10-K/A: DZS Inc. Files Amended 10-K After Restatement, Stock Remains on OTC Market

DZS Inc. has filed an amended 10-K report for the year ended December 31, 2022, following a restatement of its financial statements due to revenue recognition errors, and its stock is now trading on the OTC market after being suspended from Nasdaq.

Summary

• DZS Inc. has filed an amended 10-K report for the fiscal year ended December 31, 2022, which includes restated financial statements for 2022 and the first quarter of 2023.
• The restatement was necessary due to errors in revenue recognition related to certain customer projects.
• The company's common stock was suspended from trading on Nasdaq on August 8, 2024, and is now traded on the OTC market under the symbol DZSI.
• As of March 1, 2023, there were 31,048,773 shares of common stock issued and outstanding.
• The company has authorized 61,000,000 shares of capital stock, of which 36,000,000 are shares of common stock and 25,000,000 are shares of preferred stock.
• DZS has a global customer base with active customers in more than 70 countries.
• The company's backlog was approximately $291.3 million as of December 31, 2022, compared to $225.0 million at December 31, 2021.
• Research and product development expenses were $56.1 million in 2022, $47.0 million in 2021, and $38.0 million in 2020.
• The company had a net loss of $41.3 million in 2022, $34.7 million in 2021, and $23.1 million in 2020.
• The company's revenue increased by 2.1% to $357.5 million in 2022, compared to $350.2 million in 2021.

Sentiment

Score: 3

Explanation: The document reveals significant issues including a restatement, material weaknesses in internal controls, and a Nasdaq delisting, which overshadow any positive aspects. The overall tone is negative from an investment perspective.

Positives

• The company's backlog increased year-over-year, indicating strong demand for its products and services.
• DZS has a global presence with customers in over 70 countries, providing a diversified revenue base.
• The company continues to invest significantly in research and development, which is crucial for maintaining a competitive edge in the technology sector.
• The company's revenue increased to $357.5 million in 2022.

Negatives

• The company's financial statements for 2022 and the first quarter of 2023 were restated due to revenue recognition errors.
• DZS's stock was suspended from trading on Nasdaq and is now traded on the OTC market.
• The company reported a net loss of $41.3 million for 2022.
• The company has identified material weaknesses in its internal control over financial reporting.

Risks

• The restatement of financial statements could lead to additional legal and regulatory challenges.
• The suspension from Nasdaq could negatively impact investor confidence and the company's ability to raise capital.
• The company's ongoing losses and accumulated deficit raise concerns about its long-term financial sustainability.
• The company faces intense competition in the communications equipment market.
• The company is dependent on a limited number of suppliers for key components, which could disrupt its supply chain.
• The company's international operations are subject to various risks, including currency fluctuations and political instability.
• The company has identified material weaknesses in its internal control over financial reporting which could, if not remediated, adversely affect its ability to report its financial condition and results of operations in a timely and accurate manner.

Future Outlook

The company anticipates its software sales to increase in 2023 as it realizes a full-year of recurring software revenue from the ASSIA Acquisition. The company also expects its gross margin to improve in 2023 due to various factors including a higher proportion of revenue contribution from North America and EMEA, operating cost savings and product cost improvement resulting from its contract manufacturing transition to Fabrinet, from price increases implemented in 2021 and 2022, and a more stable foreign exchange environment.

Management Comments

• Management believes that its existing cash and cash equivalents will be sufficient to satisfy its anticipated cash requirements for at least the next 12 months.
• Management is focused on improving product margins, increasing recurring software and service revenue, and managing expenses to drive profitability.

Industry Context

The document highlights the increased demand for mobile and fixed network access solutions, driven by remote work, learning, and entertainment streaming. This trend is consistent with the broader industry's focus on upgrading network infrastructure to meet growing bandwidth needs. The company's focus on FTTx and 5G technologies aligns with current industry trends.

Comparison to Industry Standards

• DZS competes with companies like ADTRAN, Calix, Huawei, Nokia, and ZTE in the broadband connectivity market.
• In the FiberLAN business, competitors include Cisco, Nokia, and Tellabs.
• In the mobile and optical edge transport business, competitors include Ciena, Cisco and Juniper Networks.
• In the cloud software business, competitors include solutions from ADTRAN, Calix, Ciena, Nokia, and Solarwinds.
• Many of these competitors have greater financial, technical, sales and marketing resources than DZS.
• The company's performance is impacted by the global supply chain issues, similar to other companies in the industry.

Legal Proceedings

• The company is subject to multiple securities class actions relating to its previous public disclosures.
• The company is subject to a government investigation by the SEC.
• The company is involved in a lawsuit with Plume Design, Inc. regarding a reseller contract.

Related Party Transactions

• The company has various transactions with DASAN Networks, Inc. (DNI), including sales agreements, lease agreements, and a trademark license agreement.
• The company has a loan agreement with DNI.
• DNI provides payment guarantees for certain of the company's performance obligations.

Stakeholder Impact

• Shareholders are negatively impacted by the restatement, stock suspension, and potential delisting.
• Employees may be affected by restructuring activities and potential job losses.
• Customers may experience disruptions due to supply chain issues and potential financial instability of the company.
• Creditors face increased risk due to the company's financial challenges and potential non-compliance with debt covenants.

Next Steps

• The company is actively engaged in developing a remediation plan designed to address the material weaknesses in internal control over financial reporting.
• The company will continue to cooperate with the SEC investigation into these matters.
• The company will continue to focus on cost management, operating efficiency and efficient discretionary spending to support its funding requirements.

Key Dates

Keywords

restatement, revenue recognition, OTC market, Nasdaq, financial statements, internal control, telecommunications, networking, broadband, optical, cloud software, supply chain, material weakness