Notes to Unaudited Condensed Consolidated Financial Statements
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(1)
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Organization and Summary of Significant Accounting Policies
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(a)
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Description of Business
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DASAN Zhone Solutions, Inc. (formerly known as Zhone Technologies, Inc. and referred to, collectively with its subsidiaries, as "DZS" or the "Company") is a global provider of network access solutions and communications equipment for service provider and enterprise networks. The Company provides a wide array of reliable, cost-effective networking technologies, including broadband access, Ethernet switching, mobile backhaul, Passive Optical LAN and software-defined networks, to a diverse customer base that includes more than
1,000
customers in more than
50
countries worldwide.
DZS was incorporated under the laws of the state of Delaware in June 1999. On September 9, 2016, the Company acquired Dasan Network Solutions, Inc. ("DNS") through the merger of a wholly owned subsidiary of the Company with and into DNS, with DNS surviving as a wholly owned subsidiary of the Company (the "Merger"). At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DASAN Networks, Inc. ("DNI") were canceled and converted into the right to receive shares of the Company's common stock in an amount equal to
58%
of the issued and outstanding shares of the Company's common stock immediately following the Merger. In connection with the Merger, the Company changed its name from Zhone Technologies, Inc. to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone." The Company’s common stock continues to be traded on the Nasdaq Capital Market, and the Company’s ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016. The Company is headquartered in Oakland, California.
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("U.S. GAAP"), assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Accordingly, the unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
Although the Company generated
$1.4 million
of net income for the quarter ended September 30, 2017, the Company has incurred significant losses to date and losses from operations may continue. The Company incurred net losses of
$3.0 million
and
$15.3 million
for the
nine months ended
September 30, 2017
and for the year ended December 31, 2016, respectively. The Company had accumulated deficit of
$23.1 million
and working capital of
$57.3 million
as of
September 30, 2017
. As of
September 30, 2017
, the Company had approximately
$10.1 million
in cash and cash equivalents, which included
$3.4 million
in cash balances held by the Company's Korean subsidiary, and
$26.9 million
in aggregate principal amount of outstanding borrowings under the Company's short-term debt obligations and the Company's loans from DNI and its affiliates. In addition, the Company had
$7.6 million
in aggregate borrowing availability under its revolving credit facilities as of
September 30, 2017
. The Company had
$8.5 million
committed as security for letters of credit under these facilities as of
September 30, 2017
. Due to the amount of short-term debt obligations maturing within the next 12 months and the Company's recurring operating losses, the Company's cash resources may not be sufficient to settle these short-term debt obligations. The Company's ability to continue as a “going concern” is dependent on many factors, including, among other things, its ability to comply with the covenants in its existing debt agreements, its ability to cure any defaults that occur under its debt agreements or to obtain waivers or forbearances with respect to any such defaults, and its ability to pay, retire, amend, replace or refinance its indebtedness as defaults occur or as interest and principal payments come due. Although the process of amending, replacing or refinancing the Company’s short-term debt obligations is ongoing and the Company is in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide the Company with the required liquidity to remove the substantial doubt as to its ability to continue as a going concern. If the Company is unable to amend, replace or refinance its short-term debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, the Company may experience material adverse impacts on its business, operating results and financial condition.
The Company has continued its focus on cost control and operating efficiency along with restrictions on discretionary spending, however in order to meet the Company's liquidity needs and finance its capital expenditures and working capital needs for its business, the Company may be required to sell assets, issue debt or equity securities, purchase credit insurance or borrow on potentially unfavorable terms. In addition, the Company may be required to reduce the scope of its planned product development, reduce sales and marketing efforts and reduce its operations in low margin regions, including reductions in headcount. Based on the Company's current plans and business conditions, the Company 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 12 months, however the factors discussed above raise substantial doubt about the Company's ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of the uncertainties set forth above.
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(c)
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Risks and Uncertainties
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DNI owned approximately
58%
of the outstanding shares of the Company's common stock as of
September 30, 2017
. For so long as DNI and its affiliates hold shares of the Company's common stock representing at least a majority of the votes, DNI will be able to freely nominate and elect all the members of the Company's board of directors (subject to the restrictions in the Company's bylaws). The directors elected by DNI will have the authority to make decisions affecting the Company's capital structure, including the issuance of additional capital stock or options, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the declaration of dividends. The interests of DNI may not coincide with the interests of the Company's other stockholders or with holders of the Company's indebtedness. DNI’s ability to control all matters submitted to the Company's stockholders for approval limits the ability of other stockholders to influence corporate matters and, as a result, the Company may take actions that the Company's other stockholders or holders of our indebtedness do not view as beneficial. See Note 2, Note 9 and Note 11 to the unaudited condensed consolidated financial statements for additional information.
As discussed above in Note 1(b), there is also substantial doubt about the Company's ability to continue as a going concern. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
In this Quarterly Report on Form 10-Q, certain prior quarter financial information has been revised due to correction of certain errors. The Company identified errors related to the timing of revenue recognition in the consolidated financial statements for the quarter ended September 30, 2016. Correction of this error resulted in a decrease in total net revenue of
$0.8 million
, an increase in net loss of
$0.1 million
for the quarter ended September 30, 2016 as well as a decrease in net revenue of
$1.8 million
, an increase in net loss of
$0.5 million
and an increase in basic and diluted net loss per share attributable to DZS of
$0.05
for the nine months ended September 30, 2016. The prior quarter financial information has also been revised for the classification of certain related party revenue, related party cost of revenue, and related royalty fees. This correction resulted in the Company reclassifying revenues of
$0.2 million
to related party revenues and costs of
$0.1 million
to related party cost of revenue for the quarter ended September 30, 2016. This further resulted in the Company reclassifying revenues of
$9.6 million
to related party revenues and costs of
$7.6 million
to related party cost of revenue for the nine months ended September 30, 2016. Finally, an understatement of the cash flows used in investing activities of
$1.0 million
was corrected in the statement of cash flows for the nine months ended September 30, 2016. The overall impact of these errors on the Company's condensed consolidated financial position and results of operations is not material and as such, previously filed quarterly financial information filed with the SEC on March 10, 2017 affected by the errors has not been amended.
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(e)
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Basis of Presentation
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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the current interim period are not necessarily indicative of results to be expected for
the current year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the unaudited condensed consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission.
As discussed more fully in Note 2, the Merger is treated as a reverse acquisition for accounting purposes, with DNS as the acquirer of the Company. As such, the consolidated financial results of the Company for the three and
nine months ended
September 30, 2017
are compared to the financial results for DNS and its consolidated subsidiaries for the prior year period through September 8, 2016 and the financial results of DZS and its consolidated subsidiaries for the period from September 9, 2016 through
September 30, 2016
. The balance sheet of the Company reflects the fair value of the assets and liabilities of Legacy Zhone as of the effective date of the Merger. Those assets include the fair value of acquired intangible assets and goodwill. Due to the foregoing, the Company’s financial results for the three and
nine months ended
September 30, 2017
are not comparable to its financial results for the three and
nine months ended
September 30, 2016
.
Except as otherwise specifically noted herein, all references to the "Company" refer to (i) DNS and its consolidated subsidiaries for periods through September 8, 2016 and (ii) the Company and its consolidated subsidiaries for periods on or after September 9, 2016.
On February 28, 2017, the Company filed a Certificate of Amendment with the Delaware Secretary of State to amend the Company's Restated Certificate of Incorporation, which amendment effected a one-for-five reverse stock split of the Company's common stock and reduced the authorized shares of the Company's common stock from
180 million
to
36 million
. As a result of the reverse stock split, the number of shares of the Company’s common stock then issued and outstanding was reduced from approximately
81.9 million
to approximately
16.4 million
. References to shares of the Company's common stock, stock options (and associated exercise price) and restricted stock units in this Quarterly Report on Form 10-Q are provided on a post-reverse stock split basis.
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(g)
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Concentration of Risk
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The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, Internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts. For the three months ended
September 30, 2017
,
two
customers represented,
10%
and
9%
of net revenue, respectively. For the three months ended
September 30, 2016
,
three
customers represented
18%
,
16%
(a related-party) and
12%
of net revenue, respectively. For the
nine months ended
September 30, 2017
,
two
customers each represented
9%
of net revenue (one of which was a related-party). For the
nine months ended
September 30, 2016
,
three
customers represented
23%
,
21%
(a related-party) and
12%
of net revenue, respectively.
As of
September 30, 2017
,
three
customers represented
16%
(a related-party),
11%
and
10%
of net accounts receivable, respectively. As of December 31, 2016,
two
customers represented
13%
(a related-party) and
10%
of net accounts receivable, respectively.
As of
September 30, 2017
and December 31, 2016, receivables from customers in countries other than the United States represented
84%
and
87%
, respectively, of net accounts receivable.
(h) Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of the guidance in ASU No. 2014-09, Revenue from Contracts with Customer, for all entities by one year. With the deferral, the new standard is effective for the Company on January 1, 2018. Early adoption is permitted, but not before the original effective date of January 1, 2017. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, which provides clarification on how to assess collectibility, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of transition of ASU 2014-09. The effective date of this updated guidance for the Company is the same as the effective date of ASU 2014-09, which is January 1, 2018. The Company does not plan to early adopt this guidance. The Company is currently assessing the
potential impact of adopting this new guidance on its unaudited condensed consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.
In July 2015, 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 guidance does not apply to inventory that is measured using last-in, first-out ("LIFO") or the retail inventory method. The guidance applies to all other inventory, which includes inventory that is measured using first-in, first-out ("FIFO") or average cost. The guidance is effective for the Company on January 1, 2017, and will be adopted accordingly. ASU No. 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this standard will have no impact on the Company's unaudited condensed consolidated financial statements.
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-current in the balance sheet. The updated guidance is effective for the Company on January 1, 2017, and will be adopted accordingly.
The adoption of this standard will not have a material impact on the Company's unaudited condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The updated guidance is effective for the Company on January 1, 2019, and early adoption is permitted. The Company does not plan to early adopt this guidance. The Company expects its assets and liabilities to increase as a result of the adoption of this standard. The Company is currently assessing the potential impact of adopting this new guidance on its unaudited condensed consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires entities to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on statements of cash flows. The guidance is effective for the Company on January 1, 2017, and has been adopted in the first quarter of 2017. The adoption of this standard had no material impact on the Company's unaudited condensed consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The updated guidance is effective for the Company on January 1, 2018. Early adoption is permitted. The Company continues to assess all the potential impacts of the new standard and anticipates this standard may have a material impact on its unaudited condensed consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, which require that a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. The updated guidance is effective for the Company beginning on January 1, 2018. Early adoption is permitted. Adoption of this ASU is applied using a retrospective approach. As a result, the Company will no longer present transfers between cash and cash equivalents and restricted cash in the consolidated cash flow statements.
In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The updated guidance is effective for the Company on January 1, 2020, and will be adopted accordingly. Early adoption is permitted. The Company is currently assessing the potential impact of adopting this new guidance on its unaudited condensed consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of modification accounting. The purpose of the amendment is to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance is effective
for the Company beginning on January 1, 2018. The Company is currently assessing the potential impact of adopting this new guidance on its unaudited condensed consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.
On September 9, 2016, the Company acquired DNS through the Merger of a wholly owned subsidiary of the Company with and into DNS, with DNS surviving as a wholly owned subsidiary of the Company. The Merger combines leading technology platforms with a broadened customer base.
At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DNI were canceled and converted into the right to receive shares of the Company's common stock in an amount equal to
58%
of the issued and outstanding shares of the Company's common stock immediately following the Merger. Accordingly, at the effective time of the Merger, the Company issued
9,493,016
shares (post reverse stock split) of the Company’s common stock to DNI as consideration in the Merger, of which
949,302
shares (post reverse stock split) are being held in escrow as security for claims for indemnifiable losses in accordance with the merger agreement relating to the Merger. As a result, immediately following the effective time of the Merger, DNI held
58%
of the outstanding shares of the Company's common stock and the holders of the Company's common stock immediately prior to the Merger retained, in the aggregate,
42%
of the outstanding shares of the Company's common stock.
The Company accounted for the Merger as a reverse acquisition under the acquisition method of accounting in accordance with ASC 805, "Business Combination." Consequently, for the purpose of the purchase price allocation, DNS' assets and liabilities have been retained at their carrying values and Legacy Zhone's assets acquired, and liabilities assumed, by DNS (as the accounting acquirer in the Merger) have been recorded at their fair value measured as of September 9, 2016.
The total purchase consideration in the Merger was based on the number of shares of Legacy Zhone common stock and Legacy Zhone stock options vested and outstanding immediately prior to the closing of the Merger, and was determined based on the closing price of
$5.95
per share (post reverse stock split) of the Company's common stock on the September 9, 2016. The estimated total purchase consideration is calculated as follows (in thousands):
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|
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|
|
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Shares
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Estimated Fair Value
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Shares of Legacy Zhone stock as of September 8, 2016
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6,874
|
|
|
$
|
40,902
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Legacy Zhone stock options
|
|
198
|
|
|
540
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Total Purchase Consideration
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$
|
41,442
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The following table summarizes the allocation of the fair value consideration transferred as of the acquisition date (in thousands):
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Cash and cash equivalents
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$
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7,013
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|
Accounts receivable
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|
18,510
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|
Inventory
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|
16,456
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|
Prepaid expenses and other current assets
|
|
2,191
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|
Property and equipment
|
|
4,339
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|
Other assets
|
|
125
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|
Identifiable intangible assets
|
|
10,479
|
|
Goodwill
|
|
3,284
|
|
Accounts payable
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|
(11,021
|
)
|
Accrued and other liabilities
|
|
(7,089
|
)
|
Other long-term liabilities
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|
(2,845
|
)
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Total Indicated Fair Value of Assets
|
|
$
|
41,442
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|
The goodwill was primarily attributed to people, geographic diversification and complementary products. The goodwill arising from the Merger is not tax deductible.
The Company considered the deferred tax liabilities caused by the Merger to be a source of income to support recoverability of acquired deferred tax assets, before considering the recoverability of the acquirer's existing deferred tax assets. Accordingly, the valuation allowance on the acquiree's deferred tax assets was reduced by the deferred tax liabilities caused by the Merger and accounted for as part of the purchase price allocation.
The following table presents the fair values of the acquired intangible assets at the effective date of the Merger (in thousands, except years):
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Useful life
(in Years)
|
|
Fair Value
|
Developed technology
|
|
5
|
|
$
|
3,060
|
|
Customer relationships
|
|
10
|
|
5,240
|
|
Backlog
|
|
1
|
|
2,179
|
|
|
|
|
|
$
|
10,479
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|
The following unaudited pro forma condensed combined financial information for the three and nine months ended September 30, 2016 gives effect to the Merger as if it had occurred at the beginning of 2015. The unaudited pro forma condensed combined financial information has been included for comparative purposes only and is not necessarily indicative of what the combined Company's financial position or results of operations might have been had the Merger been completed as of the date indicated.
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|
September 30, 2016
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(in thousands)
|
Three
Months
Ended
|
|
Nine
Months
Ended
|
Pro forma total net revenue
|
$
|
39,740
|
|
|
$
|
142,530
|
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Pro forma net loss
|
(15,569
|
)
|
|
(25,504
|
)
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(3) Fair Value Measurement
The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
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Level 1 –
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Inputs are quoted prices in active markets for identical assets or liabilities.
|
Level 2 –
|
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
|
Level 3 –
|
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
|
The following financial instruments are not measured at fair value on the Company’s condensed consolidated balance sheet as of
September 30, 2017
and December 31, 2016, but require disclosure of their fair values: cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. The carrying values of financial instruments such as cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate their fair values based on their short-term nature. The carrying value of the Company's debt approximates their fair values based on the current rates available to the Company for debt of similar terms and maturities.
Inventories as of
September 30, 2017
and December 31, 2016 were as follows (in thousands):
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|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Raw materials
|
$
|
12,812
|
|
|
$
|
13,547
|
|
Work in process
|
3,004
|
|
|
3,705
|
|
Finished goods
|
16,150
|
|
|
13,780
|
|
Total inventories
|
$
|
31,966
|
|
|
$
|
31,032
|
|
Inventories provided as collateral for borrowings from Export-Import Bank of Korea amounted to
$18.9 million
and
$14.4 million
as of
September 30, 2017
and December 31, 2016, respectively.
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(5)
|
Property and Equipment
|
Property and equipment as of
September 30, 2017
and
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Furniture and fixtures
|
$
|
21,251
|
|
|
$
|
20,040
|
|
Machinery and equipment
|
4,945
|
|
|
4,530
|
|
Leasehold improvements
|
3,386
|
|
|
3,573
|
|
Computers and software
|
567
|
|
|
411
|
|
Other
|
983
|
|
|
922
|
|
|
31,132
|
|
|
29,476
|
|
Less accumulated depreciation and amortization
|
(25,109
|
)
|
|
(22,922
|
)
|
Less government grants
|
(211
|
)
|
|
(266
|
)
|
Total property and equipment, net
|
$
|
5,812
|
|
|
$
|
6,288
|
|
Depreciation and amortization expense associated with property and equipment for the three and
nine months ended
September 30, 2017
was
$0.5 million
and
$1.4 million
, respectively. Depreciation and amortization expense associated with property and equipment for the three and
nine months ended
September 30, 2016
was
$0.4 million
and
$0.9 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 Company records the grants as a contra amount to the assets and amortizes such amount over the useful lives of the related assets as a reduction to depreciation expense.
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(6)
|
Goodwill and Intangible Assets
|
Goodwill as of
September 30, 2017
and
December 31, 2016
was as follows (in thousands):
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|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Beginning balance
|
$
|
3,977
|
|
|
$
|
693
|
|
Addition from Merger
|
—
|
|
|
3,284
|
|
Less: accumulated impairment
|
—
|
|
|
—
|
|
Ending balance
|
$
|
3,977
|
|
|
$
|
3,977
|
|
The Company did not recognize impairment loss on goodwill during the three and
nine months ended
September 30, 2017
and 2016.
Intangible assets as of
September 30, 2017
and
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Developed technology
|
$
|
3,060
|
|
|
$
|
3,060
|
|
Customer relationships
|
5,240
|
|
|
5,240
|
|
Backlog
|
2,179
|
|
|
2,179
|
|
Other
|
194
|
|
|
105
|
|
Less accumulated amortization
|
(3,499
|
)
|
|
(1,817
|
)
|
Intangible assets, net
|
$
|
7,174
|
|
|
$
|
8,767
|
|
Amortization expense associated with intangible assets for the three and
nine months ended
September 30, 2017
was
$0.3 million
and
$1.7 million
, respectively. Amortization expense associated with intangible assets for each of the three and
nine months ended
September 30, 2016
was
$0.3 million
.
Wells Fargo Bank Facility
As of
September 30, 2017
, the Company had a
$25.0 million
credit facility (the "WFB Facility") with Wells Fargo Bank ("WFB"). Under the WFB Facility, the Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company is able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the agreement, as long as the aggregate amount outstanding does not exceed
$25.0 million
less the amount committed as security for letters of credit. To maintain availability of funds under the WFB Facility, the Company pays a commitment fee on the unused portion. The commitment fee is
0.25%
per annum and is recorded as interest expense.
As of
September 30, 2017
, the Company had
no
outstanding borrowings under its WFB Facility, and $
2.5 million
was committed as security for letters of credit. The Company had $
6.7 million
of borrowing availability under the WFB Facility as of
September 30, 2017
. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin based on the Company's average excess availability (as calculated under the WFB Facility). The interest rate on the WFB Facility was
3.8
% at
September 30, 2017
. The maturity date under the WFB Facility is March 31, 2019.
The Company’s obligations under the WFB Facility are secured by substantially all of its personal property assets and those of its subsidiaries that guarantee the WFB Facility, including their intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If the Company defaults under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell the Company’s assets to satisfy the obligations under the WFB Facility. As of
September 30, 2017
, the Company was in compliance with the covenants under the WFB Facility.
Bank and Trade Facilities - Foreign Operations
Certain of the Company's foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis 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, 2017
and December 31, 2016, the Company had an aggregate outstanding balance of
$18.4 million
and
$17.6 million
, respectively, under such financing arrangements, and the interest rates per annum applicable to outstanding borrowings under these financing arrangements were as listed in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
|
Interest rate (%)
|
|
Amount
|
Industrial Bank of Korea
|
|
Credit facility
|
|
2.8 - 3.0
|
|
$
|
3,235
|
|
Industrial Bank of Korea
|
|
Trade finance
|
|
3.9-5.4
|
|
2,287
|
|
Shinhan Bank
|
|
General loan
|
|
5.89
|
|
2,791
|
|
Shinhan Bank
|
|
Trade finance
|
|
3.70
|
|
1,950
|
|
NongHyup Bank
|
|
Credit facility
|
|
1.7 - 3.0
|
|
1,841
|
|
The Export-Import Bank of Korea
|
|
Export development loan
|
|
3.1
|
|
6,278
|
|
|
|
|
|
|
|
$
|
18,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
Interest rate (%)
|
|
Amount
|
Industrial Bank of Korea
|
|
Credit facility
|
|
2.16 - 2.76
|
|
$
|
1,106
|
|
Shinhan Bank
|
|
General loan
|
|
4.08
|
|
3,310
|
|
Shinhan Bank
|
|
Trade finance
|
|
3.28 - 3.44
|
|
1,752
|
|
NongHyup Bank
|
|
Credit facility
|
|
1.92 - 2.66
|
|
482
|
|
KEB Hana Bank
|
|
Comprehensive credit loan
|
|
2.79
|
|
3,501
|
|
The Export-Import Bank of Korea
|
|
Export development loan
|
|
3.10
|
|
7,448
|
|
|
|
|
|
|
|
$
|
17,599
|
|
As of
September 30, 2017
, the Company had
$5.0 million
in outstanding borrowings and
$6.0 million
committed as security for letters of credit under the Company's
$12.0 million
credit facility with certain foreign banks.
|
|
(8)
|
Non-Controlling Interests
|
Non-controlling interests for the
nine months ended
September 30, 2017
and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
Beginning non-controlling interests
|
|
$
|
416
|
|
|
$
|
138
|
|
Acquisition of additional interest in a subsidiary
|
|
—
|
|
|
277
|
|
Net income (loss) attributable to non-controlling interests
|
|
172
|
|
|
(17
|
)
|
Foreign currency translation adjustments (OCI)
|
|
19
|
|
|
66
|
|
Ending non-controlling interests
|
|
$
|
607
|
|
|
$
|
464
|
|
|
|
(9)
|
Related-Party Transactions
|
Related-Party Debt
In connection with the Merger, on September 9, 2016, the Company entered into a loan agreement with DNI for a
$5.0 million
unsecured subordinated term loan facility. Under the loan agreement, the Company was permitted to request drawdowns of one or more term loans in an aggregate principal amount not to exceed
$5.0 million
. As of
September 30, 2017
,
$5.0 million
in term loans was outstanding under the facility. Such term loans mature in September 2021 and are pre-payable at any time by the Company without premium or penalty. The interest rate as of
September 30, 2017
under this facility was
4.6%
per annum.
In addition, the Company borrowed
$1.8 million
from DNI for capital investment in February 2016, which amount was outstanding as of
September 30, 2017
. This loan matured in March 2017 with an option of renewal by mutual agreement, and bore interest at a rate of
6.9%
per annum, payable annually. Effective February 27, 2017, the Company amended the terms of this loan to extend the repayment date from March 2017 to March 2018, and to reduce the interest rate from
6.9%
to
4.6%
per annum.
On June 23, 2017, the Company borrowed
$3.5 million
from Solueta, an affiliate of DNI. As of
September 30, 2017
, the aggregate outstanding balance under this loan agreement was
$1.7 million
. This loan matures in November 2017 and bears interest at a rate of
4.6%
per annum, payable monthly.
Other Related-Party Transactions
Sales and purchases, cost of revenue, research and product development, selling, marketing, general and administrative and other expenses to and from related parties for the three and
nine months ended
September 30, 2017
and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
Counterparty
|
|
DNI Ownership Interest
|
|
Sales
|
|
Cost of revenue
|
|
Manufacturing (Cost of revenue)
|
|
Research and product development
|
|
Selling, marketing,
general and administrative
|
|
Other Expenses
|
DNI (Parent Company)
|
|
N/A
|
|
$
|
3,976
|
|
|
$
|
3,604
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,291
|
|
|
$
|
51
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
257
|
|
|
20
|
|
|
—
|
|
|
—
|
|
DASAN FRANCE
|
|
100%
|
|
662
|
|
|
576
|
|
|
—
|
|
|
—
|
|
|
83
|
|
|
—
|
|
DASAN INDIA Private Limited
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
D-Mobile
|
|
100%
|
|
1,233
|
|
|
1,077
|
|
|
—
|
|
|
—
|
|
|
122
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.64%
|
|
54
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
4
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
43
|
|
|
108
|
|
|
—
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
144
|
|
|
—
|
|
|
—
|
|
|
|
|
|
$
|
5,925
|
|
|
$
|
5,269
|
|
|
$
|
300
|
|
|
$
|
272
|
|
|
$
|
1,532
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016 (As Revised)
|
Counterparty
|
|
DNI Ownership Interest
|
|
Sales
|
|
Cost of revenue
|
|
Manufacturing (Cost of revenue)
|
|
Research and product development
|
|
Selling, marketing,
general and administrative
|
|
Other Expenses
|
DNI (Parent Company)
|
|
N/A
|
|
$
|
5,112
|
|
|
$
|
4,390
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
946
|
|
|
$
|
89
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
130
|
|
|
38
|
|
|
—
|
|
|
—
|
|
DASAN FRANCE
|
|
100%
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
D-Mobile
|
|
100%
|
|
1,267
|
|
|
789
|
|
|
—
|
|
|
—
|
|
|
125
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.64%
|
|
68
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
J-Mobile Corporation
|
|
90.47%
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
181
|
|
|
—
|
|
|
—
|
|
|
|
|
|
$
|
6,468
|
|
|
$
|
5,240
|
|
|
$
|
166
|
|
|
$
|
219
|
|
|
$
|
1,071
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
Counterparty
|
|
DNI Ownership Interest
|
|
Sales
|
|
Cost of revenue
|
|
Manufacturing (Cost of revenue)
|
|
Research and product development
|
|
Selling, marketing,
general and administrative
|
|
Other Expenses
|
DNI (Parent Company)
|
|
N/A
|
|
$
|
16,608
|
|
|
$
|
14,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,491
|
|
|
$
|
171
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
578
|
|
|
79
|
|
|
—
|
|
|
—
|
|
DASAN FRANCE
|
|
100%
|
|
1,612
|
|
|
1,512
|
|
|
—
|
|
|
—
|
|
|
383
|
|
|
—
|
|
DASAN INDIA Private Limited
|
|
100%
|
|
6,287
|
|
|
4,783
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
D-Mobile
|
|
100%
|
|
3,054
|
|
|
1,831
|
|
|
—
|
|
|
—
|
|
|
318
|
|
|
—
|
|
Fine Solution
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.64%
|
|
88
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
4
|
|
J-Mobile Corporation
|
|
90.47%
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
132
|
|
|
—
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
104
|
|
|
108
|
|
|
—
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
448
|
|
|
37
|
|
|
—
|
|
Solueta
|
|
27.21%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
|
|
|
$
|
27,657
|
|
|
$
|
22,169
|
|
|
$
|
682
|
|
|
$
|
635
|
|
|
$
|
4,401
|
|
|
$
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016 (As Revised)
|
Counterparty
|
|
DNI Ownership Interest
|
|
Sales
|
|
Cost of revenue
|
|
Manufacturing (Cost of revenue)
|
|
Research and product development
|
|
Selling, marketing,
general and administrative
|
|
Other Expenses
|
DNI (Parent Company)
|
|
N/A
|
|
$
|
19,080
|
|
|
$
|
16,219
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,255
|
|
|
$
|
309
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
436
|
|
|
106
|
|
|
—
|
|
|
—
|
|
DASAN FRANCE
|
|
100%
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
DASAN INDIA Private Limited
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
D-Mobile
|
|
100%
|
|
3,135
|
|
|
2,231
|
|
|
—
|
|
|
—
|
|
|
318
|
|
|
—
|
|
DMC, Inc.
|
|
27.21%
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.64%
|
|
150
|
|
|
130
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
J-Mobile Corporation
|
|
90.47%
|
|
39
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
634
|
|
|
—
|
|
PANDA Media, Inc.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
98
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
560
|
|
|
—
|
|
|
—
|
|
|
|
|
|
$
|
22,408
|
|
|
$
|
18,584
|
|
|
$
|
534
|
|
|
$
|
666
|
|
|
$
|
5,209
|
|
|
$
|
309
|
|
The Company has entered into certain sales agreements with DNI and certain of its subsidiaries. Sales and cost of revenue to DNI, DASAN France, DASAN INDIA Private Limited, and D-Mobile represent finished goods produced by the Company that are sold to these related parties who sell the Company's products in Korea, France, India and Taiwan, respectively.
The Company has entered into agreements with Tomato Soft Ltd. and CHASAN Networks Co., Ltd. to provide manufacturing and research and development services for the Company. Under the agreement with Tomato Soft Ltd. and CHASAN Networks., Ltd., the Company is charged a cost plus
7%
fee for the manufacturing and development of certain deliverables.
The Company has entered into an agreement with Tomato Soft (Xi'an) Ltd. to provide research and development services for the Company. Under the agreement with Tomato Soft (Xi'an) Ltd., the Company is charged an expected annual fee of
$0.8 million
for the development of certain deliverables.
Prior to the Merger, as DNS was then a wholly owned subsidiary of DNI, DNI had sales agreements with certain customers on DNS' behalf. Since the Merger, due to these prior sales agreements, the Company has entered into an agreement with DNI in which DNI acts as a sales channel to these customers. Selling, marketing, general and administrative expense to DNI includes a fee of
3%
of total sales to DNI for sales to these customers.
The Company shares office space with DNI and certain of DNI's subsidiaries. Prior to the Merger, DNS, then a wholly owned subsidiary of DNI, shared human resources, treasury and other administrative support with DNI. As such, the Company entered into certain service sharing agreements with DNI and certain of its subsidiaries for the shared office
space and shared administrative services. Expenses related to rent and administrative services are allocated to the Company based on square footage occupied and headcount, respectively.
The Company has entered into sales agreement with Handysoft, Inc., provider of software and system integration solutions in Korea, to supply networks equipment, research and development and logistics services through DASAN Networks, Inc.
The Company has entered into sales agreement with J-Mobile Corporation to supply networks equipment in Japan. J-Mobile Corporation also provides marketing services in Japan.
Other expenses to related parties represent expenses to DNI for its payment guarantees relating to the Company's borrowings. The Company pays DNI a guarantee fee which is calculated as
0.9%
of the guaranteed amount.
Balances of Receivables and Payables with Related Parties
Balances of receivables and payables arising from sales and purchases of goods and services with related parties as of
September 30, 2017
and December 31, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
Counterparty
|
|
DNI Ownership Interest
|
|
Account receivables
|
|
Other receivables
|
|
Deposits for lease*
|
|
Accounts payable
|
|
Other payables
|
|
Loans
|
DNI (Parent Company)
|
|
N/A
|
|
$
|
9,196
|
|
|
$
|
—
|
|
|
$
|
727
|
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
6,800
|
|
ABLE
|
|
61.99%
|
|
56
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
—
|
|
DASAN France
|
|
100%
|
|
662
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
D-Mobile
|
|
100%
|
|
3,001
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.64%
|
|
26
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
1
|
|
|
—
|
|
Solueta
|
|
27.21%
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
1,744
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57
|
|
|
—
|
|
|
|
|
|
$
|
12,941
|
|
|
$
|
22
|
|
|
$
|
727
|
|
|
$
|
106
|
|
|
$
|
210
|
|
|
$
|
8,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Counterparty
|
|
DNI Ownership Interest
|
|
Account receivables
|
|
Other receivables
|
|
Deposits for lease*
|
|
Accounts payable
|
|
Other payables
|
|
Loans
|
DNI (Parent Company)
|
|
N/A
|
|
$
|
6,679
|
|
|
$
|
171
|
|
|
$
|
690
|
|
|
$
|
360
|
|
|
$
|
6,861
|
|
|
$
|
6,800
|
|
ABLE
|
|
61.99%
|
|
53
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
70
|
|
|
—
|
|
|
—
|
|
DASAN France
|
|
100%
|
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
DASAN INDIA Private Limited
|
|
100%
|
|
2,606
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
D-Mobile
|
|
100%
|
|
3,943
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.64%
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
J-Mobile Corporation
|
|
68.56%
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63
|
|
|
—
|
|
|
|
|
|
$
|
13,311
|
|
|
$
|
171
|
|
|
$
|
699
|
|
|
$
|
430
|
|
|
$
|
6,940
|
|
|
$
|
6,800
|
|
* Included in other assets related to deposits for lease in the condensed consolidated balance sheet as of
September 30, 2017
and the consolidated balance sheet as of December 31, 2016.
|
|
(10)
|
Net Income (Loss) Per Share Attributable to DASAN Zhone Solutions, Inc.
|
Basic net income (loss) per share attributable to DASAN Zhone Solutions, Inc. is computed by dividing the net income (loss) attributable to DASAN Zhone Solutions, Inc. for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc. gives effect to common stock equivalents; however, potential common equivalent shares are excluded if their effect is antidilutive. Potential common equivalent shares are composed of incremental shares of common equivalent shares issuable upon the exercise of stock options and the vesting of restricted stock units.
Basic net income (loss) per share is the same as diluted net income (loss) per share for the three and
nine months ended
September 30, 2016
because DNS did not issue the potentially dilutive common stock. Basic net income (loss) per share is the same as diluted net income (loss) per share for the three and
nine months ended
September 30, 2017
because the effects of stock options and restricted stock units would have been anti-dilutive.
The following table is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per share calculation (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
(As Revised)
|
|
|
|
(As Revised)
|
Net income (loss) attributable to DASAN Zhone Solutions, Inc.
|
|
$
|
1,399
|
|
|
$
|
(4,733
|
)
|
|
$
|
(3,157
|
)
|
|
$
|
(9,066
|
)
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
16,382
|
|
|
11,139
|
|
|
16,380
|
|
|
10,046
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options, restricted stock units and share awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted
|
|
16,382
|
|
|
11,139
|
|
|
16,380
|
|
|
10,046
|
|
Net income (loss) per share attributable to DASAN Zhone Solutions, Inc.:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.90
|
)
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.90
|
)
|
The outstanding common equivalent shares excluded from the computation of the diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc. for the periods presented because including them would have been antidilutive are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
(As Revised)
|
Stock options
|
|
915
|
|
|
795
|
|
Restricted stock units
|
|
2
|
|
|
9
|
|
|
|
917
|
|
|
804
|
|
|
|
(11)
|
Commitments and Contingencies
|
Operating Leases
The Company has entered into operating leases for certain office space and equipment, some of which contain renewal options and escalation clauses. Estimated future lease payments under all non-cancellable operating leases with terms in excess of one year, including taxes and service fees, are as follows (in thousands):
|
|
|
|
|
|
Operating Leases
|
Year ending December 31:
|
|
2017 (remainder of the year)
|
$
|
967
|
|
2018
|
3,359
|
|
2019
|
2,496
|
|
2020
|
2,358
|
|
2021
|
2,264
|
|
Thereafter
|
8,722
|
|
Total minimum lease payments
|
$
|
20,166
|
|
Warranties
The Company accrues for warranty costs based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally two to
five years
from the date of shipment. The following table reconciles changes in the Company’s accrued warranties and related costs for the
nine months ended
September 30, 2017
and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
878
|
|
|
$
|
441
|
|
Charged to cost of revenue
|
126
|
|
|
227
|
|
Claims and settlements
|
(195
|
)
|
|
(389
|
)
|
Foreign exchange impact
|
14
|
|
|
78
|
|
Ending balance
|
$
|
823
|
|
|
$
|
357
|
|
Performance Bonds
In the normal course of operations, from time to time, the Company arranges for the issuance of various types of surety bonds, such as bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. As of
September 30, 2017
, the Company had
$1.0 million
of performance bonds and
$0.4 million
of warranty bonds guaranteed by third parties.
In addition, the Company has entered into a sales agreement with DNI, that distributes Company's products to a certain customer in Vietnam. Under the agreement with the customer, DNI is required to provides various types of surety bonds which are guaranteed by the bank. As of September 30, 2017, the Company had restricted cash of
$1.2 million
,
$2.1 million
and
$2.0 million
as a collateral for the advance payment bonds, performance bonds and warranty bonds, respectively, issued by DNI.
Purchase Commitments
The Company has agreements with various contract manufacturers which include non-cancellable inventory purchase commitments. The Company’s inventory purchase commitments typically allow for cancellation of orders
30
days in advance of the required inventory availability date as set by the Company at time of order. The amount of non-cancellable purchase commitments outstanding, net of reserve, was
$3.0 million
as of
September 30, 2017
.
Payment Guarantees
The following table sets forth third parties that have provided payment guarantees of the Company's indebtedness and other obligations as of
September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
Guarantor
|
|
Amount Guaranteed
|
|
Description of Obligations Guaranteed
|
DNI (Parent Company)
|
|
$
|
3,349
|
|
|
Borrowings from Shinhan Bank
|
DNI (Parent Company)
|
|
1,884
|
|
|
Purchasing card from Shinhan Bank
|
DNI (Parent Company)
|
|
10,493
|
|
|
Credit facility & purchasing card from Industrial Bank of Korea
|
DNI (Parent Company)
|
|
6,000
|
|
|
Credit facility from NongHyup Bank
|
DNI (Parent Company)
|
|
523
|
|
|
Purchasing card from NongHyup Bank
|
Industrial Bank of Korea
|
|
6,512
|
|
|
Credit facility
|
Industrial Bank of Korea
|
|
864
|
|
|
Performance bonds
|
NongHyup Bank
|
|
4,567
|
|
|
Credit facility
|
Shinhan Bank
|
|
191
|
|
|
Purchasing card
|
KEB Hana Bank
|
|
33
|
|
|
Performance bonds
|
State Bank of India
|
|
38
|
|
|
Performance bonds
|
Seoul Guarantee Insurance Co.
|
|
54
|
|
|
Performance bonds
|
Seoul Guarantee Insurance Co.
|
|
373
|
|
|
Warranty bonds
|
|
|
$
|
34,881
|
|
|
|
Royalties
The Company has certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue and is recorded in cost of revenue.
Legal Proceedings
The Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal contingencies that it has determined to be probable to the extent the amount of the loss can be reasonably estimated. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.
|
|
(12)
|
Enterprise-Wide Information
|
The Company is a global provider of network access solutions and communications equipment for service provider and enterprise networks. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. The Company’s chief operating decision makers are the Company’s Co-Chief Executive Officers, who 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 attributes revenue from customers to individual countries based on location shipped. The following summarizes required disclosures about geographic concentrations and revenue by products and services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(As Revised)
|
|
|
|
(As Revised)
|
Revenue by geography:
|
|
|
|
|
|
|
|
United States
|
$
|
13,068
|
|
|
$
|
3,408
|
|
|
$
|
37,176
|
|
|
$
|
7,432
|
|
Canada
|
1,498
|
|
|
254
|
|
|
4,112
|
|
|
254
|
|
Total North America
|
14,566
|
|
|
3,662
|
|
|
41,288
|
|
|
7,686
|
|
Latin America
|
7,480
|
|
|
1,877
|
|
|
19,425
|
|
|
2,912
|
|
Europe, Middle East, Africa
|
7,378
|
|
|
2,232
|
|
|
19,134
|
|
|
5,209
|
|
Korea
|
20,520
|
|
|
18,372
|
|
|
69,032
|
|
|
60,144
|
|
Other Asia Pacific
|
16,494
|
|
|
5,097
|
|
|
29,612
|
|
|
14,881
|
|
Total International
|
51,872
|
|
|
27,578
|
|
|
137,203
|
|
|
83,146
|
|
Total
|
$
|
66,438
|
|
|
$
|
31,240
|
|
|
$
|
178,491
|
|
|
$
|
90,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(As Revised)
|
|
|
|
(As Revised)
|
Revenue by products and services:
|
|
|
|
|
|
|
|
Products
|
$
|
63,257
|
|
|
$
|
28,891
|
|
|
$
|
169,831
|
|
|
$
|
84,666
|
|
Services
|
3,181
|
|
|
2,349
|
|
|
8,660
|
|
|
6,166
|
|
Total
|
$
|
66,438
|
|
|
$
|
31,240
|
|
|
$
|
178,491
|
|
|
$
|
90,832
|
|
The Company's property and equipment, net of accumulated depreciation, were located in the following geographical areas as of
September 30, 2017
and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
United States
|
$
|
3,611
|
|
|
$
|
4,094
|
|
Korea
|
1,449
|
|
|
1,455
|
|
Japan and Vietnam
|
752
|
|
|
739
|
|
|
$
|
5,812
|
|
|
$
|
6,288
|
|
Income tax expense for the three and
nine months ended
September 30, 2017
was
$0.1 million
and
$0.6 million
, respectively, on pre-tax income (losses) of
$1.5 million
and
$(2.3) million
, respectively. For the three and
nine months ended
September 30, 2016
, the Company recognized income tax benefit of
$0.6 million
and
$1.0 million
, respectively, on pre-tax losses of
$5.4 million
and
$10.1 million
, respectively. As of
September 30, 2017
, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in the United States and taxable income generated by the Company’s wholly-owned foreign subsidiaries.
Management periodically evaluates the realizability of the Company's net deferred tax assets based on all available evidence, both positive and negative. The Company evaluates on a jurisdictional basis and certain jurisdictions could result in a realization of net deferred tax assets sooner than others. The realization of net deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income, on a jurisdictional basis, during periods prior to the expiration of tax attributes to fully utilize these assets. The Company weighed both positive and negative evidence and determined that there is a continued need for a full valuation allowance on its deferred tax assets in certain jurisdictions as of September 30, 2017. The Company currently believes there is not sufficient positive evidence of future profitability to change its judgment regarding the need for a full valuation allowance on its deferred tax assets in these jurisdictions. The continued improvement in the Company's operating results, conditioned on successfully commercializing new business arrangements and managing costs would provide additional positive evidence in determining the need for a valuation allowance in certain jurisdictions and could lead to reversal of substantially all of the Company's valuation allowance on its deferred tax assets. Until such time, consumption of tax attributes to offset profits will reduce the overall level of deferred tax assets subject to valuation allowance. Should the Company determine that it would be able to realize its remaining deferred tax assets in the foreseeable future, on a jurisdictional basis, an adjustment to its remaining deferred tax assets would cause a material increase to income in the period such determination is made.
The total amount of unrecognized tax benefits, including interest and penalties, at
September 30, 2017
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
September 30, 2017
and 2016. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The open tax years for the major jurisdictions are as follows:
|
|
|
• Federal
|
2013 - 2016
|
• California and Canada
|
2012 - 2016
|
• Brazil
|
2011 - 2016
|
• Germany
|
2012 - 2016
|
• Japan
|
2011 - 2016
|
• Korea
|
2015 - 2016
|
• United Kingdom
|
2014 - 2016
|
• Vietnam
|
2016
|
However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried forward to open years.
The Company estimates that its foreign income will generally be subject 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 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.