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 ~~March 31,~~September 30, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and ~~“emerging~~"emerging growth ~~company”~~company" in Rule 12b-2 of the Exchange ~~Act (Check one~~):

Act.



Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	x
		Emerging growth company	¨

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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 ~~May 8,~~November 5, 2018, there were ~~16,441,551~~16,575,229 shares of the registrant’s common stock outstanding.

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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 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	2428
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3237
Item 4.	Controls and Procedures	3338

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3540
Item 1A.	Risk Factors	3540
Item 6.	Exhibits	3641
	Signatures	3742

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)


	March 31, 2018			December 31, 2017			September 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	23,158		$	17,475		$	20,028		$	17,475
Restricted cash	10,118			12,425			7,825			12,425
Accounts receivable, net
Trade receivables	54,934			48,257
Accounts receivable - trade, net
Third parties							58,880			48,257
Related parties	14,644			13,498			2,139			13,498
Other receivables
Others	17,030			12,494
Suppliers and others							28,097			12,494
Related parties	72			164			91			164
Inventories	32,714			25,344			45,457			25,344
Prepaid expenses and other current assets	6,431			3,652			12,256			3,652
Total current assets	159,101			133,309			174,773			133,309
Property and equipment, net	5,632			5,873			5,374			5,873
Goodwill	3,977			3,977			3,977			3,977
Intangible assets, net	6,501			6,785			5,933			6,785
Non-current deferred taxes	3,152			2,954			2,895			2,954
Long-term restricted cash	1,407			1,512			847			1,512
Other assets	5,034			4,717			1,400			4,717
Total assets	$	184,804		$	159,127		$	195,199		$	159,127
Liabilities, Stockholders’ Equity and Non-controlling Interest
Current liabilities:
Accounts payable
Others	$	40,682		$	31,441
Accounts payable - trade
Third parties							$	52,943		$	31,441
Related parties	1,639			1,351			1,302			1,351
Short-term debt	33,556			19,790
Short-term debts
Bank and trade facilities							34,171			19,790
Related party							3,148			—
Other payables
Others	2,310			2,032
Third parties							1,769			2,032
Related parties	2,806			1,956			1,859			1,956
Contract liabilities - current	2,163			3,279			2,394			3,279
Accrued and other liabilities	9,207			11,174			10,315			11,174
Total current liabilities	92,363			71,023			107,901			71,023
Long-term debt
Others	—			2,987
Long-term debts
Bank and trade facilities							—			2,987
Related parties	12,895			6,800			5,000			6,800
Contract liabilities - non-current	1,870			1,883			1,851			1,883
Other long-term liabilities	2,665			2,667			2,677			2,667
Total liabilities	109,793			85,360			117,429			85,360
Commitments and contingencies (Note 11)
Stockholders’ equity and non-controlling interest:
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
Common stock, authorized 36,000 shares, 16,566 shares and 16,410 shares outstanding as of September 30, 2018 and December 31, 2017 at $0.001 par value							16			16
Additional paid-in capital	90,672			90,198			92,408			90,198
Other comprehensive income (loss)	2,128			1,871
Accumulated other comprehensive income							5			1,871
Accumulated deficit	(18,403		)	(18,852		)	(15,190		)	(18,852		)
Total stockholders’ equity	74,413			73,233			77,239			73,233
Non-controlling interest	598			534			531			534
Total stockholders’ equity and non-controlling interest	75,011			73,767			77,770			73,767
Total liabilities, stockholders’ equity and non-controlling interest	$	184,804		$	159,127		$	195,199		$	159,127

See accompanying notes to unaudited condensed consolidated financial statements.

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DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share ~~data)~~data)


	Three Months Ended						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
	2018			2017			2018			2017			2018			2017
Net revenue:
Net revenue	$	57,906		$	41,241
Net revenue - related parties	1,598			10,871
Third parties							$	70,227		$	60,513		$	203,317		$	150,834
Related parties							1,687			5,925			4,358			27,657
Total net revenue	59,504			52,112			71,914			66,438			207,675			178,491
Cost of revenue:
Products and services	35,853			25,021
Products and services - third parties							46,565			38,301			134,234			95,103
Products and services - related parties	1,763			8,708			1,765			5,569			4,651			22,851
Amortization of intangible assets	153			153			153			153			459			459
Total cost of revenue	37,769			33,882			48,483			44,023			139,344			118,413
Gross profit	21,735			18,230			23,431			22,415			68,331			60,078
Operating expenses:
Research and product development	8,977			9,382			8,655			8,939			26,346			27,462
Selling, marketing, general and administrative	12,394			10,884			11,106			11,661			35,212			33,096
Amortization of intangible assets	131			493			131			154			393			1,191
Total operating expenses	21,502			20,759			19,892			20,754			61,951			61,749
Operating income (loss)	233			(2,529		)	3,539			1,661			6,380			(1,671		)
Interest income	86			26			42			36			203			82
Interest expense	(323		)	(274		)	(447		)	(263		)	(1,330		)	(793		)
Other income (loss), net	140			(281		)
Other income (expense), net							(572		)	60			(859		)	43
Income (loss) before income taxes	136			(3,058		)	2,562			1,494			4,394			(2,339		)
Income tax (benefit) expense	(5		)	440
Income tax expense							735			107			1,071			646
Net income (loss)	141			(3,498		)	1,827			1,387			3,323			(2,985		)
Net income attributable to non-controlling interest	34			249
Net income (loss) attributable to non-controlling interest							29			(12		)	2			172
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	$	107		$	(3,747	)	$	1,798		$	1,399		$	3,321		$	(3,157	)

Foreign currency translation adjustments	318			2,890			391			(284		)	(1,839		)	1,782
Comprehensive income (loss)	459			(608		)	2,218			1,103			1,484			(1,203		)
Comprehensive income attributable to non-controlling interest	64			269
Comprehensive income (loss) attributable to non-controlling interest							16			(14		)	(3		)	191
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.	$	395		$	(877	)	$	2,202		$	1,117		$	1,487		$	(1,394	)

Basic and diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc.	$	0.01		$	(0.23	)
Net income (loss) per share attributable to DASAN Zhone Solutions, Inc.
Basic							$	0.11		$	0.09		$	0.20		$	(0.19	)
Diluted							$	0.11		$	0.09		$	0.20		$	(0.19	)

Weighted average shares outstanding used to compute basic net income (loss) per share	16,416			16,378			16,683			16,382			16,425			16,380
Weighted average shares outstanding used to compute diluted net income (loss) per share	16,626			16,378			16,891			16,382			16,640			16,380

See accompanying notes to unaudited condensed consolidated financial statements.

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DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)


	Three Months Ended						Nine Months Ended
	March 31,						September 30,
	2018			2017			2018			2017
Cash flows from operating activities:
Net income (loss)	$	141		$	(3,498	)	$	3,323		$	(2,985	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	699			1,181			2,033			3,105
Stock-based compensation	363			255			1,357			670
Loss on inventory write-down	434			311
Unrealized gain on foreign currency transactions	20			871
Valuation allowance on inventories							753			1,003
Unrealized loss (gain) on foreign currency transactions							226			(185		)
Deferred taxes	(183		)	—			(56		)	—
Changes in operating assets and liabilities:
Accounts receivable	(9,129		)	(1,277		)	(14,536		)	(2,948		)
Inventories	(7,781		)	(4,015		)	(21,967		)	(1,581		)
Prepaid expenses and other assets	(1,918		)	(501		)	(7,942		)	(101		)
Accounts payable	6,013			6,732			24,790			6,713
Accrued expenses	(2,187		)	(739		)
Accrued and other liabilities							(3,695		)	(4,314		)
Net cash used in operating activities	(13,528		)	(680		)	(15,714		)	(623		)
Cash flows from investing activities:
Proceeds from sale of short-term investments	—			1,040			—			1,463
Purchase of short-term investments	—			(252		)	—			(430		)
Proceeds from disposal of property and equipment and other assets	1			6			1			6
Purchase of property and equipment	(86		)	(404		)	(753		)	(840		)
Purchase of intangible asset	—			(30		)	—			(72		)
Net cash provided by (used in) investing activities	(85		)	360
Net cash (used in) provided by investing activities							(752		)	127
Cash flows from financing activities:
Repayments of borrowings	(8,250		)	(4,356		)
Proceeds from short-term borrowings	18,849			2,570
Proceeds from long-term borrowings from related party	6,064			—
Proceeds from short-term borrowings from bank and trade facilities							61,419			13,778
Proceeds from short-term borrowings from related party							6,098			—
Repayments of borrowings from bank and trade facilities							(48,739		)	(15,627		)
Repayments of borrowings related party							(4,460		)	—
Proceeds from issuance of common stock	111			1			853			28
Net cash provided by (used in) financing activities	16,774			(1,785		)	15,171			(1,821		)
Effect of exchange rate changes on cash and restricted cash	110			1,288			(1,417		)	977
Net increase (decrease) in cash and cash equivalents	3,271			(817		)
Net decrease in cash and cash equivalents							(2,712		)	(1,340		)
Cash, cash equivalents and restricted cash at beginning of period	31,412			24,543			31,412			24,543
Cash, cash equivalents and restricted cash at end of period	$	34,683		$	23,726		$	28,700		$	23,203
Reconciliation of cash, cash equivalents and restricted cash to statement of financial position
Cash and equivalents	$	23,158		$	17,288		$	20,028		$	10,145
Restricted cash	10,118			6,438			7,825			13,058
Long-term restricted cash	1,407			—			847			—
Cash, cash equivalents and restricted cash in statement of financial position	$	34,683		$	23,726		$	28,700		$	23,203

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. (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.~~1999, under the name Zhone Technologies, Inc. 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%~~57.3% 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.

The Company is headquartered in Oakland, ~~California.~~

California with flexible in-house production facilities in Seminole, Florida and contract manufacturers located in China, India, Korea and Vietnam. The Company also maintains offices to provide sales and customer support at various domestic and international locations.


(b)	Risks and Uncertainties

Liquidity

The accompanying 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.

The Company had net income of ~~$0.1~~$3.3 million for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2018, and $1.2 million for the year ended December 31, 2017. ~~However, the Company incurred a net loss of $15.3 million for the year ended December 31, 2016 and significant losses in prior years.~~ As of ~~March 31,~~September 30, 2018, the Company had an accumulated deficit of ~~$18.4~~$15.2 million and working capital of ~~$66.7~~$66.9 million. In addition, the Company had a net cash outflow from operations of $15.7 million for the nine months ended September 30, 2018. As of ~~March 31,~~September 30, 2018, the Company had ~~$23.2~~$20.0 million in cash and cash equivalents, which included ~~$9.7~~$6.0 million in cash balances held by its ~~Korean subsidiary~~international subsidiaries, and ~~$46.5~~$42.3 million in aggregate principal ~~amount~~debt of ~~short-term debt obligations, long-term debt and long-term related-party borrowings. In addition,~~which $37.3 million was in current liabilities. Also, as of ~~March 31,~~September 30, 2018, the Company had ~~$6.6~~$6.4 million committed as ~~security~~cash collateral for letters of credit under its revolving credit facilities, and $12.9 million outstanding indebtedness under those facilities, leaving ~~$6.1~~$21.3 million in aggregate financing availability under ~~these~~the facilities. Subsequent to the end of the quarter, the Company repaid $6.0 million in borrowings to Wells Fargo Bank ("WFB"), which constituted all of the outstanding balance under its Wells Fargo Bank Facility (the “WFB Facility”). On July 12, 2018, the Company amended the WFB Facility by entering into an Amended and Restated Credit and Security Agreement (the “A&R Domestic Credit Agreement”) and an Amended and Restated Credit and Security Agreement (the “A&R Ex-Im Credit Agreement”) with WFB which amended and replaced the Company’s existing senior secured revolving line of credit and letter of credit facilities with WFB and revised certain reporting and compliance provisions. The A&R Domestic Credit Agreement and the A&R Ex-Im Credit Agreement (together, the “Amended WFB Facility") is described more fully in Note 7 to the unaudited condensed consolidated financial statements. On October 22, 2018, the Company borrowed $3.0 million under the Amended WFB Facility. On October 31, 2018, the Company repaid the $3.0 million in full.

The Company’s current lack of liquidity could harm it by:

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

requiring substantial amounts of cash to be used for debt servicing, rather than other purposes, including operations;

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

limiting its ability to complete the Keymile acquisition; and

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

These factors indicate that cash flows might not be sufficient for the Company to meet its 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, the Company plans to focus on cost management, operating efficiency and restrictions on discretionary spending. In addition, if necessary, the Company may sell assets, issue debt or equity securities or purchase credit insurance. The Company may 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 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 from the 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 (i) to achieve forecasted results, ~~and its ability to~~(ii) access funds approved under existing ~~facilities.~~or new credit facilities and/or raise additional capital through sales of the Company’s common stock to the public and (iii) effectively manage inventory procurement. If the Company cannot raise additional funds when it needs or wants them, its operations and prospects could be negatively affected. Management’s belief that it will achieve ~~these~~forecasted results assumes that, among other things, the Company will continue 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 occur as expected, it could cause the Company to fail to meet its obligations as they come due.

The Company plans to focus on capital raising, cost management, operating efficiency and restrictions on discretionary spending. In addition, if necessary, the Company may sell assets, issue or enter into amendments of its debt or equity securities, or purchase credit insurance. The Company may 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.

Based on the Company's current plans and current business conditions, the Company believes that 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 from the date of this Quarterly Report on Form 10-Q.

Other Uncertainties

DNI owned approximately ~~58%~~57.3% of the outstanding shares of the Company's common stock as of ~~March 31,~~September 30, 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 to the provisions of the Company's 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 the Company's indebtedness do not view as beneficial. See ~~Note~~Notes 9 and ~~Note~~ 11 to the unaudited condensed consolidated financial statements for additional information.


(c)	Reclassifications

~~Certain prior period~~For the three months ended September 30, 2017, certain statement of comprehensive ~~loss~~income (loss) items have been reclassified to ~~correct for~~correctly reflect research and product development expenses and selling, marketing, general and administrative expenses of ~~$0.2~~$0.1 million and ~~$0.3~~$0.2 million, respectively, which were previously ~~improperly~~incorrectly classified as cost of revenue-products and services.

For the nine months ended September 30, 2017 certain prior period statement of comprehensive loss items have been reclassified to correctly reflect research and product development expenses and selling, marketing, general and administrative expenses of $0.4 million and $0.6 million, respectively, which were incorrectly classified as cost of revenue-products and services.


(d)	Basis of Presentation

For a ~~complete~~ description of what ~~we believe~~the Company believes to be the critical accounting policies and estimates used in the preparation of ~~our Unaudited Condensed Consolidated Financial Statements,~~the Company's unaudited condensed consolidated financial statements, refer to ~~our~~the Company's 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 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~~the Company does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

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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~~statement 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 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, 2017 filed with the Securities and Exchange ~~Commission.~~

Commission ("SEC").


(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.


(f)	Concentration of Risk

The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, ~~Internet~~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 and nine months ended September 30, 2018, one customer each accounted for 11% of net revenue, respectively. For the three months ended ~~March 31, 2018, no customer accounted for 10% or more of net revenue. For the three months ended March 31,~~September 30, 2017, two customers represented ~~12%~~10% and ~~11%~~9% (a related party) 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).

As of ~~March 31,~~September 30, 2018, ~~two customers~~one customer represented ~~20% (a related party) and 13%~~12% of net accounts ~~receivable, respectively.~~receivable. As of December 31, 2017, two customers represented 20% (a related party) and 11% of net accounts receivable, respectively.

As of ~~March 31,~~September 30, 2018 and December 31, 2017, receivables from customers in countries other than the United States represented ~~88%~~89% and 84%, ~~respectively,~~ of net accounts ~~receivable.~~receivable, respectively.


(g)	Recent Accounting Pronouncements

~~(g)~~ Recent Accounting Pronouncements

Adopted

In May 2014, the FASB issued ASU No. 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 Company adopted Topic 606 and applied this guidance to all open contracts at the date of 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 allocation of revenue ~~between deliverables (performance obligations)~~to performance obligations identified within an arrangement. Topic 605 restricted the allocation of revenue that is 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~~provide protection to the customer by allowing it to either cancel a contract or force the Company to take corrective actions if products or services do not meet the requirements in the contract. Under Topic 606, customer acceptance that is considered a “formality”, would result in revenue recognized when control of the product or service

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is transferred to customer, which is typically upon shipment or delivery dependent upon the terms of the underlying contract.

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


											As of January 1, 2018
	Balance after adoption of ASC 606			Adjustments				Balance without adoption of ASC 606			Balance after adoption of ASC 606			Adjustments				Balance without adoption of ASC 606
Assets
Accounts receivable, net	$	62,099		$	344		⁽¹⁾	$	61,755		$	62,099		$	344		⁽¹⁾	$	61,755
Inventories	25,239			(105		)	⁽²⁾	25,344			25,239			(105		)	⁽²⁾	25,344
Liabilities
Contract liabilities - current	2,866			(413		)	⁽²⁾	3,279			3,038			(241		)	⁽²⁾	3,279
Accrued and other liabilities	11,518			344			⁽¹⁾	11,174			11,518			344			⁽¹⁾	11,174
Contract liabilities - non-current											1,711			(172		)	⁽²⁾	1,883
Stockholders’ equity
Accumulated deficit	(18,544		)	308				(18,852		)	(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 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 the adoption date 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 balance sheet ~~at March 31,~~as of September 30, 2018 (in thousands):


											As of September 30, 2018
	As reported			Adjustments				Balance without adoption of ASC 606			As reported			Adjustments					Balance without adoption of ASC 606
Assets
Accounts receivable, net	$	69,578		$	330		⁽¹⁾	$	69,248		$	61,019		$	(5,356	)	⁽¹⁾	⁽³⁾	$	66,375
Inventories	32,714			62			⁽²⁾	32,652			45,457			62			⁽²⁾		45,395
Prepaid expenses and other current assets	6,431			91			⁽²⁾	6,340			12,256			5,984			⁽³⁾		6,272
Liabilities
Contract liabilities - current	2,163			(285		)	⁽²⁾	2,448			2,394			(75		)	⁽²⁾		2,469
Accrued and other liabilities	9,207			330			⁽¹⁾	8,877			10,315			628			⁽¹⁾		9,687
Contract liabilities - non-current											1,851			36			⁽²⁾		1,815
Stockholders’ equity
Accumulated deficit	(18,403		)	(132		)		(18,271		)	(15,190		)	101					(15,291		)

⁽²⁾ Represents the impact of allocation of transaction price to separate performance obligations in open contracts as of ~~March 31,~~September 30, 2018 on a relative standalone selling price basis and acceleration of revenue (and related costs) for contracts for which acceptance clauses are a formality.

⁽³⁾ Represents conditional rights to consideration as of September 30, 2018.

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The following table summarizes the effects of Topic 606 on the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended ~~March 31,~~September 30, 2018 (in thousands):


										Three Months Ended September 30, 2018
	As reported			Adjustments			Balance without adoption of ASC 606			As reported			Adjustments		Balance without adoption of ASC 606
Net revenue	$	59,504		$	(194	)	$	59,698		$	71,914		$	386	$	71,528
Cost of revenue - products and services	37,769			(62		)	37,831			48,483			5		48,478
Gross profit	21,735			(132		)	21,867			23,431			381		23,050
Provision for income taxes	(5		)	—			(5		)
Income tax expense										(735		)	—		(735		)
Net income	141			(132		)	273			1,827			381		1,446



	Nine Months Ended September 30, 2018
	As reported			Adjustments			Balance without adoption of ASC 606
Net revenue	$	207,675		$	39		$	207,636
Cost of revenue - products and services	139,344			(62		)	139,406
Gross profit	68,331			101			68,230
Income tax expense	(1,071		)	—			(1,071		)
Net income	3,323			101			3,222

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~~goods 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~~contracts in advance, for periods ranging from one to five years.

Revenue from all sales types is recognized at the 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 products, among other factors. Historically, variable consideration has not been a significant component of the Company’s contracts with customers. As of ~~March 31,~~September 30, 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 determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, including the degree of interrelation and interdependence between obligations and whether or not the good or service significantly modifies or transforms another good or service in the contract.

After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices for

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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~~performance 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~~assets and accounts receivable based on whether receipt of the consideration is conditional on something other than the passage of time.The 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 (or unconditional rights to receive cash) in advance of fulfilling performance ~~or where the Company has a right to consideration that is unconditional, before the Company transfers a good or service to a customer.~~obligations.

The following table reflects the changes in contract balances for the ~~three~~nine months ended ~~March 31,~~September 30, 2018 (in thousands):


Item	Balance Sheet Location	March 31, 2018		January 1, 2018		$ change			% change		Balance Sheet Location	September 30, 2018		January 1, 2018		$ change			% change
Contract assets	Prepaid expenses and other current assets	$	91	$	—	$	91		100.0	%	Prepaid expenses and other current assets	$	5,984	$	—	$	5,984		—
Contract liabilities - current	Contract liabilities - current	2,163		2,866		(703		)	(24.5	)%	Contract liabilities - current	2,394		3,038		(644		)	(21	)%
Contract liabilities - non-current	Contract liabilities - non-current	1,870		1,883		(13		)	(0.7	)%	Contract liabilities - non-current	1,851		1,711		140			8	%

During the ~~three~~nine months ended ~~March 31,~~September 30, 2018, contract ~~assets~~liabilities - non-current increased and contract liabilities - current decreased primarily as a result of changes in open contracts containing multiple performance obligations. As of September 30, 2018, contract assets increased as a result of the timing of certain events for the right to consideration to become unconditional. There were no significant changes in estimates during the ~~three~~nine months ended ~~March 31,~~September 30, 2018 that would affect the contract assets and liabilities balances.

During the three and nine months ended September 30, 2018, $0.4 million and $2.7 million, respectively, was recognized as revenue from the opening contract liabilities balance.

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 ratably over the life of the contract.

Contract Costs

Applying a practical expedient, the Company 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,~~September 30, 2018, such capitalizable costs were not significant.

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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 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 Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which ~~we recognize~~the Company recognizes revenue at the amount to which the Company has the right to invoice for the services performed. The majority of the Company's 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 and nine months ended ~~March 31,~~September 30, 2018 is disclosed in Note 12.

~~Other Recent Accounting Pronouncements~~

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 became effective for the Company on January 1, 2018 and was

adopted accordingly. The adoption of this standard did not have any effect on the Company's condensed consolidated statement of cash flows for the three and nine months ended ~~March 31,~~September 30, 2018 or 2017.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, which 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 became effective for the Company beginning on January 1, 2018 and was adopted accordingly, using the retrospective approach. As a result, the Company no longer presents transfers between cash and cash equivalents and restricted cash in the consolidated cash flow statements. The condensed consolidated statement of cash flows for the nine months ended September 30, 2017 was revised to exclude the $6.1 million change in restricted cash from net cash used in investing activities and to include $6.7 million in cash, cash equivalents and restricted cash, beginning of period and $13.1 million in cash, cash equivalents and restricted cash, end of period.

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. In July 2018, the FASB issued ASU 2018-18-11, Leases(Topic 842): Targeted Improvements, ASU 2018-11 states that, separating components of a contract affect the amendments in Update 2016-02, which are not yet effective but can be early adopted. All entities, including early adopters that elect the practical expedient related to separating components of a contract in this Update 2016-02 must apply the expedient, by class of underlying asset, to all existing lease transactions that qualify for the expedient at the date elected. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial 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 consolidated financial statements. ~~The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact~~

Table of ~~the new standard on its consolidated financial statements at this time.~~Contents

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 became effective for the Company beginning on January 1, 2018 and was adopted accordingly. The adoption of this standard had no impact on the Company's consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive ~~Income.~~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 rate 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 isdoes not ~~able to quantify or cannot reasonably estimate quantitative information related to~~expect the impact of the new standard to have a material impact on its consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments add various Securities and Exchange Commission (“SEC) paragraphs pursuant to the issuance of SEC Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“Act”) (“SAB 118”). The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the financial statements atand if possible to provide a reasonable estimate. The Company has provided a reasonable estimate of the tax reform in the notes to the consolidated financial statements.

On July 30, 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-0210 (codified as ASC 842). Specifically, under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to ASC 842, and lessors may elect not to separate lease and nonlease components when certain conditions are met. The Company is currently assessing the potential impact of adopting this ~~time.~~new guidance on its consolidated financial statements.

On August 28, 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements.

~~(2) Fair Value Measurement~~


(2)	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 ~~March 31,~~September 30, 2018 and the consolidated balance sheet as of December 31, 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.

To manage certain exposures to currency fluctuations, the Company started a limited hedging program by entering into foreign currency forward contracts with maturities of one month to hedge a portion of its net outstanding foreign currency monetary assets and liabilities. These derivatives are recorded at fair value on the condensed consolidated balance sheet under "Other Current Assets" or "Accounts Payable - Trade" with changes in the fair value being recorded in "Other income (loss), net".

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~~(3) Cash, Cash Equivalents~~These derivative contracts are entered into with a single counterparty, and ~~Restricted Cash~~are not designated as hedging instruments under applicable accounting guidance. As such, all changes in the fair value of these derivative contracts are recorded in other income (loss), net on the condensed consolidated statements of comprehensive income (loss). These derivative contracts are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities, and changes in the related derivative assets and liabilities balances are classified outside of operating income (loss), consistent with the related underlying foreign currency gain or loss.

These derivative contracts expose the Company to credit risk to the extent that the counterparty may be unable to meet the terms of the arrangement. The Company mitigates this credit risk by transacting with reputable financial institutions and entering into master netting arrangements, which permit net settlement of transactions with the same counterparty. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties. The Company is not required to pledge, and is not entitled to receive, cash collateral related to these derivative instruments. The Company does not enter into derivative contracts for trading or speculative purposes. The Company's foreign currency contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.

As of ~~March 31,~~September 30, 2018, the Company had no derivative contracts, and no liability was included in accounts payable - trade.


(3)	Cash, Cash Equivalents and Restricted Cash

As of September 30, 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~~$8.7 million at ~~March 31,~~September 30, 2018 and $13.9 million at December 31, 2017.

Reconciliation of cash, cash equivalents and restricted cash to statement of financial position as of September 30, 2018 and December 31, 2017 were as follows (in thousands):



	September 30, 2018		December 31, 2017
Cash and cash equivalents	$	20,028	$	17,475
Restricted cash	7,825		12,425
Long-term restricted cash	847		1,512
Cash, cash equivalents and restricted cash	$	28,700	$	31,412


(4)	Balance Sheet Detail

Accounts Receivable - Trade

Accounts receivable - trade, net as of ~~March 31,~~September 30, 2018 and December 31, 2017 was as follows (in thousands):


	March 31, 2018				December 31, 2017			September 30, 2018				December 31, 2017
Gross accounts receivable	$	69,948			$	63,446		$	61,324			$	63,446
Allowance for doubtful accounts	(370		)		(922		)	(305		)		(922		)
Allowance for sales returns	—			⁽¹⁾	(769		)	—			⁽¹⁾	(769		)
Total allowances	(370		)		(1,691		)	(305		)		(1,691		)
Total accounts receivable, net	$	69,578			$	61,755
Accounts receivable - trade, net								$	61,019			$	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~~footnote 1(g) for additional information about the adoption impact.

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Inventories

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


	March 31, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Raw materials	$	14,442	$	12,671	$	19,227	$	12,671
Work in process	3,091		2,150		3,474		2,150
Finished goods	15,181		10,523		22,756		10,523
Total inventories	$	32,714	$	25,344	$	45,457	$	25,344

Inventories provided as collateral for borrowings from Export-Import Bank of Korea amounted to ~~$15.8~~$9.5 million and $11.4 million as of ~~March 31,~~September 30, 2018 and December 31, 2017, respectively.


(5)	Property and Equipment

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


	March 31, 2018			December 31, 2017			September 30, 2018			December 31, 2017
Furniture and fixtures	$	23,197		$	22,988		$	22,495		$	22,988
Machinery and equipment	5,531			5,455			5,577			5,455
Leasehold improvements	3,652			3,647			3,619			3,647
Computers and software	540			621			728			621
Other	1,025			1,007
Others							1,034			1,007
	33,945			33,718			33,453			33,718
Less accumulated depreciation and amortization	(28,062		)	(27,584		)
Less government grants	(251		)	(261		)
Total property and equipment, net	$	5,632		$	5,873
Less: accumulated depreciation and amortization							(27,872		)	(27,584		)
Less: government grants							(207		)	(261		)
Property and equipment, net							$	5,374		$	5,873

Depreciation expense associated with property and equipment for the three and nine months ended ~~March 31,~~September 30, 2018 ~~and March 31, 2017~~ was $0.4 million and $1.2 million respectively. Depreciation expense for the three and nine months ended September 30, 2017 was $0.5 million ~~respectively~~and $1.4 million, respectively.

The Company receives grants from 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 ~~March 31,~~September 30, 2018 and December 31, 2017 was as follows (in thousands):


	March 31, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Beginning balance	$	3,977	$	3,977	$	3,977	$	3,977
Addition from Merger	—		—
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~~nine months ended ~~March 31,~~September 30, 2018 and 2017.

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


	March 31, 2018							September 30, 2018
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	3,060	$	(969	)	$	2,091	$	3,060	$	(1,276	)	$	1,784
Customer relationships	5,240		(830		)	4,410		5,240		(1,091		)	4,149
Backlog	2,179		(2,179		)	—		2,179		(2,179		)	—
Total intangible assets	$	10,479	$	(3,978	)	$	6,501	$	10,479	$	(4,546	)	$	5,933



	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 ~~March 31,~~September 30, 2018 was $0.3 million and $0.9 million, respectively. Amortization expense associated with intangible assets for the three and nine months ended September 30, 2017 was $0.3 million and ~~$0.7~~$1.7 million, respectively.


(7)	~~Debt~~Debts

Wells Fargo Bank Facility

~~As of March 31,~~On July 12, 2018, the Company ~~had a $25.0 million~~entered into the A&R Domestic Credit Agreement and the A&R Ex-Im Credit Agreement with WFB, which amended and replaced the Company’s existing senior secured revolving line of credit and letter of credit ~~facility (the "WFB Facility")~~facilities with ~~Wells Fargo Bank ("WFB"). Under the~~WFB and revised certain reporting and compliance provisions. The Amended WFB Facility ~~the Company has the option~~provides for a revolving line of ~~borrowing funds at agreed upon interest rates. The~~credit of $25.0 million (including up to $5.0 million of letters of credit), with 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 WFB Facility, as long as the aggregate amount outstanding does not exceed $25.0 million~~ less the amount committed as ~~security~~cash collateral 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 March 31, 2018, the Company had $6.3 million in outstanding borrowings under its WFB Facility, and $2.1 million was committed as security for letters of credit. 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 $5.1 million of financing availability under the WFB Facility as of March 31, 2018. The amounts borrowed under the Amended WFB Facility ~~bear~~bears 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). To maintain availability of funds under the Amended 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. The maturity date of the Amended WFB Facility is July 12, 2021.

As of September 30, 2018, the Company had $6.0 million in outstanding borrowings under its Amended WFB Facility (included in short-term debts), and $2.1 million was committed as cash collateral for letters of credit. Subsequent to the end of the quarter, the Company repaid $6.0 million in borrowings under the WFB Facility.

Based on the Company's eligible accounts receivable and inventory, the Company had $6.5 million of financing availability under the Amended WFB Facility as of September 30, 2018. The interest rate on the Amended WFB Facility was ~~4.81%~~4.4% at ~~March 31,~~September 30, 2018. ~~The maturity date under the WFB Facility is July 15, 2019.~~

The Company’s obligations under the Amended WFB Facility are secured by substantially all of its ~~personal property~~ assets and those of its subsidiaries that guarantee the Amended WFB Facility, including their intellectual property. The Amended WFB Facility contains certain financial covenants, and customary affirmative ~~covenants~~ and negative covenants. If the Company defaults under the Amended WFB Facility due to a covenant breach or otherwise, WFB may, after the lapse of any applicable grace periods, 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 Amended WFB Facility. As of ~~March 31,~~September 30, 2018, the Company was in compliance with the covenants under the WFB Facility. On October 22, 2018, the Company borrowed $3.0 million under the Amended WFB Facility. On October 31, 2018, the Company repaid the $3.0 million in full.

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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 as they mature and are generally secured by a security interest in certain assets of the applicable foreign 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 ~~March 31,~~September 30, 2018 and December 31, 2017, the Company had an aggregate outstanding balance of ~~$27.3~~$28.2 million ~~and$22.8~~(included in short-term debts) and $22.8 million ($19.8 million included in short-term debts), 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 (amount in thousands).

As of March 31, 2018

As of September 30, 2018

Interest rate (%)

Amount

Maturity Date

Denomination

Interest rate (%)

Amount

Industrial Bank of Korea

Credit facility

3.08 - 3.68

3,679

Credit facility

10/2/2018 - 2/4/2019

USD

3.81~4.03

4,229

Industrial Bank of Korea

Trade finance

4.47 - 5.25

2,625

Credit facility

10/10/2018 - 11/12/2018

USD

3.81~3.84

1,834

Shinhan Bank

General loan

6.06

3,000

Industrial Bank of Korea

Trade finance

10/15/2018

USD

6.82

651

Shinhan Bank

Trade finance

4.16

860

General loan

3/30/2019

KRW

6.06

2,876

NongHyup Bank

Credit facility

3.16 - 3.9

2,775

Credit facility

11/19/2018 - 3/4/2019

USD

3.95~4.17

852

The Export-Import Bank of Korea

Export development loan

3.20 - 3.28

7,601

Export development loan

12/29/2018

KRW

3.28

6,471

Mitsubishi Bank (Japan)

AR factoring

1.58

5,495

Shinhan Bank (India)

General loan

8.70 - 8.90

1,221

The Export-Import Bank of Korea

Import development loan

11/14/2018

USD

4.02

850

Korea Development Bank

General loan

8/8/2019

KRW

3.48

4,494

LGUPlus

General loan

6/17/2019

KRW

1,797

JECC Factoring

AR Factoring

10/26/2018 - 12/25/2018

JPY

1.58

3,236

Shoko Chukin Bank

General loan

6/28/2019

JPY

1.33

881

27,256

28,171


		As of December 31, 2017				As of December 31, 2017
		Interest rate (%)	Amount			Maturity Date	Denomination	Interest rate (%)	Amount
Industrial Bank of Korea	Credit facility	2.89 - 3.26	$	2,328	Credit facility	1/2/2018 - 5/2/2018	USD	2.89 - 3.26	$	2,328
Industrial Bank of Korea	Trade Finance	4.47 - 5.97	2,401		Trade Finance	1/2/2018 - 5/23/2018	USD	4.47 - 5.97	2,401
Shinhan Bank	General loan	5.91	2,987		General loan	3/30/2019	KRW	5.91	2,987
Shinhan Bank	Trade finance	3.90 - 4.14	3,050		Trade finance	2/19/2018- 3/26/2018	KRW	3.90 - 4.14	3,050
NongHyup Bank (Korea)	Credit facility	2.83 - 3.42	860		Credit facility	1/8/2018- 6/18/2018	USD	2.83 - 3.42	860
The Export-Import Bank of Korea	Export development loan	3.20 - 3.28	7,570		Export development loan	2/13/2018 & 6/29/2018	KRW	3.20 - 3.28	7,570
Mitsubishi Bank (Japan)	AR factoring	1.58	1,872		AR factoring	1/31/2018 - 5/31/2018	JPY	1.58	1,872
Shinhan Bank (India)	General loan	8.70 - 8.90	1,709		General loan	4/24/2018 - 11/12/2018	INR	8.70 - 8.90	1,709
			$	22,777					$	22,777

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As of ~~March 31,~~September 30, 2018, the Company had ~~$6.5~~$6.9 million in outstanding borrowings and ~~$4.5~~$4.3 million committed as ~~security~~cash collateral for letters of credit under the Company's ~~$12.0~~$25.9 million credit facility with certain foreign banks. On June 18, 2018, the Company's Korean subsidiary received a mutual cooperation capital loan of $1.8 million from LGUPlus and provided a letter of guarantee of the same amount from Seoul Guarantee Insurance as collateral.

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


(8)	Non-Controlling Interests

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


	Three Months Ended March 31,				Nine Months Ended September 30,
	2018		2017		2018			2017
Beginning non-controlling interests	$	534	$	416	$	534		$	416
Net income (loss) attributable to non-controlling interests	34		249		2			172
Foreign currency translation adjustments (OCI)	30		20
Foreign currency translation adjustments					(5		)	19
Ending non-controlling interests	$	598	$	685	$	531		$	607


(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 of the two subsidiaries 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 ~~March 31,~~September 30, 2018, $5.0 million in term loans was outstanding under the facility. Such term loans mature in September 2021 and are pre-payable atat any time by the Company without premium or penalty. The interest rate as of ~~March 31,~~September 30, 2018 under this facility was 4.6% per annum.

In ~~addition,~~February 2016, the Company borrowed $1.8 million from DNI for capital investment, ~~in February 2016,~~ which ~~amount~~ was outstanding as of ~~March 31,~~September 30, 2018. This loan matures in July 2019 and bears interest at a rate of 4.6% per annum, payable annually.

On March 21, 2018, DNS borrowed ~~KRW6.5 billion ($6.1~~$5.8 million ~~in USD)~~ from DNI, of which $4.5 million was repaid on August 8, 2018. As of September 30, 2018, $1.3 million remained ~~outstanding at March 31, 2018.~~outstanding. 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 ~~March 31,~~September 30, 2018 and 2017 were as follows (in thousands):

Table of Contents

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
Interest expense Other expenses
DNI (Parent Company) 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% —
—
324
18
—
—
—
DASAN FRANCE 100% 202
177
—
—
—
—
—
HANDYSOFT, Inc. 17.63% 150
110
—
—
—
—
—
J-Mobile Corporation 90.47% —
—
—
—
—
—
—
Fine Solution 100% —
—
—
—
—
—
—
Solueta 27.21% —
—
—
—
—
—
—
$ 1,598
$ 1,410
$ 353
$ 172
$ 1,022
$ 79
$ 66

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 (Parent Company) N/A $ 4,151
$ 3,321
$ —
$ —
$ 874
$ 63
CHASAN Networks Co., Ltd. 100% —
—
195
27
—
—
DASAN FRANCE 100% 394
387
—
—
—
—
DASAN INDIA Private Limited⁽¹⁾
100% 6,287
4,783
—

D-Mobile⁽¹⁾
100% 11
13
—
—
102
—
Fine Solution 100% —
—
3

HANDYSOFT, Inc. 17.64% 20
9
—
—
—
—
J-Mobile Corporation 68.56% 8
—
—
—
132
—
Tomato Soft (Xi'an) Ltd. 100% —
—
—
171
—
—
$ 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.



		Three Months Ended September 30, 2018
Counterparty	DNI ownership Interest	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI (Parent Company)	N/A	$	1,472	$	1,270	$	—	$	784	$	112	$	89
Tomato Soft Ltd.	100%	—		27		—		—		—		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		119		—		—		—
Chasan Networks Co., Ltd.	100%	—		260		21		—		—		—
Handysoft, Inc.	17.63%	215		208		—		2		—		—
		$	1,687	$	1,765	$	140	$	786	$	112	$	89



		Three Months Ended September 30, 2017
Counterparty	DNI ownership Interest	Sales		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	$	5,569	$	272	$	1,532	$	55



		Nine Months Ended September 30, 2018
Counterparty	DNI ownership Interest	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI (Parent Company)	N/A	$	3,683	$	3,143	$	—	$	2,950	$	338	$	234
Tomato Soft Ltd.	100%	—		84		—		—		—		—
Tomato Soft (Xi'an) Ltd.	100%	—		10		396		—		—		—
Chasan Networks Co., Ltd.	100%	—		880		57		—		—		—
Dasan France	100%	202		177		—		—		—		—
HandySoft, Inc.	17.63%	473		357		—		4		—		—
		$	4,358	$	4,651	$	453	$	2,954	$	338	$	234

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		Nine Months Ended September 30, 2017
Counterparty	DNI ownership Interest	Sales		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⁽¹⁾	100%	6,287		4,783		—		30		—
D-Mobile⁽¹⁾	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	$	22,851	$	635	$	4,401	$	178

_{(1) As discussed above, on December 31, 2017 DNS acquired DASAN India and D-Mobile from DNI.}

The Company has entered into 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~~three quarters of 2017, DASAN India and D-Mobile) represent finished goods produced by the Company that are sold to these related parties who sell the Company's products in Korea, France, India and Taiwan, respectively.

The Company has entered into an agreement with ~~CHASAN~~Chasan Networks Co., Ltd. to provide manufacturing and research and development services for the Company. Under the agreement with ~~CHASAN~~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. Sales to DNI necessary for DNI to fulfill agreements with its customers are recorded net of royalty fees in related-party revenue.

The Company shares office space with DNI and certain of DNI's subsidiaries. Prior to the Merger, DNS, then a wholly owned subsidiary of DNI, shared human resources, treasury and other administrative support with DNI. As such, the Company entered into certain service sharing agreements with DNI and certain of its subsidiaries for the ~~shared~~ office space and ~~shared~~ administrative services. Expenses related to ~~rent~~leases and administrative services are allocated and billed to the Company based on square footage occupied and headcount, respectively.

Other expenses to related parties represent ~~expenses~~payment 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 ~~March 31,~~September 30, 2018 and December 31, 2017 were as follows (in thousands):

Table of Contents

As of March 31, 2018
Counterparty 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 $ 14,015
$ 2
$ 790
$ 12,895
$ 1,533
$ 2,756
$ —
Tomato Soft Ltd. 100% —
—
—
—
—
10
—
Tomato Soft (Xi'an) Ltd. 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
—
—
—
—
—
$ 14,644
$ 72
$ 790
$ 12,895
$ 1,639
$ 2,806
$ —

As of December 31, 2017
Counterparty 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 $ 12,576
$ 93
$ 786
$ 6,800
$ 1,264
$ 1,859
$ 59
Tomato Soft Ltd. 100% —
—
—
—
—
18
—
Tomato Soft (Xi'an) Ltd. 100% —
—
—
—
—
54
—
ABLE 94.57% —
—
—
—
—
—
—
DASAN France 100% 870
71
—
—
—
—
—
HANDYSOFT, Inc. 17.63% 52
—
—
—
—
—
—
CHASAN Networks Co., Ltd. 100% —
—
—
—
87
—
—
Solueta 100% —
—
—
—
—
25
—
$ 13,498
$ 164
$ 786
$ 6,800
$ 1,351
$ 1,956
$ 59



		As of September 30, 2018
Counterparty	DNI ownership Interest	Account receivables		Other receivables		Deposits for lease *		Loans Payable		Accounts payable		Other Payables		Accrued and other liabilities**
DNI (parent company)	N/A	$	1,679	$	26	$	738	$	8,148	$	1,000	$	1,810	$	157
Tomato Soft Ltd.	100%	—		—		—		—		—		9		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		—		—		40		—
Dasan France	100%	285		65		—		—		—		—		—
HandySoft, Inc.	17.63%	175		—		—		—		216		—		—
Chasan Networks Co., Ltd.	100%	—		—		—		—		86		—		—
		$	2,139	$	91	$	738	$	8,148	$	1,302	$	1,859	$	157



		As of December 31, 2017
Counterparty	DNI Ownership Interest	Account receivables		Other receivables		Deposits for lease *		Long-term debt		Accounts payable		Other Payables		Accrued and other liabilities**
DNI (parent company)	N/A	$	12,576	$	93	$	786	$	6,800	$	1,264	$	1,859	$	59
Tomato Soft Ltd.	100%	—		—		—		—		—		18		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		—		—		54		—
Dasan France	100%	870		71		—		—		—		—		—
HandySoft, Inc.	17.63%	52		—		—		—		—		—		—
Chasan Networks Co., Ltd.	100%	—		—		—		—		87		—		—
Solueta	100%	—		—		—		—		—		25		—
		$	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 sheetsheets as of March 31,}_{September 30, 2018}_{and the consolidated balance sheet as of December 31, 2017.}

_{**Included in accrued and other liabilities in the condensed consolidated balance sheet as of March 31,}_{September 30, 2018}_{and the consolidated balance sheet as of December 31, 2017.}

Table of Contents


(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 months ended 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,
	2018		2017		2018		2017
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	$	1,798	$	1,399	$	3,321	$	(3,157	)
Weighted average number of shares outstanding:
Basic	16,683		16,382		16,425		16,380
Effect of dilutive securities:
Stock options, restricted stock units and share awards	208		—		215		—
Diluted	16,891		16,382		16,640		16,380
Net income (loss) per share attributable to DASAN Zhone Solutions, Inc.:
Basic	$	0.11	$	0.09	$	0.20	$	(0.19	)
Diluted	$	0.11	$	0.09	$	0.20	$	(0.19	)

Three Months Ended March 31,
2018 2017
Net income (loss) attributable to DASAN Zhone Solutions, Inc. $ 107
$ (3,747 )
Weighted average number of shares outstanding:
Basic 16,416
16,378
Effect of dilutive securities:
Stock options, restricted stock units and share awards 210
—
Diluted 16,626
16,378
Net income (loss) per share attributable to DASAN Zhone Solutions, Inc.:
Basic $ 0.01
$ (0.23 )
Diluted $ 0.01
$ (0.23 )

~~The first quarter of~~During the three and nine months ended September 30, 2018, the Company excluded ~~451.7~~1.0 million, and 26 thousand stock options at a weighted average exercise price of ~~$12.02~~$10.89, and $14.73, respectively, from diluted net income per share because their effect would have been antidilutive. ~~The first quarter of 2017 excluded common stock equivalents of 4.9 thousand from~~

Basic net income (loss) per share is the ~~computation of the~~same as diluted net ~~loss~~income (loss) per share for the ~~first quarter~~nine months ended September 30, 2017 because the effects of ~~2017 presented because including them~~stock options and restricted stock units would have been ~~antidilutive.~~

anti-dilutive.


(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:
2018 (remainder of the year)	$	3,046	$	1,053
2019	3,956		4,088
2020	2,998		2,998
2021	2,590		2,590
2022	2,664		2,664
Thereafter	8,423		8,423
Total minimum lease payments	$	23,677	$	21,816

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Warranties

The Company accrues warranty costs based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally 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 ~~three~~nine months ended ~~March 31,~~September 30, 2018 and 2017 (in thousands):


	Three Months Ended March 31,						Nine Months Ended September 30,
	2018			2017			2018			2017
Beginning balance	$	931		$	878		$	931		$	878
Charged to cost of revenue	359			100			1,022			126
Claims and settlements	(195		)	(212		)	(598		)	(195		)
Foreign exchange impact	(1		)	20			6			14
Ending balance	$	1,094		$	786		$	1,361		$	823

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

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 ~~$5.0~~$2.4 million as of ~~March 31,~~September 30, 2018.

Payment Guarantees provided by Third Parties and DNI

The following table sets forth payment guarantees of the Company's indebtedness and other obligations as of ~~March 31,~~September 30, 2018 (in thousands) that have been provided by third parties and DNI. DNI owns approximately ~~58%~~57.3% of the outstanding shares of the Company's common stock:



Guarantor	Amount Guaranteed (in thousands)		Description of Obligations Guaranteed
DNI	$	3,451	Borrowings from Shinhan Bank
DNI	1,726		Purchasing Card from Shinhan Bank
DNI	10,730		LC from Industrial Bank of Korea
DNI	2,157		Purchasing Card from Industrial Bank of Korea
DNI	6,000		LC from NongHyup Bank
DNI	6,170		Borrowings from Export-Import Bank of Korea
DNI	6,000		LC from KookMin Bank
DNI	5,392		Borrowings from Korea Development Bank
DNI	8,400		LC from Korea Development Bank
Industrial Bank of Korea	6,486		Borrowings and letter of credit
NongHyup Bank	3,497		Borrowings and letter of credit
Kookmin Bank	304		Letter of credit
Korea Development Bank	894		Letter of credit
Shinhan Bank	933		Purchasing Card
Industrial Bank of Korea	4,075		Performance bonds
State Bank of India	34		Performance bonds
Seoul Guarantee Insurance Co.	4,232		Performance payment guarantee*
	$	70,481

Guarantor Amount Guaranteed (in thousands) Description of Obligations Guaranteed
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 6,893
Letter of credit
NongHyup Bank 4,076
Letter of credit
Shinhan Bank 172
Purchasing card
Industrial Bank of Korea 1,829
Performance bonds
State Bank of India 38
Performance bonds
Seoul Guarantee Insurance Co. 1,024
Performance payment guarantee*
$ 43,039

_{*The Company is responsible for the warranty liabilities generally for the period of}_two_{years regardingon major product sales and has contracted surety insurance overto cover part of the warranty liabilities.}

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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)	Stock Option and Other Benefit Plans

2018 Employee Stock Purchase Plan

On May 22, 2018, the stockholders of the Company approved the adoption of the DASAN Zhone Solutions, Inc. 2018 Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective upon stockholder approval and replaced the Company’s existing DASAN Zhone Solutions, Inc. 2002 Employee Stock Purchase Plan.

The ESPP authorizes the issuance of up to 250,000 shares of the Company’s common stock. In addition, the ESPP provides for an annual increase on the first day of each calendar year beginning on January 1, 2019 and ending on and including January 1, 2028 equal to the lesser of (i) 1% of the shares outstanding on the last day of the immediately preceding calendar year and (ii) such smaller number of shares as may be determined by the Board in its sole discretion. Notwithstanding the foregoing, the number of shares of stock that may be issued or transferred pursuant to awards under the ESPP may not exceed an aggregate of 2,000,000 shares. These 2,000,000 shares have been registered pursuant to a registration statement on Form S-8 filed with the SEC on November 8, 2018.

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(13)	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 maker is the Company’s Chief Executive Officer, who 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.~~bill to countries. The following summarizes required disclosures about geographical concentrations and revenue by products and services (in thousands):



	Three Months Ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenue by geography:
United States	$	11,125	$	13,068	$	41,373	$	37,176
Canada	1,131		1,498		3,344		4,112
Total North America	12,256		14,566		44,717		41,288
Latin America	6,841		7,480		21,713		19,425
Europe, Middle East, Africa	10,425		7,378		27,264		19,134
Korea	19,609		20,520		50,844		69,032
Other Asia Pacific	22,783		16,494		63,137		29,612
Total International	59,658		51,872		162,958		137,203
Total	$	71,914	$	66,438	$	207,675	$	178,491



	Three Months Ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenue by classification:
Products	$	68,787	$	63,257	$	198,830	$	169,831
Services	3,127		3,181		8,845		8,660
Total	$	71,914	$	66,438	$	207,675	$	178,491

Three Months Ended
March 31,
2018 2017
Revenue by geography:
United States $ 16,551
$ 12,147
Canada 971
1,192
Total North America 17,522
13,339
Latin America 7,958
4,870
Europe, Middle East, Africa 7,486
5,503
Korea 12,124
16,315
Other Asia Pacific 14,414
12,085
Total International 41,982
38,773
Total $ 59,504
$ 52,112

Three Months Ended
March 31,
2018 2017
Revenue by products and services:
Products $ 56,726
$ 49,725

Services 2,778
2,387

Total $ 59,504
$ 52,112

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


	March 31, 2018		December 31, 2017		As of September 30, 2018		As of December 31, 2017
United States	$	3,283	$	3,393	$	3,131	$	3,393
Korea	1,471		1,633		1,441		1,633
Japan and Vietnam	844		810
Taiwan and India	34		37
Other Asia Pacific					802		847
	$	5,632	$	5,873	$	5,374	$	5,873


~~(13)~~(14)	Income Taxes

As of ~~March 31,~~September 30, 2018, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in the United States and ~~the mix of earnings~~taxable income generated by the Company’s wholly-owned foreign subsidiaries.

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The total amount of unrecognized tax benefits, including interest and penalties, at ~~March 31,~~September 30, 2018 was ~~$0.6~~$0.5 million. The amount of tax benefits that would impact the effective income tax rate, if recognized, is $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 ~~quarter~~quarters ended ~~March 31,~~September 30, 2018 and 2017. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.

The Company has recognized the provisional tax impacts related to the Tax Act in the 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 assumptions 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 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~~before the ~~Company's 2017 U.S. corporate income tax return is filed~~end of the measurement period in the fourth quarter of 2018.


(15)	Subsequent Events

Keymile Acquisition / Share Purchase Agreement

On October 5, 2018, ZTI Merger Subsidiary III, Inc., a Delaware corporation, and wholly owned subsidiary of the Company (the “Purchaser”) and Riverside KM Beteiligung GmbH, a limited liability company organized under the laws of Germany (the “Seller”) entered into a Share Purchase Agreement (the “Purchase Agreement”) whereby the Purchaser agreed to purchase from the Seller all shares in Keymile GmbH (“Keymile”), a limited liability company organized under the laws of Germany, and certain of its subsidiaries, for an aggregate cash purchase price of EUR 10.25 million ($11.9 million) (the “Keymile Acquisition��). The purchase price is to be paid at closing and is subject to customary regulatory approval and satisfaction of certain closing conditions. Certain liabilities including unfunded pension liabilities are to be assumed by the Purchaser.

Keymile offers a series of multi-service access platforms for FTTx network architectures, including ultra-fast broadband copper access based on VDSL/Vectoring & G. Fast technology. The Company has pursued the acquisition to enable the strengthening of its global broadband access service market.

The Company has $42,000 of outstanding receivables and $59,000 of sales to Keymile as of and for the nine months period ended September 30, 2018.

Guarantee Agreement and Working Capital Facility

In connection with the Keymile Acquisition and the Purchase Agreement, the Company has also entered into a guarantee agreement with the Seller, dated October 5, 2018, which guarantees the purchase price of EUR 10.25 million ($11.9 million) and guarantees a working capital facility of EUR 4.0 million ($4.6 million). Both the guarantee agreement and the working capital facility are to be provided at closing of the Keymile Acquisition, which is expected to be completed in the fourth quarter of 2018.

The foregoing description of the Keymile Acquisition and the Purchase Agreement, which includes the Guarantee Agreement and Working Capital Facility as exhibits, is not complete and is qualified in its entirety by reference to the full text of the Purchase Agreement, which will be filed by the Company when the Keymile Acquisition closes on a Form 8-K.

Wells Fargo Bank Facility

On October 22, 2018, the Company borrowed $3.0 million under the Amended WFB Facility. On October 31, 2018, the Company repaid the $3.0 million in full.

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

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

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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;~~items as to future periods; 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 that they are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified or referenced under the heading “Risk Factors” in Part II, Item 1A, elsewhere in this report and in our other filings with the Securities and Exchange Commission (the SEC). ~~Therefore, actual~~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 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).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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. 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.

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RESULTS OF OPERATIONS

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


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017		2018		2017
Net revenue:
Net revenue	97	%	79	%
Net revenue - related parties	3	%	21	%
Third parties					98	%	91	%	98	%	85	%
Related parties					2	%	9	%	2	%	15	%
Total net revenue	100	%	100	%	100	%	100	%	100	%	100	%
Cost of revenue:
Products and services	60	%	48	%
Products and services - third parties					65	%	58	%	65	%	53	%
Products and services - related parties	3	%	17	%	2	%	8	%	2	%	13	%
Amortization of intangible assets	0	%	0	%	—	%	—	%	—	%	—	%
Total cost of revenue	63	%	65	%	67	%	66	%	67	%	66	%
Gross profit	37	%	35	%	33	%	34	%	33	%	34	%
Operating expenses:
Research and product development	15	%	18	%	12	%	13	%	13	%	15	%
Selling, marketing, general and administrative	21	%	21	%	16	%	18	%	17	%	19	%
Amortization of intangible assets	0	%	1	%	—	%	—	%	—	%	1	%
Total operating expenses	36	%	40	%	28	%	31	%	30	%	35	%
Operating income (loss)	1	%	(5	)%	5	%	3	%	3	%	(1	)%
Interest income	0	%	0	%	—	%	—	%	—	%	—	%
Interest expense	(1	)%	(1	)%	—	%	(1	)%	—	%	—	%
Other income, net	0	%	(1	)%	(1	)%	—	%	—	%	—	%
Income (loss) before income taxes	0	%	(6	)%	4	%	2	%	3	%	(1	)%
Income tax provision (benefit)	0	%	1	%
Income tax provision					1	%	—	%	1	%	—	%
Net income (loss)	0	%	(7	)%	3	%	2	%	2	%	(1	)%
Net loss attributable to non-controlling interest	0	%	0	%
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	0	%	(7	)%
Foreign currency translation adjustments	1	%	6	%
Comprehensive income (loss)	1	%	(1	)%
Comprehensive income attributable to non-controlling interest	0	%	0	%
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.	1	%	(1	)%

Net Revenue

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


	Three Months Ended March 31,								Three Months Ended September 30,									Nine Months Ended September 30,
	2018		2017		Increase		% change		2018		2017		Increase/ (decrease)			% change		2018		2017		Increase		% change
Products	$	56.7	$	49.7	$	7.0	14	%	$	68.8	$	63.2	$	5.6		9	%	$	198.8	$	169.8	$	29.0	17	%
Services	2.8		2.4		0.4		17	%	3.1		3.2		(0.1		)	(3	)%	8.9		8.7		0.2		2	%
Total	$	59.5	$	52.1	$	7.4	14	%	$	71.9	$	66.4	$	5.5		8	%	$	207.7	$	178.5	$	29.2	16	%

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


	Three Months Ended March 31,									Three Months Ended September 30,									Nine Months Ended September 30,
	2018		2017		Increase/(decrease)			% change		2018		2017		Increase/(decrease)			% change		2018		2017		Increase/(decrease)			% change
Revenue by geography:
United States	$	16.5	$	12.1	$	4.4		36	%	$	11.2	$	13.1	$	(1.9	)	(15	)%	$	41.4	$	37.2	$	4.2		11	%
Canada	1.0		1.2		(0.2		)	(17	)%	1.1		1.5		(0.4		)	(27	)%	3.3		4.1		(0.8		)	(20	)%
Total North America	17.5		13.3		4.2			32	%	12.3		14.6		(2.3		)	(16	)%	44.7		41.3		3.4			8	%
Latin America	8.0		4.9		3.1			63	%	6.8		7.5		(0.7		)	(9	)%	21.7		19.5		2.2			11	%
Europe, Middle East, Africa	7.5		5.5		2.0			36	%
Europe, Middle East, Africa (EMEA)										10.4		7.4		3.0			41	%	27.3		19.1		8.2			43	%
Korea	12.1		16.3		(4.2		)	(26	)%	19.6		20.4		(0.8		)	(4	)%	50.9		69.0		(18.1		)	(26	)%
Other Asia Pacific	14.4		12.1		2.3			19	%	22.8		16.5		6.3			38	%	63.1		29.6		33.5			113	%
Total International	42.0		38.8		3.2			8	%	59.6		51.8		7.8			15	%	163.0		137.2		25.8			19	%
Total	$	59.5	$	52.1	$	7.4		14	%	$	71.9	$	66.4	$	5.5		8	%	$	207.7	$	178.5	$	29.2		16	%

For the three months ended ~~March 31,~~September 30, 2018, net revenue increased ~~14%~~8% or ~~$7.4~~$5.5 million to ~~$59.5~~$71.9 million from ~~$52.1~~$66.4 million for the same period last year. For the nine months ended September 30, 2018, net revenue increased 16% or $29.2 million to $207.7 million from $178.5 million for the same period of last year. For the three months ended ~~March 31,~~September 30, 2018, product revenue increased ~~14%~~9% or ~~$7.0~~$5.6 million to ~~$56.7~~$68.8 million ~~compared~~from $63.2 million for the same period last year. For the nine months ended September 30, 2018, product revenue increased 17% or $29.0 million to $198.8 million from $169.8 million for the same period last year. The increase in net revenue for both the three ~~months~~and nine month periods ended ~~March 31,~~September 30, 2018 was primarily due to increased ~~revenues~~products sales in the ~~United States~~Europe, Middle East and ~~Latin America.~~Africa ("EMEA") and Other Asia Pacific, primarily in India, offset by decreased product sales in Korea. We also added customers in late 2017, which contributed to the revenue increase during the first three quarters this ~~quarter~~year as compared to the same ~~period~~periods last year.

Service revenue represents revenue from maintenance and other services associated with product shipments. For the three months ended ~~March 31,~~September 30, 2018, service revenue decreased 3% or $0.1 million to $3.1 million from $3.2 million for the same period last year. For the nine months ended September 30, 2018, service revenue increased ~~17%~~2% or ~~$0.4~~$0.2 million to ~~$2.8~~$8.9 million ~~compared to~~from $8.7 million for the same period last year. The increase in service revenue was primarily related to a greater number of products under ~~contract.~~contract for maintenance and extended warranty.

International net revenue increased 8%15% or ~~$3.2~~$7.8 million to ~~$42.0~~$59.6 million for the three months ended ~~March 31,~~September 30, 2018 from ~~$38.8~~$51.8 million for the same period last year, and represented ~~71%~~83% of total net revenue compared with ~~74%~~78% during the same period of 2017. International net revenue increased 19% or $25.8 million to $163.0 million for the nine months ended September 30, 2018, from $137.2 million for the same period last year, and represented 78% of total net revenue compared with 77% during the same period last year. The increases in international net revenue were primarily related to ~~improved revenues~~increased product sales in ~~Latin America and the Middle East.~~Other Asia Pacific, primarily in India.

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

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.

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Cost of Revenue and Gross Profit

Total cost of revenue increased ~~11%~~10% or ~~$3.9~~$4.5 million to ~~$37.8~~$48.5 million for the three months ended ~~March 31,~~September 30, 2018, compared to ~~$33.9~~$44.0 million for the three months ended ~~March 31,~~September 30, 2017. Total cost of revenue was ~~63%~~67% of net revenue for the ~~first quarter of~~three months ended September 30, 2018, compared to ~~65% in~~66% for the ~~first quarter~~three months ended September 30, 2017. Total cost of revenue increased 18% or $20.9 million to $139.3 million for the nine months ended September 30, 2018, from $118.4 million for the nine months ended September 30, 2017. Total cost of revenue was 67% of net revenue for the nine months ended September 30, 2018 compared to 66% for the nine months ended September 30, 2017. The ~~decreases~~increase in total cost of revenue, as a percentage of sales, ~~were~~was primarily due to ~~timing of~~an increase in revenues ~~related to product mix into Latin America,~~in the ~~United States~~EMEA and certain Other Asia Pacific ~~customers and operating efficiencies.~~customers.

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 expenses relating to discontinued products and excess or obsolete inventory.

Research and Product Development Expenses

Research and product development expenses decreased 4%3% or ~~$0.4~~$0.2 million to ~~$9.0~~$8.7 million for the three months ended ~~March 31,~~September 30, 2018 compared to ~~$9.4~~$8.9 million for the three months ended ~~March 31,~~September 30, 2017. As a percentage of sales, research and product development expenses were ~~15% in~~12% for the ~~first quarter of~~three months ended September 30, 2018, compared to ~~18% in~~13% for the ~~first quarter~~three months ended September 30, 2017. Research and product development expenses decreased 4% or $1.1 million to $26.3 million for the nine months ended September 30, 2018 compared to $27.5 million for the nine months ended September 30, 2017. As a percentage of sales, research and product development expenses were 13% for the nine months ended September 30, 2018, compared to 15% for the nine months ended September 30, 2017. The decrease in research and product development expenses was primarily due to ~~slightly decreased personnel-related expenses due to synergies from the Merger.~~cost containment initiatives and more focused product development activities. 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 14%~~decreased 5% or ~~$1.5~~$0.6 million to ~~$12.4~~$11.1 million for the three months ended ~~March 31,~~September 30, 2018, compared to ~~$10.9~~$11.7 million for the three months ended ~~March 31,~~September 30, 2017. As a percentage of sales, selling, marketing, general and administrative expenses were ~~flat at 21%~~16% for the three months ended September 30, 2018, compared to 18% for the three months ended September 30, 2017. Selling, marketing, general and administrative expenses increased 6% or $2.1 million to $35.2 million for the nine months ended September 30, 2018, compared to $33.1 million for the nine months ended September 30, 2017. As a percentage of sales, selling, marketing, general and administrative expenses were 17% for the nine months ended September 30, 2018, compared to 19% for the nine months ended September 30, 2017. The decrease in selling, marketing, general and administrative expenses for the ~~first quarter of both~~three months ended September 30, 2018 was primarily related to a continued focus on our cost containment initiatives. The increase in selling, marketing, general and ~~2017.~~administrative expenses for the nine months ended September 30, 2018 was primarily related to higher personnel expenses due to increased headcount, as well as increased legal and outside service fees.

Income Tax Provision

Income tax ~~(benefit)~~ expense for the three and nine months ended ~~March 31,~~September 30, 2018 ~~and 2017~~ was ~~approximately $0.0~~$0.7 million and ~~$0.4~~$1.1 million, respectively, on pre-tax income of $2.6 million and $4.4 million, respectively. For the three and nine months ended September 30, 2017, income tax expense was $0.1 million and $0.6 million, respectively, on pre-tax ~~loss~~income (loss) of ~~$3.1~~$1.5 million and $(2.3) million, respectively. As of ~~March 31,~~September 30, 2018, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in the United States and ~~the mix of earnings~~taxable income generated by our 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 expenses, and (v) material non-recurring transactions or events, such as ~~Merger~~merger and acquisition 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 core operating business strategies. We believe Adjusted EBITDA also assists investors and analysts in

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comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.

Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual requirements;

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

although depreciation and amortization are non-cash expenses, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

non-cash compensation is and will remain a key element of our overall long-term incentive compensation ~~package,~~programs and packages, 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, potentially limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) or any other performance measures calculated in accordance with U.S. GAAP or as a measure of liquidity. Management understands these limitations and compensates for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.

Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA, which we consider to be the most directly comparable U.S. GAAP financial measure to Adjusted EBITDA (in thousands):


	Three Months Ended March 31,						Three Months Ended September 30,				Nine Months Ended September 30,
	2018			2017			2018		2017		2018		2017
Net income (loss)	$	141		$	(3,498	)	$	1,827	$	1,387	$	3,323	$	(2,985	)
Add:
Interest expense, net	237			248			405		227		1,127		711
Income tax (benefit) expense	(5		)	440
Income tax expense							735		107		1,071		646
Depreciation and amortization	699			1,181			652		752		2,033		3,105
Stock-based compensation	363			255			617		195		1,357		670
Non-recurring merger and acquisition costs							139		—		139		—
Adjusted EBITDA	$	1,435		$	(1,374	)	$	4,375	$	2,668	$	9,050	$	2,147

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.

We had a net income of ~~$0.1~~$3.3 million for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2018, and $1.2 million for the year ended December 31, 2017. ~~However, we incurred a net loss of $15.3 million for the year ended December 31, 2016 and significant losses in prior years.~~ As of ~~March 31,~~September 30, 2018, we had an accumulated deficit of ~~$18.4~~$15.2 million and working capital of ~~$66.7~~$66.9 million. In addition, we had a net cash outflow from operations of $15.7 million for the nine months ended September 30, 2018. As of ~~March 31,~~September 30, 2018, we had ~~$23.2~~$20.0 million in cash and cash equivalents, which included ~~$9.7~~$6.0 million in cash balances held by our ~~Korean subsidiary~~international subsidiaries and ~~$46.5~~$42.3 million in aggregate principal ~~amount~~debt of ~~short-term debt obligations, other long-term debt and long-term related-party borrowings.~~which $37.3 million was in current liabilities. In addition, as of ~~March 31,~~September 30, 2018 we had ~~$6.6~~$6.4 million committed as ~~security~~cash collateral for letters of credit under our revolving credit facilities, leaving ~~$6.1~~$21.3 million in aggregate financing availability under these facilities. Our current lack of liquidity could harm us by:

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

requiring substantial amounts of cash to be used for debt servicing, rather than other purposes, including operations;

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

limiting its ability to complete Keymile acquisition; and

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

These factors indicate that cash flows might not be sufficient for us to meet 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~~Quarterly Report on Form 10-Q.

However, we plan to focus on cost management, operating efficiency and restrictions on discretionary spending. In addition, if necessary, we may sell assets, issue debt or equity securities or purchase credit insurance. We may also 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 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 from the 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 (i) achieve forecasted results, ~~and our ability to~~(ii) access funds approved under existing ~~facilities.~~or new credit facilities and/or to raise additional capital through sales of our common stock to the public and (iii) effectively manage inventory procurement. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected. 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 expected, it could cause us to fail to ~~meets~~meet our obligations as they come due.

We plan to focus on capital raising, cost management, operating efficiency and restrictions on discretionary spending. In addition, if necessary, we may sell assets, issue or enter into amendments of our debt or equity securities, or purchase credit insurance. We may 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. On July 12, 2018, we entered into the A&R Domestic Credit Agreement and the A&R Ex-Im Credit Agreement with WFB, which amended and replaced our existing senior secured revolving line of credit and letter of credit facilities with WFB and revised certain reporting and compliance provisions, as described more fully in Note 7 to the unaudited condensed consolidated financial statements.

Based on our current plans and current business conditions, we believe that 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 from the date of this Quarterly Report on Form 10-Q.

Operating Activities

Net cash used in operating activities ~~increased $12.8 million to $13.5~~was $15.7 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2018, ~~from $0.7~~compared with net cash used of $0.6 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2017. This increase was primarily due to changes in operating assets and liabilities, resulting in using ~~$15.0~~$23.4 million of cash ~~in the first quarter of~~for nine months ended September 30, 2018, compared to ~~providing $0.2~~using $2.2 million of cash infor the ~~first quarter of~~nine months ended September 30, 2017.

Investing Activities

Net cash used in investing activities was ~~$0.1~~$0.8 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2018 compared to net cash provided by investing activities of ~~$0.4~~$0.1 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2017.

Financing Activities

Net cash provided by financing activities was ~~$16.8~~$15.2 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2018 compared to net cash used in financing activities of $1.8 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2017. This change was primarily due to the ~~borrowing~~proceeds from short-term borrowings of ~~$6.3~~$67.5 million, ~~under the WFB Facility (as defined below) and KRW6.5 billion ($6.1 million in USD) from DNI in the first quarter~~offset by repayments of ~~2018.~~short-term borrowings of $53.2 million.

Cash Management

Our primary source of liquidity comes from our cash and cash equivalents, which totaled ~~$23.2~~$20.0 million at ~~March 31,~~September 30, 2018, as well as our credit facilities, under which we had aggregate financing availability of ~~$6.1~~$21.3 million as of ~~March 31,~~September 30, 2018, and under which ~~$6.6~~$6.4 million was committed as ~~security~~cash collateral for letters of credit as of ~~March 31,~~September 30, 2018. Our cash and cash equivalents as of ~~March 31,~~September 30, 2018 included ~~$9.7~~$6.0 million in cash balances held by our ~~Korean subsidiary.~~international subsidiaries.

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WFB Facility

~~As of March 31,~~

Wells Fargo Bank Facility

On July 12, 2018, we ~~had a $25.0 million~~entered into the A&R Domestic Credit Agreement and the A&R Ex-Im Credit Agreement with WFB, which amended and replaced our existing senior secured revolving line of credit and letter of credit ~~facility (the~~facilities with WFB ~~Facility) with Wells Fargo Bank (WFB). Under the~~and revised certain reporting and compliance provisions. The Amended WFB Facility ~~we have~~provides for a revolving line of credit of $25.0 million (including up to $5.0 million of letters of credit), with 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~~cash collateral 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 March 31, 2018, we had $6.3 million outstanding borrowings under the WFB Facility, and $2.1 million was committed as security for letters of credit. On 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 $5.1 million of financing availability under the WFB Facility as of March 31, 2018. The amounts borrowed under the Amended WFB Facility ~~bear~~bears 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). To maintain availability of funds under the Amended 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. The maturity date of the Amended WFB Facility is July 12, 2021.

As of September 30, 2018, we had $6.0 million in outstanding borrowings under its WFB Facility, and 2.1 million was committed as cash collateral for letters of credit. Subsequent to the end of the quarter, we repaid $6.0 million in borrowings under the WFB Facility. Based on our eligible accounts receivable and inventory, we had $6.5 million of financing availability under the WFB Facility as of September 30, 2018. The interest rate on the WFB Facility was ~~4.81%~~4.4% at ~~March 31,~~September 30, 2018. ~~The maturity date under the WFB Facility is July 15, 2019.~~

Our obligations under the Amended WFB Facility are secured by substantially all of our ~~personal property~~ assets and those of our subsidiaries that guarantee the Amended WFB Facility, including ~~our~~their intellectual property. The Amended WFB Facility contains certain financial covenants, and customary affirmative ~~covenants~~ and negative covenants. If we default under the Amended WFB Facility due to a covenant breach or otherwise, after any applicable grace periods. 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 Amended WFB Facility. ~~In the past we have violated the covenants in the WFB Facility and entered into an amendment to cure these violations.~~ As of ~~March 31,~~September 30, 2018, we were in compliance with the covenants under the Amended WFB Facility.

On October 22, 2018, we borrowed $3.0 million under the Amended WFB Facility. ~~We make no assurances that~~On October 31, 2018, we ~~will be~~repaid $3.0 million in ~~compliance with these covenants in the future.~~full.

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 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 ~~March 31,~~September 30, 2018 and December 31, 2017, we had an aggregate outstanding balance of ~~$27.3~~$28.2 million and $22.8 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements ranged from 1.3% to 6.82% as of September 30, 2018, 1.58% to 8.90% ~~as of both March 31, 2018~~ and December 31, 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2018 under this facility was 4.6% per annum.

~~In addition,~~Also, we borrowed $1.8 million from DNI for capital investment in February 2016, which amount was outstanding as of ~~March 31,~~September 30, 2018. This loan matures in July 2019 and bears interest at a rate of 4.6% per annum, payable annually.

Interest expense on these related-party borrowings was $0.1 million and $0.3 million in the three and nine months ended ~~March 31, 2018 and 2017 respectively.~~September 30, 2018.

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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 ~~March 31,~~September 30, 2018, noone customer ~~accounted for 10% or more~~represented 12% of net accounts receivable, respectively, and receivables from customers in countries other than the United States represented ~~88%~~89% of net accounts receivable. Additionally, Dasan Networks Japan has factoring arrangements in relation to certain accounts receivable with certain financial institutions as ~~March 31,~~of September 30, 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.

Contractual Commitments and Off-Balance Sheet Arrangements

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


			Payments due by period														Payments due by period
	Total		2018		2019		2020		2021		2022		Thereafter		Total		2018		2019		2020		2021		2022		Thereafter
Operating leases	$	23,677	$	3,046	$	3,956	$	2,998	$	2,590	$	2,664	$	8,423	$	21,816	$	1,053	$	4,088	$	2,998	$	2,590	$	2,664	$	8,423
Purchase commitments	5,005		5,005		—		—		—		—		—		2,403		2,403		—		—		—		—		—
Short-term debt	33,556		33,556		—		—		—		—		—
Short-term debt - bank and trade facilities															34,171		34,171		—		—		—		—		—
Short-term debt - related party															3,148		3,148		—		—		—		—		—
Long-term debt -related party	12,895		—		7,895				5,000				—		5,000		—				—		5,000		—		—
Other payable - related party	2,806		2,806												1,859		1,859		—		—		—		—		—
Royalty obligations	750		750												250		250		—		—		—		—		—
Total future contractual commitments	$	78,689	$	45,163	$	11,851	$	2,998	$	7,590	$	2,664	$	8,423	$	68,647	$	42,884	$	4,088	$	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~~are 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 ~~March 31,~~September 30, 2018.

Short-term Debt

Our short-term debt obligations have been recorded as liabilities on our balance sheet, and are comprised of ~~$27.3~~$28.2 million in outstanding borrowings under the credit facilities of our foreign subsidiaries and ~~$6.3~~$6.0 million in outstanding borrowings under the WFB Facility as of ~~March 31,~~September 30, 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,~~Subsequent to the ~~Company~~end of the quarter, we repaid ~~the $6.3~~$6.0 million in borrowings under ~~its~~our WFB Facility. At ~~March 31,~~September 30, 2018, the interest rate per annum applicable to outstanding borrowings under the trade facilities of our foreign subsidiaries ranged from ~~1.58%~~1.3% to ~~8.90%~~6.8% and was ~~4.81%~~4.4% under the WFB Facility. See above under "Cash Management" for further information about these facilities.

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Related-Party Debt

As of ~~March 31,~~September 30, 2018, we had borrowed an aggregate of ~~$6.8~~$8.1 million from DNI, which consisted of a $5.0 million unsecured subordinated term loan facility which matures in September 2021, ~~and~~ a $1.8 million loan for capital investment which matures in July ~~2019. In addition, DNS Korea has~~2019 and a secured loan outstanding of ~~KRW 6.5 billion ($6.1~~$1.3 million ~~in USD)~~ which matures in June 27, 2019. All three loans bear interest at a rate of 4.6% per annum.

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

RECENT ACCOUNTING PRONOUNCEMENTS

Please refer to Note 1(g) to the unaudited condensed consolidated financial statements included in part 1, Item 1 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 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.

For the three and nine months ended ~~March 31,~~September 30, 2018, noone customer each accounted for ~~10% or more~~11% of net ~~revenue.~~revenue, respectively. For the three months ended ~~March 31,~~September 30, 2017, two customers represented ~~12%~~10% and ~~11%~~9% (a related party) 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).

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our variable rate outstanding debt. As of ~~March 31,~~September 30, 2018,, our outstanding short-term debt balance was ~~$33.6~~$37.3 million, which consisted of principal amount of borrowings under the short-term credit facilities of our foreign subsidiaries, DNI and the WFB Facility (all of which bear interest at a variable rate). Amounts borrowed under our short-term credit facilities bore interest ranging from ~~1.58%~~1.3% to ~~8.90%~~6.82% as of ~~March 31,~~September 30, 2018 and amounts borrowed under the WFB Facility bore interest at ~~4.81%~~4.4%. Assuming the outstanding balance on our variable rate debt remains constant over a year, a 1% increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.3 million. As of ~~March 31,~~September 30, 2018, our outstanding long-term debt balance was ~~$12.9~~$5.0 million and consisted of loans from DNI and its affiliates (which bear interest at a fixed ~~rate)~~rates).

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 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.

We have performed a sensitivity analysis as of ~~March 31,~~September 30, 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 ~~$2.4~~approximately $3.0 million at ~~March 31,~~September 30, 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.

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

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~March 31,~~September 30, 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 Chief Executive Officer and our Chief Financial Officer. Based upon this evaluation, our Chief Executive 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, 2017 and that have not yet been fully remediated, as described below, our disclosure controls and procedures were not effective as of ~~March 31,~~September 30, 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. 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 in our internal control over financial reporting as of December 31, 2016 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, 2017.

As of the date of this report, we are ~~re-assessing~~continuing to re-assess the design of our internal controls over financial reporting and ~~modifying~~to modify processes related to the accounting for significant and unusual transactions, as well as enhancing monitoring and oversight controls in the application of ~~applicable~~relevant accounting guidance related to such transactions. In connection therewith, we have hired various accounting, operational and financial planning and analysis resources, we have begun designing and implementing additional processes and controls and we are in the early stages of formalizing our project plan and updating the documentation of our business process flows and related internal control over financial reporting. We anticipate that we will continue to 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.

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Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all ~~error~~errors 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~~our 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.

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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, 2017, which could materially affect our business, financial condition or future results. ~~There~~Except as set forth below, there have been no material changes to the risk factors ~~described in the "Risk Factors" section~~we previously disclosed in our ~~Annual Report on~~filings, including the Form 10-K filed for the year ended December 31, ~~2017.~~2017 with the SEC. The risks described in our Annual Report on Form 10-K, however, 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.

We may need or want to raise or access additional funds to fund our ongoing operations and to complete the Keymile acquisition and these funds may not be available to us when we need them. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected.

We need sufficient capital to fund our ongoing operations and to complete the Keymile acquisition. Our ability to meet our obligations will depend on our ability to access funds approved under existing or new credit facilities and or our ability to raise additional capital through sales of our common stock to the public. We cannot be certain that additional funds will be available to us on favorable terms when required, or at all. If we cannot raise additional funds when we need them, our financial condition, results of operations, business and prospects could be materially and adversely affected.

We face exposure to foreign currency exchange rate fluctuations.

We currently operate a limited hedging program to mitigate the impact of foreign currency exchange rate fluctuations. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign currency exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments, which could adversely affect our financial condition and operating results.

Item 6. Exhibits

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EXHIBIT INDEX



Exhibit Number	Description


~~10.1~~	Eighth Amendment to Credit and Security Agreements, dated 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
~~10.2~~	Ninth Amendment to Credit and Security Agreements, dated as of March 30, 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
~~10.3~~	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 March 27, 2018, by and between DASAN Networks, Inc. and DASAN Network Solutions, Inc.~~
~~10.5#~~	~~DASAN Zhone Solutions, Inc. Non-Employee Director Compensation Program~~
31.1	Certification of Chief Executive Officer Pursuant to ~~Rule~~Securities Exchange Rules 13a-14(a)/15d-14(a), as Adopted, Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to ~~Rule 13a-14(a)~~Securities Exchange Rules 13a14(a)/15d-14(a), as Adopted, Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1	Section 1350 Certification of Chief Executive Officer and 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.~~

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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: ~~May 15,~~November 8, 2018
	By:	/s/ IL YUNG KIM
	Name:	Il Yung Kim
	Title:	President and Chief Executive Officer


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

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		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		Interest expense		Other expenses
DNI (Parent Company)	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%	—		—		324		18		—		—		—
DASAN FRANCE	100%	202		177		—		—		—		—		—
HANDYSOFT, Inc.	17.63%	150		110		—		—		—		—		—
J-Mobile Corporation	90.47%	—		—		—		—		—		—		—
Fine Solution	100%	—		—		—		—		—		—		—
Solueta	27.21%	—		—		—		—		—		—		—
		$	1,598	$	1,410	$	353	$	172	$	1,022	$	79	$	66



		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 (Parent Company)	N/A	$	4,151	$	3,321	$	—	$	—	$	874	$	63
CHASAN Networks Co., Ltd.	100%	—		—		195		27		—		—
DASAN FRANCE	100%	394		387		—		—		—		—
DASAN INDIA Private Limited⁽¹⁾	100%	6,287		4,783						—
D-Mobile⁽¹⁾	100%	11		13		—		—		102		—
Fine Solution	100%	—		—						3
HANDYSOFT, Inc.	17.64%	20		9		—		—		—		—
J-Mobile Corporation	68.56%	8		—		—		—		132		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		171		—		—
		$	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.