UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10-Q/A~~10-Q

~~(Amendment No. 1)~~

(Mark One)



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

For the quarterly period ended ~~June~~September 30, 2016



¨	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 ~~TECHNOLOGIES,~~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, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



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

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 ~~August 1,~~November 2, 2016, there were approximately ~~34,371,266~~81,873,848 shares of the registrant’s common stock outstanding.

~~EXPLANATORY NOTE~~

Zhone Technologies, Inc. (the “Company,” “Zhone,” “we,” “us,” or “our”) is filing this Amendment No. 1 on Form 10-Q/A (this “Amended Filing”) to amend our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, which was originally filed with the Securities and Exchange Commission (“SEC”) on August 9, 2016 (the “Original Filing”). This Amended Filing is being filed solely for the purpose of showing that an independent registered public accountant did not review the interim unaudited financial statements as of and for the three and six months ended June 30, 2016 pursuant to the Public Company Accounting Oversight Board's (PCAOB) AU 722, ~~Interim Financial Information~~, as required by Rule 10-01(d) of Regulation S-X. As a result, the Report is deemed deficient and should not be relied upon. The headings in the columns of the financial statements and related notes thereto, and the headings of tables of financial information contained in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," have been amended to state “Not Reviewed.” No other changes have been made to the Report. A review of the Company’s interim unaudited financial statements may result in changes to the financial statements contained herein. We undertake the responsibility to file a separate amended Report on Form 10-Q/A for this period when the review is completed.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets	4
	Unaudited Condensed Consolidated Statements of Comprehensive Loss	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1519
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2429
Item 4.	Controls and Procedures	2530

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	2632
Item 1A.	Risk Factors	2632
Item 6.	Exhibits	2644
	Signatures	2745

EXPLANATORY NOTE

This report is the Quarterly Report on the Form 10-Q for the quarterly period ended September 30, 2016 (this "Form 10-Q") of DASAN Zhone Solutions, Inc., a Delaware corporation (the "Company"). On September 9, 2016, the acquisition of Dasan Network Solutions, Inc. ("DNS") was consummated 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"). In connection with the Merger, the Company changed its name from Zhone Technologies, Inc. to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone."

Pursuant to the Merger, all issued and outstanding shares of capital stock of DNS were canceled and converted into the right to receive shares of the Company’s common stock in an amount equal to 58% of the issued and outstanding shares of the Company’s common stock. As a result, immediately following the effective time of the Merger, DNS' former sole shareholder, DASAN Networks, Inc., held 58% of the outstanding shares of the Company’s common stock and the holders of the Company’s common stock immediately prior to the Merger retained, in the aggregate, 42% of the outstanding shares of the Company’s common stock.

The Merger has been accounted for as a reverse acquisition under which DNS was considered the accounting acquirer of the Company. As such, the financial results of the Company for the three and nine months ended September 30, 2016 presented in this Form 10-Q reflect the operating results of DNS and its consolidated subsidiaries for the period commencing on the first day of the applicable period through September 8, 2016 and the operating results of both DNS and Legacy Zhone and their respective consolidated subsidiaries for the period September 9 through September 30, 2016. Such results are compared to the financial results of DNS and its consolidated subsidiaries for the three and nine months ended September 30, 2015. The balance sheet of the Company includes the fair value of the assets and liabilities of Legacy Zhone as of the effective date of the Merger. Those assets include the fair value of acquired intangible assets and goodwill. Due to the foregoing, the Company’s financial results for the three and nine months ended September 30, 2016 are not comparable to its financial results for the three and nine months ended September 30, 2015. The fourth quarter ending December 31, 2016 will be the first quarter in which the Company's financial results reflect a full quarter of operating results for both DNS and Legacy Zhone and their respective consolidated subsidiaries. Except as otherwise specifically noted herein, all references in this Form 10-Q to the "Company", "we", "us", or "our" refer to (i) DNS and its consolidated subsidiaries for periods through September 8, 2016 and (ii) the Company and its consolidated subsidiaries for periods on or after September 9, 2016.

Refer to Notes 1 and 2 of the Notes to Consolidated Financial Statements for additional information.

As previously disclosed, the Company is still in the process of engaging a new independent registered public accounting firm following the previously disclosed resignation of KPMG, LLP. As a result, an independent registered public accounting firm did not review the interim unaudited financial statements as of and for the three and nine months ended September 30, 2016 pursuant to the Public Company Accounting Oversight Board's (PCAOB) AU 722, Interim Financial Information, as required by Rule 10-01(d) of Regulation S-X. As a result, this Form 10-Q is deemed deficient and should not be relied upon. A review of the Company’s interim unaudited financial statements may result in changes to the financial statements contained herein. The Company undertakes the responsibility to file an amendment to this Form 10-Q promptly following the Company’s engagement of an independent registered public accounting firm and the completion of their review of the interim unaudited financial statements as of and for the three and nine months ended September 30, 2016.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DASAN ZHONE ~~TECHNOLOGIES,~~SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets (NOT REVIEWED)

(In thousands, except par value)


	June 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015
	NOT REVIEWED¹						NOT REVIEWED¹
Assets
Current assets:
Cash and cash equivalents	$	8,335		$	10,113		$	34,375		$	10,015
Accounts receivable, net of allowances for sales returns and doubtful accounts of $963 as of June 30, 2016 and $960 as of December 31, 2015	26,536			28,209
Inventories	14,449			14,802
Restricted cash							5,218			3,844
Short-term investments							—			—
Accounts receivable, net of allowances for sales returns and doubtful accounts of $5,492 as of September 30, 2016 and $868 as of December 31, 2015							39,306			32,728
Other receivables							12,892			13,010
Current deferred income tax assets							—			327
Inventories, net							31,957			13,900
Prepaid expenses and other current assets	2,530			1,914			3,878			951
Total current assets	51,850			55,038			127,626			74,775
Property and equipment, net	4,383			1,358			6,258			2,251
Intangible assets, net							22,573			696
Non-current deferred income tax assets							2,114			1,058
Other assets	249			249			1,778			4,811
Total assets	$	56,482		$	56,645		$	160,349		$	83,591
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	13,487		$	10,053		$	20,609		$	14,936
Line of credit	2,000			5,000
Short-term debt							21,941			21,848
Accrued and other liabilities	6,272			5,742			26,735			4,467
Total current liabilities	21,759			20,795			69,285			41,251
Long-term debt - Related Party							5,000			—
Other long-term liabilities	2,992			1,693			8,024			510
Total liabilities	24,751			22,488			82,309			41,761
Stockholders’ equity:
Common stock, $0.001 par value. Authorized 180,000 shares; issued and outstanding 34,378 and 33,813 shares as of June 30, 2016 and December 31, 2015, respectively	34			34
Common stock, authorized 180,000 shares, 81,874 shares of the Company as of September 30, 2016 at $0.001 par value. 353,678 shares of DNS outstanding as of December 31, 2015 at $0.144 and $1 per share.							81,874			56,579
Additional paid-in capital	1,080,122			1,077,459			7,283			(8,890		)
Other comprehensive loss	(372		)	(356		)	908			(1,775		)
Accumulated deficit	(1,048,053		)	(1,042,980		)	(12,743		)	(4,222		)
Non-controlling interest							718			138
Total stockholders’ equity	31,731			34,157			78,040			41,830
Total liabilities and stockholders’ equity	$	56,482		$	56,645		$	160,349		$	83,591

See accompanying notes to unaudited condensed consolidated financial statements.

¹ AThe Company is still in the process of engaging a new independent registered public accounting firm. Accordingly, a review, pursuant to PCAOB AU 722, Interim Financial Information, by ~~the Company's~~an independent registered public ~~accountant~~accounting firm has not been completed for the indicated period.

DASAN ZHONE ~~TECHNOLOGIES,~~SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss (NOT REVIEWED)

(In thousands, except per share data)


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2016			2015			2016			2015			2016			2015			2016			2015
	NOT REVIEWED¹						NOT REVIEWED¹						NOT REVIEWED¹
Net revenue	$	22,599		$	27,493		$	43,198		$	54,615		$	32,166		$	22,591		$	93,256		$	93,339
Cost of revenue	13,832			17,269			26,180			34,220			22,693			16,774			68,997			69,287
Gross profit	8,767			10,224			17,018			20,395			9,473			5,817			24,259			24,052
Operating expenses:
Research and product development	3,422			3,942			6,980			7,992			5,885			4,859			15,582			16,546
Sales and marketing	3,884			4,387			7,686			8,769
General and administrative	3,099			2,208			7,352			4,485
Selling, general and administrative													8,202			3,939			16,903			12,458
Amortization of intangible assets													299			—			299			—
Total operating expenses	10,405			10,537			22,018			21,246			14,386			8,798			32,784			29,004
Operating loss	(1,638		)	(313		)	(5,000		)	(851		)	(4,913		)	(2,981		)	(8,525		)	(4,952		)
Interest income (expense), net	3			(16		)	(2		)	(69		)
Other income (expense), net	25			(15		)	(11		)	(4		)
Interest expense, net													(173		)	(87		)	(463		)	(286		)
Other income, net													52			583			117			780
Loss before income taxes	(1,610		)	(344		)	(5,013		)	(924		)	(5,034		)	(2,485		)	(8,871		)	(4,458		)
Income tax provision	31			22			60			44
Income tax expense (benefit)													(153		)	295			(584		)	480
Net loss	(1,641		)	(366		)	(5,073		)	(968		)	(4,881		)	(2,780		)	(8,287		)	(4,938		)
Other comprehensive income (loss)	19			18			(16		)	(71		)
Less: Net income attributable to non-controlling interest													38			—			234			—
Net loss attributable to DASAN Zhone Solutions, Inc.													(4,919		)	(2,780		)	(8,521		)	(4,938		)
Other comprehensive income, net of foreign currency translation adjustments													2,269			1,009			2,670			107
Comprehensive loss	$	(1,622	)	$	(348	)	$	(5,089	)	$	(1,039	)	$	(2,612	)	$	(1,771	)	$	(5,617	)	$	(4,831	)
Less: Comprehensive income attributable to non-controlling interest													44			0			303			0
Comprehensive loss attributable to DASAN Zhone Solutions, Inc.													$	(2,656	)	$	(1,771	)	$	(5,920	)	$	(4,831	)
Basic and diluted net loss per share	$	(0.05	)	$	(0.01	)	$	(0.15	)	$	(0.03	)	$	(0.06	)	$	(0.01	)	$	(0.10	)	$	(0.01	)
Weighted average shares outstanding used to compute basic net loss per share	33,847			32,665			33,844			32,635			81,839			347,005			81,739			347,005
Weighted average shares outstanding used to compute diluted net loss per share	33,847			32,665			33,844			32,635			81,839			347,005			81,739			347,005

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE ~~TECHNOLOGIES,~~SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows (NOT REVIEWED)

(In thousands)


	Six Months Ended						Nine Months Ended
	June 30,						September 30,
	2016			2015			2016			2015
	NOT REVIEWED¹						NOT REVIEWED¹
Cash flows from operating activities:
Net loss	$	(5,073	)	$	(968	)	$	(8,287	)	$	(4,938	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	370			384			1,165			1,112
Stock-based compensation	2,634			473			128			—
Sales returns and doubtful accounts	3			51			(48		)	—
Loss on foreign currency translation							2,189			727
Deferred income taxes							(612		)	480
Gain on foreign currency translation							(534		)	(3,069		)
Other							174			23
Changes in operating assets and liabilities:
Accounts receivable	1,670			(1,699		)	11,931			11,160
Other receivables							2,670			(2,385		)
Inventories	353			4,560			(2,779		)	1,270
Prepaid expenses and other assets	384			468			(409		)	(119		)
Accounts payable	3,434			(2,258		)	(6,064		)	(16,779		)
Accrued and other liabilities	829			(891		)	13,657			5,019
Net cash provided by operating activities	4,604			120
Net cash provided by (used in) operating activities							13,181			(7,499		)
Cash flows from investing activities:
Purchases of property and equipment	(3,395		)	(646		)
Net cash used in investing activities	(3,395		)	(646		)
Decrease in restricted cash							(1,374		)	2,526
Increase in short-term loans to others							1,561			285
Acquisition of other current financial assets							—			—
Proceeds from other current financial assets							319			86
Proceeds from disposal of property and equipment							98			6
Acquisition of property and equipment							(402		)	(541		)
Acquisition of intangible assets							(91		)	—
Proceeds of other non-current financial assets							—			106
Increase in short-term loans to others							(1,386		)	—
Decrease in long-term loans to others							330			—
Increase in long-term loans to others							—			(645		)
Net cash (used in) provided by investing activities							(945		)	1,823
Cash flows from financing activities:
Proceeds from exercise of stock options	29			152
Repayment of debt	(3,000		)	—
Net cash used in financing activities	(2,971		)	152
(Repayments of) proceeds from short-term borrowings							(3,320		)	5,770
Proceeds from long-term borrowings							6,800			—
Government grants received							31			156
Proceeds from issuance of common stock							—			1,600
Decrease in capital surplus							—			(3,002		)
Net cash provided by financing activities							3,511			4,524
Effect of exchange rate changes on cash	(16		)	(71		)	1,600			(440		)
Net decrease in cash and cash equivalents	(1,778		)	(445		)
Net increase (decrease) in cash and cash equivalents							17,347			(1,592		)
Cash and cash equivalents at beginning of period	10,113			11,528			17,028			6,786
Cash and cash equivalents at end of period	$	8,335		$	11,083		$	34,375		$	5,194
Non-cash investing activities:
Changes in accrued and other liabilities related to property and equipment purchases	$	1,198		$	(142	)

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed Consolidated Financial Statements (NOT REVIEWED)


(1)	Organization and Summary of Significant Accounting Policies


(a)	Description of Business

DASAN Zhone Solutions, Inc. (formerly known as Zhone Technologies, Inc. ~~(sometimes~~and referred to, collectively with its subsidiaries, as ~~“Zhone”~~"DASAN Zhone" or the ~~“Company”~~"Company") ~~designs, develops~~is a global leader in broad-based network access solutions. The Company provides solutions in five major product areas: broadband access, mobile backhaul, Ethernet switching, passive optical LAN ("POLAN") and ~~manufactures communications~~software defined networks ("SDN"). More than 750 of the world's most innovative network ~~equipment for telecommunications~~ operators, ~~and enterprises worldwide. The Company’s products provide enterprise solutions that enable both network~~ service providers and enterprises turn to ~~deliver high speed~~DASAN Zhone for fiber access ~~while transporting voice, video and data to the end user. The Company~~transformation.

DASAN Zhone was incorporated under the laws of the state of Delaware in June 1999. On September 9, 2016, the Company acquired Dasan Network Solutions, Inc. ("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"). In connection with the Merger, the Company changed its name from Zhone Technologies, Inc. to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone." The Company’s common stock continues to be traded on the Nasdaq Capital Market, and the Company’s ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016. The Company ~~began operations in September 1999 and~~ is headquartered in Oakland, California.


(b)	Basis of Presentation

The condensed consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented in accordance with accounting principles generally accepted in the United States of America ~~(“GAAP”~~("GAAP"). All significant inter-company 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 DNS and notes thereto included in the Company’s ~~Annual Report~~Definitive Proxy Statement filed with the Securities and Exchange Commission on ~~Form 10-K~~August 8, 2016.

As discussed more fully in Note 2, on September 9, 2016, the Company acquired DNS through the Merger of a wholly owned subsidiary of the Company ("Merger Sub") with and into DNS, with DNS surviving as a wholly owned subsidiary of the Company. The Merger is treated as a reverse acquisition for accounting purposes, with DNS as the acquirer of the Company. As such, the financial results of the Company for the ~~year~~three and nine months ended September 30, 2016 presented in this Form 10-Q reflect the operating results of DNS and its consolidated subsidiaries for the period commencing on the first day of the applicable period through September 8, 2016, and reflect the operating results of both DNS and Legacy Zhone and their respective consolidated subsidiaries for the period September 9 through September 30, 2016. Such results are compared to the financial results for DNS and its consolidated subsidiaries for the three and nine months ended September 30, 2015. The balance sheet of the Company reflects the fair value of the assets and liabilities of Legacy Zhone as of the effective date of the Merger. Those assets include the fair value of acquired intangible assets and goodwill. Due to the foregoing, the Company’s financial results for the three and nine months ended September 30, 2016 are not comparable to its financial results for the three and nine months ended September 30, 2015. The fourth quarter ending December 31, ~~2015.~~2016 will be the first quarter in which the Company’s financial results reflect a full quarter of operating results for both DNS and Legacy Zhone and their respective consolidated subsidiaries.

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


(c)	Risks and Uncertainties

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net loss of ~~$2.0~~$3.0 million for the year ended December 31, 2015 and a net loss of ~~$5.1~~$8.3 million for the ~~six~~nine months ended ~~June~~September 30, 2016, which net losses have continued to reduce cash and cash equivalents. As of ~~June~~September 30, 2016, the Company had approximately $~~8.3~~34.4 million in cash and cash equivalents and $~~2.0~~26.9 million in ~~current debt~~aggregate principal amount of outstanding borrowings under ~~its~~short-term loans and the Company's loan agreement with DASAN Networks, Inc ("DASAN"). In addition, the Company had an aggregate of $37.0 million in revolving line of credit facilities as of September 30, 2016,

which included the Company's $25.0 million revolving line of credit and letter of credit facility (the “WFB Facility”) with Wells Fargo Bank (“WFB”). The Company ~~currently expects to repay the WFB Facility within the next twelve months. The maturity date~~had no borrowings outstanding under the WFB Facility ~~is March 31, 2019.~~and $5.7 million in aggregate principal amount of borrowings under its other revolving line of credit facilities at September 30, 2016. See Note 67 and Note 8 for additional information.

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; and

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

In order to meet the Company’s liquidity needs and finance its capital expenditures and working capital needs for the business, the Company may be required to sell assets, issue debt or equity securities, purchase credit insurance or borrow on unfavorable terms. In addition, the Company may be required to reduce its operations in low margin regions, including reductions in headcount. In October 2015, the Company took steps to reduce its expenses to minimize additional cash burn, including reduction in headcount and in salaries (although salary reductions for non-executive employees were reversed in July 2016). The Company may be unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict the Company’s ability to operate its business. Likewise, any equity financing could result in additional dilution of the Company’s stockholders. If the Company is unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all, the Company may become unable to pay its ordinary expenses, including its debt service, on a timely basis and may be required to reduce the scope of its planned product development and sales and marketing efforts beyond the reductions it has previously taken. Based on the Company’s current plans and business conditions, it believes that its focused operating expense discipline 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 twelve months.

The Company's financial condition and results of operations could be materially and adversely affected by various factors, including:

Potential deferment of purchases and orders by customers;

Customers’ inability to obtain financing to make purchases from the Company and/or maintain their business;

Negative impact from increased financial pressures on third-party dealers, distributors and retailers;

Intense competition in the communication equipment market;

Commercial acceptance of the Company’s ~~Single Line Multi-Service (“SLMS”) products in its core and FiberLAN businesses;~~products; and

Negative impact from increased financial pressures on key suppliers.

The Company may experience material adverse impacts on its business, operating results and financial condition as a result of weak or recessionary economic or market conditions in the United States, Korea or the rest of the world.


~~(d)~~(e)	Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.


~~(e)~~(f)	Revenue Recognition

The Company recognizes revenue when the earnings process is complete. The Company recognizes product revenue upon shipment of product under contractual terms which transfer title to customers upon shipment, under normal credit terms, net of estimated sales returns and allowances at the time of shipment. Revenue is deferred if there are significant post-delivery obligations or if the fees are not fixed or determinable. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. The Company’s arrangements generally do not have any significant post-delivery obligations. If the Company’s arrangements include customer acceptance provisions, revenue is recognized upon obtaining the signed acceptance certificate from the customer, unless the Company can objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement prior to obtaining the signed acceptance. In those instances where revenue is recognized prior to obtaining the signed acceptance certificate, the Company uses successful completion of customer testing as the basis to objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement. The Company also considers historical acceptance experience with the customer, as well as the payment terms specified in the arrangement, when revenue is recognized prior to obtaining the signed acceptance certificate. When collectability is not reasonably assured, revenue is recognized when cash is collected.

The Company makes certain sales to product distributors. These customers are given certain privileges to return a portion of inventory. Return privileges generally allow distributors to return inventory based on a percent of purchases made within a specific period of time. The Company recognizes revenue on sales to distributors that have contractual return rights when the products have been sold by the distributors, unless there is sufficient customer specific sales and sales returns history to support revenue recognition upon shipment. In those instances when revenue is recognized upon shipment to distributors, the Company uses historical rates of return from the distributors to provide for estimated product returns.

The Company derives revenue primarily from stand-alone sales of its products. In certain cases, the Company’s products are sold along with services, which include education, training, installation, and/or extended warranty services. As such, some of the Company’s sales have multiple deliverables. The Company’s products and services qualify as separate units of accounting and are deemed to be non-contingent deliverables as the Company’s arrangements typically do not have any significant performance, cancellation, termination and refund type provisions. Products are typically considered delivered upon shipment. Revenue from services is recognized ratably over the period during which the services are to be performed.

For multiple deliverable revenue arrangements, the Company allocates revenue to products and services using the relative selling price method to recognize revenue when the revenue recognition criteria for each deliverable are met. The selling price of a deliverable is based on a hierarchy and if the Company is unable to establish vendor-specific objective evidence of selling price (“VSOE”) it uses third-party evidence of selling price (“TPE”), and if no such data is available, it uses a best estimated selling price (“BSP”). In most instances, particularly as it relates to products, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history. When VSOE cannot be established, the Company attempts to establish the selling price of each element based on TPE. Generally, the Company’s marketing strategy differs from that of the Company’s peers and the Company’s offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company is typically not able to determine TPE for the Company’s products.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses BSP. The objective of BSP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The BSP of each deliverable is determined using average discounts from list price from historical sales transactions or cost plus margin approaches based on the factors, including but not limited to, the Company’s gross margin objectives and pricing practices plus customer and market specific considerations.

The Company has established TPE for its training, education and installation services. TPE is determined based on competitor prices for similar deliverables when sold separately. These service arrangements are typically short term in nature and are largely completed shortly after delivery of the product. Training and education services are based on a daily rate per person and vary according to the type of class offered. Installation services are based on daily rate per person and vary according to the complexity of the products being installed.

Extended warranty services are priced based on the type of product and are sold in one to five year durations. Extended warranty services include the right to warranty coverage beyond the standard warranty period. In substantially all of the arrangements with multiple deliverables pertaining to arrangements with these services, the Company has used and intends to continue using VSOE to determine the selling price for the services. The Company determines VSOE based on its normal pricing practices for these specific services when sold separately.


~~(f)~~(g)	Fair Value of Financial Instruments

~~The Company had no financial assets and liabilities as~~As of ~~June~~September 30, 2016 and December 31, 2015, ~~recorded at fair value. The following~~the Company's financial instruments ~~are not measured at fair value on the Company’s condensed consolidated balance sheet as of~~ ~~June 30, 2016~~ ~~and December 31, 2015, but require disclosure of their fair values:~~included cash and cash equivalents, ~~accounts receivable,~~short-term investments, trade and other receivables, other current assets, accounts payable, ~~accrued~~other current liabilities and debt. ~~The estimated~~Due to the short-term maturities of cash and cash equivalents, trade and other receivables, other current assets, accounts payable and other current liabilities, the carrying amounts approximate fair value ~~of such instruments~~ at ~~June 30, 2016~~ ~~and December 31, 2015 approximated their~~the applicable balance sheet date. The carrying value ~~as reported on the condensed consolidated balance sheet. The~~of debt approximated its fair value ~~of such financial instruments is determined using the income approach~~ based on a comparison with then-prevailing market interest rates. Due to the ~~present~~short-term maturities of the Company’s investments, carrying amounts approximated fair value ~~of estimated future cash flows.~~at the applicable balance sheet date. The fair value of these instruments would be categorized as Level 2 in the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level 1.


~~(g)~~(h)	Concentration of Risk

The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, Internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts. For the three months ended ~~June~~September 30, 2016 and 2015, ~~four~~three customers represented ~~39%~~46% and ~~32%~~63% of net revenue, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015, ~~four~~three customers represented ~~38%~~44% and ~~33%~~56% of net revenue, respectively.

Three customers accounted for ~~45%~~37% and ~~44%~~66% of net accounts receivable as of ~~June~~September 30, 2016 and December 31, 2015, respectively.

As of ~~June~~September 30, 2016 and December 31, 2015, receivables from customers in countries other than the United States represented ~~75%~~80% and ~~83%~~93%, respectively, of net accounts receivable.


~~(h)~~(i)	Comprehensive Loss

There have been no items reclassified out of accumulated other comprehensive loss and into net loss. The Company’s other comprehensive loss for the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015 is comprised of only foreign exchange translation adjustments.

~~(i) Recent Accounting Pronouncements~~


(j)	Recent Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of the guidance in ASU No. 2014-09, Revenue from Contracts with Customer, for all entities by one year. With the deferral, the new standard is effective for the Company on January 1, 2018. Early adoption is permitted, but not before the original effective date of January 1, 2017. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in financial statements. The new standard is effective for the Company on January 1, 2017. Early application is permitted. The Company is evaluating the effect that ASU 2014-15 will have on its consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value. The ~~amendments in this update do~~guidance does not apply to inventory that is measured using last-in, first-out ("LIFO") or the retail inventory method. The ~~amendments apply~~guidance applies to all other inventory, which includes inventory that is measured using first-in, first-out ("FIFO") or average cost. The ~~amendments in this update are~~guidance is effective for the Company on January 1, 2017. ~~The amendments in this update~~ASU No. 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the effect that ASU 2015-11 will have on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Income Taxes, Balance Sheet Classification of Deferred Taxes, which simplifies the classification of deferred tax assets and liabilities as non-currrent in the balance sheet. The updated guidance is effective for the Company on January 1, 2017, and early adoption is permitted. The Company has not yet evaluated the impact of the guidance on its consolidated financial statements and related disclosures.

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 has not yet evaluated the impact of the guidance on its consolidated financial ~~statements.~~statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires entities to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on ~~statement~~statements of cash flows. The guidance is effective for the Company on January 1, 2017, and early adoption is permitted. The Company has not yet evaluated the impact of the guidance on its consolidated financial ~~statements.~~statements and related disclosures.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, which provides clarification on how to assess collectibility, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of transition of ASU 2014-09. The effective date of this updated guidance for the Company is the same as the effective date of ASU 2014-09, which is January 1, 2018. The Company has not yet evaluated the impact of the guidance on its consolidated financial statements and related disclosures.

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 is effective for the Company on January 1, 2018, and early adoption is permitted. The Company has not yet evaluated the impact of the guidance on its consolidated financial statements and related disclosures.


(2)	Merger ~~Agreement~~

On ~~April 11,~~September 9, 2016, the Company ~~Dragon Acquisition Corporation,~~acquired DNS through the Merger of a ~~California corporation and~~ wholly owned subsidiary of the Company (“Merger Sub”), DASAN Networks, Inc., a company incorporated under the laws of Korea (“DASAN”), and Dasan Network Solutions, Inc., a California corporation (“DNS”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into DNS, with DNS surviving as a wholly owned subsidiary of the ~~Company (the “Merger”), in exchange for shares of Zhone common stock to be issued to DASAN. As a result~~Company. At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DASAN ~~will~~were canceled and converted into the right to receive shares of ~~Zhone~~the Company's common stock in an amount equal to 58% of the issued and outstanding shares of ~~Zhone common~~the Company's commons stock immediately following the Merger. Accordingly, at the effective time of the Merger, the Company issued 47,465,082 shares of the Company’s common stock to DASAN as consideration in the Merger, of which 4,746,508 shares are being held in escrow as security for claims for indemnifiable losses in accordance with the merger agreement relating to the Merger. As a result, immediately following the effective time of the Merger, DASAN held 58% of the outstanding shares of the Company's common stock and ~~Zhone’s then-existing stockholders will retain~~the holders of the Company's common stock immediately prior to the Merger retained, in the aggregate, 42% of the outstanding shares of the Company's common stock.

~~42%~~

As described in Note 1, the Company accounted for the Merger as a reverse acquisition under the acquisition method of ~~such shares.~~accounting in accordance with ASC 805, "Business Combination." Consequently, for the purpose of the Purchase Price Allocation ("PPA") DNS' assets and liabilities have been retained at their carrying values and Legacy Zhone's assets acquired, and liabilities assumed, by DNS (as the accounting acquirer in the Merger) have been recorded at their fair value measured as of September 9, 2016. The Merger ~~and the Merger Agreement have been unanimously approved by the Company’s Board of Directors.~~combines leading technology platforms with a broadened customer base.

The ~~consummation~~total purchase consideration in the Merger is based on the number of shares of Legacy Zhone common stock and Legacy Zhone stock options outstanding immediately prior to the closing of the Merger, ~~which is currently expected to occur by~~and was determined based on the ~~end~~closing price of $1.19 per share of the ~~third quarter of 2016, is subject to certain customary closing conditions, including, among others, receipt of regulatory approvals, authorization for listing of Zhone~~Company's common stock on the ~~Nasdaq Capital Market, and approval by Zhone stockholders~~September 9, 2016 (the effective date of the ~~issuance of~~Merger) and the ~~shares of Zhone common stock to DASAN under the Merger Agreement.~~34,371,266 shares. The estimated total purchase consideration is calculated as follows (in thousands):



	Shares	Estimated Fair Value
	NOT REVIEWED
Shares of Legacy Zhone stock as of September 8, 2016	34,371	$	40,902
Legacy Zhone stock options	1,323	715
Assumed liabilities		25,717
Total Purchase Consideration		$	67,334

The ~~Merger Agreement also contains certain termination rights for each~~Company has performed a preliminary valuation analysis of the market value of the assets and liabilities of Legacy Zhone. The following table summarizes the preliminary allocation of the fair value consideration transferred as of the acquisition date (unaudited, in thousands):



Fair Value of Total Assets	NOT REVIEWED
Current tangible assets	40,747
Non-current tangible assets	4,464
Total tangible assets	$	45,211

Identifiable Intangible Assets
Developed technology	3,040
Customer relationships	6,740
Backlog	2,017
Total Intangible Assets	$	11,797

Goodwill	$	10,326

Total Indicated Fair Value of Assets	$	67,334

The fair value of the assets acquired includes trade receivables of $17.1 million.

During the three months period ended September 30, 2016, the Company recorded $3.5 million in Merger-related costs. These expenses are included in general and ~~DASAN, including a provision permitting~~administrative expense.

The goodwill is mainly attributable to the ~~termination~~fair values assigned to the acquired intangible assets. The following table presents the preliminary fair values of the acquired intangible assets at the effective date of the Merger ~~Agreement by either such party if~~(in thousands, except years):



	Useful life (in Years)	Fair Value	Accumulated Amortization		Net
NOT REVIEWED
Developed technology	5	3,040	(51	)	2,989
Customer relationships	7	6,740	(80	)	6,660
Backlog	1	2,017	(168	)	1,849
		11,797	(299	)	11,498

The following unaudited pro forma condensed combined financial information for the three and nine months ended September 30, 2016 and 2015 gives effect to the Merger as if it had occurred at the beginning of each period presented. The unaudited pro forma condensed combined financial information has been included for comparative purposes only and is not ~~consummated by December 31, 2016.~~necessarily indicative of the combined company's financial position or results of operations might have been had the Merger been completed as of the dates indicated. In addition, the ~~Merger Agreement may be terminated by~~unaudited pro forma condensed combined financial information does not purport to project the ~~Company if, after following certain procedures and adhering~~future financial position or results of operations of the combined company. The unaudited pro forma condensed combined financial information reflects adjustments related to ~~certain restrictions, the Board of Directors has determined that it is necessary to terminate~~ the Merger, ~~Agreement~~such as to record certain incremental expenses resulting from purchase accounting adjustments (such as amortization expenses in connection with the fair value adjustments to intangible assets and ~~enter into an agreement to effect a Superior Proposal (as defined in~~Merger-related costs).



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	NOT REVIEWED						NOT REVIEWED
Pro forma total net revenue	$	40,666		$	44,719		$	144,954		$	170,082
Pro forma net income (loss)	(17,786		)	(8,665		)	(28,058		)	(13,585		)

For the ~~Merger Agreement) in order to comply with its fiduciary duties under applicable law. The Merger Agreement further provides that, upon termination~~period from September 9, 2016 (the effective date of the ~~Merger Agreement, under specified circumstances,~~Merger) through September 30, 2016, the ~~Company will be required to pay DASAN a termination fee~~Company's income statement included $5.7 million of ~~$2,500,000,~~revenues and ~~under specified circumstances,~~$2.5 million of net loss from the ~~Company will be required to reimburse DASAN, or DASAN will be required to reimburse the Company, for certain transaction expenses in an amount of up to $5,000,000.~~

~~Additional information regarding the proposed Merger and Merger Agreement is contained in the Company’s Current Report on Form 8-K filed with the SEC on April 12, 2016.~~Legacy Zhone business.


(3)	Cash and Cash Equivalents and Restricted Cash

As of September 30, 2016 and December 31, 2015, the Company's cash and cash equivalents comprised financial deposits. Restricted cash comprised cash restricted for research and development activities and collateral for borrowings.


(4)	Inventories

Inventories as of ~~June~~September 30, 2016 and December 31, 2015 were as follows (in thousands):


	June 30, 2016		December 31, 2015		September 30, 2016		December 31, 2015
	NOT REVIEWED				NOT REVIEWED
Raw materials	$	9,589	$	9,764	$	12,935	$	5,519
Work in process	1,047		1,273		3,369		2,074
Finished goods	3,813		3,765		12,529		5,022
Other					$	3,124	$	1,285
	$	14,449	$	14,802	$	31,957	$	13,900


~~(4)~~(5)	Property and Equipment, net

Property and equipment, net, as of ~~June~~September 30, 2016 and December 31, 2015 were as follows (in thousands):


	June 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015
	NOT REVIEWED						NOT REVIEWED
Machinery and equipment	$	11,120		$	10,783		$	14,468		$	3,173
Computers and acquired software	3,965			3,911
Computers and software							3,868			—
Facilities							22,237			20,472
Furniture and fixtures	124			124			1,333			1,052
Leasehold improvements	4,788			1,920			4,640			—
Other							77			74
	19,997			16,738			46,623			24,771
Less accumulated depreciation and amortization	(15,614		)	(15,380		)	(40,022		)	(22,121		)
Less government grants							$	(343	)	$	(399	)
	$	4,383		$	1,358		$	6,258		$	2,251

Depreciation ~~and amortization~~ expense associated with property and equipment for the three months ended September 30, 2016 and 2015 amounted to $0.6 million and $0.4 million, respectively. Depreciation expense associated with property and equipment for the nine months ended September 30, 2016 and 2015 amounted to $~~0.4~~1.2 million and ~~$0.4~~$1.1 million, respectively.

The Company receives grants from the government 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 ~~six months ended June 30, 2016~~Company records the grants as a contra amount to the assets and ~~2015, respectively.~~amortizes such amount over the useful lives of the related assets as a reduction to depreciation expense.


~~(5)~~(6)	~~Net Loss Per Share~~Intangible Assets, net

~~Basic~~Intangible assets, net, ~~loss per share is computed by dividing the net loss applicable to holders~~as of ~~common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss~~

per share 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 optionsSeptember 30, 2016 and ~~warrants.~~

~~The following table is a reconciliation of the numerator and denominator in the basic and diluted net loss per share calculation~~December 31, 2015 were as follows (in ~~thousands, except per share data)~~thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,
2016 2015 2016 2015
NOT REVIEWED NOT REVIEWED
Net loss: $ (1,641 ) $ (366 ) $ (5,073 ) $ (968 )
Weighted average number of shares outstanding:
Basic 33,847
32,665
33,844
32,635
Effect of dilutive securities:
Stock options and share awards —
—
—
—
Diluted 33,847
32,665
33,844
32,635
Net loss per share:
Basic $ (0.05 ) $ (0.01 ) $ (0.15 ) $ (0.03 )
Diluted $ (0.05 ) $ (0.01 ) $ (0.15 ) $ (0.03 )



	September 30, 2016			December 31, 2015
	NOT REVIEWED
Goodwill	$	11,019		$	693

Developed Technology	3,040			—
Customer Relationships	6,740			—
Backlog	2,017			—
Other	137			40
Less accumulated amortization	(380		)	(37		)
Other intangible assets, net	11,554			3
Intangible assets, net	$	22,573		$	696

~~The following tables set forth potential common stock that is not included in the diluted net loss per share calculation because their effect would be antidilutive~~Impairment and amortization expense associated with intangible assets for the ~~periods indicated (in thousands, except exercise price per share data):~~

Three Months Ended
June 30, 2016

Weighted
Average
Exercise
Price

Six Months Ended
June 30, 2016

Weighted
Average
Exercise
Price
NOT REVIEWED NOT REVIEWED
Outstanding stock options and unvested restricted shares 1,560
$ 1.86
1,560
$ 1.86
three months ended September 30, 2016 and 2015 amounted to $0.3 million and less than $0.1 million, respectively. Impairment and amortization expense associated with intangible assets for the nine months ended September 30, 2016 and 2015 amounted to $0.4 million and less than $0.1 million, respectively.

Three Months Ended
June 30, 2015

Weighted
Average
Exercise
Price

Six Months Ended
June 30, 2015

Weighted
Average
Exercise
Price
Outstanding stock options and unvested restricted shares 5,702
$ 1.87
5,702
$ 1.87


~~(6)~~(7)	Debt

WFB Facility

As of ~~June~~September 30, 2016,, the Company had a $25.0 million revolving line of credit and letter of credit facility with WFB. Under the WFB Facility, the Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company is able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the agreement, as long as the aggregate amount outstanding does not exceed $25.0 million less the amount committed as security for letters of credit, which at ~~June~~September 30, 2016 was ~~$12.7 million.~~$3.8 million 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.

The Company had no outstanding borrowings and $~~2.0~~3.8 million ~~outstanding at~~ ~~June 30, 2016~~ ~~under its WFB Facility. In addition,~~ ~~$3.7 million~~ ~~was~~ committed as security for letters of ~~credit.~~credit under its WFB Facility at September 30, 2016. The Company had ~~$6.9~~$2.9 million of borrowing availability remaining under the WFB Facility as of ~~June~~September 30, 2016. The maturity date under the WFB Facility is March 31, 2019. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin based on our average excess availability (as calculated under the WFB Facility). The interest rate on the WFB Facility was ~~3.15%~~3.35% at ~~June~~September 30, 2016.

The Company’s obligations under the WFB Facility are secured by substantially all of its personal property assets and those of its subsidiaries that guarantee the WFB Facility, including their intellectual property. The WFB Facility contains

certain financial covenants, and customary affirmative covenants and negative covenants. If the Company defaults under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell the Company’s assets to satisfy the obligations under the WFB Facility. As of ~~June~~September 30, 2016, the Company was in compliance with these covenants.

Bank and Trade Facilities - Foreign Operations

Certain of the Company's foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries. Payments under such facilities are made in accordance with the given lender’s amortization schedules. As of September 30, 2016 and December 31, 2015, the Company had an aggregate outstanding balance of $20.1 million and $21.8 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements as of September 30, 2016 and December 31, 2015 ranged from 1.66% to 4.26% and 2.04% to 3.55%, respectively.


(8)	Related Party Borrowings

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

In addition, the Company's subsidiary DNS borrowed $1.8 million from DASAN for capital investment in February 2016, which amount was outstanding as of September 30, 2016. This loan matures in March 2017 with an option of renewal by mutual agreement, and bears interest at a rate of 6.9% per annum, payable annually.


~~(7)~~(9)	Net Loss Per Share

Basic net loss per share is computed by dividing the net loss applicable to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share 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 warrants.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	NOT REVIEWED						NOT REVIEWED
Net loss:	$	(4,881	)	$	(2,780	)	$	(8,287	)	$	(4,938	)
Weighted average number of shares outstanding:
Basic	81,839			347,005			81,739			347,005
Effect of dilutive securities:
Stock options and share awards	—			—			—			—
Diluted	81,839			347,005			81,739			347,005
Net loss per share
Basic	$	(0.06	)	$	(0.01	)	$	(0.10	)	$	(0.01	)
Diluted	$	(0.06	)	$	(0.01	)	$	(0.10	)	$	(0.01	)

The following tables set forth potential shares of the Company's common stock that are not included in the diluted net loss per share calculation for the three and nine months ended September 30,2 016 because their effect would be antidilutive for the periods indicated (in thousands, except exercise price per share data):



	Three Months Ended September 30, 2016		Weighted Average Exercise Price		Nine Months Ended September 30, 2016		Weighted Average Exercise Price
	NOT REVIEWED
Outstanding stock options	$	4,019	$	1.38	$	4,019	$	1.38

There were no shares that had anti-dilutive effect on the calculation of diluted net loss per share for the three and nine months ended September 30, 2015.


(10)	Commitments and Contingencies

Operating Leases

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


			Operating Leases
	Operating Leases		NOT REVIEWED
Year ending December 31:	NOT REVIEWED
2016 (remainder of the year)	$	481	$	272
2017	1,329		1,470
2018	995		1,066
2019	523		597
2020 and thereafter	4,131		4,237
Total minimum lease payments	$	7,459	$	7,642

Warranties

The Company accrues for warranty costs based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally up to ~~one year~~two years from the date of shipment. The following table reconciles changes in the Company’s accrued warranties and related costs for the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015 (in thousands):


	Six Months Ended June 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	NOT REVIEWED						NOT REVIEWED
Beginning balance	$	652		$	952		$	1,093		$	389
Charged to cost of revenue	285			277			703			289
Claims and settlements	(326		)	(346		)	(805		)	(297		)
Ending balance	$	611		$	883		$	991		$	381

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 ~~June~~September 30, 2016, the Company did not have any outstanding surety bonds.

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 $~~7.1~~5.5 million as of ~~June~~September 30, 2016.

Payment Guarantees Provided by Third Parties

The following table sets forth third parties that have provided payment guarantees of the Company's indebtedness and other obligations as of September 30, 2016 (in thousands):



Guarantor	Amount Guaranteed		Description of Obligations Guaranteed
NOT REVIEWED
DASAN	$	4,378	Borrowings from Shinhan Bank
DASAN	4,800		Borrowings from KEB Hana Bank
DASAN	11,684		Borrowings from Industrial Bank of Korea
DASAN	6,000		Letter of credit from Nonghyup Bank
Industrial Bank of Korea	3,593		Letter of credit
NongHyup Bank	2,156		Letter of credit
Other	1,438		Purchasing card and performance payment guarantee¹
	$	34,049

¹The Company is responsible for the warranty liabilities generally for a period of up to two years for major product sales and has obtained surety insurance with respect to part of such warranty liabilities.

Royalties

The Company has certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue and is recorded in cost of revenue.

Legal Proceedings

The Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company 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.


~~(8)~~(11)	Enterprise-Wide Information

The Company ~~designs, develops and manufactures communications~~is a global leader in broad-based network ~~equipment for enterprises and telecommunications operators worldwide.~~access solutions. The Company ~~derives substantially all of its revenues from the sales of the Zhone~~provides solutions in five major product ~~family.~~areas: broadband access, Ethernet switching, mobile backhaul, POLAN and SDN. The Company’s chief operating decision ~~maker is~~makers are the Company’s ~~Chief~~Co-Chief Executive ~~Officer.~~Officers. The ~~Chief~~Co-Chief Executive ~~Officer reviews~~Officers review 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 has determined that it has operated within one discrete reportable business segment since inception. The following summarizes required disclosures about geographic concentrations and revenue by products and services (in thousands):


									Three Months Ended				Nine Months Ended
	Three Months Ended				Six Months Ended				September 30,				September 30,
	June 30,				June 30,				2016		2015		2016		2015
	2016		2015		2016		2015		NOT REVIEWED				NOT REVIEWED
Revenue by Geography:	NOT REVIEWED				NOT REVIEWED
United States	$	9,968	$	8,166	$	18,408	$	17,290	$	3,382	$	550	$	7,240	$	3,988
Canada	1,129		786		2,089		1,825		255		—		255		—
Total North America	11,097		8,952		20,497		19,115		3,637		550		7,495		3,988
Latin America	6,618		7,675		11,221		13,971		1,406		—		1,406		—
Europe, Middle East, Africa	3,879		9,736		9,699		18,956		1,301		—		1,301		—
Asia Pacific	1,005		1,130		1,781		2,573
Korea									18,721		18,453		52,882		67,116
Other Asia Pacific									7,101		3,588		30,172		22,235
Total International	11,502		18,541		22,701		35,500		28,529		22,041		85,761		89,351
	$	22,599	$	27,493	$	43,198	$	54,615	$	32,166	$	22,591	$	93,256	$	93,339


									Three Months Ended				Nine Months Ended
	Three Months Ended				Six Months Ended				September 30,				September 30,
	June 30,				June 30,				2016		2015		2016		2015
	2016		2015		2016		2015		NOT REVIEWED				NOT REVIEWED
Revenue by Products and Services:	NOT REVIEWED				NOT REVIEWED
Products	$	21,094	$	25,915	$	40,062	$	51,484	$	28,988	$	21,633	$	86,584	$	88,922
Services	1,505		1,578		3,136		3,131		3,178		958		6,672		4,417
Total	$	22,599	$	27,493	$	43,198	$	54,615	$	32,166	$	22,591	$	93,256	$	93,339


~~(9)~~(12)	Income Taxes

The total amount of unrecognized tax benefits, including interest and penalties, at ~~June~~September 30, 2016 was not material. The amount of tax benefits that would impact the effective income tax rate, if recognized, is not expected to be material. There were no significant changes to unrecognized tax benefits during the quarters ended ~~June~~September 30, 2016 and 2015. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The open tax years for the major jurisdictions are as follows:



• Federal		2012 – 2015

• California and Canada		2011 – 2015

• Brazil		2010 – 2015

• Germany		2008 – 2015

• Japan		2011 – 2015

• Korea		2014 – 2015

• United Kingdom		2011 – 2015

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

The Company estimates that its foreign income will generally be subject to taxation in the United States on a current basis and that its foreign subsidiaries and representative offices will therefore not have any material untaxed earnings subject to deferred taxes. In addition, to the extent the Company is deemed to have a sufficient connection to a particular taxing jurisdiction to enable that jurisdiction to tax the Company but the Company has not filed an income tax return in that jurisdiction for the year(s) at issue, the jurisdiction would typically be able to assert a tax liability for such years without limitation on the number of years it may examine.

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

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

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

Forward-Looking Statements

This report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to ~~the proposed Merger (as defined below) and any statements regarding the expected timing, synergies, growth opportunities and other financial and operating benefits thereof;~~ projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; future growth and revenues from our ~~Single Line Multi-Service (SLMS)~~ products; our ability to refinance or repay our existing indebtedness prior to the applicable maturity date; future economic conditions and performance; anticipated performance of products or services; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified under the heading “Risk Factors” in Part II, Item 1A, elsewhere in this report and our other filings with the Securities and Exchange Commission (the SEC). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to ~~obtain required stockholder or~~realize the anticipated cost savings, synergies and other ~~approvals required to consummate the proposed Merger, the satisfaction or waiver~~benefits of ~~other conditions to closing in~~ the Merger ~~Agreement~~ (as defined below)~~, unanticipated difficulties or expenditures~~ and any integration risks relating to the proposed Merger, the response of business partners and competitors to the announcement of the proposed Merger, potential difficulties in employee retention as a result of the announcement and pendency of the proposed Merger, legal proceedings that may be instituted against Zhone and others related to the proposed 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, the economic slowdown in the telecommunications industry that has restricted the ability of our customers to purchase our products, commercial acceptance of our ~~SLMS~~ products, ~~in our core and FiberLAN businesses,~~ 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,

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 ~~design, develop~~are a global leader in broad-based network access solutions. We provide solutions in five major product areas: broadband access, mobile backhaul, Ethernet switching, passive optical LAN (POLAN) and manufacture communications network equipment for enterprises and telecommunications operators worldwide. Our products enable both enterprises and network service providers to deliver high speed fiber access, while transporting voice, video and data to the end user. Our next-generation solutions are based upon our SLMS architecture. From its inception, this SLMS architecture was specifically designed for the delivery of multiple classes of subscriber services (such as voice, data and video distribution), rather than being based on a particular protocol or media. In other words, our SLMS products are built to support the migration from legacy circuit to packet technologies and from copper to fiber technologies. This flexibility and versatility allows our products to adapt to future technologies while allowing service providers to focus on the delivery of additional high bandwidth services. Because this SLMS architecture is designed to interoperate with existing legacy equipment, service providers can leverage their existingsoftware defined networks to deliver a combination of voice, data and video services today, while they migrate, either simultaneously or at a future date, from legacy equipment to next-generation equipment with minimal interruption. We believe that our SLMS solution provides an evolutionary path for service providers from their existing infrastructures, as well as gives newer service providers the capability to deploy cost-effective, multi-service networks that can support voice, data and video. In addition to our established product offerings in our core business, our FiberLAN Passive Optical Local Area Network (LAN) product provides an alternative to switched copper-based ethernet LANs.(SDN).

Our ~~core business provides~~broadband access products tooffer a variety of options for carriers and service providers ~~worldwide. We believe that~~to connect residential and business customers. Our solutions allow carriers and service providers to either use high-speed fiber or leverage their existing deployed copper networks to offer broadband services to customer premises. Once our broadband access products are deployed, the service provider can ~~increase~~offer voice, high-definition and ultra-high-definition video, high-speed internet access and business class services to their ~~revenues~~customers. We develop our broadband access products for all aspects of carrier and ~~lower~~service provider access networks: customer premise equipment (such as DSL modems), Ethernet access demarcation devices, Gigabit passive optical network (GPON) and Gigabit Ethernet passive optical network (GEPON) optical network terminals (ONTs). We also develop central office products, such as broadband loop carriers for digital subscriber lines (DSL) and voice-grade telephone service (POTS), high-speed digital subscriber line access multiplexers (DSLAMs) with G.fast and very-high-bit-rate DSL (VDSL) capabilities, optical line terminals (OLTs) for passive optical distribution networks like GPON and GEPON as well as point-to-point Ethernet service for 1 Gigabit to 10 Gigabit access.

Our mobile backhaul products provide a robust, manageable and scalable solution for mobile operators that enable them to upgrade their ~~operating costs by using~~mobile backhaul systems and migrate from 3G networks to LTE and beyond. We provide our mobile backhaul products to ~~deliver high quality video~~mobile operators or carriers who provide the transport for mobile operators. Our mobile backhaul products may be collocated at the radio access node (RAN) base station (BS) and ~~interactive entertainment and Internet Protocol (IP) enabled next generation voice services~~can aggregate multiple RAN BS in ~~addition to their existing voice and data service offerings, all on a platform that permits a seamless migration from legacy technologies~~ to a ~~converged packet-based architecture. Target customers~~single backhaul for delivery of ~~our FiberLAN business include hospitality, education, sports arenas, corporate campuses, government, manufacturing~~mobile traffic to the RAN network controller. We provide standard Ethernet/IP or multiprotocol label switching (MPLS) interfaces and ~~business enterprises. We believe FiberLAN Passive Optical LAN is~~interoperate with other vendors in these networks. With mobile backhaul networks providing carriers with significant revenue growth in recent years, mobile backhaul has become one of the most ~~cost-effective,~~important parts of their networks.

Our Ethernet switching products provide a high-performance and manageable solution that bridges the gap from carrier access technologies to the core network. Over the past ten years carriers have migrated access infrastructure to Ethernet from time-division multiplexing and asynchronous transfer mode systems. Our products can also be deployed in data centers, blurring the line between central office and data center. Our products support pure Ethernet switching as well as layer 3 IP and MPLS capabilities, and are currently being developed for interfacing with SDNs.

Our FiberLAN portfolio of POLAN products are designed for enterprise, campus, hospitality, and entertainment arena usage. Our FiberLAN portfolio includes our high-performance, high-bandwidth GPON OLTs connected to the industry’s most diverse ONT product line, which include units with integrated Power over Ethernet (PoE) to power a wide range of devices such as our full range of WIFI access points (APs) and scalable WIFI AP controller. Our environmentally friendly FiberLAN POLAN solutions are one of the most cost effective LAN technologies that can be deployed, allowing network managers to deploy a future proof, low-maintenance, manageable solution that requires less space, air conditioning, copper and electricity than other alternatives.

Our SDN and network function virtualization (NFV) tools and building blocks to allow service providers to migrate their networks’ full complement of legacy control plane and data plane devices to a centralized intelligent controller that can reconfigure the services of the hundreds of network elements in real time for more controlled and efficient provision of bandwidth and latency across the network. This move to SDN and NFV provides better service for end customers and a more efficient and ~~environmentally friendly alternatives~~cost-effective use of hardware resources for service providers. We leverage our broadband access, mobile backhaul and Ethernet switching expertise to ~~existing copper-based Ethernet LAN infrastructure.~~

~~In 2015, we established a dedicated sales team~~extract and virtualize many of the traditional legacy control and data plane functions to ~~focus on~~allow them to be run from the ~~growth~~cloud. The latest evolution of our ~~FiberLAN Passive Optical LAN market penetration. As a result of this dedication, we became a leading supplier of FiberLAN Passive Optical LAN solutions in the hospitality~~hardware-based solution was designed to support SDN and education markets and grew our global market presence by triple digit percentages. We also expanded our sales footprint with the addition of several new channel partners and announced joint marketing efforts with TE Connectivity and Clearfield Communications.NFV.

had an accumulated deficit of $~~1,048.1~~12.7 million as of ~~June~~September 30, 2016. If we are unable to access or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, or if the economic, market and geopolitical conditions in the United States, Korea and the rest of the world deteriorate, we may experience material adverse impacts on our business, operating results and financial condition. ~~During the past six years, we~~We have continued our focus on cost control and operating efficiency along with restrictions on discretionary spending.

Going forward, our key financial objectives include the following:

Increasing revenue while continuing to carefully control costs;

Continued investments in strategic research and product development activities that will provide the maximum potential return on investment; and

Minimizing consumption of our cash and cash equivalents.

MERGER ~~AGREEMENT~~

On ~~April 11,~~September 9, 2016, ~~Zhone, Dragon Acquisition Corporation,~~we acquired DNS through the merger of a ~~California corporation and~~ wholly owned subsidiary of Zhone ~~(Merger Sub), DASAN Networks,~~Technologies, Inc., a company incorporated under the laws of Korea (DASAN), and Dasan Network Solutions, Inc., a California corporation (DNS), entered into an Agreement and Plan of Merger (the Merger Agreement). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into DNS, with DNS surviving as aour wholly owned subsidiary of(the Merger). In connection with the Merger, Zhone ~~(the Merger), in exchange for shares of~~Technologies, Inc. changed its name to DASAN Zhone Solutions, Inc. Our common stock continues to be ~~issued~~traded on the Nasdaq Capital Market, and our ticker symbol was changed from "ZHNE" to ~~DASAN. As a result~~"DZSI" effective September 12, 2016.

At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by its sole shareholder, DASAN ~~will~~Networks, Inc. (DASAN), were canceled and converted into the right to receive shares of ~~Zhone~~our common stock in an amount equal to 58% of the issued and outstanding shares of ~~Zhone common~~our commons stock immediately following the Merger. Accordingly, at the effective time of the Merger, we issued 47,465,082 shares of our common stock to DASAN as consideration in the Merger, of which 4,746,508 shares are being held in escrow as security for claims for indemnifiable losses in accordance with the merger agreement relating to the Merger. As a result, immediately following the effective time of the Merger, DASAN held 58% of the outstanding shares of our common stock and ~~Zhone’s then-existing stockholders will retain~~the holders of our common stock immediately prior to the Merger retained, in the aggregate, 42% of ~~such shares. The Merger and~~ the ~~Merger Agreement have been unanimously approved by Zhone’s Board~~outstanding shares of ~~Directors.~~ our common stock.

See Note 2 to the unaudited

condensed consolidated financial statements set forth in Part I, Item 1 of this report for additional information regarding the ~~Merger and~~Merger.

ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS

As discussed in Note 1 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report, the Merger ~~Agreement.~~has been accounted for as a reverse acquisition under which DNS was considered the accounting acquirer of Legacy Zhone. As such, our financial results for the three and nine months ended September 30, 2016 presented in this Form 10-Q reflect the operating results of DNS and its consolidated subsidiaries only, for the period commencing on the first day of the applicable period through September 8, 2016, and includes the operating results of both DNS and Legacy Zhone and their respective consolidated subsidiaries for the period September 9 through September 30, 2016. Such results are compared to the financial results of DNS and its consolidated subsidiaries for the three and nine months ended September 30, 2015. Our balance sheet includes the fair value of the assets and liabilities of Legacy Zhone as of the effective date of the Merger. Those assets include the fair value of acquired intangible assets and goodwill. Due to the foregoing, our financial results for the three and nine months ended September 30, 2016 are not comparable to our financial results for the three and nine months ended September 30, 2015. The fourth quarter ending December 31, 2016 will be the first quarter in which our financial results reflect a full quarter of operating results for both DNS and Legacy Zhone and their respective consolidated subsidiaries.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from the ~~information provided~~critical accounting policies and estimates of DNS set forth in ~~Part II, “Item 7. Management’s Discussion~~the consolidated financial statements of DNS and ~~Analysis of Financial Condition~~the notes thereto and ~~Results of Operations – Critical Accounting Policies and Estimates” included~~elsewhere in our ~~Annual Report~~Definitive Proxy Statement filed with the SEC on ~~Form 10-K for the year ended December 31, 2015.~~August 8, 2016.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.

RESULTS OF OPERATIONS

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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015		2016		2015		2016		2015
	NOT REVIEWED				NOT REVIEWED				NOT REVIEWED				NOT REVIEWED
Net revenue	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%
Cost of revenue	61	%	63	%	61	%	63	%	71	%	74	%	74	%	74	%
Gross profit	39	%	37	%	39	%	37	%	29	%	26	%	26	%	26	%
Operating expenses:
Research and product development	15	%	14	%	16	%	15	%	18	%	22	%	17	%	18	%
Sales and marketing	17	%	16	%	18	%	16	%
General and administrative	14	%	8	%	17	%	8	%
Selling, general and administrative									25	%	17	%	18	%	13	%
Amortization of intangible assets									1	%	0	%	0	%	0	%
Total operating expenses	46	%	38	%	51	%	39	%	45	%	39	%	35	%	31	%
Operating loss	(7	)%	(1	)%	(12	)%	(2	)%	(15	)%	(13	)%	(9	)%	(5	)%
Interest income (expense), net	0	%	0	%	0	%	0	%
Other income (expense), net	0	%	0	%	0	%	0	%
Interest expense, net									(1	)%	0	%	0	%	0	%
Other income, net									0	%	3	%	0	%	1	%
Loss before income taxes	(7	)%	(1	)%	(12	)%	(2	)%	(16	)%	(11	)%	(10	)%	(5	)%
Income tax provision	0	%	0	%	0	%	0	%
Income tax provision (benefit)									0	%	1	%	(1	)%	1	%
Net loss	(7	)%	(1	)%	(12	)%	(2	)%	(15	)%	(12	)%	(9	)%	(5	)%
Other comprehensive income (loss)	0	%	0	%	0	%	0	%
Less: Net loss attributable to non-controlling interest									0	%	0	%	0	%	0	%
Net loss attributable to DASAN Zhone Solutions, Inc.									(15	)%	(12	)%	(9	)%	(5	)%
Other comprehensive income, net of foreign currency translation adjustments									0	%	4	%	3	%	0	%
Comprehensive loss	(7	)%	(1	)%	(12	)%	(2	)%	(8	)%	(8	)%	(6	)%	(5	)%
Less: Comprehensive income attributable to non-controlling interest									0	%	0	%	0	%	0	%
Comprehensive loss attributable to DASAN Zhone Solutions, Inc.									(8	)%	(8	)%	(6	)%	(5	)%

Net Revenue

Information about our net revenue for products and services for the three and ~~six~~nine months ended ~~June~~September 30, 2016 and 2015 is summarized below (in millions):


	Three Months Ended June 30,									Six Months Ended June 30,									Three Months Ended September 30,								Nine Months Ended September 30,
	2016		2015		Decrease			% change		2016		2015		Decrease			% change		2016		2015		Decrease		% change		2016		2015		Decrease			% change
	NOT REVIEWED									NOT REVIEWED									NOT REVIEWED
Products	$	21.1	$	25.9	$	(4.8	)	(18.5	)%	$	40.1	$	51.5	$	(11.4	)	(22.1	)%	$	29.0	$	21.6	$	7.4	34	%	$	86.6	$	88.9	$	(2.3	)	(3	)%
Services	1.5		1.6		(0.1		)	(6.3	)%	3.1		3.1		0.0			0.0	%	3.2		1.0		2.2		220	%	6.7		4.4		2.3			52	%
Total	$	22.6	$	27.5	$	(4.9	)	(17.8	)%	$	43.2	$	54.6	$	(11.4	)	(20.9	)%	$	32.2	$	22.6	$	9.6	42	%	$	93.3	$	93.3	$	—		0	%

Information about our net revenue for North America and international markets for the three and ~~six~~nine months ended ~~June~~September 30, 2016 and 2015 is summarized below (in millions):


	Three Months Ended June 30,									Six Months Ended June 30,									Three Months Ended September 30,								Nine Months Ended September 30,
	2016		2015		Increase (Decrease)			% change		2016		2015		Increase (Decrease)			% change		2016		2015		Increase (Decrease)		% change		2016		2015		Increase (Decrease)			% change
NOT REVIEWED
																			NOT REVIEWED
Revenue by geography:
United States	$	10.0	$	8.2	$	1.8		22.0	%	$	18.4	$	17.3	$	1.1		6.4	%	$	3.4	$	0.6	$	2.8	467	%	$	7.2	$	4.0	$	3.2		80	%
Canada	1.1		0.8		0.3			37.5	%	2.1		1.8		0.3			16.7	%	0.3		—		0.3		100	%	0.3		—		0.3			100	%
Total North America	11.1		9.0		2.1			23.3	%	20.5		19.1		1.4			7.3	%	3.7		0.6		3.1		517	%	7.5		4.0		3.5			88	%
Latin America	6.6		7.7		(1.1		)	(14.3	)%	11.2		14.0		(2.8		)	(20.0	)%	1.4		—		1.4		100	%	1.4		—		1.4			100	%
Europe, Middle East, Africa	3.9		9.7		(5.8		)	(59.8	)%	9.7		19.0		(9.3		)	(48.9	)%	1.3		—		1.3		100	%	1.3		—		1.3			100	%
Korea																			18.7		18.5		0.2		1	%	52.9		67.1		(14.2		)	(21	)%
Asia Pacific	1.0		1.1		(0.1		)	(9.1	)%	1.8		2.5		(0.7		)	(28.0	)%	7.1		3.6		3.5		97	%	30.2		22.2		8.0			36	%
Total International	11.5		18.5		(7.0		)	(37.8	)%	22.7		35.5		(12.8		)	(36.1	)%	28.5		22.1		6.4		29	%	85.8		89.4		(3.6		)	(4	)%
Total	$	22.6	$	27.5	$	(4.9	)	(17.8	)%	$	43.2	$	54.6	$	(11.4	)	(20.9	)%	$	32.2	$	22.6	$	9.6	42	%	$	93.3	$	93.3	$	—		0	%

For the three months ended ~~June~~September 30, 2016, net revenue ~~decreased~~increased ~~18%~~42% or $~~4.9~~9.6 million to $~~22.6~~32.2 million from $~~27.5~~22.6 million for the same period last year. For the ~~six~~nine months ended ~~June~~September 30, 2016, net revenue ~~decreased 21% or $11.4 million~~remained constant compared to ~~$43.2 million from $54.6 million for~~ the same period last year. For the three months ended ~~June~~September 30, 2016, product revenue ~~decreased 19%~~increased 34% or $~~4.8~~7.4 million to ~~$21.1~~$29.0 million, compared to ~~$25.9~~$21.6 million for the same period last year. For the ~~six~~nine months ended ~~June~~September 30, 2016, product revenue decreased ~~22%~~3% or ~~$11.4~~$2.3 million to ~~$40.1~~$86.6 million, compared to ~~$51.5~~$88.9 million for the same period last year. The ~~decreases~~increase in net revenue ~~and product revenue were~~for the three months ended September 30, 2016 was primarily ~~due~~related to ~~global economic uncertainties continuing to cause many~~the consummation of ~~our international service provider customers to cautiously approach new network investments, which has~~the Merger in September 2016 (which resulted in ~~many~~the inclusion of ~~our international customers reducing their network expansion.~~net revenue related to the Legacy Zhone business for 21 days of the current year quarter). The relatively flat net revenues for the nine months ended September 30 2016 compared to the prior year period was primarily attributable to decreased sales in the Korea, offset by the inclusion of net revenue related to the Legacy Zhone business for 21 days of the current year period.

Service revenue represents revenue from maintenance and other services associated with product shipments. For the three months ended ~~June~~September 30, 2016 and 2015, service revenue ~~remained largely flat at $1.5~~increased 220% or $2.2 million ~~and $1.6~~to $3.2 million, ~~respectively.~~compared to $1.0 million for the same period last year. For the ~~six~~nine months ended ~~June~~September 30, ~~2016 and~~ 2015, service revenue ~~remained flat at $3.1 million.~~increased by 52% or $2.3 million to $6.7 million, compared to $4.4 million for the same period last year. The increase in service revenue for the three and nine months ended September 30, 2016 was primarily related to the consummation of the Merger in September 2016 (which resulted in the inclusion of service revenue related to the Legacy Zhone business for 21 days of the current year period), as well as an increase in sales of maintenance services.

International net revenue ~~decreased 38%~~increased 29% or ~~$7.0~~$6.4 million to ~~$11.5~~$28.5 million for the three months ended ~~June~~September 30, 2016 from ~~$18.5~~$22.1 million for the same period last year, and represented ~~51%~~89% of total net revenue compared with ~~67%~~98% during the same period of 2015. International net revenue decreased ~~36%~~4% or ~~$12.8~~$3.6 million to ~~$22.7~~$85.8 million for the ~~six~~nine months

ended ~~June~~September 30, 2016 from ~~$35.5~~$89.4 million for the same period last year, and represented ~~53%~~92% of total net revenue compared with ~~65%~~96% during the same period of 2015. The ~~decreases~~increase in international net revenue were primarily due to global economic uncertainties continuing to cause many of our international service provider customers to cautiously approach new network investments, which has resulted in many of our international customers reducing their network expansion.

~~For~~for the three months ended ~~June~~September 30, 2016 was primarily related to the consummation of the Merger in September 2016 (which resulted in the inclusion of international net revenue related to the Legacy Zhone business for 21 days of the current year quarter). The decrease in international net revenue for the nine months ended September 30, 2016 compared to the prior year period was primarily due to decreased sales in Korea, partially offset by the inclusion of net revenue related to the Legacy Zhone business for 21 days of the current year period.

For the three months ended September 30, 2016and 2015, ~~four~~three customers represented ~~39%~~46% and ~~32%~~63% of net revenue, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015, ~~four~~three customers represented ~~38%~~44% and ~~33%~~56% of net revenue, respectively. We anticipate that our results of operations in any given period may depend to a large extent on sales to a small number of large accounts. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.

Cost of Revenue and Gross Margin

Total cost of revenue, including stock-based compensation, ~~decreased 20%~~increased 35% or ~~$3.4~~$5.9 million to ~~$13.8~~$22.7 million for the three months ended ~~June~~September 30, 2016, compared to ~~$17.3~~$16.8 million for the three months ended ~~June~~September 30, 2015. Total cost of revenue, including stock-based compensation slightly decreased ~~23%~~0.4% or ~~$8.0~~$0.3 million to ~~$26.2~~$69.0 million for the ~~six~~nine months ended ~~June~~September 30, 2016 compared to ~~$34.2~~$69.3 million for the same period last year. The ~~decreases~~increase in total cost of revenue for the three ~~and six~~ months ended ~~June~~September 30, 2016 ~~were~~was primarily due to ~~decreased~~the consummation of the Merger in September 2016 (which resulted in the inclusion of cost of revenue related to the Legacy Zhone business for 21 days of the current year period) as well as increased sales in the current year period. Gross margin slightly increased ~~to 39% from 37% for both the three and six months ended June 30, 2016 and 2015, primarily~~ due to ~~stronger domestic margins, stronger enterprise margins~~improved manufacturing efficiencies and ~~continued manufacturing efficiencies.~~product mix.

We expect that in the future our cost of revenue as a percentage of net revenue will vary depending on the mix and average selling prices of products sold. In addition, continued competitive and economic pressures could cause us to

reduce our prices, adjust the carrying values of our inventory, or record inventory charges relating to discontinued products and excess or obsolete inventory.

Research and Product Development Expenses

Research and product development expenses ~~decreased 13%~~increased 21% or ~~$0.5~~$1.0 million to ~~$3.4~~$5.9 million for the three months ended ~~June~~September 30, 2016 compared to $4.9 million for the three months ended September 30, 2015. Research and product development expenses decreased 6% or $1.0 million to $15.6 million for the nine months ended September 30, 2016 compared to $16.5 million for the same period last year. The increase in research and product development expenses for the three months ended September 30, 2016 was primarily due to the consummation of the Merger in September 2016 (which resulted in the inclusion of research and product development expenses related to the Legacy Zhone business for 21 days of the current year period. The decrease in research and product development expenses for the nine months ended September 30, 2016 was primarily due to a reduction in personnel-related expenses from lower headcount as compared to the same period last year, partially offset by the inclusion of research and product development expenses relating to the Legacy Zhone business in the current year period as a result of the consummation of the Merger in September 2016. 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 and Administrative Expenses

Selling and administrative expenses increased 108% or $4.3 million to $8.2 million for the three months ended September 30, 2016 compared to $3.9 million for the three months ended ~~June~~September 30, ~~2015. Research~~2015, and ~~product development expenses decreased 13%~~increased 36% or ~~$1.0~~$4.4 million to ~~$7.0~~$16.9 million for the ~~six~~nine months ended ~~June~~September 30, 2016 compared to ~~$8.0~~$12.5 million for the same period last year. The ~~decreases~~increases in selling administrative expenses were primarily due to ~~a reduction~~the consummation of the Merger in ~~personnel-related expenses of $0.5 million and $1.0 million for the three and six months ended June 30,~~September 2016 ~~respectively, as compared to the same period last year, which reflected the reduction in salaries effected in October 2015.~~

~~Sales and Marketing Expenses~~

Sales and marketing expenses decreased 11% or $0.5 million to $3.9 million for the three months ended June 30, 2016 compared to $4.4 million for the three months ended June 30, 2015, and decreased 12% or $1.1 million to $7.7 million for the six months ended June 30, 2016 compared to $8.8 million for the same period last year.

~~The decrease~~(which resulted in the ~~three months ended June 30, 2016 was primarily due to a $0.3 million decrease in salaries~~inclusion of selling and wages and consultants as a result of the reduction in salaries effected in October 2015, a $0.1 million decrease in commissions as a result of lower sales during the quarter and a $0.1 million decrease inadministrative expenses related to ~~trade shows~~Legacy Zhone business for 21 days of the current year period) and ~~demo equipment.~~

~~The decrease~~inclusion in the ~~six months ended June 30, 2016~~ ~~was primarily due to a $0.4 million decrease in salaries and wages as a result~~current year periods of the reduction in salaries effected in October 2015, a $0.3 million decrease in commissions due to lower sales during the period, a $0.3 million decrease in travel and hotel expenses, and a $0.1 million decrease in benefit expenses.

~~General and Administrative Expenses~~

General and administrative expenses increased 40% or $0.9 million to $3.1 million for the three months ended June 30, 2016 compared to $2.2 million for the three months ended June 30, 2015. General and administrative expenses increased 64% or $2.9 million to $7.4 million for the six months ended June 30, 2016 compared to $4.5 million for the same period last year.

~~The increase in the three months ended June 30, 2016 was primarily due to merger-related transaction costs of $1.2 million and $0.2~~$3.5 million in moving expenses incurred as a result of moving our manufacturing facility to Seminole, Florida during the second quarter of 2016, which was partially offset by a $0.3 million decrease in personnel-related expenses as a result of the reduction in salaries effected in October 2015 and a $0.2 million decrease in stock compensation expenses.

The increase in the six months ended June 30, 2016 was primarily due to the cancellation of the stock options of James Norrod, Chief Executive Officer of Zhone, which resulted in $1.6 million of unrecognized stock compensation expense and $0.2 million of recognized stock compensation expense in the first quarter of 2016, the grant of shares of Zhone common stock with a value of $0.6 million to Morteza Ejabat, Zhone co-founder and former Chairman of the Board of Directors, pursuant to Mr. Ejabat's Transition Services Agreement, merger-related transaction costs of $1.2 million and $0.2 million in moving expenses incurred as a result of moving our manufacturing facility to Seminole, Florida during the second quarter of 2016. These increases were partially offset by a $0.7 million decrease in personnel-related expenses as a result of the reduction in salaries effected in October 2015.Merger-related costs.

Income Tax Provision

During the three and ~~six~~nine months ended ~~June~~September 30, 2016 and 2015, no material provision or benefit for income taxes was recorded, due to our recurring operating losses and the significant uncertainty regarding the realization of our net deferred tax assets, against which we have continued to record a full valuation allowance.

OTHER PERFORMANCE MEASURES

In managing our business and assessing our financial performance, we supplement the information provided by our 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, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) Merger-related costs (v) non-cash equity-based compensation expense,

~~(v) merger-related transaction costs,~~ and (vi) material non-recurring non-cash transactions, such as gain (loss) on sale of assets or impairment of fixed assets. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.

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

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

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

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

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

non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and

other companies in our industry may calculate Adjusted EBITDA and similar measures differently than we do, limiting its usefulness as a comparative measure.

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

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


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2016			2015			2016			2015
	NOT REVIEWED						NOT REVIEWED						NOT REVIEWED
Net loss	$	(1,641	)	$	(366	)	$	(5,073	)	$	(968	)	$	(4,881	)	$	(2,780	)	$	(8,287	)	$	(4,938	)
Add:
Interest expense	1			18			9			73			204			114			600			378
Provision for taxes	31			22			60			44			(153		)	295			(584		)	480
Depreciation and amortization	179			174			370			384			628			338			1,165			1,112
Merger-related costs													3,536			—			3,536			—
Non-cash equity-based compensation expense	98			300			2,634			473			128			—			128			—
Merger-related transaction costs	1,247			—			1,247			—
Adjusted EBITDA	$	(85	)	$	148		$	(753	)	$	6		$	(538	)	$	(2,033	)	$	(3,442	)	$	(2,968	)

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.

AtAs of ~~June~~September 30, 2016, our cash and cash equivalents were $~~8.3~~34.4 million compared to ~~$10.1~~$17.0 million at December 31, ~~2015.~~2015, which included $10.0 million from DNS and $7.0 million from Legacy Zhone. The ~~$1.8~~$17.4 million ~~decrease~~increase in cash and cash equivalents was attributable to net cash ~~used in investing~~provided by operating and financing activities of ~~$3.4~~$13.2 million and ~~$3.0~~$3.5 million, respectively, and effect of exchange rate changes on cash of $1.6 million, partially offset by net cash ~~provided by operating~~used in investing activities of ~~$4.6~~$0.9 million.

Operating Activities

Net cash provided by operating activities for the ~~six~~nine months ended ~~June~~September 30, 2016 consisted of a net loss of ~~$5.1~~$8.3 million, adjusted for non-cash charges totaling ~~$3.0~~$2.5 million and an increase in net operating assets totaling $6.7 million. The most significant components of the changes in net operating assets were an increase in accounts payable of $3.4 million, partially offset by a decrease in accounts receivable of $1.7 million. The increase in accounts payable was primarily the result of managing our cash outflow and the result of increased payables during the quarter. The decrease in accounts receivable was primarily the result of increased collections and decreased sales to several large customers in the current year period.

Net cash provided by operating activities for the six months ended June 30, 2015 consisted of a net loss of $1.0 million, adjusted for non-cash charges totaling $0.9 million and an increase in net operating assets totaling $0.2$19.0 million. The most significant components of the changes in net operating assets were an increase in accounts receivable of ~~$1.7~~$11.9 million offset by ~~a decrease of~~decreases in accounts payable and inventory of ~~$4.6 million.~~$6.1 million and $2.8 million, respectively, as well as the inclusion of net cash used in the operating activities of the Legacy Zhone business for 21 days of the current year period due to the consummation of the Merger in September 2016. The increase in accounts receivable was primarily the result of increased sales to several large customers in the third quarter of 2016 and timing of receivables collections during the current year period. The decrease in accounts payable was primarily due to timing of payments. The decrease in inventory was due to better utilization of inventory in the current year period.

Net cash used in operating activities for the nine months ended September 30, 2015 consisted of a net loss of $4.9 million, adjusted for non-cash charges totaling $0.7 million and an increase in net operating assets totaling $1.8 million. The most significant components of the changes in net operating assets were an increase in accounts receivable of $11.2 million offset by a decrease of accounts payable of $16.8 million. The increase in accounts receivable was primarily due to the timing of receivables collections during the current year period. The decrease in accounts payable was primarily due to timing of payments.

Investing Activities

Net cash used in investing activities for the ~~six~~nine months ended ~~June~~September 30, 2016 consisted of cash used in restricted cash and short-term loans to others of $1.4 million each, offset by repayments of short-term loans to others of $1.6 million.

Net cash provided by investing activities for the nine months ended September 30, 2015 consisted of ~~purchases~~a cash used in restricted cash of ~~property and equipment~~$2.5 million offset by repayments of ~~$3.4 million and~~in long-term loans to others of $0.6 ~~million, respectively.~~million.

Financing Activities

Net cash ~~used in~~provided by financing activities for the ~~six~~nine months ended ~~June~~September 30, 2016 ~~primarily~~ consisted of proceeds from long-term borrowings of $6.8 million offset by repayments ~~under the WFB Facility (as defined below)~~ of ~~$3.0~~short-term borrowings of $3.3 million.

Net cash provided by financing activities for the ~~six~~nine months ended ~~June~~September 30, 2015 consisted of proceeds ~~related to exercises~~from short-term borrowings and proceeds from issuance of common stock ~~options~~ of ~~$0.2~~$5.8 million and $1.6 million, respectively, offset by decrease in capital surplus of $3.0 million.

Cash Management

Our primary source of liquidity comes from our cash and cash equivalents which totaled ~~$8.3~~$34.4 million at ~~June~~September 30, 2016 ~~and our~~, as well as an aggregate of $37.0 million in revolving credit facilities as of September 30, 2016.

WFB Facility

As of September 30, 2016, we had a $25.0 million revolving line of credit and letter of credit facility ~~(the WFB Facility)~~ with ~~Wells Fargo Bank (WFB).~~

WFB. Under the WFB Facility, we have the option of borrowing funds at agreed upon interest rates. The amount that we are able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the agreement, as long as the aggregate amount outstanding does not exceed $25.0 million less the amount committed as security for letters of ~~credit, which at June 30, 2016 was $12.7 million.~~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.

We had ~~$2.0~~no outstanding borrowings and $3.8 million ~~outstanding at~~ ~~June 30, 2016~~ ~~under the WFB Facility. In addition, $3.7 million was~~ committed as security for letters of ~~credit.~~credit under its WFB Facility at September 30, 2016. We had ~~$6.9~~$2.9 million of borrowing availability remaining under the WFB Facility as of ~~June~~September 30, ~~2016~~.2016. The maturity date under the WFB Facility is March 31, 2019. The amounts borrowed under the

WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin based on our average excess availability (as calculated under the WFB Facility). The interest rate on the WFB Facility was ~~3.15%~~3.35% at ~~June~~September 30, ~~2016~~.2016.

Our obligations under the WFB Facility are secured by substantially all of our personal property assets and those of our subsidiaries that guarantee the WFB Facility, including our intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If we default under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell our assets to satisfy the obligations under the WFB Facility. As of ~~June~~September 30, 2016, we were in compliance with these covenants. We make no assurances that we will be in compliance with these covenants in the future.

Bank and Trade Facilities - Foreign Operations

Certain of our foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries. Payments under such facilities are made in accordance with the given lender’s amortization schedules. As of September 30, 2016 and December 31, 2015, we had an aggregate outstanding balance of $20.1 million and $21.8 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements as of September 30, 2016 and December 31, 2015 ranged from 1.66% to 4.26% and 2.04% to 3.55%, respectively.

Related Party Borrowings

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

In addition, DNS borrowed $1.8 million from DASAN for capital investment in February 2016, which amount was outstanding as of September 30, 2016. This loan matures in March 2017 with an option of renewal by mutual agreement, and bears interest at a rate of 6.9% per annum, payable annually.

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. Our operating lease commitments include ~~$1.5~~$1.2 million of future minimum lease payments spread over the three-year lease term under the lease agreement we

entered into in September 2015 with respect to our Oakland, California campus. In February 2016, we entered into a ten-year lease beginning June 30, 2016 for a manufacturing facility in Seminole, Florida to replace our manufacturing facility in Largo, Florida, the lease for which was terminated on June 30, 2016. Accordingly, our operating lease commitments also include $5.7 million of future minimum lease payments under the lease agreement for our manufacturing facility in Seminole, Florida. We have completed significant build-out of the new manufacturing facility, and in June 2016, we amended the lease agreement for the manufacturing facility to extend the non-refundable tenant improvement allowance from up to $1.0 million to up to $1.2 million. As of ~~June~~September 30, 2016, we had received ~~$0.9~~the full $1.2 million of the non-refundable tenant improvement ~~allowance. The tenant improvement~~ allowance ~~amount is amortized over~~related to the ~~term of the lease as an offset to rent expense.~~Seminole manufacturing facility. The remaining operating lease commitments relate to our various other offices and facilities around the world.

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 ~~June~~September 30, 2016, ~~four~~three customers accounted for ~~45%~~37% of net accounts receivable and receivables from customers in countries other than the United States ~~of America~~ represented ~~75%~~80% of net accounts receivable. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt.

We have incurred significant losses to date and expect that our operating losses and negative cash flows from operations may continue. We incurred a net loss of ~~$2.0~~$3.0 million for the year ended December 31, 2015 and a net loss of ~~$5.1~~$8.3 million for the ~~six~~nine months ended ~~June~~September 30, 2016, which net losses have continued to reduce cash and cash equivalents. We had an accumulated deficit of ~~$1,048.1~~$12.7 million at ~~June~~September 30, 2016. In order to meet our liquidity needs and finance our capital expenditures and working capital needs for our business, we may be required to sell assets, issue debt or equity securities, purchase credit insurance or borrow on potentially unfavorable terms. In addition, we may be required to reduce our operations in low margin regions, including reductions in headcount. In October 2015, we took steps to reduce our expenses to minimize additional cash burn, including reduction in headcount and in salaries (although salary reductions for non-executive employees were reversed in July 2016). We may be unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. Likewise, any equity financing could result in additional dilution of our stockholders. If we are unable to obtain additional capital or are required to obtain additional capital on terms that are not favorable to us, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. Based on our current plans and business conditions, we believe that our focused operating expense discipline 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 twelve months.

Contractual Commitments and Off-Balance Sheet Arrangements

The contractual commitments discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Commitments and Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2015 have changed significantly due to the consummation of the Merger on September 9, 2016; see Note 2 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report for additional information regarding the Merger.

At ~~June~~September 30, 2016,, our future contractual commitments by fiscal year were as follows (in thousands):


															Payments due by period
			Payments due by period										Total		2016		2017		2018		2019		2020 and thereafter
NOT REVIEWED	Total		2016		2017		2018		2019		2020 and thereafter
Operating leases	$	7,459	$	481	$	1,329	$	995	$	523	$	4,131	$	7,642	$	272	$	1,470	$	1,066	$	597	$	4,237
Purchase commitments	7,050		7,050		—		—		—		—		10,215		6,329		1,398		1,383		1,106		—
Line of credit	2,000		2,000		—		—		—		—
Lines of credit													5,749		5,749		—		—		—		—
Related party debt													6,800		—		1,800		—		—		5,000
Total future contractual commitments	$	16,509	$	9,531	$	1,329	$	995	$	523	$	4,131	$	30,406	$	12,350	$	4,668	$	2,449	$	1,703	$	9,237

Operating Leases

The operating lease amounts shown above represent primarily off-balance sheet arrangements. For operating lease commitments, a liability is generally not recorded on our balance sheet unless the facility represents an excess facility for which an estimate of the facility exit costs has been recorded on our balance sheet, net of estimated sublease income. For operating leases that include contractual commitments for operating expenses and maintenance, estimates of such

amounts are included based on current rates. Payments made under operating leases will be treated as rent expense for the facilities currently being utilized.

Purchase Commitments

The purchase commitments shown above represent non-cancellable inventory purchase commitments as of ~~June~~September 30, 2016.

~~Line~~Lines of Credit

The ~~line~~lines of credit ~~obligation has~~obligations have been recorded as ~~a liability~~liabilities on our balance ~~sheet.~~sheet, and comprise $5.7 million in outstanding borrowings under the trade facilities of our foreign subsidiaries. The ~~line~~lines of credit obligation amount shown above represents ~~the~~ scheduled principal ~~repayment,~~repayments, but not the associated interest payments which may vary based on changes in market interest rates. At ~~June~~September 30, 2016, the interest rate per annum applicable to outstanding borrowings under the ~~WFB Facility was~~ ~~3.15%~~trade facilities of our foreign subsidiaries ranged from 1.66% to 2.38%.

~~As of~~ ~~June 30, 2016, we had $2.0 million outstanding under our line of credit under the WFB Facility and an additional~~ ~~$3.7 million~~ ~~committed as security for letters of credit. The maturity date under the WFB Facility is March 31, 2019.~~

See above under “Cash Management” for further information about these facilities.

Related Party Debt

As of September 30, 2016, we had borrowed $6.8 million from DASAN, of which $5.0 million and $1.8 million mature in September 2021 and March 2017, respectively, and the ~~WFB Facility.~~interest rate per annum applicable to these borrowings was 4.6% and 6.9%, respectively.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Concentration of Credit Risk

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

We anticipate that our results of operations in any given period may depend to a large extent on sales to a small number of large accounts. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.

For the three months ended ~~June~~September 30, 2016 and 2015, ~~four~~three customers represented ~~39%~~46% and ~~32%~~63% of net revenue, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015, ~~four~~three customers represented ~~38%~~44% and ~~33%~~56% of net revenue, respectively.

As of ~~June~~September 30, 2016 and December 31, 2015, three customers accounted for ~~45%~~ ~~and 44%~~37% of net accounts ~~receivable, respectively.~~receivable.

As of ~~June~~September 30, 2016, and December 31, 2015, receivables from customers in countries other than the United States represented ~~75%~~80% and ~~83%~~93%, respectively, of net accounts receivable.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our outstanding debt. As of ~~June~~September 30, 2016, our outstanding debt balance ~~under our WFB Facility~~ was ~~$2.0~~$21.9 million. Amounts borrowed under the ~~WFB Facility~~short-term debt bear interest ~~payable monthly, at a floating rate equal~~ranging from 1.66% to ~~the three-month LIBOR plus a margin based on our average excess availability (as calculated under the WFB Facility). As~~4.26% as of ~~June~~September 30, 2016~~, the interest rate on the WFB Facility was 3.15%~~. Assuming the outstanding balance on our variable rate debt remains constant over a year, a 2% increase in the interest rate would decrease pre-tax income and cash flow by ~~less than $0.1~~approximately $0.4 million.

Foreign Currency Risk

We transact business in various foreign ~~countries. Substantially all~~countries, and a significant portion of our assets ~~are~~is located in ~~the United States.~~Korea. We have sales operations throughout Europe, Asia, the Middle East and Latin America. We are exposed to foreign currency exchange rate risk associated with foreign currency denominated assets and liabilities, primarily intercompany receivables and payables. Accordingly, our operating results are exposed to changes in exchange rates between the U.S. dollar and those currencies. During the first ~~six~~nine months of 2016 and during 2015, we did not hedge any of our foreign currency exposure.

We have performed sensitivity analyses as of ~~June~~September 30, 2016 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 analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign exchange loss of ~~$0.4~~$0.3 million at ~~June~~September 30, 2016. This sensitivity analysis assumes a parallel adverse shift in foreign currency exchange rates, which do not always move in the same direction. Actual results may differ materially.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The controls evaluation was done under the supervision and with the participation of management, including our ~~Chief~~Co-Chief Executive ~~Officer~~Officers and our Chief Financial Officer. Based upon this evaluation, our ~~Chief~~Co-Chief Executive ~~Officer~~Officers and Chief Financial Officer have concluded that, subject to the limitations noted in this Part I, Item 4, as of the end of the period covered by this report, our disclosure controls and procedures were effective except for, those pertaining to DNS, to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to DASAN Zhone and its consolidated subsidiaries is made known to management, including our ~~Chief~~Co-Chief Executive ~~Officer~~Officers and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

On September 9, 2016, the acquisition of DNS through the Merger was completed. Management has begun the evaluation of the internal control structures of DNS and its consolidated subsidiaries. However, SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessments of internal control over financial reporting and disclosure controls and procedures for a period not to exceed one year from the date of the acquisition. Accordingly, we excluded DNS and its consolidated subsidiaries from our evaluation of our disclosure controls and procedures as of September 30, 2016. As of September 30, 2016, total assets related to DNS and its consolidated subsidiaries represented approximately 58% of our total assets, which consisted primarily of cash and cash equivalents, accounts receivable, net and inventories. Net revenues from DNS and its consolidated subsidiaries comprised approximately 82% and 94% of our consolidated net revenues for the three and nine months ended September 30, 2016, respectively.

Although we excluded DNS and its consolidated subsidiaries from our evaluation of our disclosure controls and procedures as of September 30, 2016, in connection with the preparation and external audit of DNS’ consolidated financial statements as of and for the three years ended December 31, 2015 and the preparation and review of DNS’ unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2016, DNS and its independent auditors noted two material weaknesses in DNS’ internal control over financial reporting. The material weaknesses that were identified were (a) lack of resources that are knowledgeable about U.S. GAAP and SEC reporting matters to allow the company to prepare the required filings on an accurate and timely basis as a U.S. domestic registrant and (b) lack of knowledge and experience in preparing financial statements under U.S. GAAP and that comply with SEC reporting matters on a timely and accurate basis as a U.S. domestic registrant. 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.

We are currently determining a plan for remediation of the material weaknesses described above, and in connection therewith anticipate that we will hire additional accounting personnel with relevant skills, training and experience, and conduct further training of accounting and finance personnel. In addition, in November 2016 we hired a new Vice President of Finance and Corporate Controller.

Changes in Internal Control over Financial Reporting

~~There~~Except as described above, there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Merger-related integration activities may lead us to modify certain internal controls in future periods.

Inherent Limitations on Effectiveness of Controls

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed below, which we are including in this report as a result of the consummation of the Merger on September 9, 2016, and which replace and supersede the risk factors previously described in Part ~~I, “Item 1A. Risk~~1, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, as updated by the factors discussed in Part II, Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the three months ended March 31, 2016, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2015, as so updated.2015. The risks described below and elsewhere in ~~our Annual Report on Form 10-K, as so updated,~~this report 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 businesses, financial condition, results of operations or prospects.

The integration of Legacy Zhone and DNS may not be completed successfully, cost-effectively or on a timely basis, and we may not realize the full benefits of the Merger.

Our ability to realize the anticipated benefits of the Merger will depend, to a large extent, on our ability to successfully integrate the Legacy Zhone and DNS businesses. Integrating and coordinating certain aspects of the operations and personnel of the two businesses and managing the expansion in the scope of our operations and financial systems involves complex operational, technological and personnel-related challenges. Our management will be required to devote a significant amount of time and attention to the process of integrating the Legacy Zhone operations with those of DNS. The potential difficulties, and resulting costs and delays, relating to the integration of the Legacy Zhone and DNS businesses include, among others:

•the diversion of management’s attention from day-to-day operations;

•the management of a significantly larger company than before the Merger;

•the assimilation of DNS employees and the integration of the two business cultures;

•challenges in attracting and retaining key personnel;

•the need to integrate information, accounting, finance, sales, billing, payroll and regulatory compliance systems;

•challenges in keeping existing customers and obtaining new customers; and

•challenges in combining product offerings and sales and marketing activities.

There is no assurance that we will successfully or cost-effectively integrate the Legacy Zhone and DNS operations. The costs of achieving systems integration may substantially exceed our current estimates. As a non-public company prior to the Merger, DNS did not have to comply with the requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, for internal control over financial reporting and other procedures. Accordingly, neither DNS nor its independent auditors undertook a formal assessment or audit of DNS’ internal control over financial reporting prior to the Merger. However, in connection with the preparation and external audit of DNS’ consolidated financial statements as of and for the three years ended December 31, 2015 and the preparation and review of DNS’ unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2016, DNS and its independent auditors noted two material weaknesses in DNS’ internal control over financial reporting. The material weaknesses that were identified were (a) lack of resources that are knowledgeable about U.S. GAAP and SEC reporting matters to allow the company to prepare the required filings on an accurate and timely basis as a U.S. domestic registrant, and (b) lack of knowledge and experience in preparing financial statements under U.S. GAAP and that comply with SEC reporting matters on a timely and accurate basis as a U.S. domestic registrant. Bringing the legacy systems for the DNS business into compliance with requirements under the Sarbanes-Oxley Act may cause us to incur substantial additional expense. If we are unable to implement and maintain an effective system of internal controls, the existence of one or more internal control deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify internal

control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be materially harmed. In addition, the integration process may cause an interruption of, or loss of momentum in, the activities of our business. If our management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and its results of operations and financial condition may be harmed.

Even if the businesses of Legacy Zhone and DNS are successfully integrated, we may not realize the full benefits of the Merger, including anticipated cost synergies, growth opportunities and other financial and operating benefits, within the expected timeframe or at all. In addition, we expect to incur significant integration and restructuring expenses to realize synergies. However, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from elimination of duplicative expenses and the realization of economies of scale and cost savings. Although we expect that the realization of efficiencies related to the integration of the businesses may offset incremental transaction, Merger-related and restructuring costs over time, we cannot give any assurance that this net benefit will be achieved in the near term, or at all. Any of these matters could adversely affect our businesses or harm our financial condition, results of operations and prospects.

Our future operating results are difficult to predict and our stock price may continue to be volatile.

As a result of a variety of factors discussed in this report, our revenues for a particular quarter are difficult to predict. Our revenue and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. The primary factors that may affect our results of operations include the following:

commercial acceptance of our products and services;

fluctuations in demand for network access products;

the timing and size of orders from customers;

the ability of our customers to finance their purchase of our products as well as their own operations;

new product introductions, enhancements or announcements by our competitors;

our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner;

changes in our pricing policies or the pricing policies of our competitors;

the ability of our company and our contract manufacturers to attain and maintain production volumes and quality levels for our products;

our ability to obtain sufficient supplies of sole or limited source components;

increases in the prices of the components we purchase, or quality problems associated with these components;

unanticipated changes in regulatory requirements which may require us to redesign portions of our products;

changes in accounting rules, such as recording expenses for employee stock option grants;

integrating and operating any acquired businesses;

our ability to achieve targeted cost reductions;

how well we execute on our strategy and operating plans; and

general economic conditions as well as those specific to the communications, internet and related industries.

Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations, and financial condition that could adversely affect our stock price. We anticipate that our stock price and trading volume may continue to be volatile in the future, whether due to the factors described above, volatility in public stock markets generally (particularly in the technology sector) or otherwise.

Our common stock may be delisted from The Nasdaq Capital Market, which could negatively impact the price of our common stock and our ability to access the capital markets.

On September 12, 2016, we received a staff delisting determination letter from The Nasdaq Stock Market (Nasdaq) notifying us that, because we did not satisfy Nasdaq’s initial listing standard requiring a minimum bid price of $4 per share (or a minimum closing price of $3 per share for five consecutive trading days or $2 per share for 90 consecutive trading days) at the closing of the Merger, our common stock would be subject to delisting unless we timely requested a hearing before a Nasdaq Hearings Panel (the Panel). We timely requested a hearing before the Panel with respect to the staff’s delisting determination letter, which was held on November 3, 2016. At the hearing, we presented our plan to gain compliance with the initial listing minimum bid or closing price requirement, including via the implementation of a reverse stock split if necessary. On November 8, 2016, Nasdaq notified us that the Panel had granted our request for continued listing on Nasdaq, subject to us evidencing compliance with the initial listing minimum bid or closing price requirement by March 13, 2017. The compliance period granted by the Panel through March 13, 2017 is subject to us filing a preliminary proxy statement and a definitive proxy statement seeking stockholder approval of a reverse stock split with the SEC by January 31, 2017 and February 13, 2017, respectively. Although we intend to comply with the conditions set forth in the Panel’s determination, there can be no assurance that we will be successful in regaining compliance by the March 13, 2017 deadline, in which event the Panel will issue a final determination to delist and suspend trading of our shares on Nasdaq. Delisting from the Nasdaq Capital Market could have a material adverse effect on our business and on the trading of our common stock.

We have experienced significant losses and we may incur losses in the future. If we fail to generate sufficient revenue to sustain our profitability, our stock price could decline.

We have incurred significant losses to date and expect that our operating losses and negative cash flows from operations may continue. Our net loss was $8.3 million and $3.0 million for the nine months ended September 30, 2016 and year ended December 31, 2015, respectively, and we had an accumulated deficit of $12.7 million at September 30, 2016. We have significant fixed expenses and expect that we will continue to incur substantial manufacturing, research and product development, sales and marketing, customer support, administrative and other expenses in connection with the ongoing development of our business. In addition, we may be required to spend more on research and product development than originally budgeted to respond to industry trends. We may also incur significant new costs related to acquisitions and the integration of new technologies and other acquisitions that may occur in the future. We may not be able to adequately control costs and expenses or achieve or maintain adequate operating margins. As a result, our ability to sustain profitability in future periods will depend on our ability to generate and sustain higher revenue while maintaining reasonable cost and expense levels. If we fail to generate sufficient revenue to sustain profitability in future periods, we may continue to incur operating losses, which could be substantial, and our stock price could decline.

Our level of indebtedness could adversely affect our business, operating results and financial condition.

We have a significant amount of indebtedness. As of September 30, 2016, the aggregate principal amount of our total outstanding indebtedness was $26.9 million, which comprised $20.1 million in short-term borrowings under various financing arrangements of our foreign subsidiaries and $6.8 million in related party borrowings. We may incur additional indebtedness in the future, including additional borrowings under the WFB Facility. The level of indebtedness could have important consequences and could materially and adversely affect us in a number of ways, including:

•limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes;

•limiting our flexibility to plan for, or react to, changes in our business or market conditions;

•requiring us to use a significant portion of any future cash flow from operations to repay or service the debt, thereby reducing the amount of cash available for other purposes;

•making us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and

•making us more vulnerable to the impact of adverse economic and industry conditions and increases in interest rates.

The WFB Facility and the instruments governing our other indebtedness include covenants (including, in the case of the WFB Facility, financial ratios) that may restrict our ability to operate our business. These covenants restrict, among other matters, our ability to incur additional indebtedness, grant liens, sell or dispose of assets, make loans and investments, pay

dividends, redeem or repurchase capital stock, enter into affiliate transactions and consolidate or merger with, or sell substantially all of our assets to, another person. If we default under the WFB Facility or other instrument governing our other indebtedness because of a covenant breach or otherwise, all amounts outstanding thereunder could become immediately due and payable. In addition, WFB may be entitled to, among other things, sell our assets to satisfy the obligations under the WFB Facility. In the past we have violated the covenants in our former revolving line of credit and letter of credit facility and received waivers for these violations. We were in compliance with our covenants under our WFB Facility as of September 30, 2016. We cannot assure you that we will be able to comply with our financial or other covenants in the future or that any covenant violations will be waived in the future. Any acceleration of amounts due could have a material adverse effect on our liquidity and financial condition.

We cannot assure you that we will be able to generate cash flow in amounts sufficient to enable us to service our debt or to meet our working capital and capital expenditure requirements. If we are unable to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, due to borrowing base restrictions or otherwise, we may be required to sell assets, reduce capital expenditures, purchase credit insurance or obtain additional financing. We cannot assure you that we will be able to engage in any of these actions on reasonable terms, if at all.

If we are unable to obtain additional capital to fund our existing and future operations, we may be required to reduce the scope of our planned product development, and marketing and sales efforts, which would harm our business, financial condition and results of operations.

The development and marketing of new products, and the expansion of our direct sales operations and associated support personnel requires a significant commitment of resources. We may incur significant losses or expend significant amounts of capital if:

•the market for our products develops more slowly than anticipated;

•we fail to establish market share or generate revenue at anticipated levels;

•our capital expenditure forecasts change or prove inaccurate; or

•we fail to respond to unforeseen challenges or take advantage of unanticipated opportunities.

As a result, we may need to raise substantial additional capital. Additional capital, if required, may not be available on acceptable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. In addition, volatility in our stock price may make it more difficult or costly for us to raise capital through the issuance of common stock, preferred stock or other equity securities. If we elect to raise equity capital, this may be dilutive to existing stockholders and could reduce the trading price of our common stock. If we are unable to obtain additional capital or are required to obtain additional capital on terms that are not favorable to us, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions that we have previously taken, which could have a material adverse effect on our business, financial condition and results of operations.

Our lack of liquid funds and other sources of financing may limit our ability to maintain our existing operations, grow our business and compete effectively.

As of September 30, 2016, we had approximately $34.4 million in cash and cash equivalents and $26.9 million in aggregate principal amount outstanding under our debt facilities and other financing arrangements. 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; and

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

In order to meet our liquidity needs and finance our capital expenditures and working capital needs for our business, we may be required to sell assets, issue debt or equity securities, purchase credit insurance, or borrow on potentially unfavorable terms. In addition, we may be required to reduce our operations in low margin regions, including reductions in headcount. We may be unable to sell assets, access additional indebtedness or undertake other actions to meet these needs.

As a result, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. Likewise, any equity financing could result in additional dilution of our stockholders. If we are unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis and may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. In addition, we may not be able to fund our business expansion, take advantage of future opportunities, or respond to competitive pressures or unanticipated capital requirements, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our business and future operating results are subject to global economic and market conditions.

Market turbulence and weak economic conditions, as well as concerns about energy costs, geopolitical issues, the availability and cost of credit, business and consumer confidence, and unemployment could impact our business in a number of ways, including:

Potential deferment of purchases and orders by customers: Uncertainty about global economic conditions may cause consumers, businesses and governments to defer purchases in response to flat revenue budgets, tighter credit, decreased cash availability and weak consumer confidence. Accordingly, future demand for our products could differ materially from our current expectations.

Customers’ inability to obtain financing to make purchases from us and/or maintain their business: Some of our customers require substantial financing in order to finance their business operations, including capital expenditures on new equipment and equipment upgrades, and make purchases from us. The potential inability of these customers to access the capital needed to finance purchases of our products and meet their payment obligations to us could adversely impact our financial condition and results of operations. To sell to some of these customers, we may be required to assume incremental risks of uncollectible accounts or to extend credit or credit support. While we monitor these situations carefully and attempt to take appropriate measures to protect ourselves, including factoring credit arrangements to financial institutions, it is possible that we may have to defer revenue until cash is collected or write-down or write-off uncollectible accounts. Such write-downs or write-offs, if large, could have a material adverse effect on our results of operations and financial condition. If our customers become insolvent due to market and economic conditions or otherwise, it could have a material adverse impact on our business, financial condition and results of operations.

Negative impact from increased financial pressures on third-party dealers, distributors and retailers: We make sales in certain regions through third-party dealers, distributors and retailers. These third parties may be impacted, among other things, by a significant decrease in available credit. If credit pressures or other financial difficulties result in insolvency for these third parties and we are unable to successfully transition end customers to purchase our products from other third parties, or from us directly, it could adversely impact our financial condition and results of operations.

Negative impact from increased financial pressures on key suppliers: Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity constrained or insolvent, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies and adversely impact our financial condition and results of operations. In addition, credit constraints of key suppliers could result in accelerated payment of accounts payable by Zhone, impacting our cash flow.

We may experience material adverse impacts on our business, operating results and financial condition as a result of weak or recessionary economic or market conditions in the United States, Korea or the rest of the world.

If demand for our products and solutions does not develop as we anticipate, then our results of operations and financial condition will be adversely affected.

Our future revenue depends significantly on our ability to successfully develop, enhance and market our products and solutions to our target markets. Most network service providers have made substantial investments in their current infrastructure, and they may elect to remain with their current architectures or to adopt new architectures in limited stages or over extended periods of time. A decision by a customer to purchase our products will involve a significant capital investment. We must convince our service provider customers that they will achieve substantial benefits by deploying our products for future upgrades or expansions. We may experience difficulties with product reliability, partnering, and sales and marketing efforts that could adversely affect our business and divert management attention and resources from our

core business. We do not know whether a viable market for our products and solutions will develop or be sustainable in our businesses. If these markets do not develop or develop more slowly than we expect, our business, financial condition and results of operations will be seriously harmed.

We depend upon the development of new products and enhancements to existing products, and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results and market share may suffer.

The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in end-user requirements, frequent new product introductions and changes in communications offerings from network service provider customers. Our future success depends on our ability to anticipate or adapt to such changes and to offer, on a timely and cost-effective basis, products that meet changing customer demands and industry standards. We may not have sufficient resources to successfully and accurately anticipate customers’ changing needs and technological trends, manage long development cycles or develop, introduce and market new products and enhancements. The process of developing new technology is complex and uncertain, and if we fail to develop new products or enhancements to existing products on a timely and cost-effective basis, or if our new products or enhancements fail to achieve market acceptance, our business, financial condition and results of operations would be materially adversely affected.

Because our products are complex and are deployed in complex environments, our products may have defects that we discover only after full deployment by our customers, which could seriously harm our business.

We produce highly complex products that incorporate leading-edge technology, including both hardware and software. Software typically contains defects or programming flaws that can unexpectedly interfere with expected operations. In addition, our products are complex and are designed to be deployed in large quantities across complex networks. Because of the nature of these products, they can only be fully tested when completely deployed in large networks with high amounts of traffic, and there is no assurance that our pre-shipment testing programs will be adequate to detect all defects. As a result, our customers may discover errors or defects in our hardware or software, or our products may not operate as expected, after they have been fully deployed by our customers. If we are unable to cure a product defect, we could experience damage to our reputation, reduced customer satisfaction, loss of existing customers and failure to attract new customers, failure to achieve market acceptance, reduced sales opportunities, loss of revenue and market share, increased service and warranty costs, diversion of development resources, legal actions by our customers, and increased insurance costs. Defects, integration issues or other performance problems in our products could also result in financial or other damages to our customers. Our customers could seek damages for related losses from us, which could seriously harm our business, financial condition and results of operations. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly. The occurrence of any of these problems would seriously harm our business, financial condition and results of operations.

Due to the international nature of our business, political or economic changes or other factors in a specific country or region could harm our future revenue, costs and expenses and financial condition.

We currently have significant operations in Korea, as well sales and technical support teams in various locations around the world. Many of our international sales may be denominated in foreign currencies. Because we do not currently engage in material foreign currency hedging transactions related to international sales, a decrease in the value of foreign currencies relative to the U.S. dollar could result in losses from transactions denominated in foreign currencies.We expect to continue expanding our international operations in the future. The successful management and expansion of our international operations requires significant human effort and the commitment of substantial financial resources. Further, our international operations may be subject to certain risks and challenges that could harm our operating results, including:

•unexpected changes in laws, policies and regulatory requirements, including but not limited to regulations related to import-export control;

•trade protection measures, tariffs, embargoes and other regulatory requirements which may affect our ability to import or export our products into or from various countries;

•political considerations that affect service provider and government spending patterns;

•differing technology standards or customer requirements;

•developing and customizing our products for foreign countries;

•fluctuations in currency exchange rates, foreign exchange controls and restrictions on cash repatriation;

•longer accounts receivable collection cycles and financial instability of customers;

•requirements for additional liquidity to fund our international operations;

•difficulties and excessive costs for staffing and managing foreign operations;

•ineffective legal protection of our intellectual property rights in certain countries;

•potentially adverse tax consequences; and

•changes in a country’s or region’s political and economic conditions.

In addition, some of our customer purchase agreements are governed by foreign laws, which may differ significantly from U.S. laws. We may be limited in our ability to enforce our rights under these agreements and to collect damages, if awarded. Any of these factors could harm our existing international operations and business or impair our ability to continue expanding into international markets.

We are subject to Korean foreign currency exchange rate risk.

We conduct significant business in Korea, which subjects us to foreign currency exchange rate risk. Currently, we do not hold or issue foreign currency forward contracts, option contracts or other derivative financial instruments to mitigate the currency exchange rate risk. Our results of operations and our cash flows could be impacted by changes in foreign currency exchange rates.

A shortage of adequate component supply or manufacturing capacity could increase our costs or cause a delay in our ability to fulfill orders, and our failure to estimate customer demand properly may result in excess or obsolete component inventories that could adversely affect our gross margins.

Occasionally, we may experience a supply shortage, or a delay in receiving, certain component parts as a result of strong demand for the component parts and/or capacity constraints or other problems experienced by suppliers. If shortages or delays persist, the price of these components may increase, or the components may not be available at all, and we may also encounter shortages if we do not accurately anticipate our needs. Conversely, we may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenue and gross margins could suffer until other sources can be developed. Our operating results would also be adversely affected if, anticipating greater demand than actually develops, we commit to the purchase of more components than we need. Furthermore, as a result of binding price or purchase commitments with suppliers, we may be obligated to purchase components at prices that are higher than those available in the current market. In the event that we become committed to purchase components at prices in excess of the current market price when the components are actually used, our gross margins could decrease. In the past we experienced component shortages that adversely affected our financial results and in the future may continue to experience component shortages.

We rely on contract manufacturers for a portion of our manufacturing requirements.

We rely on contract manufacturers to perform a portion of the manufacturing operations for our products. These contract manufacturers build product for other companies, including our competitors. In addition, we do not have contracts in place with some of these providers and may not be able to effectively manage those relationships. We cannot be certain that our contract manufacturers will be able to fill our orders in a timely manner. We face a number of risks associated with this dependence on contract manufacturers including reduced control over delivery schedules, the potential lack of adequate capacity during periods of excess demand, poor manufacturing yields and high costs, quality assurance, increases in prices, and the potential misappropriation of our intellectual property. We have experienced in the past, and may experience in the future, problems with our contract manufacturers, such as inferior quality, insufficient quantities and late delivery of products.

We depend on a limited source of suppliers for several key components. If we are unable to obtain these components on a timely basis, we will be unable to meet our customers’ product delivery requirements, which would harm our business.

We currently purchase several key components from a limited number of suppliers. If any of our limited source of suppliers become insolvent, cease business or experience capacity constraints, work stoppages or any other reduction or disruption in output, they may be unable to meet our delivery schedules. Our suppliers may enter into exclusive arrangements with our competitors, be acquired by our competitors, stop selling their products or components to us at commercially reasonable prices, refuse to sell their products or components to us at any price or be unable to obtain or have difficulty obtaining components for their products from their suppliers. If we do not receive critical components from our limited source of suppliers in a timely manner, we will be unable to meet our customers’ product delivery

requirements. Any failure to meet a customer’s delivery requirements could materially adversely affect our business, operating results and financial condition and could materially damage customer relationships.

Our target customer base is concentrated, and the loss of one or more of our customers could harm our business.

The target customers for our products are network service providers that operate voice, data and video communications networks. There are a limited number of potential customers in our target market. For the nine months ended September 30, 2016 and year ended December 31, 2015, three customers represented 46% and 63% of net revenue, respectively. We expect that a significant portion of our future revenue will depend on sales of our products to a limited number of customers. As a result, our revenue for any quarter may be subject to significant volatility based on changes in orders from one or a small number of key customers. Any failure of one or more customers to purchase products from us for any reason, including any downturn in their businesses, would seriously harm our business, financial condition and results of operations.

Industry consolidation may lead to increased competition and may harm our operating results.

There has been a trend toward industry consolidation in the communications equipment market for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could have a material adverse effect on our business, financial condition and results of operations. Furthermore, rapid consolidation could result in a decrease in the number of customers we serve. Loss of a major customer could have a material adverse effect on our business, financial condition and results of operations.

The market we serve is highly competitive and we may not be able to compete successfully.

Competition in the communications equipment market is intense. This market is characterized by rapid change, converging technologies and a migration to networking solutions that offer superior advantages. We are aware of many companies in related markets that address particular aspects of the features and functions that our products provide. Currently, our primary competitors in our core business include Alcatel-Lucent, Calix, Adtran, Huawei, and ZTE, among others. In our FiberLAN business, our competitors include Tellabs and Cisco. We also may face competition from other large communications equipment companies or other companies that may enter our market in the future. In addition, a number of companies have introduced products that address the same network needs that our products address, both domestically and abroad. Many of our competitors have longer operating histories, greater name recognition, larger customer bases and greater financial, technical, sales and marketing resources than we do and may be able to undertake more extensive marketing efforts, adopt more aggressive pricing policies and provide more customer financing than we can. In particular, we are encountering price-focused competitors from Asia, especially China, which places pressure on us to reduce our prices. If we are forced to reduce prices in order to secure customers, we may be unable to sustain gross margins at desired levels or achieve profitability. Competitive pressures could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which could reduce our revenue and adversely affect our financial results. Moreover, our competitors may foresee the course of market developments more accurately than we do and could develop new technologies that render our products less valuable or obsolete.

In our markets, principal competitive factors include:

•product performance;

•interoperability with existing products;

•scalability and upgradeability;

•conformance to standards;

•breadth of services;

•reliability;

•ease of installation and use;

•geographic footprints for products;

•ability to provide customer financing;

•price;

•technical support and customer service; and

•brand recognition.

If we are unable to compete successfully against our current and future competitors, we may have difficulty obtaining or retaining customers, and we could experience price reductions, order cancellations, increased expenses and reduced gross margins, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our success largely depends on our ability to retain and recruit key personnel, and any failure to do so would harm our ability to meet key objectives.

Our future success depends upon the continued services of our Co-Chief Executive Officers and our other executive officers, our ability to identify, attract and retain highly skilled technical, managerial, sales and marketing personnel who have critical industry experience and relationships that we rely on to build our business. The loss of the services of any of our key employees, including our Co-Chief Executive Officers and our Chief Financial Officer, could delay the development and production of our products and negatively impact our ability to maintain customer relationships, which would harm our business, financial condition and results of operations. Moreover, our inability to attract and retain sufficient qualified accounting personnel with expertise in GAAP following the Merger may adversely affect our ability to maintain an effective system of internal controls or our ability to produce reliable financial reports, which may materially and adversely affect our business.

Any strategic acquisitions or investments we make could disrupt our operations and harm our operating results.

On an ongoing basis, we may evaluate acquisitions of, or investments in, complementary companies, products or technologies to supplement our internal growth, may acquire additional businesses, products or technologies in the future. If we do complete future acquisitions, we could:

•issue stock that would dilute our current stockholders’ percentage ownership;

•consume a substantial portion of our cash resources;

•incur substantial debt;

•assume liabilities;

•increase our ongoing operating expenses and level of fixed costs;

•record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges;

•incur amortization expenses related to certain intangible assets;

•incur large and immediate write-offs; and

•become subject to litigation.

Any acquisitions or investments that we make in the future will involve numerous risks, including:

•difficulties in integrating the operations, technologies, products and personnel of the acquired companies;

•unanticipated costs;

•diversion of management’s time and attention away from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions;

•difficulties in entering markets in which we have no or limited prior experience;

•insufficient revenues to offset increased expenses associated with acquisitions and where competitors in such markets have stronger market positions; and

•potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans.

Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control, and we cannot be certain that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. We do not know whether we will be able to

successfully integrate the businesses, products, technologies or personnel that we might acquire in the future or that any strategic investments we make will meet our financial or other investment objectives. Any failure to do so could seriously harm our business, financial condition and results of operations.

Sales to communications service providers are especially volatile, and weakness in sales orders from this industry may harm our operating results and financial condition.

Sales activity in the service provider industry depends upon the stage of completion of expanding network infrastructures, the availability of funding, and the extent to which service providers are affected by regulatory, economic and business conditions in the country of operations. Although some service providers may be increasing capital expenditures over the depressed levels that have prevailed over the last few years, weakness in orders from this industry could have a material adverse effect on our business, operating results and financial condition. Slowdowns in the general economy, overcapacity, changes in the service provider market, regulatory developments and constraints on capital availability have had a material adverse effect on many of our service provider customers, with many of these customers going out of business or substantially reducing their expansion plans. These conditions have materially harmed our business and operating results, and we expect that some or all of these conditions may continue for the foreseeable future. Finally, service provider customers typically have longer implementation cycles; require a broader range of service including design services; demand that vendors take on a larger share of risks; often require acceptance provisions, which can lead to a delay in revenue recognition; and expect financing from vendors. All these factors can add further risk to business conducted with service providers.

Compliance or the failure to comply with current and future environmental regulations could cause us significant expense.

We are subject to a variety of federal, state, local and foreign environmental regulations. If we fail to comply with any present and future regulations, we could be subject to future liabilities, the suspension of production or a prohibition on the sale of our products. In addition, such regulations could require us to incur other significant expenses to comply with environmental regulations, including expenses associated with the redesign of any non-compliant product. From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. For example, in 2003 the European Union enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE), for implementation in European Union member states. We are aware of similar legislation that is currently in force or is being considered in the United States, as well as other countries, such as Japan and China. Our failure to comply with any of such regulatory requirements or contractual obligations could result in our being liable for costs, fines, penalties and third-party claims, and could jeopardize our ability to conduct business in countries in the jurisdictions where these regulations apply.

Adverse resolution of litigation may harm our operating results or financial condition.

We are a party to various lawsuits and claims in the normal course of our business. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, operating results and financial condition.

Our intellectual property rights may prove difficult to protect and enforce.

We generally rely on a combination of copyrights, patents, trademarks and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our technology is difficult, and we do not know whether the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as extensively as in the United States. We cannot assure you that our pending, or any future, patent applications will be granted, that any existing or future patents will not be challenged, invalidated, or circumvented, or that any existing or future patents will be enforceable. While we are not dependent on any individual patents, if we are unable to protect our proprietary rights, we may find ourselves at a competitive disadvantage to others who need not incur the substantial expense, time and effort required to create the innovative products.

We may be subject to intellectual property infringement claims that are costly and time consuming to defend and could limit our ability to use some technologies in the future.

Third parties have in the past and may in the future assert claims or initiate litigation related to patent, copyright, trademark and other intellectual property rights to technologies and related standards that are relevant to us. The asserted claims or initiated litigation can include claims against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights with respect to our existing or future products, or components of those products. We have received correspondence from companies claiming that many of our products are using technology covered by or related to the intellectual property rights of these companies and inviting us to discuss licensing arrangements for the use of the technology. Regardless of the merit of these claims, intellectual property litigation can be time consuming and costly, and result in the diversion of technical and management personnel. Any such litigation could force us to stop selling, incorporating or using our products that include the challenged intellectual property, or redesign those products that use the technology. In addition, if a party accuses us of infringing upon its proprietary rights, we may have to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all. If we are unsuccessful in any such litigation, we could be subject to significant liability for damages and loss of our proprietary rights. Any of these results could have a material adverse effect on our business, financial condition and results of operations.

We rely on the availability of third party licenses.

Many of our products are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various elements of the technology used to develop these products. We cannot assure you that our existing and future third-party licenses will be available to us on commercially reasonable terms, if at all. Our inability to maintain or obtain any third-party license required to sell or develop our products and product enhancements could require us to obtain substitute technology of lower quality or performance standards, or at greater cost.

The long and variable sales cycles for our products may cause revenue and operating results to vary significantly from quarter to quarter.

The target customers for our products have substantial and complex networks that they traditionally expand in large increments on a periodic basis. Accordingly, our marketing efforts are focused primarily on prospective customers that may purchase our products as part of a large-scale network deployment. Our target customers typically require a lengthy evaluation, testing and product qualification process. Throughout this process, we are often required to spend considerable time and incur significant expense educating and providing information to prospective customers about the uses and features of our products. Even after a company makes the final decision to purchase our products, it may deploy our products over extended periods of time. The timing of deployment of our products varies widely, and depends on a number of factors, including our customers’ skill sets, geographic density of potential subscribers, the degree of configuration and integration required to deploy our products, and our customers’ ability to finance their purchase of our products as well as their operations. As a result of any of these factors, our revenue and operating results may vary significantly from quarter to quarter.

Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.

We have historically used stock options as a key component of our employee compensation program in order to align the interests of our employees with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit packages. If the trading price of our common stock declines, this would reduce the value of our share-based compensation to our present employees and could affect our ability to retain existing or attract prospective employees. Difficulties relating to obtaining stockholder approval of equity compensation plans could also make it harder or more expensive for us to grant share-based payments to employees in the future.

Our industry is subject to government regulations, which could harm our business.

Our operations are subject to various laws and regulations, including those regulations promulgated by the FCC. The FCC has jurisdiction over the entire communications industry in the United States and, as a result, our existing and future products and our customers’ products are subject to FCC rules and regulations. Changes to current FCC rules and regulations and future FCC rules and regulations could negatively affect our business. The uncertainty associated with future FCC decisions may cause network service providers to delay decisions regarding their capital expenditures for equipment for broadband services. In addition, international regulatory bodies establish standards that may govern our products in foreign markets. The SEC has adopted disclosure rules regarding the use of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries (DRC) and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals. These rules may have the effect of reducing the pool of suppliers who can supply DRC “conflict free” components and parts, and we may not be able to obtain DRC conflict free products or supplies in sufficient quantities for our operations. Also, we may face reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the origins for the conflict minerals used in our products. We are unable to predict the scope, pace or financial impact of government regulations and other policy changes that could be adopted in the future, any of which could negatively impact our operations and costs of doing business. Because of our smaller size, legislation or governmental regulations can significantly increase our costs and affect our competitive position. Changes to or future domestic and international regulatory requirements could result in postponements or cancellations of customer orders for our products and services, which would harm our business, financial condition and results of operations. Further, we cannot be certain that we will be successful in obtaining or maintaining regulatory approvals that may, in the future, be required to operate our business.

Our business and operations are especially subject to the risks of earthquakes and other natural catastrophic events.

Our corporate headquarters, including a significant portion of our research and development operations, are located in Northern California, a region known for seismic activity. Additionally, some of our facilities, including our manufacturing facilities, are located near geographic areas that have experienced hurricanes in the past. A significant natural disaster, such as an earthquake, hurricane, fire, flood or other catastrophic event, could severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially and adversely affected.

Our executive officers and directors and entities affiliated with them own or control a large percentage of our common stock, which permits them to exercise significant control over us.

As of September 30, 2016, our executive officers and directors and entities affiliated with them owned, in the aggregate, approximately 64% of the outstanding shares of our common stock. Accordingly, these stockholders will be able to substantially influence all matters requiring approval by our shareholders, including the approval of mergers or other business combination transactions and the composition of our Board of Directors. This concentration of ownership may also delay, defer or even prevent a change in control of our company and would make some transactions more difficult or impossible without their support, even if such a transaction would be beneficial to our other stockholders. Circumstances may arise in which the interests of these stockholders could conflict with the interests of our other stockholders. In addition, provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to certain stockholders.

Future sales of our common stock could lower our stock price and dilute existing shareholders.

We issued a total of approximately 47.5 million shares of our common stock to DASAN in connection with the Merger, and may issue additional shares of common stock to finance future acquisitions through the use of equity. DASAN has the right to require us to register with the SEC resales of the shares issued in connection with the Merger from time to time. In the event that DASAN exercises its registration rights with respect to such shares, such shares would become eligible for resale upon registration. Additionally, shares of our common stock are available for future sale pursuant to awards granted under our equity incentive plans. Our stock price may suffer a significant decline as a result of any sudden increase in the number of shares sold in the public market or market perception that the increased number of shares available for sale will exceed the demand for our common stock.

There is a limited public market of our common stock.

There is a limited public market for our common stock. The average daily trading volume in our common stock during the nine months ended September 30, 2016 was approximately 83,000 shares per day. We cannot provide assurances that a more active trading market will develop or be sustained. As a result of low trading volume in our common stock, the

purchase or sale of a relatively small number of shares of our common stock could result in significant price fluctuations and it may be difficult for holders to sell their shares without depressing the market price for our common stock.

Item 6. Exhibits

The Exhibit Index on page 2846 is incorporated herein by reference as the list of exhibits required as part of this report.

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.



	Z~~HONE~~ T~~ECHNOLOGIES, I~~NC. DASAN ZHONE SOLUTIONS, INC.

Date: ~~August 22,~~November 14, 2016	By:	/s/ J~~AMES~~ N~~ORROD~~ JAMES NORROD
	Name:	James Norrod
	Title:	~~Chief~~Co-Chief Executive Officer

	By:	/s/ K~~IRK~~ M~~ISAKA~~ IL YUNG KIM
	Name:	Il Yung Kim
	Title:	Co-Chief Executive Officer

	By:	/s/ KIRK MISAKA
	Name:	Kirk Misaka
	Title:	Chief Financial Officer

EXHIBIT INDEX



Exhibit Number	Description


~~10.1~~3.1	~~First~~Restated Certificate of Incorporation of DASAN Zhone Solutions, Inc., as amended through September 9, 2016

3.2	Amended and Restated Bylaws of DASAN Zhone Solutions, Inc. (incorporated by reference to Exhibit 3.2 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

10.1#	DASAN Zhone Solutions, Inc. Amended and Restated 2001 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.6 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

10.2#	Form of Stock Option Agreement for the DASAN Zhone Solutions, Inc. Amended and Restated 2001 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.7 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

10.3#	Form of Restricted Stock Unit Award Agreement for the DASAN Zhone Solutions, Inc. Amended and Restated 2001 Stock Incentive Plan, as amended

10.4#	Employment Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and Il Yung Kim (incorporated by reference to Exhibit 10.1 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

10.5#	Amended and Restated Employment Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and James Norrod (incorporated by reference to Exhibit 10.2 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

10.6#	Employment Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and Kirk Misaka (incorporated by reference to Exhibit 10.3 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

10.7#	Transaction Bonus Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and James Norrod (incorporated by reference to Exhibit 10.4 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

10.8#	Transaction Bonus Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and Kirk (incorporated by reference to Exhibit 10.5 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

10.9#	Letter Agreement, dated November 10, 2016, between DASAN Zhone Solutions, Inc. and Eric Presworsky (incorporated by reference to Exhibit 10.1 of registrant’s Current Report on Form 8-K dated November 8, 2016 and filed on November 14, 2016)

10.10	Stockholder Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and DASAN Networks, Inc. (incorporated by reference to Exhibit 10.1 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

10.11	Lock-Up Agreement, dated as of September 9, 2016, by and among DASAN Zhone Solutions, Inc., DASAN Networks, Inc. and the other parties thereto (incorporated by reference to Exhibit 10.2 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

10.12	Registration Rights Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and DASAN Networks, Inc. (incorporated by reference to Exhibit 10.3 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

10.13	Loan Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and DASAN Networks, Inc. (incorporated by reference to Exhibit 10.4 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

10.14	Sixth Amendment to ~~Office Lease Agreement,~~Credit and Security Agreements and Consent, dated ~~June~~as of September 9, 2016, by and among Zhone Technologies, Inc., ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.5 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)



10.15	Joinder and Seventh Amendment to Credit and Security Agreements, dated as of October 7, 2016, ~~between~~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 ~~BACM 2005-3 Bryan Dairy Industrial, LLC~~Wells Fargo Bank, National Association

31.1	Certification of ~~Chief~~Co-Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2	Certification of Co-Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.3	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1	Section 1350 Certification of ~~Chief~~Co-Chief Executive ~~Officer~~Officers 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

2847



	Three Months Ended June 30, 2016	Weighted Average Exercise Price		Six Months Ended June 30, 2016	Weighted Average Exercise Price
	NOT REVIEWED			NOT REVIEWED
Outstanding stock options and unvested restricted shares	1,560	$	1.86	1,560	$	1.86



	Three Months Ended June 30, 2015	Weighted Average Exercise Price		Six Months Ended June 30, 2015	Weighted Average Exercise Price
Outstanding stock options and unvested restricted shares	5,702	$	1.87	5,702	$	1.87