UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ||
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
toCommission File Number: 000-32743
DASAN ZHONE SOLUTIONS, 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 No.) |
1350 South Loop Road, Suite 130
Alameda, California 94621
(Address of principal executive office)
Registrant’s telephone number, including area code: (510) 777-7000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, $0.001 Par Value | DZSI | The Nasdaq | ||
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 ☒x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐¨ No ☒x
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 ☒x No ☐¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒x 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 (Check one):
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 ☒x
As of SeptemberMarch 20, 2017,2020, there were 16,385,45521,513,373 shares outstanding of the registrant’s common stock, $0.001 par value. As of June 30, 20162019 (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 $34,173,915.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III where indicated.
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PART I | ||||
Item 1. | 1 | |||
Item 1A. | 8 | |||
Item 1B. | 22 | |||
Item 2. | 22 | |||
Item 3. | ||||
Item 4. | ||||
PART II | ||||
Item 5. | ||||
Item 6. | 24 | |||
Item 7. | 25 | |||
Item 7A. | 36 | |||
Item 8. | 37 | |||
Item 9. | 78 | |||
Item 9A. | 78 | |||
Item 9B. | 79 | |||
PART III | ||||
Item 10. | 80 | |||
Item 11. | 80 | |||
Item 12. | 80 | |||
Item 13. | 80 | |||
Item 14. | 80 | |||
PART IV | ||||
Item 15. | 81 | |||
Item 16. | 81 | |||
82 | ||||
86 |
This report,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 or the Exchange Act.(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. 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;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 the Merger (as defined below);merger with Dasan Network Solutions, Inc. and the acquisition of Keymile GmbH; future growth and revenues from our products; our plans and our ability to refinance or repay our existing indebtedness prior to the applicable maturity date;dates; our ability to access other capital to fund our future operations; future economic conditions and performance; the impact of the global outbreak of COVID-19, also known as the coronavirus; the impact of interest rate and foreign currency fluctations; the anticipated relocation of our corporate headquarters to Texas; anticipated performance of products or services; competition; plans, objectives and strategies for future operations;operations, including our pursuit or strategic acquisiitons and our continued investment in research and development; other characterizations of future events or circumstances,circumstances; and all other statements that are not statements of historical fact, are forward-looking statements. Readers are cautionedstatements within the meaning of the Securities Act and the Exchange Act. Although we believe that thesethe assumptions underlying the forward-looking statements are only predictionsreasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified under the heading “Risk Factors” in Item 1A, elsewhere in this report and our other filings with the Securities and Exchange Commission (the SEC). Therefore,future prospects or which could cause actual results mayto differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a differenceour expectations include, but are not limited to, our ability to realize to:
the anticipated cost savings, synergies and other benefitsimpact of the Mergerglobal outbreak of the coronavirus on the Company’s business and any integration risks relating tooperations, including as a result of travel bans related thereto, the Merger, the ability to generate sufficient revenue to achieve or sustain profitability,health and wellbeing of our employees in affected areas, disruption of our supply chain and softening of demands for our products;
our ability to raise additional capital to fund existing and future operations or to refinance or repay our existing indebtedness, indebtedness;
our ability to retain our key management personnel;
defects or other performance problems in our products, any economic slowdown in the telecommunications industry that restricts the abilityproducts;
• | any economic slowdown in the telecommunications industry that restricts or delays the purchase of |
commercial acceptance of our products, products;
intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same networksnetwork needs as our products, products;
higher than anticipated expenses that we may incur, incur;
any failure to comply with the periodic report filing and other requirements of The Nasdaq Stock Market or Nasdaq, for continued listing, listing;
material weaknesses or other deficiencies in our internal control over financial reporting,reporting; and
additional 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 those described from time to time in our future reports filed with the initiation of any civil litigation, regulatory proceedings, government enforcement actions or other adverse effects relating to the Audit Committee investigation or errors in the consolidated financial statements of Legacy Zhone (as defined below)U.S. Securities and other factors identified elsewhere in this report. We undertake no obligation to revise or update any forward-looking statements for any reason.Exchange Commission (the “SEC”).
DASAN Zhone Solutions, Inc. (DZS,(“DZS” or the “Company,” formerly known as Zhone Technologies, Inc.) was incorporated under the laws of the state of Delaware in June 1999. On September 9, 2016, weDZS acquired Dasan Network Solutions, Inc. (DNS)a California corporation (“DNS”), through the merger of a wholly owned subsidiary of Zhone Technologies, Inc. with and into DNS, with DNS surviving as our wholly owned subsidiary (the Merger).subsidiary. We refer to this transaction as the “Merger.” At the effective timedate of the Merger, all issued and outstanding shares of capital stock of DNS held by its sole shareholder, DASAN Networks, Inc. (DNI)(“DNI”), a company incorporated under the laws of the Republic of Korea (“Korea”), were canceled and converted into the right to receive shares of our common stock in an amount equal to 58%57.3% of theour issued and outstanding shares of our common stock immediately following the Merger. In connection with the Merger, Zhone Technologies, Inc. changed its name to DASAN Zhone Solutions, Inc. Our common stock continues to be traded on the Nasdaq Capital Market, and our ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016.
The mailing address of our worldwide headquarters is 7195 Oakport Street, Oakland,1350 South Loop Road, Suite 130, Alameda, California 94621,94502, and our telephone number at that location is (510) 777-7000.
Company Overview
We are a global provider of ultra-broadband network access solutions and communications equipment forplatforms deployed by advanced Tier 1, 2 and 3 service providerproviders and enterprise networks. customers. Our solutions are deployed by over 1200 customers in more than 120 countries worldwide. Our ultra-broadband 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. Our principal focus is centered on enabling our customers to “connect everything and everyone” to the internet-cloud economy via ultra-broadband connectivity solutions.
We research, develop, test, sell, manufacture and support communications equipmentplatforms in five major areas: broadband access, mobile fronthaul/backhaul, Ethernet switching mobile backhaul, passive opticalwith Software Defined Networking (“SDN”) capabilities, new enterprise solutions based on Passive Optical LAN (POLAN)(“POL”), and software defined networks (SDN).
Broadband Access
Our broadband access products are at the core of our product strategy and offer a variety of options for carriers and service providers to connect residential and business customers. Our solutions allow carriers and service providers to either use high-speed fiber or leverage 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, high-speed internet access and business class services to their customers. We develop our broadband access products for all aspects of carrier and service provider access networks:networks, including customer premise equipment (such asequipment. Products include digital subscriber line (DSL) modems),(“DSL”) modems, Ethernet access demarcation devices, Gigabit passive optical network (GPON) and(“GPON”) terminals, 10 Gigabit Ethernet(“10G”) passive optical network (GEPON)(“GPON/GEPON/XGPON1/XGSPON/NGPON2/10GEPON”) units and, Gigabit and 10G point-to-point Active Ethernet optical network terminals (ONTs)(“ONTs”). We also develop central office products, such as broadband loop carriers for DSL and voice-grade telephone service (POTS)(“POTS”), high-speed digital subscriber line access multiplexers (DSLAMs)(“DSLAMs”) with G.fastG. Fast and very-high-bit-rate DSL (VDSL)VDSL capabilities, optical line terminals (OLTs)(“OLTs”) for passive optical distribution networks like GPONGPONs, 10G passive optical networks and GEPON as well as10G point-to-point Ethernet service for 1 Gigabit to 10 Gigabit access. Both DNS and Legacy Zhone were market leaders in the broadband access market prior to the Merger, and the combination of DNS and Legacy Zhone is expected to enhance our leadership position for both carrier and enterprise solutions in this market following the Merger.
Ethernet Switching
Our Ethernet switching products provide a high-performancehigh switching performance and manageable solution that bridges the gap from carrier access technologies to the core network. Over the past ten (10) years carriers have migrated access infrastructure to Ethernet from time-division multiplexing and asynchronous transfer mode systems. Our products can also be deployed in data centers, blurring the line between central office and data center. Our products support pure Ethernet switching as well as layer 3 IP and MPLS capabilities,multiprotocol label switching (“MPLS”) and are currently being developed for interfacing with SDNs. Legacy Zhone did not offer comparable Ethernet switching products prior toas part of the Merger, and therefore the Ethernet switching market is expected to provide an opportunity for growth for the combined company following the Merger.new programmable SDNs networks.
Mobile Fronthaul/Backhaul
Our mobile fronthaul/backhaul products provide a robust, manageable and scalable solution for mobile operators that enable them to upgrade their mobile fronthaul/backhaul systems and migrate from 3Gto 5G networks to LTE and beyond. We provide our mobile fronthaul/backhaul products to mobile operators or carriers who provide the transport for mobile operators. Our mobile fronthaul/backhaul products may be collocated at the radio access node (RAN) base station (BS) and can aggregate multiple RAN BS in to radio access node base stations into a single fronthaul/backhaul for delivery of mobile traffic to the RANradio access node network controller. We provide standard Ethernet/IP or multiprotocol label switching (MPLS)MPLS interfaces and interoperate with other vendors in these networks. WithIn recent years, mobile fronthaul/backhaul networks have been providing carriers with significant revenue growth, in recent years,which has led to mobile fronthaul/backhaul has becomebecoming one of the most important parts of their networks. Legacy Zhone did not offer comparable mobile backhaul products prior to the Merger, and therefore the mobile backhaul market is expected to provide an opportunity for growth for the combined company following the Merger.
Enterprise Passive Optical LAN
Our FiberLANTM portfolio of POLANPOL products are designed for enterprise, campus, hospitality and entertainment arena usage. Our FiberLAN portfolio includes our high-performance, high-bandwidth GPON OLTsswitches connected to the industry’s most diverse ONT product line,port extenders, which include units with integrated Power over Ethernet (PoE)(“PoE”) to power a wide range of devices such as our full range of WIFIPoE-enabled access points (APs) and scalable WIFI AP controller. devices.
Our environmentally friendly FiberLAN POLANPOL solutions are one of the most cost effectivecost-effective LAN technologies that can be deployed, allowing IT network managers to deploy a future proof,future-proof, low-maintenance, manageable solution that requires less space, air conditioning, copper and electricity than other alternatives. Our FiberLAN
The FiberLAN™ 2.0 portfolio relates primarilyis focused on a “plug and play” architecture for a new generation of distributed enterprise IT infrastructure that is both highly secure and bandwidth scalable with unified management of wireless and wireline end points/devices from a central network operations center with full visibility and management control of remote sites. Additionally, with SDN upgrades enterprise networks can be software programmed to Legacy Zhone products, while our WIFI access pointsautonomously monitor, reconfigure, diagnose and controllers consist primarily of DNS products. We expectauthenticate without the combination of Legacy Zhone and DNS products in this market to enhance the functionality of our product offerings and provide an opportunityneed for growth for the combined company following the Merger.
Software Defined Networks
Our SDN and network function virtualization (NFV)SDN/NFV strategy is to develop tools and building blocks tothat will allow service providerscustomers to migrate their networks’ full complement of legacy control plane and data plane devices to a centralized intelligent controller that can reconfigure the services of the hundreds of network elements in real time for more controlled and efficient provision of services and bandwidth and latency acrosson a web scale basis. The latest evolution of our hardware-based solution are designed to support SDN/NFV architectures.
The adoption of SDN/NFV is a slow process in the network. This move to SDN and NFV providesservice provider space, but is viewed as providing a better service for end customerssubscribers and a more
Industry Background
We believe growththat expansion in our worldwide business in the coming years will beis driven by continued growth in worldwidethe increased demand of subscribers and cloud service providers for mobile and fixed network access solutions and communications equipment that enable or support access to high-speed broadband services. The communications industry continueshigher speed bandwidth access to experience rapid expansion with the internetinternet. Furthermore, increased competition between service providers for the subscriber business has resulted in significant investment pressure to upgrade network infrastructure to meet the growing bandwidth needs. Broadband access networks must be multiservice in nature and proliferationmust have an extensive quality of bandwidth-intensive applicationsservice guarantees in order to support 5G mobile fronthaul/backhaul, symmetric business services and residential services leading to increasing demandsas well as virtual overlay networks for high-bandwidth communications networks. The broad adoption of new technologies such as smartphones, digital video camerasalternative operators and high definition and ultra high definition televisions allow music, pictures, user-generated content (as found on the many video-sharing sites) and high definition video to be a growing part of consumers’ regular exchange of information. wholesale access.
In recent years, the growth of social communications and social networking has continued to placeplaced significant demands on existinglegacy access infrastructure, and new consumer demands arewhich has been challenging for the industry, even for the newest and most advanced infrastructures.subscribers. Increased subscriber usage of smartphone, video streaming services, PC gaming services and high definition and ultra-high definition televisions has increased the demand for 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 SaaS, Cloud, IoT, and 5G have also increased the demand for broadband network access. All of these new technologies share a common dependency on high-bandwidth communication networks and sophisticated traffic management tools. However, network service providers have struggled to meet the increased demand for high-speed broadband access due to the cost of network infrastructure upgrades. 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 datacenters)data centers), depending on the selection of technology selection and cost.costs.
It is widely believedacknowledged in the industry that a fiber-optic connection that runs from customers’ premises all the way to the carrier’s datacentersbroadband access network is the bestpreferred network architecture for a broadband fixed network. This network architecture is commonly called Fiber to the Premises (FTTP). However, FTTP is also typically the most expensive network solution, due to the associated build-out and equipment cost. Although many carriers have, to different degrees, adopted FTTP as their primary network architecture, many limit their use of FTTP to new greenfield builds and rely on hybrid fiber-copper topologies in their existing network in order to reduce cost. For example, popular and less costly alternatives to FTTP include Fiber to the Curb (FTTC)(“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 units (ONT). The Fiber to the Node (FTTN) network architecture. In these architectures,(“FTTN”) architecture is also deployed where the carrier lays a fiber-optic cable toterminates at a street cabinet and then useswhich contains a DSLAMs or Multiple Service Access Node (MSAN) to provide(“MSAN”) that then provides higher speed services to their customers over the last mile legacy copper wire. Another trend in network access iswireline 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 wirewireline networks are decommissioning their legacy telephone switches and moving services over to Voice over Internet Protocol (VoIP)(“VoIP”) platforms onvia an MSAN.MSAN/Softswitch solution. Our broadband access products and solutions are designed to address all these market trendsfiber 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.
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)(“3G”) to 4th generation wireless (4G(“4G” or LTE)“LTE”) and to plan for 5th generation wireless technologies (5G)(“5G”). These technology upgrades are typically accompanied by network infrastructure upgrades, including upgrades to the carriers’ access networks (referred to as mobile backhaul)“mobile fronthaul/backhaul”), core networks and datacenters.data centers. Our mobile fronthaul/backhaul 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 from 3G networks to LTE4G and beyond.
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 datacenters,data centers, both of which require network redesigns and upgrades. Our FiberLAN portfolio of POLANPOL products, as well as our Ethernet switching products and SDN and NFV tools and building blocks, are designed to address these market trends, with POLANPOL emerging as a popular customer choice for network upgrades.
Our Strategy
We are a leading global provider of ultra-broadband network access solutions and communications equipment. platforms deployed by advanced Tier 1, 2 and 3 service providers and enterprise customers. We provide a wide array of reliable, cost-effective networking technologies that include broadband access, Ethernet switching, mobile fronthaul/backhaul, passive optical LAN and software-defined networks.
The principal elements of our strategy include:
Leverage Growth Opportunities from Merger.Global Presence. We believe the expanded geographic reach of the combined company and the enhanced functionality and range ofhave a diversified customer base that includes more than 1200 customers in more than 120 countries worldwide. We provide our product offerings following the Merger represent attractive opportunities for growth in our business. Priornetwork access solutions to the Merger, DNS provided communications equipment primarilyTier 1 carriers in the Asia-Pacific region, with a particular focus onthe Middle East region and Europe, as well as Tier 2 and Tier 3 carriers in North America and Latin America. We leverage our global infrastructure, including sales offices all over the world, leading research and development centers in the United States, Germany, Korea, Japan and Vietnam, and Legacy Zhone provided communications equipment primarilymanufacturing capabilities in the AmericasUnited States, Germany, Korea, and China, to support our customer base.
Leading FTTx Market Position. We enjoy a strong leadership position in the FTTx network access space. As an industry global leader in FTTx ONT and OLT portfolio options, we shipped more than 2.0 million ONTs in 2019, which we believe positions us as a top two leader, by volume, in the broadband fiber access market, excluding Chinese equipment manufacturers. We offer customers an extensive choice of indoor and outdoor fiber demarcation and fully integrated smart gateway’s with telephone data, POE, Wi-Fi 5 and OTT STB capabilities and other service interfaces. In the FTTx Optical Line Termination (OLT) category, we offer the industry’s largest portfolio of modular chassis and single platform for deployment in datacenter, central office, extended temperature environments and multi dwelling unit (MDU) scenarios.
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 January 3, 2019, we acquired Keymile to expand our business efforts in the Europe, Middle East and Africa (“EMEA”) region by acquiring experienced employees in sales and marketing, support and services, manufacturing, and research and development groups. This also expanded our in-house manufacturing and logistics and procurement capacity. The Keymile Multi-service Access Nodes (MSAN) portfolio complement the DZS existing portfolio by offering leading class point-to-point active FTTx Ethernet and copper-based access technology based on VDSL/Vectoring and G. Fast technology as well as VoIP gateway features. In addition, Keymile has a broad base of customers, comprised primarily of Tier 1 and Tier 2 service providers, across 35 countries, which further offers DZS customer and geographic diversification, particularly in Europe. The DZS regional EMEA region. DNS and Legacy Zhone had complementary product portfolios prior toheadquarters is located in the Merger, with both DNS and Legacy Zhone offering broadband access solutions andKeymile facilities in Hannover, Germany.
Drive Cost Efficiencies through Integration of DNS and Legacy Zhone Operations.Technology Leadership We intend to continue to drive cost efficiencies in our business through continuing efforts to integrate the DNS and Legacy Zhone global operations, with a view to creating a single efficient global engineering and support organization to support all customers of the combined company worldwide. We also expect to drive further cost efficiencies through product cost reductions and manufacturing economies of scale resulting from the Merger.
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. For example, 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
For our core business, 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 consumers.subscribers. Our global customer base includes regional, national and international carriers and service providers. To date, our products have been deployed by over 1,0001200 carriers and service providers worldwide.
For our FiberLANEnterprise FiberLAN™ business, we sell our POLAN solutions directly andindirectly to end customers through system integrators and distributors to the hospitality, education, stadiums, manufacturing and business enterprises as well as to the government and military. Our global FiberLANFiberLAN™ customer base includes hotels, universities, sports arenas, military bases, government institutions, manufacturing facilities and Fortune 500 businesses.
For the year ended December 31, 2016, three2019, we had no customers SK Broadband, Inc., DNI and LG Uplus Corp.that represented 16%, 14% and 10% or more of net revenue, respectively.revenue. For the year ended December 31, 2015, four customers, KT Corporation, LG Uplus Corp., DNI (a related-party) and2018, one customer, SK Broadband, Inc., represented 26%, 21%, 17% and 10%11% of net revenue, respectively. For the year ended December 31, 2014, four customers, KT Corporation, LG Uplus Corp., SK Broadband, Inc. and DNI (a related-party) represented 17%, 14%, 13% and 12% of net revenue, respectively. No other customers accounted for 10% or more of net revenue during these periods.
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 product development facilities at our headquarters in Oakland, California, as well as in research and product development centersteams located in the United States (Oakland, California; Seminole, FloridaFlorida; Alpharetta, Georgia), Korea, Vietnam, India and Alpharetta, Georgia, and in Korea, India, China and Vietnam.Hannover, Germany through the acquisition of Keymile. In all of these facilitiescenters, we develop and test both our hardware and software.software solutions. We have investedcontinue to invest heavily in both 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 represent viable revenue opportunities. We are actively engaged in continuing to refine our solution architecture, introducing new products using the various solutions we support, and in creating additional interfaces and protocols for both domestic and international markets.
We continue our commitment to invest in leading edge technology research and development.development for new products and innovative solutions that align with our business strategy. Our research and product development expenses were $25.4 million, $21.3$38.5 million and $22.8$35.3 million in 2016, 20152019 and 2014,2018, respectively. We plan to continue to support the development of new products and features, while seeking to carefully manage associated costs through expense controls.
Intellectual Property
We seek to establish, maintain and maintainprotect our proprietary rights in our technology and products through the use of patents, copyrights, trademarks and trade secret laws.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
Many of our products are designed to 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.
Sales and Marketing
We have a global sales presence in various domestic and foreign locations,with customers from over 120 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 services and support services in addition to the network equipment sale. sales. Our sales efforts are generally organized and fitted according to geographical regions:
U.S. Sales.Americas Sales. Our U.S.Americas Sales organization includes coverage of North America and Latin America regions. On the functional side, the Americas Sales organization also manages our inside sales and sales engineer activities. The organization establishes and maintains direct and indirect relationships with domestic customers in the Americas, which includeincludes carriers and service providers, cable operators, utilities and utilities.enterprises. In addition, this organization is responsible for managing our distribution and original equipment manufacturer, or OEM, partnerships.channel.
International Sales.EMEA Sales. Our InternationalEMEA Sales organization targets foreignconsists of the combination of the Keymile sales organization with DZS’s EMEA Sales organization. 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 is staffedenterprises.
Asia-Pacific (excluding Korea) Sales. Our Asia-Pacific Sales organization includes coverage of Asia Pacific countries, exclusive of Korea. The organization establishes and maintains direct and indirect relationships with individuals with specific experience dealing withcustomers in the Asia Pacific region, which includes carriers and service providers, in their designated international territories.cable operators, utilities and enterprises.
Korea Sales. Our Korea Sales organization establishes and maintains direct relationships with our 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.
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, and performs outbound education and public relations.
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. AtAs of December 31, 2016,2019, our backlog was $28.8approximately $80.0 million, as compared to $2.6$47.3 million at December 31, 2015.2018. 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 voice, data and video services. These markets are characterized by rapid change, converging technologies and a migration to solutions that offer superior advantages. These market factors represent both an opportunity and a competitive threat to us. We compete with numerous vendors in our core business, including Nokia,ADTRAN, Calix, Adtran, Huawei, Nokia, and ZTE, among others. In our FiberLAN business, our competitors include Cisco, Nokia, and Tellabs, among others. In our Ethernet switching business, our competitors include Cisco and Cisco,Juniper Networks, among others. In addition, a number of companies have introduced products that address the same network needs that our products and solutions address, both domestically and abroad.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:
product performance;
feature capabilities;
manufacturing capacity;
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
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, atthroughout the process we manage the assembly, quality assurance, customer testing, final inspection and shipping of our facility in Florida, and the use of original equipment manufacturers (OEMs) located in the Far East. products.
We manufacture many of our more complexlow volume, high mix products at our manufacturing facilityfacilities in Florida.
Some completed products are procured to our specifications and shipped directly to our customers. We also acquire completed products from certain suppliers, andwhich 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.
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 asalong with our technologies evolve.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, ISO-9001:2008 and we are certified to, ISO-9001:20082015 by our external registrar, National Standards Authority of Ireland (NSAI).Ireland. ISO-9001:20082015 requires that our processes arebe 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.
We believe that wehave generally been able to have sufficient production capacity to meet current and future demand for our product offerings through a combination of existing and added capacity, additional employees orand the outsourcing of products or components.
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 U.S.United States are determined by the Federal Communications Commission, or FCC, Underwriters Laboratories (a global safety certification company), Quality Management Institute Telcordia Technologies, Inc.(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, by the European
Environmental Matters
Our operations and manufacturing processes are subject to federal, state, local and foreign environmental protection laws and regulations. TheseSuch 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.
Our operations in 2003 the European Union enactedare subject to the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE), for implementation in European Union member states.Directive. We are aware of similar legislation that is currently in force or is being consideredand are taking suitable action to comply with the new European Union Restriction of Hazardous Substances standards. Our operations in the United States as well asor other countries, such as Japan and China.China are subject to similar legislation. Our failure to comply with any of such regulatory requirements or contractual obligations relating to environmental matters or hazardous materials could result in ourus being liable for costs, fines, penalties and third-party claims, and could jeopardize our ability to conduct business in countries in the jurisdictions where thesesuch laws or the regulations apply.
Employees
As of December 31, 2016,2019, we employed 622 individualsover 789 staff members 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.comwww.dasanzhone.com. The information on our website does not constitute part of this report. Through a linkAnnual Report on Form 10-K, or any other report, schedule or document we file or furnish to the "Financials"SEC. On the “Investor Relations” section of our website at http://investor-dzsi.com, 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. All such filings are available free of charge.
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 documents we file with the SEC arepublic filings. The trading price of our common stock could decline due to any of these risks, and, uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.
Risks Related to our ability to continue asBusiness
We have a going concern. If we are unable to amend, replace, refinance our short-term debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, we may experience material adverse impacts on our business, operating results and financial condition. Our financial statements do not include any adjustments that may be necessary in the event we are unable to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. If we ceased operations, it is likely that allsignificant amount of our stockholders would lose their entire investment.
In the event of a default and acceleration of our obligations under the March 2020 DNI Loan, we may not be able to obtain replacement financing at all or on commercially reasonable terms or on terms that are acceptable to us.Our cashlevel of indebtedness could have important consequences and cash equivalentscould materially and adversely affect us in a number of ways, including:
• | limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes; |
• | requiring us to use a significant portion of any future cash flow from operations to repay or service the debt, thereby reducing the amount of cash available for other purposes; |
• | making us more highly leveraged than some of our competitors, which could place us at a competitive disadvantage; and |
making us more vulnerable to the impact of adverse economic and industry conditions and increases in interest rates.
The agreements governing the March 2020 DNI Loan and the instruments governing our other indebtedness contain certain covenants, limitations, and conditions with respect to the Company and its subsidiaries, including financial reporting obligations and customary events of default and require that certain of our assets be pledged as collateral for such loans. These terms, conditions and collateral requirements could restrict our ability to operate our business. If an event of default occurs under the March 2020 DNI Loan, DNI will be entitled to take various actions, including requiring the immediate repayment of all outstanding amounts borrowed under the March 2020 DNI Loan and seizing and/or selling the assets of the Company and the subsidiary guarantors to satisfy the obligations under the March 2020 DNI Loan.
In the past, we have violated certain financial covenants in our credit agreements and received waivers for these violations. At September 30, 2019, the Company was not in compliance with the maximum leverage ratio financial covenant under the PNC Credit Facilities, which represented an event of default thereunder. On November 8, 2019, the Company obtained a waiver of the foregoing event of default. As a condition for the issuance of the waiver, the Company voluntarily prepaid $10.0 million of the outstanding term loan and paid a one-time fee of $150,000.The Company would have been in further breach of this financial covenant as of December 31, 20162019. The Company and DNS Korea entered into the March 2020 DNI Loan in part to repay and terminate the PNC Credit Facilities. While the Company believes the covenants in the March 2020 DNI Loan are more favorable than the covenants contained in the PNC Credit Facilities, there remains uncertainty as to whether DNS Korea will be able to satisfy some of the covenants included $9.8 million in the March 2020 DNI Loan. If the Company violates covenants in the March 2020 DNI Loan, the Company could be required to repay the amounts then outstanding under the March 2020 DNI Loan.
We cannot assure you that we will be able to generate cash balances held byflow in amounts sufficient to enable us to service our Korean subsidiary. Our current lack of liquidity could harm us by:
We may be unable to sell assets, access additional indebtedness or undertake other actions to meet these needs. As a result, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis. Ifneed additional capital, is raisedand we cannot be certain that additional financing will be available.
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. Additionally, while there are no covenants in the March 2020 DNI Loan restricting our ability, or the ability of our subsidiaries, to borrow additional funds, the collateral requirements under the March 2020 DNI Loan may make it difficult to for us to obtain additional secured financing. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or other debt financing,privileges senior to the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. Likewise, any equity financing could result in additional dilution of our stockholders. Moreover, we may be required to include audited annual and unaudited interim historical financial statements of Legacy Zhone in any registration statement for the sale of sharesrights of our common stock, or other securities, whichand our stockholders may make it more costly and time consuming for us to raiseexperience dilution.
If we need additional capital through a public offering of securities. If we are unable to sell assets, issue securities or access additional indebtedness to meet these needsand cannot raise it on favorableacceptable terms, or at all, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis and may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. In addition, we may not be able to, among other things:
maintain existing operations;
pay ordinary expenses;
fund our business expansion takeor product innovation;
pursue future business opportunities, including acquisitions;
respond to unanticipated capital requirements;
repay or refinance our existing debt;
hire, train and retain employees; or
respond to competitive pressures or unanticipated working capital requirements,requirements.
Our failure to do any of whichthese things could have a material adverse effect on our business, financial condition and results of operations.
We may not have the liquidity to support our future operations and capital requirements.
As of December 31, 2019, we had approximately $28.7 million in cash and cash equivalents, including $14.2 million in cash balances held by our international subsidiaries. If our operating performance does not improve, and we are unable to raise additional capital (as discussed in the prior risk factor), we may be unable to adequately fund our existing operations. Our current liquidity condition exposes us to the following risks:
vulnerability to adverse economic conditions in our industry or the economy in general;
a substantial portion of available cash is dedicated to debt servicing, rather than other purposes, including operations and new product innovation;
limitations on our ability to adequately plan for, or react to, changes in our business and industry; and
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:
the market for our products develops more slowly than anticipated;
we fail to establish market share or generate revenue at anticipated levels;
our capital expenditure forecasts change or prove to be inaccurate; or
we fail to respond to unforeseen challenges or take advantage of unanticipated opportunities.
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 $13.3 million and net income of $2.8 million for the years ended December 31, 2019 and 2018, respectively. Additionally, we have incurred significant losses in prior years. We have an accumulated deficit of $29.2 million as of December 31, 2019. We have significant fixed expenses and 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 Legacy Zhonenew technologies and DNSother acquisitions that may occur in the future. We may not be completed successfully, cost-effectivelyable 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.
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:
commercial acceptance of our products and services;
fluctuations in demand for network access products;
fluctuation in gross margin;
our ability to attract and retain qualified and key personnel;
the timing and size of orders from customers;
the ability of our customers to finance their purchase of our products as well as their own operations;
new product introductions, enhancements or announcements by our competitors;
our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely basis,manner;
changes in our pricing policies or the pricing policies of our competitors;
the ability of our company and our contract manufacturers to attain and maintain production volumes and quality levels for our products;
our ability to obtain sufficient supplies of sole or limited source components;
increases in the prices of the components we purchase, or quality problems associated with these components;
unanticipated changes in regulatory requirements which may require us to redesign portions of our products;
changes in accounting rules;
integrating and operating any acquired businesses;
our ability to achieve targeted cost reductions;
how well we execute on our strategy and operating plans; and
general economic conditions as well as those specific to the communications, internet and related industries.
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. 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.
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 Keymile Acquisition, 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 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. 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. 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.
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 Keymile in 2019, that we believe are complementary to our core business and are consistent with our growth strategy. In the future we may continue to make investments in or acquire other companies or complementary solutions or technologies as part of our growth strategy. 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 maycannot be certain that our previous or future acquisitions will be successful and will not realize the full benefitsmaterially 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.
• | insufficient revenues to offset increased expenses associated with acquisitions and where competitors in such markets have stronger market positions; |
• | conforming the acquired company’s standards, policies, processes, procedures and controls with our operations; |
• | difficulties in entering markets in which we have no or limited prior experience; |
• | difficulties in integrating the operations, technologies, products and personnel of the acquired companies; |
• | coordinating new product and process development, especially with respect to highly complex technologies; |
• | hiring and training additional management and other critical personnel; |
• | 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; |
litigation or cost-effectively integrate the Legacy Zhone and DNS operations. The costs of achieving systems integration may substantially exceed our current estimates. As a non-public company prior to the Merger, DNS did not have to comply with the requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, for internal control over financial reporting and other procedures. Accordingly, neither DNS nor its independent auditors undertook a formal assessment or audit of DNS’ internal control over financial reporting prior to the Merger. However,claims in connection with the preparation and external audit of DNS’ consolidated financial statements as of andacquired company, including claims for the three years ended December 31, 2015 and the preparation and review of DNS’ unaudited condensed consolidated financial statements as of and for the three
We have identified material weaknesses in our internal control over financial reporting, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and which may lead to a decline in our stock price.
We are responsible for establishing and after informing our independent registered public accounting firm, that, due to incorrect application of generally accepted accounting principles that resulted in material misstatements and a restatement of our unaudited condensed consolidated financial statements, our previously issued interim unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016 should no longer be relied upon. On March 21, 2017, the Audit Committee of our Board of Directors concluded, in consultation with management and after informing our former independent registered public accounting firm, that Legacy Zhone's unaudited condensed consolidated financial statements for the quarter ended June 30, 2016 should also no longer be relied upon due to material errors associated with the sale and subsequent return of certain products sold in December 2014. In connection with such finding, the Audit Committee commenced an independent investigation to determine whether any financial statements of Legacy Zhone prior to the quarter ended June 30, 2016 contained material errors. As a result of this investigation, which concluded in late July 2017, the Audit Committee concluded, in consultation with management and after informing our former independent registered public accounting firm, that Legacy Zhone's unaudited condensed consolidated financial statements for the quarters ended March 31, 2015, June 30, 2015, September 30, 2015 and March 31, 2016 and Legacy Zhone's audited consolidated financial statements and assessments ofmaintaining adequate internal control over financial reporting including disclosure controlsto provide reasonable assurance regarding the reliability of our financial reporting and procedures,the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. We assessed the years ended December 31, 2015 and 2014 should no longer be relied upon. See “Business - Audit Committee Investigation” above for additional information.
Management concluded that, as of December 31, 2019, our internal control over financial reporting was not be prevented or detected on a timely basis.
If we are re-assessing the design of our controls and modifying processes related to the accounting for significant and unusual transactions as well as enhancing monitoring and oversight controls in the application of applicable accounting guidance related to such transactions. In connection therewith, we anticipate that we will hire additional accounting personnel with relevant skills, training and experience, and conduct further training of accounting and finance personnel. We believe that these initiatives will remediate the material weaknesses in internal control over financial reporting described above. However, there can be no assurance that we will benot able to fully remediate our existingcorrect material weaknesses or thatdeficiencies in internal controls in a timely manner, our internal control overability to record, process, summarize and report financial reporting will not sufferinformation accurately and within the time periods specified in the future from other material weaknesses, thus making us unable to prevent or detect onSEC’s rules and forms will be adversely affected. Such a timely basis material misstatements inresult could negatively impact the market price and trading liquidity of our periodic reports with the SEC. If we fail to remediate these material weaknesses or otherwise maintain effective internal control over financial reporting in the future, the existence of one or more internal control deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify internal control deficiencies. If we cannot produce reliable financial reports, we may have difficulty in filing timely periodic reports with the SEC, investors could losecommon stock, weaken investor confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely affect our business and financial condition.
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 market priceuses and features of our stock products. Even after a company makes the final decision to purchase our products, it could declinedeploy 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. 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 obtain additional financing to operatesustain gross margins at desired levels or achieve profitability. Competitive pressures could result in increased pricing pressure, reduced profit margins, increased sales and expand our business,marketing expenses and our business and financial condition could be materially harmed. In addition, any failure to remediateincrease, or the existing material weaknessesloss 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 a failureobsolete.
In our markets, principal competitive factors include:
brand recognition.
If we are unable to maintain effective internal control over financial reportingcompete successfully against our current and future competitors, we may have difficulty obtaining or retaining customers, and we could negatively impact our results of operations, cash flowsexperience price reductions, order cancellations, increased expenses and financial condition, subject us to potential litigation and regulatory inquiry and cause us to incur additional costs in future periods relating to the implementation of remedial measures.
If demand for our products and solutions does not develop as we anticipate, then our results ofbusiness operations, and 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
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 results of operationsliquidity 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 seriously harmhave a material adverse effect on our business.
We produce highly complex products that incorporate leading-edge technology, including both hardware and software. Software typicallyoften 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, after they have been fully deployed by our customers.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 financial or other damages to our customers.customers, financial or otherwise. Our customers could seek damages for related losses from us, which could seriously harm our business, operations, financial condition and results of operations.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 results of operations.
Increased tariffs on products and goods that we purchase from off-shore sources (particularly Chinese sources) and changes in international naturetrade 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, while a trade deal was signed between the U.S. and China on January 15, 2020 that signals a cooling of tensions between the U.S. and China over trade, concerns over the stability of bilateral trade relations remain. Before the trade deal, the United States had recently 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 recent tariffs was 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. In addition, changes in the political environment, governmental policies, international trade policies and relations, or economic changesU.S.-China relations could result in
revisions to laws or other factorsregulations or their interpretation and enforcement, trade sanctions, or retaliatory actions by China in a specific country or regionresponse to U.S. actions, which could have an adverse effect on our customers, business plans and operating results.
Sales to communications service providers are especially volatile, and weakness in sales orders from this industry could harm our future revenue, costsbusiness, operations, financial condition and expensesliquidity.
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.
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 currently engagehave contracts in material foreign currency hedging transactions relatedplace with some of these providers and may not be able to international sales,effectively manage those relationships. We cannot be certain that our contract manufacturers will be able to fill our orders in a decreasetimely 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 the value of foreign currencies relative to the U.S. dollar could result in losses from transactions denominated in foreign currencies. We expect to continue expanding our international operations in the future. The successful management and expansion of our international operations requires significant human effortprices, 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 and our operating results, including:
A shortage of adequate component supply or manufacturing capacity could increase our costs or cause a delay in our ability to fulfill orders, and our failure to estimate customer demand properly maycould 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. 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.
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, operating resultsoperations, and financial condition and liquidity and could materially damage customer relationships.
The loss of onea key customer or more of our customers could harm our business.
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 business, financial conditionrevenue 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 highly competitivesubject to credit risk associated with the concentration of accounts receivable from its key customers. As of December 31, 2019, two (2) customers represented 18% and we may not be able to compete successfully.
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 experienced significant turnover on our executive team and board in both 2018 and 2019, including the departure of our former Chief Financial Officer. 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 wouldcould 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. The loss of the services of any of our key employees, including our Chief Executive Officer, could delay the development and production of our products and negatively impact our ability to maintain customer relationships, which wouldcould harm our business, operations, financial condition and results of operations. liquidity. Moreover, our historical inability to attract and retain sufficient qualified accounting personnel with expertise in U.S.US GAAP following the Merger mayhas adversely affectaffected our ability to maintain an effective system of internal controls orand our ability to produce reliable financial reports, which maycould materially and adversely affect our business.
We rely on the availability of or investments in, complementary companies, products or technologies to supplement our internal growth, may acquire additional businesses, products or technologies in the future.
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 also enter into confidentiality, or licenseemployee, contractor and commercial agreements with our employees, consultants and corporate partners, and control access to and distribution of our proprietary information.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 technology.intellectual property. Monitoring unauthorized use of our technologyand 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 the 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.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.
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 telecommunicationscommunications 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, whichthat 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.rights through litigation or the threat of litigation. These companies typically have little or no product revenues and therefore our patents maycould provide little or no deterrence against such companies filing patent infringement lawsuits against us. In addition, third parties have initiated and maycould 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, various proceedings have been commenced against Broadcom Corporation and other parties alleging patent infringement in various jurisdictions, and in some cases the courts have issued rulings adverse to Broadcom enjoining Broadcom from offering, distributing, using or importing products that include the challenged intellectual property. Although we are not party to these proceedings, adverse rulings or injunctive relief awarded against Broadcom or other key suppliers of components for our products maycould 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.
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 European Commission also recently approved and adopted the GDPR, a recent 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. Implementation of and compliance with these laws and regulations may be more costly or take longer than we anticipate, or could otherwise adversely affect our business operations, which could negatively impact our financial position or cash flows.
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.
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. 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, as well as concerns about energy costs, geopolitical issues, 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 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 relymay 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 availabilityUnited States, Korea, Germany, or the rest of third party licenses.
Due to the international nature of our products are designed to include softwarebusiness, political or economic changes or other intellectual property licensed from third parties. Itfactors in a specific country or region could harm our future revenue, costs and expenses and financial condition.
We currently have significant operations in India, Korea, and Vietnam, as well as sales and technical support teams in various locations around the world. We expect to continue expanding 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 necessarysubject to certain risks, disruptions and challenges that could materially harm our business, operations, financial condition, and liquidity, including:
• | unexpected changes in laws, policies and regulatory requirements, including but not limited to regulations related to import-export control; |
• | 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; |
• | fluctuations in currency exchange rates, foreign exchange controls and restrictions on cash repatriation; |
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 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 seekmitigate the impact of foreign currency exchange rate fluctuations. The use of such hedging activities may not offset any or renew licenses relating to various elementsmore than a portion of the technology used to develop these products. We cannot assure you that our existing and future third-party licenses will be available to us on commercially reasonable terms,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 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.
As such, our results of operations and our cash flows could be impacted by changes in foreign currency exchange rates.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our employee compensation program in order to aligncontrol may damage our facilities or the interestsfacilities of third parties on which we depend, and could materially impact our supply chain and the operations of our employees withcustomers and suppliers.
Our global headquarters are located in California near major geologic faults that have experienced earthquakes in the interestspast. An earthquake or other natural disaster or power shortages or outages could disrupt operations or impair critical systems. Any of these disruptions or other events outside 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 andcontrol could affect our abilitybusiness negatively, harming our operating results. In addition, if 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 earthquakes, tsunamis, power shortages or outages, floods or monsoons, public health crises, such as pandemics and epidemics, 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.
The COVID-19 outbreak has had a material impact on our business and a sustained global outbreak could have a further material adverse effect on our business, financial condition and results of operations.
In December 2019, a strain of coronavirus, now known as COVID-19, was reported to retain existing or attract prospective employees. Difficulties relating to obtaining stockholder approvalhave surfaced in Wuhan, China, resulting in increased travel restrictions and the extended shutdown of equity compensation plans could also make it harder or more expensive for us to grant share-based payments to employeescertain businesses in the future.
The Company relies on suppliers and contract manufacturers located in China and has significant business operations in South Korea and Japan. The outbreak may have a significant impact on our first quarter 2020 results, as we have experienced a negative impact on our supply chain in Asia and softer product demand due to the effects of the virus. These effects include travel restrictions, business closures, public health concerns, and other actions affecting the supply of labor and the export of raw materials and finished products. If the virus continues to spread, the effects of the virus could continue to materially and adversely affect our financial condition and results of operations. If we are forced to arrange alternative manufacturing and supply sources, our cost of production could increase materially, negatively affecting our financial condition and results of operations
Given the ongoing and dynamic nature of the virus and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The impact of a continued COVID-19 outbreak could have a material adverse effect on our business, financial condition and results of operations.
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 generally accepted accounting principles in the United States (“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 FASB, the 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 whichrelated to our business could harm our business.
Our operations are subject to various laws and regulations, including those regulations promulgated by the FCC.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 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 (DRC) 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 DRC “conflict free” components and parts, and we may not be able to obtain DRC conflict free“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 wouldcould harm our business, operations, financial condition and results of operations.liquidity. Further, we cannot be certain that we will be successful in obtaining or maintaining regulatory approvals that may,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 significant disruption in, or breach in security of, our information technology systems, our business could be adversely affected.
Risks Related to this threat, or any future acts of terrorism, may cause further disruption to the economy and create further uncertainties in the economy. Energy shortages, such as gas or electricity shortages, could have similar negative impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipmentour Common Stock
DNI owns a significant amount of our products, our business, operating resultsoutstanding common stock and financial condition could be materially and adversely affected.
As of December 31, 2016,2019, DNI owned approximately 58%44.3% of the outstanding shares of our common stock. Accordingly, until such time as DNI and its affiliates hold sharesstock, representing less than a majoritysignificant amount of the votes entitled to be cast by the holders of our outstanding common stock at a stockholder meeting,meeting. Due to its significant ownership percentage of our common stock, DNI generally will havehas the ability to substantially influence or control the outcome of any matter submitted for the vote of our stockholders, except in certain circumstances set forth in our certificate of incorporation or bylaws. In addition, pursuant to our bylaws, we are subject to certain requirements and limitations regarding the composition of our board of directors until September 2018. Thereafter, for so long as DNI and its affiliates hold shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of our common stock at a stockholder meeting, DNI will be able to freely nominate and elect all the members of our board of directors, subject only to a requirement that a certain number of directors qualify as "independent directors" under Nasdaq listing rules and applicable laws. We have elected to be treated as a “controlled company” under Nasdaq Marketplace Rules because more than 50% of the voting power forincluding the election of directors is held by DNI. As a “controlled company,” we may rely on exemptions from certain corporate governance requirements under Nasdaq Marketplace Rules, including the requirement that we have a majority of independent directors on the Board of Directors and requirements with respect to compensation and nominating and corporate governance committees. The directors elected by DNI will have the authority to make decisions affecting our capital structure, including the issuance of additional capital stock or options, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the declarationapproval of dividends.certain transactions. The interests of DNI may not coincideconflict with the interests of our other stockholders or with holders of our indebtedness. DNI’s ability, subjectindebtedness and may cause us to the limitations in our certificate of incorporation and bylaws, to control all matters submitted to our stockholders for approval limits the ability of other stockholders to influence corporate matters and, as a result, we may take actions that our other stockholders or holders of our indebtedness do not view as beneficial. In addition, the existence
DNI’s large concentration of a controlling stockholderstock ownership may have the effect of makingmake it more difficult for a third party to acquire us or discouragingdiscourage a third party from seeking to acquire us. A third partypotential third-party acquirer would be required 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. In addition, provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to certain stockholders.
Additionally, two of the shares issuedCompany’s directors serve as executive officers of DNI – Min Woo Nam (who also serves as Chairman of the Board, Chairman of the Compensation Committee and Chairman of the Corporate Governance and Nominating Committee of the Company) 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. Each of Messrs. Nam and Yoo owe fiduciary duties to us and, in connection with the Merger from timeaddition, have duties to time. In the event that DNI exercises its registration rightsDNI. As a result, these directors may face real or apparent conflicts of interest with respect to such shares, such shares would become eligible for resale upon registration. Additionally,matters affecting both us and DNI.
Prior to May 20, 2019, DNI owned more than 50% of the outstanding shares of our common stock, which allowed us to elect to be treated as a “controlled company” under Nasdaq Marketplace Rules. As a “controlled company,” we were exempt from certain corporate governance requirements under the Nasdaq Marketplace Rules, including the requirement that we have a majority of independent directors on the Board of Directors and requirements with respect to compensation and nominating and corporate governance committees. Following the loss of “controlled company” status, we are availablerequired to phase in compliance with the Nasdaq corporate governance requirements over a one-year period. As of the date hereof, the Company is relying on the “phase-in” transition schedule with respect to the composition of the compensation committee and the nominating and corporate governance committee. The Board intends to cause both of these committees to consist solely of independent directors on or before May 20, 2020.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for future salesubstantially all disputes between us and our stockholders (except for causes of action arising under the federal securities laws), which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated bylaws (the “Bylaws”) provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for:
• | any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s stockholders; |
• | any action asserting a claim against the Company arising pursuant to any provision of the General Corporation Law of the State of Delaware, the Certificate of Incorporation or our Bylaws; and |
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find the exclusive forum provision in our Bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business. For example, the Court of Chancery of the State of Delaware recently determined that the exclusive forum provision of federal district courts of the United States for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable. However, this decision is pending before the Delaware Supreme Court and could be overturned.
The limitation of liability and indemnification provisions could harm our stockholders’ investments and discourage them from suing our directors for breach of their fiduciary duties.
The limitation of liability and indemnification provisions in our certificate of incorporation, as restated, may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to awards grantedthese indemnification provisions. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. There is no pending litigation or proceeding naming any of our equity incentive plans. Our stock price may suffer a significant declinedirectors or officers as a resultto which indemnification is being sought, nor are we aware of any sudden increasepending or threatened litigation that may result in the number of shares sold in the public marketclaims for indemnification by any director or market perception that the increased number of shares available for sale will exceed the demand for 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, 20162019 was approximately 15,41075,000 shares (post reverse stock split) 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 9.5 million shares of our common stock as of December 31, 2019 and has the right to require us to register, from time to time, the resale of those shares with the SEC. If DNI were to exercise its registration rights, its shares would become eligible for resale upon registration 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 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.
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, 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. |
None
We lease our worldwide headquarters, which are located in Oakland,Alameda, California. In March 2020, we announced that we entered into a lease in Plano, Texas and that we will be relocating our corporate headquarters and our U.S. engineering center to that location during 2020. We intend to retain space in our facility in Alameda, California.
We also lease facilities for office space in Seoul, South Korea as well as lease facilities for manufacturing, research and development purposes at locations in the United States including Seminole, Florida and Alpharetta, Georgia, and in Korea, India, China and Vietnam.as well as Hannover, Germany through the acquisition of Keymile. We maintain smaller offices to provide sales and customer support at various domestic and international locations. We manufacture many of our more complex products at our manufacturing facility in Florida. We believe that our existing facilities are suitable and adequate for our present purposes.
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, we dothe 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 ourits consolidated financial position, or results of operations.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.
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Set forth below is information concerning our executive officers as of December 31, 2019.
Name | Age | Office | ||
Il Yung Kim | 63 | Chief Executive Officer, President | ||
Thomas J. Cancro | 52 | Chief Financial Officer, Corporate Treasurer | ||
Philip Yim | 58 | Chief Operating Officer |
Il Yung Kim has served as our President and Chief Executive Officer since September 11, 2017. Mr. Kim joined us in connection with the Merger and has served as a member of our Board of Directors since September 9, 2016 and as Co-Chief Executive Officer from September 9, 2016 to September 11, 2017, and Acting Chief Financial Officer from September 11, 2017 to December 1, 2017. Prior to the Merger, Mr. Kim served as a consultant to DNI in connection with the Merger. From September 2014 to August 2016, Mr. Kim served as Chief Executive Officer of TukTak in Korea, an online startup company, which enables people with creative talents to collaborate and produce goods and services online. From December 2014 to August 2016, he also served as a strategic adviser for InMobi, a global mobile advertising platform provider. Previously, Mr. Kim held various positions with Korea Telecom, including President and executive board member from 2013 to 2014, and Chief Strategy Officer from 2010 to 2013. Mr. Kim commenced his career with British Telecom (now known as BT Group plc) in 1982, where he held senior positions, including Vice President of Technology and Innovation and Programme Director and Head of Technology and Investment. Mr. Kim holds a Bachelor of Science (with Honors) in Electronic Engineering and a Master of Science Degree in Microwave and Modern Optics from University College, University of London.
Thomas J. Cancro was appointed to the position of Chief Financial Officer and Corporate Treasurer on November 25, 2019. Mr. Cancro recently served as Controller of GE Global Research, General Electric Company’s technology research and IP-licensing business unit. Prior roles include executive positions at Verizon Communications Inc. (“Verizon”), including Chief Financial Officer of Verizon’s joint venture with AT&T Inc. and Deutsche Telekom AG, and an executive role in Verizon’s Treasury organization, where he advised the company as to capital markets strategy. He also served as Chief Accounting Officer and Corporate Controller of GFI Group Inc., a FinTech provider of wholesale brokerage services and SaaS software solutions (now a subsidiary of BGC Partners, Inc.), and as Senior Vice President and Corporate Controller of MasTec, Inc., a Fortune 500 telecommunications and energy infrastructure service provider. Mr. Cancro holds a Bachelor of Science degree in Accounting from the Pennsylvania State University and began his career at PricewaterhouseCoopers LLP. He is a Certified Public Accountant and also holds a CFA Charter.
Philip Yim has served as our Chief Operating Officer since August 2018. Mr. Yim joined the Company in June 2017 as our Vice President of Engineering, and in August 2018 he was promoted to Chief Operating Officer. Prior to joining DZS, Mr. Yim held several global multinational executive leadership positions across global operations, marketing, development, business and sales, including as Executive Vice President of Global Program Management for Allied Telesis, Inc. from February 2012 to May 2017. Mr. Yim has a Bachelor of Engineering from the University of Bradford in West Yorkshire, U.K.
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” (formerly "ZHNE" prior to the Merger). The following table sets forth, for the periods indicated, the high and low per share sales prices of our common stock as reported on Nasdaq. All per share prices reflect the one-for-five reverse stock split effected on February 28, 2017.
2016: | |||||||
High | Low | ||||||
Fourth Quarter ended December 31, 2016 | $ | 5.95 | $ | 4.65 | |||
Third Quarter ended September 30, 2016 | 7.10 | 5.25 | |||||
Second Quarter ended June 30, 2016 | 8.25 | 5.60 | |||||
First Quarter ended March 31, 2016 | 8.10 | 5.00 |
2015: | |||||||
High | Low | ||||||
Fourth Quarter ended December 31, 2015 | $ | 7.50 | $ | 4.70 | |||
Third Quarter ended September 30, 2015 | 11.20 | 6.80 | |||||
Second Quarter ended June 30, 2015 | 14.75 | 6.25 | |||||
First Quarter ended March 31, 2015 | 8.75 | 6.05 |
As of September 20, 2017, there were 596March 11, 2020, we had 488 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 and otheror 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.
12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | ||||||
DASAN Zhone Solutions, Inc. | $100 | $53 | $601 | $199 | $113 | $111 | |||||
S&P 500 Index - Total Returns | $100 | $116 | $154 | $175 | $177 | $198 | |||||
NASDAQ Telecommunications Index | $100 | $105 | $134 | $150 | $142 | $167 |
Year Ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(As restated) | (As restated) | ||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Statement of Comprehensive Income (Loss) Data: | |||||||||||||||||||
Net revenue | $ | 121,670 | $ | 114,421 | $ | 108,634 | $ | 108,046 | $ | 102,761 | |||||||||
Net revenue - related parties | 28,634 | 24,775 | 30,760 | 10,164 | 5,610 | ||||||||||||||
Total net revenue | 150,304 | 139,196 | 139,394 | 118,210 | 108,371 | ||||||||||||||
Cost of revenue | |||||||||||||||||||
Products and services | 84,415 | 81,420 | 70,361 | 66,821 | 58,689 | ||||||||||||||
Products and services - related parties | 24,738 | 21,890 | 28,191 | 10,436 | 6,002 | ||||||||||||||
Amortization of intangible assets | 204 | — | — | — | — | ||||||||||||||
Gross profit | 40,947 | 35,886 | 40,842 | 40,953 | 43,680 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Research and product development | 25,396 | 21,331 | 22,805 | 18,774 | 18,019 | ||||||||||||||
Selling, marketing, general and administrative | 27,348 | 17,528 | 14,834 | 14,040 | 18,438 | ||||||||||||||
Amortization of intangible assets | 1,556 | 4 | — | — | — | ||||||||||||||
Gain from sale of assets | (304 | ) | — | — | — | — | |||||||||||||
Total operating expenses | 53,996 | 38,863 | 37,639 | 32,814 | 36,457 | ||||||||||||||
Operating income (loss) | (13,049 | ) | (2,977 | ) | 3,203 | 8,139 | 7,223 | ||||||||||||
Interest income | 183 | 136 | 418 | 550 | 1,314 | ||||||||||||||
Interest expense | (830 | ) | (532 | ) | (526 | ) | (629 | ) | (523 | ) | |||||||||
Other income (expense), net | (145 | ) | 266 | 122 | 656 | (691 | ) | ||||||||||||
Income (loss) before income taxes | (13,841 | ) | (3,107 | ) | 3,217 | 8,716 | 7,323 | ||||||||||||
Income tax provision | 1,487 | 232 | 1,380 | 2,208 | 2 | ||||||||||||||
Net income (loss) | (15,328 | ) | (3,339 | ) | 1,837 | 6,508 | 7,321 | ||||||||||||
Net loss attributable to non-controlling interest | (2 | ) | — | — | — | — | |||||||||||||
Net income (loss) attributable to DASAN Zhone Solutions, Inc. | $ | (15,326 | ) | $ | (3,339 | ) | $ | 1,837 | $ | 6,508 | $ | 7,321 | |||||||
Foreign currency translation adjustments | (1,047 | ) | (2,790 | ) | (1,997 | ) | 905 | 2,570 | |||||||||||
Comprehensive income (loss) | (16,375 | ) | (6,129 | ) | (160 | ) | 7,413 | 9,891 | |||||||||||
Comprehensive income attributable to non-controlling interest | 1 | — | — | — | — | ||||||||||||||
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc. | $ | (16,376 | ) | $ | (6,129 | ) | $ | (160 | ) | $ | 7,413 | $ | 9,891 | ||||||
Basic and diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc. (1) (2) | $ | (1.32 | ) | $ | (0.36 | ) | $ | 0.20 | $ | 0.71 | $ | 0.80 | |||||||
Weighted average shares outstanding used to compute basic and diluted net income (loss) per share (1) | 11,637 | 9,314 | 9,199 | 9,146 | 9,126 | ||||||||||||||
Not Required
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
As of December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(As restated) | (As restated) | ||||||||||||||||||
(in thousands) | |||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 18,886 | $ | 9,095 | $ | 7,150 | $ | 24,719 | $ | 11,581 | |||||||||
Working capital | 56,819 | 33,159 | 40,033 | 37,987 | 28,082 | ||||||||||||||
Total assets | 145,447 | 83,226 | 103,279 | 88,384 | 62,135 | ||||||||||||||
Stockholders’ equity and non-controlling interest | 66,868 | 41,465 | 48,633 | 47,124 | 36,102 |
Overview
We are a global provider of ultra-broadband network access solutions and communications equipment forplatforms deployed by advanced Tier 1, 2 and 3 service providerproviders and enterprise networks.customers. We operate in a single reporting segment. We research, develop, test, sell, manufacture and support communications equipment in five major areas: broadband access, Ethernet switching, mobile fronthaul/backhaul, POLANPassive Optical LAN and SDN:
Our broadband access products offer a variety of solutions for carriers and service providers to connect residential and business customers, either using high-speed fiber or leveraging their existing deployed copper networks to offer broadband services to customer premises. Once our broadband access products are deployed, the service provider can offer voice, high-definition and ultra-high-definition video, high-speed internet access and business class services to their customers. Both DNS and Legacy Zhone were market leaders in the broadband access market prior to the Merger, and the combination of DNS and Legacy Zhone is expected to enhance our leadership position for both carrier and enterprise solutions in this market following the Merger.
Our Ethernet switching products provide a high-performance and manageable solution that bridges the gap from carrier access technologies to the core network. Our products support pure Ethernet switching as well as layer 3 IP and MPLS capabilities, and are currently being developed for interfacing with SDN. Legacy Zhone did not offer comparable Ethernet switching products prior to the Merger, and therefore the Ethernet switching market is expected to provide an opportunity for growth for the combined company following the Merger.deployment as part of SDNs.
Our mobile fronthaul/backhaul products provide a robust, manageable and scalable solution for mobile operators that enable them to upgrade their mobile fronthaul/backhaul systems and migrate from 3G networks to LTE5G and beyond. Our mobile backhaul products may be collocated at the RAN BSradio access node base station and can aggregate multiple RAN BS in toradio access node base stations into a single backhaul for delivery of mobile traffic to the RANradio access node network controller. We provide standard Ethernet/IP or MPLS interfaces and
Our FiberLAN portfolio of POLANPOL products are designed for enterprise, campus, hospitality, and entertainment arena usage. Our FiberLAN portfolio includes our high-performance, high-bandwidth GPON OLTs connected to the industry’s most diverse ONT product line, which include units with integrated PoE to power a wide range of devices such as our full range of WIFI APs and scalable WIFI AP controller. PoE-enabled access devices.
Our FiberLAN portfolio relates primarilySDN/NFV strategy is to Legacy Zhone products, while our WIFI access points and controllers consist primarily of DNS products. We expect the combination of Legacy Zhone and DNS products in this market to enhance the functionality of our product offerings and provide an opportunity for growth for the combined company following the Merger.
Going forward, our key financial objectives include the following:
Increasing revenue while continuing to carefully control costs;
Continuing investments in strategic research and product development activities that will provide the maximum potential return on investment; and
Minimizing consumption of our cash and cash equivalents.
Recent Developments
DNI
On SeptemberMarch 5, 2020, DASAN Network Solutions, Inc., a corporation organized under the laws of the Republic of Korea, and an indirect, wholly-owned subsidiary of the Company (“DNS Korea”) entered into a Loan Agreement with DNI, pursuant to which DNS Korea borrowed KRW 22.4 billion ($18.5 million USD) from DNI (the “March 2020 DNI Loan”). DNS Korea will fully loan such borrowed funds to the Company, which will be used to repay and terminate the PNC Credit Facilities.
Relocation of Corporation Headquarters and New Facilities in Alameda, California
On March 2, 2020, the Company announced its plans to relocate its corporate headquarters from California to Plano, Texas and establish a new U.S.-based Engineering Center of Excellence in Plano. In connection with the planned relocation, the Company entered into sublease agreements with Huawei Technologies, Inc. and Futurewei Technologies, Inc. to sublease an aggregate of approximately 16,300 square feet located at Legacy Place, 5700 Tennyson Parkway, Plano, Texas.
On July 9, 2016, we2019, the Company entered into a lease agreement with Family Stations, Inc. to lease approximately 16,500 square feet located at 1350 South Loop Road, Alameda, California. The Alameda location will replace the Company’s current facilities in Oakland, California.
Appointment of New Chief Financial Officer
On November 25, 2019, the Company appointed Thomas J. Cancro to the position of Chief Financial Officer and Corporate Treasurer. Mr. Cancro recently served as Controller of GE Global Research, General Electric Company’s technology research and IP-licensing business unit. Prior roles include executive positions at Verizon Communications Inc. (“Verizon”), including Chief Financial Officer of Verizon’s joint venture with AT&T Inc. and Deutsche Telekom AG, and an executive role in Verizon’s Treasury organization, where he advised the company as to capital markets strategy. He also served as Chief Accounting Officer and Corporate Controller of GFI Group Inc., a FinTech provider of wholesale brokerage services and SaaS software solutions (now a subsidiary of BGC Partners, Inc.), and as Senior Vice President and Corporate Controller of MasTec, Inc., a Fortune 500 telecommunications and energy infrastructure service provider. Mr. Cancro holds a Bachelor of Science degree in Accounting from the Pennsylvania State University and began his career at PricewaterhouseCoopers LLP. He is a Certified Public Accountant and also holds a CFA Charter.
Keymile Acquisition
On January 3, 2019, ZTI Merger Subsidiary III Inc., a Delaware corporation and our wholly owned subsidiary, acquired DNS throughall of the mergeroutstanding shares of Keymile GmbH, a limited liability company organized under the laws of Germany (“Keymile”), from Riverside KM Beteiligung GmbH, also a limited liability company organized under the laws of Germany (“Riverside”), pursuant to a share purchase agreement. The Company refers to this transaction as the “Keymile Acquisition.” The aggregate cash purchase price paid for all of the shares of Keymile and certain of its subsidiaries was EUR 10,250,000 ($11.8 million), which was paid with a combination of cash, a loan from DNI, and a draw under our Wells Fargo Bank (“Wells Fargo”) credit facility (as amended, the “Wells Fargo Facility”). Following the closing of the Keymile Acquisition, Keymile became our indirect wholly owned subsidiary.
Keymile is a leading solution provider and manufacturer of telecommunication systems for broadband access. The Company believes the Keymile Acquisition complements and strengthens our portfolio of broadband access solutions, which now includes a series of multi-service access platforms, including ultra-fast broadband copper access based on very-high-bit-rate DSL (“VDSL/Vectoring”) & G. Fast technology.
DZS Japan
On July 31, 2019, the Company acquired the remaining 30.9% non-controlling interest of DZS Japan, Inc. (“DZS Japan”), and DZS Japan became a wholly owned subsidiary of Zhone Technologies, Inc. withthe Company. The Company acquired the remaining interest in DZS Japan for total cash consideration of $950,000, consisting entirely of payments to the former shareholder (Handysoft).
Trends and into DNS, with DNS survivingUncertainties
In December 2019, a strain of coronavirus, now known as COVID-19, was reported to have surfaced in Wuhan, China, resulting in increased travel restrictions and the extended shutdown of certain businesses in the region and within Greater China. Since that time, other countries including the United States, South Korea, Italy and Japan have experienced widespread or sustained transmission of the virus, and there is a risk that the virus will continue to spread to additional countries.
The Company relies on suppliers and contract manufacturers located in China and has significant business operations in South Korea and Japan. The outbreak has had a significant impact on our wholly owned subsidiary. In connection withfirst quarter 2020 results, as we have experienced a negative impact on our Chinese supply chain and softer product demand in EMEA due to the Merger, Zhone Technologies, Inc. changed its name to DASAN Zhone Solutions, Inc. Our common stockeffects of the virus. These effects include travel restrictions, business closures, public health concerns, and other actions affecting the supply of labor and the export of raw materials and finished products. If the virus continues to be traded onspread, the Nasdaq Capital Market, and our ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016.
Given the right to receive shares of our common stock in an amount equal to 58%ongoing and dynamic nature of the issuedvirus and outstanding shares of our common stock immediately following the Merger. Accordingly, atworldwide response related thereto, it is difficult to predict the effective timefull impact of the Merger, we issued 9,493,016 shares (post reverse stock split)COVID-19 outbreak on our business. The impact of a continued COVID-19 outbreak could have a material adverse effect on our common stock to DNI as consideration in the Merger,business, financial condition and results of which 949,302 shares (post reverse stock split) are being held in escrow as security for claims for indemnifiable lossesoperations.
Impact of Inflation and Changing Price
The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires the merger agreement relating to the Merger. As a result, immediately following the effective timemeasurement of the Merger, DNI held 58%financial position and operating results in terms of the outstanding shares of our common stock and the holders of our common stock immediately prior to the Merger retained,historical dollars without considering changes in the aggregate, 42%relative purchasing power of the outstanding sharesmoney 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 common stock. See Note 2 to the consolidated financial statements set forth in Part II, Item 8 of this report for additional information regarding the Merger.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America.U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The policies discussed below are considered by management to be critical because changes in such estimates can materially affect the amount of our reported net income or loss. For all of these policies, management cautions that actual results maycould differ materially from thesesuch estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenues when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services.
We generate revenue primarily from sales of products and services, including, extended warranty service and customer support. Our revenue from product sales is recognized at a point in time when control of the goods is transferred to our customers, generally occurring upon shipment or delivery, dependent upon the terms of the underlying contract. Our 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 our customers equal benefit throughout the contract period. We typically invoice customers for support contracts in advance, for periods ranging from one (1) to five (5) years.
Our transaction price is calculated as selling price net of variable consideration. Our sales to certain distributors are made under arrangements which provide our 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, we analyze historical data, channel inventory levels, current economic trends and changes in our customer demand for our products, among other factors. Historically, variable consideration has not been a significant component of our contracts with customers.
For contracts with customers that contain multiple performance obligations, we account for the promises separately as individual performance obligations if they are distinct. In determining whether performance obligations meet the criteria for being distinct, we consider 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, we allocate transaction price 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 our customers on a standalone basis. Unsatisfied and partially unsatisfied performance obligations as of the end of the reporting period primarily consist of products and services for which our customer purchase orders have been accepted and that are in the process of being delivered.
We record contract assets when it has a right to consideration and record accounts receivable when it has an “unconditional” right to consideration. We record deferred revenue when cash payments received (or unconditional rights to receive cash) in advance of fulfilling our performance obligations.
Our payment terms vary by the earnings process is complete. We recognize product revenue upon shipmenttype and location of product under contractual terms which transfer title to customers upon shipment, under normal credit terms, net of estimated sales returnsour customer and allowances at the time of shipment. Revenue is deferred if there are significant post-delivery obligations or if the fees are not fixed or determinable. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. Our arrangements generally do not have any significant post-delivery obligations. If our arrangements include customer acceptance provisions, revenue is recognized upon obtaining the signed acceptance certificate from the customer, unless we can objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement prior to obtaining the signed acceptance. In those instances where revenue is recognized prior to obtaining the signed acceptance certificate, we use successful completion of customer testing as the basis to objectively demonstrate that the deliveredoffered. For certain products or services meet all the acceptance criteria specified in the arrangement. We also consider historical acceptance experience with theand customer as well as thetypes, we require payment terms specified in the arrangement, when revenue is recognized prior to obtaining the signed acceptance certificate. When collectability is not reasonably assured, revenue is recognized when cash is collected.
Allowances for Sales Returns and Doubtful Accounts
We record 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 allowance against our accounts receivable.accrued and other liabilities. We base our 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, our future revenue could be adversely affected.
We record an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments for amounts owed to us. The allowance for doubtful accounts is recorded as a charge to general and administrative expenses. We base our allowance on periodic assessments of our customers’ liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement reviews and historical collection trends. Additional allowances may be required in the future if the liquidity or financial condition of our customers deteriorates, resulting in impairment indoubts about their ability to make payments.
Inventories
Inventories are stated at the lower of cost or market,net realizable value, with cost being determined using the first-in, first-out (FIFO) method. In assessing the net realizable value of inventories, we are 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 forecasts. To the extent that a severe decline in forecasted demand occurs, or we experience a higher incidence of inventory obsolescence due to rapidly changing technology and customer requirements, we may incur significant charges for excess inventory.
Goodwill and Other Acquisition-Related Intangible Assets
Goodwill and other acquisition-related intangible assets not subject to amortization are tested annually for impairment using a two-step approach, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. In the application of the impairment testing, we are 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. Our future operating performance will be impacted by the future amortization of intangible assets, potential charges related to purchased in-process research and development for future acquisitions, and potential impairment charges related to goodwill. Accordingly, the allocation of the purchase price of the acquired companies to intangible assets and goodwill has a significant impact on our future operating results. The allocation process requires management to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for these cash flows. Should different conditions prevail, we would have to perform an impairment review that might result in material write-downs of intangible assets and/or goodwill. Other factors
Factors we consider important which could trigger an impairment review, include, but are not limited to, significant changes in the manner of use of ourits acquired assets,
In the application of impairment testing, we are required to make estimates of future operating trends and potential changes in our strategyresulting cash flows and product portfolio, it is possible that forecasts used to support our intangible assets may change in thejudgments on discount rates and other variables. Actual future whichresults and other assumed variables could result in additional non-cash charges that would adversely affect our results of operations and financial condition.
Business Combination
We allocate 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 acquired as part ofin the Merger.
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.
Income Tax
We estimate ouruse the asset and liability method to account for income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related to examinations by taxing authorities. We also make judgments regarding the realization oftaxes. Under this method, deferred tax assets and establish valuation allowances where we believe it is more likely than notliabilities 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 future taxable income in certain jurisdictions will be insufficientin effect when the differences are expected to realize thesereverse. Valuation allowances are established, when necessary, to reduce deferred tax assets. Our estimates regarding future taxable income and income tax provision or benefit may vary dueassets to changes in market conditions, changes in tax laws, or other factors. If our assumptions, and consequently our estimates, change in the future, the valuation allowances we have established mayamount expected to be increased or decreased, impacting future income tax expense.
RESULTS OF OPERATIONS
We list in the table below the historical consolidated statement of comprehensive income (loss) as a percentage of total net revenue for the periods indicated.
|
| Year ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Net revenue: |
|
|
|
|
|
|
|
|
Third parties |
|
| 99 | % |
|
| 98 | % |
Related parties |
|
| 1 | % |
|
| 2 | % |
Total net revenue |
|
| 100 | % |
|
| 100 | % |
Cost of revenue: |
|
|
|
|
|
|
|
|
Products and services - third parties |
|
| 66 | % |
|
| 66 | % |
Products and services - related parties |
|
| — |
|
|
| 2 | % |
Amortization of intangible assets |
|
| 1 | % |
|
| — |
|
Total cost of revenue |
|
| 67 | % |
|
| 68 | % |
Gross profit |
|
| 33 | % |
|
| 32 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
Research and product development |
|
| 13 | % |
|
| 13 | % |
Selling, marketing, general and administrative |
|
| 20 | % |
|
| 17 | % |
Restructuring and other charges |
|
| 2 | % |
|
| — |
|
Amortization of intangible assets |
|
| — |
|
|
| — |
|
Goodwill impairment charge |
|
| — |
|
|
| — |
|
Total operating expenses |
|
| 35 | % |
|
| 30 | % |
Operating income (loss) |
|
| (2 | )% |
|
| 3 | % |
Interest income |
|
| — |
|
|
| — |
|
Interest expense |
|
| (1 | )% |
|
| (1 | )% |
Other income (expense), net |
|
| — |
|
|
| — |
|
Income (loss) before income taxes |
|
| (3 | )% |
|
| 2 | % |
Income tax provision (benefit) |
|
| 1 | % |
|
| 1 | % |
Net income (loss) |
|
| (4 | )% |
|
| 1 | % |
Net income (loss) attributable to non-controlling interest |
|
| — |
|
|
| — |
|
Net income (loss) attributable to DASAN Zhone Solutions, Inc. |
|
| (4 | )% |
|
| 1 | % |
Year ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
(As restated) | (As restated) | |||||||
Net revenue: | ||||||||
Net revenue | 81 | % | 82 | % | 78 | % | ||
Net revenue - related parties | 19 | % | 18 | % | 22 | % | ||
Total net revenue | 100 | % | 100 | % | 100 | % | ||
Cost of revenue: | ||||||||
Products and services | 56 | % | 58 | % | 50 | % | ||
Products and services - related parties | 16 | % | 16 | % | 20 | % | ||
Amortization of intangible assets | — | % | — | % | — | % | ||
Total cost of revenue | 73 | % | 74 | % | 71 | % | ||
Gross profit | 27 | % | 26 | % | 29 | % | ||
Operating expenses: | ||||||||
Research and product development | 17 | % | 15 | % | 16 | % | ||
Selling, marketing, general and administrative | 18 | % | 13 | % | 11 | % | ||
Amortization of intangible assets | 1 | % | — | % | — | % | ||
Gain from sale of assets | — | % | — | % | — | % | ||
Total operating expenses | 36 | % | 28 | % | 27 | % | ||
Operating income (loss) | (9 | )% | (2 | )% | 2 | % | ||
Interest income | 0 | % | 0 | % | 0 | % | ||
Interest expense | (1 | )% | 0 | % | 0 | % | ||
Other income (expense), net | 0 | % | 0 | % | 0 | % | ||
Income (loss) before income taxes | (9 | )% | (2 | )% | 2 | % | ||
Income tax provision | 1 | % | 0 | % | 1 | % | ||
Net income (loss) | (10 | )% | (2 | )% | 1 | % | ||
Net loss attributable to non-controlling interest | 0 | % | 0 | % | 0 | % | ||
Net income (loss) attributable to DASAN Zhone Solutions, Inc. | (10 | )% | (2 | )% | 1 | % | ||
Foreign currency translation adjustments | (1 | )% | (2 | )% | (1 | )% | ||
Comprehensive loss | (11 | )% | (4 | )% | — | % | ||
Comprehensive income attributable to non-controlling interest | — | % | — | % | — | % | ||
Comprehensive loss attributable to DASAN Zhone Solutions, Inc. | (11 | )% | (4 | )% | — | % |
2019 COMPARED WITH 2015
Net Revenue
The following table presents our revenues by source (in millions):
|
| 2019 |
|
| 2018 |
|
| Increase (Decrease) |
|
| % change |
| ||||
Products |
| $ | 286.3 |
|
| $ | 269.3 |
|
| $ | 17.0 |
|
|
| 6.3 | % |
Services |
|
| 20.6 |
|
|
| 13.0 |
|
|
| 7.6 |
|
|
| 58.5 | % |
|
| $ | 306.9 |
|
| $ | 282.3 |
|
| $ | 24.6 |
|
|
| 8.7 | % |
Net revenue increased 8.7% or $24.6 million to $306.9 million for 2019 compared to $282.3 million for 2018. The increase in product revenue was primarily due to product lines added with the Merger, DNS provided communications equipment primarily in the Asia-Pacific region, providing products and services to someacquisition of the largest carriers in the region with a particular focus on Korea, Japan and Vietnam. DNS typically generated approximately 85% of its netKEYMILE.
Service revenue represents revenue from the Asia-Pacific region priormaintenance and other services associated with product shipments. The increase in service revenue was primarily related to the Merger. In contrast, Legacy Zhone typically generated less than 5%a greater number of its net revenue from the Asia-Pacific region prior to the Merger, with instead the majority of its net revenue derived from the Americasproducts under contract for maintenance and the EMEA region. Given DNS’ pre-Merger market share in Korea and in the Asia-Pacific region, we expect that net revenue from Korea and elsewhere in the Asia-Pacific region will continue to be significant for the combined company following the Merger, with growth opportunities for the combined company to expand sales of legacy DNS products in the geographic regions where Legacy Zhone had a strong presence.
Information about our net revenue for products and services for 2016 and 2015by geography is summarized below (in millions):
|
| 2019 |
|
| 2018 |
|
| Increase (Decrease) |
|
| % change |
| ||||
Revenue by geography: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 36.4 |
|
| $ | 50.8 |
|
| $ | (14.4 | ) |
|
| -28.3 | % |
Canada |
|
| 4.7 |
|
|
| 4.4 |
|
|
| 0.3 |
|
|
| 6.8 | % |
Total North America |
|
| 41.1 |
|
|
| 55.2 |
|
|
| (14.1 | ) |
|
| -25.5 | % |
Latin America |
|
| 23.8 |
|
|
| 27.6 |
|
|
| (3.8 | ) |
|
| -13.8 | % |
Europe, Middle East, Africa |
|
| 78.4 |
|
|
| 34.7 |
|
|
| 43.7 |
|
|
| 125.9 | % |
Korea |
|
| 79.1 |
|
|
| 76.0 |
|
|
| 3.1 |
|
|
| 4.1 | % |
Other Asia Pacific |
|
| 84.5 |
|
|
| 88.8 |
|
|
| (4.3 | ) |
|
| -4.8 | % |
Total International |
|
| 265.8 |
|
|
| 227.1 |
|
|
| 38.7 |
|
|
| 17.0 | % |
Total |
| $ | 306.9 |
|
| $ | 282.3 |
|
| $ | 24.6 |
|
|
| 8.7 | % |
2016 | 2015 | Increase (Decrease) | % change | |||||||||||
(As restated) | ||||||||||||||
Products | $ | 142.2 | $ | 133.0 | $ | 9.2 | 7 | % | ||||||
Services | 8.1 | 6.2 | 1.9 | 31 | % | |||||||||
$ | 150.3 | $ | 139.2 | $ | 11.1 | 8 | % |
2016 | 2015 | Increase (Decrease) | % change | |||||||||||
(As restated) | ||||||||||||||
Revenue by geography: | ||||||||||||||
United States | $ | 16.9 | $ | 4.4 | $ | 12.5 | 284 | % | ||||||
Canada | 2.0 | — | 2.0 | N/A | ||||||||||
Total North America | 18.9 | 4.4 | 14.5 | 330 | % | |||||||||
Latin America | 9.6 | 2.5 | 7.1 | 284 | % | |||||||||
Europe, Middle East, Africa | 13.6 | 9.4 | 4.2 | 45 | % | |||||||||
Korea | 77.9 | 114.7 | (36.8 | ) | (32 | )% | ||||||||
Other Asia Pacific | 30.3 | 8.2 | 22.1 | 270 | % | |||||||||
Total International | 131.4 | 134.8 | (3.4 | ) | (3 | )% | ||||||||
Total | $ | 150.3 | $ | 139.2 | $ | 11.1 | 8 | % |
Net revenue increased 8%8.7% or $11.1$24.6 million to $150.3$306.9 million for 20162019 compared to $139.2$282.3 million for 2015.2018. The increase in net revenue was primarily due to the consummationacquisition of KEYMILE and, to a lesser extent, growth from the MergerMiddle East and Africa region, which more than offset the decline in September 2016, which resulted in the inclusionNorth America. Across international markets, Asia-Pacific (including Korea) contributed approximately 53.4% of net revenue from the Legacy Zhone business in 2016 for the period from and after the consummationEMEA contributed approximately 25.5% of the Merger. This increase was partially offset by a decrease in product revenue resulting from the decrease in sales to certain customers in Korea.
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 6% or $6.0 million8.2% to $109.4$206.8 million for 2016,2019, compared to $103.3$191.0 million for 2015. The increase in cost of revenue was primarily due to the consummation of the Merger in September 2016, which resulted in the inclusion of cost of revenue related to the Legacy Zhone business in 2016 for the period from and after the consummation of the Merger. This increase was partially offset by lower cost of revenue resulting from decreased sales in Korea in 2016
We expect that in the future our cost of revenue as a percentage of net revenue will vary depending on the mix and average selling prices of products sold, with longer term gross margin expansion expected to come from product cost reductions and manufacturing economies of scale resulting from the Merger.sold. In addition, continued competitive and economic pressures could cause us to reduce our prices, adjust the carrying values of our inventory, or record inventory expenses relating to discontinued products and excess or obsolete inventory.
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 19% or $4.1 millionby 12.6% to $25.4$38.5 million for 20162019 compared to $21.3$35.3 million for 2015.2018. The increase was primarily due to the consummation of the Merger in September 2016, which resulted in the inclusion of $5.1 million in research and product development expense relatingexpenses related to the Legacy Zhone business in 2016 for the period from and after the consummationKeymile of the Merger. This increase was$5.3 million, partially offset by a decrease duringin these expenses in the period prior to the MergerU.S. and Other Asia Pacific region, in research and product development expenses of $0.8 million resulting from lower personnel related expensespart due to a lower headcount. headcount related costs.
We intend to continue to invest in research and product development to attain our strategic product development objectives, while seeking to manage the associated costs through expense controls.
Selling, Marketing, General and Administrative Expenses
Selling, marketing, general and administrative expenses include personnel costs for sales, marketing, administration, finance, information technology, human resources and general management as well as legal and accounting expenses, rent, utilities, trade show expenses and related travel costs.
Selling, marketing, general and administrative expenses increased 56% or $9.8 million26.7% to $27.3$61.2 million for 20162019 compared to $17.5$48.3 million for 2015. The increase was primarily due to the consummation of the Merger in September 2016, which resulted in the inclusion of $10.7 million in selling, marketing, general and administrative expense relating to the Legacy Zhone business in 2016 for the period from and after the consummation of the Merger. This increase was partially offset by a decrease during the period prior to the Merger of sales expenses of $2.6 million due primarily to higher bad debt expenses in 2015 and reduced commission expenses in 2016. We expect selling, marketing, general and administrative expenses to increase in 2017, primarily driven by an increase in sales commission expense resulting from expected additional sales opportunities primarily related to the combined company's mobile backhaul and FiberLAN POLAN products.
2015 | 2014 | Increase (Decrease) | % change | |||||||||||
(As restated) | (As restated) | |||||||||||||
Products | $ | 133.0 | $ | 132.3 | $ | 0.7 | 1 | % | ||||||
Services | 6.2 | 7.1 | (0.9 | ) | (13 | )% | ||||||||
$ | 139.2 | $ | 139.4 | $ | (0.2 | ) | — | % |
2015 | 2014 | Increase (Decrease) | % change | |||||||||||
(As restated) | (As restated) | |||||||||||||
Revenue by geography: | ||||||||||||||
United States | $ | 4.4 | $ | 12.5 | $ | (8.1 | ) | (65 | )% | |||||
Canada | — | — | — | — | % | |||||||||
Total North America | 4.4 | 12.5 | (8.1 | ) | (65 | )% | ||||||||
Latin America | 2.5 | 1.3 | 1.2 | 92 | % | |||||||||
Europe, Middle East, Africa | 9.4 | 20.9 | (11.5 | ) | (55 | )% | ||||||||
Korea | 114.7 | 99.6 | 15.1 | 15 | % | |||||||||
Other Asia Pacific | 8.2 | 5.1 | 3.1 | 61 | % | |||||||||
Total International | 134.8 | 126.9 | 7.9 | 6 | % | |||||||||
Total | $ | 139.2 | $ | 139.4 | $ | (0.2 | ) | — | % |
Restructuring and increased expenses to related parties for shared human resources, treasuryOther Charges and Goodwill Impairment
During the fourth quarter of 2019, the Company recorded restructuring and other administrative services.
Interest Expense, net
Interest expense, net was $0.4$3.5 million and $1.5 million for 2015,2019 and 2018, respectively. This increase in interest expense was primarily related to higher average borrowings during 2019.
Other Income (Expense), net
Other income, net was $0.9 million for 2019 compared to $0.1Other expense, net of $1.1 million in 2018. The main reason for 2014. Our outstanding debt balance decreased from $23.1 million at December 31, 2014the increase in Other Income, net was due to $21.8 million at December 31, 2015 and interest rates remained low during 2015 and 2014.
Income Tax Provision
We recorded an income tax provisionexpense of $0.2$3.6 million for 2019 compared to $1.7 million for 2018. The increase in income tax expense was primarily due to taxable income generated in higher taxed jurisdictions, including Korea and $1.4 million related to foreign and state taxes for the years ended December 31, 2015 and 2014, respectively. Due to our recurring operating losses and the significant uncertainty regarding the realization of our net deferred tax assets we have continued to record a full valuation allowance.
OTHER PERFORMANCE MEASURES
In managing our business and assessing our financial performance, we supplement the information provided by our U.S. GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-GAAPnon-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 non-recurring transactions or events that we believe are not indicative of our core operating performance, such as Merger transaction costsrestructuring and other charges, goodwill impairment, bargain purchase gain, any of which may or a gain (loss) on sale of assets or impairment of fixed assets.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 supplementally.
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):
|
| Year Ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Net income (loss) |
| $ | (13,263 | ) |
| $ | 2,836 |
|
Add (deduct): |
|
|
|
|
|
|
|
|
Interest expense, net |
|
| 3,525 |
|
|
| 1,474 |
|
Income tax (benefit) provision |
|
| 3,585 |
|
|
| 1,724 |
|
Restructuring and other charges |
|
| 4,908 |
|
|
| — |
|
Goodwill impairment charge |
|
| 1,003 |
|
|
| — |
|
Depreciation and amortization |
|
| 5,115 |
|
|
| 2,702 |
|
Stock-based compensation |
|
| 3,508 |
|
|
| 2,080 |
|
Inventory step-up amortization |
|
| 577 |
|
|
| — |
|
Merger and acquisition transaction costs |
|
| 337 |
|
|
| 1,404 |
|
Adjusted EBITDA |
| $ | 9,295 |
|
| $ | 12,220 |
|
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(As restated) | |||||||||||
Net income (loss) | $ | (15,328 | ) | $ | (3,339 | ) | $ | 1,837 | |||
Add: | |||||||||||
Interest expense, net | 647 | 396 | 108 | ||||||||
Income tax provision | 1,487 | 232 | 1,380 | ||||||||
Depreciation and amortization | 3,173 | 1,404 | 1,936 | ||||||||
Stock-based compensation | 336 | — | — | ||||||||
Merger transaction costs | 1,273 | — | — | ||||||||
Adjusted EBITDA | $ | (8,412 | ) | $ | (1,307 | ) | $ | 5,261 |
LIQUIDITY AND CAPITAL RESOURCES
Our operations arehave historically and continue to be financed through a combination of our existing cash and cash equivalents, available credit facilities,cash generated in the business, borrowings, and sales of equity and debt instruments, based onequity.
The following table summarizes the information regarding our operating requirements and market conditions.
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
Cash and cash equivalents |
| $ | 28,747 |
|
| $ | 27,709 |
|
Working capital |
|
| 114,885 |
|
|
| 75,280 |
|
The Company had a net loss of December 31, 2016 included $9.8 million in cash balances held by our Korean subsidiary. The increase in cash and cash equivalents of $8.8 million was attributable to net cash provided by operating activities, financing activities and investing activities of $3.5 million, $2.8 million and $2.7 million, respectively.
As of December 31, 2019, we had an accumulated deficit of $19.9$29.2 million and working capital of $56.8 million as of December 31, 2016.$114.9 million. As of December 31, 2016,2019, we had approximately $17.9$28.7 million in cash and cash equivalents, which included $9.8$14.2 million in cash balances held by our Korean subsidiary,international subsidiaries, and $24.4$38.0 million in aggregate principal amount of outstanding borrowings under our short-term debt obligations and our loans from DNI.debt. In addition, we had $4.2 million in aggregate borrowing availability under our revolving credit facilities as of December 31, 2016. We2019, we had $14.6$4.5 million committed as security for letters of credit under these facilities asour revolving credit facilities.
Our current lack of December 31, 2016. Dueliquidity could harm us by:
increasing our vulnerability to adverse economic conditions in our industry or the amounteconomy in general;
requiring substantial amounts of short-termcash to be used for debt obligations maturing within the next 12 months and our recurring operating losses, our cash resources may not be sufficient to settle these short-term debt obligations. Our ability to continue as a "going concern" is dependent on many factors,servicing, rather than other purposes, including among other things,operations;
limiting our ability to comply with the covenantsplan for, or react to, changes in our existing debt agreements,business and industry; and
influencing investor and customer perceptions about our financial stability and limiting our ability to cure any defaults that occur under our debt agreementsobtain financing or to obtain waivers or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due. Although the process of amending, replacing or refinancing our short-term debt obligations is ongoing andacquire customers.
However, we are in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficientcontinue to provide us with the required liquidity to remove the substantial doubt as to our ability to continue as a going concern. If we are unable to amend, replace, refinance our short-term debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, we may experience material adverse impacts on our business, operating results and financial condition.
Our ability to meet our obligations as they become due in the ordinary course of business for the next twelve (12) months will depend on our ability (i) to achieve forecasted results of operations, (ii) access funds under new credit facilities and/or raise additional capital through sale of our common stock to the public, and (iii) effectively manage working capital requirements. If we cannot raise additional funds when we need or wants them, our operations and prospects could be negatively affected. We believe that we will achieve forecasted results of operations assumes that, among other things, we will continue to be successful in implementing its business strategy and that there will be no material adverse development in our business, liquidity or capital
requirements. If one or more of these factors do not occur as a going concern.
Operating Activities
Net cash provided byused for operating activities consisted of a net loss of $15.3 million, adjusted for non-cash expenses totaling $4.7was $22.7 million and a net decrease$12.2 million in operating assets totaling $14.1 million.2019 and 2018, respectively. The most significant components of the changes in net operating assets were an$10.5 million increase in accounts receivable of $2.1 million, an increasecash used for operating activities in accounts payable of $4.5 million and an increase in accrued and other liabilities of $9.8 million. The increase in accounts receivable was related to the timing of cash collections. The increase in accounts payable and accrued and other liabilities2019 was primarily due to timingan increase of payments.
Investing Activities
Cash flow used in investing activities of $7.0 million in 2019 consists primarily of the Keymile acquisition and purchases of property, plant and equipment, compared with $1.2 million of cash flow used in investing activities in 2018.
Financing Activities
Cash provided by operatingfinancing activities totaled $28.0 million in 2019. and consisted primarily of a net lossproceeds from issuance of $3.3common stock of $42.5 million, adjusted for non-cash expenses totaling less than $0.1 million and a net increase in operating assets totaling $7.6 million. The most significant componentsas well as proceeds from borrowings of the changes in net operating assets were a decrease in accounts receivable of $11.4 million and an decrease in inventory of $6.0$25.0 million, partially offset by a decrease in accounts payablesnet outflow associated with the repayment of $6.7short term borrowings of $20.1 million, the repayment of long term debt of $11.9 million, as well as the repayment of a related party loan of $5.0 million. The increase in accounts receivable was relatedThis compared to the timing of cash collections. The decrease in inventory was primarily due to better utilization of inventory in 2015. The decrease in accounts payable was primarily due to timing of payments.
Debt Facilities
DNI Loan
On March 5, 2020, DNS Korea, the Company’s wholly-owned, indirect subsidiary entered into a Loan Agreement with DNI (the “March 2020 DNI Loan”). The March 2020 DNI Loan was negotiated and approved on behalf of the Company and its subsidiaries by a special committee of the Board of Directors of the Company (the “Special Committee”) consisting of directors determined to be independent from short-term borrowingsDNI. The March 2020 DNI Loan consists of $25.1a term loan in the amount of KRW 22.4 billion ($18.5 million USD) with interest payable semi-annually at an annual rate of 4.6% and proceeds from long-term borrowings of $5.0 million, offset by repayments of short-term borrowings of $27.3 million.
As security for lettersthe March 2020 DNI Loan (and other existing loans between DNI and DNS Korea and/or DNS California), (i) DNS California, a wholly-owned, direct subsidiary of credit asthe Company and the sole stockholder of December 31, 2016. Our cashDNS Korea, agreed to pledge the outstanding shares of DNS Korea to DNI and cash equivalents as of December 31, 2016 included $9.8 million(ii) DNS Korea granted a security interest in cash balances held by our Korean subsidiary.
DNS Korea loaned the covenantsfunds borrowed under the March 2020 DNI Loan to the Company, and the Company intends to use a portion of such funds to repay in our formerfull and terminate the PNC Credit Facilities, described below.
PNC Credit Facilities
On February 27, 2019, the Company and certain of its subsidiaries (as co-borrowers or guarantors) entered into that certain Revolving Credit, Term Loan, Guaranty and Security Agreement and that certain Export-Import Revolving Credit, Guaranty and Security Agreement, in each case with PNC Bank, National Association (“PNC Bank”) and Citibank, N.A. as lenders, and PNC as agent for the lenders. We refer to such transactions and the agreements referenced above as the “PNC Credit Facilities”.
The PNC Credit Facilities provided for a $25 million term loan and a $15 million revolving line of credit and letter(including subfacilities for Ex-Im transactions, letters of credit facility and received waiversswing loans) with a $10 million incremental increase option. The amount the Company was able to borrow on the revolving line of credit at any time was based on eligible accounts receivable and other conditions, less certain reserves. Borrowings under the PNC Credit Facilities bore interest at a floating rate equal to either the PNC prime rate or the LIBOR rate for these violations.the applicable period, plus a margin that was based on the type of advance.
The Company used a portion of the funds borrowed from the term loan under the PNC Credit Facilities to (i) repay $5.0 million of existing related party indebtedness with DNI plus accrued interest, (ii) repay $1.5 million revolving line of credit outstanding balance plus accrued interest and fees and cash collateralize $3.6 million in outstanding letters of credit under the Company’s former senior secured credit facilities with Wells Fargo Bank (the “Former WFB Facility”), described below, and (iii) repay $5.6 million in short-term debt in Korea and Japan. The Company’s obligations under the PNC Credit Facilities were secured by substantially all of the personal property assets of the Company and its subsidiaries that were co-borrowers or guarantors under the PNC Credit Facilities, including their intellectual property.
The PNC Credit Facilities had a three-year term and were scheduled to mature on February 27, 2022. The PNC Credit Facilities contemplated repayment of the term loan in quarterly installments over the term of the loan, with the balance of the term loan and revolving line of credit due at maturity.
The PNC Credit Facilities had a three-year term and were scheduled to mature on February 27, 2022. The PNC Credit Facilities contemplated repayment of the term loan in quarterly installments over the term of the loan, with the balance of the term loan and revolving line of credit due at maturity. The interest rate on the term loan was 8.12% at December 31, 2019. On July 3, 2017, we executed2, 2019, $4.4 million in outstanding borrowings under the revolving line of credit (which represented all outstanding borrowings under the revolving line of credit) was repaid in full.
The PNC Credit Facilities contained certain covenants, limitations, and conditions with respect to the Company, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a minimum liquidity covenant, as well as financial reporting obligations, and usual and customary events of default. At September 30, 2019, the Company was not in compliance with the maximum leverage ratio financial covenant in the PNC Credit Facilities, which represented an agreement with WFBevent of default thereunder. On November 8, 2019, the Company obtained a waiver of the foregoing event of default from PNC Bank. As a condition for the issuance of such waiver, the Company voluntarily prepaid $10.0 million of the outstanding term loan and paid a one-time fee of $150,000. The Company would have been in further breach of this financial covenant as of December 31, 2019. As discussed further in Note 7 to extend the due date for delivery for our auditedconsolidated financial statements, in March 2020, the Company entered into a term loan with DNI in the amount of KRW 22.4 billion ($18.5 million). The Company plans to use the proceeds of such loan to repay in full the PNC Credit Facilities, and thus does not expect to be in breach of its financial covenants for the yearperiod ended December 31, 2016 to September 27, 2017. 2019. Covenants under the March 2020 DNI loan are significantly less restrictive than under the PNC Credit Facilities.
As of December 31, 2016, we were2019, the Company had $13.1 million in complianceoutstanding term loan borrowings under the PNC Credit Facilities, and no outstanding borrowings under the revolving line of credit.
Former Wells Fargo Bank Facility
On February 27, 2019, in connection with the covenantsentry into the PNC Credit Facilities, the Company repaid $1.5 million in principal amount of outstanding borrowings plus accrued interest and fees under the Former WFB Facility and cash collateralized $3.6 million in outstanding letters of credit under the Former WFB Facility and terminated the Former WFB Facility. We make no assurances that we will beRefer to footnote 7. Debt, of the Consolidated Financial Statements, included in compliance with these covenants inthis Form 10-K, for further details about the future.
Bank and Trade Facilities - Foreign Operations
Certain of our foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries.subsidiaries and supported by guarantees given by DNI or third parties. Payments under such facilities are made in accordance with the given lender’s amortization schedules. As of December 31, 20162019 and December 31, 2015,2018, we had an aggregate outstanding balance of $17.6$15.8 million and $21.8$24.8 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements as of December 31, 20162019 and December 31, 20152018 ranged from 1.92%0% to 4.08%4.5% and 2.04%0% to 3.55%6.1%, respectively.
Related - Party Debt
In February 2016, DNS borrowed $1.8 million from DNI for capital investment with an interest rate of 4.6% per annum. On February 27, 2019, in connection with the Merger, onentry into the PNC Credit Facilities, the Company amended the terms of this loan to extend the repayment date to May 27, 2022. As of December 31, 2019, the $1.8 million remained outstanding.
In September, 9, 2016, wethe Company entered into a loan agreement with DNI for a $5.0 million unsecured subordinated term loan facility. Under theThe term loan agreement, we were permittedwas scheduled to request drawdowns of one or more term loans in an aggregate principal amount not to exceed $5.0 million. As of December 31, 2016, $5.0 million in term loans was outstanding under the facility. Such term loans mature in September 2021 and arewas pre-payable at any time by usthe Company without premium or penalty. The interest rate as of December 31, 2016 under this facility was 4.6% per annum.
In March 2018, Dasan Network Solutions, Inc., a subsidiary of the Company incorporated under the laws of Korea (“DNS Korea”) borrowed $1.8$5.8 million from DNI, for capital investment in February 2016,of which amount$4.5 million was outstanding as of December 31, 2016. Thisrepaid on August 8, 2018. The loan matured in March 2017 with an option of renewal by mutual agreement, and borebears interest at a rate of 6.9% per annum, payable annually. Effective4.6%. On February 27, 2017, we2019, in connection with the entry into the PNC Credit Facilities, the Company amended the terms of this loan to extend the repayment date from March 2017 to MarchMay 27, 2022. As of December 31, 2019, $1.3 million remained outstanding.
On December 27, 2018, the Company entered into a loan agreement with DNI, for a $6.0 million term loan with an interest rate of 4.6% per annum. On February 27, 2019, in connection with the entry into the PNC Credit Facilities, the Company amended
the terms of the term loan to extend the repayment date to May 27, 2022 and to reduceterminate any security granted to DNI with respect to such term loan. As of December 31, 2019, the $6.0 million remained outstanding.
The modifications resulting from the amendments described in the four preceding paragraphs were limited to the extension of the maturity dates and removal of the collateral on the outstanding term loans with DNI. There were no fees paid to DNI or external costs otherwise incurred in connection with these modifications. Interest expense on these related party borrowings was $0.4 million in both 2019 and 2018.
As of December 31, 2019 and 2018, the Company had borrowings of $9.1 million and $14.1 million, respectively, outstanding from DNI. The outstanding balance at December 31, 2019 consisted of a $6.0 million unsecured subordinated term loan facility which matures in May 2022, a $1.8 million loan for capital investment which matures in May 2022, and KRW 1.5 billion ($1.3 million) outstanding under a secured loan to DNS Korea which matures in May 2022. All three loans bear interest at a rate from 6.9% toof 4.6% per annum.
As noted above under “Debt Facilities – DNI Loan,” on March 5, 2020, DNS Korea entered into a subsequent loan transaction with DNI in the amount of KRW 22.4 billion ($18.5 million from Solueta, an affiliate of DNI,USD), which amount was outstanding as of June 30, 2017. This loan matures in November 2017 andon March 11, 2022. The loan bears interest at a rate of 4.6% per annum, payable monthly.
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, 2016,2019, two (2) customers, APSFL and Softbank, accounted for 12% (a related-party)18% and 10%11%, respectively, of our net accounts receivable, respectively, andreceivable. Our receivables from customers in countries other than the United StatesU.S represented 87%94% of net 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
At December 31, 2016,2019, our future contractual commitments by fiscal year were as follows (in thousands):
|
|
|
|
|
| Payments due by period |
| |||||||||||||||||
|
| Total |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 |
|
| 2024 and thereafter |
| ||||||
Operating leases |
| $ | 24,725 |
|
| $ | 5,287 |
|
| $ | 4,655 |
|
| $ | 4,211 |
|
| $ | 3,795 |
|
| $ | 6,777 |
|
Purchase commitments |
|
| 4,354 |
|
|
| 4,354 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Short-term debt - bank and trade facilities |
|
| 18,279 |
|
|
| 18,279 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Long-term debt - bank and trade facilities |
|
| 10,625 |
|
|
| — |
|
|
| 3,438 |
|
|
| 7,187 |
|
|
| — |
|
|
| — |
|
Long-term debt - related party |
|
| 9,096 |
|
|
| — |
|
|
| — |
|
|
| 9,096 |
|
|
| — |
|
|
| — |
|
Total future contractual commitments |
| $ | 67,079 |
|
| $ | 27,920 |
|
| $ | 8,093 |
|
| $ | 20,494 |
|
| $ | 3,795 |
|
| $ | 6,777 |
|
Total | Payments due by period | ||||||||||||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2121 | Thereafter | ||||||||||||||||||||||
Operating leases | $ | 21,420 | $ | 3,633 | $ | 2,916 | $ | 2,335 | $ | 2,192 | $ | 2,178 | $ | 8,166 | |||||||||||||
Purchase commitments | 10,327 | 6,441 | 1,398 | 1,382 | 1,106 | — | — | ||||||||||||||||||||
Short-term debt | 17,599 | 17,599 | — | — | — | — | — | ||||||||||||||||||||
Related-party debt | 6,800 | — | 1,800 | — | — | — | 5,000 | ||||||||||||||||||||
Total future contractual commitments | $ | 56,146 | $ | 27,673 | $ | 6,114 | $ | 3,717 | $ | 3,298 | $ | 2,178 | $ | 13,166 |
Operating Leases
Future minimum operating lease amounts shownobligations in the table above representinclude primarily off-balance sheet arrangements. For operating lease commitments, a liability is generally not recorded onpayments for our balance sheet unless the facility represents an excess facility foroffice locations and manufacturing, research and development locations, which an estimateexpire at various dates through 2025. See Note 14 “Commitments and Contingencies” of the facility exit costs has been recordedNotes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our balance sheet, net of estimated sublease income. For operating leases that include contractual commitments for operating expenses and maintenance, estimates of such amounts are included based on current rates. Payments made under operating leases will be treated as rent expense for the facilities currently being utilized.
Purchase Commitments
The purchase commitments shown above represent non-cancellable inventory purchase commitments as of December 31, 2016.2019.
Short-term Debt
The short-term debt obligation amount shown above represents scheduled principal repayments, but not the associated interest payments which may vary based on changes in market interest rates. At December 31, 2016,See Note 7 “Debt” of the interest rate per annum applicableNotes to outstanding borrowings under the trade facilities of our foreign subsidiaries ranged from 1.92% to 4.08%. See above under “Cash Management”Consolidated Financial Statements included in this Annual Report on Form 10-K for further information about these facilities.
Not required
ITEM 8. |
DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
38 | |
41 | |
42 | |
43 | |
44 | |
45 |
No financial statement schedules are required because all the relevant data is included elsewhere in this Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
DASAN Zhone Solutions, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of DASAN Zhone Solutions, Inc.
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, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 24, 2020 expressed an adverse opinion.
Change in accounting principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases on January 1, 2019 using the modified retrospective approach due to the adoption of the new leasing standard.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe 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 of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).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. Anmisstatement, whether due to error or fraud. Our audit includesincluded 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 supporting the amounts and disclosures in the financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2019.
San Francisco, California
March 24, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
DASAN Zhone Solutions, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of DASAN Zhone Solutions, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weaknesses described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified and included in management’s assessment related to insufficiency of qualified personnel, including a lack of qualified personnel to account for significant unusual transactions; financial close and reporting, including monitoring foreign subsidiaries; and the Company’s control environment, specifically inventory valuation and revenue.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019. The material weaknesses identified above were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report dated March 24, 2020 which expressed an unqualified opinion on those financial statements.
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 Annual 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/ GRANT THORNTON LLP
San Francisco, California
March 24, 2020
Report of Independent Registered Public Accounting Firm
To the Board of Directors and ShareholderStockholders of
Opinion on the Financial Statements
We have audited the consolidated balance sheet of DASAN Zhone Solutions, Inc. and its subsidiaries (the “Company”) as of December 31, 20152018, and the related consolidated statements of comprehensive income(loss)income (loss), of stockholder’sstockholders’ equity and non-controlling interest and of cash flows for each of the two years inyear then ended, including the period ended December 31, 2015,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 DASAN Zhone Solutions, Inc. (formerly, DASAN Network Solutions, Inc.) and its subsidiariesthe Company as of December 31, 20152018, and the results of theirits operations and theirits cash flows for each of the two years in the periodyear then ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.audit. We conducted our audits of these statements in accordanceare a public accounting firm registered with the auditing standards of the Public Company Accounting Oversight Board (United States). (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 audits of these consolidated financial statements 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 consolidated financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud.
Our audit includesincluded performing procedures to assess the risks of material misstatement of the consolidated 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 supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 12, 2019
We served as the Company's auditor from 2016 to 2019.
DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES
(In thousands, except par value)
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 28,747 |
|
| $ | 27,709 |
|
Restricted cash |
|
| 4,646 |
|
|
| 7,003 |
|
Accounts receivable - trade, net of allowance for doubtful accounts of $393 in 2019 and $328 in 2018 |
|
|
|
|
|
|
|
|
Third parties |
|
| 96,865 |
|
|
| 71,034 |
|
Related parties |
|
| — |
|
|
| 583 |
|
Other receivables |
|
|
|
|
|
|
|
|
Suppliers and others |
|
| 8,092 |
|
|
| 12,923 |
|
Related parties |
|
| 32 |
|
|
| 65 |
|
Inventories |
|
| 35,439 |
|
|
| 33,868 |
|
Contract assets |
|
| 16,680 |
|
|
| 11,381 |
|
Prepaid expenses and other current assets |
|
| 4,185 |
|
|
| 4,185 |
|
Total current assets |
|
| 194,686 |
|
|
| 168,751 |
|
Property, plant and equipment, net |
|
| 6,769 |
|
|
| 5,518 |
|
Right-of-use assets from operating leases |
|
| 20,469 |
|
|
| — |
|
Goodwill |
|
| 3,977 |
|
|
| 3,977 |
|
Intangible assets, net |
|
| 12,381 |
|
|
| 5,649 |
|
Deferred tax assets, net |
|
| 1,622 |
|
|
| 2,752 |
|
Long-term restricted cash |
|
| 242 |
|
|
| 936 |
|
Other assets |
|
| 6,001 |
|
|
| 2,424 |
|
Total assets |
| $ | 246,147 |
|
| $ | 190,007 |
|
Liabilities, Stockholders’ Equity and Non-controlling Interest |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable - trade |
|
|
|
|
|
|
|
|
Third parties |
|
| 38,331 |
|
|
| 36,865 |
|
Related parties |
|
| 96 |
|
|
| 1,743 |
|
Short-term debt - Bank and trade facilities |
|
| 17,484 |
|
|
| 31,762 |
|
Other payables |
|
|
|
|
|
|
|
|
Third parties |
|
| 1,748 |
|
|
| 1,792 |
|
Related parties |
|
| 1,530 |
|
|
| 1,281 |
|
Contract liabilities - current |
|
| 3,567 |
|
|
| 8,511 |
|
Operating lease liabilities - current |
|
| 4,201 |
|
|
| — |
|
Accrued and other liabilities |
|
| 12,844 |
|
|
| 11,517 |
|
Total current liabilities |
|
| 79,801 |
|
|
| 93,471 |
|
Long-term debts |
|
|
|
|
|
|
|
|
Bank and trade facilities |
|
| 9,937 |
|
|
| — |
|
Related party |
|
| 9,096 |
|
|
| 14,142 |
|
Contract liabilities - non-current |
|
| 3,230 |
|
|
| 1,801 |
|
Operating lease liabilities - non-current |
|
| 18,154 |
|
|
| — |
|
Pension liabilities |
|
| 17,671 |
|
|
| — |
|
Other long-term liabilities |
|
| 1,710 |
|
|
| 2,739 |
|
Total liabilities |
|
| 139,599 |
|
|
| 112,153 |
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
Stockholders’ equity and non-controlling interest |
|
|
|
|
|
|
|
|
Common stock, authorized 36,000 shares, 21,419 and 16,587 shares outstanding as of December 31, 2019 and 2018, respectively, at a $0.001 par value |
|
| 21 |
|
|
| 16 |
|
Additional paid-in capital |
|
| 139,700 |
|
|
| 93,192 |
|
Accumulated other comprehensive loss |
|
| (3,939 | ) |
|
| (192 | ) |
Accumulated deficit |
|
| (29,234 | ) |
|
| (15,777 | ) |
Total stockholders' equity |
|
| 106,548 |
|
|
| 77,239 |
|
Non-controlling interest |
|
| — |
|
|
| 615 |
|
Total stockholders' equity and non-controlling interest |
|
| 106,548 |
|
|
| 77,854 |
|
Total liabilities, stockholders’ equity and non-controlling interest |
| $ | 246,147 |
|
| $ | 190,007 |
|
December 31, 2016 | December 31, 2015 | ||||||
(As restated) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 17,893 | $ | 9,095 | |||
Restricted cash | 6,650 | 4,764 | |||||
Short-term investments | 993 | — | |||||
Accounts receivable, net of allowances for sales returns and doubtful accounts of $1,143 in 2016 and $868 in 2015 | |||||||
Trade receivables | 38,324 | 17,712 | |||||
Related parties | 13,311 | 14,575 | |||||
Other receivables | |||||||
Others | 12,068 | 11,268 | |||||
Related parties | 171 | 1,742 | |||||
Current deferred tax assets | — | 327 | |||||
Inventories | 31,032 | 13,976 | |||||
Prepaid expenses and other current assets | 4,131 | 951 | |||||
Total current assets | 124,573 | 74,410 | |||||
Property and equipment, net | 6,288 | 2,251 | |||||
Goodwill | 3,977 | 693 | |||||
Intangible assets, net | 8,767 | 3 | |||||
Non-current deferred tax assets | — | 1,058 | |||||
Other assets | 1,842 | 4,811 | |||||
Total assets | $ | 145,447 | $ | 83,226 | |||
Liabilities, Stockholders’ Equity and Non-controlling Interest | |||||||
Current liabilities: | |||||||
Accounts payable | |||||||
Others | 30,681 | 14,936 | |||||
Related parties | 430 | — | |||||
Short-term debt | 17,599 | 21,848 | |||||
Other payables | |||||||
Others | 2,040 | 1,352 | |||||
Related parties | 6,940 | 133 | |||||
Deferred revenue | 1,901 | — | |||||
Accrued and other liabilities | 8,163 | 2,982 | |||||
Total current liabilities | 67,754 | 41,251 | |||||
Long-term debt - related parties | 6,800 | — | |||||
Deferred revenue | 1,674 | — | |||||
Other long-term liabilities | 2,351 | 510 | |||||
Total liabilities | 78,579 | 41,761 | |||||
Commitments and contingencies (Note 14) | |||||||
Stockholders’ equity and non-controlling interest | |||||||
Common stock, authorized 36,000 shares, 16,375 shares and 9,493 shares outstanding as of December 31, 2016 and December 31, 2015 at $0.001 par value (1) | 16 | 9 | |||||
Additional paid-in capital | 89,174 | 47,680 | |||||
Other comprehensive loss | (2,815 | ) | (1,765 | ) | |||
Accumulated deficit | (19,923 | ) | (4,597 | ) | |||
Total stockholders' equity | 66,452 | 41,327 | |||||
Non-controlling interest | 416 | 138 | |||||
Total stockholders' equity and non-controlling interest | 66,868 | 41,465 | |||||
Total liabilities, stockholders’ equity and non-controlling interest | $ | 145,447 | $ | 83,226 |
See accompanying notes to consolidated financial statements.
DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES
(In thousands, except per share data)
|
| Years Ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Net revenue: |
|
|
|
|
|
|
|
|
Third parties |
| $ | 304,369 |
|
| $ | 276,718 |
|
Related parties |
|
| 2,513 |
|
|
| 5,630 |
|
Total net revenue |
|
| 306,882 |
|
|
| 282,348 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
Products and services - third parties |
|
| 203,269 |
|
|
| 185,709 |
|
Products and services - related parties |
|
| 1,906 |
|
|
| 4,696 |
|
Amortization of intangible assets |
|
| 1,596 |
|
|
| 612 |
|
Total cost of revenue |
|
| 206,771 |
|
|
| 191,017 |
|
Gross profit |
|
| 100,111 |
|
|
| 91,331 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and product development |
|
| 38,516 |
|
|
| 35,306 |
|
Selling, marketing, general and administrative |
|
| 61,206 |
|
|
| 48,321 |
|
Restructuring and other charges |
|
| 4,908 |
|
|
| — |
|
Amortization of intangible assets |
|
| 1,507 |
|
|
| 524 |
|
Goodwill impairment charge |
|
| 1,003 |
|
|
| — |
|
Total operating expenses |
|
| 107,140 |
|
|
| 84,151 |
|
Operating income (loss) |
|
| (7,029 | ) |
|
| 7,180 |
|
Interest income |
|
| 456 |
|
|
| 264 |
|
Interest expense |
|
| (3,981 | ) |
|
| (1,738 | ) |
Other income (expense), net |
|
| 876 |
|
|
| (1,146 | ) |
Income (loss) before income taxes |
|
| (9,678 | ) |
|
| 4,560 |
|
Income tax provision (benefit) |
|
| 3,585 |
|
|
| 1,724 |
|
Net income (loss) |
|
| (13,263 | ) |
|
| 2,836 |
|
Net income (loss) attributable to non-controlling interest |
|
| 194 |
|
|
| 69 |
|
Net income (loss) attributable to DASAN Zhone Solutions, Inc. |
|
| (13,457 | ) |
|
| 2,767 |
|
Foreign currency translation adjustments |
|
| (1,939 | ) |
|
| (2,051 | ) |
Actuarial gain (loss) for pension plan |
|
| (1,793 | ) |
|
| — |
|
Comprehensive income (loss) |
|
| (16,995 | ) |
|
| 785 |
|
Comprehensive income attributable to non-controlling interest |
|
| 209 |
|
|
| 81 |
|
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc. |
| $ | (17,204 | ) |
| $ | 704 |
|
Basic earnings (loss) per share attributable to DASAN Zhone Solutions, Inc. |
| $ | (0.69 | ) |
| $ | 0.17 |
|
Diluted earnings (loss) per share attributable to DASAN Zhone Solutions, Inc. |
| $ | (0.69 | ) |
| $ | 0.17 |
|
Weighted average shares outstanding used to compute basic net income (loss) per share |
|
| 19,403 |
|
|
| 16,482 |
|
Weighted average shares outstanding used to compute diluted net income (loss) per share |
|
| 19,403 |
|
|
| 16,746 |
|
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(As restated) | (As restated) | ||||||||||
Net revenue: | |||||||||||
Net revenue | $ | 121,670 | $ | 114,421 | $ | 108,634 | |||||
Net revenue - related parties | 28,634 | 24,775 | 30,760 | ||||||||
Total net revenue | 150,304 | 139,196 | 139,394 | ||||||||
Cost of revenue: | |||||||||||
Products and services | 84,415 | 81,420 | 70,361 | ||||||||
Products and services - related parties | 24,738 | 21,890 | 28,191 | ||||||||
Amortization of intangible assets | 204 | — | — | ||||||||
Total cost of revenue | 109,357 | 103,310 | 98,552 | ||||||||
Gross profit | 40,947 | 35,886 | 40,842 | ||||||||
Operating expenses: | |||||||||||
Research and product development | 25,396 | 21,331 | 22,805 | ||||||||
Selling, marketing, general and administrative | 27,348 | 17,528 | 14,834 | ||||||||
Amortization of intangible assets | 1,556 | 4 | — | ||||||||
Gain from sale of assets | (304 | ) | — | — | |||||||
Total operating expenses | 53,996 | 38,863 | 37,639 | ||||||||
Operating income (loss) | (13,049 | ) | (2,977 | ) | 3,203 | ||||||
Interest income | 183 | 136 | 418 | ||||||||
Interest expense | (830 | ) | (532 | ) | (526 | ) | |||||
Other income (expense), net | (145 | ) | 266 | 122 | |||||||
Income (loss) before income taxes | (13,841 | ) | (3,107 | ) | 3,217 | ||||||
Income tax provision | 1,487 | 232 | 1,380 | ||||||||
Net income (loss) | (15,328 | ) | (3,339 | ) | 1,837 | ||||||
Net loss attributable to non-controlling interest | (2 | ) | — | — | |||||||
Net income (loss) attributable to DASAN Zhone Solutions, Inc. | $ | (15,326 | ) | $ | (3,339 | ) | $ | 1,837 | |||
Foreign currency translation adjustments | (1,047 | ) | (2,790 | ) | (1,997 | ) | |||||
Comprehensive loss | (16,375 | ) | (6,129 | ) | (160 | ) | |||||
Comprehensive income attributable to non-controlling interest | 1 | — | — | ||||||||
Comprehensive loss attributable to DASAN Zhone Solutions, Inc. | $ | (16,376 | ) | $ | (6,129 | ) | $ | (160 | ) | ||
Basic and diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc. (1) | $ | (1.32 | ) | $ | (0.36 | ) | $ | 0.20 | |||
Weighted average shares outstanding used to compute basic and diluted net income (loss) per share (1) | 11,637 | 9,314 | 9,199 |
See accompanying notes to consolidated financial statements.
DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES
Years ended December 31, 2016, 20152019 and 2014
(In thousands)
|
| Common stock |
|
| Additional paid-in |
|
| Accumulated other comprehensive |
|
| Accumulated |
|
| Total stockholders |
|
| Non- controlling |
|
| Total stockholders' equity and non- controlling |
| |||||||||||
|
| Shares |
|
| Amount |
|
| capital |
|
| income (loss) |
|
| deficit |
|
| equity |
|
| interest |
|
| interest |
| ||||||||
Balances as of December 31, 2017 |
|
| 16,410 |
|
| $ | 16 |
|
| $ | 90,198 |
|
| $ | 1,871 |
|
| $ | (18,852 | ) |
| $ | 73,233 |
|
| $ | 534 |
|
| $ | 73,767 |
|
ASC 606 opening balance adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 308 |
|
|
| 308 |
|
|
| — |
|
|
| 308 |
|
Exercise of stock options and restricted stock grant |
|
| 177 |
|
|
| — |
|
|
| 914 |
|
|
| — |
|
|
| — |
|
|
| 914 |
|
|
| — |
|
|
| 914 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 2,080 |
|
|
| — |
|
|
| — |
|
|
| 2,080 |
|
|
| — |
|
|
| 2,080 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,767 |
|
|
| 2,767 |
|
|
| 69 |
|
|
| 2,836 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,063 | ) |
|
| — |
|
|
| (2,063 | ) |
|
| 12 |
|
|
| (2,051 | ) |
Balance as of December 31, 2018 |
|
| 16,587 |
|
|
| 16 |
|
|
| 93,192 |
|
|
| (192 | ) |
|
| (15,777 | ) |
|
| 77,239 |
|
|
| 615 |
|
|
| 77,854 |
|
Issuance of common stock in public offering, net of issuance costs |
|
| 4,718 |
|
|
| 5 |
|
|
| 42,504 |
|
|
| — |
|
|
| — |
|
|
| 42,509 |
|
|
| — |
|
|
| 42,509 |
|
Purchase of non- controlling interest in subsidiary |
|
| — |
|
|
| — |
|
|
| (127 | ) |
|
| — |
|
|
| — |
|
|
| (127 | ) |
|
| (824 | ) |
|
| (951 | ) |
Exercise of stock options and restricted stock grant |
|
| 75 |
|
|
| — |
|
|
| 256 |
|
|
| — |
|
|
| — |
|
|
| 256 |
|
|
| — |
|
|
| 256 |
|
Employee stock plan purchase program (ESPP) |
|
| 39 |
|
|
| — |
|
|
| 367 |
|
|
| — |
|
|
| — |
|
|
| 367 |
|
|
| — |
|
|
| 367 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 3,508 |
|
|
| — |
|
|
| — |
|
|
| 3,508 |
|
|
| — |
|
|
| 3,508 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,457 | ) |
|
| (13,457 | ) |
|
| 194 |
|
|
| (13,263 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,747 | ) |
|
| — |
|
|
| (3,747 | ) |
|
| 15 |
|
|
| (3,732 | ) |
Balance as of December 31, 2019 |
|
| 21,419 |
|
| $ | 21 |
|
| $ | 139,700 |
|
| $ | (3,939 | ) |
| $ | (29,234 | ) |
| $ | 106,548 |
|
| $ | — |
|
| $ | 106,548 |
|
Common stock | Additional paid-in capital | Other comprehensive income (loss) | Accumulated deficit | Total stockholders' equity | Non-controlling interest | Total stockholders' equity and non-controlling interest | ||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||
Balances as of December 31, 2013 | 9,173 | $ | 9 | $ | 47,188 | $ | 3,022 | $ | (3,095 | ) | $ | 47,124 | $ | — | $ | 47,124 | ||||||||||||||
Issuance of common stock | 48 | — | 1,800 | — | — | 1,800 | — | 1,800 | ||||||||||||||||||||||
Increase in parent company investment | — | — | (131 | ) | — | — | (131 | ) | — | (131 | ) | |||||||||||||||||||
Net income | — | — | — | — | 1,837 | 1,837 | — | 1,837 | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | (1,997 | ) | — | (1,997 | ) | — | (1,997 | ) | |||||||||||||||||||
Balances as of December 31, 2014 | 9,221 | 9 | 48,857 | 1,025 | (1,258 | ) | 48,633 | — | 48,633 | |||||||||||||||||||||
Issuance of common stock | 272 | — | 1,800 | — | — | 1,800 | — | 1,800 | ||||||||||||||||||||||
Net increase in parent company investment | — | — | (2,977 | ) | — | — | (2,977 | ) | — | (2,977 | ) | |||||||||||||||||||
Net loss | — | — | — | — | (3,339 | ) | (3,339 | ) | — | (3,339 | ) | |||||||||||||||||||
Other comprehensive loss | — | — | — | (2,790 | ) | — | (2,790 | ) | — | (2,790 | ) | |||||||||||||||||||
Acquisition of controlling interest | — | — | — | — | — | — | 138 | 138 | ||||||||||||||||||||||
Balances as of December 31, 2015 (As restated) | 9,493 | 9 | 47,680 | (1,765 | ) | (4,597 | ) | 41,327 | 138 | 41,465 | ||||||||||||||||||||
Stock-based compensation | 8 | — | 336 | — | — | 336 | — | 336 | ||||||||||||||||||||||
Shares of Legacy Zhone stock as of September 8, 2016 acquired through business combination | 6,874 | 7 | 41,435 | — | — | 41,442 | — | 41,442 | ||||||||||||||||||||||
Net loss | — | — | — | — | (15,326 | ) | (15,326 | ) | (2 | ) | (15,328 | ) | ||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (1,050 | ) | — | (1,050 | ) | 3 | (1,047 | ) | |||||||||||||||||||
Acquisition of additional interest | — | — | (277 | ) | — | — | (277 | ) | 277 | — | ||||||||||||||||||||
Balances as of December 31, 2016 | 16,375 | $ | 16 | $ | 89,174 | $ | (2,815 | ) | $ | (19,923 | ) | $ | 66,452 | $ | 416 | $ | 66,868 |
See accompanying notes to consolidated financial statements.
DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES
(In thousands)
|
| Years Ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (13,263 | ) |
| $ | 2,836 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 5,115 |
|
|
| 2,702 |
|
Goodwill impairment charge |
|
| 1,003 |
|
|
| — |
|
Amortization of deferred financing cost |
|
| 664 |
|
|
| — |
|
Stock-based compensation |
|
| 3,508 |
|
|
| 2,080 |
|
Provision for inventory reserves |
|
| 2,984 |
|
|
| 835 |
|
Provision for doubtful accounts |
|
| 155 |
|
|
| 20 |
|
Provision for sales returns |
|
| 370 |
|
|
| 1,343 |
|
Unrealized loss (gain) on foreign currency transactions |
|
| 158 |
|
|
| (1,229 | ) |
Provision for deferred income taxes |
|
| 1,130 |
|
|
| 202 |
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (23,072 | ) |
|
| (10,287 | ) |
Inventories |
|
| 4,802 |
|
|
| (9,359 | ) |
Contract assets |
|
| (5,962 | ) |
|
| (12,175 | ) |
Prepaid expenses and other assets |
|
| (7,688 | ) |
|
| 3,381 |
|
Accounts payable |
|
| 10,340 |
|
|
| 5,702 |
|
Accrued and other liabilities |
|
| 854 |
|
|
| (3,727 | ) |
Contract liabilities |
|
| (3,800 | ) |
|
| 5,458 |
|
Net cash used in operating activities |
|
| (22,702 | ) |
|
| (12,218 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from disposal of property, plant and equipment and other assets |
|
| — |
|
|
| 2 |
|
Purchases of property, plant and equipment |
|
| (2,314 | ) |
|
| (1,182 | ) |
Acquisition of business, net of cash acquired |
|
| (4,660 | ) |
|
| — |
|
Net cash used in investing activities |
|
| (6,974 | ) |
|
| (1,180 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock in public offerings, net of issuance costs |
|
| 42,509 |
|
|
| — |
|
Proceeds from short-term borrowings and line of credit |
|
| 49,243 |
|
|
| 55,518 |
|
Repayments of short-term borrowings and line of credit |
|
| (69,357 | ) |
|
| (45,033 | ) |
Proceeds from long-term borrowings |
|
| 25,000 |
|
|
| — |
|
Repayments of long-term borrowings |
|
| (11,875 | ) |
|
| — |
|
Proceeds from related party term loan |
|
| — |
|
|
| 12,064 |
|
Repayments of related party term loan |
|
| (5,000 | ) |
|
| (4,460 | ) |
Financing cost - debt issuance |
|
| (2,148 | ) |
|
| — |
|
Purchase of non-controlling interest |
|
| (951 | ) |
|
| — |
|
Proceeds from exercise of stock options |
|
| 623 |
|
|
| 914 |
|
Net cash provided by financing activities |
|
| 28,044 |
|
|
| 19,003 |
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash |
|
| (381 | ) |
|
| (1,369 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| (2,013 | ) |
|
| 4,236 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
| 35,648 |
|
|
| 31,412 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 33,635 |
|
| $ | 35,648 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash to statement of financial position |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 28,747 |
|
| $ | 27,709 |
|
Restricted cash |
|
| 4,646 |
|
|
| 7,003 |
|
Long-term restricted cash |
|
| 242 |
|
|
| 936 |
|
|
| $ | 33,635 |
|
| $ | 35,648 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Shares of the Company's common stock held in escrow |
|
| — |
|
|
| — |
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest - bank and trade facilities |
| $ | 2,786 |
|
| $ | 1,332 |
|
Interest - related party |
| $ | 509 |
|
| $ | 611 |
|
Income taxes |
| $ | 2,017 |
|
| $ | 1,260 |
|
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(As restated) | (As restated) | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (15,328 | ) | $ | (3,339 | ) | $ | 1,837 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | 3,173 | 1,404 | 1,936 | ||||||||
Gain from sale of assets | (304 | ) | — | — | |||||||
Stock-based compensation | 336 | — | — | ||||||||
Unrealized gain on foreign currency transactions | 62 | (1,301 | ) | (2,066 | ) | ||||||
Deferred taxes | 1,408 | (86 | ) | (432 | ) | ||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | (2,092 | ) | 11,442 | (16,554 | ) | ||||||
Inventories | (1,080 | ) | 6,026 | (4,792 | ) | ||||||
Prepaid expenses and other current assets | 3,074 | 196 | (9,412 | ) | |||||||
Accounts payable | 4,488 | (6,676 | ) | 8,432 | |||||||
Accrued expenses | 9,759 | (3,415 | ) | 1,541 | |||||||
Net cash provided by (used in) operating activities | 3,496 | 4,251 | (19,510 | ) | |||||||
Cash flows from investing activities: | |||||||||||
Cash acquired through the Merger | 7,013 | — | — | ||||||||
(Increase) decrease in restricted cash | (2,128 | ) | 1,479 | 278 | |||||||
Decrease in short-term and long-term loans to others | 516 | 88 | 209 | ||||||||
Increase in short-term and long-term loans to others | (214 | ) | �� | (446 | ) | — | |||||
Proceeds from disposal of property and equipment and other assets | 10 | 2,230 | 2,678 | ||||||||
Purchases of short-term investments | (1,034 | ) | (1,856 | ) | (1,899 | ) | |||||
Purchases of property and equipment | (1,311 | ) | (794 | ) | (1,137 | ) | |||||
Purchases of intangible assets | (61 | ) | — | — | |||||||
Payment for purchase of shares of HandySoft, net of cash acquired | — | (548 | ) | — | |||||||
Net cash provided by (used in) investing activities | 2,791 | 153 | 129 | ||||||||
Cash flows from financing activities: | |||||||||||
Repayments of borrowings | (27,336 | ) | (17,796 | ) | (31,384 | ) | |||||
Proceeds from short-term borrowings | 25,069 | 17,950 | 38,349 | ||||||||
Proceeds from long-term borrowings - related party | 5,000 | — | — | ||||||||
Government grants received | — | 217 | 156 | ||||||||
Proceeds from issuance of common stock | — | 1,800 | 1,800 | ||||||||
Decrease in other capital | — | (2,977 | ) | (131 | ) | ||||||
Net cash provided by (used in) financing activities | 2,733 | (806 | ) | 8,790 | |||||||
Effect of exchange rate changes on cash | (222 | ) | (510 | ) | (256 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 8,798 | 3,088 | (10,847 | ) | |||||||
Cash and cash equivalents at beginning of period | 9,095 | 6,007 | 16,854 | ||||||||
Cash and cash equivalents at end of period | $ | 17,893 | $ | 9,095 | $ | 6,007 | |||||
Supplemental disclosure of cash flow information: | |||||||||||
Shares of the Company's common stock held in escrow | 949 | — | — | ||||||||
Cash paid during the period for: | |||||||||||
Interest | $ | 663 | $ | 570 | $ | 474 | |||||
Income taxes | 353 | 1,496 | 2,430 |
See accompanying notes to consolidated financial statements.
DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES
(a) Description of Business
DASAN Zhone Solutions, Inc. (formerly known as Zhone Technologies, Inc. and referred(referred to, collectively with its subsidiaries, as "DZS"“DZS” or the "Company"“Company”) is a global provider of ultra-broadband network access solutions and communications equipment forplatforms deployed by advanced Tier 1, 2 and 3 service providerproviders and enterprise networks.customers. The Company provides a wide array of reliable, cost-effective networking technologies, including broadband access, Ethernet switching, mobile backhaul, Passive Optical LAN and software-defined networks, to a diverse customer base that includes more than 1,0001200 customers in more than 50120 countries worldwide.
DZS was incorporated under the laws of the state of Delaware in June 1999. The Company is headquartered in Oakland, California with flexible in-house production facilities in Seminole, Florida and Hannover, Germany, and contract manufacturers located in China, India, Korea and Vietnam. The Company also maintains offices to provide sales and customer support at global locations. On September 9, 2016,March 2, 2020, the Company acquired Dasan Network Solutions, Inc. ("DNS") throughannounced its plans to relocate its corporate headquarters from Oakland, California to Plano, Texas and to establish a new U.S.-based Engineering Center of Excellence in Plano.
(b) Basis of Presentation
The consolidated financial statements are prepared in accordance with U.S. GAAP and include the merger of a wholly owned subsidiaryaccounts of the Company, with and into DNS, with DNS surviving as aits wholly owned subsidiaries and a subsidiary in which it had a controlling interest. All inter-company transactions and balances have been eliminated in consolidation.
(c) DNI Ownership
As of December 31, 2019, DNI owned approximately 44.4% of the Company (the "Merger"). At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DASAN Networks, Inc. ("DNI") were canceled and converted into the right to receive shares of the Company's common stock in an amount equal to 58% of the issued and outstanding shares of the Company's common stock immediately followingstock. As a result, DNI is able to significantly influence corporate and management policies and the Merger. In connectionoutcome of any corporate transaction or other matter submitted to the Company’s stockholders for approval. Such transactions may include mergers and acquisitions, sales of all or some of the Company’s assets or purchases of assets, and other significant corporate transactions. The interests of DNI may not coincide with the Merger,interests of the Company changed its name from Zhone Technologies, Inc.Company's other stockholders or with holders of the Company's indebtedness. See Note 7 and Note 12 to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone." The Company’s common stock continues to be traded on the Nasdaq Capital Market,consolidated financial statements for additional information.
(d) Risks and the Company’s ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016. The Company is headquartered in Oakland, California.
The accompanying consolidated financial statements have been prepared in conformity with generally accepted
The Company hashad net loss of $13.3 million for the year ended December 31, 2019 and net income of $2.8 million for the year ended December 31, 2018. Additionally, the Company incurred significant losses to date and losses from operations may continue. The Company incurred net lossesin prior years. As of $15.3 million and $3.3 million for the years ended December 31, 2016 and 2015, respectively. The2019, the Company had an accumulated deficit of $19.9$29.2 million and working capital of $56.8 million as of December 31, 2016.$114.9 million. As of December 31, 2016,2019, the Company had approximately $17.9$28.7 million in cash and cash equivalents, which included $9.8$14.2 million in cash balances held by the Company's Korean subsidiary,its international subsidiaries, and $24.4$38.0 million in aggregate principal amount debt of outstanding borrowings under the Company's short-term debt obligations and the Company's loans from DNI. which $18.3 million was reflected in current liabilities. In addition, the Company had $4.2 million in aggregate borrowing availability under its revolving credit facilities as of December 31, 2016. The2019, the Company had $14.6$4.5 million committed as security for letters of credit under its revolving credit facilities.
The Company’s liquidity could be impacted by:
its vulnerability to adverse economic conditions in its industry or the economy in general;
debt servicing requiring substantial amounts of cash, rather than being available for other purposes, including operations;
its ability to plan for, or react to, changes in its business and industry; and
investor and customer perceptions about its financial stability and limiting its ability to obtain financing or acquire customers.
The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next twelve (12) months will depend on its ability (i) to achieve forecasted results of operations, (ii) access funds approved under existing or new credit facilities and/or raise additional capital through sale of the Company’s common stock to the public, and (iii) effectively manage working capital requirements. If the Company cannot raise additional funds when it needs or wants them, its operations and prospects could be negatively affected. 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. If one or more of these facilitiesfactors do not occur as expected, it could cause the Company to fail to meet its obligations as they come due.
At September 30, 2019, the Company was not in compliance with the maximum leverage ratio financial covenant under the PNC Credit Facilities, which represented an event of default thereunder. On November 8, 2019, the Company obtained a waiver of the foregoing event of default. The Company would have been in further breach of this financial covenant as of December 31, 2016. Due2019. As discussed further in Note 7 to the consolidated financial statements, in March 2020, the Company entered into a term loan with DNI in the amount of short-term debt obligations maturing withinKRW 22.4 billion ($18.5 million). The Company plans to use the next 12 monthsproceeds of such loan to repay in full the PNC Credit Facilities, and terminate the facility. Covenants under the March 2020 DNI loan are less restrictive than under the PNC Credit Facilities.
In December 2019, a strain of coronavirus, now known as COVID-19, was reported to have surfaced in Wuhan, China. Since that time, other countries including the United States, South Korea, Italy and Japan have experienced widespread or sustained transmission of the virus, and there is a risk that the virus will continue to spread to additional countries. The Company relies on suppliers and contract manufacturers located in China and has significant business operations in South Korea and Japan. If the virus continues to spread, the effects of the virus could continue to materially and adversely affect our financial condition, results of operations, and cash flows. Given the ongoing and dynamic nature of the virus and the Company's recurring operating losses,worldwide response related thereto, it is difficult to predict the Company's cash resources may not be sufficient to settle these debt obligations.full impact of the COVID-19 outbreak on our business. The Company's ability to continue asimpact of a "going concern" is dependent on many factors, including, among other things, its ability to comply with the covenants in its existing debt agreements, its ability to cure any defaults that occur under its debt agreements or to obtain waivers or forbearances with respect to any such defaults, and its ability to pay, retire, amend, replace or refinance its indebtedness as defaults occur or as interest and principal payments come due. Although the process of amending, replacing or refinancing the Company’s short-term debt obligations is ongoing and the Company is in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide the Company with the required liquidity to remove the substantial doubt as to its ability to continue ascontinued COVID-19 outbreak could have a going concern. If the Company is unable to amend, replace, refinance its debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, the Company may experience material adverse impactseffect on itsour business, operatingfinancial condition, results of operations, and financial condition.
Based on the Company's current plans and current business conditions, the Company believes that its focused operating
Concentration of the Merger, DNI owned approximately 58% of the outstanding shares of the Company's common stock as of December 31, 2016. Thereafter, for so long as DNI and its affiliates hold shares of the Company's common stock representing at least a majority of the votes, DNI will be able to freely nominate and elect all the members of the Company's board of directors. The directors elected by DNI will have the authority to make decisions affecting the Company's capital structure, including the issuance of additional capital stock or options, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the declaration of dividends. The interests of DNI may not coincide with the interests of the Company's other stockholders or with holders of the Company's indebtedness. DNI’s ability to control all matters submitted to the Company's stockholders for approval limits the ability of other stockholders to influence corporate matters and, as a result,Risk
Financial instruments, which potentially subject the Company may take actions that the Company's other stockholders or holdersto concentrations of our indebtedness do not view as beneficial. See Note 2, Note 13credit risk, consist primarily of cash and Note 14 to the consolidatedcash equivalents, accounts receivable and contract assets. Cash and cash equivalents consist principally of financial statements for additional information.
The accompanying consolidated financial statements do notCompany’s customers include any adjustments that might be necessary if the Company is unable to continue as a going concern.
For the year ended December 31, 2015 and December 31, 2014. In addition, the restatement includes corrections2019, no customer represented 10% or more of certain other balance sheet misclassifications. The Company has concluded that these errors were material to the consolidated financial statements fornet revenue. For the year ended December 31, 20152018, one (1) customer represented 11% of net revenue.
As of December 31, 2019, two (2) customers represented 18% and 11% of net accounts receivable, respectively. As of December 31, 2018, two (2) customers represented 11% and 10% of net accounts receivable, respectively. As of December 31, 2019 and December 31, 2014, and have restated those periods2018, receivables from customers in this filing.
Consolidated Balance Sheet | ||||||||||||
December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Cash and cash equivalents (1) | $ | 10,015 | $ | (920 | ) | $ | 9,095 | |||||
Restricted cash (1) | 3,844 | 920 | 4,764 | |||||||||
Accounts receivable - Trade | 27,084 | (9,372 | ) | 17,712 | ||||||||
Accounts receivable - Related Party | 5,644 | 8,931 | 14,575 | |||||||||
Inventories | 13,900 | 76 | 13,976 | |||||||||
Total current assets | 74,775 | (365 | ) | 74,410 | ||||||||
Total assets | 83,591 | (365 | ) | 83,226 | ||||||||
Other comprehensive loss (1) | (1,775 | ) | 10 | (1,765 | ) | |||||||
Accumulated deficit | (4,222 | ) | (375 | ) | (4,597 | ) | ||||||
Total stockholders' equity | 41,692 | (365 | ) | 41,327 | ||||||||
Total liabilities and stockholders' equity and non-controlling interest | 83,591 | (365 | ) | 83,226 |
Consolidated Statement of Comprehensive Loss | ||||||||||||
December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Net revenue | $ | 127,890 | $ | (13,469 | ) | $ | 114,421 | |||||
Net revenue - Related Party(1) | 12,135 | 12,640 | 24,775 | |||||||||
Total revenue | 140,025 | (829 | ) | 139,196 | ||||||||
Cost of revenue | 92,664 | (11,244 | ) | 81,420 | ||||||||
Cost of revenue - Related Party | 10,722 | 11,168 | 21,890 | |||||||||
Total cost of revenue | 103,386 | (76 | ) | 103,310 | ||||||||
Gross Profit | 36,639 | (753 | ) | 35,886 | ||||||||
Selling, marketing, general and administrative expense (1) | 17,919 | (391 | ) | 17,528 | ||||||||
Operating income (loss) | (2,615 | ) | (362 | ) | (2,977 | ) | ||||||
Other income (expense), net | 279 | (13 | ) | 266 | ||||||||
Income (loss) before income taxes | (2,732 | ) | (375 | ) | (3,107 | ) | ||||||
Net loss | (2,964 | ) | (375 | ) | (3,339 | ) | ||||||
Comprehensive loss | (5,764 | ) | (365 | ) | (6,129 | ) | ||||||
Basic and diluted net loss per share | (0.32 | ) | (0.04 | ) | (0.36 | ) |
Consolidated Statement of Comprehensive Loss | ||||||||||||
December 31, 2014 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Net revenue | $ | 124,648 | $ | (16,014 | ) | $ | 108,634 | |||||
Net revenue - Related Party (1) | 15,226 | 15,534 | 30,760 | |||||||||
Total revenue | 139,874 | (480 | ) | 139,394 | ||||||||
Cost of revenue | 84,598 | (14,237 | ) | 70,361 | ||||||||
Cost of revenue - Related Party | 13,954 | 14,237 | 28,191 | |||||||||
Total cost of revenue | 98,552 | — | 98,552 | |||||||||
Gross Profit | 41,322 | (480 | ) | 40,842 | ||||||||
Selling, marketing, general and administrative expense (1) | 15,314 | (480 | ) | 14,834 |
Consolidated Statement of Cash Flows | ||||||||||||
December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Net cash provided by (used in) operating activities (1) | $ | 4,261 | $ | (10 | ) | $ | 4,251 | |||||
Net cash provided by (used in) investing activities (1) | 294 | (141 | ) | 153 |
Consolidated Statement of Cash Flows | |||||||||
December 31, 2014 | |||||||||
As Previously Reported | Restatement Adjustments | As Restated | |||||||
Net cash provided by (used in) investing activities (1) | 908 | (779 | ) | 129 |
(e) Consolidated Subsidiaries
Details of the Company's consolidated operating subsidiaries as of December 31, 20162019 and December 31, 20152018 are as follows:
|
|
| Percentage of ownership (%) |
| ||||||
|
| Location |
| December 31, 2019 |
|
| December 31, 2018 |
| ||
Dasan Network Solutions, Inc. (U.S. subsidiary) |
| US |
|
| 100 | % |
|
| 100 | % |
Dasan Network Solutions, Inc. (Korean subsidiary) |
| Korea |
|
| 100 | % |
|
| 100 | % |
DZS Japan Inc. |
| Japan |
|
| 100 | % |
|
| 69.06 | % |
DASAN Vietnam Company Limited |
| Vietnam |
|
| 100 | % |
|
| 100 | % |
D-Mobile Limited |
| Taiwan |
|
| 100 | % |
|
| 100 | % |
DASAN India Private Limited |
| India |
|
| 99.99 | % |
|
| 99.99 | % |
Keymile Gmbh |
| Germany |
|
| 100 | % |
|
| — | % |
Percentage of ownership (%) | ||||||||
Location | December 31, 2016 | December 31, 2015 | ||||||
Dasan Network Solutions, Inc. (U.S. subsidiary) | US | 100 | % | 100 | % | |||
Dasan Network Solutions, Inc. (Korean subsidiary) | Korea | 100 | % | 100 | % | |||
DASAN Network Solutions Japan Co., Ltd. (formerly: HandySoft Japan Co., Ltd.) | Japan | 69.06 | % | 50.25 | % | |||
DASAN Vietnam Co., Ltd | Vietnam | 100 | % | N/A |
(f) Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of AmericaU.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.
(g) 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 filedexpects 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 and customer support. Revenue from product sales is recognized at a Certificate of Amendment with the Delaware Secretary of State to amend the Company's Restated Certificate of Incorporation, which amendment effected a one-for-five reverse stock splitpoint in time when control of the Company's common stock and reducedgoods is transferred to the authorized sharescustomer, generally occurring upon shipment or delivery dependent upon the terms of the Company's common stock from 180 million to 36 million. As a resultunderlying contract. Most of the reverse stock split, the number of shares of the Company’s common stock then issued and outstanding was reduced from approximately 81.9 million to approximately 16.4 million. References to shares of the Company's common stock, stock options (and associated exercise price) and restricted stock units in this Annual Report on Form 10-K are provided on a post-reverse stock split basis.
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 (1) to five (5) 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, channel inventory levels, 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 has a right to consideration and records accounts receivable when it has an unconditional right to consideration. The Company records contract liabilities when cash payments are received (or unconditional rights to receive cash) in advance of fulfilling its performance obligations.
The Company’s payment terms specifiedvary 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 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 arrangement, whenassurance 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 in accordance with applicable guidance. Optional extended warranties, 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 isand recognized prior to obtainingratably over the signed acceptance certificate. When collectability is not reasonably assured, revenue is recognized when cash is collected.
The Company makes certain salesrecords estimated costs related to standard warranties upon product distributors. These customers are given certain privileges to return a portionshipment or upon identification of inventory. Return privileges generally allow distributors to return inventory based on a percent of purchases made within 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 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
Applying a practical expedient, the Company recognizes the incremental costs of obtaining contracts, which primarily consist of sales commissions, as sales and marketing expense, when incurred if the amortization period of time. the assets that otherwise would have been recognized is one year or less. If the service period, inclusive of any anticipated renewal, is longer than a year, the incremental direct costs are capitalized and amortized over the period of benefit. As of December 31, 2019 and 2018, such capitalized costs were not significant.
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, 2019 and 2018, such financing components were not significant.
Bill-and-hold
The Company recognizes revenue from the sale of products when control has passed to the customer, which is based on salesthe shipping terms of the arrangement, when significant risk and rewards have transferred to distributorsthe customer. In some instances, the customer agrees to buy product from the Company but requests delivery at a later date, commonly known as bill-and-hold arrangements. For these transactions, the Company deems that have contractual return rightscontrol passes to the customer when the product is ready for delivery. The Company views products readiness for delivery when a signed agreement is in place, the transaction is billable, and the customer has significant risk and rewards for the products, the ability to direct the assets, the products have been sold byset aside specifically for the distributors, unless there is sufficient customer, specific sales and sales returns historycannot be redirected to support revenue recognition upon shipment. In those instancesanother customer.
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 upon shipment to distributors, the Company uses historical rates of return from the distributors to provide for estimated product returns.
Unsatisfied Performance Obligations
The Company derives revenue primarily from stand-alone salesdoes not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The majority of the Company's performance obligations in its products. In certain cases,contracts with customers relate to contracts with duration of less than one year. The transaction price allocated to unsatisfied performance obligations included in contracts with duration of more than 12 months is reflected in contract liabilities – non-current on the consolidated balance sheet.
Disaggregation of Revenue
The following table presents the revenues by source (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Revenue by products and services: |
|
|
|
|
|
|
|
|
Products |
| $ | 286,292 |
|
| $ | 269,269 |
|
Services |
|
| 20,590 |
|
|
| 13,079 |
|
Total |
| $ | 306,882 |
|
| $ | 282,348 |
|
Information about the Company’s products are sold along with services, which include education, training, installation, and/or extended warranty services. As such, some of the Company’s sales have multiple deliverables. The Company’s productsnet revenue for North America and services qualify as separate units of accountinginternational markets for 2019 and are deemed to be non-contingent deliverables as the Company’s arrangements typically do not have any significant performance, cancellation, termination and refund type provisions. Products are typically considered delivered upon shipment. Revenue from services2018 is recognized ratably over the period during which the services are to be performed.summarized below (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Revenue by geography: |
|
|
|
|
|
|
|
|
United States |
| $ | 36,383 |
|
| $ | 50,795 |
|
Canada |
|
| 4,690 |
|
|
| 4,413 |
|
Total North America |
|
| 41,073 |
|
|
| 55,208 |
|
Latin America |
|
| 23,774 |
|
|
| 27,596 |
|
Europe, Middle East, Africa |
|
| 78,375 |
|
|
| 34,741 |
|
Korea |
|
| 79,124 |
|
|
| 76,006 |
|
Other Asia Pacific |
|
| 84,536 |
|
|
| 88,797 |
|
Total International |
|
| 265,809 |
|
|
| 227,140 |
|
Total |
| $ | 306,882 |
|
| $ | 282,348 |
|
(h) Allowances for Sales Returns and Doubtful Accounts
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 allowance against accounts receivable.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.
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 tounder 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 collection trends. Additional allowances may be required in the future if the liquidity or financial conditionscondition of itsthe Company's customers deteriorate,deteriorates, resulting in impairment indoubts about their ability to make payments.
Activity under the Company’s allowance for doubtful accounts is comprised as follows (in thousands):
|
| December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Balance at beginning of year |
| $ | 328 |
|
| $ | 1,246 |
|
Charged to expense |
|
| 155 |
|
|
| 20 |
|
Reversal of expense |
|
| — |
|
|
| (11 | ) |
Utilization/write offs/exchange rate differences |
|
| (90 | ) |
|
| (927 | ) |
Balance at end of year |
| $ | 393 |
|
| $ | 328 |
|
Activity under the Company’s allowance for sales returns and doubtful accounts wasis comprised as follows (in thousands):
|
| December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Balance at beginning of year |
| $ | 706 |
|
| $ | 445 |
|
Charged to revenue |
|
| 370 |
|
|
| 1,343 |
|
Utilization/write offs/exchange rate differences |
|
| (733 | ) |
|
| (1,082 | ) |
Balance at end of year |
| $ | 343 |
|
| $ | 706 |
|
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Balance at beginning of year | $ | 868 | $ | 136 | $ | 589 | |||||
Charged to revenue | 466 | 767 | — | ||||||||
Utilization/write offs | (149 | ) | — | (450 | ) | ||||||
Exchange differences | (42 | ) | (35 | ) | (3 | ) | |||||
Balance at end of year | $ | 1,143 | $ | 868 | $ | 136 |
(i) Inventories
Inventories are stated at the lower of cost or market,net realizable value, with cost being determined using the first-in, first-out (FIFO) method. 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.
(j) 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 loss,income (loss,) which is reflected as a separate component of stockholders’ equity. Gains and losses on foreign currency transactions are included in other income (expense) in the accompanying consolidated statement of comprehensive income (loss).
(k) Comprehensive Income (Loss)
There have been no items reclassified out of accumulated other comprehensive income (loss) and into net income (loss). The Company’s other comprehensive lossincome (loss) for the years ended December 31, 2016, 2015,2019 and 20142018 is comprised of only foreign currency translations.
(l) Property, Plant and money market accounts. Cash and cash equivalents are principally held with various domestic financial institutions with high credit standing.
Property, and Equipment
Asset Category | Useful Life | |
Furniture and fixtures | 3 to 4 years | |
Machinery and equipment | 3 to | |
Computers and software | 3 years | |
Leasehold improvements | Shorter of remaining lease term or estimated useful lives |
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.
(m) 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 based on expected undiscounted cash flows attributable to that asset or asset group.recoverable. 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. 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.
The Company estimates the fair value of its long-lived assets based on a combination of market information primarily obtained from third-party quotes and online markets. In the application of the 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. During the years ended December 31, 2016, 2015, and 2014, the Company recorded no impairment expenses related to the impairment of long-lived assets.
(n) Goodwill and Other Acquisition-Related Intangible Assets
Goodwill and other acquisition-related intangible assets not subject to amortization are tested annually for impairment using a two-step approach, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. In the application of the 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. The Company's future operating performance will be impacted by the future amortization of intangible assets, potential expenses related to purchased in-process research and development for future acquisitions, and potential impairment expenses related to goodwill. Accordingly, the allocation of the purchase price of the acquired companies to intangible assets and goodwill has a significant impact on the Company's future operating results. The allocation process requires management to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for these cash flows. Should different conditions prevail, the Company would have to perform an impairment review that might result in material write-downs of intangible assets and/or goodwill. Other factors
Factors the Company considers important which could trigger an impairment review, include, but are not limited to, significant changes in the manner of use of its acquired assets, significant changes in the strategy for ourthe 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. 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. DueAn impairment loss is recognized to uncertain market conditionsthe 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 potential changes inresulting cash flows and judgments on discount rates and other variables. Actual future results and other assumed variables could differ from these estimates.
During 2019, the Company's strategy and product portfolio, it is possibleCompany recorded Goodwill of $1.0 million related to the acquisition of Keymile. In performing the annual impairment evaluation, utilizing a present value cash flow model to determine the fair value of the reporting unit, the Company determined that forecasts usedthe goodwill related to support its intangible assets may change inKeymile was impaired, due to the future, which could result in additional non-cash expenses that would adversely affect its resultsfinancial performance on the reporting unit. The Company recognized an impairment loss of operations and financial condition.
(o) Business Combination
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.
(p) Stock-Based Compensation
The Company amortizes the values 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 statement of comprehensive income (loss). The Company accounts for forfeitures as they occur.
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, actual and projected employee option exercise behaviors, 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 U.S.United States Treasury securities.
(q) 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. Based on the cumulative losses incurred, the Company has recorded a full valuation allowance against its net deferred tax assets at December 31, 2016 due to the significant uncertainty regarding whether the deferred tax assets will be realized.
(r) Net Income (Loss) per Share Attributable to DASAN Zhone Solutions, Inc.
Basic net income (loss) per share attributable to DASAN Zhone Solutions, Inc. is computed by dividing the net income (loss) attributable to DASAN Zhone Solutions, Inc. for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc. 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 equivalent sharesstock issuable upon the exercise of stock options.
(s) Research and Development Cost
Costs related to research and development, which primarily consists of labor and benefits, supplies, facilities, consulting, and outside service fees, are expensed as incurred.
(t) Cash and Cash Equivalents
Cash and cash equivalents consist of one year,cash and short-term investments (if any) with the option to purchase an extended warrantyoriginal maturities of up to five years, depending on the product type. The Company recognizes estimated costs related to warranty activities 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 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 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.
(u) Recent Accounting Pronouncements
Recent Accounting Pronouncements Adopted
Lease Accounting
In February 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU"Codification 842, Leases (“ASC 842”) No. 2014-09, Revenue from Contracts with Customers,, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. ASC 842 requires that lease arrangements longer than 12 months’ result in an entity recognizing an asset and liability, with respect to such lease arrangement, among other changes.
The Company adopted the new standard on January 1, 2019, using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of this adoption. ASC 842 sets out the principles for the recognition, measurement, presentation and disclosure of leases.
The Company has elected to use a certain package of practical expedients permitted under the transition guidance within ASC 842. Those practical expedients are as follows:
The Company did not reassess (i) whether expired or existing contracts contain leases under the new definition of a lease; (ii) lease classification for expired or existing leases; and (iii) whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
The Company did not reassess a lease whose term is 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise.
The Company did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
For all asset classes, the Company elected to not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less.
For all asset classes, the amount of revenueCompany elected to not separate non-lease components from lease components to which it expects to be entitledthey relate and has accounted for the transfercombined lease and non-lease components as a single lease component.
The Company applies significant judgment in considering all relevant factors that create an economic benefit (e.g., contract-based, asset-based, entity-based, and market-based, among others) as of promised goodsthe commencement date in determining the initial lease term and future lease payments. For example, the Company exercises judgment in determining whether renewal periods will be exercised during the initial measurement process. If the Company believes it will exercise the renewal option, and the lease payments associated with the renewal periods are known or servicescalculable, such renewal lease payments would be included in the initial measurement of the lease liability. If the Company believes that it will exercise the renewal period and the renewal
payments are unknown or not calculable, the renewal term will not be included until they become known or calculable at which time the Company would remeasure the remaining lease payments similar to customers. The ASU will replace most existing revenuea lease modification.
Adoption of ASC 842 resulted in the balance sheet recognition guidanceof right of use assets and lease liabilities of approximately $22.5 million as of January 1, 2019. Adoption of ASC 842 did not materially impact the Company’s consolidated statements of comprehensive income (loss), stockholders’ equity and non-controlling interest, and cash flows. See Note 13 in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. notes to consolidated financial statements.
Income Tax Effects within Accumulated Other Comprehensive Income
In August 2015,February 2018, the FASB issued ASU 2015-14, which defers2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the effective dateTax Cuts and Jobs Act (the “Tax Act”). The adoption of this standard on January 1, 2019 did not have an impact on the guidanceCompany’s consolidated financial statements.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost. The ASU requires the Company to disaggregate the service cost component from the other components of net periodic benefit costs and requires the Company to present the other components of net periodic benefit cost in ASU No. 2014-09, Revenue from Contracts with Customer, for all entities by one year. With the deferral, the newother income, net. The standard is effective for annual and interim periods beginning after December 31, 2017, and retrospective application is required. The Company adopted this guidance during the Company on January 1, 2018. Early adoptionfirst quarter of 2019 without any retrospective adjustments since the underlying pension obligations were acquired through the Keymile Acquisition in 2019. The interest cost, which is permitted, but not before the original effective dateonly component of January 1, 2017. net periodic post-retirement cost, is recognized in Other income (loss), net in the consolidated statement of comprehensive income (loss).
Other recent accounting pronouncements
In May 2016,December 2019, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-ScopeNo. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. We have not early adopted this ASU for 2019. The ASU is currently not expected to have a material impact on the Company’s consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements and Practical Expedients,to Topic 326, Financial Instruments-Credit Losses, which provides clarification on how to assess collectibility, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of transitionclarifies or addresses specific issues about certain aspects of ASU 2014-09.2016-13. ASU 2019-11 clarifies that to use the practical expedient, entities must reasonably expect the borrower “to continue to replenish the collateral to meet the requirements of the contract.” In addition, if entities have elected the practical expedient (i.e., they reasonably expect the borrower to continue to replenish the collateral to meet the requirements of the contract) and the fair value of the collateral is less than the amortized cost of the financial asset, they should estimate expected credit losses on the portion of the amortized cost basis that is unsecured (i.e., the amount by which the amortized cost basis of the financial asset exceeds the fair value of the collateral). The expected credit loss is limited to the difference between the amortized cost basis of the financial asset and the fair value of the collateral. Effective Dates for entities that have not yet adopted ASU 2016-13, the amendments in ASU 2019-11 are effective date of this updated guidance for the Company ison the same date as those in ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-11 are effective date of ASU 2014-09, which is January 1, 2018. The Company does not plan to early adopt this guidance. for fiscal years beginning after December 15, 2019, and interim periods therein. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements.
In July 2015,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. 2015-11, Simplifying the Measurement of Inventory, which requires an entity2018-19, Codification Improvements to measure inventory at the lower of cost and net realizable value. The guidance does not apply to inventory that is measured using last-in, first-out ("LIFO") or the retail inventory method. The guidance applies to all other inventory, which includes inventory that is measured using first-in, first-out ("FIFO") or average cost. The guidance is effective for the Company on January 1, 2017, and will be adopted accordingly.Topic 326, Financial Instruments - Credit Losses, ASU No. 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this standard will have no impact2019-04, 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 Company's consolidated financial statements.
In March 2016,November 2019, the FASB issued ASU 2016-09, Improvements2019-08, Compensation - Stock Compensation (ASC 718). This ASU requires an entity measure and classify share-based payment awards granted to Employee Share-Based Payment Accounting, which requires entities to simplify several aspectsa customer by applying the guidance in ASC 718. The amount of the accounting for share-based payment transactions, including income tax consequences, classificationaward that is recorded as a reduction of awards as either equity or liabilities, and classification on statements of cash flows.the transaction price is required to be measured at the grant-date fair value in accordance with ASC 718. The guidance isamendments in this update are effective for the Company on January 1, 2017,for annual and has been adoptedinterim periods beginning in fiscal 2020. The Company does not expect the first quarter of 2017. The adoption of this standard had no material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other Internal-Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement. The update reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for annual and interim periods beginning after December 15, 2019, and retrospective or prospective application is permitted. The Company is not able to quantify or cannot reasonably estimate quantitative information related tocurrently evaluating the impact of the new standardadoption of this ASU, but it is not expected to have a material effect on its consolidated financial statements at this time.
In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The updated guidance is effective for the Company on January 1, 2020, and will be adopted accordingly. Early adoption is permitted. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.
On August 28, 2018, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation2018-13, Fair Value Measurement (Topic 718): Scope of modification accounting. The purpose of the amendment is820), which removes, modifies, and adds certain disclosure requirements related to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.fair value measurements in ASC 820. The updated guidance is effective for the Companyannual and interim periods beginning on January 1, 2018.after December 15, 2019. Early adoption is permitted. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The updated guidance is effective for the Company acquired DNS throughon January 1, 2021, with early adoption permitted. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements.
(2) Business Combinations
Keymile Acquisition
On January 3, 2019, ZTI Merger ofSubsidiary III Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“ZTI”), acquired all of the outstanding shares of Keymile GmbH (“Keymile”), a limited liability company organized under the laws of Germany, from Riverside KM Beteiligung GmbH (“Riverside”), a limited liability company organized under the laws of Germany, pursuant to a share purchase agreement (the “Keymile Acquisition”).
Keymile is a leading solution provider and manufacturer of telecommunication systems for broadband access. The Company believes Keymile strengthens its portfolio of broadband access solutions, which now includes a series of multi-service access platforms for FTTx network architectures, including ultra-fast broadband copper access based on VDSL/Vectoring and G. Fast technology.
The aggregate cash purchase price paid for all of the shares of Keymile and certain of its subsidiaries, was €10.25 million (approximately $11.8 million), prior to adjustment for the lockbox mechanism described below. The Company also assumed pension obligations of approximately $16.2 million. Following the closing of the Keymile Acquisition, Keymile became the Company’s wholly owned subsidiary. The Keymile Acquisition agreement also provided for a lockbox mechanism such that normal operations were observed by Keymile management and any excess cash flows generated from operating activities for the period from October 1, 2018 to December 31, 2018 remained with Keymile following the closing, with the Company as the beneficiary, as the purchaser of Keymile. At December 31, 2018, cash received from the lockbox mechanism amounted to $2.5 million, resulting in a final adjusted acquisition price of $9.3 million.
On October 1, 2018, as a condition for the Keymile Acquisition, Riverside extended a €4.0 million ($4.4 million, which represents the cash and into DNS,cash equivalents and short-term debt, in the “Allocation of Purchase Consideration” table below) working capital loan to Keymile. The working capital loan bore interest at a rate of 3.5% per annum and was repaid during 2019.
A summary of the final estimated purchase price allocation to the fair value of assets acquired and liabilities assumed is as follows (in thousands):
Purchase consideration |
|
|
|
|
Cash consideration |
| $ | 11,776 |
|
Working capital adjustment: cash received from lockbox mechanism |
|
| (2,497 | ) |
Adjusted purchase consideration |
| $ | 9,279 |
|
The following summarizes the final estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the Keymile Acquisition (in thousands):
Allocation of purchase consideration |
|
|
|
|
Current assets |
|
|
|
|
Cash and cash equivalents |
| $ | 4,619 |
|
Accounts receivable - trade, net |
|
| 6,820 |
|
Other receivables |
|
| 798 |
|
Inventories |
|
| 9,943 |
|
Property, plant and equipment |
|
| 983 |
|
Other assets |
|
| 3,698 |
|
Right-of-use assets from operating leases |
|
| 5,011 |
|
Intangible assets |
|
| 10,047 |
|
Accounts payable - trade |
|
| (3,303 | ) |
Short-term debt |
|
| (4,582 | ) |
Contract liabilities |
|
| (364 | ) |
Accrued liabilities |
|
| (3,651 | ) |
Operating lease liabilities - current |
|
| (823 | ) |
Deferred tax liabilities |
|
| (425 | ) |
Pension obligations |
|
| (16,191 | ) |
Operating lease liabilities - non-current |
|
| (4,188 | ) |
Other long term liabilities |
|
| (116 | ) |
Goodwill |
|
| 1,003 |
|
Total purchase consideration |
| $ | 9,279 |
|
The purchase price allocation resulted in the recognition of goodwill of approximately $1.0 million. The goodwill was the result of the purchase price paid for the Keymile Acquisition (adjusted for amounts received under the lockbox mechanism) exceeding the fair value of the identifiable net assets acquired.
The estimated weighted average useful lives of the acquired property, plant and equipment is 5 years. Depreciation is calculated using the straight-line method.
The following table represents the final estimated fair value and useful lives of identifiable intangible assets acquired:
|
| Estimated Fair Value (in thousands) |
|
| Estimated Useful Life | |
Intangible assets acquired |
|
|
|
|
|
|
Technology - developed core |
| $ | 5,040 |
|
| 5 years |
Customer relationships |
|
| 3,632 |
|
| 5 years |
Trade name |
|
| 1,375 |
|
| 5 years |
Total intangible assets |
| $ | 10,047 |
|
|
|
As of the valuation date, there was value attributable to Keymile’s existing customer relationships. Keymile’s key customer base is made up of independent telecommunication service providers and network operators, a base of customers that have seen growth since 2012. Keymile is seen as a market leader and historically has had low customer attrition. In addition, switching costs are considered to be high due to the disruption of switching platforms as well as the additional training necessary. The Company valued the customer relationships using the Income Approach, specifically the Multi-Period Excess Earnings Method (“MPEEM”).
The Company utilized the Relief from Royalty Method (“RFRM”) to value the tradename and developed technology. The RFRM assumes that the value of the asset equals the amount a third party would pay to use the asset and capitalize on the related benefits of the asset. Therefore, a revenue stream for the asset is estimated, and then an appropriate royalty rate is applied to the forecasted revenue to estimate the pre-tax income associated with DNS survivingthe asset. The pre-tax income is then tax-effected to estimate the after-tax net income associated with the asset. Finally, the after tax net income is discounted to the present value using an appropriate rate of return that considers both the risk of the asset and the associated cash flow estimates.
Pro Forma Financial Information
The unaudited pro forma information for the period set forth below gives effect to the Keymile Acquisition as if it had occurred as of January 1, 2018. The unaudited pro forma financial information has been prepared by management for illustrative purposes only and does not purport to represent what the results of operations of the Company would have been if the Keymile Acquisition had occurred on January 1, 2018 or what such results will be for any future periods. The unaudited pro forma financial information is based on estimates and assumptions and on the information available at the time of the preparation thereof. These estimates and assumptions may change, be revised or prove to be materially different, and the estimates and assumptions may not be representative of facts existing at the time of the Keymile Acquisition. The pro forma adjustments primarily relate to acquisition related costs, amortization of acquired intangible assets and interest expense related to financing arrangements.
Below is the pro forma financial information (in thousands), unaudited:
|
| Year Ended December 31, 2018 |
| |
Pro forma net revenues |
| $ | 332,571 |
|
Pro forma net income attributable to DASAN Zhone Solutions, Inc. |
|
| 2,480 |
|
Below is the financial information for Keymile (in thousands):
|
| Year Ended December 31, 2019 |
| |
Net revenues |
| $ | 36,390 |
|
Net loss attributable to DASAN Zhone Solutions, Inc. |
|
| (13,072 | ) |
Acquisition of the Non-controlling Interest in DZS Japan
On July 31, 2019, the Company acquired the remaining 30.94% non-controlling interest of DZS Japan, Inc. (“DZS Japan”), and DZS Japan became a wholly owned subsidiary of the Company. The Merger combines leading technology platforms withCompany acquired the remaining interest in DZS Japan for total cash consideration of $950,000, consisting entirely of payments to the former shareholder (Handysoft). This transaction resulted in a broadened customer base.
Shares | Estimated Fair Value | ||||||
Shares of Legacy Zhone stock as of September 8, 2016 (1) | 6,874 | $ | 40,902 | ||||
Legacy Zhone stock options (1) | 198 | 540 | |||||
Total purchase consideration | $ | 41,442 |
Preliminary Fair Value as of September 9, 2016 | Correction of Errors (1) | Fair Value as of December 31, 2016 | ||||||||||
Cash and cash equivalents | $ | 7,013 | $ | — | $ | 7,013 | ||||||
Accounts receivable | 18,847 | (337 | ) | 18,510 | ||||||||
Inventory | 16,456 | — | 16,456 | |||||||||
Prepaid expenses and other current assets | 2,436 | (245 | ) | 2,191 | ||||||||
Property and equipment | 4,339 | — | 4,339 | |||||||||
Other assets | 125 | — | 125 | |||||||||
Identifiable intangible assets | 10,479 | — | 10,479 | |||||||||
Goodwill | 2,820 | 464 | 3,284 | |||||||||
Accounts payable | (11,021 | ) | — | (11,021 | ) | |||||||
Accrued and other liabilities | (7,272 | ) | 183 | (7,089 | ) | |||||||
Other long-term liabilities | (2,780 | ) | (65 | ) | (2,845 | ) | ||||||
Total Indicated Fair Value of Assets | $ | 41,442 | $ | — | $ | 41,442 |
Useful life (in Years) | Fair Value | |||||
Developed technology | 5 | $ | 3,060 | |||
Customer relationships | 10 | 5,240 | ||||
Backlog | 1 | 2,179 | ||||
$ | 10,479 |
Years Ended December 31, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Pro forma total net revenue | $ | 202,321 | $ | 240,342 | ||||
Pro forma net loss | (29,514 | ) | (11,369 | ) |
(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. |
The following financial instruments arewere not measured at fair value on the Company’s consolidated balance sheet as of December 31, 20162019 and 2015,2018, but require disclosure of their fair values: cash and cash equivalents, short-term investments,restricted cash, accounts receivable,and other receivables, accounts payable and debt. The carrying values of financial instruments such as cash and cash equivalents, short-term investments,restricted cash, accounts receivableand other receivables and accounts payable approximate their fair values based on their short-term nature. The carrying value of the Company's debt approximates their fair values based on the current rates available to the Company for debt of similar terms and maturities.
All derivatives are entered into and exited at the end of the period, thus there is no fair value associated with any outstanding derivatives at December 31, 2018. No such instruments were in place during 2019.
(4) Cash and Cash Equivalents and Restricted Cash
As of December 31, 20162019 and December 31, 2015,2018, the Company's cash and cash equivalents comprisedconsisted of financial deposits. Restricted cash comprisedconsisted primarily of cash restricted for research and development activitiesperformance bonds, warranty bonds and collateral for borrowings.
(5) Balance Sheet Detail
Balance sheet detail as of December 31, 20162019 and 20152018 is as follows (in thousands):
Inventories
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
| $ | 15,774 |
|
| $ | 15,688 |
|
Work in process |
|
| 1,458 |
|
|
| 2,429 |
|
Finished goods |
|
| 18,207 |
|
|
| 15,751 |
|
|
| $ | 35,439 |
|
| $ | 33,868 |
|
2016 | 2015 | ||||||
(As restated) | |||||||
Inventories: | |||||||
Raw materials | $ | 13,547 | $ | 5,519 | |||
Work in process | 3,705 | 2,074 | |||||
Finished goods | 13,780 | 6,383 | |||||
$ | 31,032 | $ | 13,976 |
Inventories provided as collateral for borrowings from Export-Import Bank of Korea amounted to $14.4$6.7 million and $9.5 million as of December 31, 2016.
2016 | 2015 | ||||||
Property and equipment, net: | |||||||
Furniture and fixtures | $ | 20,040 | $ | 20,456 | |||
Machinery and equipment | 4,530 | 3,173 | |||||
Leasehold improvements | 3,573 | 688 | |||||
Computers and software | 411 | 16 | |||||
Other | 922 | 438 | |||||
29,476 | 24,771 | ||||||
Less accumulated depreciation and amortization | (22,922 | ) | (22,121 | ) | |||
Less government grants | (266 | ) | (399 | ) | |||
$ | 6,288 | $ | 2,251 |
Property, plant and equipment
|
|
|
| |||||
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Property, plant and equipment, net: |
|
|
|
|
|
|
|
|
Furniture and fixtures |
| $ | 10,803 |
|
| $ | 8,029 |
|
Machinery and equipment |
|
| 2,550 |
|
|
| 3,553 |
|
Leasehold improvements |
|
| 4,267 |
|
|
| 3,715 |
|
Computers and software |
|
| 1,990 |
|
|
| 922 |
|
Other |
|
| 660 |
|
|
| 982 |
|
|
|
| 20,270 |
|
|
| 17,201 |
|
Less: accumulated depreciation and amortization |
|
| (13,130 | ) |
|
| (11,271 | ) |
Less: government grants |
|
| (371 | ) |
|
| (412 | ) |
|
| $ | 6,769 |
|
| $ | 5,518 |
|
Depreciation expense associated with property, plant and equipment was $1.3 million, $1.4$2.0 million and $1.9$1.6 million for the years ended December 31, 2016, 20152019 and 2014,2018, respectively.
The Company receives grants from thevarious government entities mainly to support capital expenditures. 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.
Accrued and other liabilities
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Accrued and other liabilities (in thousands): |
|
|
|
|
|
|
|
|
Accrued warranty |
| $ | 1,611 |
|
| $ | 1,319 |
|
Accrued compensation |
|
| 1,618 |
|
|
| 2,461 |
|
Other accrued expenses |
|
| 9,615 |
|
|
| 7,737 |
|
|
| $ | 12,844 |
|
| $ | 11,517 |
|
2016 | 2015 | ||||||
Accrued and other liabilities (in thousands): | |||||||
Accrued warranty | $ | 878 | $ | 441 | |||
Accrued compensation | 2,834 | — | |||||
Other Accrued expenses | 4,451 | 2,541 | |||||
$ | 8,163 | $ | 2,982 |
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 (in thousands):
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Balance at beginning of the year |
| $ | 1,319 |
|
| $ | 931 |
|
Charged to cost of revenue |
|
| 967 |
|
|
| 1,171 |
|
Claims and settlements |
|
| (903 | ) |
|
| (791 | ) |
Warranty liability assumed from Keymile acquisition |
|
| 230 |
|
|
| — |
|
Foreign exchange impact |
|
| (2 | ) |
|
| 8 |
|
Balance at end of the year |
| $ | 1,611 |
|
| $ | 1,319 |
|
Contract Asset
The balance of Contract Assets, current at December 31, 2019 was $16.7 million, which increased from $11.4 million as of December 31, 2018. The increase in contract assets by $5.3 million was primarily due to new customer contracts entered into during the year of $6.5 million, partially offset by billed products and services during the year of $1.2 million.
Contract Liability
The balance of Contract Liabilities, current at December 31, 2019 was $3.6 million, comprising of Products and services contract liability of $2.7 million and Extended warranty contract liability of $0.9 million. The balance of Contract Liabilities, current at December 31, 2018 was $8.5 million.
The balance of Contract Liabilities, long-term at December 31, 2019 was $3.2 million, comprising of Products and services contract liability of $1.0 million and Extended warranty contract liability of $2.2 million. The balance of Contract Liabilities, current at December 31, 2018 was $1.8 million.
During the year ended December 31, 2019, the Company recorded $2.5 million in Net Revenue, related to Contract Liabilities as of December 31, 2018.
Accrued Restructuring Costs
The Company established a restructuring plan in September 2019 to further align its business resources based on an analysis of the current business conditions. The Company incurred restructuring and other charges of approximately $4.9 million for the year ended December 31, 2019, consisting primarily of severance and other termination related benefits of $3.9 million, and an impairment charge of $1.0 million related to an Right-of-use asset from an operating lease. Severance and other termination related benefits are as follows (in thousands):
Severance and Related Benefits | |||
Balance as of December 31, 2018 | $ | — | |
Restructuring charges for the year | 3,930 | ||
Cash payments | (3,930 | ) | |
Balance as of December 31, 2019 | $ | — |
Balance at December 31, 2013 | $ | 312 | |
Charged to cost of revenue | 401 | ||
Claims and settlements | (324 | ) | |
Balance at December 31, 2014 | 389 | ||
Charged to cost of revenue | 578 | ||
Claims and settlements | (526 | ) | |
Balance at December 31, 2015 | 441 | ||
Balance assumed with the Merger | 652 | ||
Charged to cost of revenue | 717 | ||
Claims and settlements | (925 | ) | |
Foreign exchange impact | (7 | ) | |
Balance at December 31, 2016 | $ | 878 |
(6) Goodwill and Intangible Assets
Goodwill as of December 31, 20162019 and December 31, 20152018 was as follows (in thousands):
| As of December 31, |
| ||||||
|
| 2019 |
|
| 2018 |
| ||
Balance at beginning of the year |
| $ | 3,977 |
|
| $ | 3,977 |
|
Goodwill from Keymile acquisition |
|
| 1,003 |
|
|
| — |
|
Less: Impairment of Keymile acquisition goodwill |
|
| (1,003 | ) |
|
| — |
|
Balance at end of the year |
| $ | 3,977 |
|
| $ | 3,977 |
|
December 31, 2016 | December 31, 2015 | ||||||
Beginning balance | $ | 693 | $ | — | |||
Goodwill from Merger | 2,820 | 693 | |||||
Correction of errors | 464 | — | |||||
Less: accumulated impairment | — | — | |||||
Ending balance | $ | 3,977 | $ | 693 |
During 2019, the Company recorded Goodwill of $1.0 million related to the acquisition of Keymile. Refer to Note 2 Business Combinations, for further detail. In performing the annual impairment evaluation, utilizing a present value cash flow model to determine the fair value of the reporting unit, the Company determined that the goodwill related to Keymile was impaired, due to the financial performance of the reporting unit. The Company did not recognizerecognized an impairment loss of $1.0 million on goodwill duringfor the yearsyear ended December 31, 2016, 20152019 and 2014.
Intangible assets as of December 31, 20162019 and December 31, 20152018 were as follows (in thousands):
| As of December 31, 2019 |
| ||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
| |||
Developed technology |
| $ | 7,994 |
|
| $ | (3,027 | ) |
| $ | 4,967 |
|
Customer relationships |
|
| 8,795 |
|
|
| (2,458 | ) |
|
| 6,337 |
|
Trade name |
|
| 1,346 |
|
|
| (269 | ) |
|
| 1,077 |
|
Total intangible assets, net |
| $ | 18,135 |
|
| $ | (5,754 | ) |
| $ | 12,381 |
|
During 2019 the Company recorded $5.0 million, $3.6 million and $1.4 million in Developed technology, Customer relationships and Trade names, respectively, related to the acquisition of Keymile. Refer to Note 2 Business Combinations, for further detail.
|
| As of December 31, 2018 |
| |||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
| |||
Developed technology |
| $ | 3,060 |
|
| $ | (1,428 | ) |
| $ | 1,632 |
|
Customer relationships |
|
| 5,240 |
|
|
| (1,223 | ) |
|
| 4,017 |
|
Backlog |
|
| 2,179 |
|
|
| (2,179 | ) |
|
| - |
|
Total intangible assets, net |
| $ | 10,479 |
|
| $ | (4,830 | ) |
| $ | 5,649 |
|
December 31, 2016 | ||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Government Grant | Net | |||||||||||||
Developed Technology | $ | 3,060 | $ | (203 | ) | $ | — | $ | 2,857 | |||||||
Customer Relationships | 5,240 | (321 | ) | — | 4,919 | |||||||||||
Backlog | 2,179 | (1,236 | ) | — | 943 | |||||||||||
Other | 105 | (34 | ) | (23 | ) | 48 | ||||||||||
Total intangible assets, net | $ | 10,584 | $ | (1,794 | ) | $ | (23 | ) | $ | 8,767 |
December 31, 2015 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Government Grant | Net | |||||||||
Other | 40 | (37 | ) | — | 3 | |||||||
Total intangible assets, net | 40 | (37 | ) | — | 3 |
Amortization expense associated with intangible assets for the yearyears ended December 31, 20162019 and 20152018 amounted to $1.8$3.1 million, and $10.0 thousand,$1.1 million, respectively. As of December 31, 2016,2019, expected future amortization expense for the years indicated was as follows (in thousands):
Period | Expected Amortization Expense |
| |
2020 | $ | 3,103 |
|
2021 |
| 2,899 |
|
2022 |
| 2,491 |
|
2023 |
| 2,491 |
|
2024 |
| 524 |
|
Thereafter |
| 873 |
|
Total | $ | 12,381 |
|
Period | Expected Amortization Expense | |||
2017 | $ | 2,087 | ||
2018 | 1,145 | |||
2019 | 1,166 | |||
2020 | 1,136 | |||
2021 | 933 | |||
Thereafter | 2,300 | |||
Total | $ | 8,767 |
(7) Debt
The following tables summarize the Company’s debt (in thousands):
|
| As of December 31, 2019 |
| |||||||||
|
| Short-term |
|
| Long-term |
|
| Total |
| |||
PNC Credit Facilities |
| $ | 2,500 |
|
| $ | 10,625 |
|
| $ | 13,125 |
|
Bank and Trade Facilities - Foreign Operations |
|
| 15,779 |
|
|
| — |
|
|
| 15,779 |
|
Related party |
|
| — |
|
|
| 9,096 |
|
|
| 9,096 |
|
|
|
| 18,279 |
|
|
| 19,721 |
|
|
| 38,000 |
|
Less: unamortized deferred financing costs on the PNC Bank Facility |
|
| (795 | ) |
|
| (688 | ) |
|
| (1,483 | ) |
|
| $ | 17,484 |
|
| $ | 19,033 |
|
| $ | 36,517 |
|
|
| As of December 31, 2018 |
| |||||||||
|
| Short-term |
|
| Long-term |
|
| Total |
| |||
Former WFB Facility |
| $ | 7,000 |
|
| $ | — |
|
| $ | 7,000 |
|
Bank and Trade Facilities - Foreign Operations |
|
| 24,762 |
|
|
| — |
|
|
| 24,762 |
|
Related party |
|
| — |
|
|
| 14,142 |
|
|
| 14,142 |
|
|
| $ | 31,762 |
|
| $ | 14,142 |
|
| $ | 45,904 |
|
The future principal maturities of our Secured Term Loans for each of the next five years are as follows (in thousands):
Year ended December 31, |
|
|
|
2020 | $ | 18,279 |
|
2021 |
| 3,438 |
|
2022 |
| 16,283 |
|
2023 |
| — |
|
2024 |
| — |
|
Thereafter |
| — |
|
Total | $ | 38,000 |
|
PNC Credit Facilities
On February 27, 2019, the Company and ZTI (collectively, the “Borrowers”), and certain direct and indirect subsidiaries of the Borrowers, as guarantors, entered into a Revolving Credit, Term Loan, Guaranty and Security Agreement (the “Domestic Credit Agreement”) and an Export-Import Revolving Credit, Guaranty and Security Agreement (the “Ex-Im Credit Agreement,” and together with the Domestic Credit Agreement, the “Credit Agreements”), in each case with PNC Bank, National Association (“PNC”) and Citibank, N.A. as lenders, and PNC as agent for the lenders (the “PNC Credit Facilities”), which replaced the Company’s former senior secured credit facilities with Wells Fargo Bank (the “Former WFB Facility”). We refer to such transactions and the agreements referenced above as the “PNC Credit Facilities.”
The PNC Credit Facilities provided for a $25 million term loan and a $15 million revolving line of credit (including subfacilities for Ex-Im transactions, letters of credit and swing loans) with a $10 million incremental increase option. The amount the Company was able to borrow on the revolving line of credit at any time was based on eligible accounts receivable and other conditions, less certain reserves. Borrowings under the PNC Credit Facilities bore interest at a floating rate equal to either the PNC prime rate or the LIBOR rate for the applicable period, plus a margin that was based on the type of advance.
The Company used a portion of the funds borrowed from the term loan under the PNC Credit Facilities to (i) repay $5.0 million of existing related party indebtedness with DNI plus accrued interest, (ii) repay $1.5 million revolving line of credit outstanding balance plus accrued interest and fees and cash collateralize $3.6 million in outstanding letters of credit under the Wells Fargo Credit Facility
The PNC Credit Facilities had a three-year term and were scheduled to mature on February 27, 2022. The PNC Credit Facilities contemplated repayment of the term loan in quarterly installments over the term of the loan, with the balance of the term loan and revolving line of credit due at maturity.
The PNC Credit Facilities contained certain covenants, limitations, and conditions with respect to the Company, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a minimum liquidity covenant, as well as financial reporting obligations, and usual and customary events of default. At September 30, 2019, the Company was not in compliance with the maximum leverage ratio financial covenant in the PNC Credit Facilities, which represented an event of default thereunder. On November 8, 2019, the Company obtained a waiver of the foregoing event of default from PNC Bank. As a condition for the issuance of such waiver, the Company voluntarily prepaid $10.0 million of the outstanding term loan and paid a one-time fee of $150,000.
The interest rate on the term loan was 8.12% at December 31, 2019. Deferred financing costs of $1.5 million has been netted against the aggregate principal amount of the PNC term loan in the consolidated balance sheet as of December 31, 2019. On July 2, 2019, $4.4 million in outstanding borrowings under the revolving line of credit (which represented all outstanding borrowings under the revolving line of credit) was repaid in full.
As of December 31, 2016,2019, the Company had $13.1 million in outstanding term loan borrowings under the PNC Facilities, and no outstanding borrowings under the revolving line of credit.
Former WFB Facility
As of December 31, 2018, the Company had a $25.0 million revolving line of credit andfacility (including up to $5.0 million in letter of credit facility (the "WFB Facility")credit) with Wells Fargo Bank ("WFB"(the “Former WFB Facility”). Under the Former WFB Facility, the Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company iswas able to borrow under the WFBWells Fargo Facility variesvaried based on eligible accounts receivable and inventory less amount committed as defined incash collateral for letter of credit.
As of December 31, 2018, the agreement, as long as the aggregate amountCompany had $7.0 million outstanding does not exceed $25.0
The Company’s obligations under the Former WFB Facility arewere secured by substantially all of its personal property assets and those of its subsidiaries that guarantee the WFBWells Fargo Facility, including their intellectual property. The Former WFB Facility containscontained certain financial covenants,covenants, and customary affirmative covenants and negative covenants. If the Company defaults under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell the Company’s assets to satisfy the obligations under the WFB Facility. On July 3, 2017, the Company executed an agreement with WFB to extend the due date for delivery for the Company's audited financial statements for the year ended December 31, 2016 to September 27, 2017. As of December 31, 2016,2018, the Company was in compliance with the covenants under the Former WFB Facility.
On February 27, 2019, the Company repaid $1.5 million in principal amount of outstanding borrowings on the revolving line of credit plus accrued interest and fees and cash collateralized $3.6 million in outstanding letters of credit under the Former WFB Facility with some of the proceeds of the PNC Credit Facilities. On February 27, 2019, the Company also terminated the Former WFB Facility.
Working Capital Loan
On October 1, 2018, as a condition for the Keymile Acquisition, Riverside, the former stockholder of Keymile, extended a €4.0 million ($4.4 million) working capital loan to Keymile. The working capital loan bore interest at a rate of 3.5% per annum and was repaid during 2019.
Bank and Trade Facilities - Foreign Operations
Certain of the Company's foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basisas they mature and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries.subsidiaries and supported by guarantees given by DNI or third parties. Payments under such facilities are made in accordance with the given lender’s amortization schedules.
As of December 31, 20162019 and December 31, 2015,2018, the Company had an aggregate outstanding balance of $17.6$15.8 million and $21.8$24.8 million, respectively, under such financing arrangements,arrangements. The weighted average borrowing rate as of December 31, 2019 was 2.7%. The maturity date and the interest rates per annum applicable to outstanding borrowings under these financing arrangements were as listed in the tables below (in(amounts in thousands).
|
|
|
| As of December 31, 2019 |
| |||||||
|
|
|
| Maturity Date |
| Denomination |
| Interest rate (%) |
| Amount |
| |
NongHyup Bank |
| Credit facility |
| 09/30/2020 |
| USD |
| 3.50 ~ 4.50 |
| $ | 2,091 |
|
The Export-Import Bank of Korea |
| Export development loan |
| 07/01/2020 |
| KRW |
| 2.75 |
|
| 5,182 |
|
Korea Development Bank |
| General loan |
| 08/08/2020 |
| KRW |
| 3 |
|
| 4,319 |
|
Korea Development Bank |
| Credit facility |
| 08/07/2020 |
| USD |
| 3.00 ~ 3.15 |
|
| 2,460 |
|
LGUPlus |
| General loan |
| 06/17/2020 |
| KRW |
| 0 |
|
| 1,727 |
|
|
|
|
|
|
|
|
|
|
| $ | 15,779 |
|
|
|
|
| As of December 31, 2018 |
| |||||||
|
|
|
| Maturity Date |
| Denomination |
| Interest rate (%) |
| Amount |
| |
Industrial Bank of Korea |
| Credit facility |
| 01/02/2019 ~ 05/15/2019 |
| USD |
| 3.96 ~ 4.36 |
| $ | 1,982 |
|
Industrial Bank of Korea |
| Trade finance |
| 02/18/2019 ~ 02/25/2019 |
| USD |
| 5.31 ~ 6.08 |
|
| 1,920 |
|
Shinhan Bank |
| General loan |
| 3/30/2019 |
| KRW |
| 6.06 |
|
| 2,862 |
|
NongHyup Bank |
| Credit facility |
| 01/07/2019 ~ 04/29/2019 |
| USD |
| 3.71 ~ 4.50 |
|
| 2,053 |
|
The Export-Import Bank of Korea |
| Export development loan |
| 07/01/2019 |
| KRW |
| 3.44 |
|
| 6,439 |
|
The Export-Import Bank of Korea |
| Import development loan |
| 02/14/2019 |
| USD |
| 4.31 |
|
| 850 |
|
Korea Development Bank |
| General loan |
| 08/08/2019 |
| KRW |
| 3.48 |
|
| 4,472 |
|
Korea Development Bank |
| Credit facility |
| 02/07/2019 ~ 03/06/2019 |
| USD |
| 3.64 ~ 3.91 |
|
| 1,489 |
|
LGUPlus |
| General loan |
| 06/17/2019 |
| KRW |
| 0 |
|
| 1,789 |
|
Shoko Chukin Bank |
| General loan |
| 06/28/2019 |
| JPY |
| 1.33 |
|
| 906 |
|
|
|
|
|
|
|
|
|
|
| $ | 24,762 |
|
As of December 31, 2016 | |||||||||
Interest rate (%) | Amount | ||||||||
Industrial Bank of Korea | Credit facility | 2.16 - 2.76 | $ | 1,106 | |||||
Shinhan Bank | General loan | 4.08 | 3,310 | ||||||
Shinhan Bank | Trade finance | 3.28 - 3.44 | 1,752 | ||||||
NongHyup Bank | Credit facility | 1.92 - 2.66 | 482 | ||||||
KEB Hana Bank | Comprehensive credit loan | 2.79 | 3,501 | * | |||||
The Export-Import Bank of Korea | Export development loan | 3.10 | 7,448 | ||||||
$ | 17,599 |
As of December 31, 2015 | ||||||||||
Interest rate (%) | Amount | |||||||||
Industrial Bank of Korea | Credit facility | 2.04 - 2.34 | $ | 3,431 | ||||||
Shinhan Bank | General loan | 2.94 | 3,413 | |||||||
Shinhan Bank | Trade finance | 2.80 | 329 | |||||||
NongHyup Bank | Credit facility | 1.60 - 1.95 | 1,574 | |||||||
KEB Hana Bank | Comprehensive credit loan | 3.55 | 5,421 | |||||||
The Export-Import Bank of Korea | Export development loan | 2.94 | 7,680 | |||||||
$ | 21,848 |
As of December 31, 2016,2019 and December 31, 2018, the Company had $1.6$4.6 million and $5.5 million in outstanding borrowings, respectively, and $9.3$0.8 million and $2.6 million committed as security for letters of credit under the Company's $12.0$19.0 million credit facility with certain foreign banks.
Related Party Debt
In February 2016, in connection with the consummation of the Merger, the Company entered into an amended and restated employment agreement with James Norrod and employment agreements with each of Il Yung Kim and Kirk Misaka, in the respective forms approved by the Board of Directors, each ofDNS California borrowed $1.8 million from DNI for capital investment, which superseded their respective existing employment arrangements, and each of which had an initial term of one year, to be automatically extended for additional successive one year terms unless either party elects not to extend the term.
In September 2016, andwe entered into a loan agreement with DNI for a $5.0 million unsecured subordinated term loan facility. Under the loan agreement, we were permitted to request drawdowns of one or more term loans in an additional stock-based compensation plan adopted by the Company in January 2017.aggregate principal amount not to exceed $5.0 million. As of December 31, 2016,2019, the loan was repaid in full. As of December 31, 2018, $5.0 million in term loans was outstanding under the facility. The interest rate as of December 31, 2019 under this facility was 4.6% per annum. On or about February 27, 2019, the entire outstanding balance on this term loan was repaid with some of the proceeds of the PNC Credit Facilities.
In March 2018, DNS Korea borrowed $5.8 million from DNI of which $4.5 million was repaid on August 8, 2018. As of December 31, 2018, $1.3 million remained outstanding. The loan bears interest at a rate of 4.6%, and is secured by certain accounts receivable of DNS Korea. On February 27, 2019, the Company amended the terms of this loan to extend the repayment date until May 27, 2022.
In December 2018, we entered into a Loan Agreement with DNI for a $6.0 million term loan with an interest rate of 4.6% per annum. On February 27, 2019, we amended the terms of the term loan to extend the repayment date until May 27, 2022.
The modifications resulting from the amendments described in the four preceding paragraphs were limited to the extension of the maturity dates and removal of the collateral on the outstanding term loans with DNI. There were no fees paid to DNI or external costs otherwise incurred in connection with these modifications.
Interest expense on these related party borrowings was $0.4 million in 2019 and 2018, respectively.
On March 5, 2020, DNS Korea entered into a loan transaction with DNI in the amount of KRW 22.4 billion ($18.5 million USD), which loan matures on March 11, 2022, bears interest at a rate of 4.6% per annum and is pre-payable without premium or penalty. See Note 18 to the consolidated financial statements for additional information.
As of December 31, 2019, we had an aggregate of $9.1 million in outstanding borrowings from DNI, which consisted of a $6.0 million unsecured subordinated term loan facility which matures in May 2022, a $1.8 million loan for capital investment which matures in May 2022, and KRW 1.5 billion ($1.3 million) outstanding under a secured loan from DNS Korea which matures in May 2022. All three loans bear interest at a rate of 4.6% per annum.
(8) Stockholders’ Equity
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):
| As of December 31, |
| ||||||
|
| 2019 |
|
| 2018 |
| ||
Beginning accumulated other comprehensive income |
| $ | (192 | ) |
|
| 1,871 |
|
Actuarial loss for pension plan |
|
| (1,793 | ) |
|
| — |
|
Foreign currency translation adjustments, net |
|
| (1,939 | ) |
|
| (2,051 | ) |
Non-controlling interest |
|
| (15 | ) |
|
| (12 | ) |
Ending accumulated other comprehensive income |
| $ | (3,939 | ) |
| $ | (192 | ) |
Stock-based Compensation
As of December 31, 2019, the Company has one significant(1) stock-based compensation plan related to equity compensation (including equity compensation in the form of stock options, restricted stock and restricted stock units) and one (1) plan related to employee stock purchases.
The following table summarizes stock-based compensation expense for the year ended December 31, 2016 (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cost of revenue |
| $ | 41 |
|
| $ | 18 |
|
Research and product development |
|
| 267 |
|
|
| 134 |
|
Selling, marketing, general and administrative |
|
| 3,200 |
|
|
| 1,928 |
|
|
| $ | 3,508 |
|
| $ | 2,080 |
|
Year ended December 31, | |||
2016 | |||
Compensation expense relating to employee stock options, restricted stock units and restricted stock | $ | 336 |
2017 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. As
On January 4, 2017, the Board of December 31, 2016,Directors approved, and at the Company had one active stock incentive plan,2017 Annual Meeting of Stockholders, the Amended and Restated 2001 StockCompany’s stockholders approved, the DASAN Zhone Solutions, Inc. 2017 Incentive Award Plan. On February 12, 2018, the Board of Directors approved an amendment to the 2017 Incentive Award Plan, ("2001 Plan"which is referred to herein as the “2017 Plan Amendment”). The 2001Company’s stockholders approved the 2017 Plan provided forAmendment at the grant2018 Annual Meeting of incentive stock options, non-statutorythe Stockholders. The 2017 Incentive Award Plan, as amended by the 2017 Plan Amendment, is referred to herein as the “2017 Plan.”
The 2017 Plan authorizes the issuance of stock options, restricted stock, unitrestricted stock units, dividend equivalents, stock payment awards, restricted stock appreciation rights, performance bonus awards and other stock-basedincentive awards. The 2017 Plan authorizes the grant of awards to officers, employees, non-employee directors and consultants of the Company.Company and its subsidiaries. Under the 20012017 Plan, stock options were permitted tomay be granted at an exercise price less than, equal to or greater than the fair market value on the date of grant, except that anystock 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 determineddetermine the term of each stock option, the option exercise price and the vesting terms. Stock options wereare generally granted at an exercise price equal to the fair
market value on the date of grant, expiring seven (7) to ten (10) years from the date of grant and vesting over a period of four years. On January 1 of each year, if the number of shares available for grant under the 2001 Plan was less than 5% of the total number of shares of common stock outstanding as of that date, the shares available for grant under the plan were automatically increased by the amount necessary to make the total number of shares available for grant equal to 5% of the total number of shares of common stock outstanding, or by a lesser amount as determined by the Board of Directors.
The maximum number of shares of the Company’s common stock for which grants may be madegranted under the 2017 Plan is the sum of (i) 600,000 shares, plus (ii) any shares subject to awards granted under the Amended and Restated 2001 Stock Incentive Planprior 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
The Company has estimated the fair value of stock-based payment awards 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 historical option exercises. Estimated volatility was based on the historical volatility of the Company and the risk freerisk-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.
Stock Options
The Company is also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data was used to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Expected term (years) |
|
| 5.85 |
|
|
| 4.88 |
|
Volatility |
|
| 65.72 | % |
|
| 81.87 | % |
Risk free interest rate |
|
| 1.99 | % |
|
| 2.74 | % |
The weighted average grant date fair value of options granted during the yearyears ended December 31, 2016 was $4.08. There2019 and 2018 were no exercises of options during the year ended December 31, 2016.
The following table sets forth the summary of option activity under the stock option program for the year ended December 31, 20162019 (in thousands, except per share data):
|
| Options Outstanding |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding as of December 31, 2018 |
|
| 1,744 |
|
| $ | 8.00 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 470 |
|
|
| 10.36 |
|
|
|
|
|
|
|
|
|
Canceled/Forfeited |
|
| (128 | ) |
|
| 9.83 |
|
|
|
|
|
|
|
|
|
Expired |
|
| (39 | ) |
|
| 8.32 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (35 | ) |
|
| 6.22 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019 |
|
| 2,012 |
|
|
| 8.47 |
|
|
| 7.36 |
|
|
| 2,418 |
|
Vested and expected to vest at December 31, 2019 |
|
| 2,012 |
|
|
| 8.47 |
|
|
| 7.36 |
|
|
| 2,418 |
|
Vested and exercisable at December 31, 2019 |
|
| 946 |
|
|
| 7.47 |
|
|
| 5.74 |
|
|
| 1,684 |
|
Options Outstanding (1) | Weighted Average Exercise Price (1) | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||
Outstanding as of December 31, 2015 | — | $ | — | |||||||||
Options assumed as part of the Merger | 265 | $ | 8.68 | |||||||||
Granted | 530 | $ | 5.95 | |||||||||
Canceled/Forfeited | (8 | ) | $ | 11.75 | ||||||||
Exercised | — | $ | — | |||||||||
Outstanding as of December 31, 2016 | 787 | $ | 6.84 | 8.56 | $ | 60 | ||||||
Vested and expected to vest at December 31, 2016 | 684 | $ | 7.01 | 8.39 | $ | 52 | ||||||
Vested and exercisable at December 31, 2016 | 233 | $ | 8.34 | 5.85 | $ | 14 |
The aggregate intrinsic value represents the total pretax intrinsic value, based on the Company’s closing stock price as of December 31, 20162019 of $4.90,$8.86 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, 2019 and 2018 were $0.2 million and $0.6 million, respectively.
As of December 31, 2016,2019, there was $2.1$6.3 million of unrecognized compensation costs adjusted for estimated forfeitures which are expected to be recognized over a weighted average period of 2.3three (3) years.
The following table sets forth the summary of option activity under the stock option program for the year ended December 31, 2018 (in thousands, except per share data):
|
| Options Outstanding |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding as of December 31, 2017 |
|
| 1,213 |
|
| $ | 6.50 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 836 |
|
|
| 9.86 |
|
|
|
|
|
|
|
|
|
Canceled/Forfeited |
|
| (155 | ) |
|
| 8.00 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (150 | ) |
|
| 6.08 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018 |
|
| 1,744 |
|
|
| 8.00 |
|
|
| 8.65 |
|
|
| 10,378 |
|
Vested and expected to vest at December 31, 2018 |
|
| 1,744 |
|
|
| 8.00 |
|
|
| 8.65 |
|
|
| 10,378 |
|
Vested and exercisable at December 31, 2018 |
|
| 488 |
|
|
| 6.77 |
|
|
| 7.51 |
|
|
| 3,497 |
|
Restricted Stock Units
The following table sets forth the summary of restricted stock unit awards activity under the stock award program for the year ended December 31, 2019 (in thousands, except per share data):
|
| RSU Outstanding |
|
| Weighted Average Grant Date Fair Value |
| ||
Non-vested as of December 31, 2018 |
|
| 4 |
|
| $ | 7.50 |
|
Granted |
|
| 40 |
|
|
| 12.77 |
|
Canceled/Forfeited |
|
| — |
|
|
| — |
|
Vested |
|
| (33 | ) |
|
| 13.11 |
|
Non-vested as of December 31, 2019 |
|
| 11 |
|
|
| 10.05 |
|
The following table sets forth the summary of restricted stock unit awards activity under the stock award program for the year ended December 31, 2018 (in thousands, except per share data):
|
| RSU Outstanding |
|
| Weighted Average Grant Date Fair Value |
| ||
Non-vested as of December 31, 2017 |
|
| 5 |
|
| $ | 7.43 |
|
Granted |
|
| 35 |
|
|
| 9.66 |
|
Canceled/Forfeited |
|
| — |
|
|
| — |
|
Vested |
|
| (36 | ) |
|
| 9.56 |
|
Non-vested as of December 31, 2018 |
|
| 4 |
|
|
| 7.50 |
|
Total grant-date fair value of awards granted during the years ended December 31, 2019 and 2018 was $0.5 million and $0.3 million, respectively. Total fair value of awards vested was $0.4 million during both years ended December 31, 2019 and 2018.
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 weighted average assumptions used to value option grants for the year ended December 31, 2019 included an Expected term of 0.5 years, Volatility of 66.04% and a Risk free interest rate of 2.31%. The Company recorded $149,000 and $14,000 of expense related to the ESPP for the year ended December 31, 2019 and 2018, respectively.
(9) 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):
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) attributable to DASAN Zhone Solutions, Inc. |
| $ | (13,457 | ) |
| $ | 2,767 |
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
| 19,403 |
|
|
| 16,482 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options, restricted stock units and share awards |
|
| — |
|
|
| 264 |
|
Diluted |
|
| 19,403 |
|
|
| 16,746 |
|
Net income (loss) per share attributable to DASAN Zhone Solutions Inc.: |
|
|
|
|
|
|
|
|
Basic |
| $ | (0.69 | ) |
| $ | 0.17 |
|
Diluted |
| $ | (0.69 | ) |
| $ | 0.17 |
|
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(As restated) | |||||||||||
Numerator: | |||||||||||
Net income (loss) attributable to DASAN Zhone Solutions, Inc. | $ | (15,326 | ) | $ | (3,339 | ) | $ | 1,837 | |||
Denominator: | |||||||||||
Weighted average number of shares outstanding: | |||||||||||
Basic (1) | 11,637 | 9,314 | 9,199 | ||||||||
Effect of dilutive securities: | |||||||||||
Stock options, restricted stock units and share awards | — | — | — | ||||||||
Diluted (1) | 11,637 | 9,314 | 9,199 | ||||||||
Net income (loss) per share attributable to DASAN Zhone Solutions Inc.: | |||||||||||
Basic (1) | $ | (1.32 | ) | $ | (0.36 | ) | $ | 0.20 | |||
Diluted (1) | $ | (1.32 | ) | $ | (0.36 | ) | $ | 0.20 |
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, except exercise price per share data):
|
| 2019 |
|
| Weighted average option exercise price |
|
| 2018 |
|
| Weighted average option exercise price |
| ||||
Outstanding stock options, restricted stock units and unvested restricted shares |
|
| 2,023 |
|
| $ | 8.42 |
|
|
| 1,747 |
|
| $ | 7.91 |
|
2016 | Weighted average option exercise price | |||||
Outstanding stock options, restricted stock units and unvested restricted shares | 796 | $ | 6.84 |
As of December 31, 2016, 20152019 and 2014,2018, no shares of issued common stock were subject to repurchase.
(10) Income Taxes
The geographical breakdown of income (loss) before income taxes is as follows (in thousands):
| Years ended December 31, |
| ||||||
|
| 2019 |
|
| 2018 |
| ||
Loss before income taxes - Domestic |
| $ | (11,069 | ) |
| $ | (3,003 | ) |
Income before income taxes - Foreign |
|
| 1,391 |
|
|
| 7,563 |
|
Income (loss) before income taxes |
| $ | (9,678 | ) |
| $ | 4,560 |
|
The following is a summary of the components of income tax expense applicable to lossincome (loss) before income taxes (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Current: |
|
|
|
|
|
|
|
|
Federal |
| $ | — |
|
| $ | — |
|
State |
|
| 16 |
|
|
| 13 |
|
Foreign |
|
| 2,439 |
|
|
| 1,509 |
|
Total current tax provision |
| $ | 2,455 |
|
| $ | 1,522 |
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
| $ | — |
|
| $ | 12 |
|
State |
|
| — |
|
|
| — |
|
Foreign |
|
| 1,130 |
|
|
| 190 |
|
Total deferred tax provision (benefit) |
| $ | 1,130 |
|
| $ | 202 |
|
Total tax provision (benefit) |
| $ | 3,585 |
|
| $ | 1,724 |
|
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Current: | |||||||||||
Federal | $ | — | $ | — | $ | — | |||||
State | (9 | ) | — | — | |||||||
Foreign | 88 | 318 | 1,812 | ||||||||
Total current tax expense | $ | 79 | $ | 318 | $ | 1,812 | |||||
Deferred: | |||||||||||
Federal | $ | — | $ | — | $ | — | |||||
State | — | — | — | ||||||||
Foreign | 1,408 | (86 | ) | (432 | ) | ||||||
Total deferred tax expense | $ | 1,408 | $ | (86 | ) | $ | (432 | ) | |||
Total tax expense | $ | 1,487 | $ | 232 | $ | 1,380 |
A reconciliation of the expected tax expenseprovision (benefit) to the actual tax expenseprovision (benefit) is as follows (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Expected tax provision (benefit) at statutory rate |
| $ | (2,032 | ) |
| $ | 953 |
|
State taxes, net of Federal effect |
|
| 13 |
|
|
| 297 |
|
State change in deferreds |
|
| 1,927 |
|
|
| — |
|
Foreign rate differential |
|
| 2,751 |
|
|
| 129 |
|
Valuation allowance |
|
| 557 |
|
|
| (906 | ) |
Permanent differences |
|
| 544 |
|
|
| 297 |
|
Other permanent items |
|
| — |
|
|
| 1,178 |
|
Tax credit carry-forwards |
|
| (212 | ) |
|
| (280 | ) |
Tax expense adjustments after tax return for prior period |
|
| 37 |
|
|
| 74 |
|
Others |
|
| — |
|
|
| (18 | ) |
Total tax provision |
| $ | 3,585 |
|
| $ | 1,724 |
|
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Expected tax expense (benefit) at statutory rate (e.g. 34%) | $ | (4,644 | ) | $ | (929 | ) | $ | 1,094 | |||
State taxes, net of Federal effect | (348 | ) | — | — | |||||||
Foreign rate differential | 391 | 328 | (386 | ) | |||||||
Valuation allowance | 7,004 | 218 | 260 | ||||||||
Permanent differences | 687 | 40 | 237 | ||||||||
Tax credit carry-forwards | (896 | ) | (674 | ) | — | ||||||
Tax on accumulated earnings from prior year | 29 | 1,348 | — | ||||||||
Tax paid to overseas | 71 | — | — | ||||||||
Tax expense adjustments after tax return for prior | (837 | ) | — | — | |||||||
Foreign currency translation | 124 | — | — | ||||||||
Other | (94 | ) | (99 | ) | 175 | ||||||
Total tax expense | $ | 1,487 | $ | 232 | $ | 1,380 |
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, 20162019 and 20152018 are as follows (in thousands):
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss, capital loss, and tax credit carryforwards |
| $ | 23,195 |
|
| $ | 12,621 |
|
Fixed assets and intangible assets |
|
| 1,057 |
|
|
| 1,451 |
|
Inventory and other reserves |
|
| 1,368 |
|
|
| 1,998 |
|
Operating lease liability |
|
| 1,684 |
|
|
| — |
|
Other (mainly accrued expenses) |
|
| 2,552 |
|
|
| 2,042 |
|
Gross deferred tax assets |
|
| 29,856 |
|
|
| 18,112 |
|
Less valuation allowance |
|
| (26,827 | ) |
|
| (15,360 | ) |
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Operating lease right-of-use-asset |
|
| (1,407 | ) |
|
| — |
|
Gross deferred tax liabilities |
|
| (1,407 | ) |
|
| — |
|
Total net deferred tax assets |
| $ | 1,622 |
|
| $ | 2,752 |
|
2016 | 2015 | ||||||
Deferred tax assets: | |||||||
Net operating loss, capital loss, and tax credit carryforwards | $ | 14,243 | $ | 1,907 | |||
Reduction of gross deferred tax assets due to built-in loss limitation | (4,402 | ) | — | ||||
Fixed assets and intangible assets | 3,775 | 217 | |||||
Inventory and other reserves | 4,573 | 513 | |||||
Other | 2,661 | 197 | |||||
Gross deferred tax assets | 20,850 | 2,834 | |||||
Less valuation allowance | (20,850 | ) | (1,449 | ) | |||
Total net deferred tax assets | $ | — | $ | 1,385 |
For the years ended December 31, 20162019 and 2015,2018, the net changes in the valuation allowance were an increase of $19.4$11.5 million, and $0.2a decrease of $0.9 million, respectively. The Company recorded a full valuation allowance againstincrease during the current year is mainly due to the increase of U.S. net deferred tax assets at December 31, 2016and recognition of the Germany deferred tax assets. The decrease during 2018 is mainly due to the decrease of U.S. net deferred tax assets. The Company maintains a valuation allowance on its U.S. and Germany net deferred tax assets since it is more likely than not that the net deferred tax assets will not be realized due to the lack of previously paid taxes and anticipated taxable income.
As of December 31, 2016,2019, the Company had net operating loss carryforwards for federal state, and foreignstate income tax purposes of approximately $29.0 million, $43.9$38.0 million and $2.1$29.4 million, respectively. The federal losses begin to expire in 2025.various years beginning in 2030. The state losses begin to expire in 2017. The foreign losses begin to expire in 2026.
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.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 lossesloss and tax credit carryforwardscarry forward which arose prior to that date that the Company can utilize.
As of December 31, 2019, the Company had research credit carryforwards of approximately $1.2 million and $1.6 million for federal and state purposes, respectively. If not utilized, the federal carryforwards will expire beginning in 2036. The California credit carryforwards do not expire and the Georgia credit carryforwards will expire beginning in 2026.
In accordance with ASC 740 the Company is requirerequired 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. At December 31, 2016,2019, the Company had gross unrecognized tax benefits of $0.1$1.0 million, none of which if recognized, would reduce the effective tax rate in a future period, due to the Company's full valuation allowance.
A reconciliation of the beginning and ending unrecognized tax benefit amounts for 20162019 and 20152018 are as follows (in thousands):
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Balance at beginning of the year |
| $ | 807 |
|
| $ | 380 |
|
Increases related to current year tax positions |
|
| 229 |
|
|
| 427 |
|
Balance at end of the year |
| $ | 1,036 |
|
| $ | 807 |
|
Balance at December 31, 2014 | $ | — | |
Increases related to prior year tax positions | — | ||
Decreases related to prior year tax positions | — | ||
Increases related to current year tax positions | — | ||
Settlements | — | ||
Lapse of statute of limitations | — | ||
Balance at December 31, 2015 | — | ||
Increases related to prior year tax positions | — | ||
Decreases related to prior year tax positions | — | ||
Increases related to current year tax positions | 77 | ||
Settlements | — | ||
Lapse of statute of limitations | — | ||
Balance at December 31, 2016 | $ | 77 |
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 its statementthe consolidated statements of operations. comprehensive income (loss).
The Company did not record any interest and penalty (benefit) expenseprovision during the yearyears ended December 31, 20162019 and 2015.
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 | 2016 - 2019 | |
California and Canada | 2015 - | |
Brazil | 2014 - | |
Germany | 2015 - | |
Japan | 2014 - | |
Korea | 2017 - | |
United Kingdom | 2016 - | |
Vietnam | 2017 - 2019 |
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.
(11) Non-Controlling Interests
Non-controlling interests were as follows (in thousands)
:
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Beginning non-controlling interests |
| $ | 615 |
|
| 534 |
| |
Net income attributable to non-controlling interests |
|
| 194 |
|
| 69 |
| |
Foreign currency translation adjustments (Other Comprehensive Income) |
|
| 15 |
|
| 12 |
| |
Purchase of non-controlling interests |
|
| (824 | ) |
|
| — |
|
Ending non-controlling interests |
| $ | — |
|
| $ | 615 |
|
Years Ended December 31, | ||||||||
2016 | 2015 | |||||||
Beginning non-controlling interests | $ | 138 | $ | — | ||||
Acquisition of additional interest in a subsidiary | 277 | — | ||||||
Net loss attributable to non-controlling interests | (2 | ) | — | |||||
Foreign currency translation adjustments (OCI) | 3 | — | ||||||
Acquisition of controlling interest | — | 138 | ||||||
Ending non-controlling interests | $ | 416 | $ | 138 |
Acquisition of the Non-Controlling Interest in DNS Japan
On July 31, 2019, the Company acquired the remaining 30.94% non-controlling interest of Dasan Network Solutions JAPAN, Inc. (“DNS Japan”), and DNS Japan became a wholly owned subsidiary of the Company. The Company acquired the remaining interest in DNS Japan for total cash consideration of $950,000, consisting entirely of payments to the former shareholder (Handysoft).
This transaction resulted in a decrease to Additional paid-in capital of $127,000, a decrease to Non- controlling interest of $823,000, and a total impact of $950,000 in the Consolidated Statements of Stockholders' Equity and Non-Controlling Interest.
(12) Related Party Transactions
Related Party Debt
As of December 31, 2016, $5.0 million in term loans was outstanding under the facility. Such term loans mature in September 20212019 and are pre-payable at any time by2018, the Company without premium or penalty. The interest rate as of December 31, 2016 under this facility was 4.6% per annum.
See Note 7 Debt – Related Party Debt for further information about the Company borrowed $1.8 million from DNI for capital investment in February 2016, which amount was outstanding as of December 31, 2016. This loan matured in March 2017 with an option of renewal by mutual agreement, and bore interest at a rate of 6.9% per annum, payable annually. Effective February 27, 2017, the Company amended the terms of this loan to extend the repayment date from March 2017 to March 2018, and to reduce the interest rate from 6.9% to 4.6% per annum.
Other Related Party Transactions
Sales and Purchases to and from Related Parties
Sales and purchases, cost of revenue, research and product development, selling, marketing, general and administrative and other income and expenses to and from related parties for the years ended December 31, 2016, 20152019 and 20142018 were as follows (in thousands):
|
|
|
|
|
| For the year ended December 31, 2019 |
| |||||||||||||||||||||||||
Counterparty |
| DNI direct ownership interest |
|
| Sales |
|
| Cost of revenue |
|
| Manufacturing (Cost of revenue) |
|
| Research and product development |
|
| Selling, marketing, general and administrative |
|
| Interest expense |
|
| Other Expenses |
| ||||||||
DNI |
| N/A |
|
| $ | 2,471 |
|
| $ | 1,825 |
|
|
| — |
|
|
| — |
|
| $ | 3,768 |
|
| $ | 459 |
|
| $ | 341 |
| |
Tomato Soft Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| 117 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Tomato Soft (Xi'an) Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 526 |
|
|
| — |
|
|
| — |
|
|
| — |
| |
CHASAN Networks Co., Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| 1,103 |
|
|
| 71 |
|
|
| — |
|
|
| — |
|
|
| — |
| |
J-Mobile Corporation |
| 91.50% |
|
|
| 42 |
|
|
| 81 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
|
|
|
|
|
| $ | 2,513 |
|
| $ | 1,906 |
|
| $ | 1,220 |
|
| $ | 597 |
|
| $ | 3,768 |
|
| $ | 459 |
|
| $ | 341 |
|
|
|
|
|
|
| For the year ended December 31, 2018 |
| |||||||||||||||||||||||||
Counterparty |
| DNI direct ownership interest |
|
| Sales |
|
| Cost of revenue |
|
| Manufacturing (Cost of revenue) |
|
| Research and product development |
|
| Selling, marketing, general and administrative |
|
| Interest expense |
|
| Other Expenses |
| ||||||||
DNI |
| N/A |
|
| $ | 4,633 |
|
| $ | 3,892 |
|
|
| — |
|
|
| — |
|
| $ | 4,262 |
|
| $ | 435 |
|
| $ | 343 |
| |
Tomato Soft Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| 121 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Tomato Soft (Xi'an) Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 520 |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Chasan Networks Co., Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| 1,119 |
|
|
| 72 |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Dasan France |
| 100% |
|
|
| 203 |
|
|
| 177 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Handysoft, Inc. |
| 17.63% |
|
|
| 794 |
|
|
| 627 |
|
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| — |
| |
|
|
|
|
|
| $ | 5,630 |
|
| $ | 4,696 |
|
| $ | 1,240 |
|
| $ | 592 |
|
| $ | 4,268 |
|
| $ | 435 |
|
| $ | 343 |
|
For the year ended December 31, 2016 | ||||||||||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Sales | Cost of revenue | Manufacturing (Cost of revenue) | Research and product development | Selling, marketing, general and administrative | Other income | Other expenses | ||||||||||||||||||||||
DNI (Parent Company) | N/A | $ | 21,214 | $ | 18,173 | $ | — | $ | — | $ | 5,079 | $ | — | $ | 389 | |||||||||||||||
ABLE | 61.99% | 50 | — | — | — | — | — | — | ||||||||||||||||||||||
CHASAN Networks Co., Ltd. | 100% | — | — | 720 | 149 | — | — | — | ||||||||||||||||||||||
DASAN France | 100% | 19 | 18 | — | — | — | — | |||||||||||||||||||||||
DASAN INDIA Private Limited | 100% | 2,710 | 2,080 | — | — | — | — | — | ||||||||||||||||||||||
DMC | 100% | 1 | 1 | — | — | — | — | — | ||||||||||||||||||||||
D-Mobile | 100% | 4,431 | 3,610 | — | — | 421 | — | — | ||||||||||||||||||||||
DTS | 81.56% | — | — | — | — | — | 1 | — | ||||||||||||||||||||||
HANDYSOFT, Inc. | 17.64% | 155 | 136 | — | — | — | — | |||||||||||||||||||||||
J-Mobile Corporation | 68.56% | 54 | — | — | — | 634 | 25 | — | ||||||||||||||||||||||
PANDA Media, Inc. | 90% | — | — | — | — | 2 | — | 1 | ||||||||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 750 | — | — | — | ||||||||||||||||||||||
$ | 28,634 | $ | 24,018 | $ | 720 | $ | 899 | $ | 6,136 | $ | 26 | $ | 390 |
For the year ended December 31, 2015 | ||||||||||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Sales (1) (2) | Cost of revenue (2) | Manufacturing (Cost of revenue) | Research and product development | Selling, marketing, general and administrative (1) | Other income | Other expenses | ||||||||||||||||||||||
As Restated | As Restated | As Restated | ||||||||||||||||||||||||||||
DNI (Parent Company) | N/A | $ | 23,365 | $ | 19,822 | $ | — | $ | — | $ | 7,230 | $ | 24 | $ | 363 | |||||||||||||||
CHASAN Networks Co., Ltd. | 100% | — | — | 731 | 358 | — | — | — | ||||||||||||||||||||||
DASAN RND Co., LTD | 100% | — | — | — | — | 605 | — | — | ||||||||||||||||||||||
D-Mobile | 100% | — | — | — | — | 91 | — | — | ||||||||||||||||||||||
HANDYSOFT, Inc. | 17.64% | 1,410 | 1,337 | — | — | — | — | 184 | ||||||||||||||||||||||
J-Mobile Corporation | 68.56% | — | — | — | — | 1,511 | 15 | — | ||||||||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 631 | — | — | — | ||||||||||||||||||||||
$ | 24,775 | $ | 21,159 | $ | 731 | $ | 989 | $ | 9,437 | $ | 39 | $ | 547 |
For the year ended December 31, 2014 | ||||||||||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Sales (1) (2) | Cost of revenue (2) | Manufacturing (Cost of revenue) | Research and product development | Selling, marketing, general and administrative (1) | Other income | Other expenses | ||||||||||||||||||||||
As Restated | As Restated | As Restated | ||||||||||||||||||||||||||||
DNI (Parent Company) | N/A | $ | 30,760 | $ | 27,353 | $ | — | $ | — | $ | 7,098 | $ | — | $ | — | |||||||||||||||
CHASAN Networks Co., Ltd. | 100% | — | — | 838 | 471 | — | — | — | ||||||||||||||||||||||
DASAN RND Co., LTD | 100% | — | — | — | — | 1,214 | — | — | ||||||||||||||||||||||
J-Mobile Corporation | 68.56% | — | — | — | — | 766 | — | — | ||||||||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 575 | — | — | — | ||||||||||||||||||||||
$ | 30,760 | $ | 27,353 | $ | 838 | $ | 1,046 | $ | 9,078 | $ | — | $ | — |
The Company has entered into certain sales agreements with DNI and certain of its subsidiaries. Sales and cost of revenue to DNI, DASAN France, DASAN INDIA Private Limited, and D-Mobile represent finished goods produced by the Company that are sold to these related parties who sell the Company's products in Korea, France, India and Taiwan, respectively.
The Company has entered into an agreement with CHASAN Networks Co., Ltd. to provide manufacturing and research and development services for the Company. Under the agreement with CHASAN Networks., Ltd., the Company is charged a cost plus 7% fee for the manufacturing and development of certain deliverables.
The Company has entered into an agreement with Tomato Soft Ltd., a wholly owned subsidiary of DNI, to provide manufacturing and research and development services for the Company.
The Company has entered into an agreement with Tomato Soft (Xi'an) Ltd. to provide research and development services for the Company. Under the agreement with Tomato Soft (Xi'an) Ltd., the Company is charged an expected annual fee of $0.8$0.7 million for the development of certain deliverables.
Prior to the Merger, as DNS was then a wholly owned subsidiary of DNI, DNI had sales agreements with certain customers on DNS' behalf. Since the Merger, due to these prior sales agreements, the Company has entered into an agreement with DNI in which DNI acts as a sales channel to these customers. Sales to DNI necessary for DNI to fulfill agreements with its customers are recorded net of royalty fees in related party revenue.
The Company shares office space with DNI and certain of DNI's subsidiaries. Prior to the Merger, DNS, then a wholly owned subsidiary of DNI, shared 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. Expenses related to rent and administrative services are allocated to the Company based on square footage occupied and headcount, respectively.
Other expenses to related parties represent expenses to DNI for its payment guarantees relating to the Company's borrowings. The Company pays DNI a guarantee fee which is calculated as 0.9% of the guaranteed amount.
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, 20162019 and 20152018 were as follows (in thousands):
As of December 31, 2016 | ||||||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Account receivables | Other receivables | Deposits for lease* | Accounts payable | Other payables | Loans | |||||||||||||||||||
DNI (Parent Company) | N/A | $ | 6,679 | $ | 171 | $ | 690 | $ | 360 | $ | 6,861 | $ | 6,800 | |||||||||||||
ABLE | 61.99% | 53 | — | 9 | — | — | — | |||||||||||||||||||
DASAN France | 100% | 23 | — | — | — | — | — | |||||||||||||||||||
DASAN INDIA Private Limited | 100% | 2,606 | — | — | — | — | — | |||||||||||||||||||
D-Mobile | 100% | 3,943 | — | — | — | — | — | |||||||||||||||||||
HANDYSOFT, Inc. | 17.64% | 2 | — | — | — | — | — | |||||||||||||||||||
J-Mobile Corporation | 68.56% | 5 | — | — | — | — | — | |||||||||||||||||||
Tomato Soft Ltd. | 100% | — | — | — | — | 16 | — | |||||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 70 | 63 | — | |||||||||||||||||||
$ | 13,311 | $ | 171 | $ | 699 | $ | 430 | $ | 6,940 | $ | 6,800 |
|
|
|
|
|
| As of December 31, 2019 |
| |||||||||||||||||||||
Counterparty |
| DNI Ownership Interest |
|
| Other receivables |
|
| Deposits for lease* |
|
| Loans payable |
|
| Accounts payable |
|
| Other payables |
|
| Accrued and other liabilities** |
| |||||||
DNI (parent company) |
| N/A |
|
| $ | 32 |
|
| $ | 709 |
|
| $ | 9,096 |
|
| $ | — |
|
| $ | 1,475 |
|
| $ | 119 |
| |
Tomato Soft Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| — |
| |
Tomato Soft (Xi'an) Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 45 |
|
|
| — |
| |
Dasan France |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Chasan Networks Co., Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 96 |
|
|
| — |
|
|
| — |
| |
|
|
|
|
|
| $ | 32 |
|
| $ | 709 |
|
| $ | 9,096 |
|
| $ | 96 |
|
| $ | 1,530 |
|
| $ | 119 |
|
|
|
|
|
|
| As of December 31, 2018 |
| |||||||||||||||||||||||||
Counterparty |
| DNI Ownership Interest |
|
| Account receivables |
|
| Other receivables |
|
| Deposits for lease* |
|
| Loan Payable |
|
| Accounts payable |
|
| Other payables |
|
| Accrued and other liabilities** |
| ||||||||
DNI (parent company) |
| N/A |
|
| $ | — |
|
| $ | — |
|
| $ | 735 |
|
| $ | 14,142 |
|
| $ | 1,000 |
|
| $ | 1,231 |
|
| $ | 169 |
| |
Tomato Soft Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9 |
|
|
| — |
| |
Tomato Soft (Xi'an) Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 41 |
|
|
| — |
| |
Dasan France |
| 100% |
|
|
| 280 |
|
|
| 65 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Handysoft, Inc. |
| 14.77% |
|
|
| 303 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 654 |
|
|
| — |
|
|
| — |
| |
Chasan Networks Co., Ltd. |
| 100% |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 89 |
|
|
| — |
|
|
| — |
| |
|
|
|
|
|
| $ | 583 |
|
| $ | 65 |
|
| $ | 735 |
|
| $ | 14,142 |
|
| $ | 1,743 |
|
| $ | 1,281 |
|
| $ | 169 |
|
As of December 31, 2015 | ||||||||||||||||||||||
Counterparty | DNI Ownership Interest | Account receivables (As Restated) | Other receivables | Deposits for lease* | Other payables | Loans | ||||||||||||||||
DNI (Parent Company) | N/A | $ | 14,553 | $ | 1,431 | $ | 3,137 | $ | — | $ | — | |||||||||||
CHASAN Networks Co., Ltd. | 100% | — | — | — | 62 | — | ||||||||||||||||
DMC, Inc. | 100% | — | 1 | — | — | — | ||||||||||||||||
HANDYSOFT, Inc. | 17.64% | 22 | — | — | — | — | ||||||||||||||||
J-Mobile Corporation | 68.56% | — | 310 | — | 430 | |||||||||||||||||
Tomato Soft Ltd. | 100% | — | — | — | 16 | — | ||||||||||||||||
Tomato Soft (Xi'an) Ltd. | 100% | — | — | — | 55 | — | ||||||||||||||||
$ | 14,575 | $ | 1,742 | $ | 3,137 | $ | 133 | $ | 430 |
* | Included in other assets related to deposits for lease in the consolidated balance sheets as of December 31, 2019 and 2018. |
** | Included in accrued and other liabilities in the consolidated balance sheet as of December 31, 2019 and 2018. |
(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 2027.
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 condensed consolidated balance sheet 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.
For the measurement and classification of its lease agreements, the Company groups lease and non-lease components into a single lease component for all underlying asset classes. Variable lease payments include payments for non-lease components of maintenance costs. The components of lease expense were as follows for the year ended December 31, 2019:
| Year ended December 31, 2019 |
| ||
|
| (in thousands) |
| |
Operating lease cost |
| $ | 5,212 |
|
Variable lease cost |
|
| 644 |
|
Short-term lease cost |
|
| 404 |
|
Total net lease cost |
| $ | 6,260 |
|
Lease expense was approximately $4.3 million for the year ended December 31, 2018.
Supplemental cash flow information related to the Company’s operating leases was as follows for the year ended December 31, 2019:
|
| Year ended December 31, 2019 |
| |
|
| (in thousands) |
| |
Operating cash flows from operating leases |
| $ | 4,932 |
|
ROU assets obtained in exchange for operating lease obligations |
| $ | 3,812 |
|
The following table presents the lease balances within the Company’s consolidated balance sheet, weighted average remaining lease term, and weighted average discount rates related to the Company’s operating leases as of December 31, 2016 and 2015.2019 (in thousands):
Lease Assets and Liabilities |
|
|
|
|
Assets: |
|
|
|
|
Right-of-use assets from operating leases |
| $ | 20,469 |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Operating lease liabilities - current |
| $ | 4,201 |
|
Operating lease liabilities - non-current |
|
| 18,154 |
|
Total operating lease liabilities |
| $ | 22,355 |
|
|
|
|
|
|
Weighted average remaining lease term |
| 2.22 years |
| |
Weighted average discount rate |
|
| 4.8 | % |
During the year ended December 31, 2019, the Company reviewed assets designated for its Keymile business. As a result of the Company’s restructuring activities, it determined that the carrying value of a right-to-use asset for an operating lease building was impaired. As a result, the Company recorded a non-cash asset impairment charge of $0.7 million to reduce the carrying value of these assets, as reflected within Restructuring charges, on the Company’s Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2019.
The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2019 (in thousands):
|
| Minimum Future Lease Payments |
| |
Year ending December 31: |
|
|
|
|
2020 |
| $ | 5,287 |
|
2021 |
|
| 4,655 |
|
2022 |
|
| 4,211 |
|
2023 |
|
| 3,795 |
|
2024 |
|
| 3,320 |
|
Thereafter |
|
| 3,457 |
|
Total operating lease payments |
|
| 24,725 |
|
Less: imputed interest |
|
| (2,370 | ) |
Total minimum lease payments |
| $ | 22,355 |
|
(14) Commitments and Contingencies
Minimum Future Lease Payments | |||
Year ending December 31: | |||
2017 | $ | 3,633 | |
2018 | 2,916 | ||
2019 | 2,335 | ||
2020 | 2,192 | ||
2021 | 2,178 | ||
Thereafter | 8,166 | ||
Total minimum lease payments | $ | 21,420 |
Performance Bonds
In the normal course of operations, from time to time, the Company arranges for the issuance of various types of surety bonds, such as bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. As of December 31, 2016,2019, the Company had $0.5$9.2 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 which include non-cancellable inventory purchase commitments. The amount of non-cancellable purchase commitments outstanding net of reserve, was $10.3$4.3 million as of December 31, 2016.
Payment Guarantees Provided by Third Parties
The following table sets forth third parties that have provided payment guarantees of the Company's indebtedness and other obligations as of December 31, 2016 (in thousands):
Guarantor |
| Amount Guaranteed (in thousands) |
|
| Description of Obligations Guaranteed | |
DNI |
| $ | 8,400 |
|
| Credit facility from Industrial Bank of Korea |
DNI |
| $ | 2,073 |
|
| Purchasing Card from Industrial Bank of Korea |
DNI |
| $ | 8,400 |
|
| Credit facility from Korea Development Bank |
DNI |
| $ | 5,182 |
|
| Borrowings from Korea Development Bank |
DNI |
| $ | 6,000 |
|
| Credit facility from NongHyup Bank |
DNI |
| $ | 3,700 |
|
| Borrowings from Export-Import Bank of Korea |
DNI |
| $ | 3,000 |
|
| Payment Guarantee from Shinhan Bank |
DNI |
| $ | 1,658 |
|
| Backed Loan from Shinhan Bank |
PNC Bank N.A. |
| $ | 4,649 |
|
| Performance Bond |
Citi Bank |
| $ | 253 |
|
| Performance Bond |
Seoul Guarantee Insurance Co. |
| $ | 6,009 |
|
| Performance Bond, Warranty Bond, etc. (*) |
Industrial Bank of Korea |
| $ | 836 |
|
| Bank Guarantee |
Korea Development Bank |
| $ | 3,124 |
|
| Letter of Credit |
NongHyup Bank |
| $ | 2,266 |
|
| Letter of Credit |
Woori Bank |
| $ | 1,626 |
|
| Bank Guarantee |
Shinhan Bank |
| $ | 583 |
|
| Purchasing Card |
Shinhan Bank |
| $ | 683 |
|
| Payment Guarantee |
AXA Insurance Company |
| $ | 179 |
|
| Guarantee for flexible retirement program |
|
| $ | 58,621 |
|
|
|
* | The Company is responsible for the warranty liabilities generally for the period of two (2) years regarding major product sales and have contracted surety insurance to cover part of the warranty liabilities. |
Guarantor | Amount Guaranteed | Description of Obligations Guaranteed | ||||
DNI | $ | 3,972 | Borrowings from Shinhan Bank | |||
DNI | 1,986 | Purchasing card from Shinhan Bank | ||||
DNI | 4,800 | Borrowings from KEB Hana Bank | ||||
DNI | 11,379 | Credit facility and purchasing card from Industrial Bank of Korea | ||||
DNI | 6,000 | Credit facility from NongHyup Bank | ||||
DNI | 993 | Purchasing card from NongHyup Bank | ||||
Industrial Bank of Korea | 6,881 | Credit facility | ||||
Industrial Bank of Korea | 286 | Credit facility (local) | ||||
NongHyup Bank | 3,678 | Credit facility | ||||
Shinhan Bank | 299 | Purchasing card | ||||
KEB Hana Bank | 59 | Performance bonds | ||||
State Bank of India | 37 | Performance bonds | ||||
Seoul Guarantee Insurance Co. | 403 | Performance payment guarantee | ||||
$ | 40,773 |
Royalties
The Company has certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue and is recorded in cost of revenue.
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, or results of operations.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
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 may make discretionary contributions. The 401(k) plan is a Legacy Zhone plan. The Company made no discretionary contributions to the plan in 2016.
The Company also maintains a defined contribution plan for its employees in Korea. Under the defined contribution plan, the Company contributes 8.33% of an employee's gross salary into the plan. For the year ended December 31, 2019, the Company recorded an expense of $1.3 million for the plan.
Pension Plans
The Company sponsors defined benefit plans for its employees in Keymile and Japan. Defined benefit plans provide pension benefits based on compensation and years of service.
The net periodic benefit cost related to the plans consisted of the following components during the year ended December 31, 2019 (in thousands):
|
| Year Ended December 31, 2019 |
| |
Service Cost |
| $ | 219 |
|
Interest Cost |
|
| 265 |
|
Net amortization |
|
| — |
|
Net periodic benefit cost |
| $ | 484 |
|
The service cost component of net benefit cost is presented within cost of sales or selling, general and administrative expense on the accompanying statements of operations, 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 statements of operations.
The following provides a reconciliation of the changes in plan every quarter.assets and benefit obligation, and the funded status at the end of the year (in thousands):
|
| Year Ended December 31, 2019 |
| |
Benefit obligation, January 1 |
| $ | — |
|
Assumed with acquisition |
|
| 16,191 |
|
Service cost |
|
| 219 |
|
Interest cost |
|
| 265 |
|
Benefits paid |
|
| (456 | ) |
Plan amendments |
|
| — |
|
Actuarial (gains) losses |
|
| 1,793 |
|
Foreign exchange impact |
|
| (341 | ) |
Benefit obligation, December 31 |
|
| 17,671 |
|
Underfunded status, December 31 |
| $ | 17,671 |
|
The Company has recorded the 2019 underfunded status as a long-term liability on the consolidated balance sheets. The accumulated benefit obligation for the plans were $17.7 million as of December 31, 2019. The Company has life insurance contracts, with the Company as beneficiary, in the amount of $3.3 million as of December 31, 2019, related to individuals under the pension plans. These insurance contracts are classified as other assets on the Company’s 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 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 $19,000. The Company expects to make no contributions to the plans in 2020.
The following gross amounts are recognized net of tax in accumulated other comprehensive loss:
The following benefit payments, which reflect expected future service, are expected to be paid (in thousands):
Years Ending December 31, |
|
|
|
|
2020 |
| $ | 602 |
|
2021 |
|
| 647 |
|
2022 |
|
| 687 |
|
2023 |
|
| 720 |
|
2024 |
|
| 699 |
|
2025 - 2029 |
|
| 3,496 |
|
The following gross amounts are recognized net of tax in accumulated other comprehensive loss:
|
| Year Ended December 31, 2019 |
| |
Prior service cost |
| $ | — |
|
Net loss |
|
| 1,793 |
|
Net periodic benefit cost |
| $ | 1,793 |
|
The weighted average assumptions used in determining the periodic net cost and benefit obligation information related to the plans are as follows:
Year Ended December 31, 2019 | ||||
Net periodic benefit cost : | ||||
Discount rate | 0.9 | % | ||
Rate of compensation increase | 1.7 | % | ||
Benefit obligation: | ||||
Discount rate | 0.9 | % | ||
Rate of compensation increase | 1.7 | % |
(16) Enterprise-Wide Information
The Company is a global provider of ultra-broadband network access solutions and communications equipment forplatforms deployed by advanced Tier 1, 2 and 3 service providerproviders and enterprise networks.customers. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. The Company’s chief operating decision makers aremaker is the Company’s Co-ChiefChief Executive Officers,Officer, who reviewreviews financial information presented on a consolidated basis accompanied by disaggregated information about 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. The following summarizes required disclosures about geographicgeographical concentrations and revenue by products and services (in thousands):
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Revenue by geography: |
|
|
|
|
|
|
|
|
United States |
| $ | 36,383 |
|
| $ | 50,795 |
|
Canada |
|
| 4,690 |
|
|
| 4,413 |
|
Total North America |
|
| 41,073 |
|
|
| 55,208 |
|
Latin America |
|
| 23,774 |
|
|
| 27,596 |
|
Europe, Middle East, Africa |
|
| 78,375 |
|
|
| 34,741 |
|
Korea |
|
| 79,124 |
|
|
| 76,006 |
|
Other Asia Pacific |
|
| 84,536 |
|
|
| 88,797 |
|
Total International |
|
| 265,809 |
|
|
| 227,140 |
|
Total |
| $ | 306,882 |
|
| $ | 282,348 |
|
|
| Years ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Revenue by products and services: |
|
|
|
|
|
|
|
|
Products |
| $ | 286,292 |
|
| $ | 269,269 |
|
Services |
|
| 20,590 |
|
|
| 13,079 |
|
Total |
| $ | 306,882 |
|
| $ | 282,348 |
|
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Revenue by geography: | As Restated | As Restated | |||||||||
United States | $ | 16,872 | $ | 4,426 | $ | 12,526 | |||||
Canada | 1,967 | 7 | — | ||||||||
Total North America | 18,839 | 4,433 | 12,526 | ||||||||
Latin America | 9,604 | 2,510 | 1,318 | ||||||||
Europe, Middle East, Africa | 13,611 | 9,383 | 20,865 | ||||||||
Korea | 77,979 | 114,676 | 99,646 | ||||||||
Other Asia Pacific | 30,271 | 8,194 | 5,039 | ||||||||
Total International | 131,465 | 134,763 | 126,868 | ||||||||
Total | $ | 150,304 | $ | 139,196 | $ | 139,394 |
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Revenue by products and services: | As Restated | As Restated | |||||||||
Products | $ | 142,238 | $ | 133,036 | $ | 132,282 | |||||
Services | 8,066 | 6,160 | 7,112 | ||||||||
Total | $ | 150,304 | $ | 139,196 | $ | 139,394 |
The Company's property, plant and equipment, net of accumulated depreciation, were located in the following geographical areas as of December 31, 20162019 and 20152018 (in thousands):
| As of December 31, |
| ||||||
|
| 2019 |
|
| 2018 |
| ||
United States |
| $ | 2,809 |
|
| $ | 3,036 |
|
Korea |
|
| 2,020 |
|
|
| 1,543 |
|
Japan and Vietnam |
|
| 1,074 |
|
|
| 910 |
|
Taiwan and India |
|
| 24 |
|
|
| 29 |
|
Germany |
|
| 842 |
|
|
| — |
|
|
| $ | 6,769 |
|
| $ | 5,518 |
|
As of December 31, | |||||||
2016 | 2015 | ||||||
United States | $ | 4,094 | $ | 113 | |||
Korea | 1,455 | 2,138 | |||||
Japan and Vietnam | 739 | — | |||||
$ | 6,288 | $ | 2,251 |
Year ended December 31, 2016 | |||||||||||||||
Q1 (1) | Q2 (1) | Q3 (1) (2) | Q4 (2) | ||||||||||||
(in thousands, except per share data) | |||||||||||||||
Net revenue | $ | 25,340 | $ | 34,252 | $ | 31,240 | $ | 59,472 | |||||||
Gross profit | 4,611 | 9,002 | 9,300 | 18,034 | |||||||||||
Operating loss | (4,341 | ) | (165 | ) | (5,114 | ) | (3,429 | ) | |||||||
Net loss | (3,761 | ) | (533 | ) | (4,789 | ) | (6,245 | ) | |||||||
Net income (loss) attributable to non-controlling interest | 6 | 33 | (56 | ) | 15 | ||||||||||
Net loss attributable to DASAN Zhone Solutions, Inc. | (3,767 | ) | (566 | ) | (4,733 | ) | (6,260 | ) | |||||||
Net loss per share attributable to DASAN Zhone Solutions, Inc.: | |||||||||||||||
Basic | $ | (0.40 | ) | $ | (0.06 | ) | $ | (0.42 | ) | $ | (0.38 | ) | |||
Diluted | (0.40 | ) | (0.06 | ) | (0.42 | ) | (0.38 | ) | |||||||
Weighted-average shares outstanding: | |||||||||||||||
Basic | 9,493 | 9,493 | 11,139 | 16,375 | |||||||||||
Diluted | 9,493 | 9,493 | 11,139 | 16,375 |
(17) Subsequent Events(1) Certain prior quarterly financial information has been revised due
Relocation of Corporation Headquarters and New Facilities in Alameda, California
On March 2, 2020, the Company announced its plans to correctionrelocate its corporate headquarters from Oakland, California to Plano, Texas and establish a new U.S.-based Engineering Center of Excellence in Plano.
On February 24, 2020, in connection with the planned relocation, the Company entered into two separate Agreements of Sublease (the “Subleases”) with Huawei Technologies USA Inc. (“Huawei”) and Futurewei Technologies, Inc. (“Futurewei,” together with Huawei, the “Sublessors”), respectively, for two suites at Legacy Place, 5700 Tennyson Parkway, Plano, Texas (the “Premises”). The Subleases are subject to that certain errors.Office Lease dated October 7, 2009 by and between Equus Investment Partnership XI, L.P., as successor-in-interest to Legacy Acquisition, L.P., and Huawei, as amended, and that certain Office Lease dated December 14, 2017 by and between Equus Investment Partnership XI, L.P., as successor-in-interest to L&B CIP Legacy Place I & II, LLC, and Futurewei, respectively.
The Subleases cover premises which, together, consist of 16,333 rentable square feet. Both Subleases are expected to commence in March, 2020 and terminate on November 30, 2025. The Company identified and recorded immaterial errors relateddoes not have any option to extend the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016. The immaterial errors resulted from overstatementterm of net revenue and the associated related costs. The overall impacteither of the errorsSubleases. The Subleases provide that the base rent will be abated until July 1, 2020. Beginning on July 1, 2020, the Company's consolidated financial positionaggregate base monthly rent payments due under the Subleases will be $21,777, subject to an annual increase of $0.50 per rentable square foot per annum thereafter. The Company is also responsible for certain other costs under the Subleases including operating expenses, insurance and resultsutilities.
DNI Loan
On March 5, 2020, DNS Korea, the Company’s wholly-owned, indirect subsidiary entered into a Loan Agreement with DNI (the “March 2020 DNI Loan”). The March 2020 DNI Loan was negotiated and approved on behalf of operations is not material and as such, previously filed Quarterly Report on Form 10-Q affected by the errors has not been amended.
Year ended December 31, 2015 | |||||||||||||||||||||||
Q1 | Q2 | ||||||||||||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | As Previously Reported | Restatement Adjustments | As Restated | ||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||
Net revenue | $ | 38,727 | $ | (322 | ) | $ | 38,405 | $ | 32,021 | $ | (188 | ) | $ | 31,833 | |||||||||
Gross profit | 9,755 | (322 | ) | 9,433 | 8,480 | (188 | ) | 8,292 | |||||||||||||||
Operating income (loss) | 137 | (103 | ) | 34 | (2,108 | ) | (170 | ) | (2,278 | ) | |||||||||||||
Net income (loss) | 389 | (103 | ) | 286 | (2,547 | ) | (170 | ) | (2,717 | ) | |||||||||||||
Net income (loss) per share: | |||||||||||||||||||||||
Basic | $ | 0.04 | $ | (0.01 | ) | $ | 0.03 | $ | (0.28 | ) | $ | (0.01 | ) | $ | (0.29 | ) | |||||||
Diluted | 0.04 | (0.01 | ) | 0.03 | (0.28 | ) | (0.01 | ) | (0.29 | ) | |||||||||||||
Weighted-average shares outstanding: | |||||||||||||||||||||||
Basic | 9,222 | 9,222 | 9,222 | 9,233 | 9,233 | 9,233 | |||||||||||||||||
Diluted | 9,222 | 9,222 | 9,222 | 9,233 | 9,233 | 9,233 |
Year ended December 31, 2015 | |||||||||||||||||||||||
Q3 | Q4 | ||||||||||||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | As Previously Reported | Restatement Adjustments | As Restated | ||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||
Net revenue | $ | 22,591 | $ | (68 | ) | $ | 22,523 | $ | 46,686 | $ | (251 | ) | $ | 46,435 | |||||||||
Gross profit | 5,817 | (18 | ) | 5,799 | 12,587 | (225 | ) | 12,362 | |||||||||||||||
Operating income (loss) | (2,981 | ) | (18 | ) | (2,999 | ) | 2,337 | (71 | ) | 2,266 | |||||||||||||
Net income (loss) | (2,779 | ) | (18 | ) | (2,797 | ) | 1,973 | (84 | ) | 1,889 | |||||||||||||
Net income (loss) per share: | |||||||||||||||||||||||
Basic | $ | (0.30 | ) | $ | — | $ | (0.30 | ) | $ | 0.21 | $ | (0.01 | ) | $ | 0.20 | ||||||||
Diluted | (0.30 | ) | — | (0.30 | ) | 0.21 | (0.01 | ) | 0.20 | ||||||||||||||
Weighted-average shares outstanding: | |||||||||||||||||||||||
Basic | 9,331 | 9,331 | 9,331 | 9,459 | 9,459 | 9,459 | |||||||||||||||||
Diluted | 9,331 | 9,331 | 9,331 | 9,459 | 9,459 | 9,459 |
As security for the March 2020 DNI Loan (and other existing loans between DNI and DNS Korea and/or DNS California), (i) DNS California, a wholly-owned, direct subsidiary of the Company asand the sole stockholder of DNS Korea, agreed to pledge the outstanding shares of DNS Korea to DNI and (ii) DNS Korea granted a security interest in its Corporate Treasurerpersonal property assets, accounts receivable and Secretary forintellectual property assets to DNI. The March 2020 DNI Loan includes certain covenants consisting of financial reporting obligations, a transitionalmaintenance covenant whereby DNS Korea agreed to maintain a minimum stockholders’ equity value in an amount equal to or greater than KRW 43.3 billion ($35.8 million USD), and customary events of default. If an event of default occurs and is not remedied within the applicable cure period, DNI will be entitled to assist withtake various actions, including requiring the transitionimmediate repayment of his responsibilities, withall outstanding amounts under the same base salary as was in effect priorMarch 2020 DNI Loan and selling the shares or assets of DNS Korea.
DNS Korea loaned the funds borrowed under the March 2020 DNI Loan to the management transition,Company, and continued vesting of his outstanding stock options during the term of his employment, although his continued employment will no longer be governed by the terms of his employment agreement, which was terminated effective September 11, 2017. As part of this management transition, effective September 11, 2017, the Board of Directors of the Company appointed Il Yung Kimintends to serve as President, Chief Executive Officerutilize a portion of such funds to repay in full and Acting Chief Financial Officer ofterminate the Company.
None.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934 (the Exchange Act)“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 Co-ChiefChief Executive OfficersOfficer 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 SEC 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, 2016,2019, the end of the period covered by this report. The evaluation was done under the supervision and with the participation of Annual Report on Form 10-K. Our management, including our Co-ChiefChief Executive OfficersOfficer and our Chief Financial Officer. Based upon this evaluationOfficer, supervised and participated in the results of the independent investigation conducted by the Audit Committee (as discussed above, under "Business - Audit Committee Investigation"), our Co-Chief Executive Officers and Chief Financial Officerevaluation. They concluded that our disclosure controls and procedures were not effective as of December 31, 2019 because of the materialmaterial weaknesses in our internal control over financial reporting described below under “Management’s Annual Report on Internal Control over Financial Reporting,Reporting.” The effectiveness of our disclosure controls and procedures were not effectiveinternal control over financial reporting as of December 31, 2016.
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, 2016,2019, the end of our fiscal year.the period covered by this Annual Report on Form 10-K. In making this assessment, management used the criteria established in
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. Based onManagement determined that the results of the independent investigation and due to the incorrect application of generally accepted accounting principles that resulted in material misstatements andCompany did not maintain a restatement of our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016, management identified material weaknesses in our internal control over financial reporting as of December 31, 2016. Specifically, we did not
These material weaknesses could result in a misstatement in the financial statements that would result in a material misstatement in the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
As of the date of this report,Annual Report on Form 10-K, we are re-assessing the design of our controls and modifying processes related to the accounting for significant and unusual transactions as well as enhancing monitoring and oversight controls in the application of applicable accounting guidance related to such transactions. In connection therewith, in December of 2019, we hired a new Chief Financial Officer and Chief Accounting Officer, and we anticipate that we will hire additional accounting personnel with relevant skills, training and experience, and conduct further training of our accounting and finance personnel.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of our lastlatest fiscal quarteryear that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Merger-related integration activities may lead us to modify certain internal controls in future periods.
Inherent Limitations on Effectiveness of Controls
Our management, including our Co-ChiefChief Executive OfficersOfficer 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 companyCompany 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.
None.
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 2020 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 "Executive Officers"“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.
Name | Age | Position | Term Expires | Class | ||||
Min Woo Nam | 54 | Chairman of the Board of Directors | 2019 | III | ||||
Michael Connors | 75 | Director | 2017 | I | ||||
Il Yung Kim | 60 | President, Chief Executive Officer, Acting Chief Financial Officer and Director | 2019 | III | ||||
Seong Gyun Kim | 50 | Director | 2017 | I | ||||
Sung-Bin Park | 50 | Director | 2018 | II |
Director | Audit Committee | Compensation Committee | Corporate Governance and Nominating Committee | |||
Michael Connors (1) | Member | |||||
Robert Dahl (2) | Chair | Member | Member | |||
Morteza Ejabat (3) | ||||||
Il Yung Kim | ||||||
Seong Gyun Kim(2) | Chair | |||||
C. Richard Kramlich (1) (4) | Member | Member | Member | |||
Min Woo Nam (2)(4) | Chair | Chair | ||||
James Norrod (5) | ||||||
Sung-Bin Park (4)(6) | Member | Member | Member | |||
Mahvash Yazdi (7) | ||||||
Number of Meetings in 2016 | 6 | 4 | 4 |
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 can be found in the "Corporate Governance" section ofis published on our website at
The information required by this item is incorporated herein by reference to the compensation of our executive officers and senior managers, including how we determine the elements and amounts of compensation. The Compensation Committeesections of the Board of Directors is responsible for determining, establishingProxy Statement entitled “Executive Compensation” and approving each element of compensation including salary and all bonus, incentive, equity and other compensation for the company’s executive officers and
“Director Compensation.”
Name and Principal Position | Year | Salary ($) | Bonus ($) (1) | Stock Awards($) | Option Awards ($) (2) | Non - Equity Incentive Plan Compensation ($) | Change in Pension Value and Non- qualified Deferred Compensation Earnings($) | All Other Compensation ($) (3) | Total ($) | ||||||||||||||||||
Il Yung Kim | 2016 | 113,711 | (5) | — | — | 739,907 | 33,095 | (6) | 886,713 | ||||||||||||||||||
President, Chief Executive Officer and Acting Chief Financial Officer (4) | |||||||||||||||||||||||||||
James Norrod | 2016 | 320,000 | 1,000,000 | — | 707,535 | — | — | 71,380 | (7) | 2,098,915 | |||||||||||||||||
Former Co-Chief Executive Officer (4) | 2015 | 396,923 | 100,000 | — | — | — | — | 86,248 | (8) | 583,171 | |||||||||||||||||
2014 | 172,306 | — | — | 2,826,383 | — | — | 49,738 | 3,048,427 | |||||||||||||||||||
Kirk Misaka | 2016 | 292,000 | 500,000 | — | 411,850 | — | — | 20,954 | (9) | 1,224,804 | |||||||||||||||||
Corporate Treasurer and Secretary and Former Chief Financial Officer (4) | 2015 | 362,192 | 267,237 | — | — | — | — | 17,631 | (10) | 647,060 | |||||||||||||||||
2014 | 365,000 | — | — | — | — | — | 15,039 | 380,039 |
Name | Grant Date | Estimated Possible Payouts under Non-Equity Incentive Plan Awards Target ($) | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) (1) | Exercise or base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) | |||||||||||||
Il Yung Kim | 9/9/2016 | 400,000 | — | 200,000 | 5.95 | $ | 739,907 | ||||||||||||
James Norrod | 9/9/2016 | 400,000 | — | 200,000 | 5.95 | $ | 707,535 | ||||||||||||
Kirk Misaka | 9/9/2016 | 200,000 | — | 100,000 | 5.95 | $ | 411,850 |
Option Awards (1) | |||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | (2) | Number of Securities Underlying Unexercised Options (#) Unexercisable | (2) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($)(2) | Option Expiration Date | ||||||||||
Il Yung Kim | — | 200,000 | (3) | $ | 5.95 | 9/9/2027 | |||||||||||
James Norrod | 12,499 | 187,500 | — | 5.95 | 9/9/2027 | ||||||||||||
Kirk Misaka | 17,999 | — | — | 6.16 | 9/1/2017 | ||||||||||||
17,999 | — | — | 7.55 | 9/1/2018 | |||||||||||||
6,249 | 93,751 | — | 5.95 | 9/9/2027 |
Name | Fees Earned or Paid in Cash ($) (1) | Stock Awards ($) (2) | Option Awards ($) (3) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) (4) | Total ($) | ||||||||||||||
Michael Connors (5) | 30,000 | — | 42,501 | — | — | — | 72,501 | ||||||||||||||
Robert Dahl (6) | 12,000 | — | — | — | — | — | 12,000 | ||||||||||||||
Morteza Ejabat (7) | — | 640,000 | — | — | — | — | 640,000 | ||||||||||||||
Seong Gyun Kim (8) | 24,000 | 17,850 | — | — | — | — | 41,850 | ||||||||||||||
C. Richard Kramlich (9) | 8,000 | 17,850 | — | — | — | — | 25,850 | ||||||||||||||
Min Woo Nam (10) | 20,000 | — | 37,822 | — | — | — | 57,822 | ||||||||||||||
Sung-Bin Park (11) | 22,000 | — | 37,822 | — | — | — | 59,822 | ||||||||||||||
Mahvash Yazdi (12) | 20,000 | — | — | — | — | — | 20,000 |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information knownrequired by this item relating to us regardingsecurity ownership of our common stock on September 15, 2017 by (1) each person who beneficially owned more than 5% of our common stock, (2) each current director, (3) each of our named executive officerscertain beneficial owners and (4) all directors, named executive officersmanagement, and their affiliates as a group. We are not aware of any arrangements, including any pledge of our common stock that could result in a change in control.
Name of Beneficial Owner (1) | Number of Shares Beneficially Owned (2) | Percent Owned (3) | |||||
DASAN Networks, Inc. | 9,493,015 | (4) | 57.9 | % | |||
New Enterprise Associates | 956,254 | (5) | 5.8 | % | |||
Il Yung Kim | 58,332 | (6) | * | ||||
James Norrod | 70,324 | (7) | * | ||||
Kirk Misaka | 136,472 | (8) | * | ||||
Min Woo Nam | 2,914 | (9) | * | ||||
Michael Connors | 78,802 | (10) | * | ||||
Seong Gyun Kim | 750 | (11) | * | ||||
Sung-Bin Park | 2,914 | (12) | * | ||||
All directors, named executive officers and their affiliates as a group (8 persons) | 10,802,025 | 65.1 | % |
(a) | (b) | (c) | |||||||||||
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (1)(2) | Weighted average exercise price of outstanding options, warrants and rights(2) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(2) | ||||||||||
Equity compensation plans approved by security holders | 910,245 | $ | 6.84 | 120,104 | (3)(4) | ||||||||
Equity compensation plans not approved by security holders | — | — | — |
The information required by this item is incorporated herein by reference to the company and our directors and executive officers or their immediate family members are participants are reviewed by our Audit Committee or another independent bodysection of the Board of Directors, such as the independentProxy Statement entitled “Certain Relationships and disinterested members of the Board of Directors. As set forth in the Audit Committee charter, the members of the Audit Committee, all of whom are independent directors, review and approve related party transactions for which such approval is required under applicable law, including SEC and Nasdaq rules. In the course of its review and approval or ratification of a disclosable related party transaction, the Audit Committee or the independent and disinterested members of the Board of Directors may consider:
The followinginformation required by this item is a summaryincorporated herein by reference to the section of the fees billed by PricewaterhouseCoopers LLP (PwC) and Samil PricewaterhouseCoopers (Samil PwC) for professional services rendered to DZS and DNS, respectively, for the year ended December 31, 2016, and billed by Samil PwC to DNS for the year ended December 31, 2015:
2016 | 2015 | ||||||||
Audit Fees | $ | 1,893,194 | (1) | $ | 661,144 | ||||
Audit-Related Fees | 60,274 | (2) | 116,878 | ||||||
Tax Fees | 77,043 | — | |||||||
All Other Fees | — | 2,244 | |||||||
Total | $ | 2,030,511 | $ | 780,266 |
1. | Financial Statements |
The Index to Consolidated Financial Statements on page 42 is incorporated herein by reference as the list of financial statements required as part of this report.
2. | Exhibits |
The Exhibit Index on page 106exhibits 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 as the list of exhibits required as part of this report.
ITEM 16. |
None.
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| Incorporated by Reference |
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Exhibit Number |
| Exhibit Description |
| Form |
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| Filing Date |
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2.1 |
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| 8-K |
| 10.1 |
| January 1, 2019 |
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2.2 |
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| 8-K |
| 10.3 |
| January 1, 2019 |
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2.3 |
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| 8-K |
| 2.1 |
| August 5, 2019 |
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3.1 |
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| 10-K |
| 3.1 |
| September 27, 2017 |
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3.2 |
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| 8-K |
| 3.2 |
| September 12, 2016 |
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4.1 |
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| X | |
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10.1# |
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| 8-K |
| 10.1 |
| January 10, 2017 |
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10.1.1# |
| Amendment to DASAN Zhone Solutions, Inc. 2017 Incentive Award Plan |
| 10-K |
| 10.1.1 |
| March 12, 2019 |
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10.1.2# |
| Form of Stock Option Agreement for the DASAN Zhone Solutions, Inc. 2017 Incentive Award Plan |
| 8-K |
| 10.2 |
| January 10, 2017 |
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10.1.3# |
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| 10-K |
| 10.1 |
| September 27, 2017 |
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10.2# |
| DASAN Zhone Solutions, Inc. Amended and Restated 2001 Stock Incentive Plan, as amended |
| 8-K |
| 10.6 |
| September 13, 2016 |
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10.2.1# |
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| 8-K |
| 10.7 |
| September 13, 2016 |
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10.2.2# |
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| 10.2 |
| May 17, 2007 |
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10.2.3# |
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| 10-Q |
| 10.3 |
| November 14, 2016 |
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10.3# |
| DASAN Zhone Solutions, Inc. 2018 Employee Stock Purchase Plan |
| S-8 |
| 10.1 |
| November 8, 2018 |
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10.4# |
| DASAN Zhone Solutions, Inc. Non-Employee Director Compensation Program |
| 10-K |
| 10.4 |
| April 4, 2018 |
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| Incorporated by Reference |
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Exhibit Number |
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10.5# |
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| 10-Q |
| 10.20 |
| May 14, 2004 |
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10.6# |
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| 10-K |
| 10.8 |
| April 4, 2018 |
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10.7# |
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| 8-K |
| 10.1 |
| November 25, 2019 |
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10.8# |
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| 10-Q |
| 10.1 |
| November 13, 2019 |
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10.9 |
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| 8-K |
| 10.1 |
| September 12, 2016 |
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10.10 |
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| 8-K |
| 10.2 |
| September 12, 2016 |
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10.11 |
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| 8-K |
| 10.3 |
| September 12, 2016 |
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10.12 |
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| 8-K |
| 10.4 |
| September 12, 2016 |
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10.13 |
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| 8-K |
| 10.1 |
| April 2, 2018 |
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10.13.1 |
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| 10-Q |
| 10.3 |
| May 10, 2019 |
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10.14 |
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| 8-K |
| 10.2 |
| January 3, 2019 |
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10.14.1 |
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| 10-Q |
| 10.4 |
| May 10, 2019 |
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10.15 |
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| 10.1 |
| May 10, 2019 |
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10.16 |
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| 10-Q |
| 10.2 |
| May 10, 2019 |
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| Incorporated by Reference |
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Exhibit Number |
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10.17 |
| 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 |
| 10-Q |
| 10.1 |
| August 14, 2019 |
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10.18 |
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| 10.2 |
| August 14, 2019 |
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10.19 |
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| 10-Q |
| 10.3 |
| November 13, 2019 |
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10.20 |
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| 8-K |
| 10.1 |
| February 23, 2016 |
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10.20.1 |
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| 10-Q |
| 10.1 |
| August 9, 2016 |
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10.21 |
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| 10.3 |
| August 14, 2019 |
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10.22 |
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| 10.1 |
| March 10, 2020 |
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10.23 |
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| 10.2 |
| March 10, 2020 |
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10.24 |
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| 10.3 |
| March 10, 2020 |
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10.25 |
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| 10.1 |
| March 2, 2020 |
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10.26 |
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| 10.2 |
| March 2, 2020 |
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16.1 |
| Letter from PricewaterhouseCoopers LLP to the Securities and Exchange Commission dated June 14, 2019 |
| 8-K |
| 16.1 |
| June 14, 2019 |
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21.2 |
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23.1 |
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23.2 |
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Incorporated by Reference | ||||||||||
Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date | Filed or Furnished Herewith | |||||
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) | X | ||||||||
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) | X | ||||||||
32.1 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | X | ||||||||
101.INS | XBRL Instance Document | X | ||||||||
101.SCH | XBRL Taxonomy Extension Schema | X | ||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | ||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | ||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | X | ||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X |
# | Management contract or compensatory plan or arrangement in which one or more executive officers or directors participates. |
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.
DASAN ZHONE SOLUTIONS, INC. | ||||||
Date: | By: | / | ||||
Il Yung Kim | ||||||
President, Chief Executive Officer and | ||||||
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 | ||||
/ | President, Chief Executive Officer (Principal Executive Officer) and | March 24, 2020 | ||||
Il Yung Kim | ||||||
/s/ THOMAS J. CANCRO | Chief Financial Officer and | March 24, 2020 | ||||
Thomas J. Cancro | ||||||
/ | Chairman of the Board of Directors | March 24, 2020 | ||||
Min Woo Nam | ||||||
/ | ||||||
Director | March 24, 2020 | |||||
Seong Gyun Kim | ||||||
/ | Director | March 24, 2020 | ||||
David Schopp | ||||||
/s/ ROLF UNTERBERGER | Director | March 24, 2020 | ||||
Rolf Unterberger | ||||||
/s/ JOON KYUNG KIM | Director | March 24, 2020 | ||||
Joon Kyung Kim | ||||||
/s/ CHOON YUL YOO | Director | March 24, 2020 | ||||
Choon Yul Yoo |
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed or Furnished Herewith | ||||||||
Form | File Number | Exhibit | Filing Date | ||||||||
3.1 | X | ||||||||||
3.2 | 8-K | 000-32743 | 3.2 | September 12, 2016 | |||||||
10.1# | 8-K | 000-32743 | 10.1 | January 10, 2017 | |||||||
10.1.1# | 8-K | 000-32743 | 10.2 | January 10, 2017 | |||||||
10.1.2# | X | ||||||||||
10.2 # | 8-K | 000-32743 | 10.6 | September 13, 2016 | |||||||
10.2.1# | 8-K | 000-32743 | 10.7 | September 13, 2016 | |||||||
10.2.2# | 8-K | 000-32743 | 10.2 | May 17, 2007 | |||||||
10.2.3# | 10-Q | 000-32743 | 10.3 | November 14, 2016 | |||||||
10.3# | 8-K | 000-32743 | 10.1 | May 17, 2006 | |||||||
10.5# | X | ||||||||||
10.5# | 10-Q | 000-32743 | 10.20 | May 14, 2004 | |||||||
10.6# | 10-Q | 000-32743 | 10.1 | August 9, 2012 | |||||||
10.7# | 10-Q | 000-32743 | 10.1 | November 8, 2013 | |||||||
10.8# | 8-K | 000-32743 | 10.1 | September 13, 2016 | |||||||
10.9# | 8-K | 000-32743 | 10.2 | September 13, 2016 |
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed or Furnished Herewith | ||||||||
Form | File Number | Exhibit | Filing Date | ||||||||
10.10# | 8-K | 000-32743 | 10.3 | September 13, 2016 | |||||||
10.11# | 8-K | 000-32743 | 10.4 | September 13, 2016 | |||||||
10.12# | 8-K | 000-32743 | 10.5 | September 13, 2016 | |||||||
10.13# | 8-K | 000-32743 | 10.1 | November 14, 2016 | |||||||
10.14# | 8-K | 000-32743 | 10.1 | April 5, 2016 | |||||||
10.15# | 10-K | 000-32743 | 10.17 | March 23, 2016 | |||||||
10.16 | 8-K | 000-32743 | 10.1 | September 12, 2016 | |||||||
10.17 | 8-K | 000-32743 | 10.2 | September 12, 2016 | |||||||
10.18 | 8-K | 000-32743 | 10.3 | September 12, 2016 | |||||||
10.19 | 8-K | 000-32743 | 10.4 | September 12, 2016 | |||||||
10.20 | 10-K | 000-32743 | 10.16 | March 15, 2012 |
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed or Furnished Herewith | ||||||||
Form | File Number | Exhibit | Filing Date | ||||||||
10.21.1 | 10-K | 000-32743 | 10.12.1 | March 15, 2013 | |||||||
10.21.2 | 8-K | 000-32743 | 10.1 | October 1, 2013 | |||||||
10.21.3 | 10-K | 000-32743 | 10.13.3 | March 5, 2014 | |||||||
10.21.4 | 10-K | 000-32743 | 10.14.4 | March 6, 2015 | |||||||
10.21.5 | 10-K | 000-32743 | 10.14.5 | March 23, 2016 | |||||||
10.2.6 | 8-K | 000-32743 | 10.5 | September 12, 2016 |
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed or Furnished Herewith | ||||||||
Form | File Number | Exhibit | Filing Date | ||||||||
10.21.7 | 10-Q | 000-32743 | 10.15 | November 14, 2016 | |||||||
10.21.8 | 8-K | 000-32743 | 10.1 | May 9, 2017 | |||||||
10.21.9 | 8-K | 000-32743 | 10.1 | July 6, 2017 | |||||||
10.22 | 10-K | 000-32743 | 10.17 | March 15, 2012 | |||||||
10.23 | 8-K | 000-32743 | 10.1 | February 23, 2016 | |||||||
10.23.1 | 10-Q | 000-32743 | 10.1 | August 9, 2016 | |||||||
21.2 | X | ||||||||||
23.1 | X | ||||||||||
23.2 | X | ||||||||||
31.1 | X |
86