligations and
purchase commitments. Future minimum operating lease obligations were $18.4 million and included operating lease payments
for our office locations and manufacturing, research and development locations, which expire at various dates through 2028.
Refer to Note 13 Leases, in the Notes to Consolidated Financial Statements, for more details. Our long-term purchase
commitments were $3.2 million and included non-cancellable inventory purchase commitments. Refer to Note 14
Commitments and Contingencies, in the Notes to Consolidated Financial Statements, for more details.
The Company’s pension plan obligations are excluded from the contractual commitments since the plan is unfunded, and the
timing and amount of any cash payments are uncertain. Refer to Note 15 Employee Benefit Plans, in the Notes to Consolidated
Financial Statements, for more details.
Critical Accounting Estimates
The methods, assumptions, and estimates that we use in applying our accounting policies may require us to apply judgments
regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if: (1) we must make
assumptions that were uncertain when the judgment was made, and (2) changes in the estimate assumptions, or selection of a
different estimate methodology, could have a significant impact on our financial position and the results that we report in our
Consolidated Financial Statements. While we believe that our estimates, assumptions, and judgments are reasonable, they are
based on information available when the estimate was made.
30
Refer to Note 1 Accounting Policies, in the Notes to Consolidated Financial Statements, for further information on our critical
accounting estimates and policies, which are as follows:
Revenue Recognition – the calculation of transaction price, net of variable consideration. Our sales arrangements to
certain distributors provide our distributors with volume discounts, price adjustments, and other allowances under
certain circumstances. For contracts with customers that contain multiple performance obligations, we account for the
promises separately as individual performance obligations if they are distinct.
Inventories – the capitalization of manufacturing costs in inventory, excluding factory excess capacity costs. Inventory
reflected at the lower of cost or net realizable value considering future demand and market conditions.
Goodwill and Long-lived Assets – the valuation methods and assumptions used in assessing the impairment of
property, plant and equipment, identified intangibles, and goodwill, including the determination of asset groupings and
the identification and allocation of goodwill to reporting units.
Business Combination – the valuation methods and assumptions used in assessing the fair value of assets and liabilities
on the acquisition date.
Income Tax – the determination of deferred tax assets and liabilities based on differences between the financial
reporting and the income tax bases of assets and liabilities. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
Allowances for Doubtful Accounts – the determination of expected credit losses through analysis of information
obtained from credit rating agencies, financial statement review, and historical and current collection trends.
Pension Benefit Obligation – the valuation methods and assumptions used to measure the pension benefit obligation.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not required.
31
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DZS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
Report of Independent Registered Public Accounting Firm (PCAOB ID: 248)
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
33
35
36
37
38
39
40
No financial statement schedules are required because all the relevant data is included elsewhere in these consolidated financial
statements.
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of DZS Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of DZS Inc. and subsidiaries (the Company) as of December 31,
2021, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for the year then
ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31,
2021, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated March 9, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the account or disclosure to which it relates.
Deferred Tax Asset Valuation Allowance
Description of the Matter As more fully described in Note 11, Income Taxes, as of December 31, 2021, the Company had
deferred tax assets of $49.8 million before a valuation allowance of $46.0 million in the U.S.
and foreign jurisdictions. Deferred tax assets are reduced by a valuation allowance if, based
upon the weight of all available evidence, it is more likely than not that some portion, or all, of
the deferred tax assets will not be realized. Management’s analysis of the realizability of its
deferred tax assets was critical to our audit because the assessment process by jurisdiction is
complex, involves judgment, and includes assumptions that may be affected by future market
or economic conditions.
33
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of
controls over the Company’s income tax process, including the Company’s assessment of the
realizability of deferred tax assets. This included testing controls over management’s review of
the valuation allowance position and the deferred tax rollforward by jurisdiction.
We evaluated the Company’s assessment of the realizability of deferred tax assets, including
management’s evaluation of the sources of taxable income considered in determining whether a
valuation allowance is required and management’s assessment of all available evidence, both
positive and negative, to determine the amount of the valuation allowance. Among other audit
procedures performed, we involved our tax professionals to evaluate the application of tax law
in the Company’s assessment and the resulting valuation allowance. We also tested the
Company’s scheduling of the reversal of existing taxable temporary differences and evaluated
the adequacy of the Company’s financial statement disclosure in Note 11 to the consolidated
financial statements related to this tax matter.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021.
Dallas, Texas
March 9, 2022
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
DZS Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of DZS Inc. (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2020, the related consolidated statements of comprehensive income (loss), stockholders’
equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We served as the Company’s auditor from 2019 to 2021.
Dallas, Texas
March 11, 2021
35
DZS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value)
As of December 31,
2021
2020
Current assets:
Assets
Cash and cash equivalents
Restricted cash
Accounts receivable - trade, net of allowance for doubtful accounts of
$17,735 as of December 31, 2021 and $3,954 as of December 31, 2020
Other receivables
Inventories
Contract assets
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Right-of-use assets from operating leases
Goodwill
Intangible assets, net
Deferred tax assets, net
Other assets
Total assets
Current liabilities:
Liabilities and Stockholders’ Equity
Accounts payable - trade
Short-term debt - bank, trade facilities and secured borrowings
Contract liabilities
Operating lease liabilities
Accrued and other liabilities
Total current liabilities
Long-term debt - related party
Contract liabilities - non-current
Operating lease liabilities - non-current
Pension liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 14)
Stockholders’ equity:
$
$
46,666 $
6,808
86,114
10,621
56,893
2,184
5,690
214,976
9,842
12,640
6,145
5,115
-
8,950
257,668 $
$
64,258 $
-
6,091
4,097
16,032
90,478
-
3,044
12,103
16,527
3,609
125,761
Common stock, 36,000 shares authorized, 27,505 and 21,958 shares issued and
outstanding as of December 31, 2021 and December 31, 2020, respectively, at
$0.001 par value
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
27
223,336
(4,457)
(86,999)
131,907
257,668 $
$
See accompanying notes to consolidated financial statements.
45,219
9,200
97,253
9,165
39,572
6,182
5,332
211,923
7,146
18,483
3,977
3,377
1,405
5,919
252,230
49,250
13,787
4,400
4,494
16,707
88,638
29,754
2,471
15,959
20,052
1,777
158,651
22
147,997
(2,124)
(52,316)
93,579
252,230
36
DZS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share data)
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Research and product development
Selling, marketing, general and administrative
Restructuring and other charges
Impairment of long-lived assets
Amortization of intangible assets
Total operating expenses
Operating loss
Interest income
Interest expense
Loss on extinguishment of debt
Other income (expense), net
Loss before income taxes
Income tax provision
Net loss
Foreign currency translation adjustments
Actuarial gain (loss)
Comprehensive loss
Net loss per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
Years ended December 31,
2021
2020
$
350,206 $
229,938
120,268
47,052
90,241
12,310
1,735
1,182
152,520
(32,252)
107
(345)
-
1,020
(31,470)
3,213
(34,683)
(4,046)
1,713
(37,016) $
(1.30) $
(1.30) $
26,692
26,692
$
$
$
300,640
203,761
96,879
37,957
63,543
-
6,472
1,432
109,404
(12,525)
77
(2,035)
(1,369)
(3,729)
(19,581)
3,501
(23,082)
2,796
(981)
(21,267)
(1.07)
(1.07)
21,588
21,588
See accompanying notes to consolidated financial statements.
37
DZS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2021 and 2020
(In thousands)
Balance as of December 31, 2019
Exercise of stock awards and
employee stock plan purchases
Stock-based compensation
Net loss
Other comprehensive loss
Balance as of December 31, 2020
Issuance of common stock in public
offering, net of issuance costs
Exercise of stock awards and
employee stock plan purchases
Stock-based compensation
Net loss
Other comprehensive loss
Balance as of December 31, 2021
Common stock
Shares
Amount
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
Accumulated
deficit
Total
stockholders'
equity
21,419 $
21 $
139,700 $
(3,939) $
(29,234) $
106,548
539
—
—
—
21,958
1
—
—
—
22
3,684
4,613
—
—
147,997
—
—
—
1,815
(2,124)
—
—
(23,082)
—
(52,316)
3,685
4,613
(23,082)
1,815
93,579
4,600
5
59,520
—
—
59,525
947
—
—
—
27,505 $
—
—
—
—
27 $
6,829
8,990
—
—
223,336 $
—
—
—
(2,333)
(4,457) $
—
—
(34,683)
—
(86,999) $
6,829
8,990
(34,683)
(2,333)
131,907
See accompanying notes to consolidated financial statements.
38
DZS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization
Impairment of long-lived assets and non-cash restructuring
Gain on lease termination
Loss on extinguishment of debt
Amortization of deferred financing costs
Stock-based compensation
Provision for inventory write-down
Bad debt expense, net of recoveries
Provision for sales returns
Provision for warranty
Loss on foreign currency transactions
Loss (gain) of disposal of property, plant and equipment
Deferred taxes
Changes in operating assets and liabilities:
Accounts receivable
Other receivable
Inventories
Contract assets
Prepaid expenses and other assets
Accounts payable
Contract liabilities
Accrued and other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment and other assets
Purchases of property, plant and equipment
Acquisition of business, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock in public offerings, net of issuance costs
Proceeds from short-term borrowings and line of credit
Repayments of short-term borrowings and line of credit
Repayments of long-term borrowings
Proceeds from related party term loan
Repayments of related party term loan
Proceeds from factored accounts receivable
Proceeds from exercise of stock awards and employee stock plan purchases
Net cash provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Reconciliation of cash, cash equivalents and restricted cash to balance sheets
Cash and cash equivalents
Restricted cash
Long-term restricted cash
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest - bank and trade facilities
Interest - related party
Income taxes
Years ended December 31,
2021
2020
$
(34,683) $
(23,082)
4,551
4,425
(908)
—
12
8,990
4,064
14,491
1,132
798
335
(468)
1,329
(6,624)
(4,780)
(23,241)
3,915
(2,965)
19,092
2,215
(6,006)
(14,326)
561
(5,585)
(4,459)
(9,483)
59,525
—
(13,278)
—
—
(29,298)
—
6,829
23,778
(917)
(948)
54,587
53,639 $
$
46,666
6,808
165
53,639 $
83 $
108 $
3,029 $
5,143
6,472
—
1,343
149
4,613
5,531
3,833
1,303
1,072
2,875
18
316
(18,782)
822
(6,916)
11,341
703
11,136
13
(2,839)
5,064
—
(2,270)
—
(2,270)
—
13,774
(16,696)
(13,125)
18,341
—
11,645
3,685
17,624
534
20,952
33,635
54,587
45,219
9,200
168
54,587
788
981
2,645
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
39
DZS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
DZS Inc. (referred to, collectively with its subsidiaries, as “DZS” or the “Company”) is a global provider of leading-edge
access, 5G transport, and enterprise communications platforms that enable the emerging hyper-connected, hyper-broadband
world. The Company provides a wide array of reliable, cost-effective networking technologies, including broadband access,
Ethernet switching, mobile backhaul, Passive Optical LAN and software-defined networks, to a diverse customer base.
DZS was incorporated under the laws of the state of Delaware in June 1999. The Company is headquartered in Plano, Texas
with flexible in-house production facilities in Seminole, Florida, and contract manufacturers located in China, India, Korea and
Vietnam. The Company also maintains offices to provide sales and customer support at global locations.
On August 26, 2020, the Company filed a Certificate of Amendment to its Restated Certificate of Incorporation with the
Delaware Secretary of State reflecting a company name change from Dasan Zhone Solutions, Inc. to DZS Inc.
(b) Basis of Presentation
The consolidated financial statements are prepared in accordance with U.S. GAAP and include the accounts of the Company
and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. Certain
prior-year amounts have been reclassified to conform to the current-year presentation.
(c) Related Party Transactions
The financial statements include disclosures of material related party transactions. However, disclosure of transactions that are
eliminated in the preparation of consolidated financial statements are not required to be disclosed. As of December 31, 2021,
Dasan Networks, Inc. (“DNI”) owned approximately 36.7% of the outstanding shares of the Company's common stock. See
Note 12 Related Party Transactions for additional information about related party transactions.
(d) Risks and Uncertainties
The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, assuming the
Company will continue as a going concern.
The Company had a net loss of $34.7 million for the year ended December 31, 2021 and net loss of $23.1 million for the year
ended December 31, 2020. As of December 31, 2021, the Company had an accumulated deficit of $87.0 million and working
capital of $124.5 million. As of December 31, 2021, the Company had $46.7 million in cash and cash equivalents, which
included $30.1 million in cash balances held by its international subsidiaries. On January 29, 2021, the Company closed an
equity offering which resulted in net proceeds to the Company of approximately $59.5 million. The Company used a portion of
the net proceeds from the Equity Offering to pay off the entire remaining outstanding balance of debt with related parties,
banks, and other lending institutions. Refer to Note 8 Debt and Note 9 Stockholder's Equity for more details. On February 9,
2022, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A., that provides for $30.0 million of
revolving credit commitment. On February 10, 2022, the Company filed a “shelf” registration statement on Form S-3 to register
up to $150 million of Company common stock, representing an indeterminate number of shares of common stock as may be
issued from time to time pursuant to underwritten public offerings, negotiated transactions, block trades or a combination of
these methods at indeterminate prices. Refer to Note 17 Subsequent Events for more details.
Based on the Company's current plans and current business conditions, the Company believes that its existing cash, cash
equivalents and available credit facility will be sufficient to satisfy its anticipated cash requirements for at least the next 12
months from the date of this Annual Report on Form 10-K.
The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next 12 months
will depend on its ability (i) to achieve forecasted results of operations, and (ii) continue to effectively manage working capital
requirements. Management’s belief that it will achieve forecasted results of operations assumes that, among other things, the
Company will continue to be successful in implementing its business strategy.
In December 2019, a strain of coronavirus, now known to cause COVID-19, was reported to have surfaced in Wuhan, China.
Since that time, the widespread and sustained transmission of the virus has reached global pandemic status. In response to the
pandemic, many national and international health agencies recommended, and many countries and state, provincial and local
governments implemented various measures, including travel bans and restrictions, limitations on public and private gatherings,
business closures or operating restrictions, social distancing, and shelter-in-place orders. Although some of these measures have
since been lifted, 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,
40
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. Due to the
uncertainty around the future economic impact of the pandemic, the fair value measurements used in the Company’s
impairment assessments could be negatively impacted and could result in future impairments of goodwill, intangibles and other
long-lived assets. During the year ended December 31, 2021, our revenues increased by 16% compared to the year ended
December 31, 2020, however the impact of a continued COVID-19 pandemic or sustained measures taken to limit or contain
the outbreak could continue to have a material and adverse effect on our business, financial condition, results of operations, and
cash flows.
The recent outbreak of the coronavirus in China and other countries has negatively impacted our supply chain in recent months.
Supply chain pricing, freight and logistics costs, availability, and extended lead-times became a challenge in 2021 as the world
economy recovered from the COVID-19 pandemic. As we continue to incur elevated costs for components and expedite fees,
our supply chain and operations teams continue to focus on managing through a constrained environment, thereby enabling
DZS to maximize shipments despite elongated lead times. We remain cautious about continued supply chain headwinds that
challenge the industry and anticipate a constrained supply chain environment to persist throughout 2022.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and
cash equivalents, accounts receivable and contract assets. Cash and cash equivalents consist principally of financial deposits
and money market accounts that are principally held with various domestic and international financial institutions with high
credit standing.
The 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.
For the year ended December 31, 2021, two customers represented 19% and 12% of net revenue, respectively. For the year
ended December 31, 2020, two customers represented 14% and 13% of net revenue, respectively.
As of December 31, 2021, two customers represented 26% and 10% of net accounts receivable, respectively. As of December
31, 2020, two customers represented 17% and 16% of net accounts receivable, respectively.
As of December 31, 2021, and December 31, 2020, net accounts receivable from customers in countries other than the United
States represented 79% and 89%, respectively.
In 2017, the Company entered into an agreement with a customer in India to supply product for a state sponsored broadband
project. The Company substantially completed its obligations under the agreement in 2018, and all amounts due were billed
under the terms of the agreement by December 31, 2020. The Company billed the customer, which is a state government
sponsored entity, approximately $59.0 million and collected payments of approximately $41.7 million, leaving a balance of
approximately $17.3 million as of December 31, 2020. The remaining $17.3 million balance is substantially beyond the
customers contractual payment terms, and the Company has been actively working with the customer and third parties in India
to arrange payment of the entire remaining balance of $17.3 million. The Company recorded an allowance for doubtful
accounts of $3.1 million on December 31, 2020, for a partial payment promised but not received. In late March 2021, the
customer’s state government parent experienced difficulty passing a budget further impacting the ability of the customer to
make agreed-upon partial payments to us. In light of this development, the Company recognized an additional allowance of
$14.2 million during the three months ended March 31, 2021. During the fourth quarter 2021, the Company recovered
approximately $0.3 million of accounts receivable related to the customer. As of December 31, 2021, the Company has a
recorded allowance for doubtful accounts of $16.7 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 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.
(e) Use of Estimates
The preparation of the 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 consolidated financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ materially from those estimates.
41
(f) Revenue Recognition
Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the
customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or
services.
The Company generates revenue primarily from sales of products and services, including, extended warranty service, software
and customer support. Revenue from product sales is recognized at a point in time when control of the goods is transferred to
the customer, generally occurring upon shipment or delivery, dependent upon the terms of the underlying contract. Many of the
Company’s arrangements include customer acceptance provisions which the Company typically considers a formality. In
situations when the customer acceptance terms are more than a formality, transfer of control usually occurs upon obtaining the
signed acceptance certificate from the customer. In those instances where transfer of control occurs prior to obtaining the
signed acceptance certificate, the Company considers a number of factors, including successful completion of customer testing
to demonstrate that the delivered products meet all the acceptance criteria specified in the arrangement, its experience with the
customer and its experience with other contracts for similar products.
Revenue from services is generally recognized over time on a ratable basis over the contract term, using an output measure of
progress, as the contracts usually provide the customer equal benefit throughout the contract period. The Company typically
invoices customers for support contracts in advance, for periods ranging from one to five years.
Transaction price is calculated as selling price net of variable consideration. Sales to certain distributors are made under
arrangements which provide the distributors with volume discounts, price adjustments, and other allowances under certain
circumstances. These adjustments and allowances are accounted for as variable consideration. To estimate variable
consideration, the Company analyzes historical data and current economic trends, and changes in customer demand for the
Company's products, among other factors. Historically, variable consideration has not been a significant component of the
Company’s contracts with customers.
For contracts with customers that contain multiple performance obligations, the Company accounts for the promised
performance obligations separately as individual performance obligations if they are distinct. In determining whether
performance obligations meet the criteria for being distinct, the Company considers a number of factors, including the degree
of interrelation and interdependence between obligations and whether or not the good or service significantly modifies or
transforms another good or service in the contract. After identifying the separate performance obligations, the transaction price
is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices for
products are determined using either an adjusted market assessment or expected cost-plus margin. For customer support and
extended warranty services, standalone selling price is primarily based on the prices charged to customers, when sold
separately. Unsatisfied and partially unsatisfied performance obligations as of the end of the reporting period primarily consist
of products and services for which customer purchase orders have been accepted and that are in the process of being delivered.
The Company records contract assets when it satisfies a performance obligation but does not have an unconditional right to
consideration and records accounts receivable when it satisfies a performance obligation and has an unconditional right to
consideration. The Company records contract liabilities when cash payments (or unconditional rights to receive cash) are
received in advance of fulfilling its performance obligations.
The Company’s payment terms vary by the type and location of its customer and the products or services offered. For certain
products or services and customer types, the Company requires payment before the products or services are delivered to the
customer.
Other related policies and revenue information
Warranties
Products sold to customers include standard warranties, typically for one year, covering physical operation and software bug
fixes and minor updates such that the product continues to function according to published technical specifications. These
standard warranties are assurance type warranties and do not offer any services in addition to the assurance that the product will
continue working as specified. Therefore, standard warranties are not considered separate performance obligations. Instead, the
expected cost of warranty is accrued as expense as discussed below. Optional extended warranties, typically between one and
three years, and for up to five years, are sold with certain products and include additional support services. The transaction
price for extended warranties is accounted for as service revenue and recognized ratably over the life of the contract.
The Company records estimated costs related to standard warranties upon product shipment or upon identification of a specific
product failure. The Company recognizes estimated warranty costs when it is probable that a liability has been incurred and the
amount of loss is reasonably estimable. The estimates are based upon historical and projected product failure and claim rates,
historical costs incurred in correcting product failures and information available related to any specifically identified product
failures. Significant judgment is required in estimating costs associated with warranty activities and the Company's estimates
are limited to information available to the Company at the time of such estimates. In some cases, such as when a specific
product failure is first identified or a new product is introduced, the Company may initially have limited information and
42
limited historical failure and claim rates upon which to base its estimates, and such estimates may require revision in future
periods. The recorded amount is adjusted from time to time for specifically identified warranty exposure.
Contract Costs
The Company recognizes an asset for certain costs to fulfill a contract if it is determined that such costs relate directly to a
contract or anticipated contracts, can be determined to generate or enhance resources that will be used in satisfying related
performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is
consistent with the transfer to the customer of the goods to which the asset relates. Contract costs primarily consist of sales
commissions that are amortized as sales and marketing expense.
Financing
The Company applies the practical expedient not to adjust the promised amount of consideration for the effects of a financing
component if the Company expects, at contract inception, that the period between when the Company transfers a good or
service to the customer and when the customer pays for the good or service will be one year or less. During the year ended
December 31, 2021 and 2020, such financing components were not significant.
Shipping and Handling
The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a
good as a fulfillment cost rather than as an additional promised service. As a result, the Company accrues the costs of shipping
and handling when the related revenue is recognized.
Unsatisfied Performance Obligations
The majority of the Company's performance obligations in its contracts with customers relate to contracts with duration of less
than one year. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original
expected length of one year or less, based on the elected practical expedients. The transaction price allocated to noncancellable
unsatisfied performance obligations included in contracts with duration of more than 12 months is reflected in contract
liabilities – non-current on the consolidated balance sheets.
Disaggregation of Revenue
The following table presents the revenues by source (in thousands):
Products
Services and other
Total
The following table present revenues by geographical region (in thousands):
Americas
Europe, Middle East, Africa
Asia
Total
Years ended December 31,
2021
2020
330,093 $
20,113
350,206 $
280,988
19,652
300,640
Years ended December 31,
2021
2020
101,473 $
70,046
178,687
350,206 $
61,900
64,580
174,160
300,640
$
$
$
$
(g) Allowances for Doubtful Accounts and Sales Returns
The Company records an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make
payments for amounts owed to the Company. The allowance for doubtful accounts is recorded as an expense under general and
administrative expenses. The Company bases its allowance on periodic assessments of its customers’ liquidity and financial
condition through analysis of information obtained from credit rating agencies, financial statement review and historical and
current collection trends. Though the allowance for doubtful accounts at each balance sheet date represents the Company’s best
estimate at that point in time, an increase or decrease to the allowance for doubtful accounts may be required in the future based
on updated estimates of customers' ability or willingness to pay or if previously reserved balances have been collected.
43
Activity under the Company’s allowance for doubtful accounts is comprised as follows (in thousands):
Balance at beginning of period
Charged to expense, net of recoveries
Utilization/write offs/exchange rate differences
Balance at end of period
Years ended December 31,
2021
2020
$
$
3,954 $
14,491
(710)
17,735 $
393
3,833
(272)
3,954
The Company records an allowance for sales returns for estimated future product returns related to current period product
revenue. The allowance for sales returns is recorded as a reduction of revenue and an increase to accrued and other liabilities.
The Company bases its allowance for sales returns on periodic assessments of historical trends in product return rates and
current approved returned products. If the actual future returns were to deviate from the historical data on which the reserve had
been established, the Company’s future revenue could be adversely affected.
Activity under the Company’s allowance for sales returns is comprised as follows (in thousands):
Balance at beginning of period
Charged to revenue
Utilization/write offs/exchange rate differences
Balance at end of period
(h) Inventories
Years ended December 31,
2021
2020
390 $
1,132
(649)
873 $
343
1,303
(1,256)
390
$
$
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. In assessing the net realizable value of inventories, the
Company is required to make judgments as to future demand requirements and compare these with the current or committed
inventory levels. Once inventory has been written down to its estimated net realizable value, its carrying value cannot be
increased due to subsequent changes in demand. To the extent that a severe decline in forecasted demand occurs, or the
Company experiences a higher incidence of inventory obsolescence due to rapidly changing technology and customer
requirements, the Company may incur significant expenses for excess and obsolete inventory. The Company also evaluates the
terms of its agreements with its suppliers and establishes accruals for estimated losses on adverse purchase commitments as
necessary, applying the same lower of cost or net realizable value approach that is used to value inventory.
(i) Foreign Currency Translation
For operations outside the United States, the Company translates assets and liabilities of foreign subsidiaries, whose functional
currency is the applicable local currency, at end of period exchange rates. Revenues and expenses are translated at periodic
average rates. The adjustment resulting from translating the financial statements of such foreign subsidiaries is included in
accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity. Realized
and unrealized gains and losses on foreign currency transactions are included in other income (expense) in the accompanying
consolidated statements of comprehensive income (loss). Our primary exposure to foreign currency exchange rate movements
is with our Korea subsidiary, that has a Korean Won functional currency, our Japan subsidiary, that has a Japanese Yen
functional currency, and our Germany subsidiary, that has a Euro functional currency.
(j) Comprehensive Income (Loss)
There have been no material items reclassified out of accumulated other comprehensive income (loss) and into net income
(loss). The Company’s other comprehensive income (loss) for the years ended December 31, 2021 and 2020 is comprised of
foreign currency translation gains and losses and actuarial gains and losses from the Company’s pension liabilities.
(k) Property, Plant and Equipment
Property, plant, and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line
method over the estimated useful life of each asset. The useful life of each asset category is as follows:
Asset Category
Furniture and fixtures
Machinery and equipment
Computers and software
Leasehold improvements
Useful Life
3 to 4 years
2 to 10 years
3 to 5 years
Shorter of remaining lease term
or estimated useful lives
44
Upon retirement or sale, the cost and related accumulated depreciation of the asset are removed from the balance sheet and the
resulting gain or loss is reflected in operating expenses.
(l) Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
value of an asset or asset group may not be recoverable. Factors the Company considers important which could trigger an
impairment review, include, but are not limited to, significant changes in the manner of use the assets, significant changes in
the strategy for the Company's overall business or significant negative economic trends. If this evaluation indicates that the
value of an intangible asset may be impaired an assessment of the recoverability of the net carrying value of the asset over its
remaining useful life is made. Recoverability of assets to be held and used is measured by comparing the carrying amount of an
asset to the future net undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future net undiscounted cash flows, an impairment expense is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset. If this assessment indicates that the cost of an intangible asset is not
recoverable, based on the estimated undiscounted future cash flows or other comparable market valuations of the entity or
technology acquired over the remaining amortization period, the net carrying value of the related intangible asset will be
reduced to fair value and the remaining amortization period may be adjusted. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset’s fair value.
In the application of impairment testing, the Company is required to make estimates of future operating trends and resulting
cash flows and judgments on discount rates and other variables. Actual future results and other assumed variables could differ
from these estimates.
Any assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
(m) Goodwill and Other Intangible Assets
Goodwill and other acquisition-related intangible assets not subject to amortization are tested annually for impairment and are
tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. The quantitative
goodwill impairment test is a two-step process with step one requiring the comparison of the reporting unit's estimated fair
value with the carrying amount of its net assets. If necessary, step two of the impairment test determines the amount of
goodwill impairment to be recorded when the reporting unit's recorded net assets exceed its fair value. In 2021, the Company
changed its annual impairment testing date to October 31 to ensure the completion of its annual goodwill impairment test prior
to the end of its annual reporting period, thereby aligning impairment testing procedures with its year-end financial reporting.
In the application of impairment testing, the Company is required to make estimates of future operating trends and resulting
cash flows and judgments on discount rates and other variables. Actual future results and other assumed variables could differ
from these estimates.
(n) Business Combinations
The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and
intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the
fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets
acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to
intangible assets and certain tangible assets such as inventory.
Critical estimates in valuing certain tangible and intangible assets include but are not limited to future expected cash flows from
the underlying assets and discount rates. Management’s estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
(o) Stock-Based Compensation
Stock-based compensation cost is measured at the grant date of the awards based on the estimated fair value of the awards. The
Company determines the fair value of restricted stock units based on the Company’s stock price on the date of grant. The
Company uses the Black Scholes model to estimate the fair value of options, which is affected by the Company's stock price as
well as assumptions regarding a number of complex and subjective variables. These variables include the Company's expected
stock price volatility over the expected term of the awards, risk-free interest rates and expected dividends. The expected stock
price volatility is based on the weighted average of the historical volatility of the Company's common stock over the most
recent period commensurate with the estimated expected life of the Company's stock options. The Company based its expected
life assumption on its historical experience and on the terms and conditions of the stock awards granted. Risk-free interest rates
reflect the yield on zero-coupon United States Treasury securities.
45
The Company amortizes the value of the stock-based compensation to expense using the straight-line method. The value of the
award is recognized as expense over the requisite service periods in the Company’s consolidated statements of comprehensive
income (loss). The Company accounts for forfeitures as they occur.
(p) Income Taxes
The Company uses the asset and liability method to account for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting and the income tax bases of assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
The Company does not recognize a tax benefit unless it concludes that it is more likely than not that the benefit will be
sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition
threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in the Company’s
judgment, is greater than 50 percent likely to be realized. The Company records interest and penalties related to uncertain tax
positions in interest expense and in general and administrative expense, respectively.
(q) 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) gives effect to common
stock equivalents; however, potential common equivalent shares are excluded if their effect is antidilutive. Potential common
stock equivalent shares are composed of restricted stock units, unvested restricted shares and incremental shares of common
stock issuable upon the exercise of stock options.
(r) Research and Development Costs
Costs related to research and development, which primarily consists of labor and benefits, supplies, facilities, consulting, and
outside service fees, are expensed as incurred.
(s) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments (if any) with original maturities of less than three months.
(t) Leases
The Company determines if an arrangement is a lease at inception. The Company’s lease agreements generally contain lease
and non-lease components. Payments under the Company’s lease arrangements are primarily fixed. Lease assets and liabilities
are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to
determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in
our leases is not readily determinable. The Company’s incremental borrowing rate is estimated to approximate the interest rate
on a collateralized basis with similar terms and payments. The Company’s lease terms include periods under options to extend
the lease when it is reasonably certain that we will exercise that option.
(u) Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740), which removes
certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other
areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after
December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this
new accounting standard effective January 1, 2021 which did not have a material impact on the Company's consolidated
financial statements or disclosures.
In March 2020, the FASB issued ASU No. 2020-04 (Topic 848), Reference Rate Reform - Facilitation of the Effects of
Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing
guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market
transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates,
such as the Secured Overnight Financing Rate. The standard was effective upon issuance and may generally be applied through
December 31, 2022, to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR. The
ASU is not expected to have a material impact on our consolidated financial statements.
In June 2016, FASB issued 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,
46
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-05, Financial Instruments -
Credit Losses (Topic 326): Targeted Transition Relief, and ASU No. 2019-11, Codification Improvements to Topic 326,
Financial Instruments - Credit Losses, which provided additional implementation guidance on the previously issued ASU. The
Company adopted the updated guidance on January 1, 2022. The ASU is 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 (the “Optelian Acquisition”). Following the closing of
the Optelian Acquisition, Optelian became the Company’s wholly owned subsidiary.
Optelian was a leading optical networking solution provider. This acquisition introduced the “O-Series” to the DZS portfolio of
carrier grade optical networking products with 100 gigabits per second (Gig) and above capability, expanding DZS product
portfolios by providing environmentally hardened, high capacity, and flexible solutions at the network edge.
The purchase price of $7.5 million included cash paid to the shareholders and option holders of Optelian, cash paid to retire
Optelian's outstanding debt on the date of acquisition, and contingent payments to shareholders (in thousands):
Purchase consideration
Retirement of Optelian debt
Payment to shareholders and option holders
Contingent payment to shareholders
Total purchase consideration
$
$
4,929
664
1,897
7,490
The payment to shareholders and option holders includes a $0.3 million holdback and $1.9 million contingent consideration
based on a certain percentage of future revenue of certain Optelian products through the end of 2023. The maximum amount of
payment under contingent consideration provision is not limited per the acquisition agreement.
The acquisition was recorded as a business combination with valuations of the assets acquired and liabilities assumed at their
acquisition date fair value using level three inputs, defined as unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. In the first quarter of 2021, the Company recorded
fair values of assets acquired and liabilities assumed as provisional. In the third quarter of 2021, we recorded a measurement-
period adjustment of $0.5 million to reduce the value of intangible assets acquired with a corresponding offset to goodwill. The
adjustment did not have a material impact on the amortization expense recorded in the previous quarters. We completed the
purchase price allocation for Optelian acquisition in the fourth quarter of 2021.
The following summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition for the
Optelian Acquisition (in thousands):
Allocation of purchase consideration
Cash and cash equivalents
Accounts receivable - trade
Other receivables
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Intangible assets
Accounts payable - trade
Contract liabilities
Accrued and other liabilities
Goodwill
Total purchase consideration
47
$
$
1,236
460
153
448
49
718
3,160
(390)
(169)
(123)
1,948
7,490
The purchase price allocation resulted in the recognition of goodwill of approximately $1.9 million, which primarily related to
the expected synergies from combining operations. Of this amount, approximately $0.9 million is expected to be deductible for
tax purposes. The following table represents the final estimated fair value and useful lives of identifiable intangible assets
acquired (in thousands):
Intangible assets acquired
Developed technology
Customer relationships
In-process research and development
Total intangible assets
RIFT Acquisition
Estimated
fair value
$
$
1,780
490
890
3,160
Estimated
useful life
5 years
5 years
5 years
On March 3, 2021, the Company acquired substantially all of the assets of RIFT, Inc., a network automation solutions
company, including all the outstanding shares of RIFT.IO India Private Limited, a wholly owned subsidiary of RIFT, Inc.
(collectively “RIFT”). RIFT developed a carrier-grade RIFT.ware software platform that simplifies the deployment of any slice,
service, or application on any cloud. The total purchase consideration was $0.5 million, including a $0.2 million holdback that
was released in April of 2021 following the fulfillment of certain requirements in the purchase agreement. The Company
allocated the purchase price to $0.1 million in net tangible assets, $0.2 million in developed technologies, and $0.2 million in
goodwill. As a result of the acquisition, RIFT.IO India Private Limited became a wholly owned subsidiary of the Company.
(3) Fair Value Measurement
The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value
measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to
measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would
use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a
reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three
levels:
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-
corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are
unobservable.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying values of financial instruments such as cash and cash equivalents, restricted cash, accounts and other receivables,
accounts payable and accrued liabilities approximate their fair values based on their short-term nature.
The Company classifies its contingent liability within Level 3 as it includes inputs not observable in the market. The Company
estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using
the revenue forecast for certain Optelian products through the end of 2023. The fair value of contingent liability is generally
sensitive to changes in the revenue forecast. Refer to Note 2 Business Combinations for further information.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a
recurring basis using the above input categories (in thousands):
Cash and cash equivalents
Restricted cash
Contingent liability
Total
December 31, 2021
Level 1
Level 2
Level 3
Total
$
$
46,666
6,808
-
53,474
$
$
-
-
-
-
$
$
- $
-
2,121
2,121 $
46,666
6,808
2,121
55,595
48
Cash and cash equivalents
Restricted cash
Total
December 31, 2020
Level 1
Level 2
Level 3
Total
$
$
45,219
9,200
54,419
$
$
-
-
-
$
$
- $
-
- $
45,219
9,200
54,419
The change in fair value of the Company’s contingent liability is included in selling, marketing, general and administrative
expenses on the consolidated statements of comprehensive income (loss). The following table reconciles the beginning and
ending balances of the Company’s Level 3 contingent liability (in thousands):
Balance at beginning of period
Initial fair value of contingent liability
Net change in fair value
Balance at end of period
Year ended December 31,
2021
-
1,897
224
2,121
$
$
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
In conjunction with the restructuring in Hanover, Germany and the headquarters relocation to Plano, Texas, we wrote down
certain long-lived assets held and used to their fair value of $0.2 million, resulting in an impairment charge of $4.5 million,
which was included in earnings for the period. The impaired long-lived assets primarily consisted of right-of-use assets, and we
used estimated sub-lease payment data to fair value the respective assets. We concluded that this fair value measurement should
be categorized within Level 2.
(4) Cash and Cash Equivalents and Restricted Cash
As of December 31, 2021 and 2020, the Company's cash, cash equivalents, and restricted cash consisted of financial deposits.
Cash and cash equivalents held within the U.S. are held at FDIC insured depository institutions. Cash and cash equivalents held
outside the U.S. totaled $31.3 million and $32.2 million as of December 31, 2021 and December 31, 2020, respectively.
Restricted cash consisted primarily of cash restricted for performance and warranty bonds. Long term restricted cash was
$0.2 million as of December 31, 2021 and December 31, 2020 and is included in other assets on the consolidated balance
sheets.
(5) Balance Sheet Detail
Balance sheet detail as of December 31, 2021 and 2020 is as follows (in thousands):
Inventories
Raw materials
Work in process
Finished goods
Total inventories
As of December 31,
2021
2020
$
$
34,512 $
1,427
20,954
56,893 $
16,962
1,486
21,124
39,572
49
As of December 31, 2021, the Company had no inventories provided as collateral for borrowings from Export-Import Bank of
Korea compared to $9.6 million as of December 31, 2020.
Property, plant and equipment
Property, plant and equipment, net:
Machinery and equipment
Leasehold improvements
Computers and software
Furniture and fixtures
Construction in progress and other
Less: accumulated depreciation and amortization
Less: government grants
Total property, plant and equipment, net
As of December 31,
2021
2020
$
$
14,278 $
5,219
3,217
1,771
2,937
27,422
(17,394)
(186)
9,842 $
13,656
4,633
2,829
1,123
716
22,957
(15,445)
(366)
7,146
Depreciation expense associated with property, plant and equipment was $2.9 million and $2.2 million for the years ended
December 31, 2021 and 2020, 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.
As of December 31, 2021, other assets included $4.2 million of capitalized cloud computing implementation costs related to the
Company's enterprise resource planning and reporting software. The Company had no capitalized cloud computing
implementation costs as of December 31, 2020.
Accrued and other liabilities
Accrued and other liabilities:
Accrued warranty
Accrued compensation
Accrued taxes payable
Other accrued expenses
As of December 31,
2021
2020
$
$
1,981 $
7,230
2,306
4,515
16,032 $
1,522
5,692
4,736
4,757
16,707
The Company accrues for warranty costs based on historical trends for the expected material and labor costs to provide
warranty services. The Company's standard warranty period is one year from the date of shipment with the ability for customers
to purchase an extended warranty of up to five years from the date of shipment. The following table summarizes the activity
related to the product warranty liability:
Balance at beginning of period
Charged to cost of revenue
Claims, settlements, and pending returns
Foreign exchange impact
Balance at end of period
Years ended December 31,
2021
2020
1,522 $
798
(404)
65
1,981 $
1,611
1,072
(1,189)
28
1,522
$
$
50
Contract Balances
The opening and closing balances of current and long-term contract assets and contract liabilities related to contracts with
customers are as follows:
December 31, 2020
December 31, 2021
Increase (decrease)
Contract
assets
Contract
liabilities
$
$
$
6,182
2,184
(3,998) $
6,871
9,135
2,264
The decrease in contract assets during the year ended December 31, 2021 was primarily due to the invoicing of certain unbilled
balances where revenue recognition criteria have been met as of December 31, 2020.
The increase in contract liabilities during the year ended December 31, 2021 was primarily due to amounts being invoiced for
certain customers that did not yet meet the revenue recognition criteria. The amount of revenue recognized during the year
ended December 31, 2021 that was included in the prior period contract liability balance was $4.4 million. This revenue
consists of services provided to customers who had been invoiced prior to the current year. We expect to recognize
approximately 67% of outstanding contract liabilities as revenue over the next 12 months and the remainder thereafter.
The balance of contract cost deferred at December 31, 2021 and 2020 was $0.8 million and $0.5 million, respectively. During
the year ended December 31, 2021, the Company recorded $0.5 million in amortization related to contract cost deferred as of
December 31, 2020.
(6) Restructuring and other charges
In March 2021, the Company made the strategic decision to transition DZS GmbH to a sales and research and development
center by the end of 2021. In July 2021, the Company came to an agreement with the works council and entered into a social
plan that covers statutory benefits and one-time severance obligations. The Company recognized expense for the statutory
benefit obligations when such amounts were probable and estimable and the Company recognized expense for the one-time
severance when the final terms of the benefit arrangement were communicated to the affected employees. The Company
recorded related restructuring and other charges of approximately $11.9 million for the year December 31, 2021, consisting of
termination-related benefits of $8.2 million, an impairment of long-lived assets charge of $2.7 million primarily related to right-
of-use assets from operating leases, professional services of $0.9 million, and $0.1 million of other charges. The termination-
related benefits are comprised of statutory benefits of $1.7 million and one-time severance obligations of $6.5 million.
In May 2021, the Company made the strategic decision to relocate manufacturing function of Optelian to Seminole, Florida and
eliminate redundant workforces. The Company incurred restructuring and other charges of approximately $0.4 million for the
year ended December 31, 2021, consisting primarily of termination-related benefits.
As of December 31, 2021, the Company had $0.8 million of accrued liabilities related to the restructuring costs.
(7) Goodwill and Intangible Assets
The following table summarizes the activity related to Goodwill (in thousands):
Balance at beginning of period, gross
Accumulated impairment at beginning of period
Goodwill from acquisitions
Balance at end of period
As of December 31,
2021
2020
$
$
4,980 $
(1,003)
2,168
6,145 $
4,980
(1,003)
-
3,977
51
The accumulated impairment of goodwill was $1.0 million as of both December 31, 2021 and 2020. The Company recognized
no impairment loss for goodwill for the years ended December 31, 2021 and 2020.
During the year ended December 31, 2021, the Company recorded goodwill of $1.9 million related to the acquisition of
Optelian and $0.2 million related to the acquisition of RIFT, which was allocated to the Americas reporting unit. Refer to Note
2 Business Combinations for further information.
Intangible assets consisted of the following (in thousands):
Developed technology
Customer relationships
In-process research and development
Total intangible assets, net
Developed technology
Customer relationships
Total intangible assets, net
As of December 31, 2021
Gross Carrying
Amount
Accumulated
Amortization
Net
$
$
5,007 $
5,730
890
11,627 $
(3,464) $
(2,886)
(162)
(6,512) $
1,543
2,844
728
5,115
As of December 31, 2020
Gross Carrying
Amount
Accumulated
Amortization
Net
$
$
3,060 $
5,240
8,300 $
(2,652) $
(2,271)
(4,923) $
408
2,969
3,377
Weighted
Average
Remaining
Useful Life
4.1 years
4.6 years
4.1 years
4.4 years
Weighted
Average
Remaining
Useful Life
0.7 years
5.7 years
5.1 years
During the year ended December 31, 2021, the Company recorded $1.9 million, $0.5 million and $0.9 million in developed
technology, customer relationships and in-process research and development, respectively, related to the acquisitions of
Optelian and RIFT. Refer to Note 2 Business Combinations for further information.
During 2020, the Company recorded an impairment charge of $6.5 million for DZS GmbH intangible assets as part of the
Company’s evaluation for impairment, utilizing a present value cash flow model to determine the fair value of the intangible
assets. The Company determined that the intangible assets related to DZS GmbH were impaired, due to the financial
performance of the reporting unit and loss of a significant customer. The impairment expense was comprised of $3.3 million for
developed technology, $2.3 million for customer relationships, and $0.9 million for trade names, respectively. The impairment
charge is included in impairment of long-lived assets on the consolidated statements of comprehensive income (loss). The
Company did not identify any triggering events for potential impairment of intangible assets in 2021.
The following table summarizes the activity related to intangible assets, net (in thousands):
As of December 31,
2021
2020
Balance at beginning of period
Intangible assets from acquisitions
Less: amortization expense
Less: impairment charge
Foreign exchange impact
Balance at end of period
$
$
3,377 $
3,327
(1,589)
-
-
5,115 $
As of December 31, 2021, expected future amortization expense for the years indicated was as follows (in thousands):
2022
2023
2024
2025
Thereafter
Total
$
$
52
12,381
-
(2,959)
(6,472)
427
3,377
1,177
1,177
1,177
1,177
407
5,115
(8) Debt
As of December 31, 2021, the Company had no debt obligations. During the first half of 2021, the Company paid off the
outstanding balance of debt with related parties, foreign banks and other lending institutions. The Company has no contractual
principal payments due in the next five years.
The following tables summarize the Company’s debt as of the beginning of the period (in thousands):
Bank and Trade Facilities - Foreign Operations
Related party
Less: unamortized deferred financing costs
Bank and Trade Facilities - Foreign Operations
As of December 31, 2020
Short-term
Long-term
Total
$
$
13,787 $
—
13,787
—
13,787 $
— $
29,766
29,766
(12)
29,754 $
13,787
29,766
43,553
(12)
43,541
During prior periods, certain of the Company's foreign subsidiaries entered into financing arrangement with foreign banks and
other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development
loans. As of December 31, 2020, the Company had an aggregate outstanding balance of $13.8 million under such financing
arrangements. The weighted average borrowing rates as of December 31, 2020 was 1.8%. During the first two quarters of 2021,
the Company paid the entire outstanding balance under such financing arrangements. As of December 31, 2021, the Company
had no borrowings outstanding from banks and other lending institutions.
As of December 31, 2020, the Company had $19.0 million available to draw under its letter of credit facilities with NongHyup
Bank and Korea Development Bank. These letter of credit facilities expired in the third quarter of 2021.
Related Party Debt
During prior periods, certain of the Company's subsidiaries entered into term loan arrangements with DNI. As of December 31,
2020, the Company had an aggregate outstanding balance of $29.8 million under such financing arrangements. In the first
quarter of 2021, the entire outstanding balance on these term loans was repaid. Interest expense on related party borrowings
was $0.1 million and $1.0 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021,
the Company had no borrowings outstanding from related parties.
PNC Credit Facilities
On February 27, 2019, the Company entered into a Revolving Credit, Term Loan, Guaranty and Security Agreement with PNC
Bank, National Association (“PNC”) and Citibank, N.A. as lenders, and PNC as agent for the lenders (the “PNC Credit
Facilities”). On March 26, 2020, the Company paid the outstanding term loan borrowings in full and terminated the PNC Credit
Facilities. In association with this debt repayment, the Company recorded a loss on extinguishment of debt of $1.4 million
during the three months ended March 31, 2020.
JPMorgan Credit Facility
On February 9, 2022, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A., that provides for
revolving loans in an aggregate principal amount of up to $30 million, up to $15 million of which is available for letters of
credit. Refer to Note 17 Subsequent Events for more details.
53
(9) Stockholders’ Equity
General
The Company has authorized the issuance of 36 million shares of common stock and 25 million shares of preferred stock, with
a par value of $0.001. As of December 31, 2021, the Company had 27.5 million shares of common stock issued and
outstanding. As of December 31, 2021, the Company had reserved 3,565,234 shares of common stock for the issuance of
options and restricted stock units granted under the Company’s 2017 Stock Incentive Plan and Non-Qualified Inducement
Stock Option Grant, and for the issuance of shares under the Company's 2018 Employee Stock Purchase Plan. The Company
did not issue any shares of preferred stock as of December 31, 2021.
On January 26, 2021, the Company sold 4.6 million shares of common stock (including 0.6 million shares issued pursuant to
the underwriters’ option to purchase additional shares) at a price of $14.00 per share in an underwritten public offering. The
equity offering closed on January 29, 2021 and resulted in gross proceeds to the Company of approximately $64.4 million and
net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, of approximately
$59.5 million.
Changes in Accumulated Other Comprehensive Income (Loss)
The table below summarizes the changes in accumulated other comprehensive income (loss) by component, net of tax (in
thousands):
Beginning accumulated other comprehensive loss
Actuarial income (loss) for pension plan
Foreign currency translation adjustments, net
Ending accumulated other comprehensive loss
As of December 31,
2021
2020
$
$
(2,124) $
1,713
(4,046)
(4,457) $
(3,939)
(981)
2,796
(2,124)
During the year ended December 31, 2021, the Company recorded foreign currency translation loss, and no income taxes were
allocated to the translation adjustments due to the full valuation allowance position. During the year ended December 31, 2020,
the Company recorded foreign currency translation gain and allocated $0.7 million income taxes to the translation
adjustments.
Stock Incentive Plans
The Company’s stock-based compensation plans are designed to attract, motivate, retain and reward employees, directors and
consultants and align stockholder and employee interests.
The Company’s DASAN Zhone Solutions, Inc. 2017 Incentive Award Plan (“2017 Plan”) authorizes the issuance of stock
options, restricted stock, restricted stock units, dividend equivalents, stock payment awards, stock appreciation rights,
performance bonus awards and other incentive awards. The 2017 Plan authorizes the grant of awards to employees, non-
employee directors and consultants of the Company and its subsidiaries. Under the 2017 Plan, stock options may be granted at
an exercise price less than, equal to or greater than the fair market value on the date of grant, except that any stock options
granted to a 10% stockholder must have an exercise price equal to at least 110% of the fair market value of the Company’s
common stock on the date of grant. The Board of Directors determine the term of each stock option, the option exercise price
and the vesting terms. Stock options are generally granted at an exercise price equal to the fair market value on the date of
grant, expiring seven to ten years from the date of grant and vesting over a period of four years.
The maximum number of shares of the Company’s common stock which may be granted under the 2017 Plan is the sum of (i)
1,174,359 shares, plus (ii) any shares subject to awards granted under the prior plan to the extent such shares become available
for issuance under the 2017 Plan pursuant to its terms, plus (iii) any shares subject to an annual increase on each January 1
during the 10 year term of the 2017 Plan equal to the lesser of (x) 4% of the total shares of the Company’s common stock
outstanding (on an as-converted basis) and (y) such smaller amount as may be determined by the Board of Directors in its sole
discretion. The annual increase on January 1, 2021 was 878,315 shares. In addition, the following annual limitations apply: (i)
the maximum aggregate number of shares of the Company’s common stock that may be subject to awards granted to any one
participant during a calendar year is 4,000,000 shares; and (ii) the maximum aggregate amount of cash that may be paid to any
one participant during any calendar year with respect to awards initially payable in cash is $10 million. The number of shares of
the Company’s common stock that may be issued or transferred pursuant to awards granted under the 2017 Plan shall not
exceed an aggregate of 8,000,000 shares.
54
In 2020, the Compensation Committee of the Company’s Board of Directors approved the grant to Charles Daniel Vogt, the
Company’s Chief Executive Officer, of nonqualified stock options to purchase 518,518 shares of the Company’s common stock
at an exercise price of $10.11 per share, which equaled the closing price of the Company’s common stock on August 1, 2020, the
effective date of grant. The vesting commencement date is the grant date of options. The shares subject to the option shall vest
on the third anniversary of the vesting commencement date, subject to Mr. Vogt's continuous service as an employee, director or
consultant through such vesting date. The grant was a part of the Inducement Option Agreements with Mr. Vogt and was not
covered by 2017 Plan.
Stock Options
Options issued under the Company’s stock incentive plans are exercisable for periods not to exceed ten years, and vest and
contain such other terms and conditions as specified in the applicable award document. Options to buy common stock are
issued under the 2017 Plan, with exercise prices equal to the closing price of shares of the Company’s common on the date of
award.
The following table sets forth the summary of option activity under the stock option program for the year ended December 31,
2021 (in thousands, except per share data):
Outstanding at beginning of period
Granted
Exercised
Canceled/Forfeited
Expired
Outstanding at end of period
Vested and expected to vest at end of period
Vested and exercisable at end of period
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Options
Outstanding
2,442 $
846
(713)
(477)
(110)
1,988
1,988
505 $
9.02
17.90
7.68
10.69
10.20
12.81
12.81
9.05
5.69 $
15,761
8.42
8.42
6.92 $
8,259
8,259
3,624
The aggregate intrinsic value represents the total pretax intrinsic value, based on the Company’s closing stock price as of
December 31, 2021 of $16.22 per share which would have been received by the option holders had the option holders exercised
their options as of that date. The aggregate intrinsic value of awards exercised during the years ended December 31, 2021 and
2020 were $6.2 million and $1.9 million, respectively.
The Company has estimated the fair value of stock options on the date of grant using the Black Scholes pricing model, which is
affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These
variables include the Company’s expected stock price volatility over the term of the awards, actual and projected employee
option exercise behaviors, risk-free interest rate and expected dividends. The estimated expected term of options granted was
determined based on SAB 107 simplified method because the Company does not have adequate historical data for newly issued
stock options. Estimated volatility was based on the historical volatility of the Company and the risk-free interest rate was
based on the U.S. Treasury yield in effect at the time of grant for the expected life of the options. The Company does not
anticipate paying any cash dividends in the foreseeable future, and therefore used an expected dividend yield of zero in the
option valuation model. Forfeitures are recognized as they occur.
The weighted average assumptions used to value option grants for the year ended December 31, 2021 and 2020 are as follows:
Expected term (years)
Volatility
Risk free interest rate
Dividend yield
Fair value of underlying stock options
Years ended December 31,
2021
2020
6.0
59.5%
1.1%
0%
$
9.84
$
6.2
60.5%
0.4%
0%
5.40
For the years ended December 31, 2021 and 2020, the Company recorded compensation expense related to stock options of
$3.7 million and $3.2 million, respectively. As of December 31, 2021, there was $9.3 million of unrecognized compensation
costs which are recognized over a weighted average period of 2.7 years.
55
Restricted Stock Units
The following table sets forth the summary of restricted stock units activity under the stock option program for the year ended
December 31, 2021 (in thousands, except per share data):
Outstanding at beginning of period
Granted
Cancelled/Forfeited
Vested and issued
Outstanding at end of period
Vested and unissued at end of period
Non-vested at end of period
RSU
Outstanding
Weighted
Average
Grant Date Fair
Value
416 $
1,243
(206)
(143)
1,310
7
1,303 $
10.65
17.74
14.67
11.63
16.65
11.76
16.67
The fair value of restricted stock units is determined based on the Company's stock price on the date of grant. Total grant-date
fair value of awards granted during the years ended December 31, 2021 and 2020 was $22.2 million and $4.9 million,
respectively. Total fair value of awards vested during the years ended December 31, 2021 and 2020 was $3.1 million and
$0.5 million, respectively.
For the years ended December 31, 2021 and 2020, the Company recorded compensation expense related to restricted stock
units of $4.6 million and $1.1 million, respectively. As of December 31, 2021, there was $18.4 million of unrecognized
compensation costs which are expected to be recognized over a weighted average period of 3.1 years.
2018 Employee Stock Purchase Plan
On May 22, 2018, the stockholders of the Company approved the adoption of the DASAN Zhone Solutions, Inc. 2018
Employee Stock Purchase Plan (the “ESPP”). The ESPP replaced the DASAN Zhone Solutions, Inc. 2002 Employee Stock
Purchase Plan.
The ESPP authorizes the issuance of up to 250,000 shares of the Company’s common stock. In addition, the ESPP provides for
an annual increase on the first day of each calendar year beginning on January 1, 2019, and ending on and including January 1,
2028, equal to the lesser of (i) 1% of the shares outstanding on the last day of the immediately preceding calendar year and (ii)
such smaller number of shares as may be determined by the Board of Directors in its sole discretion. Notwithstanding the
foregoing, the number of shares of stock that may be issued or transferred pursuant to awards under the ESPP may not exceed
an aggregate of 2,000,000 shares. These 2,000,000 shares have been registered pursuant to a registration statement on Form S-8
filed with the SEC on November 8, 2018. The purchase price of the shares will be 85% of the lower of the fair market value of
our common stock on (a) the first trading day of the offering period or (b) the final trading day of the offering period, which
would be the applicable purchase date.
The weighted average assumptions used to value the ESPP shares for the year ended December 31, 2021 included an expected
term of 0.5 years, volatility of 53.7% and a risk free interest rate of 0.3%. The Company recorded $0.7 million and $0.3 million
of expense related to the ESPP for the year ended December 31, 2021 and 2020, respectively.
Stock-based Compensation
The following table summarizes total stock-based compensation expense for stock options, restricted stock units, and ESPP.
Cost of revenue
Research and product development
Selling, marketing, general and administrative
Years ended December 31,
2021
2020
$
$
276 $
1,074
7,640
8,990 $
86
395
4,132
4,613
56
(10) Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share
data):
Net income (loss)
Weighted average number of shares outstanding:
Basic
Effect of dilutive securities:
Stock options, restricted stock units and share awards
Diluted
Net income (loss) per share:
Basic
Diluted
Years ended December 31,
2021
2020
$
(34,683) $
(23,082)
26,692
—
26,692
$
$
(1.30) $
(1.30) $
21,588
—
21,588
(1.07)
(1.07)
The following tables set forth potential common stock that is not included in the diluted net income (loss) per share calculation
above because their effect would be anti-dilutive for the periods indicated (in thousands):
Outstanding stock options
Unvested restricted stock units
Years ended December 31,
2021
2020
448
269
277
20
As of December 31, 2021 and 2020, no shares of issued common stock were subject to repurchase.
(11) Income Taxes
The geographical breakdown of income (loss) before income taxes is as follows (in thousands):
Loss before income taxes - Domestic
Loss before income taxes - Foreign
Loss before income taxes
Years ended December 31,
2021
2020
$
$
(6,031) $
(25,439)
(31,470) $
(19,276)
(305)
(19,581)
The following is a summary of the components of income tax expense applicable to income (loss) before income taxes (in
thousands):
Current:
Federal
State
Foreign
Total current tax provision
Deferred:
Federal
State
Foreign
Total deferred tax provision (benefit)
Total tax provision (benefit)
Years ended December 31,
2021
2020
$
$
$
$
$
- $
29
1,779
1,808 $
$
-
-
1,405
1,405 $
3,213 $
-
28
3,256
3,284
-
-
217
217
3,501
57
A reconciliation of the expected tax provision (benefit) to the actual tax provision (benefit) is as follows (in thousands):
Expected tax provision (benefit) at statutory rate
State taxes, net of Federal effect
State change in deferred taxes
Foreign taxes
Foreign rate differential
Valuation allowance
Change in reserves
Permanent differences
Tax credit carry-forwards
Miscellaneous
Total tax provision
Years ended December 31,
2021
2020
$
$
(6,609) $
23
304
166
(1,946)
11,341
2,696
(2,150)
(1,102)
490
3,213
$
(4,112)
22
(325)
3,472
(65)
2,550
-
1,950
(202)
211
3,501
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting and income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as
of December 31, 2021 and 2020 are as follows (in thousands):
Deferred tax assets:
Net operating loss, capital loss, and tax credit carryforwards
Fixed assets and intangible assets
Inventory and other reserves
Operating lease liability
Other (mainly accrued expenses)
Gross deferred tax assets
Less valuation allowance
Deferred tax liabilities:
Fixed assets and intangible assets
Operating lease right-of-use-asset
Gross deferred tax liabilities
Total net deferred tax assets
As of December 31,
2021
2020
$
$
26,512 $
4,043
4,863
3,958
10,410
49,786
(46,027)
(856)
(2,903)
(3,759)
- $
24,071
2,689
1,554
1,725
4,792
34,831
(31,994)
-
(1,432)
(1,432)
1,405
For the years ended December 31, 2021 and 2020, the net changes in the valuation allowance were an increase of $14.0 million,
and an increase of $5.2 million, respectively. The increase during the current year is primarily due to the increase of U.S. net
deferred tax assets and increase of the valuation allowance on certain foreign deferred tax assets, including $5.6 million of
deferred tax assets obtained in the acquisition of Optelian. The Company maintains a valuation allowance on its global net
deferred tax assets since it is more likely than not that the net deferred tax assets will not be realized in the foreseeable future.
As of December 31, 2021, the Company had net operating loss carryforwards for federal and state income tax purposes of
approximately $43.4 million and $28.8 million, respectively. The federal losses begin to expire in various years beginning in
2030. The state losses begin to expire in various years beginning in 2022. The federal net operating loss carryforward includes
$17.9 million that has an indefinite carryforward period. As of December 31, 2021, the Company had federal and state net
operating losses for German tax purposes of approximately $25.3 million and $25.2 million respectively, which do not expire
and are carried forward indefinitely, and net operating losses from Canada of approximately $6.3 million which may be carried
forward for 20 years and begin to expire in 2039.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, or IRC, annual use of the Company's net operating losses and
tax credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-
year period. The Company had an ownership change in September 2016, which has resulted in an annual limitation on the
amount of net operating loss and tax credit carry forward which arose prior to that date that the Company can utilize in a future
year. In addition, some of the pre-acquisition NOLs were written off in a prior year due to the limitation.
As of December 31, 2021, the Company had research credit carryforwards of approximately $2.0 million and $2.0 million for
federal and state purposes, respectively, as well as Canadian research and investment credits of approximately $3.3 million and
$2.2 million, respectively. If not utilized, the federal carryforwards will expire beginning in 2036. The California credit
58
carryforwards do not expire, the Georgia credit carryforwards will expire beginning in 2026, and the Texas credit carryforwards
will expire beginning in 2040. The Canadian research and investment credits begin to expire in 2031 and 2031 respectively.
The Company does not intend to distribute the earnings from its foreign subsidiaries and has not recorded any deferred tax
liability related to such amounts. The Company considers the remaining excess of the amount for financial reporting over the
tax basis of our investments in our foreign subsidiaries to be indefinitely reinvested and the determination of any deferred tax
liability on this amount is not practicable.
The Company is required to inventory, evaluate, and measure all uncertain tax positions taken or to be taken on tax returns, and
to record liabilities for the amount of such positions that may not be sustained, or may only be partially sustained, upon
examination by the relevant taxing authorities. After reviewing the documentation maintained in support of uncertain tax
positions taken in prior years the Company concluded that it will be unlikely to sustain those positions should they be audited
by the relevant tax authorities. Accordingly, the Company increased the reserve for those positions by approximately $2.3
million in the current year. As of December 31, 2021, the Company had gross unrecognized tax benefits of $4.2 million, none
of which if recognized, would reduce the effective tax rate in a future period, due to the Company's full valuation allowance on
U.S. net deferred tax assets.
A reconciliation of the beginning and ending unrecognized tax benefit amounts for 2021 and 2020 are as follows (in
thousands):
Balance at beginning of period
Increases related to prior year’s tax positions
Increases related to current year tax positions
Balance at end of period
As of December 31,
2021
2020
$
$
1,255 $
2,252
681
4,188 $
1,036
-
219
1,255
It is the Company's policy to account for interest and penalties related to uncertain tax positions as interest expense and general
administrative expense, respectively in the consolidated statements of comprehensive income (loss).
The Company did not record any interest or penalty (benefit) provision during the years ended December 31, 2021 and 2020.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. The open tax years for the major jurisdictions are as follows:
Federal
California
Canada
Brazil
Germany
Japan
Korea
United Kingdom
Vietnam
2018 - 2021
2017 - 2021
2017 - 2021
2017 - 2021
2016 - 2021
2016 - 2021
2016 - 2021
2017 - 2021
2011 - 2021
However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items
attributable to technically closed years are still subject to adjustment by the relevant taxing authority through an adjustment to
tax attributes carried forward to open years.
(12) Related Party Transactions
Related Party Debt
As of December 31, 2021, the Company had no outstanding borrowings from related parties compared to $29.8 million as of
December 31, 2020. See Note 8 Debt for further information about the Company’s related party debt.
The following table sets forth payment guarantees of certain of the Company's performance obligations as of December 31,
2021 that have been provided by DNI. DNI owns approximately 36.7% 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.
59
Guarantor
Dasan Networks, Inc.
Dasan Networks, Inc.
Other Related Party Transactions
Amount Guaranteed
(in thousands)
Description of Obligations Guaranteed
$
6,056 Payment guarantee to Industrial Bank of Korea
1,615 Payment guarantee to Shinhan Bank
7,671
Sales, cost of revenue, research and product development, selling, marketing, general and administrative, interest expense and
other expenses to and from relate parties were as follows (in thousands) for the years ended December, 2021 and 2020:
Counterparty
Dasan Networks, Inc.
Dasan Invest Co., Ltd.*
Counterparty
Dasan Networks, Inc.
Dasan Invest Co., Ltd.*
Sales
2,103
—
2,103
Sales
4,362
—
4,362
$
$
$
$
Cost of
revenue
1,940
30
1,970
Cost of
revenue
3,843
22
3,865
$
$
$
$
$
$
$
$
For the year ended December 31, 2021
Research
and product
development
Selling,
marketing,
general and
administrative
1,019
134
1,153
$
$
1,620
57
1,677
For the year ended December 31, 2020
Research
and product
development
Selling,
marketing,
general and
administrative
953
100
1,053
$
$
1,579
42
1,621
Interest
expense
Other
expenses
$
$
$
$
132
—
132
Interest
expense
1,047
—
1,047
$
$
$
$
197
—
197
Other
expenses
355
—
355
* Dasan Invest Co., Ltd. indirectly holds 3.1% of DNI’s shares.
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 consolidated statements of comprehensive income (loss).
Sales to DNI are recorded net of royalty fees for a sales channel arrangement.
DNS California, a subsidiary of the Company, shares human resources, treasury and other administrative support with DNI. As
such, the Company entered into certain service sharing agreements with DNI and certain of its subsidiaries for the shared office
space and shared administrative services.
DNS Korea, a subsidiary of the Company, has two separate lease agreements with DNI related to the lease of office space and
warehouse facilities. Operating lease cost related to these leases totaled $1.8 million and $1.7 million for the years ended
December 31, 2021 and 2020, respectively. Operating lease expense is allocated between cost of revenue, research and product
development, and selling, marketing, general and administrative expenses on the consolidated statements of comprehensive
income (loss). As of December 31, 2021, the right-of-use asset and operating lease liability related to these leases were
$6.4 million. As of December 31, 2020, the right-of-use asset and operating lease liability related to these leases were
$8.6 million. Deposits for these leases are included in other assets on the consolidated balance sheets as of December 31, 2021
and 2020.
The Company had an agreement with Dasan Invest Co., Ltd. to provide IT services for the Company. The agreement was
terminated in the fourth quarter of 2021. The respective expense was allocated between cost of revenue, research and product
development, and selling, marketing, general and administrative expenses on the consolidated statements of comprehensive
income (loss). Interest expense represents interest paid to DNI for the related party debt. Refer to Note 8 Debt for further
information.
60
Other expenses to related parties represent expenses to DNI for its payment guarantees relating to the Company's performance
obligations. The Company pays DNI a guarantee fee which is calculated as 0.9% of the guaranteed amount. Refer to the table
above for further information about obligations guaranteed by DNI.
Balances of Receivables and Payables with Related Parties
Balances of receivables and payables arising from sales and purchases of goods and services with related parties as of
December 31, 2021 and 2020 were as follows (in thousands):
Counterparty
Dasan Networks, Inc.
Dasan Invest Co., Ltd.*
Counterparty
Dasan Networks, Inc.
Dasan Invest Co., Ltd.*
$
$
$
$
Account
receivables
Other
receivables
Other assets
As of December 31, 2021
181 $
—
181 $
$
215
—
215 $
Loans Payable
—
—
— $
$
$
691
—
691 $
Accounts
payable
785
—
785
As of December 31, 2020
Account
receivables
Other
receivables
Other assets
Loans
Payable
Accounts
payable
2,278 $
—
2,278 $
247 $
—
247 $
755 $
—
755 $
29,754 $
—
29,754 $
1,552
32
1,584
* Dasan Invest Co., Ltd. holds 3.1% of DNI’s shares
The related party receivable and payable balances are reflected in the respective balance sheet captions on the consolidated
balance sheets as of December 31, 2021 and 2020.
(13) Leases
The Company leases certain properties and buildings (including manufacturing facilities, warehouses, and office spaces) and
equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the
lease term. The Company’s lease portfolio consists of operating leases which expire at various dates through 2028.
The Company determines if an arrangement contains a lease at inception. The Company evaluates each service contract upon
inception to determine whether it is, or contains, a lease. Such determination is made by applying judgment in evaluating each
service contract within the context of the 5-step decision making process under ASC 842. The key concepts of the 5-step
decision making process that the Company evaluated can be summarized as: (1) is there an identified physical asset; (2) does
the Company have the right to substantially all the economic benefits from the asset throughout the contract period; (3) does the
Company control how and for what purpose the asset is used; (4) does the Company operate the asset; and (5) did the Company
design the asset in a way that predetermines how it will be used.
Assets and liabilities related to operating leases are included in the consolidated balance sheets as right-of-use assets from
operating leases, operating lease liabilities - current and operating lease liabilities - non-current.
Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease
payments over the lease term. Many of the Company’s lease agreements contain renewal options; however, the Company does
not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that the Company is reasonably
certain of renewing the lease at inception or when a triggering event occurs. Some of the Company’s lease agreements contain
rent escalation clauses, rent holidays, capital improvement funding or other lease concessions.
The Company recognizes minimum rental expense on a straight-line basis based on the fixed components of a lease
arrangement. The Company amortizes this expense over the term of the lease beginning with the date of initial possession,
which is the date lessor makes an underlying asset available for use. Variable lease components represent amounts that are not
fixed in nature, are not tied to an index or rate, and are recognized as incurred.
In determining its right-of-use assets and lease liabilities, the Company applies a discount rate to the minimum lease payments
within each lease agreement. ASC 842 requires the Company to use the rate of interest that a lessee would have to pay to
borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The Company determines the incremental borrowing rate for each lease based primarily on its lease term and the economic
environment of the applicable country or region.
61
The components of lease expense were as follows for the years ended December 31, 2021 and 2020 (in thousands):
Operating lease cost
Short-term lease cost
Total net lease cost
Years ended December 31,
2021
2020
$
$
4,201
1,302
5,503
$
$
5,393
264
5,657
Short-term lease costs related to the short-term rent of office spaces and office equipment leases. Variable lease cost was not
significant for the years ended December 31, 2021 and 2020.
During the year ended December 31, 2021, the Company recorded $4.2 million in impairment charges on the right-of-use
assets, including $2.5 million related to the restructuring in Hanover, Germany and $1.7 million related to the headquarters
relocation to Plano, Texas. These charges were included into restructuring and other charges and impairment of long-lived
assets, respectively, on the consolidated statements of comprehensive income (loss).
Supplemental cash flow information related to the Company’s operating leases was as follows for the years ended December
31, 2021 and 2020 (in thousands):
Operating cash outflows from operating leases
Right-of-use assets obtained in exchange for operating lease obligations
$
5,936 $
2,783
5,307
1,405
The following table presents the lease balances within the Company’s consolidated balance sheets, weighted average remaining
lease term, and weighted average discount rates related to the Company’s operating leases as of December 31, 2021 and 2020
(in thousands):
Years ended December 31,
2021
2020
Lease Assets and Liabilities
Assets:
Right-of-use assets from operating leases
Liabilities:
Operating lease liabilities - current
Operating lease liabilities - non-current
Total operating lease liabilities
Weighted average remaining lease term
Weighted average discount rate
As of December 31,
2021
2020
$
$
$
12,640
$
18,483
4,097
12,103
16,200
4.2 years
$
$
5.6%
4,494
15,959
20,453
4.6 years
5.7%
The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2021 (in thousands):
2022
2023
2024
2025
2026
Thereafter
Total operating lease payments
Less: imputed interest
Total operating lease liabilities
$
$
4,866
4,468
3,899
2,596
1,698
835
18,362
(2,162)
16,200
62
(14) Commitments and Contingencies
Performance Bonds
In the normal course of operations, from time to time, the Company arranges for the issuance of various types of performance
bonds, such as performance, warranty, and bid bonds, in the form of bank guarantees or surety bonds. These instruments are
arrangements under which the financial institution or surety provides a financial guarantee that the Company will perform in
accordance with contractual or legal obligations. As of December 31, 2021, the Company had $8.9 million of surety bonds
guaranteed by third parties.
Purchase Commitments
The Company’s inventory purchase commitments typically allow for cancellation of orders 30 days in advance of the required
inventory availability date as set by the Company at time of order. However, the Company has agreements with various
contract manufacturers and semiconductor companies which include non-cancellable inventory purchase commitments. The
amount of our long-term non-cancellable purchase commitments outstanding was $3.2 million as of December 31, 2021.
Litigation
From time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of
business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal
contingencies that it has determined to be probable to the extent that the amount of the loss can be reasonably estimated. The
Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated
financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable
rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the
results of operations and cash flows of the reporting period in which the ruling occurs, or future periods.
(15) Employee Benefit Plans
Defined Contribution Plans
In the U.S., the Company maintains a 401(k) plan for its employees whereby eligible employees may contribute up to a
specified percentage of their earnings, on a pretax basis, subject to the maximum amount permitted by the Internal Revenue
Code. Under the 401(k) plan, the Company made discretionary contributions to the plan in 2021. The Company made no
discretionary contributions to the plan in 2020. For the year ended December 31, 2021, the Company recorded an expense of
$0.5 million compared to no expense for the year ended December 31, 2020.
The Company maintains a defined contribution plan for its employees in Korea. Under the defined contribution plan, the
Company contributes the equivalent of 8.3% of an employee's gross salary into the plan. For each of the years ended December
31, 2021 and 2020, the Company recorded an expense of $1.3 million for the plan.
Defined Benefit Plans
The Company sponsors defined benefit plans for its employees in Germany and Japan. Defined benefit plans provide pension
benefits based on compensation and years of service. The Germany plans were frozen as of September 30, 2003 and have not
been offered to new employees after that date.
The following provides a reconciliation of the changes in benefit obligation, and the funded status at the end of the years
(in thousand):
Benefit obligation at beginning of period
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Foreign currency exchange rate change
Benefit obligation at end of period
Underfunded status at end of period
Years ended December 31,
2021
2020
$
$
20,052 $
115
82
(592)
(1,606)
(1,524)
16,527
16,527 $
17,671
95
191
(568)
1,002
1,661
20,052
20,052
63
The Company has recorded the 2021 and 2020 underfunded status as a long-term liability on the consolidated balance
sheets. The Company holds pension insurance contracts, with the Company as beneficiary, in the amount of $2.9 million
and $3.5 million as of December 31, 2021 and 2020, respectively, related to individuals under the pension plans. The
Company records these insurance contracts based on their cash surrender value at the balance sheet dates. These
insurance contracts are classified as other assets on the consolidated balance sheet. The Company intends to use any
proceeds from these policies to fund the pension plans. However, since the Company is the beneficiary on these policies,
these assets have not been designated pension plan assets.
The net periodic benefit cost related to the plans consisted of the following components during the years ended December 31,
2021 and 2020 (in thousands):
Net Periodic Benefit Cost
Service Cost
Interest Cost
Net amortization of net gain (loss)
Net periodic benefit cost
Years ended December 31,
2021
2020
$
$
115 $
82
107
304 $
95
170
21
286
The service cost component of net benefit cost is presented within cost of revenue or selling, marketing, general and
administrative expense on the accompanying consolidated statements of comprehensive income (loss), in accordance with
where compensation cost for the related associate is reported. All other components of net benefit cost, including interest cost
and net amortization noted above, are presented within other income/expense, net in the accompanying consolidated statements
of comprehensive income (loss).
The following table presents changes in benefit obligations recognized net of tax in other comprehensive income during the
years ended December 31, 2021 and 2020 (in thousands):
Amortization of net (gain) loss
Actuarial (gain) loss in the current period
Net change during the period
Years ended December 31,
2021
2020
$
$
(107) $
(1,606)
(1,713) $
(21)
1,002
981
The increase in the actuarial gain during the year ended December 31, 2021, compared to the year ended December 31, 2020
was mainly due to the increase in the discount rate, resulting from an increase in the implicit rate of high-quality fixed income
investments. The estimated net loss and prior service cost for the plans that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost over the next fiscal year is not significant. The Company expects to make no
contributions to the plans in 2022.
The weighted average assumptions used in determining the periodic net cost and benefit obligation information related to the
plans are as follows:
Discount rate
Rate of compensation increase
Years ended December 31,
2021
2020
1.0%
1.7%
The following benefit payments, which are funded by the Company, are expected to be paid (in thousands):
2022
2023
2024
2025
2026
2027 - 2031
(16) Enterprise-Wide Information
$
$
0.4%
1.7%
687
713
717
720
730
3,695
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.
64
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(f) Revenue
Recognition 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 December 31, 2021 and 2020:
United States
Korea
Japan
Canada
Germany
Other
(17) Subsequent Events
Equity Offering
As of December 31,
2021
2020
$
$
6,105 $
2,367
799
280
210
81
9,842 $
2,878
2,472
952
—
761
83
7,146
On February 10, 2022, the Company filed a “shelf” registration statement on Form S-3 to register up to $150 million of
Company common stock, representing an indeterminate number of shares of common stock as may be issued from time to time
pursuant to underwritten public offerings, negotiated transactions, block trades or a combination of these methods at
indeterminate prices. Included on this registration statement as a secondary offering are 10,093,015 shares of Company
common stock held by DNI.
Revolving Credit Agreement
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 provides for revolving loans in an aggregate principal amount of up to $30 million, up to $15 million of which is
available for letters of credit. The Credit Agreement matures 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 million.
Loans under the Credit Agreement bear interest at the Company’s option at (i) the prime rate plus 2.00%, (ii) the adjusted term
SOFR rate plus 2.90% or (iii) the adjusted daily simple SOFR rate plus 2.90%. We pay a per annum fee of 2.90% on all letters
of credit issued under the Credit Agreement, and we pay a commitment fee of 0.25% per annum on the unused revolving credit
availability under the Credit Agreement.
65
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be
disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934 (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 Chief Executive Officer and Chief Financial Officer, as
appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Exchange Act, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2021, the end of the period covered by this Annual
Report on Form 10-K. Our management, including our Chief Executive Officer and our Chief Financial Officer, supervised and
participated in the evaluation. They concluded that our disclosure controls and procedures were effective as of December 31,
2021.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2021, the end of the period covered by this Annual Report on Form 10-K.
In making this assessment, management used the criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Management concluded that, as of December 31,
2021, our internal control over financial reporting was effective based on those criteria. The effectiveness of our internal control
over financial reporting as of December 31, 2021 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, and Ernst & Young LLP has issued a report on our internal control over financial reporting, which is included
herein.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during the most recent fiscal quarter that have
materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part on certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over
time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
66
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of DZS Inc.
Opinion on Internal Control Over Financial Reporting
We have audited the internal control over financial reporting of DZS Inc. and subsidiaries (the Company) as of December 31,
2021 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheet of the Company as of December 31, 2021, the related consolidated statements of
comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and our report dated March 9, 2022
expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
March 9, 2022
67
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
None.
68
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in this item relating to our corporate governance, directors and nominees, and the compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the sections of our definitive proxy
statement for our 2021 Annual Meeting of Stockholders to be filed with SEC within 120 days of the end of our fiscal year (the
“Proxy Statement”) entitled “Corporate Governance Principles and Board Matters,” “Ownership of Securities” and “Proposal 1:
Election of Directors.” Since our last Annual Report on Form 10-K, we have not made any material changes to the procedures
by which our stockholders may recommend nominees to the Board of Directors.
Information relating to our executive officers is included under the caption “Information About our Executive Officers” in Part
I of this Annual Report on Form 10-K, pursuant to General Instruction G(3) of Form 10-K.
We have adopted a Code of Conduct and Ethics applicable to all of our employees, directors and officers (including our
principal executive officer, principal financial officer, principal accounting officer and controller). The Code of Conduct and
Ethics is designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and
regulations. The full text of our Code of Conduct and Ethics is published on our website at
https://investor.dzsi.com/governance/governance-documents. We intend to disclose any future amendments to certain
provisions of our Code of Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on our
website within four business days following the date of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the sections of the Proxy Statement entitled
“Executive Compensation” and “Director Compensation.”
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item relating to security ownership of certain beneficial owners and management, and
securities authorized for issuance under equity compensation plans is incorporated herein by reference to the sections of the
Proxy Statement entitled “Ownership of Securities” and “Executive Compensation.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the section of the Proxy Statement entitled “Certain
Relationships and Related Transactions.”
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section of the Proxy Statement entitled
“Proposal 2: Ratification of Appointment of Independent Registered Public Accounting Firm.”
69
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
PART IV
The Index to Consolidated Financial Statements on page 32 is incorporated herein by reference as the list of financial
statements required as part of this Annual Report on Form 10-K.
2. Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the “Index to Exhibits” immediately preceding the
exhibits hereto and such listing is incorporated herein by reference.
ITEM 16.
FORM 10-K SUMMARY
None.
70
Exhibit
Number
2.1
2.2
2.3
3.1
3.1.1
3.2
4.1
10.1#
10.1.1#
10.1.2#
10.1.3#
10.2#
10.2.1#
10.2.2#
10.2.3#
10.3#
10.4#
10.5#
10.6#
INDEX TO EXHIBITS
Incorporated by Reference
Exhibit Description
Form
Exhibit
Filing Date
Filed or
Furnished
Herewith
X
Share Purchase Agreement dated as of October 5, 2018,
by and between ZTI Acquisition Subsidiary III Inc. and
Riverside KM Beteiligung GmbH
Agreement, dated as of December 31, 2018, by and
between ZTI Acquisition Subsidiary III Inc. and
Riverside KM Beteiligung GmbH
Share Transfer Agreement dated as of July 31, 2019 by
and between Handysoft, Inc., as Transferor, and
DASAN Zhone Solutions, Inc., as Transferee
Restated Certificate of Incorporation of DASAN Zhone
Solutions, Inc., as amended through February 28, 2017
Certificate of Amendment to the Restated Certificate of
Incorporation of DZS Inc.
Amended and Restated Bylaws of DZS Inc.
Description of Capital Stock
DASAN Zhone Solutions, Inc. 2017 Incentive Award
Plan
Amendment to DASAN Zhone Solutions, Inc. 2017
Incentive Award Plan
Form of Stock Option Agreement for the DASAN
Zhone Solutions, Inc. 2017 Incentive Award Plan
Form of Restricted Stock Unit Award Agreement for the
DASAN Zhone Solutions, Inc. 2017 Incentive Award
Plan
DASAN Zhone Solutions, Inc. Amended and Restated
2001 Stock Incentive Plan, as amended
Form of Stock Option Agreement for the DASAN
Zhone Solutions, Inc. Amended and Restated 2001
Stock Incentive Plan, as amended
Form of Restricted Stock Award Agreement for the
DASAN Zhone Solutions, Inc. Amended and Restated
2001 Stock Incentive Plan, as amended
Form of Restricted Stock Unit Award Agreement for the
DASAN Zhone Solutions, Inc. Amended and Restated
2001 Stock Incentive Plan, as amended
DASAN Zhone Solutions, Inc. 2018 Employee Stock
Purchase Plan
DASAN Zhone Solutions, Inc. Non-Employee Director
Compensation Program
Form of Indemnity Agreement (directors and officers)
Employment Agreement dated August 1, 2020, by and
between DASAN Zhone Solutions, Inc. and Charles
Daniel Vogt
71
8-K
10.1
January 1, 2019
8-K
10.3
January 1, 2019
8-K
2.1
August 5, 2019
10-K
8-K
10-K
3.1
3.1
3.2
September 27, 2017
August 27, 2020
March 11, 2021
8-K
10.1
January 10, 2017
10-K
10.1.1
March 12, 2019
8-K
10.2
January 10, 2017
10-K
10.1
September 27, 2017
8-K
10.6
September 13, 2016
8-K
10.7
September 13, 2016
8-K
10.2
May 17, 2007
10-Q
10.3
November 14, 2016
S-8
10.1
November 8, 2018
10-K
10.4
April 4, 2018
10-Q
10-Q
10.20
10.2
May 14, 2004
November 6, 2020
10.6.1#
10.7#
10.8#
10.9#
10.10#
10.11#
First Amendment to Employment Agreement dated as of
June 1, 2021 by and between DZS Inc. and Charlie Vogt
8-K
10.1
June 4, 2021
Stock Option Agreement dated August 1, 2020, by and
between DASAN Zhone Solutions, Inc. and Charles
Daniel Vogt
Stock Option Agreement dated August 1, 2020, by and
between DASAN Zhone Solutions, Inc. and Charles
Daniel Vogt
Employment Agreement dated as of August 2, 2021, by
and between DZS Inc. and Misty D. Kawecki
Employment Agreement dated as of September 28, 2020
by and between DZS Inc. and Justin L. Ferguson
Employment Agreement, dated as of December 2, 2019,
by and between DASAN Zhone Solutions, Inc. and Tom
Cancro
10-Q
10.3
November 6, 2020
10-Q
10.4
November 6, 2020
8-K
10.1
August 2, 2021
10-K
10.10
March 11, 2021
8-K
10.1
November 25, 2019
10.11.1# Amendment to Employment Agreement dated as of
8-K
10.1
December 4, 2020
10.11.2#
10.11.3#
10.12
10.13
10.13.1
10.14
10.14.1
10.15
10.16
December 1, 2020 by and between DZS Inc. and
Thomas Cancro
Second Amendment to Employment Agreement
effective April 7, 2021 by and between DZS Inc. and
Thomas Cancro
Third Amendment to Employment Agreement effective
June 1, 2021 by and between DZS Inc. and Thomas
Cancro
Registration Rights Agreement, dated as of September
9, 2016, by and among DASAN Zhone Solutions, Inc.,
DASAN Networks, Inc. and the other parties thereto
Loan Agreement, dated as of March 27, 2018, by and
between DASAN Networks, Inc. and DASAN Network
Solutions, Inc.
Amendment No. 1 to Loan Agreement dated as of
February 25, 2019 by and between DASAN Network,
Inc., as Lender, and DASAN Network Solutions, Inc., as
Borrower
Loan Agreement dated as of December 27, 2018 by and
between DASAN Networks, Inc., as Lender, and
DASAN Zhone Solutions, Inc., as Borrower
Amendment No. 1 to Loan Agreement dated as of
February 25, 2019 by and between DASAN Network,
Inc., as Lender, and DASAN Network Solutions, Inc., as
Borrower
Revolving Credit, Term Loan, Guaranty and Security
Agreement dated as of February 27, 2019 by and among
PNC Bank, National Association, Citibank, N.A.,
DASAN Zhone Solutions, Inc., and the lenders named
therein
Export-Import Revolving Credit, Guaranty and Security
Agreement dated as of February 27, 2019 by and among
PNC Bank, National Association, Citibank, N.A.,
DASAN Zhone Solutions, Inc., and the lenders named
therein
72
8-K
10.1
April 13, 2021
8-K
10.2
June 4, 2021
8-K
10.3
September 12, 2016
8-K
10.1
April 2, 2018
10-Q
10.3
May 10, 2019
8-K
10.2
January 3, 2019
10-Q
10.4
May 10, 2019
10-Q
10.1
May 10, 2019
10-Q
10.2
May 10, 2019
10-Q
10.1
August 14, 2019
10-Q
10.2
August 14, 2019
10-Q
10.3
November 13, 2019
8-K
10.1
March 10, 2020
8-K
10.2
March 10, 2020
8-K
10.3
March 10, 2020
8-K
10.1
February 10, 2022
10.17
10.18
10.19
10.20
10.21
10.22
10.23
21.2
23.1
23.2
31.1
31.2
32.1
Letter Agreement dated May 10, 2019 by and among
PNC Bank, National Association and Citibank, N.A., as
lenders, and DASAN Zhone Solutions, Inc., as
borrowing agent
Letter Agreement dated May 31, 2019 by and among
PNC Bank, National Association and Citibank, N.A., as
lenders, and DASAN Zhone Solutions, Inc., as
borrowing agent
Letter Agreement dated November 8, 2019 by and
among PNC Bank, National Association and Citibank,
N.A., as lenders, and DASAN Zhone Solutions, Inc., as
borrowing agent
Loan Agreement dated March 3, 2020 and entered into
as of March 4, 2020 by and between DASAN Networks,
Inc. and DASAN Network Solutions, Inc. (Korea)
Intellectual Property Pledge Agreement dated March 3,
2020 and entered into as of March 4, 2020 by and
between DASAN Networks, Inc. and DASAN Network
Solutions, Inc. (Korea)
Share Pledge Agreement dated March 3, 2020 and
entered into as of March 4, 2020 by and among DASAN
Networks, Inc., DASAN Network Solutions, Inc.
(Korea) and DASAN Network Solutions, Inc.
(California)
Credit Agreement, dated as of February 9, 2022, among
DZS Inc., as Borrower, the other Loan Parties party
thereto, the Lenders from time to time parties thereto
and JPMorgan Chase Bank, N.A., as Administrative
Agent.
List of Subsidiaries
Consent of Independent Registered Public Accounting
Firm
Consent of Independent Registered Public Accounting
Firm
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
Section 1350 Certification of Chief Executive Officer
and Chief Financial Officer
101.INS
Inline XBRL Instance Document – the instance
document does not appear in the Interactive Data File
because XBRL tags are embedded within the Inline
XBRL document
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation
Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation
73
X
X
X
X
X
X
X
X
X
X
X
X
Linkbase
104
Cover Page Interactive Data File (embedded within the
Inline XBRL document and included in Exhibit 101)
X
# Management contract or compensatory plan or arrangement in which one or more executive officers or directors
participates.
74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 9, 2022
DZS INC.
By:
/s/ Charles Daniel Vogt
Charles Daniel Vogt
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Charles Daniel Vogt
Charles Daniel Vogt
/s/ Misty Kawecki
Misty Kawecki
/s/ Min Woo Nam
Min Woo Nam
/s/ Matt Bross
Matt Bross
/s/ Barbara Carbone
Barbara Carbone
/s/ Joon Kyung Kim
Joon Kyung Kim
/s/ David Schopp
David Schopp
/s/ Choon Yul Yoo
Choon Yul Yoo
President, Chief Executive Officer (Principal Executive
Officer) and Director
March 9, 2022
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
75
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1)(cid:3)Registration Statements (Form S-3 No. 333-230476 and 333-262634) of DZS Inc.,
(2) Registration Statements (Form S-8 No. 333-254218, 333-246295, 333-230236, 333-228276, 333-221568,
333- 202580, 333-194334, 333-180148, 333-172876, 333-165510, 333-158009, 333-155321, 333-149598,
333- 141153, 333-132336, 333-123369) pertaining to the 2017 Incentive Plan of DZS Inc.;
of our reports dated March 9, 2022, with respect to the consolidated financial statements of DZS Inc. and
subsidiaries and the effectiveness of internal control over financial reporting of DZS Inc. included in this Annual
Report (Form 10-K) of DZS Inc. for the year ended December 31, 2021.
/s/ Ernst & Young LLP
Dallas, Texas
March 9, 2022
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 11, 2021, with respect to the consolidated financial statements included
in the Annual Report of DZS Inc. on Form 10-K for the year ended December 31, 2021. We consent to the
incorporation by reference of said report in the Registration Statements of DZS Inc. on Forms S-8 (File Nos.
333-254218, 333-246295, 333-230236, 333-228276, 333-221568, 333-202580, 333-194334, 333-180148, 333-
172876, 333-165510, 333-158009, 333-155321, 333-149598, 333-141153, 333-132336, and 333-123369) and
on Forms S-3 (File Nos. 333-230476 and 333-262634).
/s/ GRANT THORNTON LLP
Dallas, Texas
March 9, 2022
Exhibit 23.2
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
RULE 13a-14(a)/15d-14(a)
I, Charles Daniel Vogt, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of DZS Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 9, 2022
/s/ Charles Daniel Vogt
Charles Daniel Vogt
President, Chief Executive Officer
Exhibit 23.2
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
RULE 13a-14(a)/15d-14(a)
I, Misty Kawecki, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of DZS Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 9, 2022
/s/ Misty Kawecki
Misty Kawecki
Chief Financial Officer
(Principal Financial and Accounting Officer)
SECTION 1350 CERTIFICATIONS
EXHIBIT 32.1
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Charles
Daniel Vogt, President and Chief Executive Officer of DZS Inc. (the "Company"), and Misty Kawecki, Chief
Financial Officer (Principal Financial and Accounting Officer) of the Company, each hereby certify that, to their
knowledge:
1. The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Report”) fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: March 9, 2022
/s/ Charles Daniel Vogt
Charles Daniel Vogt
President, Chief Executive Officer
/s/ Misty Kawecki
Misty Kawecki
Chief Financial Officer
(Principal Financial and Accounting Officer)