UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~September 30, 2017~~March 31, 2018



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

For the transition period from to

000-32743

(Commission File Number)

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 Number)

7195 Oakport Street Oakland, California		94621
(Address of principal executive offices)		(Zip code)

(510) 777-7000

(Registrant’s telephone number, including area code)

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, smaller reporting company, or an emerging growth company. See 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	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x
		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 ~~November~~May 8, ~~2017,~~2018, there were ~~approximately 16,386,955~~16,441,551 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss)	6
	Unaudited Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3432
Item 4.	Controls and Procedures	3533

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3735
Item 1A.	Risk Factors	3735
Item 2.6.	Exhibits	3736
	Signatures	3837

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	10,145		$	17,893		$	23,158		$	17,475
Restricted cash	13,058			6,650			10,118			12,425
Short-term investments	—			993
Accounts receivable, net of allowances for sales returns and doubtful accounts of $2,095 as of September 30, 2017 and $1,143 as of December 31, 2016:
Accounts receivable, net
Trade receivables	43,478			38,324			54,934			48,257
Related parties	12,941			13,311			14,644			13,498
Other receivables:
Other receivables
Others	13,851			12,068			17,030			12,494
Related parties	22			171			72			164
Inventories	31,966			31,032			32,714			25,344
Prepaid expenses and other current assets	3,198			4,131			6,431			3,652
Total current assets	128,659			124,573			159,101			133,309
Property and equipment, net	5,812			6,288			5,632			5,873
Goodwill	3,977			3,977			3,977			3,977
Intangible assets, net	7,174			8,767			6,501			6,785
Non-current deferred taxes							3,152			2,954
Long-term restricted cash							1,407			1,512
Other assets	1,536			1,842			5,034			4,717
Total assets	$	147,158		$	145,447		$	184,804		$	159,127
Liabilities, Stockholders’ Equity and Non-controlling Interest
Current liabilities:
Accounts payable:
Accounts payable
Others	$	35,224		$	30,681		$	40,682		$	31,441
Related parties	106			430			1,639			1,351
Short-term debt:
Short-term debt							33,556			19,790
Other payables
Others	18,382			17,599			2,310			2,032
Related parties	3,544			—			2,806			1,956
Other payables:
Contract liabilities - current							2,163			3,279
Accrued and other liabilities							9,207			11,174
Total current liabilities							92,363			71,023
Long-term debt
Others	1,691			2,040			—			2,987
Related parties	210			6,940			12,895			6,800
Deferred revenue	2,073			1,901
Accrued and other liabilities	10,108			8,163
Total current liabilities	71,338			67,754
Long-term debt - related parties	5,000			6,800
Deferred revenue	1,875			1,674
Contract liabilities - non-current							1,870			1,883
Other long-term liabilities	2,581			2,351			2,665			2,667
Total liabilities	80,794			78,579			109,793			85,360
Commitments and contingencies (Note 11)
Stockholders’ equity and non-controlling interest:
Common stock, authorized 36,000 shares, 16,387 shares and 16,375 shares outstanding as of September 30, 2017 and December 31, 2016 at $0.001 par value	16			16
Common stock, authorized 36,000 shares, 16,431 shares and 16,410 shares outstanding as of March 31, 2018 and December 31, 2017 at $0.001 par value							16			16
Additional paid-in capital	89,873			89,174			90,672			90,198
Other comprehensive income (loss)	(1,052		)	(2,815		)	2,128			1,871
Accumulated deficit	(23,080		)	(19,923		)	(18,403		)	(18,852		)
Total stockholders’ equity	65,757			66,452			74,413			73,233
Non-controlling interest	607			416			598			534
Total stockholders’ equity and non-controlling interest	66,364			66,868			75,011			73,767
Total liabilities, stockholders’ equity and non-controlling interest	$	147,158		$	145,447		$	184,804		$	159,127

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss)

(In thousands, except per share data)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2018			2017
Net revenue:
Net revenue	$	60,513		$	24,772		$	150,834		$	68,424		$	57,906		$	41,241
Net revenue - related parties	5,925			6,468			27,657			22,408			1,598			10,871
Total net revenue	66,438			31,240			178,491			90,832			59,504			52,112
Cost of revenue:
Products and services	38,643			16,483			96,127			48,750			35,853			25,021
Products and services - related parties	5,569			5,406			22,851			19,118			1,763			8,708
Amortization of intangible assets	153			51			459			51			153			153
Total cost of revenue	44,365			21,940			119,437			67,919			37,769			33,882
Gross profit	22,073			9,300			59,054			22,913			21,735			18,230
Operating expenses:
Research and product development	8,804			5,885			27,028			15,583			8,977			9,382
Selling, marketing, general and administrative	11,454			8,278			32,506			16,691			12,394			10,884
Amortization of intangible assets	154			251			1,191			259			131			493
Total operating expenses	20,412			14,414			60,725			32,533			21,502			20,759
Operating income (loss)	1,661			(5,114		)	(1,671		)	(9,620		)	233			(2,529		)
Interest income	36			31			82			137			86			26
Interest expense	(263		)	(204		)	(793		)	(600		)	(323		)	(274		)
Other income (loss), net	60			(112		)	43			(41		)	140			(281		)
Income (loss) before income taxes	1,494			(5,399		)	(2,339		)	(10,124		)	136			(3,058		)
Income tax expense (benefit)	107			(610		)	646			(1,041		)
Income tax (benefit) expense													(5		)	440
Net income (loss)	1,387			(4,789		)	(2,985		)	(9,083		)	141			(3,498		)
Net income (loss) attributable to non-controlling interest	(12		)	(56		)	172			(17		)
Net income attributable to non-controlling interest													34			249
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	$	1,399		$	(4,733	)	$	(3,157	)	$	(9,066	)	$	107		$	(3,747	)

Foreign currency translation adjustments	(284		)	2,291			1,782			2,690			318			2,890
Comprehensive income (loss)	1,103			(2,498		)	(1,203		)	(6,393		)	459			(608		)
Comprehensive income (loss) attributable to non-controlling interest	(14		)	(54		)	191			48
Comprehensive income attributable to non-controlling interest													64			269
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.	$	1,117		$	(2,444	)	$	(1,394	)	$	(6,441	)	$	395		$	(877	)

Basic and diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc.	$	0.09		$	(0.42	)	$	(0.19	)	$	(0.90	)	$	0.01		$	(0.23	)
Weighted average shares outstanding used to compute basic and diluted net income (loss) per share	16,382			11,139			16,380			10,046
Weighted average shares outstanding used to compute basic net income (loss) per share													16,416			16,378
Weighted average shares outstanding used to compute diluted net income (loss) per share													16,626			16,378

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)


	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2017			2016			2018			2017
Cash flows from operating activities:
Net loss	$	(2,985	)	$	(9,083	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Net income (loss)							$	141		$	(3,498	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	3,105			1,164			699			1,181
Stock-based compensation	670			128			363			255
Unrealized gain (loss) on foreign currency transactions	(185		)	1,655
Loss on inventory write-down							434			311
Unrealized gain on foreign currency transactions							20			871
Deferred taxes	—			(1,069		)	(183		)	—
Changes in operating assets and liabilities:				—
Accounts receivable	(2,948		)	14,450			(9,129		)	(1,277		)
Inventories	(578		)	(4,107		)	(7,781		)	(4,015		)
Prepaid expenses and other assets	(101		)	2,320			(1,918		)	(501		)
Accounts payable	6,713			(5,814		)	6,013			6,732
Accrued expenses	(4,314		)	13,598			(2,187		)	(739		)
Net cash provided by (used in) operating activities	(623		)	13,242
Net cash used in operating activities							(13,528		)	(680		)
Cash flows from investing activities:
Cash increase through Merger	—			7,013
Increase in restricted cash	(6,061		)	(947		)
Decrease in short-term and long-term loans to others	—			1,891
Increase in short-term and long-term loans to others	—			(1,386		)
Proceeds from sale of short-term investments	1,463			—			—			1,040
Purchase of short-term investments	(430		)	—			—			(252		)
Proceeds from disposal of property and equipment and other assets	6			98			1			6
Purchase of property and equipment	(840		)	(370		)	(86		)	(404		)
Purchase of intangible asset	(72		)	(92		)	—			(30		)
Net cash provided by (used in) investing activities	(5,934		)	6,207			(85		)	360
Cash flows from financing activities:
Repayments of borrowings	(15,627		)	(23,088		)	(8,250		)	(4,356		)
Proceeds from short-term borrowings	13,778			19,769			18,849			2,570
Proceeds from long-term borrowings	—			6,800
Proceeds from long-term borrowings from related party							6,064			—
Proceeds from issuance of common stock	28			—			111			1
Net cash provided by (used in) financing activities	(1,821		)	3,481			16,774			(1,785		)
Effect of exchange rate changes on cash	630			1,538
Effect of exchange rate changes on cash and restricted cash							110			1,288
Net increase (decrease) in cash and cash equivalents	(7,748		)	24,468			3,271			(817		)
Cash and cash equivalents at beginning of period	17,893			9,095
Cash and cash equivalents at end of period	$	10,145		$	33,563
Cash, cash equivalents and restricted cash at beginning of period							31,412			24,543
Cash, cash equivalents and restricted cash at end of period							$	34,683		$	23,726
Reconciliation of cash, cash equivalents and restricted cash to statement of financial position
Cash and equivalents							$	23,158		$	17,288
Restricted cash							10,118			6,438
Long-term restricted cash							1,407			—
Cash, cash equivalents and restricted cash in statement of financial position							$	34,683		$	23,726

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed Consolidated Financial Statements


(1)	Organization and Summary of Significant Accounting Policies


(a)	Description of Business

DASAN Zhone Solutions, Inc. ~~(formerly known as Zhone Technologies, Inc. and referred~~(referred to, collectively with its subsidiaries, as "DZS" or the "Company") is a global provider of network access solutions and communications equipment for service provider and enterprise networks. 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 1,000 customers in more than 50 countries worldwide.

DZS was incorporated under the laws of the state of Delaware in June 1999. On September 9, 2016, the Company acquired Dasan Network Solutions, Inc., a California corporation ("DNS") through the merger of a wholly owned subsidiary of the Company with and into DNS, with DNS surviving as a wholly owned subsidiary 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 following the Merger. In connection with the Merger, the Company changed its name from Zhone Technologies, Inc. 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, and the Company’s ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016. The Company is headquartered in Oakland, California.


(b)	~~Going Concern~~Risks and Uncertainties

The accompanying ~~unaudited condensed~~ consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("U.S. GAAP"), assuming the Company will continue as a going ~~concern, which contemplates the realization~~concern.

The Company had net income of assets and satisfaction of liabilities in the normal course of business. Accordingly, the unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

~~Although the Company generated $1.4~~$0.1 million ~~of net income~~ for the quarter ended ~~September 30, 2017, the Company has incurred significant losses to date~~March 31, 2018 and ~~losses from operations may continue. The Company incurred net losses of $3.0 million and $15.3~~$1.2 million for the ~~nine months~~year ended ~~September 30, 2017 and~~December 31, 2017. However, the Company incurred a net loss of $15.3 million for the year ended December 31, 2016 ~~respectively. The~~and significant losses in prior years. As of March 31, 2018, the Company had an accumulated deficit of ~~$23.1~~$18.4 million and working capital of ~~$57.3 million as of September 30, 2017.~~$66.7 million. As of ~~September 30, 2017,~~March 31, 2018, the Company had ~~approximately $10.1~~$23.2 million in cash and cash equivalents, which included ~~$3.4~~$9.7 million in cash balances held by ~~the Company's~~its Korean subsidiary and ~~$26.9~~$46.5 million in aggregate principal amount of ~~outstanding borrowings under the Company's~~ short-term debt obligations, long-term debt and ~~the Company's loans from DNI and its affiliates.~~long-term related-party borrowings. In addition, as of March 31, 2018 the Company had ~~$7.6 million in aggregate borrowing availability under its revolving credit facilities as of September 30, 2017. The Company had $8.5~~$6.6 million committed as security for letters of credit under its revolving credit facilities, leaving $6.1 million in aggregate financing availability under these ~~facilities as~~facilities. The Company’s current lack of ~~September 30, 2017. Due~~liquidity could harm it by:

increasing its vulnerability to adverse economic conditions in its industry or the ~~amount~~economy in general;

requiring substantial amounts of ~~short-term~~cash to be used for debt ~~obligations maturing within the next 12 months~~servicing, rather than other purposes, including operations;

limiting its ability to plan for, or react to, changes in its business and ~~the Company's recurring operating losses, the Company's~~industry; and

influencing investor and customer perceptions about its financial stability and limiting its ability to obtain financing or acquire customers.

These factors indicate that cash ~~resources may~~flows might not be sufficient to settle these short-term debt obligations. The Company's ability to continue as 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 andfor the Company isto meet its obligations as they come due in ~~active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide~~the ordinary course of business for a period of 12 months from the date of this interim report on Form 10-Q.

However, the Company ~~with the required liquidity~~plans to remove the substantial doubt as to its ability to continue as a going concern. If the Company is unable to amend, replace or refinance its short-term debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, the Company may experience material adverse impacts on its business, operating results and financial condition.

~~The Company has continued its~~ focus on cost ~~control and~~management, operating efficiency ~~along with~~and restrictions on discretionary ~~spending, however in order to meet the Company's liquidity needs and finance its capital expenditures and working capital needs for its business,~~spending. In addition, if necessary, the Company may ~~be required to~~ sell assets, issue debt or equity securities or purchase credit ~~insurance or borrow on potentially unfavorable terms. In addition, the~~insurance. The Company may ~~be required to~~also reduce the scope of its planned product development, reduce sales and marketing efforts and reduce its operations in low margin regions, including reductions in headcount. In the first quarter of 2018, the Company modified the terms of certain existing debt and obtained a new loan, as described more fully in Note (7) Debt and Note (9) Related-Party Transactions to the unaudited condensed consolidated financial statements. Based on the Company's current plans and current business conditions, the Company believes that ~~its focused operating expense discipline~~these measures along with its existing cash, cash equivalents and available credit facilities will be sufficient to

satisfy its anticipated cash requirements for at least the next 12 months ~~however~~from the ~~factors discussed above raise substantial doubt about the Company's~~date of this Quarterly Report on Form 10-Q.

The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next 12 months will depend on its ability to achieve forecasted results and its ability to access funds approved under existing facilities. Management’s belief that it will achieve these results assumes that, among other things, the Company will continue ~~as a going concern. The accompanying unaudited condensed consolidated financial statements~~to be successful in implementing its business strategy and that there will be no material adverse development in its business, liquidity or capital requirements. If one or more of these factors do not ~~include any adjustments that may result from~~occur as expected, it could cause the ~~outcome of the uncertainties set forth above.~~Company to fail to meet its obligations as they come due.


~~(c)~~	~~Risks and Uncertainties~~

DNI owned approximately 58% of the outstanding shares of the Company's common stock as of ~~September 30, 2017.~~March 31, 2018. 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, ~~(subject~~subject to the ~~restrictions in~~provisions of the Company's ~~bylaws).~~bylaws and applicable requirements under Nasdaq listing rules and applicable laws. 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, the Company may take actions that the Company's other stockholders or holders of ~~our~~the Company's indebtedness do not view as beneficial. See ~~Note 2,~~ Note 9 and Note 11 to the unaudited condensed consolidated financial statements for additional information.

~~As discussed above in Note 1(b), there is also substantial doubt about the Company's ability~~


(c)	Reclassifications

Certain prior period statement of comprehensive loss items have been reclassified to ~~continue~~correct for research and product development expenses and selling, marketing, general and administrative expenses of $0.2 million and $0.3 million, respectively, which were previously improperly classified as ~~a going concern. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.~~cost of revenue-products and services.


(d)	~~Correction of errors~~

In this Quarterly Report on Form 10-Q, certain prior quarter financial information has been revised due to correction of certain errors. The Company identified errors related to the timing of revenue recognition in the consolidated financial statements for the quarter ended September 30, 2016. Correction of this error resulted in a decrease in total net revenue of $0.8 million, an increase in net loss of $0.1 million for the quarter ended September 30, 2016 as well as a decrease in net revenue of $1.8 million, an increase in net loss of $0.5 million and an increase in basic and diluted net loss per share attributable to DZS of $0.05 for the nine months ended September 30, 2016. The prior quarter financial information has also been revised for the classification of certain related party revenue, related party cost of revenue, and related royalty fees. This correction resulted in the Company reclassifying revenues of $0.2 million to related party revenues and costs of $0.1 million to related party cost of revenue for the quarter ended September 30, 2016. This further resulted in the Company reclassifying revenues of $9.6 million to related party revenues and costs of $7.6 million to related party cost of revenue for the nine months ended September 30, 2016. Finally, an understatement of the cash flows used in investing activities of $1.0 million was corrected in the statement of cash flows for the nine months ended September 30, 2016. The overall impact of these errors on the Company's condensed consolidated financial position and results of operations is not material and as such, previously filed quarterly financial information filed with the SEC on March 10, 2017 affected by the errors has not been amended.


~~(e)~~	Basis of Presentation

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2017.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with ~~generally accepted accounting principles~~U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by ~~generally accepted accounting principles~~U.S. GAAP for complete financial statements.

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

the current year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the ~~unaudited condensed~~ consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 filed with the Securities and Exchange Commission.

As discussed more fully in Note 2, the Merger is treated as a reverse acquisition for accounting purposes, with DNS as the acquirer of the Company. As such, the consolidated financial results of the Company for the three and nine months ended September 30, 2017 are compared to the financial results for DNS and its consolidated subsidiaries for the prior year period through September 8, 2016 and the financial results of DZS and its consolidated subsidiaries for the period from September 9, 2016 through September 30, 2016. The balance sheet of the Company reflects the fair value of the assets and liabilities of Legacy Zhone as of the effective date of the Merger. Those assets include the fair value of acquired intangible assets and goodwill. Due to the foregoing, the Company’s financial results for the three and nine months ended September 30, 2017 are not comparable to its financial results for the three and nine months ended September 30, 2016.

Except as otherwise specifically noted herein, all references to the "Company" refer to (i) DNS and its consolidated subsidiaries for periods through September 8, 2016 and (ii) the Company and its consolidated subsidiaries for periods on or after September 9, 2016.


~~(f)~~(e)	Reverse Stock Split

On February 28, 2017, the Company filed 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 split of the Company's common stock and reduced the authorized shares of the Company's common stock from 180 million to 36 million. As a result 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 Quarterly Report on Form 10-Q are provided on a post-reverse stock split basis.


~~(g)~~(f)	Concentration of Risk

The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, Internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts. For the three months ended ~~September 30, 2017, two customers represented,~~March 31, 2018, no customer accounted for 10% ~~and 9%~~or more of net ~~revenue, respectively.~~revenue. For the three months ended ~~September 30, 2016, three customers represented 18%, 16% (a related-party) and 12% of net revenue, respectively. For the nine months ended September 30,~~March 31, 2017, two customers ~~each~~ represented ~~9% of net revenue (one of which was a related-party). For the nine months ended September 30, 2016, three customers represented 23%, 21% (a related-party)~~12% and ~~12%~~11% of net revenue, respectively.

As of ~~September 30, 2017, three~~March 31, 2018, two customers represented ~~16%~~20% (a ~~related-party), 11%~~related party) and ~~10%~~13% of net accounts receivable, respectively. As of December 31, ~~2016,~~2017, two customers represented ~~13%~~20% (a ~~related-party)~~related party) and ~~10%~~11% of net accounts receivable, respectively.

As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, receivables from customers in countries other than the United States represented ~~84%~~88% and ~~87%~~84%, respectively, of net accounts receivable.

~~(h)~~(g) Recent Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of the guidance in ASU No. 2014-09, Revenue from Contracts with Customer, for all entities by one year. With the deferral, the new standard is effective for the Company on January 1, 2018. Early adoption is permitted, but not before the original effective date of January 1, 2017.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, 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 transition of ASU 2014-09. The effective date of this updated guidance for the Company is the same as the effective date of ASU 2014-09, which is January 1, 2018. The Company does not plan to early adopt this guidance. The Company is currently assessing the

potential impact of adopting this new guidance on its unaudited condensed 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 unaudited condensed consolidated financial statements at this time.

~~In July 2015,~~2014, the FASB issued ASU No. ~~2015-11, Simplifying~~2014-09 “Revenue from Contracts with Customers” (“Topic 606”), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Topic 606 replaced most existing revenue recognition standards under U.S. GAAP, including ASC 605, Revenue Recognition ("Topic 605").

On January 1, 2018, the ~~Measurement~~Company adopted Topic 606 and applied this guidance to all open contracts at the date of ~~Inventory, which~~adoption using the modified retrospective method. The Company recognized the cumulative effect of initially applying Topic 606 as an adjustment to the balance of accumulated deficit at January 1, 2018. The comparative information has not been restated and continues to be reported under Topic 605.

The Company’s adoption of Topic 606 primarily impacted the following:

Topic 606 requires an ~~entity to measure inventory at~~allocation of revenue between deliverables (performance obligations) within an arrangement. Topic 605 restricted the ~~lower~~allocation of ~~cost and net realizable value. The guidance does not apply to inventory~~revenue that is ~~measured using last-in, first-out ("LIFO")~~contingent on future deliverables to current deliverables, however, Topic 606 removes this restriction, to the extent that the future deliverables represent performance obligations that are distinct. Under Topic 606, the nature of the performance obligations identified within a contract impacts the allocation of the transaction price between deliverables.

Some of the Company’s contracts include customer acceptance terms, which provides protection to the customer by allowing it to either cancel a contract or force the ~~retail inventory method. The guidance applies~~Company to ~~all other inventory, which includes inventory~~take corrective actions if products or services do not meet the requirements in the contract. Under Topic 606, customer acceptance that is ~~measured using first-in, first-out ("FIFO")~~considered a “formality”, would result in revenue recognized when control of the product or ~~average cost.~~ service is transferred to customer, which is typically upon shipment or delivery dependent upon the terms of the underlying contract.

The ~~guidance is effective~~following table summarizes the effects of Topic 606 on the Company’s unaudited condensed consolidated balance sheet at January 1, 2018 (in thousands):



	Balance after adoption of ASC 606			Adjustments				Balance without adoption of ASC 606
Assets
Accounts receivable, net	$	62,099		$	344		⁽¹⁾	$	61,755
Inventories	25,239			(105		)	⁽²⁾	25,344
Liabilities
Contract liabilities - current	2,866			(413		)	⁽²⁾	3,279
Accrued and other liabilities	11,518			344			⁽¹⁾	11,174
Stockholders’ equity
Accumulated deficit	(18,544		)	308				(18,852		)

⁽¹⁾Allowance for sales returns was historically presented as a contra-asset within accounts receivable on the Company's consolidated balance sheets. Upon the adoption of Topic 606, the Company ~~on January 1, 2017,~~presents the allowance for sales returns in Accrued and ~~will be adopted accordingly. ASU No. 2015-11 should be applied prospectively with earlier application permitted~~other liabilities (current).

⁽²⁾ Represents the impact of allocation of transaction price to separate performance obligations in open contracts as of the ~~beginning~~adoption date on a relative standalone selling price basis and acceleration of ~~an interim or annual reporting period.~~ revenue (and related costs) for contracts for which acceptance clauses are a formality.

The following table summarizes the effects of Topic 606 on the Company’s unaudited condensed consolidated balance sheet at March 31, 2018 (in thousands):



	As reported			Adjustments				Balance without adoption of ASC 606
Assets
Accounts receivable, net	$	69,578		$	330		⁽¹⁾	$	69,248
Inventories	32,714			62			⁽²⁾	32,652
Prepaid expenses and other current assets	6,431			91			⁽²⁾	6,340
Liabilities
Contract liabilities - current	2,163			(285		)	⁽²⁾	2,448
Accrued and other liabilities	9,207			330			⁽¹⁾	8,877
Stockholders’ equity
Accumulated deficit	(18,403		)	(132		)		(18,271		)

⁽¹⁾Allowance for sales returns was historically presented as a contra-asset within accounts receivable on the Company's consolidated balance sheets. Upon the adoption of ~~this standard will have~~Topic 606, the Company presents the allowance for sales returns in Accrued and other liabilities (current).

⁽²⁾ Represents the impact of allocation of transaction price to separate performance obligations in open contracts as of March 31, 2018 on a relative standalone selling price basis and acceleration of revenue (and related costs) for contracts for which acceptance clauses are a formality.

The following table summarizes the effects of Topic 606 on the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2018 (in thousands):



	As reported			Adjustments			Balance without adoption of ASC 606
Net revenue	$	59,504		$	(194	)	$	59,698
Cost of revenue - products and services	37,769			(62		)	37,831
Gross profit	21,735			(132		)	21,867
Provision for income taxes	(5		)	—			(5		)
Net income	141			(132		)	273

There was no impact on net revenue from related parties as a result of Topic 606.

Revenue Recognition Accounting Policy

Revenue Recognition

Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The Company generates revenue primarily from sales of products and services, including, extended warranty service and customer support. Revenue from product sales is recognized at a point in time when control of the good is transferred to the customer, generally occurring upon shipment or delivery dependent upon the terms of the underlying contract. 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 contract in advance, for periods ranging from one to five years.

Revenue from all sales types is recognized at transaction price, which is the amount the Company expects to be entitled to in exchange for transferring goods and/or providing services. 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 ~~unaudited condensed consolidated financial statements.~~products, among other factors. Historically, variable consideration has not been a significant component of the Company’s contracts with customers. As of March 31, 2018, the total estimate of variable consideration was not significant.

Contracts with Multiple Performance Obligations

Some of the Company's contracts with customers contain multiple promised goods or services. For these contracts, the Company accounts for the promises separately as individual performance obligations if they are distinct. In ~~November 2015,~~determining whether performance obligations meet the ~~FASB issued ASU 2015-17, Income Taxes, Balance Sheet Classification~~criteria for being distinct, the Company considers a number of ~~Deferred Taxes, which simplifies~~factors, including the ~~classification~~degree of ~~deferred tax assets~~interrelation and ~~liabilities as non-current~~interdependence between obligations and whether or not the good or service significantly modifies or transforms another good or service in the ~~balance sheet.~~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.

Remaining performance obligations represent the transaction price allocated to performances obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations primarily consist of backlog, which are products and services for which customer purchase orders have been accepted and that are in the process of being delivered.

Contract Balances

Topic 606 distinguishes between a contract asset and accounts receivable based on whether receipt of the consideration is conditional on something other than passage of time. The ~~updated guidance~~Company records contract assets when it has a right to consideration and records accounts receivable when it has an “unconditional” right to consideration. Contract liabilities consist of cash payments received in advance of performance or where the Company has a right to consideration that is ~~effective~~unconditional, before the Company transfers a good or service to a customer.

The following table reflects the changes in contract balances for the three months ended March 31, 2018 (in thousands):



Item	Balance Sheet Location	March 31, 2018		January 1, 2018		$ change			% change
Contract assets	Prepaid expenses and other current assets	$	91	$	—	$	91		100.0	%
Contract liabilities - current	Contract liabilities - current	2,163		2,866		(703		)	(24.5	)%
Contract liabilities - non-current	Contract liabilities - non-current	1,870		1,883		(13		)	(0.7	)%

During the three months ended March 31, 2018, contract assets increased and contract liabilities decreased primarily as a result of changes in open contracts containing multiple performance obligations. There were no significant changes in estimates during the three months ended March 31, 2018 that would affect the contract balances.

Warranties

Products sold to customers include standard warranties, covering bug fixes, minor updates such that the product continues to function according to published technical specifications. These standard warranties are assurance type warranties and do not offer any services in addition to the assurance that the product will continue working as specified. Therefore, standard warranties are not considered separate performance obligations in the arrangement. Instead, the expected cost of warranty is accrued as expense in accordance with applicable guidance. Extended warranties are sold with certain products and include additional support services. The transaction price for extended warranties is accounted for as service revenue and recognized over the life of the contract.

Contract Costs

Applying a practical expedient, the Company ~~on January 1, 2017,~~recognizes the incremental costs of obtaining contracts, which primarily consist of sales commissions, as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in sales and marketing expenses. If the incremental direct costs of obtaining a contract relate to a service recognized over a period longer than one year, such costs are capitalized and amortized in line with the related services over the period of benefit. As of March 31, 2018, such capitalizable costs were not significant.

Financing

The Company's contracts do not include a significant financing component. 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 ~~adopted accordingly.~~one year or less.

Shipping and Handling

The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than as an additional promised service. As a result, the Company accrues the costs of shipping and handling when the related revenue is recognized.

Unsatisfied performance obligations

The ~~adoption~~Company does not disclose the value of ~~this standard will not have a material impact on~~unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which the Company has the right to invoice for the services performed. The majority of the Company's ~~unaudited condensed consolidated financial statements.~~performance obligations in its contracts with customers relate to contracts with a duration of less than one year and therefore transaction price allocated to unsatisfied performance obligations included in contracts with a duration of more than 12 months was not material.

Disaggregation of Revenue

The disaggregation of revenue by geographical regions for the three months ended March 31, 2018 is disclosed in Note 12.

Other Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The updated guidance is effective for the Company on January 1, 2019, and early adoption is permitted. The Company does not plan to early adopt this guidance. The Company expects its assets and liabilities to increase as a result of the adoption of this standard. The Company is currently assessing the potential impact of adopting this new guidance on its ~~unaudited condensed~~ 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 ~~unaudited condensed~~ consolidated financial statements at this time.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires entities to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on statements of cash flows. The guidance is effective for the Company on January 1, 2017, and has been adopted in the first quarter of 2017. The adoption of this standard had no material impact on the Company's unaudited condensed consolidated financial statements.

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The updated guidance isbecame effective for the Company on January 1, ~~2018. Early~~2018 and was

adopted accordingly. The adoption ~~is permitted. The Company continues to assess all the potential impacts~~ of ~~the new standard and anticipates~~ this standard ~~may~~did not have ~~a material impact~~any effect on ~~its unaudited~~the Company's condensed consolidated ~~financial statements. The Company is not able to quantify~~statement of cash flows for the three months ended March 31, 2018 or ~~cannot reasonably estimate quantitative information related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.~~2017.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, which ~~require~~requires that a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. The updated guidance isbecame effective for the Company beginning on January 1, ~~2018. Early adoption is permitted. Adoption of this ASU is applied~~2018 and was adopted accordingly, using athe retrospective approach. As a result, the Company ~~will~~ no longer ~~present~~presents transfers between cash and cash equivalents and restricted cash in the consolidated cash flow statements.

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 ~~unaudited condensed~~ 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 ~~unaudited condensed~~ consolidated financial statements at this time.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of modification accounting. The purpose of the amendment is to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance isbecame effective

for the Company beginning on January 1, ~~2018.~~2018 and was adopted accordingly. The ~~Company is currently assessing~~adoption of this standard had no impact on the ~~potential impact of adopting this new guidance on its unaudited condensed~~Company's consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, 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 Tax Cuts and Jobs Act (the "Tax Act"). Consequently the amendments eliminate the stranded tax effects resulting from the Tax Act. Because the amendments only relate to the reclassification of the income tax effect of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018 and interim periods in those years. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its ~~unaudited condensed~~ consolidated financial statements at this time.


(2)	~~Merger~~

On September 9, 2016, the Company acquired DNS through the Merger of a wholly owned subsidiary of the Company with and into DNS, with DNS surviving as a wholly owned subsidiary of the Company. The Merger combines leading technology platforms with a broadened customer base.

At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by 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 following the Merger. Accordingly, at the effective time of the Merger, the Company issued 9,493,016 shares (post reverse stock split) of the Company’s common stock to DNI as consideration in the Merger, of which 949,302 shares (post reverse stock split) are being held in escrow as security for claims for indemnifiable losses in accordance with the merger agreement relating to the Merger. As a result, immediately following the effective time of the Merger, DNI held 58% of the outstanding shares of the Company's common stock and the holders of the Company's common stock immediately prior to the Merger retained, in the aggregate, 42% of the outstanding shares of the Company's common stock.

The Company accounted for the Merger as a reverse acquisition under the acquisition method of accounting in accordance with ASC 805, "Business Combination." Consequently, for the purpose of the purchase price allocation, DNS' assets and liabilities have been retained at their carrying values and Legacy Zhone's assets acquired, and liabilities assumed, by DNS (as the accounting acquirer in the Merger) have been recorded at their fair value measured as of September 9, 2016.

The total purchase consideration in the Merger was based on the number of shares of Legacy Zhone common stock and Legacy Zhone stock options vested and outstanding immediately prior to the closing of the Merger, and was determined based on the closing price of $5.95 per share (post reverse stock split) of the Company's common stock on the September 9, 2016. The estimated total purchase consideration is calculated as follows (in thousands):

Shares Estimated Fair Value
Shares of Legacy Zhone stock as of September 8, 2016 6,874
$ 40,902
Legacy Zhone stock options 198
540
Total Purchase Consideration $ 41,442

~~The following table summarizes the allocation of the fair value consideration transferred as of the acquisition date (in thousands):~~

Cash and cash equivalents $ 7,013
Accounts receivable 18,510
Inventory 16,456
Prepaid expenses and other current assets 2,191
Property and equipment 4,339
Other assets 125
Identifiable intangible assets 10,479
Goodwill 3,284
Accounts payable (11,021 )
Accrued and other liabilities (7,089 )
Other long-term liabilities (2,845 )
Total Indicated Fair Value of Assets $ 41,442

~~The goodwill was primarily attributed to people, geographic diversification and complementary products. The goodwill arising from the Merger is not tax deductible.~~

The Company considered the deferred tax liabilities caused by the Merger to be a source of income to support recoverability of acquired deferred tax assets, before considering the recoverability of the acquirer's existing deferred tax assets. Accordingly, the valuation allowance on the acquiree's deferred tax assets was reduced by the deferred tax liabilities caused by the Merger and accounted for as part of the purchase price allocation.

~~The following table presents the fair values of the acquired intangible assets at the effective date of the Merger (in thousands, except years):~~

Useful life
(in Years)
Fair Value
Developed technology 5 $ 3,060
Customer relationships 10 5,240
Backlog 1 2,179
$ 10,479

The following unaudited pro forma condensed combined financial information for the three and nine months ended September 30, 2016 gives effect to the Merger as if it had occurred at the beginning of 2015. The unaudited pro forma condensed combined financial information has been included for comparative purposes only and is not necessarily indicative of what the combined Company's financial position or results of operations might have been had the Merger been completed as of the date indicated.

September 30, 2016
(in thousands) Three
Months
Ended Nine
Months
Ended
Pro forma total net revenue $ 39,740
$ 142,530
Pro forma net loss (15,569 ) (25,504 )

~~(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 are not measured at fair value on the Company’s condensed consolidated balance sheet as of ~~September 30, 2017~~March 31, 2018 and the consolidated balance sheet as of December 31, ~~2016,~~2017, but require disclosure of their fair values: cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. The carrying values of financial instruments such as cash and cash equivalents, short-term investments, accounts receivable 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.

(3) Cash, Cash Equivalents and Restricted Cash

As of March 31, 2018 and December 31, 2017, the Company's cash and cash equivalents comprised financial deposits. Restricted cash consisted primarily of cash restricted for performance bonds, warranty bonds and collateral for borrowings. Current and long-term restricted cash was $11.5 million at March 31, 2018 and $13.9 million at December 31, 2017.


(4)	~~Inventories~~Balance Sheet Detail

Accounts receivable, net as of March 31, 2018 and December 31, 2017 was as follows (in thousands):



	March 31, 2018				December 31, 2017
Gross accounts receivable	$	69,948			$	63,446
Allowance for doubtful accounts	(370		)		(922		)
Allowance for sales returns	—			⁽¹⁾	(769		)
Total allowances	(370		)		(1,691		)
Total accounts receivable, net	$	69,578			$	61,755

⁽¹⁾ Upon adoption of ASC 606, allowances for sales returns were reclassified to accrued and other liabilities as these reserve balances are considered estimated refund liabilities. Refer to Footnote 1(g) for additional information about the adoption impact.

Inventories as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 were as follows (in thousands):


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Raw materials	$	12,812	$	13,547	$	14,442	$	12,671
Work in process	3,004		3,705		3,091		2,150
Finished goods	16,150		13,780		15,181		10,523
Total inventories	$	31,966	$	31,032	$	32,714	$	25,344

Inventories provided as collateral for borrowings from Export-Import Bank of Korea amounted to ~~$18.9~~$15.8 million and ~~$14.4~~$11.4 million as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.


(5)	Property and Equipment

Property and equipment as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 were as follows (in thousands):


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Furniture and fixtures	$	21,251		$	20,040		$	23,197		$	22,988
Machinery and equipment	4,945			4,530			5,531			5,455
Leasehold improvements	3,386			3,573			3,652			3,647
Computers and software	567			411			540			621
Other	983			922			1,025			1,007
	31,132			29,476			33,945			33,718
Less accumulated depreciation and amortization	(25,109		)	(22,922		)	(28,062		)	(27,584		)
Less government grants	(211		)	(266		)	(251		)	(261		)
Total property and equipment, net	$	5,812		$	6,288		$	5,632		$	5,873

Depreciation ~~and amortization~~ expense associated with property and equipment for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and March 31, 2017 ~~was $0.5 million and $1.4 million, respectively. Depreciation and amortization expense associated with property and equipment for the three and nine months ended September 30, 2016~~ was $0.4 million and ~~$0.9~~$0.5 million, ~~respectively.~~respectively

The Company receives grants from ~~the~~various 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.


(6)	Goodwill and Intangible Assets

Goodwill as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 was as follows (in thousands):


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Beginning balance	$	3,977	$	693	$	3,977	$	3,977
Addition from Merger	—		3,284		—		—
Less: accumulated impairment	—		—		—		—
Ending balance	$	3,977	$	3,977	$	3,977	$	3,977

The Company did not recognize impairment loss on goodwill during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017.

Intangible assets as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 were as follows (in thousands):


							March 31, 2018
	September 30, 2017			December 31, 2016			Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	3,060		$	3,060		$	3,060	$	(969	)	$	2,091
Customer relationships	5,240			5,240			5,240		(830		)	4,410
Backlog	2,179			2,179			2,179		(2,179		)	—
Other	194			105
Less accumulated amortization	(3,499		)	(1,817		)
Intangible assets, net	$	7,174		$	8,767
Total intangible assets							$	10,479	$	(3,978	)	$	6,501



	December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	3,060	$	(816	)	$	2,244
Customer relationships	5,240		(699		)	4,541
Backlog	2,179		(2,179		)	—
Total intangible assets	$	10,479	$	(3,694	)	$	6,785

Amortization expense associated with intangible assets for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 was $0.3 million and ~~$1.7~~$0.7 million, respectively. ~~Amortization expense associated with intangible assets for each of the three and nine months ended September 30, 2016 was $0.3 million.~~


(7)	Debt

Wells Fargo Bank Facility

As of ~~September 30, 2017,~~March 31, 2018, the Company had a $25.0 million revolving line of credit and letter of credit facility (the "WFB Facility") with Wells Fargo Bank ("WFB"). Under the WFB Facility, the Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company is able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the ~~agreement,~~WFB Facility, as long as the aggregate amount outstanding does not exceed $25.0 million less the amount committed as security for letters of credit. To maintain availability of funds under the WFB Facility, the Company pays a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense.

As of ~~September 30, 2017,~~March 31, 2018, the Company had no$6.3 million in outstanding borrowings under its WFB Facility, and ~~$2.5~~$2.1 million was committed as security for letters of credit. ~~The~~On April 5, 2018, the Company repaid the $6.3 million borrowings under its WFB Facility. Based on the Company's eligible accounts receivable and inventory, the Company had ~~$6.7~~$5.1 million of ~~borrowing~~financing availability under the WFB Facility as of ~~September 30, 2017.~~March 31, 2018. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin based on the Company's average excess availability (as calculated under the WFB Facility). The interest rate on the WFB Facility was ~~3.8%~~4.81% at ~~September 30, 2017.~~March 31, 2018. The maturity date under the WFB Facility is ~~March 31,~~July 15, 2019.

The Company’s obligations under the WFB Facility are secured by substantially all of its personal property assets and those of its subsidiaries that guarantee the WFB Facility, including their intellectual property. The WFB Facility contains certain financial 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. As of ~~September 30, 2017,~~March 31, 2018, the Company was in compliance with the covenants under the WFB Facility.

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 basis~~as 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 ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the Company had an aggregate outstanding balance of ~~$18.4~~$27.3 million ~~and $17.6~~and$22.8 million, respectively, under such financing arrangements, and the interest rates per annum applicable to outstanding borrowings under these financing arrangements were as listed in the tables ~~below.~~below (amount in thousands).


		As of September 30, 2017				As of March 31, 2018
		Interest rate (%)	Amount			Interest rate (%)	Amount
Industrial Bank of Korea	Credit facility	2.8 - 3.0	$	3,235	Credit facility	3.08 - 3.68	$	3,679
Industrial Bank of Korea	Trade finance	3.9-5.4	2,287		Trade finance	4.47 - 5.25	2,625
Shinhan Bank	General loan	5.89	2,791		General loan	6.06	3,000
Shinhan Bank	Trade finance	3.70	1,950		Trade finance	4.16	860
NongHyup Bank	Credit facility	1.7 - 3.0	1,841		Credit facility	3.16 - 3.9	2,775
The Export-Import Bank of Korea	Export development loan	3.1	6,278		Export development loan	3.20 - 3.28	7,601
Mitsubishi Bank (Japan)					AR factoring	1.58	5,495
Shinhan Bank (India)					General loan	8.70 - 8.90	1,221
			$	18,382			$	27,256


		As of December 31, 2016				As of December 31, 2017
		Interest rate (%)	Amount			Interest rate (%)	Amount
Industrial Bank of Korea	Credit facility	2.16 - 2.76	$	1,106	Credit facility	2.89 - 3.26	$	2,328
Industrial Bank of Korea					Trade Finance	4.47 - 5.97	2,401
Shinhan Bank	General loan	4.08	3,310		General loan	5.91	2,987
Shinhan Bank	Trade finance	3.28 - 3.44	1,752		Trade finance	3.90 - 4.14	3,050
NongHyup Bank	Credit facility	1.92 - 2.66	482
KEB Hana Bank	Comprehensive credit loan	2.79	3,501
NongHyup Bank (Korea)					Credit facility	2.83 - 3.42	860
The Export-Import Bank of Korea	Export development loan	3.10	7,448		Export development loan	3.20 - 3.28	7,570
Mitsubishi Bank (Japan)					AR factoring	1.58	1,872
Shinhan Bank (India)					General loan	8.70 - 8.90	1,709
			$	17,599			$	22,777

As of ~~September 30, 2017,~~March 31, 2018, the Company had ~~$5.0~~$6.5 million in outstanding borrowings and ~~$6.0~~$4.5 million committed as security for letters of credit under the Company's $12.0 million credit facility with certain foreign banks.

See Note 9 for a discussion of related-party debt.


(8)	Non-Controlling Interests

Non-controlling interests for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ were as follows (in thousands):


	Nine Months Ended September 30,					Three Months Ended March 31,
	2017		2016			2018		2017
Beginning non-controlling interests	$	416	$	138		$	534	$	416
Acquisition of additional interest in a subsidiary	—		277
Net income (loss) attributable to non-controlling interests	172		(17		)	34		249
Foreign currency translation adjustments (OCI)	19		66			30		20
Ending non-controlling interests	$	607	$	464		$	598	$	685


(9)	Related-Party Transactions

Related-Party Acquisitions

On December 31, 2017, DNS acquired 100% and 99.99% of the common stock of D-Mobile Limited (“D-Mobile”) and DASAN India Private Limited ("DASAN India"), respectively, from DNI. D-Mobile and DASAN India are resellers of the Company's products in Taiwan and India, respectively. The consideration payable by the Company to DNI for the common stock is the net book value of D-Mobile and DASAN India at December 31, 2017, subject to final adjustments. The net book value of D-Mobile and DASAN India was an aggregate of $0.8 million. These transactions were accounted for by the Company as common control transactions, with the net assets transferred recorded at historical cost. The transactions did not result in a change in reporting entity and hence were accounted for prospectively.

Related-Party Debt

In connection with the Merger, on September 9, 2016, the Company entered into a loan agreement with DNI for a $5.0 million unsecured subordinated term loan facility. Under the loan agreement, the Company was permitted to request drawdowns of one or more term loans in an aggregate principal amount not to exceed $5.0 million. As of ~~September 30, 2017,~~March 31, 2018, $5.0 million in term loans was outstanding under the facility. Such term loans mature in September 2021 and are pre-payable at any time by the Company without premium or penalty. The interest rate as of ~~September 30, 2017~~March 31, 2018 under this facility was 4.6% per annum.

In addition, the Company borrowed $1.8 million from DNI for capital investment in February 2016, which amount was outstanding as of ~~September 30, 2017. 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.

~~On June 23, 2017, the Company borrowed $3.5 million from Solueta, an affiliate of DNI. As of September 30, 2017, the aggregate outstanding balance under this loan agreement was $1.7 million.~~31, 2018. This loan matures in ~~November 2017~~July 2019 and bears interest at a rate of 4.6% per annum, payable ~~monthly.~~annually.

On March 21, 2018, DNS borrowed KRW6.5 billion ($6.1 million in USD) from DNI, which remained outstanding at March 31, 2018. The loan bears interest at a rate of 4.6% and matures on June 27, 2019, and is secured by certain accounts receivable of DNS Korea.

Other Related-Party Transactions

Sales and purchases, cost of revenue, research and product development, selling, marketing, general and administrative, interest expense and other expenses to and from related parties for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ were as follows (in thousands):

Three Months Ended September 30, 2017
Counterparty DNI Ownership Interest Sales Cost of revenue Manufacturing (Cost of revenue) Research and product development
Selling, marketing,
general and administrative
Other Expenses
DNI (Parent Company) N/A $ 3,976
$ 3,604
$ —
$ —
$ 1,291
$ 51
CHASAN Networks Co., Ltd. 100% —
—
257
20
—
—
DASAN FRANCE 100% 662
576
—
—
83
—
DASAN INDIA Private Limited 100% —
—
—
—
30
—
D-Mobile 100% 1,233
1,077
—
—
122
—
HANDYSOFT, Inc. 17.64% 54
12
—
—
6
4
Tomato Soft Ltd. 100% —
—
43
108
—
—
Tomato Soft (Xi'an) Ltd. 100% —
—
—
144
—
—
$ 5,925
$ 5,269
$ 300
$ 272
$ 1,532
$ 55


		Three Months Ended September 30, 2016 (As Revised)													Three Months Ended March 31, 2018
Counterparty	DNI Ownership Interest	Sales		Cost of revenue		Manufacturing (Cost of revenue)		Research and product development		Selling, marketing, general and administrative		Other Expenses		DNI ownership Interest	Sales		Cost of revenue		Manufacturing (cost of revenue)		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI (Parent Company)	N/A	$	5,112	$	4,390	$	—	$	—	$	946	$	89	N/A	$	1,246	$	1,123	$	—	$	—	$	1,022	$	79	$	66
Tomato Soft Ltd.														100%	—		—		19		—		—		—		—
Tomato Soft (Xi'an) Ltd.														100%	—		—		10		154		—		—		—
CHASAN Networks Co., Ltd.	100%	—		—		130		38		—		—		100%	—		—		324		18		—		—		—
DASAN FRANCE	100%	3		3		—		—		—		—		100%	202		177		—		—		—		—		—
D-Mobile	100%	1,267		789		—		—		125		—
HANDYSOFT, Inc.	17.64%	68		58		—		—		—		—		17.63%	150		110		—		—		—		—		—
J-Mobile Corporation	90.47%	18		—		—		—		—		—		90.47%	—		—		—		—		—		—		—
Tomato Soft Ltd.	100%	—		—		36		—		—		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		181		—		—
Fine Solution														100%	—		—		—		—		—		—		—
Solueta														27.21%	—		—		—		—		—		—		—
		$	6,468	$	5,240	$	166	$	219	$	1,071	$	89		$	1,598	$	1,410	$	353	$	172	$	1,022	$	79	$	66

Nine Months Ended September 30, 2017
Counterparty DNI Ownership Interest Sales Cost of revenue Manufacturing (Cost of revenue) Research and product development Selling, marketing,
general and administrative Other Expenses
DNI (Parent Company) N/A $ 16,608
$ 14,020
$ —
$ —
$ 3,491
$ 171
CHASAN Networks Co., Ltd. 100% —
—
578
79
—
—
DASAN FRANCE 100% 1,612
1,512
—
—
383
—
DASAN INDIA Private Limited 100% 6,287
4,783
—
—
30
—
D-Mobile 100% 3,054
1,831
—
—
318
—
Fine Solution 100% —
—
—
—
4
—
HANDYSOFT, Inc. 17.64% 88
23
—
—
6
4
J-Mobile Corporation 90.47% 8
—
—
—
132
—
Tomato Soft Ltd. 100% —
—
104
108
—
—
Tomato Soft (Xi'an) Ltd. 100% —
—
—
448
37
—
Solueta 27.21% —
—
—
—
—
3
$ 27,657
$ 22,169
$ 682
$ 635
$ 4,401
$ 178


		Nine Months Ended September 30, 2016 (As Revised)														Three Months Ended March 31, 2017
Counterparty	DNI Ownership Interest	Sales		Cost of revenue		Manufacturing (Cost of revenue)		Research and product development		Selling, marketing, general and administrative		Other Expenses			DNI ownership Interest	Sales		Cost of revenue		Manufacturing (cost of revenue)		Research and product development		Selling, marketing, general and administrative		Other expenses
DNI (Parent Company)	N/A	$	19,080	$	16,219	$	—	$	—	$	4,255	$	309		N/A	$	4,151	$	3,321	$	—	$	—	$	874	$	63
CHASAN Networks Co., Ltd.	100%	—		—		436		106		—		—			100%	—		—		195		27		—		—
DASAN FRANCE	100%	3		3		—		—		—		—			100%	394		387		—		—		—		—
DASAN INDIA Private Limited(1)	100%	—		—		—		—		—		—			100%	6,287		4,783						—
D-Mobile(1)	100%	3,135		2,231		—		—		318		—			100%	11		13		—		—		102		—
DMC, Inc.	27.21%	1		1		—		—		—		—
Fine Solution															100%	—		—						3
HANDYSOFT, Inc.	17.64%	150		130		—		—		—		—			17.64%	20		9		—		—		—		—
J-Mobile Corporation	90.47%	39		—		—		—		634		—			68.56%	8		—		—		—		132		—
PANDA Media, Inc.	100%	—		—		—		—		2		—
Tomato Soft Ltd.	100%	—		—		98		—		—		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		560		—		—			100%	—		—		—		171		—		—
		$	22,408	$	18,584	$	534	$	666	$	5,209	$	309			$	10,871	$	8,513	$	195	$	198	$	1,111	$	63
⁽¹⁾As discussed above, on December 31, 2017 DNS acquired DASAN India and D-Mobile from DNI.														⁽¹⁾As discussed above, on December 31, 2017 DNS acquired DASAN India and D-Mobile from DNI.

The Company has entered into ~~certain~~ sales agreements with DNI and certain of its subsidiaries. Sales and cost of revenue to DNI and DASAN France (and with respect to the first quarter of 2017, DASAN ~~INDIA Private Limited,~~India and ~~D-Mobile~~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 ~~agreements~~an agreement with ~~Tomato Soft Ltd. and~~ CHASAN Networks Co., Ltd. to provide manufacturing and research and development services for the Company. Under the agreement with ~~Tomato Soft Ltd. and~~ 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 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. ~~Selling, marketing, general and administrative expense~~Sales to DNI ~~includes a fee~~necessary for DNI to fulfill agreements with its customers are recorded net of ~~3% of total sales to DNI for sales to these customers.~~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.

The Company has entered into sales agreement with Handysoft, Inc., provider of software and system integration solutions in Korea, to supply networks equipment, research and development and logistics services through DASAN Networks, Inc.

~~The Company has entered into sales agreement with J-Mobile Corporation to supply networks equipment in Japan. J-Mobile Corporation also provides marketing services in Japan.~~

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 ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 were as follows (in thousands):


		As of September 30, 2017													As of March 31, 2018
Counterparty	DNI Ownership Interest	Account receivables		Other receivables		Deposits for lease*		Accounts payable		Other payables		Loans		DNI ownership Interest	Account receivables		Other receivables		Deposits for lease *		Long-term debt		Accounts payable		Other Payables		Accrued and other current liabilities
DNI (Parent Company)	N/A	$	9,196	$	—	$	727	$	—	$	125	$	6,800
ABLE	61.99%	56		—		—		—		—		—
CHASAN Networks Co., Ltd.	100%	—		—		—		100		—		—
DASAN France	100%	662		4		—		—		—		—
D-Mobile	100%	3,001		16		—		—		—		—
HANDYSOFT, Inc.	17.64%	26		—		—		6		1		—
Solueta	27.21%	—		2		—		—		2		1,744
DNI (parent company)														N/A	$	14,015	$	2	$	790	$	12,895	$	1,533	$	2,756	$	—
Tomato Soft Ltd.	100%	—		—		—		—		25		—		100%	—		—		—		—		—		10		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		—		57		—		100%	—		—		—		—		—		40		—
ABLE														94.57%	139		—		—		—		—		—		—
DASAN France														100%	490		69		—		—		—		—		—
HANDYSOFT, Inc.														17.63%	—		—		—		—		1		—		—
CHASAN Networks Co., Ltd.														100%	—		—		—		—		105		—		—
Solueta														100%	—		1		—		—		—		—		—
		$	12,941	$	22	$	727	$	106	$	210	$	8,544		$	14,644	$	72	$	790	$	12,895	$	1,639	$	2,806	$	—


		As of December 31, 2016													As of December 31, 2017
Counterparty	DNI Ownership Interest	Account receivables		Other receivables		Deposits for lease*		Accounts payable		Other payables		Loans		DNI Ownership Interest	Account receivables		Other receivables		Deposits for lease *		Long-term debt		Accounts payable		Other Payables		Accrued and other current liabilities**
DNI (Parent Company)	N/A	$	6,679	$	171	$	690	$	360	$	6,861	$	6,800
ABLE	61.99%	53		—		9		—		—		—
CHASAN Networks Co., Ltd.	100%	—		—		—		70		—		—
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		—		—		—		—		—
DNI (parent company)														N/A	$	12,576	$	93	$	786	$	6,800	$	1,264	$	1,859	$	59
Tomato Soft Ltd.	100%	—		—		—		—		16		—		100%	—		—		—		—		—		18		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		—		63		—		100%	—		—		—		—		—		54		—
ABLE														94.57%	—		—		—		—		—		—		—
DASAN France														100%	870		71		—		—		—		—		—
HANDYSOFT, Inc.														17.63%	52		—		—		—		—		—		—
CHASAN Networks Co., Ltd.														100%	—		—		—		—		87		—		—
Solueta														100%	—		—		—		—		—		25		—
		$	13,311	$	171	$	699	$	430	$	6,940	$	6,800		$	13,498	$	164	$	786	$	6,800	$	1,351	$	1,956	$	59

* Included in other assets related to deposits for lease in the condensed consolidated balance sheet as of ~~September 30, 2017~~March 31, 2018 and the consolidated balance sheet as of December 31, ~~2016.~~2017.

**Included in accrued and other liabilities in the condensed consolidated balance sheet as of March 31, 2018 and the consolidated balance sheet as of December 31, 2017.


(10)	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 equivalent shares are composed of incremental shares of common equivalent shares issuable upon the exercise of stock options and the vesting of restricted stock units.

Basic net income (loss) per share is the same as diluted net income (loss) per share for the three ~~and nine~~ months ended September 30, 2016 because DNS did not issue the potentially dilutive common stock. Basic net income (loss) per share is the same as diluted net income (loss) per share for the three and nine months ended September 30,March 31, 2017 because the effects of stock options and restricted stock units would have been anti-dilutive.

The following table is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per share calculation (in thousands, except per share data):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017			2016			Three Months Ended March 31,
			(As Revised)						(As Revised)			2018		2017
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	$	1,399	$	(4,733	)	$	(3,157	)	$	(9,066	)	$	107	$	(3,747	)
Weighted average number of shares outstanding:
Basic	16,382		11,139			16,380			10,046			16,416		16,378
Effect of dilutive securities:
Stock options, restricted stock units and share awards	—		—			—			—			210		—
Diluted	16,382		11,139			16,380			10,046			16,626		16,378
Net income (loss) per share attributable to DASAN Zhone Solutions, Inc.:
Basic	$	0.09	$	(0.42	)	$	(0.19	)	$	(0.90	)	$	0.01	$	(0.23	)
Diluted	$	0.09	$	(0.42	)	$	(0.19	)	$	(0.90	)	$	0.01	$	(0.23	)

The ~~outstanding~~first quarter of 2018 excluded 451.7 thousand stock options at a weighted average exercise price of $12.02 from diluted net income per share because their effect would have been antidilutive. The first quarter of 2017 excluded common ~~equivalent shares excluded~~stock equivalents of 4.9 thousand from the computation of the diluted net ~~income (loss)~~loss per share ~~attributable to DASAN Zhone Solutions, Inc.~~ for the ~~periods~~first quarter of 2017 presented because including them would have been ~~antidilutive are as follows (in thousands):~~

Three and Nine Months Ended September 30,
2017 2016
(As Revised)
Stock options 915
795
Restricted stock units 2
9
917
804

antidilutive.


(11)	Commitments and Contingencies

Operating Leases

The Company has entered into operating leases for certain office space and equipment, some of which contain renewal options and escalation clauses. Estimated future lease payments under all non-cancellable operating leases with terms in excess of one year, including taxes and service fees, are as follows (in thousands):


	Operating Leases		Operating Leases
Year ending December 31:
2017 (remainder of the year)	$	967
2018	3,359
2018 (remainder of the year)			$	3,046
2019	2,496		3,956
2020	2,358		2,998
2021	2,264		2,590
2022			2,664
Thereafter	8,722		8,423
Total minimum lease payments	$	20,166	$	23,677

Warranties

The Company accrues ~~for~~ warranty costs based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally ~~two~~one to five years from the date of shipment. The following table reconciles changes in the Company’s accrued warranties and related costs for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ (in thousands):


	Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2018			2017
Beginning balance	$	878		$	441		$	931		$	878
Charged to cost of revenue	126			227			359			100
Claims and settlements	(195		)	(389		)	(195		)	(212		)
Foreign exchange impact	14			78			(1		)	20
Ending balance	$	823		$	357		$	1,094		$	786

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 ~~September 30, 2017,~~March 31, 2018, the Company had ~~$1.0~~$2.9 million of ~~performance bonds and $0.4 million of warranty~~surety bonds guaranteed by third parties.

In addition, the Company has entered into a sales agreement with DNI, that distributes Company's products to a certain customer in Vietnam. Under the agreement with the customer, DNI is required to provides various types of surety bonds which are guaranteed by the bank. As of September 30, 2017, the Company had restricted cash of $1.2 million, $2.1 million and $2.0 million as a collateral for the advance payment bonds, performance bonds and warranty bonds, respectively, issued by DNI.

Purchase Commitments

The Company has agreements with various contract manufacturers which include non-cancellable inventory 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. The amount of non-cancellable purchase commitments outstanding, net of reserve, was ~~$3.0~~$5.0 million as of ~~September 30, 2017~~March 31, 2018.

Payment Guarantees provided by Third Parties and DNI

The following table sets forth ~~third parties that have provided~~ payment guarantees of the Company's indebtedness and other obligations as of ~~September 30, 2017~~March 31, 2018 (in thousands): that have been provided by third parties and DNI. DNI owns approximately 58% of the outstanding shares of the Company's common stock:

Guarantor

Amount Guaranteed

Description of Obligations Guaranteed

Amount Guaranteed (in thousands)

Description of Obligations Guaranteed

DNI (Parent Company)

3,349

Borrowings from Shinhan Bank

DNI (Parent Company)

1,884

Purchasing card from Shinhan Bank

DNI (Parent Company)

10,493

Credit facility & purchasing card from Industrial Bank of Korea

DNI (Parent Company)

6,000

Credit facility from NongHyup Bank

DNI (Parent Company)

523

Purchasing card from NongHyup Bank

Industrial Bank of Korea

6,512

Credit facility

DNI

3,601

Borrowings from Shinhan Bank

DNI

1,800

Purchasing card from Shinhan Bank

DNI

10,650

Letter of credit from Industrial Bank of Korea

DNI

6,000

Letter of credit from NongHyup Bank

DNI

563

Purchasing card from NongHyup Bank

DNI

6,393

Borrowings from Export-Import Bank of Korea

Industrial Bank of Korea

864

Performance bonds

6,893

Letter of credit

NongHyup Bank

4,567

Credit facility

4,076

Letter of credit

Shinhan Bank

191

Purchasing card

172

Purchasing card

KEB Hana Bank

Performance bonds

Industrial Bank of Korea

1,829

Performance bonds

State Bank of India

Performance bonds

Seoul Guarantee Insurance Co.

Performance bonds

1,024

Performance payment guarantee*

Seoul Guarantee Insurance Co.

373

Warranty bonds

34,881

43,039

*The Company is responsible for the warranty liabilities generally for the period of two years regarding major product sales and has contracted surety insurance over part of the warranty liabilities.

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.

Legal Proceedings

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 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. 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 of the period in which the ruling occurs, or future periods.


(12)	Enterprise-Wide Information

The Company is a global provider of network access solutions and communications equipment for service provider and enterprise networks. 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 are~~maker is the Company’s ~~Co-Chief~~Chief Executive ~~Officers,~~Officer, who ~~review~~reviews 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 ~~geographic~~geographical concentrations and revenue by products and services (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Three Months Ended
	2017		2016		2017		2016		March 31,
			(As Revised)				(As Revised)		2018		2017
Revenue by geography:
United States	$	13,068	$	3,408	$	37,176	$	7,432	$	16,551	$	12,147
Canada	1,498		254		4,112		254		971		1,192
Total North America	14,566		3,662		41,288		7,686		17,522		13,339
Latin America	7,480		1,877		19,425		2,912		7,958		4,870
Europe, Middle East, Africa	7,378		2,232		19,134		5,209		7,486		5,503
Korea	20,520		18,372		69,032		60,144		12,124		16,315
Other Asia Pacific	16,494		5,097		29,612		14,881		14,414		12,085
Total International	51,872		27,578		137,203		83,146		41,982		38,773
Total	$	66,438	$	31,240	$	178,491	$	90,832	$	59,504	$	52,112


	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Three Months Ended
	2017		2016		2017		2016		March 31,
			(As Revised)				(As Revised)		2018		2017
Revenue by products and services:
Products	$	63,257	$	28,891	$	169,831	$	84,666	$	56,726	$	49,725
Services	3,181		2,349		8,660		6,166		2,778		2,387
Total	$	66,438	$	31,240	$	178,491	$	90,832	$	59,504	$	52,112

The Company's property and equipment, net of accumulated depreciation, were located in the following geographical areas as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 (in thousands):


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
United States	$	3,611	$	4,094	$	3,283	$	3,393
Korea	1,449		1,455		1,471		1,633
Japan and Vietnam	752		739		844		810
Taiwan and India					34		37
	$	5,812	$	6,288	$	5,632	$	5,873


(13)	Income Taxes

Income tax (benefit) expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 was ~~$0.1~~approximately $0.0 million and ~~$0.6~~$0.4 million, respectively, on pre-tax income ~~(losses)~~ of ~~$1.5~~$0.1 million and ~~$(2.3) million, respectively. For the three and nine months ended September 30, 2016, the Company recognized income tax benefit~~pre-tax loss of ~~$0.6 million and $1.0 million, respectively, on pre-tax losses of $5.4 million and $10.1~~$3.1 million, respectively. As of ~~September 30, 2017,~~March 31, 2018, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in the United States and ~~taxable income~~the mix of earnings generated by the Company’s wholly-owned foreign subsidiaries.

Management periodically evaluates the realizability of the Company's net deferred tax assets based on all available evidence, both positive and negative. The Company evaluates on a jurisdictional basis and certain jurisdictions could result in a realization of net deferred tax assets sooner than others. The realization of net deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income, on a jurisdictional basis, during periods prior to the expiration of tax attributes to fully utilize these assets. The Company weighed both positive and negative evidence and determined that there is a continued need for a full valuation allowance on its deferred tax assets in certain jurisdictions as of September 30, 2017. The Company currently believes there is not sufficient positive evidence of future profitability to change its judgment regarding the need for a full valuation allowance on its deferred tax assets in these jurisdictions. The continued improvement in the Company's operating results, conditioned on successfully commercializing new business arrangements and managing costs would provide additional positive evidence in determining the need for a valuation allowance in certain jurisdictions and could lead to reversal of substantially all of the Company's valuation allowance on its deferred tax assets. Until such time, consumption of tax attributes to offset profits will reduce the overall level of deferred tax assets subject to valuation allowance. Should the Company determine that it would be able to realize its remaining deferred tax assets in the foreseeable future, on a jurisdictional basis, an adjustment to its remaining deferred tax assets would cause a material increase to income in the period such determination is made.

The total amount of unrecognized tax benefits, including interest and penalties, at ~~September 30, 2017~~March 31, 2018 was ~~not material.~~$0.6 million. The amount of tax benefits that would impact the effective income tax rate, if recognized, is ~~not expected to be material.~~$0.1 million. The amount of unrecognized tax benefits increased by $0.2 million during the quarter ended March 31, 2018. There were no significant changes to unrecognized tax benefits during the ~~quarters~~quarter ended ~~September 30, 2017 and 2016.~~March 31, 2017. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.

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~~	~~2013 - 2016~~
~~• California and Canada~~	~~2012 - 2016~~
~~• Brazil~~	~~2011 - 2016~~
~~• Germany~~	~~2012 - 2016~~
~~• Japan~~	~~2011 - 2016~~
~~• Korea~~	~~2015 - 2016~~
~~• United Kingdom~~	~~2014 - 2016~~
~~• Vietnam~~	~~2016~~

However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried forward to open years.

The Company ~~estimates that its foreign income will generally be subject~~has recognized the provisional tax impacts related to ~~taxation~~the Tax Act in the ~~United States on a current basis~~Company’s consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and that its foreign subsidiaries and representative offices will therefore not have any material untaxed earnings subject to deferred taxes. In addition, to the extent the Company is deemed to have sufficient connection to a particular taxing jurisdiction to enable that jurisdiction to tax the Company butassumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The Company has not ~~filed~~yet determined its policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the global intangible low-taxed income (“GILTI”) provisions in future periods or use the period cost method. The Company has, however, included an estimate of the current GILTI impact in its tax provision for 2018. The Company continues to evaluate the impact of the tax reform and the accounting is expected to be completed when the Company's 2017 U.S. corporate income tax return is filed in ~~that jurisdiction for the year(s) at issue, the jurisdiction would typically be able to assert a tax liability for such years without limitation on the number of years it may examine.~~

~~The Company is not currently under examination for income taxes in any material jurisdiction.~~

2018.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this report, unless the context suggests otherwise, the terms "we", "us", or "our" refer to (i) Dasan Network Solutions, Inc. (DNS) and its consolidated subsidiaries for periods through September 8, 2016 and (ii) DASAN Zhone Solutions, Inc. and its consolidated subsidiaries (collectively, DZS) for periods on or after September 9, 2016, the effective date of the Merger (as defined below). In connection with the Merger, Zhone Technologies, Inc. changed its name to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone."

Forward-Looking Statements

This report, 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 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “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; anticipated

growth and trends in our business or key markets; cost synergies, growth opportunities and other financial and operating benefits of the Merger; future growth and revenues from our products; our ability to refinance or repay our existing indebtedness prior to the applicable maturity date; future economic conditions and performance; anticipated performance of products or services; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified under the heading “Risk Factors” in Part II, Item 1A, elsewhere in this report and our other filings with the Securities and Exchange Commission (the SEC). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to realize the

anticipated cost savings, synergies and other benefits of the Merger and any integration risks relating to the Merger, the ability to generate sufficient revenue to achieve or sustain profitability, the ability to raise additional capital to fund existing and future operations or to refinance or repay our existing indebtedness, defects or other performance problems in our products, any economic slowdown in the telecommunications industry that restricts the ability of our customers to purchase our products, commercial acceptance of our products, intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same networks needs as our products, higher than anticipated expenses that we may incur, any failure to comply with the periodic filing and other requirements of The Nasdaq Stock Market for continued listing, material weaknesses or other deficiencies in our internal control over financial reporting, 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 Technologies, Inc. and other factors identified elsewhere in this report and in our most recent reports on Forms 10-K, 10-Q and 8-K. We undertake no obligation to revise or update any forward-looking statements for any reason.

OVERVIEW

We are a global provider of network access solutions and communications equipment for service provider and enterprise networks. We research, develop, test, sell, manufacture and support communications equipment in five major areas: broadband access, Ethernet switching, mobile backhaul, passive optical LAN (POLAN) and software defined networks (SDN).

As discussed under "Liquidity and Capital Resources" below, the maturing of short-term debt obligations and our recurring losses from operations raise substantial doubt on whether we will be able to continue as a going concern.

~~As of September 30, 2017, the total outstanding principal amount of our debt obligations was $26.9 million, consisting of the following:~~

~~$18.4 million in short-term debt obligations to other non-related parties;~~

~~$3.5 million in short-term debt obligations to related parties; and~~

~~$5.0 million in long-term debt obligations to related parties.~~

Our ability to continue as a “going concern” is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements, our ability to cure any defaults that occur under our debt agreements 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.

~~Going forward, our key financial objectives include the following:~~

~~Increasing revenue while continuing to carefully control costs;~~

~~Continued 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.~~

~~Merger~~

On September 9, 2016, we acquired 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). 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.

At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by its sole shareholder, DASAN Networks, Inc. (DNI), were canceled and converted into the right to receive shares of our common stock in an amount equal to 58% of the issued and outstanding shares of our common stock immediately following the Merger. Accordingly, at the effective time of the Merger, we issued 9,493,016 shares (post reverse stock split) of our common stock to DNI as consideration in the Merger, of which 949,302 shares (post reverse stock split) are being held in escrow as security for claims for indemnifiable losses in accordance with the merger agreement relating to the Merger. As a result, immediately following the effective time of the Merger, DNI held 58% of the outstanding shares of our common stock and the holders of our common stock immediately prior to the Merger retained, in the aggregate, 42% of the outstanding shares of our common stock.

~~See Note 2 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report for additional information regarding the Merger.~~

~~ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS~~

As discussed in Note 1(e) to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report, the Merger has been accounted for as a reverse acquisition under which DNS was considered the accounting acquirer of Legacy Zhone. As such, our financial results for the three and nine months ended September 30, 2017 presented in this report are compared to the financial results of DNS and its consolidated subsidiaries for the prior year period through September 8, 2016 and the financial results of DZS and its consolidated subsidiaries for the period from September 9, 2016 through September 30, 2016. Our balance sheet includes the fair value of the assets and liabilities of Legacy Zhone as of the effective date of the Merger. Those assets include the fair value of acquired intangible assets and goodwill. Due to the foregoing, our financial results for the three and nine months ended September 30, 2017 are not comparable to our financial results for the three and nine months ended September 30, 2016.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

~~There have been no material changes~~For a complete description of what we believe to ~~our~~be the critical accounting policies and estimates ~~from~~used in the ~~information provided in Part II, “Item 7. Management’s Discussion and Analysis~~preparation of our Unaudited Condensed Consolidated Financial ~~Condition and Results of Operations – Critical Accounting Policies and Estimates” included in~~Statements, refer to our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2017. Refer to Note 1 (g) Recent Accounting Pronouncements in the Notes to Unaudited Condensed Consolidated Balance Sheets in Item 1 of Part I of this Quarterly Report on Form 10-Q, for the updated accounting policy of revenue recognition upon the adoption of ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606) as of January 1, 2018.

RESULTS OF OPERATIONS

We list in the table below the historical condensed consolidated statement of comprehensive ~~loss data~~income (loss) as a percentage of total net revenue for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		Three Months Ended March 31,
			(As Revised)				(As Revised)		2018		2017
Net revenue:
Net revenue	91	%	79	%	85	%	75	%	97	%	79	%
Net revenue - related parties	9	%	21	%	15	%	25	%	3	%	21	%
Total net revenue	100	%	100	%	100	%	100	%	100	%	100	%
Cost of revenue:
Products and services	58	%	53	%	54	%	54	%	60	%	48	%
Products and services - related parties	8	%	17	%	13	%	21	%	3	%	17	%
Amortization of intangible assets	0	%	0	%	0	%	0	%	0	%	0	%
Total cost of revenue	67	%	70	%	67	%	75	%	63	%	65	%
Gross profit	33	%	30	%	33	%	25	%	37	%	35	%
Operating expenses:
Research and product development	14	%	19	%	15	%	17	%	15	%	18	%
Selling, marketing, general and administrative	17	%	26	%	18	%	18	%	21	%	21	%
Amortization of intangible assets	0	%	1	%	1	%	0	%	0	%	1	%
Total operating expenses	31	%	46	%	34	%	35	%	36	%	40	%
Operating income (loss)	2	%	(16	)%	(1	)%	(10	)%	1	%	(5	)%
Interest income	0	%	0	%	0	%	0	%	0	%	0	%
Interest expense	0	%	(1	)%	0	%	(1	)%	(1	)%	(1	)%
Other income, net	0	%	0	%	0	%	0	%	0	%	(1	)%
Income (loss) before income taxes	2	%	(17	)%	(1	)%	(11	)%	0	%	(6	)%
Income tax provision (benefit)	0	%	(2	)%	1	%	(1	)%	0	%	1	%
Net income (loss)	2	%	(15	)%	(2	)%	(10	)%	0	%	(7	)%
Net loss attributable to non-controlling interest	0	%	0	%	0	%	0	%	0	%	0	%
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	2	%	(15	)%	(2	)%	(10	)%	0	%	(7	)%
Foreign currency translation adjustments	0	%	7	%	1	%	3	%	1	%	6	%
Comprehensive income (loss)	2	%	(8	)%	(1	)%	(7	)%	1	%	(1	)%
Comprehensive income attributable to non-controlling interest	0	%	0	%	0	%	0	%	0	%	0	%
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.	2	%	(8	)%	(1	)%	(7	)%	1	%	(1	)%

Net Revenue

Information about our net revenue for products and services for the ~~three and~~ ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017 is summarized below (in millions):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2017		2016		Increase/(decrease)		% change		2017		2016		Increase/(decrease)		% change		Three Months Ended March 31,
			(As Revised)								(As Revised)						2018		2017		Increase		% change
Products	$	63.2	$	28.9	$	34.3	119	%	$	169.8	$	84.6	$	85.2	101	%	$	56.7	$	49.7	$	7.0	14	%
Services	3.2		2.3		0.9		39	%	8.7		6.2		2.5		40	%	2.8		2.4		0.4		17	%
Total	$	66.4	$	31.2	$	35.2	113	%	$	178.5	$	90.8	$	87.7	97	%	$	59.5	$	52.1	$	7.4	14	%

Information about our net revenue for North America and international markets for the ~~three and~~ ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017 is summarized below (in millions):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2017		2016		Increase/(decrease)		% change		2017		2016		Increase/(decrease)		% change		Three Months Ended March 31,
			(As Revised)								(As Revised)						2018		2017		Increase/(decrease)			% change
Revenue by geography:
United States	$	13.1	$	3.4	$	9.7	285	%	$	37.2	$	7.4	$	29.8	403	%	$	16.5	$	12.1	$	4.4		36	%
Canada	1.5		0.3		1.2		100	%	4.1		0.3		3.8		100	%	1.0		1.2		(0.2		)	(17	)%
Total North America	14.6		3.7		10.9		295	%	41.3		7.7		33.6		436	%	17.5		13.3		4.2			32	%
Latin America	7.5		1.9		5.6		295	%	19.4		2.9		16.5		569	%	8.0		4.9		3.1			63	%
Europe, Middle East, Africa	7.4		2.2		5.2		236	%	19.1		5.2		13.9		267	%	7.5		5.5		2.0			36	%
Korea	20.5		18.4		2.1		11	%	69.0		60.1		8.9		15	%	12.1		16.3		(4.2		)	(26	)%
Asia Pacific	16.4		5.0		11.4		228	%	29.7		14.9		14.8		99	%
Other Asia Pacific																	14.4		12.1		2.3			19	%
Total International	51.8		27.5		24.3		88	%	137.2		83.1		54.1		65	%	42.0		38.8		3.2			8	%
Total	$	66.4	$	31.2	$	35.2	113	%	$	178.5	$	90.8	$	87.7	97	%	$	59.5	$	52.1	$	7.4		14	%

For the three months ended ~~September 30, 2017,~~March 31, 2018, net revenue increased ~~113%~~14% or ~~$35.2~~$7.4 million to ~~$66.4~~$59.5 million from ~~$31.2 million for the same period last year. For the nine months ended September 30, 2017, net revenue increased 97% or $87.7 million to $178.5 million from $90.8~~$52.1 million for the same period last year. For the three months ended ~~September 30, 2017,~~March 31, 2018, product revenue increased ~~119%~~14% or ~~$34.3~~$7.0 million to ~~$63.2 million compared to the same period last year. For the nine months ended September 30, 2017, product revenue increased 101% or $85.2 million to $169.8~~$56.7 million compared to the same period last year. The increase in net revenue for ~~the~~ three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 was primarily ~~related~~due to increased revenues in the United States and Latin America. We also added customers in late 2017, which contributed to the ~~consummation of the Merger in September 2016 (which resulted in the inclusion of net~~ revenue ~~related~~increase during this quarter as compared to the ~~Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods).~~same period last year.

Service revenue represents revenue from maintenance and other services associated with product shipments. For the three months ended ~~September 30, 2017,~~March 31, 2018, service revenue increased ~~39%~~17% or ~~$0.9~~$0.4 million to ~~$3.2 million compared to the same period last year. For the nine months ended September 30, 2017, service revenue increased 40% or $2.5 million to $8.7~~$2.8 million compared to the same period last year. The ~~increases~~increase in service revenue ~~were~~was primarily related to ~~the consummation~~a greater number of the Merger in September 2016 (which resulted in the inclusion of service revenue related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods), as well as an increase in sales of maintenance services.products under contract.

International net revenue increased ~~88%~~8% or ~~$24.3~~$3.2 million to ~~$51.8~~$42.0 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$27.5~~$38.8 million for the same period last year, and represented ~~78%~~71% of total net revenue compared with ~~88%~~74% during the same period of 2016. International net revenue increased 65% or $54.1 million to $137.2 million for the nine months ended September 30, 2017 from $83.1 million for the same period last year, and represented 77% of total net revenue compared with 92% during the same period of 2016.2017. The increases in international net revenue were primarily related to improved revenues in Latin America and the consummation of the Merger in September 2016 (which resulted in the inclusion of international net revenue related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods).Middle East.

For the three months ended ~~September 30, 2017, two~~March 31, 2018, no customers represented 10% ~~and 9%~~or more of net ~~revenue, respectively. For the nine months ended September 30, 2017, two customers each represented 9% of net revenue (one of which was a related-party).~~revenue. For the three months ended ~~September 30, 2016, three~~March 31, 2017, two customers represented ~~18%, 16% (a related-party)~~12% and ~~12% of net revenue, respectively. For the nine months ended September 30, 2016, three customers represented 23%, 21% (a related-party) and 12%~~11% of net revenue, respectively. 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 ~~Margin~~Profit

Total cost of revenue increased ~~102%~~11% or ~~$22.4~~$3.9 million to ~~$44.4~~$37.8 million for the three months ended ~~September 30, 2017,~~March 31, 2018, compared to ~~$21.9~~$33.9 million for the three months ended ~~September 30, 2016.~~March 31, 2017. Total cost of revenue ~~increased 76% or $51.5 million to $119.4 million~~was 63% of net revenue for the ~~nine months ended September 30, 2017,~~first quarter of 2018 compared to ~~$67.9 million for~~65% in the ~~nine months ended September 30, 2016.~~first quarter of 2017. The ~~increases~~decreases in total cost of revenue, as a percentage of sales, were primarily due to ~~the consummation~~timing of ~~the Merger in September 2016 (which resulted in the inclusion of cost of revenue~~revenues related to product mix into Latin America, the ~~Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods) as well as increased sales. Gross margin increased slightly in both the three~~United States and ~~nine months ended September 30, 2017 compared to the prior year periods due to improved manufacturing efficiencies~~certain Asia Pacific customers and ~~product mix.~~operating efficiencies.

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. In addition, continued competitive and economic pressures could cause us to reduce our prices, adjust the carrying values of our inventory, or record inventory ~~charges~~expenses relating to discontinued products and excess or obsolete inventory.

Research and Product Development Expenses

Research and product development expenses ~~increased 50%~~decreased 4% or ~~$2.9~~$0.4 million to ~~$8.8~~$9.0 million for the three months ended ~~September 30, 2017~~March 31, 2018 compared to ~~$5.9~~$9.4 million for the three months ended ~~September 30, 2016. Research~~March 31, 2017. As a percentage of sales, research and product development expenses ~~increased 73% or $11.4 million to $27.0 million for~~were 15% in the ~~nine months ended September 30, 2017~~first quarter of 2018 compared to ~~$15.6 million for~~18% in the ~~nine months ended September 30, 2016.~~first quarter of 2017. The ~~increase~~decrease in research and product development expenses was primarily due to slightly decreased personnel-related expenses due to synergies from the consummation of the Merger in September 2016 (which resulted in the inclusion of research and product development expenses related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods).Merger. 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 increased ~~38%~~14% or ~~$3.2~~$1.5 million to ~~$11.5~~$12.4 million for the three months ended ~~September 30, 2017~~March 31, 2018 compared to ~~$8.3~~$10.9 million for the three months ended September 30, 2016. Selling, marketing, general and administrative expenses increased 95% or $15.8 million to $32.5 million for the nine months ended September 30, 2017 compared to $16.7 million for the nine months ended September 30, 2016. The increases inMarch 31, 2017. As a percentage of sales, selling, marketing, general and administrative expenses were ~~primarily due to the consummation of the Merger in September 2016 (which resulted~~flat at 21% in the ~~inclusion~~first quarter of ~~selling, marketing, general~~both 2018 and administrative expenses related to Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods), offset by higher commission expenses during the three and nine months ended September 30, 2016.2017.

Income Tax Provision

~~During~~Income tax (benefit) expense for the three ~~and~~ ~~nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 was approximately $0.0 million and ~~2016, no material provision or benefit for~~$0.4 million, respectively, on pre-tax income ~~taxes was recorded,~~of $0.1 million and pre-tax loss of $3.1 million, respectively. As of March 31, 2018, the income tax rate varied from the United States statutory income tax rate primarily due to ~~our recurring operating losses~~valuation allowances in the United States and the ~~significant uncertainty regarding the realization~~mix of earnings generated by our ~~net deferred tax assets, against which we have continued to record a full valuation allowance.~~wholly-owned foreign subsidiaries.

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-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) material non-recurring transactions or events, such as Merger transaction costs or a gain (loss) on sale of assets or impairment of fixed assets. 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 ~~charges,~~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 ~~loss~~income (loss) to Adjusted EBITDA, which we consider to be the most directly comparable U.S. GAAP financial measure to Adjusted EBITDA (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017			2016			Three Months Ended March 31,
			(As Revised)						(As Revised)			2018			2017
Net income (loss)	$	1,387	$	(4,789	)	$	(2,985	)	$	(9,083	)	$	141		$	(3,498	)
Add:
Interest expense, net	227		173			711			463			237			248
Income tax provision (benefit)	107		(610		)	646			(1,041		)
Income tax (benefit) expense												(5		)	440
Depreciation and amortization	752		628			3,105			1,165			699			1,181
Stock-based compensation	195		128			670			128			363			255
Merger-related costs	—		3,536			—			3,536
Adjusted EBITDA	$	2,668	$	(934	)	$	2,147		$	(4,832	)	$	1,435		$	(1,374	)

LIQUIDITY AND CAPITAL RESOURCES

Our operations are financed through a combination of our existing cash, cash equivalents, available credit facilities, and sales of equity and debt instruments, based on our operating requirements and market conditions.

AsWe had a net income of ~~September 30, 2017, our cash and cash equivalents were~~ ~~$10.1~~$0.1 million compared to $17.9 million at December 31, 2016. Our cash and cash equivalents as of September 30, 2017 included $3.4 million in cash balances held by our Korean subsidiary. The $7.7 million decrease in cash and cash equivalents was attributable to net cash used in operating, investing and financing activities of $0.6 million, $5.9 million and $1.8 million, respectively, partially offset by the effect of exchange rate changes on cash of $0.6 million.

~~Ability to Continue as a Going Concern~~

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Accordingly, the unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of DZS to continue as a going concern.

~~Although we generated $1.4 million of net income~~ for the quarter ended ~~September 30, 2017,~~March 31, 2018 and $1.2 million for the year ended December 31, 2017. However, we ~~have~~ incurred ~~significant losses to date and our losses from operations may continue. We incurred~~a net ~~losses~~loss of ~~$3.0 million and~~ $15.3 million for ~~the nine months ended September 30, 2017 and~~ the year ended December 31, 2016 ~~respectively. We~~and significant losses in prior years. As of March 31, 2018, we had an accumulated deficit of ~~$23.1~~$18.4 million and working capital of ~~$57.3 million as of September 30, 2017.~~$66.7 million. As of ~~September 30, 2017,~~March 31, 2018, we had ~~approximately $10.1~~$23.2 million in cash and cash equivalents, which included ~~$3.4~~$9.7 million in cash balances held by our Korean subsidiary and ~~$26.9~~$46.5 million in aggregate principal amount of ~~outstanding borrowings under our~~ short-term debt obligations, other long-term debt and ~~our loans from DNI and its affiliates.~~long-term related-party borrowings. In addition, as of March 31, 2018 we had ~~$7.6 million in aggregate borrowing availability under our credit facilities as of~~

~~September 30, 2017. We had $8.5~~$6.6 million committed as security for letters of credit under our revolving credit facilities, leaving $6.1 million in aggregate financing availability under these ~~facilities as~~facilities. Our current lack of ~~September 30, 2017. Due~~liquidity could harm us by:

increasing our vulnerability to adverse economic conditions in our industry or the ~~amount~~economy in general;

requiring substantial amounts of ~~short-term~~cash to be used for debt ~~obligations maturing within the next 12 months~~servicing, rather than other purposes, including operations;

limiting our ability to plan for, or react to, changes in our business and industry; and

influencing investor and customer perceptions about our ~~recurring operating losses,~~financial stability and limiting our ability to obtain financing or acquire customers.

These factors indicate that cash ~~resources may~~flows might not be sufficient to settle these short-term debt obligations. Our ability to continue as a "going concern" is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements, our ability to cure any defaults that occur under our debt agreements 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 and we are in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to providefor 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,~~our obligations as they come due in the ordinary course of business for a period of 12 months from the date of this interim report on Form 10-Q.

However, we ~~may experience material adverse impacts on our business, operating results and financial condition.~~

~~We have continued our~~plan to focus on cost ~~control and~~management, operating efficiency ~~along with~~and restrictions on discretionary spending. In ~~order to meet our liquidity needs and finance our capital expenditures and working capital needs for our business,~~addition, if necessary, we may ~~be required to~~ sell assets, issue debt or equity securities or purchase credit ~~insurance or borrow on potentially unfavorable terms. In addition, we~~insurance. We may ~~be required to~~also reduce the scope of our planned product development, reduce sales and marketing efforts and reduce our operations in low margin regions, including reductions in headcount. In the first quarter of 2018, we modified the terms of certain existing debt and obtained a new loan, as described more fully in Note 7 Debt and Note 9 Related Party Transactions. Based on our current plans and current business conditions, we believe that ~~our focused operating expense discipline~~these measures along with our existing cash, cash equivalents and available credit facilities will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months ~~however~~from the ~~factors discussed above raise substantial doubt about~~date of this Quarterly Report on Form 10-Q.

Our ability to meet our obligations as they become due in the ordinary course of business for the next 12 months will depend on our ability to achieve forecasted results and our ability to access funds approved under existing facilities. Management’s belief that we will achieve these results assumes that, among other things, we will continue to be successful in implementing our 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.~~expected, it could cause us to fail to meets our obligations as they come due.

Operating Activities

Net cash used in operating activities increased $12.8 million to $13.5 million for the ~~nine~~three months ended ~~September 30, 2017 consisted of a net loss of $3.0~~March 31, 2018 from $0.7 million adjusted for non-cash charges totaling $3.6 million and a decrease in net operating assets totaling $1.2 million. The most significant components of the changes in net operating assets were an increase in accounts receivable of $2.9 million, an increase in inventory of $0.6 million and a decrease in accrued expenses of $4.3 million offset by an increase in accounts payable of $6.7 million. The increase in accounts receivable was primarily the result of the timing of receivables collections during the current year period. The increase in inventory was due to slower utilization of inventory in the current year period. The decrease in accounts payable was mainly due to reclassification of certain balances to short-term debt.

~~Net cash provided by operating activities~~ for the ~~nine~~three months ended ~~September 30, 2016 consisted of a net loss of $9.1 million, adjusted for non-cash charges totaling $1.9 million and an~~March 31, 2017. This increase in net operating assets totaling $20.4 million. The most significant components of the changes were a decrease in accounts receivables of $14 million and an increase in accrued expenses of $13.6 million offset by a decrease in accounts payable of $5.8 million. The increase in accounts receivable was primarily due to changes in operating assets and liabilities, resulting in using $15.0 million of cash in the ~~timing~~first quarter of ~~receivables collections during~~2018 compared to providing $0.2 million of cash in the ~~current year period. The decrease in accounts payable was primarily due to timing~~first quarter of ~~payments.~~2017.

Investing Activities

Net cash used in investing activities was $0.1 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 ~~consisted~~compared to net cash provided by investing activities of ~~an increase in restricted cash of $6.1~~$0.4 million ~~and purchase of property of equipment of $0.8 million, offset by proceeds from sale of short-term investments of $1.5 million. The increase in restricted cash was to provide collateral~~ for the ~~various surety bonds issued by DNI to a certain customer in Vietnam.~~

~~Net cash used in investing activities for the nine~~three months ended September 30, 2016 consisted of an increase in short-term and long-term loans to others of $1.4 million and an increase in restricted cash of $0.9 million, offset by a decrease in short-term and long-term loans of $1.9 million.

March 31, 2017.

Financing Activities

Net cash provided by financing activities was $16.8 million for the three months ended March 31, 2018 compared to net cash used in financing activities of $1.8 million for the ~~nine~~three months ended ~~September 30, 2017~~ ~~consisted~~March 31, 2017. This change was primarily due to the borrowing of ~~cash used~~$6.3 million under the WFB Facility (as defined below) and KRW6.5 billion ($6.1 million in ~~repayments~~USD) from DNI in the first quarter of ~~borrowings of $15.6 million, offset by proceeds from short-term borrowings of $13.8 million.~~2018.

Net cash provided by financing activities for the nine months ended September 30, 2016 consisted of proceeds from short-term borrowings and proceeds from long-term borrowings of $19.8 million and $6.8 million, respectively, offset by repayments of borrowings of $23.1 million.

Cash Management

Our primary source of liquidity comes from our cash and cash equivalents, which totaled ~~$10.1~~$23.2 million at ~~September 30, 2017~~March 31, 2018, as well as our credit facilities, under which we had aggregate ~~borrowing~~financing availability of ~~$7.6~~$6.1 million as of ~~September 30, 2017,~~March 31, 2018, and under which ~~$8.5~~$6.6 million was committed as security for letters of credit as of ~~September 30, 2017.~~March 31, 2018. Our cash and cash equivalents as of ~~September 30, 2017~~March 31, 2018 included ~~$3.4~~$9.7 million in cash balances held by our Korean subsidiary.

WFB Facility

As of ~~September 30, 2017,~~March 31, 2018, we had a $25.0 million revolving line of credit and letter of credit facility (the WFB Facility) with Wells Fargo Bank (WFB). Under the WFB Facility, we have the option of borrowing funds at agreed upon interest rates. The amount that we are able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the WFB Facility, as long as the aggregate amount outstanding does not exceed $25.0 million less the amount committed as security for letters of credit. To maintain availability of funds under the WFB Facility, we pay a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense.

As of ~~September 30, 2017,~~March 31, 2018, we had no$6.3 million outstanding borrowings under the WFB Facility, and ~~$2.5~~$2.1 million was committed as security for letters of credit. WeOn April 5, 2018, the Company repaid the $6.3 million borrowings under its WFB Facility. Based on our eligible accounts receivable and inventory, we had ~~$6.7~~$5.1 million of ~~borrowing~~financing availability under the WFB Facility as of ~~September 30, 2017.~~March 31, 2018. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin based on our average excess availability (as calculated under the WFB Facility). The interest rate on the WFB Facility was ~~3.8%~~4.81% at ~~September 30, 2017.~~March 31, 2018. The maturity date under the WFB Facility is ~~March 31,~~July 15, 2019.

Our obligations under the WFB Facility are secured by substantially all of our personal property assets and those of our subsidiaries that guarantee the WFB Facility, including our intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If we default 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 our assets to satisfy the obligations under the WFB Facility. In the past we have violated the covenants in ~~our former credit facility~~the WFB Facility and ~~received waivers for~~entered into an amendment to cure these violations. As of ~~September 30, 2017,~~March 31, 2018, we were in compliance with the covenants under the WFB Facility. We make no assurances that we will be in compliance with these covenants in 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 ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we had an aggregate outstanding balance of ~~$18.4~~$27.3 million and ~~$17.6~~$22.8 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements ranged from 1.58% to 8.90% as of ~~September 30, 2017~~both March 31, 2018 and December 31, ~~2016 ranged from 2.3% to 5.9% and 1.9% to 4.1%, respectively.~~2017.

Related-Party Debt

In connection with the Merger, on September 9, 2016, we 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 aggregate principal amount not to exceed $5.0 million. As of ~~September 30, 2017,~~March 31, 2018, $5.0 million in term loans was outstanding under the facility. Such term loans mature in September 2021 and are pre-payable at any time by us without premium or penalty. The interest rate as of ~~September 30, 2017~~March 31, 2018 under this facility was 4.6% per annum.

In addition, we borrowed $1.8 million from DNI for capital investment in February 2016, which amount was outstanding as of ~~September 30, 2017. 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, we 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.

~~On June 23, 2017, we borrowed $3.5 million from Solueta, an affiliate of DNI. As of September 30, 2017, the aggregate outstanding balance under this loan agreement was $1.7 million.~~31, 2018. This loan matures in ~~November 2017~~July 2019 and bears interest at a rate of 4.6% per annum, payable ~~monthly.~~annually.

Interest expense on these related-party borrowings was $0.1 million in the three months ended March 31, 2018 and 2017 respectively.

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 ~~September 30, 2017, three customers~~March 31, 2018, no customer accounted for ~~16% (a related-party), 11% and~~ 10% or more of net accounts ~~receivables, respectively,~~receivable and receivables from customers in countries other than the United States represented ~~84%~~88% of net accounts receivable. Additionally, Dasan Networks Japan has factoring arrangements in relation to certain accounts receivable with certain financial institutions as March 31, 2018. 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.

As discussed above in "Ability to Continue as a Going Concern", there is substantial doubt about our ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Contractual Commitments and Off-Balance Sheet Arrangements

At ~~September 30, 2017,~~March 31, 2018, our future contractual commitments by fiscal year were as follows (in thousands):


			Payments due by period														Payments due by period
	Total		2017		2018		2019		2020		2021		Thereafter		Total		2018		2019		2020		2021		2022		Thereafter
Operating leases	$	20,166	$	967	$	3,359	$	2,496	$	2,358	$	2,264	$	8,722	$	23,677	$	3,046	$	3,956	$	2,998	$	2,590	$	2,664	$	8,423
Purchase commitments	2,966		2,966		—		—		—		—		—		5,005		5,005		—		—		—		—		—
Short-term debt	18,382		18,382		—		—		—		—		—		33,556		33,556		—		—		—		—		—
Related-party debt	8,544		1,744		1,800		—		—		5,000		—
Long-term debt -related party															12,895		—		7,895				5,000				—
Other payable - related party															2,806		2,806
Royalty obligations															750		750
Total future contractual commitments	$	50,058	$	24,059	$	5,159	$	2,496	$	2,358	$	7,264	$	8,722	$	78,689	$	45,163	$	11,851	$	2,998	$	7,590	$	2,664	$	8,423

Operating Leases

The operating lease amounts shown above represent primarily off-balance sheet arrangements. For operating lease commitments, a liability is generally not recorded on our balance sheet unless the facility represents an excess facility for which an estimate of the facility exit costs has been recorded on 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 ~~September 30, 2017.~~March 31, 2018.

Short-term Debt

Our short-term debt obligations have been recorded as liabilities on our balance sheet, and are comprised ~~$18.4~~of $27.3 million in outstanding borrowings under the credit facilities of our foreign subsidiaries and $6.3 million in outstanding borrowings under the WFB Facility as of ~~September 30, 2017.~~March 31, 2018. The amount shown above represents scheduled principal repayments under the facilities, but not the associated interest payments which may vary based on changes in market interest rates. On April 5, 2018, the Company repaid the $6.3 million borrowings under its WFB Facility. At ~~September 30, 2017,~~March 31, 2018, the interest rate per annum applicable to outstanding borrowings under the trade facilities of our foreign subsidiaries ranged from ~~2.3%~~1.58% to ~~5.9%. The amount shown above excludes $3.5 million in short-term debt obligations to related parties, which is included in~~8.90% and was 4.81% under the ~~table as related-party debt (as discussed further below).~~

WFB Facility. See above under ~~“Cash Management”~~"Cash Management" for further information about these facilities.

Related-Party Debt

As of ~~September 30, 2017,~~March 31, 2018, we had borrowed an aggregate of ~~$8.5 million from related parties, which included~~ $6.8 million from DNI, which consisted of ~~which~~a $5.0 million ~~and $1.8 million mature~~unsecured subordinated term loan facility which matures in September 2021 and ~~March 2018, respectively, and $1.7~~a $1.8 million ~~from Solueta, an affiliate of DNI,~~loan for capital investment which matures in ~~November 2017. The~~July 2019. In addition, DNS Korea has a secured loan outstanding of KRW 6.5 billion ($6.1 million in USD) which matures in June 2019. All three loans bear interest at a rate of 4.6% per ~~annum applicable to these borrowings was 4.6%.~~annum.

See above under “Cash Management” for further information about our related-party debt.

RECENT ACCOUNTING PRONOUNCEMENTS

Please refer to “~~Part I,~~Note 1(g) to the unaudited condensed consolidated financial statements included in part 1, Item ~~1. Financial Statements” and “Notes to Condensed Consolidated Financial Statements, Note~~ 1 ~~(h) – Recent Accounting Pronouncements~~.”of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Concentration of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. Cash and cash equivalents consist principally of ~~demand~~financial deposit and money market accounts. Cash and cash equivalents are principally held with various domestic financial institutions with high credit standing. We perform ongoing credit evaluations of our customers and generally do not require collateral. Allowances are maintained for potential doubtful accounts.

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.

For the three months ended ~~September 30, 2017, two customers represented,~~March 31, 2018, no customer accounted for 10% ~~and 9%~~or more of net ~~revenue, respectively. For the nine months ended September 30, 2017, two customers each represented 9% of net revenue (one of which was a related-party).~~revenue. For the three months ended ~~September 30, 2016, three~~March 31, 2017, two customers represented ~~18%, 16% (a related-party)~~12% and ~~12% of net revenue, respectively. For the nine months ended September 30, 2016, three customers represented 23%, 21% (a related-party) and 12%~~11% of net revenue respectively.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our variable rate outstanding debt. As of ~~September 30, 2017~~March 31, 2018, our outstanding short-term debt balance was ~~$26.9~~$33.6 million, which ~~comprised $18.4 million in aggregate~~consisted of principal amount of borrowings under ~~our~~the short-term credit facilities of our foreign subsidiaries and ~~$8.5 million in loans from DNI and its affiliates (which~~the WFB Facility (all of which bear interest at a ~~fixed~~variable rate). Amounts borrowed under our short-term credit facilities bore interest ranging from ~~2.3%~~1.58% to ~~5.9%~~8.90% as of ~~September 30, 2017~~March 31, 2018 and amounts borrowed under the WFB Facility bore interest at 4.81%. Assuming the outstanding balance on our variable rate debt remains constant over a year, a 2%1% increase in the interest rate would decrease pre-tax income and cash flow by approximately ~~$0.5~~$0.3 million. As of March 31, 2018, our outstanding long-term debt balance was $12.9 million and consisted of loans from DNI and its affiliates (which bear interest at a fixed rate).

Foreign Currency Risk

We transact business in various foreign countries, and a significant portion of our assets is located in Korea. We have sales operations throughout Asia, Europe ~~Asia,~~ the Middle East and Latin America. We are exposed to foreign currency exchange rate risk associated with foreign currency denominated assets and liabilities, primarily intercompany receivables and payables. Accordingly, our operating results are exposed to changes in exchange rates between the U.S. dollar and those currencies. ~~During the first nine months of 2017 and during fiscal year 2016, we did not hedge any of our foreign currency exposure.~~

We have performed a sensitivity analysis as of ~~September 30, 2017~~March 31, 2018 using a modeling technique that measures the impact on the balance sheet arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign exchange loss of ~~$2.3~~$2.4 million at ~~September 30, 2017~~March 31, 2018. This sensitivity analysis assumes a parallel adverse shift in foreign currency exchange rates, which do not always move in the same direction. Actual results may differ materially.

Item 4. Controls and Procedures

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) 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-Chief~~Chief Executive ~~Officers~~Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by ~~SEC~~ Rule 13a-15(b), under the Exchange Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September 30, 2017,~~March 31, 2018, the end of the period covered by this report. The evaluation was done under the supervision and with the participation of management, including our ~~Co-Chief~~Chief Executive ~~Officers~~Officer and our Chief Financial Officer. Based upon this evaluation, our ~~Co-Chief~~Chief Executive ~~Officers~~Officer and Chief Financial Officer concluded that, because of the material weaknesses in our internal control over financial reporting that existed as of December 31, ~~2016~~2017 and that have not yet been remediated, as described below, our disclosure controls and procedures were not effective as of ~~September 30, 2017.~~March 31, 2018.

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. ~~The~~Based on the results of the independent investigation and due to the incorrect application of generally accepted accounting principles that resulted in material misstatements and a restatement of our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016, management identified material weaknesses ~~that management previously identified~~ in ~~connection with its evaluation of~~ our internal control over financial reporting as of December 31, 2016 ~~were as follows:~~which continued to exist at December 31, 2017. Specifically, we did not maintain an effective control environment as there was an insufficient complement of personnel with appropriate accounting knowledge, experience and competence, resulting in incorrect application of generally accepted accounting principles. This material weakness contributed to the following material weaknesses. We did not maintain effective controls over our financial close process. Also, we did not design and maintain effective controls over the review of supporting information to determine the completeness and accuracy of the accounting for complex transactions, specifically related to the business combination that occurred on September 9, 2016, which resulted in an incorrect application of generally accepted accounting principles that resulted in material misstatements and a restatement of our unaudited condensed consolidated financial statements for the three and nine months period ended September 30, 2016. Additionally, 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.

In light of the material weakness described above, and based on the criteria set forth in Internal Control —Integrated Framework (2013) issued by the Committee Sponsoring Organizations of the Treadway Commission (COSO), our management concluded that our internal control over financial reporting was not effective as of December 31, ~~2016.~~2017.

As of the date of this report, 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 have hired and we anticipate that we will hire

additional accounting personnel with relevant skills, training and experience, and conduct further training of accounting and finance personnel.

Changes in Internal Control over Financial Reporting

Except as described above, there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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-Chief~~Chief Executive ~~Officers~~Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are 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 do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in the "Risk Factors" section in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.6. Exhibits

EXHIBIT INDEX



Exhibit Number	Description


10.1	~~Letter agreement,~~Eighth Amendment to Credit and Security Agreements, dated ~~July 3, 2017,~~as of March 19, 2018, by and among DASAN Zhone Solutions, Inc., ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation, Dasan Network Solutions, Inc. and Wells Fargo ~~Bank, National Association (incorporated by reference to Exhibit 10.1 of registrant's Current Report on Form 8-K dated July 3, 2017)~~
10.2	~~General Release of Claims,~~Ninth Amendment to Credit and Security Agreements, dated as of ~~September 11, 2017,~~March 30, 2018, by and ~~between~~among DASAN Zhone Solutions, Inc., ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation, Dasan Network Solutions, Inc. and ~~James Norrod~~Wells Fargo
10.3	~~General Release of Claims,~~Letter Agreement, dated March 27, 2018, by and among DASAN Zhone Solutions, Inc., ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation, Dasan Network Solutions, Inc. and Wells Fargo
10.4	Loan Agreement, dated as of ~~September 11, 2017,~~March 27, 2018, by and between DASAN Networks, Inc. and DASAN Network Solutions, Inc.
10.5#	DASAN Zhone Solutions, Inc. ~~and Kirk Misaka~~Non-Employee Director Compensation Program
31.1	Certification of Chief Executive Officer ~~and Acting~~Pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Section 1350 Certification of Chief Executive Officer and ~~Acting~~ Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Labels Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

#	Management contract or compensatory plan or arrangement in which one or more executive officers or directors participates.

SIGNATURES

Pursuant to the retirements 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: ~~November 14, 2017~~May 15, 2018
	By:	/s/ IL YUNG KIM
	Name:	Il Yung Kim
	Title:	President and Chief Executive Officer ~~and Acting~~


	By:	/s/ MICHAEL GOLOMB
	Name:	Michael Golomb
	Title:	Chief Financial Officer, Corporate Treasurer and Secretary

3937



	Shares	Estimated Fair Value
Shares of Legacy Zhone stock as of September 8, 2016	6,874	$	40,902
Legacy Zhone stock options	198	540
Total Purchase Consideration		$	41,442



	Useful life (in Years)	Fair Value
Developed technology	5	$	3,060
Customer relationships	10	5,240
Backlog	1	2,179
		$	10,479



	September 30, 2016
(in thousands)	Three Months Ended			Nine Months Ended
Pro forma total net revenue	$	39,740		$	142,530
Pro forma net loss	(15,569		)	(25,504		)



		Three Months Ended September 30, 2017
Counterparty	DNI Ownership Interest	Sales		Cost of revenue		Manufacturing (Cost of revenue)		Research and product development		Selling, marketing, general and administrative		Other Expenses
DNI (Parent Company)	N/A	$	3,976	$	3,604	$	—	$	—	$	1,291	$	51
CHASAN Networks Co., Ltd.	100%	—		—		257		20		—		—
DASAN FRANCE	100%	662		576		—		—		83		—
DASAN INDIA Private Limited	100%	—		—		—		—		30		—
D-Mobile	100%	1,233		1,077		—		—		122		—
HANDYSOFT, Inc.	17.64%	54		12		—		—		6		4
Tomato Soft Ltd.	100%	—		—		43		108		—		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		144		—		—
		$	5,925	$	5,269	$	300	$	272	$	1,532	$	55



		Nine Months Ended September 30, 2017
Counterparty	DNI Ownership Interest	Sales		Cost of revenue		Manufacturing (Cost of revenue)		Research and product development		Selling, marketing, general and administrative		Other Expenses
DNI (Parent Company)	N/A	$	16,608	$	14,020	$	—	$	—	$	3,491	$	171
CHASAN Networks Co., Ltd.	100%	—		—		578		79		—		—
DASAN FRANCE	100%	1,612		1,512		—		—		383		—
DASAN INDIA Private Limited	100%	6,287		4,783		—		—		30		—
D-Mobile	100%	3,054		1,831		—		—		318		—
Fine Solution	100%	—		—		—		—		4		—
HANDYSOFT, Inc.	17.64%	88		23		—		—		6		4
J-Mobile Corporation	90.47%	8		—		—		—		132		—
Tomato Soft Ltd.	100%	—		—		104		108		—		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		448		37		—
Solueta	27.21%	—		—		—		—		—		3
		$	27,657	$	22,169	$	682	$	635	$	4,401	$	178