10-Q 1 dzsi-20220331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

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

 

For the quarterly period ended March 31, 2022

OR

 

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

 

For the transition period from to

000-32743

(Commission File Number)

 

DZS INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

22-3509099

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

5700 Tennyson Parkway, Suite 400

Plano, Texas

 

75024

(Address of principal executive offices)

 

(Zip code)

 

(469) 327-1531

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

 

 

 

Common stock, $0.001 par value

DZSI

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

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

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

 

As of April 27, 2022, there were 27,616,165 shares outstanding of the registrant’s common stock, $0.001 par value.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets

3

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

4

 

Unaudited Condensed Consolidated Statements of Stockholders' Equity

5

 

Unaudited Condensed Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 5.

Other Information

27

Item 6.

Exhibits

27

 

Signatures

29

 

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,160

 

 

$

46,666

 

Restricted cash

 

 

6,343

 

 

 

6,808

 

Accounts receivable - trade, net of allowance for doubtful accounts of
     $
17,058 as of March 31, 2022 and $17,735 as of December 31, 2021

 

 

82,607

 

 

 

86,114

 

Other receivables

 

 

9,898

 

 

 

10,621

 

Inventories

 

 

66,459

 

 

 

56,893

 

Contract assets

 

 

902

 

 

 

2,184

 

Prepaid expenses and other current assets

 

 

13,039

 

 

 

5,690

 

Total current assets

 

 

213,408

 

 

 

214,976

 

Property, plant and equipment, net

 

 

10,277

 

 

 

9,842

 

Right-of-use assets from operating leases

 

 

11,751

 

 

 

12,640

 

Goodwill

 

 

6,145

 

 

 

6,145

 

Intangible assets, net

 

 

4,820

 

 

 

5,115

 

Other assets

 

 

9,904

 

 

 

8,950

 

Total assets

 

$

256,305

 

 

$

257,668

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable - trade

 

$

63,774

 

 

$

64,258

 

Contract liabilities

 

 

7,103

 

 

 

6,091

 

Operating lease liabilities

 

 

3,927

 

 

 

4,097

 

Accrued and other liabilities

 

 

16,832

 

 

 

16,032

 

Total current liabilities

 

 

91,636

 

 

 

90,478

 

Long-term debt

 

 

 

 

 

 

Contract liabilities - non-current

 

 

2,881

 

 

 

3,044

 

Operating lease liabilities - non-current

 

 

11,029

 

 

 

12,103

 

Pension liabilities

 

 

16,106

 

 

 

16,527

 

Other long-term liabilities

 

 

3,704

 

 

 

3,609

 

Total liabilities

 

 

125,356

 

 

 

125,761

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, 36,000 shares authorized, 27,603 and 27,505 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively, at $0.001 par value

 

 

27

 

 

 

27

 

Additional paid-in capital

 

 

226,163

 

 

 

223,336

 

Accumulated other comprehensive loss

 

 

(4,793

)

 

 

(4,457

)

Accumulated deficit

 

 

(90,448

)

 

 

(86,999

)

Total stockholders’ equity

 

 

130,949

 

 

 

131,907

 

Total liabilities and stockholders’ equity

 

$

256,305

 

 

$

257,668

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Net revenue

 

$

77,040

 

 

$

81,031

 

Cost of revenue

 

 

50,215

 

 

 

52,936

 

Gross profit

 

 

26,825

 

 

 

28,095

 

Operating expenses:

 

 

 

 

 

 

Research and product development

 

 

11,844

 

 

 

11,119

 

Selling, marketing, general and administrative

 

 

17,742

 

 

 

31,824

 

Restructuring and other charges

 

 

436

 

 

 

6,252

 

Impairment of long-lived assets

 

 

 

 

 

1,735

 

Amortization of intangible assets

 

 

294

 

 

 

262

 

Total operating expenses

 

 

30,316

 

 

 

51,192

 

Operating loss

 

 

(3,491

)

 

 

(23,097

)

Interest income

 

 

37

 

 

 

42

 

Interest expense

 

 

(127

)

 

 

(249

)

Other income (expense), net

 

 

(800

)

 

 

972

 

Loss before income taxes

 

 

(4,381

)

 

 

(22,332

)

Income tax provision (benefit)

 

 

(1,333

)

 

 

893

 

Net loss

 

 

(3,048

)

 

 

(23,225

)

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(268

)

 

 

(2,270

)

Actuarial loss

 

 

 

 

 

(28

)

Comprehensive loss

 

$

(3,316

)

 

$

(25,523

)

Net loss per share

 

 

 

 

 

 

Basic

 

$

(0.11

)

 

$

(0.92

)

Diluted

 

$

(0.11

)

 

$

(0.92

)

Weighted average shares outstanding

 

 

 

 

 

 

Basic

 

 

27,530

 

 

 

25,252

 

Diluted

 

 

27,530

 

 

 

25,252

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Stockholders' Equity

(In thousands)

 

 

 

Common stock

 

 

Additional
paid-in

 

 

Accumulated
other
comprehensive

 

 

Accumulated

 

 

Total
stockholders'

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

deficit

 

 

equity

 

For the three-months ended
   March 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

 

 

27,505

 

 

$

27

 

 

$

223,336

 

 

$

(4,457

)

 

$

(86,999

)

 

$

131,907

 

Cumulative effect of ASC 326 adoption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(401

)

 

 

(401

)

Exercise of stock awards and
   employee stock plan purchases

 

 

98

 

 

 

 

 

 

156

 

 

 

 

 

 

 

 

 

156

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,671

 

 

 

 

 

 

 

 

 

2,671

 

Net income loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,048

)

 

 

(3,048

)

Subsidiary dissolution

 

 

 

 

 

 

 

 

 

 

 

(68

)

 

 

 

 

 

(68

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(268

)

 

 

 

 

 

(268

)

Balance as of March 31, 2022

 

 

27,603

 

 

$

27

 

 

$

226,163

 

 

$

(4,793

)

 

$

(90,448

)

 

$

130,949

 

 

For the three-months ended
   March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2020

 

 

21,958

 

 

$

22

 

 

$

147,997

 

 

$

(2,124

)

 

$

(52,316

)

 

$

93,579

 

Issuance of common stock in public
   offering, net of issuance costs

 

 

4,600

 

 

 

5

 

 

 

59,520

 

 

 

 

 

 

 

 

 

59,525

 

Exercise of stock awards and
   employee stock plan purchases

 

 

325

 

 

 

 

 

 

2,569

 

 

 

 

 

 

 

 

 

2,569

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,352

 

 

 

 

 

 

 

 

 

1,352

 

Net income loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,225

)

 

 

(23,225

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(2,298

)

 

 

 

 

 

(2,298

)

Balance as of March 31, 2021

 

 

26,883

 

 

$

27

 

 

$

211,438

 

 

$

(4,422

)

 

$

(75,541

)

 

$

131,502

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(3,048

)

 

$

(23,225

)

Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,081

 

 

 

1,265

 

Impairment of long-lived assets and non-cash restructuring

 

 

 

 

 

4,443

 

Amortization of deferred financing costs

 

 

 

 

 

12

 

Stock-based compensation

 

 

2,671

 

 

 

1,352

 

Provision for inventory write-down

 

 

705

 

 

 

666

 

Bad debt expense, net of recoveries

 

 

(752

)

 

 

14,228

 

Provision for sales returns

 

 

1,448

 

 

 

239

 

Provision for warranty

 

 

121

 

 

 

269

 

Unrealized loss (gain) on foreign currency transactions

 

 

874

 

 

 

(883

)

Subsidiary dissolution

 

 

(68

)

 

 

 

Deferred taxes

 

 

 

 

 

(134

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

2,761

 

 

 

(846

)

Other receivable

 

 

126

 

 

 

(2,678

)

Inventories

 

 

(10,931

)

 

 

(3,239

)

Contract assets

 

 

1,261

 

 

 

(267

)

Prepaid expenses and other assets

 

 

(7,577

)

 

 

(1,186

)

Accounts payable

 

 

1,586

 

 

 

3,539

 

Contract liabilities

 

 

(1,446

)

 

 

32

 

Accrued and other liabilities

 

 

456

 

 

 

(523

)

Net cash used in operating activities

 

 

(10,732

)

 

 

(6,936

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,317

)

 

 

(1,266

)

Acquisition of business, net of cash acquired

 

 

 

 

 

(4,258

)

Net cash used in investing activities

 

 

(1,317

)

 

 

(5,524

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock in public offerings, net of issuance costs

 

 

 

 

 

59,525

 

Repayments of short-term borrowings and line of credit

 

 

 

 

 

(11,494

)

Repayments of related party term loan

 

 

 

 

 

(29,298

)

Payments for debt issue costs

 

 

(178

)

 

 

 

Proceeds from exercise of stock awards and employee stock plan purchases

 

 

156

 

 

 

2,569

 

Net cash provided by (used in) financing activities

 

 

(22

)

 

 

21,302

 

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

 

 

(903

)

 

 

404

 

Net increase in cash, cash equivalents and restricted cash

 

 

(12,974

)

 

 

9,246

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

53,639

 

 

 

54,587

 

Cash, cash equivalents and restricted cash at end of period

 

$

40,665

 

 

$

63,833

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,160

 

 

$

56,818

 

Restricted cash

 

 

6,343

 

 

 

6,848

 

Long-term restricted cash

 

 

162

 

 

 

167

 

 

 

$

40,665

 

 

$

63,833

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest - bank and trade facilities

 

$

36

 

 

$

83

 

Interest - related party

 

 

 

 

 

94

 

Income taxes

 

$

283

 

 

$

1,206

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Organization and Summary of Significant Accounting Policies

(a) Description of Business

DZS Inc. (referred to, collectively with its subsidiaries, as “DZS” or the “Company”) is a global provider of 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.

(b) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 3 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements include the accounts of the Company and its wholly owned subsidiaries. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2022. For a complete description of what the Company believes to be the critical accounting policies and estimates used in the preparation of its unaudited condensed consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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

(c) Risks and Uncertainties

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

The COVID-19 pandemic continued to adversely affect significant portions of our business and our financial condition and results of operations in the first quarter of 2022. The emergence of the Omicron variant in late 2021 with a resulting increase in COVID cases in early 2022 resulted in re-implementation of 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.

We have experienced and continue to experience disruptions in our supply chain due to the pandemic, which has also impacted and may adversely impact our operations (including, without limitation, logistical and other operational costs) and the operations of some of our key suppliers. Supply chain pricing, freight and logistics costs, product and component availability, and extended lead-times became a challenge in 2021 and continue into 2022 as the world economy recovers from the COVID-19 pandemic. As we continue to incur elevated costs for components and expedite fees, our supply chain and operations teams continue to focus on managing through a constrained environment, thereby enabling DZS to maximize shipments despite elongated lead times. We remain cautious about continued supply chain headwinds that challenge the industry and anticipate a constrained supply chain environment to persist throughout 2022.

For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A, Risk Factors of our 2021 Form 10-K.

(d) Use of Estimates

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

7


 

(e) Disaggregation of Revenue

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

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Products

 

$

72,462

 

 

$

76,252

 

Services and other

 

 

4,578

 

 

 

4,779

 

Total

 

$

77,040

 

 

$

81,031

 

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

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Americas

 

$

23,061

 

 

$

20,169

 

Europe, Middle East, Africa

 

 

18,649

 

 

 

17,918

 

Asia

 

 

35,330

 

 

 

42,944

 

Total

 

$

77,040

 

 

$

81,031

 

 

(f) Concentration of Risk

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

The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts based upon the expected collectability of accounts receivable using historical loss rates adjusted for customer-specific factors and current economic conditions. The Company performs periodic assessments of its customers’ liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement review and historical and current collection trends.

Activity under the Company’s allowance for doubtful accounts is comprised as follows (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

17,735

 

 

$

3,954

 

Charged to expense, net of recoveries

 

 

(752

)

 

 

14,228

 

Utilization/write offs/exchange rate differences

 

 

 

 

 

(94

)

Cumulative effect of ASC 326 adoption

 

 

401

 

 

 

 

Foreign exchange impact

 

 

(326

)

 

 

(148

)

Balance at end of period

 

$

17,058

 

 

$

17,940

 

For the three months ended March 31, 2022, two customers accounted for 13% and 12% of net revenue, respectively. For the three months ended March 31, 2021, two customers accounted for 18% and 10% of net revenue, respectively.

As of March 31, 2022, no customers represented more than 10% of net accounts receivable. As of December 31, 2021, two customers represented 26% and 10% of net accounts receivable, respectively.

As of March 31, 2022, and December 31, 2021, net accounts receivables from customers in countries other than the United States represented 77% and 79%, respectively.

In 2017, the Company entered into an agreement with a customer in India to supply product for a state sponsored broadband project. The Company substantially completed its obligations under the agreement in 2018. The Company billed the customer, which is a state government sponsored entity, approximately $59.0 million and collected payments of approximately $41.7 million by December 31, 2020. In late March 2021, the customer’s state government parent experienced difficulty passing a budget impacting the ability of the customer to make remaining agreed-upon payments to us. In light of this development, the Company recorded an allowance that covered the entire balance unpaid by the customer. Subsequent to March 2021, the Company recovered approximately $1.9 million of accounts receivable related to the customer. As of March 31, 2022 the Company has a recorded allowance for doubtful accounts of $14.8 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.

8


 

 

(g) Business Combinations

The Company allocates the fair value of purchase consideration to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets and certain tangible assets such as inventory.

Critical estimates in valuing certain tangible and intangible assets include but are not limited to future expected cash flows from the underlying assets and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

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

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

(h) Restructuring and Other Charges

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

(i) Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, which provided additional implementation guidance on the previously issued ASU. The Company adopted the updated guidance on January 1, 2022, utilizing the modified retrospective transition method and recorded a cumulative-effect adjustment of $0.4 million to retained earnings.

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

9


 

(2) Business Combinations

Optelian Acquisition

On February 5, 2021, the Company acquired Optelian Access Networks Corporation (“Optelian”), a corporation incorporated under the laws of Canada and registered extra-provincially in the Province of Ontario, pursuant to an acquisition agreement whereby the Company purchased all the outstanding shares of Optelian (the “Optelian Acquisition”). Following the closing of the Optelian Acquisition, Optelian became the Company’s wholly owned subsidiary.

Optelian was a leading optical networking solution provider. This acquisition introduced the “O-Series” to the DZS portfolio of carrier grade optical networking products with 100 gigabits per second (Gig) and above capability, expanding the DZS product portfolio 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.

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. We completed the purchase price allocation for Optelian acquisition in 2021. 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.

RIFT Acquisition

On March 3, 2021, the Company acquired substantially all of the assets of RIFT, Inc., a network automation solutions company, and all the outstanding shares of RIFT.IO India Private Limited, a wholly owned subsidiary of RIFT, Inc. (collectively “RIFT”). RIFT developed a carrier-grade RIFT.ware software platform that simplifies the deployment of any slice, service, or application on any cloud. 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. We completed the purchase price allocation for RIFT acquisition in 2021. The purchase price allocation resulted in the recognition of goodwill of approximately $0.2 million, which primarily related to the expected synergies from combining operations.

(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 from Optelian acquisition within Level 3 as it includes inputs not observable in the market. The Company estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using the revenue forecast for certain Optelian products through the end of 2023. The fair value of contingent liability is generally sensitive to changes in the revenue forecast. As of March 31, 2022 and December 31, 2021, the Company’s Level 3 contingent liability was $2.2 million and $2.1 million, respectively. During the three months ended March 31, 2022, the Company recorded $0.1 million expense related to the change in fair value of the Company’s contingent liability. The change in fair value is included in selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss).

10


 

(4) Cash, Cash Equivalents and Restricted Cash

As of March 31, 2022 and December 31, 2021, the Company's cash, cash equivalents and restricted cash consisted of financial deposits. Cash, cash equivalents and restricted cash held within the U.S. totaled $8.7 million and $22.3 million as of March 31, 2022 and December 31, 2021, respectively. Cash, cash equivalents and restricted cash held within the U.S. are held at FDIC insured depository institutions. Cash, cash equivalents and restricted cash held outside the U.S. totaled $32.0 million and $31.3 million as of March 31, 2022 and December 31, 2021, respectively. Restricted cash consisted primarily of cash collateral for performance bonds and warranty bonds. Long-term restricted cash was $0.2 million as of March 31, 2022 and December 31, 2021 and is included in other assets on the unaudited condensed consolidated balance sheets.

(5) Balance Sheet Details

Balance sheet detail as of March 31, 2022 and December 31, 2021 is as follows (in thousands):

Inventories

 

 

March 31, 2022

 

 

December 31, 2021

 

Raw materials