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. (referred to, collectively with its subsidiaries, as "DZS" or the "Company") is a global provider of network access solutions and communications equipment for service provider and enterprise networks. The Company provides a wide array of reliable, cost-effective networking technologies, including broadband access, Ethernet switching, mobile backhaul, Passive Optical LAN and software-defined networks, to a diverse customer base that includes more than
1,000
customers in more than
50
countries worldwide.
DZS was incorporated under the laws of the state of Delaware in June 1999. On September 9, 2016, the Company acquired Dasan Network Solutions, Inc., a California corporation ("DNS") through the merger of a wholly owned subsidiary of the Company with and into DNS, with DNS surviving as a wholly owned subsidiary of the Company (the "Merger"). At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DASAN Networks, Inc. ("DNI") were canceled and converted into the right to receive shares of the Company's common stock in an amount equal to
58%
of the issued and outstanding shares of the Company's common stock immediately following the Merger. In connection with the Merger, the Company changed its name from Zhone Technologies, Inc. to DASAN Zhone Solutions, Inc. The Company is headquartered in Oakland, California.
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(b)
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Risks and Uncertainties
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The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("U.S. GAAP"), assuming the Company will continue as a going concern.
The Company had net income of
$0.1 million
for the quarter ended March 31, 2018 and
$1.2 million
for the year ended December 31, 2017. However, the Company incurred a net loss of
$15.3 million
for the year ended December 31, 2016 and significant losses in prior years. As of March 31, 2018, the Company had an accumulated deficit of
$18.4 million
and working capital of
$66.7 million
. As of March 31, 2018, the Company had
$23.2 million
in cash and cash equivalents, which included
$9.7 million
in cash balances held by its Korean subsidiary and
$46.5 million
in aggregate principal amount of short-term debt obligations, long-term debt and long-term related-party borrowings. In addition, as of March 31, 2018 the Company had
$6.6 million
committed as security for letters of credit under its revolving credit facilities, leaving
$6.1 million
in aggregate financing availability under these facilities. The Company’s current lack of liquidity could harm it by:
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•
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increasing its vulnerability to adverse economic conditions in its industry or the economy in general;
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•
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requiring substantial amounts of cash to be used for debt servicing, rather than other purposes, including operations;
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•
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limiting its ability to plan for, or react to, changes in its business and industry; and
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•
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influencing investor and customer perceptions about its financial stability and limiting its ability to obtain financing or acquire customers.
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These factors indicate that cash flows might not be sufficient for the Company to meet its obligations as they come due in the ordinary course of business for a period of 12 months from the date of this interim report on Form 10-Q.
However, the Company plans to focus on cost management, operating efficiency and restrictions on discretionary spending. In addition, if necessary, the Company may sell assets, issue debt or equity securities or purchase credit insurance. The Company may also reduce the scope of its planned product development, reduce sales and marketing efforts and reduce its operations in low margin regions, including reductions in headcount. In the first quarter of 2018, the Company modified the terms of certain existing debt and obtained a new loan, as described more fully in Note (7) Debt and Note (9) Related-Party Transactions to the unaudited condensed consolidated financial statements. Based on the Company's current plans and current business conditions, the Company believes that these measures along with its existing cash, cash equivalents and available credit facilities will be sufficient to
satisfy its anticipated cash requirements for at least the next 12 months from the date of this Quarterly Report on Form 10-Q.
The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next 12 months will depend on its ability to achieve forecasted results and its ability to access funds approved under existing facilities. Management’s belief that it will achieve these results assumes that, among other things, the Company will continue to be successful in implementing its business strategy and that there will be no material adverse development in its business, liquidity or capital requirements. If one or more of these factors do not occur as expected, it could cause the Company to fail to meet its obligations as they come due.
DNI owned approximately
58%
of the outstanding shares of the Company's common stock as of
March 31, 2018
. For so long as DNI and its affiliates hold shares of the Company's common stock representing at least a majority of the votes, DNI will be able to freely nominate and elect all the members of the Company's board of directors, subject to the provisions of the Company's bylaws and applicable requirements under Nasdaq listing rules and applicable laws. The directors elected by DNI will have the authority to make decisions affecting the Company's capital structure, including the issuance of additional capital stock or options, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the declaration of dividends. The interests of DNI may not coincide with the interests of the Company's other stockholders or with holders of the Company's indebtedness. DNI’s ability to control all matters submitted to the Company's stockholders for approval limits the ability of other stockholders to influence corporate matters and, as a result, the Company may take actions that the Company's other stockholders or holders of the Company's indebtedness do not view as beneficial. See Note 9 and Note 11 to the unaudited condensed consolidated financial statements for additional information.
Certain prior period statement of comprehensive loss items have been reclassified to correct for research and product development expenses and selling, marketing, general and administrative expenses of
$0.2 million
and
$0.3 million
, respectively, which were previously improperly classified as cost of revenue-products and services.
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(d)
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Basis of Presentation
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For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2017.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission.
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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(f)
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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
March 31, 2018
,
no
customer accounted for 10% or more of net revenue. For the three months ended
March 31, 2017
,
two
customers represented
12%
and
11%
of net revenue, respectively.
As of
March 31, 2018
,
two
customers represented
20%
(a related party) and
13%
of net accounts receivable, respectively. As of December 31, 2017,
two
customers represented
20%
(a related party) and
11%
of net accounts receivable, respectively.
As of
March 31, 2018
and December 31, 2017, receivables from customers in countries other than the United States represented
88%
and
84%
, respectively, of net accounts receivable.
(g) Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09
“Revenue from Contracts with Customers”
(“Topic 606”), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Topic 606 replaced most existing revenue recognition standards under U.S. GAAP, including ASC 605,
Revenue Recognition
("Topic 605").
On
January 1, 2018
, the Company adopted Topic 606 and applied this guidance to all open contracts at the date of adoption using the modified retrospective method. The Company recognized the cumulative effect of initially applying Topic 606 as an adjustment to the balance of accumulated deficit at January 1, 2018. The comparative information has not been restated and continues to be reported under Topic 605.
The Company’s adoption of Topic 606 primarily impacted the following:
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Topic 606 requires an allocation of revenue between deliverables (performance obligations) within an arrangement. Topic 605 restricted the allocation of revenue that is contingent on future deliverables to current deliverables, however, Topic 606 removes this restriction, to the extent that the future deliverables represent performance obligations that are distinct. Under Topic 606, the nature of the performance obligations identified within a contract impacts the allocation of the transaction price between deliverables.
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Some of the Company’s contracts include customer acceptance terms, which provides protection to the customer by allowing it to either cancel a contract or force the Company to take corrective actions if products or services do not meet the requirements in the contract. Under Topic 606, customer acceptance that is considered a “formality”, would result in revenue recognized when control of the product or service is transferred to customer, which is typically upon shipment or delivery dependent upon the terms of the underlying contract.
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The following table summarizes the effects of Topic 606 on the Company’s unaudited condensed consolidated balance sheet at January 1, 2018 (in thousands):
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Balance after adoption of ASC 606
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Adjustments
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Balance without adoption of ASC 606
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Assets
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Accounts receivable, net
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$
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62,099
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$
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344
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(1)
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$
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61,755
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Inventories
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25,239
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(105
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)
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(2)
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25,344
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Liabilities
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Contract liabilities - current
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2,866
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(413
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)
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(2)
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3,279
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Accrued and other liabilities
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11,518
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344
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(1)
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11,174
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Stockholders’ equity
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Accumulated deficit
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(18,544
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)
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308
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(18,852
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)
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(1)
Allowance for sales returns was historically presented as a contra-asset within accounts receivable on the Company's consolidated balance sheets. Upon the adoption of Topic 606, the Company presents the allowance for sales returns in Accrued and other liabilities (current).
(2)
Represents the impact of allocation of transaction price to separate performance obligations in open contracts as of the adoption date on a relative standalone selling price basis and acceleration of revenue (and related costs) for contracts for which acceptance clauses are a formality.
The following table summarizes the effects of Topic 606 on the Company’s unaudited condensed consolidated balance sheet at March 31, 2018 (in thousands):
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As reported
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Adjustments
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Balance without adoption of ASC 606
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Assets
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Accounts receivable, net
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$
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69,578
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$
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330
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(1)
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$
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69,248
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Inventories
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32,714
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62
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(2)
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32,652
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Prepaid expenses and other current assets
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6,431
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91
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(2)
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6,340
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Liabilities
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Contract liabilities - current
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2,163
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(285
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)
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(2)
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2,448
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Accrued and other liabilities
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9,207
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330
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(1)
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8,877
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Stockholders’ equity
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Accumulated deficit
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(18,403
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)
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(132
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)
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(18,271
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)
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(1)
Allowance for sales returns was historically presented as a contra-asset within accounts receivable on the Company's consolidated balance sheets. Upon the adoption of Topic 606, the Company presents the allowance for sales returns in Accrued and other liabilities (current).
(2)
Represents the impact of allocation of transaction price to separate performance obligations in open contracts as of March 31, 2018 on a relative standalone selling price basis and acceleration of revenue (and related costs) for contracts for which acceptance clauses are a formality.
The following table summarizes the effects of Topic 606 on the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2018 (in thousands):
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As reported
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Adjustments
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Balance without adoption of ASC 606
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Net revenue
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$
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59,504
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$
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(194
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)
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$
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59,698
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Cost of revenue - products and services
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37,769
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(62
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)
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37,831
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Gross profit
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21,735
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(132
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)
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21,867
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Provision for income taxes
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(5
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)
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—
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(5
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)
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Net income
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141
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(132
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)
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|
273
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There was no impact on net revenue from related parties as a result of Topic 606.
Revenue Recognition Accounting Policy
Revenue Recognition
Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The Company generates revenue primarily from sales of products and services, including, extended warranty service and customer support. Revenue from product sales is recognized at a point in time when control of the good is transferred to the customer, generally occurring upon shipment or delivery dependent upon the terms of the underlying contract. Revenue from services is generally recognized over time on a ratable basis over the contract term, using an output measure of progress, as the contracts usually provide the customer equal benefit
throughout the contract period. The Company typically invoices customers for support contract in advance, for periods ranging from
one
to
five
years.
Revenue from all sales types is recognized at transaction price, which is the amount the Company expects to be entitled to in exchange for transferring goods and/or providing services. Transaction price is calculated as selling price net of variable consideration.
Sales to certain distributors are made under arrangements which provide the distributors with volume discounts, price adjustments, and other allowances under certain circumstances. These adjustments and allowances are accounted for as variable consideration.
To estimate variable consideration, the Company analyzes historical data, channel inventory levels, current economic trends and changes in customer demand for the Company's products, among other factors. Historically, variable consideration has not been a significant component of the Company’s contracts with customers. As of
March 31, 2018
, the total estimate of variable consideration was not significant.
Contracts with Multiple Performance Obligations
Some of the Company's contracts with customers contain multiple promised goods or services. For these contracts, the Company accounts for the promises separately as individual performance obligations if they are distinct. In determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, including the degree of interrelation and interdependence between obligations and whether or not the good or service significantly modifies or transforms another good or service in the contract.
After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices for products are determined using either an adjusted market assessment or
expected cost-plus margin
. For customer support and extended warranty services, standalone selling price is primarily based on the prices charged to customers.
Remaining performance obligations represent the transaction price allocated to performances obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations primarily consist of backlog, which are products and services for which customer purchase orders have been accepted and that are in the process of being delivered.
Contract Balances
Topic 606 distinguishes between a contract asset and accounts receivable based on whether receipt of the consideration is conditional on something other than passage of time.
The Company records contract assets when it has a right to consideration and records accounts receivable when it has an “unconditional” right to consideration. Contract liabilities consist of cash payments received in advance of performance or where the Company has a right to consideration that is unconditional, before the Company transfers a good or service to a customer.
The following table reflects the changes in contract balances for the three months ended March 31, 2018 (in thousands):
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Item
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Balance Sheet Location
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March 31, 2018
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|
January 1, 2018
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$ change
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% change
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Contract assets
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|
Prepaid expenses and other current assets
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
91
|
|
|
100.0
|
%
|
Contract liabilities - current
|
|
Contract liabilities - current
|
|
2,163
|
|
|
2,866
|
|
|
(703
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)
|
|
(24.5
|
)%
|
Contract liabilities - non-current
|
|
Contract liabilities - non-current
|
|
1,870
|
|
|
1,883
|
|
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(13
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)
|
|
(0.7
|
)%
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During the three months ended March 31, 2018, contract assets increased and contract liabilities decreased primarily as a result of changes in open contracts containing multiple performance obligations. There were
no
significant changes in estimates during the three months ended
March 31, 2018
that would affect the contract balances.
Warranties
Products sold to customers include standard warranties, covering bug fixes, minor updates such that the product continues to function according to published technical specifications. These standard warranties are assurance type warranties and do not offer any services in addition to the assurance that the product will continue working as specified. Therefore, standard warranties are not considered separate performance obligations in the arrangement. Instead, the expected cost of warranty is accrued as expense in accordance with applicable guidance. Extended warranties are sold with certain products and include additional support services. The transaction price for extended warranties is accounted for as service revenue and recognized over the life of the contract.
Contract Costs
Applying a practical expedient, the Company recognizes the incremental costs of obtaining contracts, which primarily consist of sales commissions, as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in sales and marketing expenses. If the incremental direct costs of obtaining a contract relate to a service recognized over a period longer than one year, such costs are capitalized and amortized in line with the related services over the period of benefit. As of March 31, 2018, such capitalizable costs were not significant.
Financing
The Company's contracts do not include a significant financing component. The Company applies the practical expedient not to adjust the promised amount of consideration for the effects of a financing component if the Company expects, at contract inception, that the period between when the Company transfers a good or service to the customer and when the customer pays for the good or service will be one year or less.
Shipping and Handling
The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than as an additional promised service. As a result, the Company accrues
the costs of shipping and handling when the related revenue is recognized
.
Unsatisfied performance obligations
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which the Company has the right to invoice for the services performed. The majority of the Company's performance obligations in its contracts with customers relate to contracts with a duration of less than one year and therefore transaction price allocated to unsatisfied performance obligations included in contracts with a duration of more than 12 months was not material.
Disaggregation of Revenue
The disaggregation of revenue by geographical regions for the three months ended March 31, 2018 is disclosed in Note 12.
Other Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The updated guidance is effective for the Company on January 1, 2019, and early adoption is permitted. The Company does not plan to early adopt this guidance. The Company expects its assets and liabilities to increase as a result of the adoption of this standard. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The updated guidance became effective for the Company on January 1, 2018 and was
adopted accordingly. The adoption of this standard did not have any effect on the Company's condensed consolidated statement of cash flows for the three months ended March 31, 2018 or 2017.
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, which requires that a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. The updated guidance became effective for the Company beginning on January 1, 2018 and was adopted accordingly, using the retrospective approach. As a result, the Company no longer presents transfers between cash and cash equivalents and restricted cash in the consolidated cash flow statements.
In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The updated guidance is effective for the Company on January 1, 2020, and will be adopted accordingly. Early adoption is permitted. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of modification accounting. The purpose of the amendment is to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance became effective for the Company beginning on January 1, 2018 and was adopted accordingly. The adoption of this standard had no impact on the Company's consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Consequently the amendments eliminate the stranded tax effects resulting from the Tax Act. Because the amendments only relate to the reclassification of the income tax effect of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018 and interim periods in those years. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.
(2) Fair Value Measurement
The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
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Level 1 –
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Inputs are quoted prices in active markets for identical assets or liabilities.
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Level 2 –
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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.
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Level 3 –
|
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
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The following financial instruments are not measured at fair value on the Company’s condensed consolidated balance sheet as of
March 31, 2018
and the consolidated balance sheet as of December 31, 2017, but require disclosure of their fair values: cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. The carrying values of financial instruments such as cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate their fair values based on their short-term nature. The carrying value of the Company's debt approximates their fair values based on the current rates available to the Company for debt of similar terms and maturities.
(3) Cash, Cash Equivalents and Restricted Cash
As of March 31, 2018 and December 31, 2017, the Company's cash and cash equivalents comprised financial deposits. Restricted cash consisted primarily of cash restricted for performance bonds, warranty bonds and collateral for borrowings. Current and long-term restricted cash was
$11.5 million
at March 31, 2018 and
$13.9 million
at December 31, 2017.
Accounts receivable, net as of March 31, 2018 and December 31, 2017 was as follows (in thousands):
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|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Gross accounts receivable
|
$
|
69,948
|
|
|
$
|
63,446
|
|
Allowance for doubtful accounts
|
(370
|
)
|
|
(922
|
)
|
Allowance for sales returns
|
—
|
|
(1)
|
(769
|
)
|
Total allowances
|
(370
|
)
|
|
(1,691
|
)
|
Total accounts receivable, net
|
$
|
69,578
|
|
|
$
|
61,755
|
|
(1)
Upon adoption of ASC 606, allowances for sales returns were reclassified to accrued and other liabilities as these reserve balances are considered estimated refund liabilities. Refer to Footnote 1(g) for additional information about the adoption impact.
Inventories as of
March 31, 2018
and December 31, 2017 were as follows (in thousands):
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|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Raw materials
|
$
|
14,442
|
|
|
$
|
12,671
|
|
Work in process
|
3,091
|
|
|
2,150
|
|
Finished goods
|
15,181
|
|
|
10,523
|
|
Total inventories
|
$
|
32,714
|
|
|
$
|
25,344
|
|
Inventories provided as collateral for borrowings from Export-Import Bank of Korea amounted to
$15.8 million
and
$11.4 million
as of
March 31, 2018
and December 31, 2017, respectively.
|
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(5)
|
Property and Equipment
|
Property and equipment as of
March 31, 2018
and
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Furniture and fixtures
|
$
|
23,197
|
|
|
$
|
22,988
|
|
Machinery and equipment
|
5,531
|
|
|
5,455
|
|
Leasehold improvements
|
3,652
|
|
|
3,647
|
|
Computers and software
|
540
|
|
|
621
|
|
Other
|
1,025
|
|
|
1,007
|
|
|
33,945
|
|
|
33,718
|
|
Less accumulated depreciation and amortization
|
(28,062
|
)
|
|
(27,584
|
)
|
Less government grants
|
(251
|
)
|
|
(261
|
)
|
Total property and equipment, net
|
$
|
5,632
|
|
|
$
|
5,873
|
|
Depreciation expense associated with property and equipment for the
three months ended
March 31, 2018
and
March 31, 2017
was
$0.4 million
and
$0.5 million
, respectively
The Company receives grants from various government entities mainly to support capital expenditures. Such grants are deferred and are generally refundable to the extent the Company does not utilize the funds for qualifying expenditures.
Once earned, the Company records the grants as a contra amount to the assets and amortizes such amount over the useful lives of the related assets as a reduction to depreciation expense.
|
|
(6)
|
Goodwill and Intangible Assets
|
Goodwill as of
March 31, 2018
and
December 31, 2017
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Beginning balance
|
$
|
3,977
|
|
|
$
|
3,977
|
|
Addition from Merger
|
—
|
|
|
—
|
|
Less: accumulated impairment
|
—
|
|
|
—
|
|
Ending balance
|
$
|
3,977
|
|
|
$
|
3,977
|
|
The Company did not recognize impairment loss on goodwill during the
three months ended
March 31, 2018
and 2017.
Intangible assets as of
March 31, 2018
and
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Developed technology
|
$
|
3,060
|
|
|
$
|
(969
|
)
|
|
$
|
2,091
|
|
Customer relationships
|
5,240
|
|
|
(830
|
)
|
|
4,410
|
|
Backlog
|
2,179
|
|
|
(2,179
|
)
|
|
—
|
|
Total intangible assets
|
$
|
10,479
|
|
|
$
|
(3,978
|
)
|
|
$
|
6,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Developed technology
|
$
|
3,060
|
|
|
$
|
(816
|
)
|
|
$
|
2,244
|
|
Customer relationships
|
5,240
|
|
|
(699
|
)
|
|
4,541
|
|
Backlog
|
2,179
|
|
|
(2,179
|
)
|
|
—
|
|
Total intangible assets
|
$
|
10,479
|
|
|
$
|
(3,694
|
)
|
|
$
|
6,785
|
|
Amortization expense associated with intangible assets for the
three months ended
March 31, 2018
and 2017 was
$0.3 million
and
$0.7 million
, respectively.
Wells Fargo Bank Facility
As of
March 31, 2018
, the Company had a
$25.0 million
revolving line of credit and letter of credit facility (the "WFB Facility") with Wells Fargo Bank ("WFB"). Under the WFB Facility, the Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company is able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the WFB Facility, as long as the aggregate amount outstanding does not exceed
$25.0 million
less the amount committed as security for letters of credit. To maintain availability of funds under the WFB Facility, the Company pays a commitment fee on the unused portion. The commitment fee is
0.25%
per annum and is recorded as interest expense.
As of
March 31, 2018
, the Company had
$6.3 million
in outstanding borrowings under its WFB Facility, and $
2.1 million
was committed as security for letters of credit. On
April 5, 2018
, the Company repaid the
$6.3 million
borrowings under its WFB Facility. Based on the Company's eligible accounts receivable and inventory, the Company had $
5.1 million
of financing availability under the WFB Facility as of
March 31, 2018
. The amounts borrowed under the 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
4.81
% at
March 31, 2018
. The maturity date under the WFB Facility is July 15, 2019.
The Company’s obligations under the WFB Facility are secured by substantially all of its personal property assets and those of its subsidiaries that guarantee the WFB Facility, including their intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If the Company defaults under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell the Company’s assets to satisfy the obligations under the WFB Facility. As of
March 31, 2018
, the Company was in compliance with the covenants under the WFB Facility.
Bank and Trade Facilities - Foreign Operations
Certain of the Company's foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed as they mature and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries and supported by guarantees given by DNI or third parties. Payments under such facilities are made in accordance with the given lender’s amortization schedules.
As of
March 31, 2018
and December 31, 2017, the Company had an aggregate outstanding balance of
$27.3 million
and
$22.8 million
, respectively, under such financing arrangements, and the interest rates per annum applicable to outstanding borrowings under these financing arrangements were as listed in the tables below (amount in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
|
|
|
Interest rate (%)
|
|
Amount
|
Industrial Bank of Korea
|
|
Credit facility
|
|
3.08 - 3.68
|
|
$
|
3,679
|
|
Industrial Bank of Korea
|
|
Trade finance
|
|
4.47 - 5.25
|
|
2,625
|
|
Shinhan Bank
|
|
General loan
|
|
6.06
|
|
3,000
|
|
Shinhan Bank
|
|
Trade finance
|
|
4.16
|
|
860
|
|
NongHyup Bank
|
|
Credit facility
|
|
3.16 - 3.9
|
|
2,775
|
|
The Export-Import Bank of Korea
|
|
Export development loan
|
|
3.20 - 3.28
|
|
7,601
|
|
Mitsubishi Bank (Japan)
|
|
AR factoring
|
|
1.58
|
|
5,495
|
|
Shinhan Bank (India)
|
|
General loan
|
|
8.70 - 8.90
|
|
1,221
|
|
|
|
|
|
|
|
$
|
27,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
Interest rate (%)
|
|
Amount
|
Industrial Bank of Korea
|
|
Credit facility
|
|
2.89 - 3.26
|
|
$
|
2,328
|
|
Industrial Bank of Korea
|
|
Trade Finance
|
|
4.47 - 5.97
|
|
2,401
|
|
Shinhan Bank
|
|
General loan
|
|
5.91
|
|
2,987
|
|
Shinhan Bank
|
|
Trade finance
|
|
3.90 - 4.14
|
|
3,050
|
|
NongHyup Bank (Korea)
|
|
Credit facility
|
|
2.83 - 3.42
|
|
860
|
|
The Export-Import Bank of Korea
|
|
Export development loan
|
|
3.20 - 3.28
|
|
7,570
|
|
Mitsubishi Bank (Japan)
|
|
AR factoring
|
|
1.58
|
|
1,872
|
|
Shinhan Bank (India)
|
|
General loan
|
|
8.70 - 8.90
|
|
1,709
|
|
|
|
|
|
|
|
$
|
22,777
|
|
As of
March 31, 2018
, the Company had
$6.5 million
in outstanding borrowings and
$4.5 million
committed as security for letters of credit under the Company's
$12.0 million
credit facility with certain foreign banks.
See Note 9 for a discussion of related-party debt.
|
|
(8)
|
Non-Controlling Interests
|
Non-controlling interests for the
three months ended
March 31, 2018
and 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Beginning non-controlling interests
|
|
$
|
534
|
|
|
$
|
416
|
|
Net income (loss) attributable to non-controlling interests
|
|
34
|
|
|
249
|
|
Foreign currency translation adjustments (OCI)
|
|
30
|
|
|
20
|
|
Ending non-controlling interests
|
|
$
|
598
|
|
|
$
|
685
|
|
|
|
(9)
|
Related-Party Transactions
|
Related-Party Acquisitions
On December 31, 2017, DNS acquired
100%
and
99.99%
of the common stock of D-Mobile Limited (“D-Mobile”) and DASAN India Private Limited ("DASAN India"), respectively, from DNI. D-Mobile and DASAN India are resellers of the Company's products in Taiwan and India, respectively. The consideration payable by the Company to DNI for the common stock is the net book value of D-Mobile and DASAN India at December 31, 2017, subject to final adjustments. The net book value of D-Mobile and DASAN India was an aggregate of
$0.8 million
. These transactions were accounted for by the Company as common control transactions, with the net assets transferred recorded at historical cost. The transactions did not result in a change in reporting entity and hence were accounted for prospectively.
Related-Party Debt
In connection with the Merger, on September 9, 2016, the Company entered into a loan agreement with DNI for a
$5.0 million
unsecured subordinated term loan facility. Under the loan agreement, the Company was permitted to request drawdowns of one or more term loans in an aggregate principal amount not to exceed
$5.0 million
. As of
March 31, 2018
,
$5.0 million
in term loans was outstanding under the facility. Such term loans mature in September 2021 and are pre-payable at any time by the Company without premium or penalty. The interest rate as of
March 31, 2018
under this facility was
4.6%
per annum.
In addition, the Company borrowed
$1.8 million
from DNI for capital investment in February 2016, which amount was outstanding as of
March 31, 2018
. This loan matures in July 2019 and bears interest at a rate of
4.6%
per annum, payable annually.
On March 21, 2018, DNS borrowed KRW
6.5 billion
(
$6.1 million
in USD) from DNI, which remained outstanding at March 31, 2018. The loan bears interest at a rate of
4.6%
and matures on June 27, 2019, and is secured by certain accounts receivable of DNS Korea.
Other Related-Party Transactions
Sales and purchases, cost of revenue, research and product development, selling, marketing, general and administrative, interest expense and other expenses to and from related parties for the
three months ended
March 31, 2018
and 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
Counterparty
|
|
DNI ownership Interest
|
|
Sales
|
|
Cost of revenue
|
|
Manufacturing (cost of revenue)
|
|
Research and product development
|
|
Selling, marketing,
general and administrative
|
|
Interest expense
|
|
Other expenses
|
DNI (Parent Company)
|
|
N/A
|
|
$
|
1,246
|
|
|
$
|
1,123
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,022
|
|
|
$
|
79
|
|
|
$
|
66
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
10
|
|
|
154
|
|
|
—
|
|
|
—
|
|
|
—
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
324
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
DASAN FRANCE
|
|
100%
|
|
202
|
|
|
177
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.63%
|
|
150
|
|
|
110
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
J-Mobile Corporation
|
|
90.47%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fine Solution
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Solueta
|
|
27.21%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
$
|
1,598
|
|
|
$
|
1,410
|
|
|
$
|
353
|
|
|
$
|
172
|
|
|
$
|
1,022
|
|
|
$
|
79
|
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
Counterparty
|
|
DNI ownership Interest
|
|
Sales
|
|
Cost of revenue
|
|
Manufacturing (cost of revenue)
|
|
Research and product development
|
|
Selling, marketing,
general and administrative
|
|
Other expenses
|
DNI (Parent Company)
|
|
N/A
|
|
$
|
4,151
|
|
|
$
|
3,321
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
874
|
|
|
$
|
63
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
195
|
|
|
27
|
|
|
—
|
|
|
—
|
|
DASAN FRANCE
|
|
100%
|
|
394
|
|
|
387
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
DASAN INDIA Private Limited
(1)
|
|
100%
|
|
6,287
|
|
|
4,783
|
|
|
|
|
|
|
—
|
|
|
|
D-Mobile
(1)
|
|
100%
|
|
11
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
102
|
|
|
—
|
|
Fine Solution
|
|
100%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
3
|
|
|
|
HANDYSOFT, Inc.
|
|
17.64%
|
|
20
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
J-Mobile Corporation
|
|
68.56%
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
132
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
171
|
|
|
—
|
|
|
—
|
|
|
|
|
|
$
|
10,871
|
|
|
$
|
8,513
|
|
|
$
|
195
|
|
|
$
|
198
|
|
|
$
|
1,111
|
|
|
$
|
63
|
|
(1)
As discussed above, on December 31, 2017 DNS acquired DASAN India and D-Mobile from DNI.
|
|
|
|
|
The Company has entered into sales agreements with DNI and certain of its subsidiaries. Sales and cost of revenue to DNI and DASAN France (and with respect to the first quarter of 2017, DASAN India and D-Mobile) represent finished goods produced by the Company that are sold to these related parties who sell the Company's products in Korea, France, India and Taiwan, respectively.
The Company has entered into an agreement with CHASAN Networks Co., Ltd. to provide manufacturing and research and development services for the Company. Under the agreement with CHASAN Networks., Ltd., the Company is charged a cost plus
7%
fee for the manufacturing and development of certain deliverables.
The Company has entered into an agreement with Tomato Soft Ltd., a wholly owned subsidiary of DNI, to provide manufacturing and research and development services for the Company.
The Company has entered into an agreement with Tomato Soft (Xi'an) Ltd. to provide research and development services for the Company. Under the agreement with Tomato Soft (Xi'an) Ltd., the Company is charged an expected annual fee of
$0.8 million
for the development of certain deliverables.
Prior to the Merger, as DNS was then a wholly owned subsidiary of DNI, DNI had sales agreements with certain customers on DNS' behalf. Since the Merger, due to these prior sales agreements, the Company has entered into an agreement with DNI in which DNI acts as a sales channel to these customers. Sales to DNI necessary for DNI to fulfill agreements with its customers are recorded net of royalty fees in related-party revenue.
The Company shares office space with DNI and certain of DNI's subsidiaries. Prior to the Merger, DNS, then a wholly owned subsidiary of DNI, shared human resources, treasury and other administrative support with DNI. As such, the Company entered into certain service sharing agreements with DNI and certain of its subsidiaries for the shared office space and shared administrative services. Expenses related to rent and administrative services are allocated to the Company based on square footage occupied and headcount, respectively.
Other expenses to related parties represent expenses to DNI for its payment guarantees relating to the Company's borrowings. The Company pays DNI a guarantee fee which is calculated as
0.9%
of the guaranteed amount.
Balances of Receivables and Payables with Related Parties
Balances of receivables and payables arising from sales and purchases of goods and services with related parties as of
March 31, 2018
and December 31, 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
|
Counterparty
|
|
DNI ownership Interest
|
|
Account receivables
|
|
Other receivables
|
|
Deposits for lease *
|
|
Long-term debt
|
|
Accounts payable
|
|
Other Payables
|
|
Accrued and other current liabilities
|
DNI (parent company)
|
|
N/A
|
|
$
|
14,015
|
|
|
$
|
2
|
|
|
$
|
790
|
|
|
$
|
12,895
|
|
|
$
|
1,533
|
|
|
$
|
2,756
|
|
|
$
|
—
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40
|
|
|
—
|
|
ABLE
|
|
94.57%
|
|
139
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
DASAN France
|
|
100%
|
|
490
|
|
|
69
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.63%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
105
|
|
|
—
|
|
|
—
|
|
Solueta
|
|
100%
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
$
|
14,644
|
|
|
$
|
72
|
|
|
$
|
790
|
|
|
$
|
12,895
|
|
|
$
|
1,639
|
|
|
$
|
2,806
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Counterparty
|
|
DNI Ownership Interest
|
|
Account receivables
|
|
Other receivables
|
|
Deposits for lease *
|
|
Long-term debt
|
|
Accounts payable
|
|
Other Payables
|
|
Accrued and other current liabilities**
|
DNI (parent company)
|
|
N/A
|
|
$
|
12,576
|
|
|
$
|
93
|
|
|
$
|
786
|
|
|
$
|
6,800
|
|
|
$
|
1,264
|
|
|
$
|
1,859
|
|
|
$
|
59
|
|
Tomato Soft Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
Tomato Soft (Xi'an) Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54
|
|
|
—
|
|
ABLE
|
|
94.57%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
DASAN France
|
|
100%
|
|
870
|
|
|
71
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HANDYSOFT, Inc.
|
|
17.63%
|
|
52
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
CHASAN Networks Co., Ltd.
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
87
|
|
|
—
|
|
|
—
|
|
Solueta
|
|
100%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
|
|
|
$
|
13,498
|
|
|
$
|
164
|
|
|
$
|
786
|
|
|
$
|
6,800
|
|
|
$
|
1,351
|
|
|
$
|
1,956
|
|
|
$
|
59
|
|
* Included in other assets related to deposits for lease in the condensed consolidated balance sheet as of
March 31, 2018
and the consolidated balance sheet as of December 31, 2017.
**Included in accrued and other liabilities in the condensed consolidated balance sheet as of March 31, 2018 and the consolidated balance sheet as of December 31, 2017.
|
|
(10)
|
Net Income (Loss) Per Share Attributable to DASAN Zhone Solutions, Inc.
|
Basic net income (loss) per share attributable to DASAN Zhone Solutions, Inc. is computed by dividing the net income (loss) attributable to DASAN Zhone Solutions, Inc. for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income (loss) per share attributable to DASAN Zhone
Solutions, Inc. gives effect to common stock equivalents; however, potential common equivalent shares are excluded if their effect is antidilutive. Potential common equivalent shares are composed of incremental shares of common equivalent shares issuable upon the exercise of stock options and the vesting of restricted stock units.
Basic net income (loss) per share is the same as diluted net income (loss) per share for the
three months ended
March 31, 2017
because the effects of stock options and restricted stock units would have been anti-dilutive.
The following table is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per share calculation (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Net income (loss) attributable to DASAN Zhone Solutions, Inc.
|
|
$
|
107
|
|
|
$
|
(3,747
|
)
|
Weighted average number of shares outstanding:
|
|
|
|
|
Basic
|
|
16,416
|
|
|
16,378
|
|
Effect of dilutive securities:
|
|
|
|
|
Stock options, restricted stock units and share awards
|
|
210
|
|
|
—
|
|
Diluted
|
|
16,626
|
|
|
16,378
|
|
Net income (loss) per share attributable to DASAN Zhone Solutions, Inc.:
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.23
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.23
|
)
|
The first quarter of 2018 excluded
451.7 thousand
stock options at a weighted average exercise price of
$12.02
from diluted net income per share because their effect would have been antidilutive. The first quarter of 2017 excluded common stock equivalents of
4.9 thousand
from the computation of the diluted net loss per share for the first quarter of 2017 presented because including them would have been antidilutive.
|
|
(11)
|
Commitments and Contingencies
|
Operating Leases
The Company has entered into operating leases for certain office space and equipment, some of which contain renewal options and escalation clauses. Estimated future lease payments under all non-cancellable operating leases with terms in excess of one year, including taxes and service fees, are as follows (in thousands):
|
|
|
|
|
|
Operating Leases
|
Year ending December 31:
|
|
2018 (remainder of the year)
|
$
|
3,046
|
|
2019
|
3,956
|
|
2020
|
2,998
|
|
2021
|
2,590
|
|
2022
|
2,664
|
|
Thereafter
|
8,423
|
|
Total minimum lease payments
|
$
|
23,677
|
|
Warranties
The Company accrues warranty costs based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally
one
to
five years
from the date of shipment. The following table reconciles changes in the Company’s accrued warranties and related costs for the
three months ended
March 31, 2018
and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
931
|
|
|
$
|
878
|
|
Charged to cost of revenue
|
359
|
|
|
100
|
|
Claims and settlements
|
(195
|
)
|
|
(212
|
)
|
Foreign exchange impact
|
(1
|
)
|
|
20
|
|
Ending balance
|
$
|
1,094
|
|
|
$
|
786
|
|
Performance Bonds
In the normal course of operations, from time to time, the Company arranges for the issuance of various types of surety bonds, such as bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. As of
March 31, 2018
, the Company had
$2.9 million
of surety bonds guaranteed by third parties.
Purchase Commitments
The Company has agreements with various contract manufacturers which include non-cancellable inventory purchase commitments. The Company’s inventory purchase commitments typically allow for cancellation of orders
30
days in advance of the required inventory availability date as set by the Company at time of order. The amount of non-cancellable purchase commitments outstanding, net of reserve, was
$5.0 million
as of
March 31, 2018
.
Payment Guarantees provided by Third Parties and DNI
The following table sets forth payment guarantees of the Company's indebtedness and other obligations as of
March 31, 2018
(in thousands) that have been provided by third parties and DNI. DNI owns approximately
58%
of the outstanding shares of the Company's common stock:
|
|
|
|
|
|
|
|
Guarantor
|
|
Amount Guaranteed (in thousands)
|
|
Description of Obligations Guaranteed
|
DNI
|
|
$
|
3,601
|
|
|
Borrowings from Shinhan Bank
|
DNI
|
|
1,800
|
|
|
Purchasing card from Shinhan Bank
|
DNI
|
|
10,650
|
|
|
Letter of credit from Industrial Bank of Korea
|
DNI
|
|
6,000
|
|
|
Letter of credit from NongHyup Bank
|
DNI
|
|
563
|
|
|
Purchasing card from NongHyup Bank
|
DNI
|
|
6,393
|
|
|
Borrowings from Export-Import Bank of Korea
|
Industrial Bank of Korea
|
|
6,893
|
|
|
Letter of credit
|
NongHyup Bank
|
|
4,076
|
|
|
Letter of credit
|
Shinhan Bank
|
|
172
|
|
|
Purchasing card
|
Industrial Bank of Korea
|
|
1,829
|
|
|
Performance bonds
|
State Bank of India
|
|
38
|
|
|
Performance bonds
|
Seoul Guarantee Insurance Co.
|
|
1,024
|
|
|
Performance payment guarantee*
|
|
|
$
|
43,039
|
|
|
|
*The Company is responsible for the warranty liabilities generally for the period of
two
years regarding major product sales and has contracted surety insurance over part of the warranty liabilities.
Royalties
The Company has certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue and is recorded in cost of revenue.
Legal Proceedings
The Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal contingencies that it has determined to be probable to the extent the amount of the loss can be reasonably estimated. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.
|
|
(12)
|
Enterprise-Wide Information
|
The Company is a global provider of network access solutions and communications equipment for service provider and enterprise networks. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. The Company attributes revenue from customers to individual countries based on location shipped. The following summarizes required disclosures about geographical concentrations and revenue by products and services (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2018
|
|
2017
|
Revenue by geography:
|
|
|
|
United States
|
$
|
16,551
|
|
|
$
|
12,147
|
|
Canada
|
971
|
|
|
1,192
|
|
Total North America
|
17,522
|
|
|
13,339
|
|
Latin America
|
7,958
|
|
|
4,870
|
|
Europe, Middle East, Africa
|
7,486
|
|
|
5,503
|
|
Korea
|
12,124
|
|
|
16,315
|
|
Other Asia Pacific
|
14,414
|
|
|
12,085
|
|
Total International
|
41,982
|
|
|
38,773
|
|
Total
|
$
|
59,504
|
|
|
$
|
52,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
Revenue by products and services:
|
|
|
|
|
Products
|
$
|
56,726
|
|
|
$
|
49,725
|
|
|
Services
|
2,778
|
|
|
2,387
|
|
|
Total
|
$
|
59,504
|
|
|
$
|
52,112
|
|
|
The Company's property and equipment, net of accumulated depreciation, were located in the following geographical areas as of
March 31, 2018
and December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
United States
|
$
|
3,283
|
|
|
$
|
3,393
|
|
Korea
|
1,471
|
|
|
1,633
|
|
Japan and Vietnam
|
844
|
|
|
810
|
|
Taiwan and India
|
34
|
|
|
37
|
|
|
$
|
5,632
|
|
|
$
|
5,873
|
|
Income tax (benefit) expense for the three months ended
March 31, 2018
and
2017
was approximately
$0.0 million
and
$0.4 million
, respectively, on pre-tax income of
$0.1 million
and pre-tax loss of
$3.1 million
, respectively. As of March 31, 2018, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in the United States and the mix of earnings generated by the Company’s wholly-owned foreign subsidiaries.
The total amount of unrecognized tax benefits, including interest and penalties, at
March 31, 2018
was
$0.6 million
. The amount of tax benefits that would impact the effective income tax rate, if recognized, is
$0.1 million
. The amount of unrecognized tax benefits increased by
$0.2 million
during the quarter ended
March 31, 2018
. There were
no
significant changes to unrecognized tax benefits during the quarter ended
March 31, 2017
. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.
The Company has recognized the provisional tax impacts related to the Tax Act in the Company’s consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The Company has not yet determined its policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the global intangible low-taxed income (“GILTI”) provisions in future periods or use the period cost method. The Company has, however, included an estimate of the current GILTI impact in its tax provision for 2018. The Company continues to evaluate the impact of the tax reform and the accounting is expected to be completed when the Company's 2017 U.S. corporate income tax return is filed in 2018.