Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x

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


For the quarterly period ended September 30, 2017

March 31, 2022

OR

¨

☐

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


For the transition period from to

000-32743

(Commission File Number)

DASAN ZHONE SOLUTIONS, INC.

DZS INC.

(Exact name of registrant as specified in its charter)

Delaware

22-3509099

Delaware22-3509099

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

7195 Oakport Street
Oakland, California

5700 Tennyson Parkway, Suite 400

Plano, Texas

94621

75024

(Address of principal executive offices)

(Zip code)

(510) 777-7000

(469) 327-1531

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value

DZSI

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rulerule 12b-2 of the Exchange Act (Check one):

Act.

Large accelerated filer

¨

☐

Accelerated filer

¨

☒

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

☐

Smaller reporting company

x

☐

Emerging growth company

¨

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨


☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨Yes☐ No x

As of November 8, 2017, there were approximately 16,386,955 shares of the registrant’s common stock outstanding.
☒

As of April 27, 2022, there were 27,616,165 shares outstanding of the registrant’s common stock, $0.001 par value.

TABLE OF CONTENTS


TABLE OF CONTENTS

Page

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

4

3

Unaudited Condensed Consolidated Balance Sheets

5

3

Unaudited Condensed Consolidated Statements of Comprehensive LossIncome (Loss)

6

4

Unaudited Condensed Consolidated Statements of Stockholders' Equity

5

Unaudited Condensed Consolidated Statements of Cash Flows

7

6

Notes to Unaudited Condensed Consolidated Financial Statements

8

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

25

Item 4.

Controls and Procedures

35

25

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

37

27

Item 1A.

Risk Factors

37

27

Item 2.5.

ExhibitsOther Information

37

27

Item 6.

SignaturesExhibits

27

38Signatures

29


2

PART I. FINANCIAL INFORMATION


Item 1. Financial Statements



DASAN ZHONE SOLUTIONS,

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)

 September 30,
2017		 December 31,
2016
Assets   
Current assets:   
Cash and cash equivalents$10,145
 $17,893
Restricted cash13,058
 6,650
Short-term investments—
 993
Accounts receivable, net of allowances for sales returns and doubtful accounts of $2,095 as of September 30, 2017 and $1,143 as of December 31, 2016:   
Trade receivables43,478
 38,324
Related parties12,941
 13,311
Other receivables:   
Others13,851
 12,068
Related parties22
 171
Inventories31,966
 31,032
Prepaid expenses and other current assets3,198
 4,131
Total current assets128,659
 124,573
Property and equipment, net5,812
 6,288
Goodwill3,977
 3,977
Intangible assets, net7,174
 8,767
Other assets1,536
 1,842
Total assets$147,158
 $145,447
Liabilities, Stockholders’ Equity and Non-controlling Interest
 
Current liabilities:   
Accounts payable:   
Others$35,224
 $30,681
Related parties106
 430
Short-term debt:   
Others18,382
 17,599
Related parties3,544
 —
Other payables:   
Others1,691
 2,040
Related parties210
 6,940
Deferred revenue2,073
 1,901
Accrued and other liabilities10,108
 8,163
Total current liabilities71,338
 67,754
Long-term debt - related parties5,000
 6,800
Deferred revenue1,875
 1,674
Other long-term liabilities2,581
 2,351
Total liabilities80,794
 78,579
Commitments and contingencies (Note 11)
 
Stockholders’ equity and non-controlling interest:   
Common stock, authorized 36,000 shares, 16,387 shares and 16,375 shares outstanding as of September 30, 2017 and December 31, 2016 at $0.001 par value16
 16
Additional paid-in capital89,873
 89,174
Other comprehensive income (loss)(1,052) (2,815)
Accumulated deficit(23,080) (19,923)
Total stockholders’ equity65,757
 66,452
Non-controlling interest607
 416
Total stockholders’ equity and non-controlling interest66,364
 66,868
Total liabilities, stockholders’ equity and non-controlling interest$147,158
 $145,447

 

 

March 31,
2022

 

 

December 31,
2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,160

 

 

$

46,666

 

Restricted cash

 

 

6,343

 

 

 

6,808

 

Accounts receivable - trade, net of allowance for doubtful accounts of
     $17,058 as of March 31, 2022 and $17,735 as of December 31, 2021

 

 

82,607

 

 

 

86,114

 

Other receivables

 

 

9,898

 

 

 

10,621

 

Inventories

 

 

66,459

 

 

 

56,893

 

Contract assets

 

 

902

 

 

 

2,184

 

Prepaid expenses and other current assets

 

 

13,039

 

 

 

5,690

 

Total current assets

 

 

213,408

 

 

 

214,976

 

Property, plant and equipment, net

 

 

10,277

 

 

 

9,842

 

Right-of-use assets from operating leases

 

 

11,751

 

 

 

12,640

 

Goodwill

 

 

6,145

 

 

 

6,145

 

Intangible assets, net

 

 

4,820

 

 

 

5,115

 

Other assets

 

 

9,904

 

 

 

8,950

 

Total assets

 

$

256,305

 

 

$

257,668

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable - trade

 

$

63,774

 

 

$

64,258

 

Contract liabilities

 

 

7,103

 

 

 

6,091

 

Operating lease liabilities

 

 

3,927

 

 

 

4,097

 

Accrued and other liabilities

 

 

16,832

 

 

 

16,032

 

Total current liabilities

 

 

91,636

 

 

 

90,478

 

Long-term debt

 

 

—

 

 

 

—

 

Contract liabilities - non-current

 

 

2,881

 

 

 

3,044

 

Operating lease liabilities - non-current

 

 

11,029

 

 

 

12,103

 

Pension liabilities

 

 

16,106

 

 

 

16,527

 

Other long-term liabilities

 

 

3,704

 

 

 

3,609

 

Total liabilities

 

 

125,356

 

 

 

125,761

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, 36,000 shares authorized, 27,603 and 27,505 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively, at $0.001 par value

 

 

27

 

 

 

27

 

Additional paid-in capital

 

 

226,163

 

 

 

223,336

 

Accumulated other comprehensive loss

 

 

(4,793

)

 

 

(4,457

)

Accumulated deficit

 

 

(90,448

)

 

 

(86,999

)

Total stockholders’ equity

 

 

130,949

 

 

 

131,907

 

Total liabilities and stockholders’ equity

 

$

256,305

 

 

$

257,668

 

See accompanying notes to unaudited condensed consolidated financial statements.


DASAN ZHONE SOLUTIONS,

3

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss

Income (Loss)

(In thousands, except per share data)

 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Net revenue:     
Net revenue$60,513
 $24,772
 $150,834
 $68,424
Net revenue - related parties5,925
 6,468
 27,657
 22,408
Total net revenue66,438
 31,240
 178,491
 90,832
Cost of revenue:       
Products and services38,643
 16,483
 96,127
 48,750
Products and services - related parties5,569
 5,406
 22,851
 19,118
Amortization of intangible assets153
 51
 459
 51
Total cost of revenue44,365
 21,940
 119,437
 67,919
Gross profit22,073
 9,300
 59,054
 22,913
Operating expenses:       
Research and product development8,804
 5,885
 27,028
 15,583
Selling, marketing, general and administrative11,454
 8,278
 32,506
 16,691
Amortization of intangible assets154
 251
 1,191
 259
Total operating expenses20,412
 14,414
 60,725
 32,533
Operating income (loss)1,661
 (5,114) (1,671) (9,620)
Interest income36
 31
 82
 137
Interest expense(263) (204) (793) (600)
Other income (loss), net60
 (112) 43
 (41)
Income (loss) before income taxes1,494
 (5,399) (2,339) (10,124)
Income tax expense (benefit)107
 (610) 646
 (1,041)
Net income (loss)1,387
 (4,789) (2,985) (9,083)
Net income (loss) attributable to non-controlling interest(12) (56) 172
 (17)
Net income (loss) attributable to DASAN Zhone Solutions, Inc.$1,399
 $(4,733) $(3,157) $(9,066)
        
Foreign currency translation adjustments(284) 2,291
 1,782
 2,690
Comprehensive income (loss)1,103
 (2,498) (1,203) (6,393)
Comprehensive income (loss) attributable to non-controlling interest(14) (54) 191
 48
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.$1,117
 $(2,444) $(1,394) $(6,441)
        
Basic and diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc.$0.09
 $(0.42) $(0.19) $(0.90)
Weighted average shares outstanding used to compute basic and diluted net income (loss) per share16,382
 11,139
 16,380
 10,046
        

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Net revenue

 

$

77,040

 

 

$

81,031

 

Cost of revenue

 

 

50,215

 

 

 

52,936

 

Gross profit

 

 

26,825

 

 

 

28,095

 

Operating expenses:

 

 

 

 

 

 

Research and product development

 

 

11,844

 

 

 

11,119

 

Selling, marketing, general and administrative

 

 

17,742

 

 

 

31,824

 

Restructuring and other charges

 

 

436

 

 

 

6,252

 

Impairment of long-lived assets

 

 

—

 

 

 

1,735

 

Amortization of intangible assets

 

 

294

 

 

 

262

 

Total operating expenses

 

 

30,316

 

 

 

51,192

 

Operating loss

 

 

(3,491

)

 

 

(23,097

)

Interest income

 

 

37

 

 

 

42

 

Interest expense

 

 

(127

)

 

 

(249

)

Other income (expense), net

 

 

(800

)

 

 

972

 

Loss before income taxes

 

 

(4,381

)

 

 

(22,332

)

Income tax provision (benefit)

 

 

(1,333

)

 

 

893

 

Net loss

 

 

(3,048

)

 

 

(23,225

)

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(268

)

 

 

(2,270

)

Actuarial loss

 

 

—

 

 

 

(28

)

Comprehensive loss

 

$

(3,316

)

 

$

(25,523

)

Net loss per share

 

 

 

 

 

 

Basic

 

$

(0.11

)

 

$

(0.92

)

Diluted

 

$

(0.11

)

 

$

(0.92

)

Weighted average shares outstanding

 

 

 

 

 

 

Basic

 

 

27,530

 

 

 

25,252

 

Diluted

 

 

27,530

 

 

 

25,252

 

See accompanying notes to unaudited condensed consolidated financial statements.



DASAN ZHONE SOLUTIONS,

4

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

Stockholders' Equity

(In thousands)

 Nine Months Ended
 September 30,
 2017 2016
Cash flows from operating activities:   
Net loss$(2,985) $(9,083)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
Depreciation and amortization3,105
 1,164
Stock-based compensation670
 128
Unrealized gain (loss) on foreign currency transactions(185) 1,655
Deferred taxes—
 (1,069)
Changes in operating assets and liabilities:
 —
Accounts receivable(2,948) 14,450
Inventories(578) (4,107)
Prepaid expenses and other assets(101) 2,320
Accounts payable6,713
 (5,814)
Accrued expenses(4,314) 13,598
Net cash provided by (used in) operating activities(623) 13,242
Cash flows from investing activities:
 
Cash increase through Merger—
 7,013
Increase in restricted cash(6,061) (947)
Decrease in short-term and long-term loans to others—
 1,891
Increase in short-term and long-term loans to others—
 (1,386)
Proceeds from sale of short-term investments1,463
 —
Purchase of short-term investments(430) —
Proceeds from disposal of property and equipment and other assets6
 98
Purchase of property and equipment(840) (370)
Purchase of intangible asset(72) (92)
Net cash provided by (used in) investing activities(5,934) 6,207
Cash flows from financing activities:
 
Repayments of borrowings(15,627) (23,088)
Proceeds from short-term borrowings13,778
 19,769
Proceeds from long-term borrowings—
 6,800
Proceeds from issuance of common stock28
 —
Net cash provided by (used in) financing activities(1,821) 3,481
Effect of exchange rate changes on cash630
 1,538
Net increase (decrease) in cash and cash equivalents(7,748) 24,468
Cash and cash equivalents at beginning of period17,893
 9,095
Cash and cash equivalents at end of period$10,145
 $33,563

 

 

Common stock

 

 

Additional
paid-in

 

 

Accumulated
other
comprehensive

 

 

Accumulated

 

 

Total
stockholders'

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

deficit

 

 

equity

 

For the three-months ended
   March 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

 

 

27,505

 

 

$

27

 

 

$

223,336

 

 

$

(4,457

)

 

$

(86,999

)

 

$

131,907

 

Cumulative effect of ASC 326 adoption

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(401

)

 

 

(401

)

Exercise of stock awards and
   employee stock plan purchases

 

 

98

 

 

 

—

 

 

 

156

 

 

 

—

 

 

 

—

 

 

 

156

 

Stock-based compensation

 

 

—

 

 

 

—

 

 

 

2,671

 

 

 

—

 

 

 

—

 

 

 

2,671

 

Net income loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,048

)

 

 

(3,048

)

Subsidiary dissolution

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(68

)

 

 

—

 

 

 

(68

)

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(268

)

 

 

—

 

 

 

(268

)

Balance as of March 31, 2022

 

 

27,603

 

 

$

27

 

 

$

226,163

 

 

$

(4,793

)

 

$

(90,448

)

 

$

130,949

 

For the three-months ended
   March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2020

 

 

21,958

 

 

$

22

 

 

$

147,997

 

 

$

(2,124

)

 

$

(52,316

)

 

$

93,579

 

Issuance of common stock in public
   offering, net of issuance costs

 

 

4,600

 

 

 

5

 

 

 

59,520

 

 

 

 

 

 

 

 

 

59,525

 

Exercise of stock awards and
   employee stock plan purchases

 

 

325

 

 

 

—

 

 

 

2,569

 

 

 

—

 

 

 

—

 

 

 

2,569

 

Stock-based compensation

 

 

—

 

 

 

—

 

 

 

1,352

 

 

 

—

 

 

 

—

 

 

 

1,352

 

Net income loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(23,225

)

 

 

(23,225

)

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,298

)

 

 

—

 

 

 

(2,298

)

Balance as of March 31, 2021

 

 

26,883

 

 

$

27

 

 

$

211,438

 

 

$

(4,422

)

 

$

(75,541

)

 

$

131,502

 

See accompanying notes to unaudited condensed consolidated financial statements.




5

DZS INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

Three months ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(3,048

)

 

$

(23,225

)

Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,081

 

 

 

1,265

 

Impairment of long-lived assets and non-cash restructuring

 

 

—

 

 

 

4,443

 

Amortization of deferred financing costs

 

 

—

 

 

 

12

 

Stock-based compensation

 

 

2,671

 

 

 

1,352

 

Provision for inventory write-down

 

 

705

 

 

 

666

 

Bad debt expense, net of recoveries

 

 

(752

)

 

 

14,228

 

Provision for sales returns

 

 

1,448

 

 

 

239

 

Provision for warranty

 

 

121

 

 

 

269

 

Unrealized loss (gain) on foreign currency transactions

 

 

874

 

 

 

(883

)

Subsidiary dissolution

 

 

(68

)

 

 

—

 

Deferred taxes

 

 

—

 

 

 

(134

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

2,761

 

 

 

(846

)

Other receivable

 

 

126

 

 

 

(2,678

)

Inventories

 

 

(10,931

)

 

 

(3,239

)

Contract assets

 

 

1,261

 

 

 

(267

)

Prepaid expenses and other assets

 

 

(7,577

)

 

 

(1,186

)

Accounts payable

 

 

1,586

 

 

 

3,539

 

Contract liabilities

 

 

(1,446

)

 

 

32

 

Accrued and other liabilities

 

 

456

 

 

 

(523

)

Net cash used in operating activities

 

 

(10,732

)

 

 

(6,936

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,317

)

 

 

(1,266

)

Acquisition of business, net of cash acquired

 

 

—

 

 

 

(4,258

)

Net cash used in investing activities

 

 

(1,317

)

 

 

(5,524

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock in public offerings, net of issuance costs

 

 

—

 

 

 

59,525

 

Repayments of short-term borrowings and line of credit

 

 

—

 

 

 

(11,494

)

Repayments of related party term loan

 

 

—

 

 

 

(29,298

)

Payments for debt issue costs

 

 

(178

)

 

 

—

 

Proceeds from exercise of stock awards and employee stock plan purchases

 

 

156

 

 

 

2,569

 

Net cash provided by (used in) financing activities

 

 

(22

)

 

 

21,302

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(903

)

 

 

404

 

Net increase in cash, cash equivalents and restricted cash

 

 

(12,974

)

 

 

9,246

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

53,639

 

 

 

54,587

 

Cash, cash equivalents and restricted cash at end of period

 

$

40,665

 

 

$

63,833

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash to statement of
   financial position

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,160

 

 

$

56,818

 

Restricted cash

 

 

6,343

 

 

 

6,848

 

Long-term restricted cash

 

 

162

 

 

 

167

 

 

 

$

40,665

 

 

$

63,833

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest - bank and trade facilities

 

$

36

 

 

$

83

 

Interest - related party

 

 

—

 

 

 

94

 

Income taxes

 

$

283

 

 

$

1,206

 

See accompanying notes to unaudited condensed consolidated financial statements.

6

Notes to Unaudited Condensed Consolidated Financial Statements

(1)Organization and Summary of Significant Accounting Policies

(a)Description of Business
DASAN Zhone Solutions,

(1) Organization and Summary of Significant Accounting Policies

(a) Description of Business

DZS Inc. (formerly known as Zhone Technologies, Inc. and referred(referred to, collectively with its subsidiaries, as "DZS"“DZS” or the "Company"“Company”) is a global provider of networkleading-edge access, solutions and communications equipment for service provider5G transport, and enterprise networks.communications platforms that enable the emerging hyper-connected, hyper-broadband world. 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.

base.

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")1999. At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DASAN Networks, Inc. ("DNI") were canceled and converted into the right to receive shares of the Company's common stock in an amount equal to 58% of the issued and outstanding shares of the Company's common stock immediately following the Merger. In connection with the Merger, the Company changed its name from Zhone Technologies, Inc. to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone." The Company’s common stock continues to be traded on the Nasdaq Capital Market, and the Company’s ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016. The Company is headquartered in Oakland, California.


(b)Going Concern
The accompanying unaudited condensed consolidated financial statements have been preparedPlano, Texas with flexible in-house production facilities in conformity with generally accepted accounting principlesSeminole, Florida, and contract manufacturers located in the United States ("U.S. GAAP"), assuming the Company will continue as a going concern, which contemplates the realization of assetsChina, India, Korea 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.Vietnam. 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 sufficientalso maintains offices 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 forcustomer support 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 outcomeglobal locations.

(b) Basis of the uncertainties set forth above.


(c)Risks and Uncertainties
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.

(d)Correction of errors

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

(e)Basis of Presentation
Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principlesU.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 103 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principlesU.S. GAAP for complete financial statements.

These financial statements include the accounts of the Company and its wholly owned subsidiaries. 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, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2022. For a complete description of what the Company believes to be the critical accounting policies and estimates used in the preparation of its unaudited condensed consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

All intercompany transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current-quarter presentation. 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

(c) Risks and Uncertainties

The accompanying unaudited condensed consolidated financial statements should be readhave been prepared in conjunctionconformity with U.S. GAAP, assuming the Company will continue as a going concern.

The COVID-19 pandemic continued to adversely affect significant portions of our business and our financial condition and results of operations in the first quarter of 2022. The emergence of the Omicron variant in late 2021 with a resulting increase in COVID cases in early 2022 resulted in re-implementation of various measures, including travel bans and restrictions, limitations on public and private gatherings, business closures or operating restrictions, social distancing, and shelter-in-place orders. The health effects of the pandemic and the above measures taken in response thereto have had an effect on the global economy in general and have materially impacted and will likely continue to impact the Company’s financial condition, results of operations and cash flows. Given the ongoing and dynamic nature of the virus and its variants, and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 pandemic on our business.

We have experienced and continue to experience disruptions in our supply chain due to the pandemic, which has also impacted and may adversely impact our operations (including, without limitation, logistical and other operational costs) and the operations of some of our key suppliers. Supply chain pricing, freight and logistics costs, product and component availability, and extended lead-times became a challenge in 2021 and continue into 2022 as the world economy recovers from the COVID-19 pandemic. As we continue to incur elevated costs for components and expedite fees, our supply chain and operations teams continue to focus on managing through a constrained environment, thereby enabling DZS to maximize shipments despite elongated lead times. We remain cautious about continued supply chain headwinds that challenge the industry and anticipate a constrained supply chain environment to persist throughout 2022.

For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A, Risk Factors of our 2021 Form 10-K.

(d) Use of Estimates

The preparation of the unaudited condensed consolidated financial statements ofin conformity with U.S. GAAP requires management to make estimates and assumptions that affect 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 acquirerreported amounts 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 and disclosure of Legacy Zhone as ofcontingent assets and liabilities at the effective date of the Merger. Those assets includeunaudited condensed consolidated financial statements and the fair valuereported amounts of acquired intangible assetsrevenue and goodwill. Due toexpenses during the foregoing, the Company’s financialreporting period. Actual 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.could differ materially from those estimates.

7

(e) Disaggregation of Revenue

The following table presents revenues by source (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Products

 

$

72,462

 

 

$

76,252

 

Services and other

 

 

4,578

 

 

 

4,779

 

Total

 

$

77,040

 

 

$

81,031

 

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 following table present revenues by geographical concentration (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Americas

 

$

23,061

 

 

$

20,169

 

Europe, Middle East, Africa

 

 

18,649

 

 

 

17,918

 

Asia

 

 

35,330

 

 

 

42,944

 

Total

 

$

77,040

 

 

$

81,031

 

(f) Concentration of Risk

Financial instruments that potentially subject the Company and its consolidated subsidiaries for periods on or after September 9, 2016.


(f)Reverse Stock Split
On February 28, 2017, the Company filed a Certificateto concentrations of Amendment with the Delaware Secretarycredit risk consist primarily 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)cash, cash equivalents and restricted stock units in this Quarterly Report on Form 10-Qcash, accounts receivables, and contract assets. Cash, cash equivalents and restricted cash consist of financial deposits and money market accounts that are provided on a post-reverse stock split basis.

(g)Concentration of Risk
principally held with various domestic and international financial institutions with high credit standing.

The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, Internetinternet 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. accounts based upon the expected collectability of accounts receivable using historical loss rates adjusted for customer-specific factors and current economic conditions. The Company performs periodic assessments of its customers’ liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement review and historical and current collection trends.

Activity under the Company’s allowance for doubtful accounts is comprised as follows (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

17,735

 

 

$

3,954

 

Charged to expense, net of recoveries

 

 

(752

)

 

 

14,228

 

Utilization/write offs/exchange rate differences

 

 

—

 

 

 

(94

)

Cumulative effect of ASC 326 adoption

 

 

401

 

 

 

—

 

Foreign exchange impact

 

 

(326

)

 

 

(148

)

Balance at end of period

 

$

17,058

 

 

$

17,940

 

For the three months ended September 30, 2017, twoMarch 31, 2022, 2 customers represented, 10%accounted for 13% and 9%12% of net revenue, respectively. For the three months ended September 30, 2016, threeMarch 31, 2021, 2 customers represented 18%, 16% (a related-party)accounted for 18% and 12%10% of net revenue, respectively. For the nine months ended September 30, 2017, two

As of March 31, 2022, 0 customers each represented 9%more than 10% of net revenue (oneaccounts receivable. As of which was a related-party). For the nine months ended September 30, 2016, threeDecember 31, 2021, 2 customers represented 23%, 21% (a related-party)26% and 12% of net revenue, respectively.

As of September 30, 2017, three customers represented 16% (a related-party), 11% and 10%10% of net accounts receivable, respectively.

As of DecemberMarch 31, 2016, two customers represented 13% (a related-party) and 10% of net accounts receivable, respectively.

As of September 30, 20172022, and December 31, 2016,2021, net accounts receivables from customers in countries other than the United States represented 84%77% and 87%79%, respectively,respectively.

In 2017, the Company entered into an agreement with a customer in India to supply product for a state sponsored broadband project. The Company substantially completed its obligations under the agreement in 2018. The Company billed the customer, which is a state government sponsored entity, approximately $59.0 million and collected payments of netapproximately $41.7 million by December 31, 2020. In late March 2021, the customer’s state government parent experienced difficulty passing a budget impacting the ability of the customer to make remaining agreed-upon payments to us. In light of this development, the Company recorded an allowance that covered the entire balance unpaid by the customer. Subsequent to March 2021, the Company recovered approximately $1.9 million of accounts receivable related to the customer. As of March 31, 2022 the Company has a recorded allowance for doubtful accounts of $14.8 million related to this receivable. The Company will continue to pursue collection of the entire outstanding balance and any amounts collected will be recognized in the period which they are received. In the event the Company’s efforts to collect from this customer prove unsuccessful, DZS may seek payment through other means, including through legal action.

8

(g) Business Combinations

The Company allocates the fair value of purchase consideration to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets and certain tangible assets such as inventory.

Critical estimates in valuing certain tangible and intangible assets include but are not limited to future expected cash flows from the underlying assets and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (which cannot exceed one year from the acquisition date), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date.

When the consideration transferred by the Company in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the total consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are made retrospectively, with corresponding adjustments against goodwill. Changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments are made in the current period, with corresponding adjustments recognized in earnings.


(h) Restructuring and Other Charges

Restructuring and other charges primarily consists of severance and other termination benefits and non-cash impairment charges related to right-of-use assets from operating leases related to the restructuring activities in Hanover, Germany and Ottawa, Canada. The Company recognizes contractual termination benefits when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. The Company recognizes one-time employee termination benefits when (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement in sufficient detail to enable employees to determine the type and amount of benefits they will receive, and (iv) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. These charges are included in restructuring and other charges in the unaudited condensed consolidated statement of comprehensive income (loss).

(h)

(i)Recent Accounting Pronouncements

On May 28, 2014,

In June 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU"(“ASU”) No. 2014-09, Revenue from Contracts with Customers,2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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, butto measure and recognize expected credit losses for financial assets held and not before the original effective date of January 1, 2017.accounted for at fair value through net income. In November 2018, April 2019 and 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 2015,2019, the FASB issued ASU No. 2015-11, Simplifying2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, which provided additional implementation guidance on the Measurement of Inventory, which requires an entity to measure inventory atpreviously issued ASU. The Company adopted the lower of cost and net realizable value. Theupdated 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, 2017,2022, utilizing the modified retrospective transition method and will be adopted accordingly. ASU No. 2015-11 should be applied prospectively with earlier application permitted asrecorded a cumulative-effect adjustment 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.
$0.4 million to retained earnings.

In November 2015,March 2020, the FASB issued ASU 2015-17, Income Taxes, Balance Sheet ClassificationNo. 2020-04 (Topic 848), Reference Rate Reform - Facilitation of Deferred Taxes,the Effects of Reference Rate Reform on Financial Reporting, which simplifiesprovides temporary optional expedients and exceptions to the classification of deferred tax assetsexisting guidance on contract modifications and liabilitieshedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as non-current in the balance sheet.Secured Overnight Financing Rate. The updated guidancestandard was effective upon issuance and may generally be applied through December 31, 2022, to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR. The ASU is effective for the Company on January 1, 2017, and will be adopted accordingly.

The adoption of this standard will not expected to have a material impact on the Company's unaudited condensedour consolidated financial statements.

9

In

(2) Business Combinations

Optelian Acquisition

On 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 for5, 2021, the Company on January 1, 2019,acquired Optelian Access Networks Corporation (“Optelian”), a corporation incorporated under the laws of Canada and early adoption is permitted. Theregistered extra-provincially in the Province of Ontario, pursuant to an acquisition agreement whereby the Company does not plan to early adopt this guidance. The Company expects its assets and liabilities to increase as a resultpurchased all the outstanding shares of Optelian (the “Optelian Acquisition”). Following the closing of the adoptionOptelian Acquisition, Optelian became the Company’s wholly owned subsidiary.

Optelian was a leading optical networking solution provider. This acquisition introduced the “O-Series” to the DZS portfolio of this standard. carrier grade optical networking products with 100 gigabits per second (Gig) and above capability, expanding the DZS product portfolio by providing environmentally hardened, high capacity, and flexible solutions at the network edge.

The Company is currently assessingpurchase price of $7.5 million included cash paid to the potential impactshareholders and option holders of adopting this new guidanceOptelian, cash paid to retire Optelian's outstanding debt on its unaudited condensed consolidated financial statements. the date of acquisition, and contingent payments to shareholders.

The Company is not ablepayment to quantify or cannot reasonably estimate quantitative informationshareholders and option holders includes a $0.3 million holdback and $1.9 million contingent consideration based on a certain percentage of future revenue of certain Optelian products through the end of 2023. We completed the purchase price allocation for Optelian acquisition in 2021. The purchase price allocation resulted in the recognition of goodwill of approximately $1.9 million, which primarily related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.

Inexpected synergies from combining operations.

RIFT Acquisition

On 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.

(2)Merger
On September 9, 2016,3, 2021, the Company acquired DNS throughsubstantially all of the Mergerassets of RIFT, Inc., a network automation solutions company, and all the outstanding shares of RIFT.IO India Private Limited, a wholly owned subsidiary of RIFT, Inc. (collectively “RIFT”). RIFT developed a carrier-grade RIFT.ware software platform that simplifies the Company with and into DNS, with DNS surviving asdeployment of any slice, service, or application on any cloud. The total purchase consideration was $0.5 million, including a wholly owned subsidiary$0.2 million holdback that was released in April 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 immediately2021 following the Merger. Accordingly, at the effective timefulfillment of the Merger, the Company issued 9,493,016 shares (post reverse stock split) of the Company’s common stock to DNI as considerationcertain requirements 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 ofpurchase agreement. We completed 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 acquirerfor RIFT acquisition in 2021. The purchase price allocation resulted in the Merger) have been recorded at their fair value measured asrecognition of September 9, 2016.
The total purchase consideration in the Merger was based on the numbergoodwill of shares of Legacy Zhone common stock and Legacy Zhone stock options vested and outstanding immediately priorapproximately $0.2 million, which primarily related 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):expected synergies from combining operations.

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

The following table summarizes the allocation of the fair value consideration transferred as of the acquisition date (in thousands):
Cash and cash equivalents $7,013
Accounts receivable 18,510
Inventory 16,456
Prepaid expenses and other current assets 2,191
Property and equipment 4,339
Other assets 125
Identifiable intangible assets 10,479
Goodwill 3,284
Accounts payable (11,021)
Accrued and other liabilities (7,089)
Other long-term liabilities (2,845)
Total Indicated Fair Value of Assets $41,442

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

The Company considered the deferred tax liabilities caused by the Merger to be a source of income to support recoverability of acquired deferred tax assets, before considering the recoverability of the acquirer's existing deferred tax assets. Accordingly, the valuation allowance on the acquiree's deferred tax assets was reduced by the deferred tax liabilities caused by the Merger and accounted for as part of the purchase price allocation.
The following table presents the fair values of the acquired intangible assets at the effective date of the Merger (in thousands, except years):
  
Useful life
(in Years)
 Fair Value
Developed technology 5 $3,060
Customer relationships 10 5,240
Backlog 1 2,179
    $10,479

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

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


(3) Fair Value Measurement

The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1 –

Inputs are quoted prices in active markets for identical assets or liabilities.

Level 2 –

Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

Level 3 –

Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.unobservable

The following financial instruments are not measured

Assets and Liabilities Measured at fair valueFair 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. a Recurring Basis:

The carrying values of financial instruments such as cash and cash equivalents, short-term investments,restricted cash, accounts receivable and other receivables, accounts payable and accrued liabilities approximate their fair values based on their short-term nature.

The carryingCompany classifies its contingent liability from Optelian acquisition within Level 3 as it includes inputs not observable in the market. The Company estimates the fair value of contingent consideration as the present value of the Company's debt approximates theirexpected contingent payments, determined using the revenue forecast for certain Optelian products through the end of 2023. The fair values based onvalue of contingent liability is generally sensitive to changes in the current rates available to the Company for debtrevenue forecast. As of similar terms and maturities.



(4)Inventories
Inventories as of September 30, 2017March 31, 2022 and December 31, 2016 were2021, the Company’s Level 3 contingent liability was $2.2 million and $2.1 million, respectively. During the three months ended March 31, 2022, the Company recorded $0.1 million expense related to the change in fair value of the Company’s contingent liability. The change in fair value is included in selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss).

10

(4) Cash, Cash Equivalents and Restricted Cash

As of March 31, 2022 and December 31, 2021, the Company's cash, cash equivalents and restricted cash consisted of financial deposits. Cash, cash equivalents and restricted cash held within the U.S. totaled $8.7 million and $22.3 million as of March 31, 2022 and December 31, 2021, respectively. Cash, cash equivalents and restricted cash held within the U.S. are held at FDIC insured depository institutions. Cash, cash equivalents and restricted cash held outside the U.S. totaled $32.0 million and $31.3 million as of March 31, 2022 and December 31, 2021, respectively. Restricted cash consisted primarily of cash collateral for performance bonds and warranty bonds. Long-term restricted cash was $0.2 million as of March 31, 2022 and December 31, 2021 and is included in other assets on the unaudited condensed consolidated balance sheets.

(5) Balance Sheet Details

Balance sheet detail as of March 31, 2022 and December 31, 2021 is as follows (in thousands):

Inventories

 

 

March 31, 2022

 

 

December 31, 2021

 

Raw materials

 

$

45,527

 

 

$

34,512

 

Work in process

 

 

1,216

 

 

 

1,427

 

Finished goods

 

 

19,716

 

 

 

20,954

 

Total inventories

 

$

66,459

 

 

$

56,893

 

 September 30,
2017		 December 31,
2016
Raw materials$12,812
 $13,547
Work in process3,004
 3,705
Finished goods16,150
 13,780
Total inventories$31,966
 $31,032

Inventories provided as collateral for borrowings from Export-Import Bankare stated at the lower of Korea amounted to $18.9 million and $14.4 million as of September 30, 2017 and December 31, 2016, respectively.

cost or net realizable value, with cost being computed based on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis.

(5)Property and Equipment

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

 

 

March 31, 2022

 

 

December 31, 2021

 

Property, plant and equipment, net:

 

 

 

 

 

 

Machinery and equipment

 

$

17,090

 

 

$

14,278

 

Leasehold improvements

 

 

5,251

 

 

 

5,219

 

Computers and software

 

 

3,278

 

 

 

3,217

 

Furniture and fixtures

 

 

1,726

 

 

 

1,771

 

Construction in progress and other

 

 

1,052

 

 

 

2,937

 

 

 

 

28,397

 

 

 

27,422

 

Less: accumulated depreciation and amortization

 

 

(17,971

)

 

 

(17,394

)

Less: government grants

 

 

(149

)

 

 

(186

)

Total property, plant and equipment, net

 

$

10,277

 

 

$

9,842

 

 September 30,
2017		 December 31,
2016
Furniture and fixtures$21,251
 $20,040
Machinery and equipment4,945
 4,530
Leasehold improvements3,386
 3,573
Computers and software567
 411
Other983
 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, plant and equipment was $0.8 million and $0.9 million for the three and nine months ended September 30, 2017 was $0.5 millionMarch 31, 2022 and $1.4 million,2021, 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 thecertain foreign government entities mainly to support capital expenditures.expenditures in the region. 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.

Warranties

The Company accrues warranty costs based on historical trends for the expected material and labor costs to provide warranty services. The Company's standard warranty period is one year from the date of shipment with the ability for customers to purchase an extended warranty of up to five years from the date of shipment. The following table summarizes the activity related to the product warranty liability:

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

1,981

 

 

$

1,522

 

Charged to cost of revenue

 

 

121

 

 

 

269

 

Claims and settlements

 

 

(149

)

 

 

(267

)

Foreign exchange impact

 

 

(17

)

 

 

56

 

Balance at end of period

 

$

1,936

 

 

$

1,580

 

11

Contract Balances

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. The majority of the Company's performance obligations in its contracts with customers relate to contracts with duration of less than one year.

The opening and closing balances of current and long-term contract assets and contract liabilities related to contracts with customers are as follows:

 

 

Contract
assets

 

 

Contract
liabilities

 

December 31, 2021

 

$

2,184

 

 

$

9,135

 

March 31, 2022

 

 

902

 

 

 

9,984

 

Increase (decrease)

 

$

(1,282

)

 

$

849

 

(6)Goodwill and Intangible Assets
Goodwill

The decrease in contract assets during the three months ended March 31, 2022 was primarily due to invoicing that occurred in 2022 from unbilled balances reflected as contract assets as of September 30, 2017December 31, 2021.

The increase in contract liabilities during the three months ended March 31, 2022 was primarily due to amounts being invoiced for certain customers that have not yet met the revenue recognition criteria. The amount of revenue recognized in the three months ended March 31, 2022 that was included in the prior period contract liability balance was $2.4 million. This revenue consists of services provided to customers who had been invoiced prior to the current year. We expect to recognize approximately 71% of outstanding contract liabilities as revenue over the next 12 months and the remainder thereafter.

The balance of contract cost deferred as of March 31, 2022 and December 31, 20162021 was $0.6 million and $0.8 million, respectively. During the three months ended March 31, 2022, the Company recorded $0.2 million in amortization related to contract cost deferred as followsof December 31, 2021.

(6) Goodwill and Intangible Assets

The following table summarizes the activity related to goodwill (in thousands):

 

 

March 31,

 

 

 

2022

 

 

2021

 

Balance at beginning of period, gross

 

$

7,148

 

 

$

4,980

 

Accumulated impairment at beginning of period

 

 

(1,003

)

 

 

(1,003

)

Goodwill from acquisitions

 

 

—

 

 

 

1,698

 

Balance at end of period

 

$

6,145

 

 

$

5,675

 

 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 asconsisted of September 30, 2017 and December 31, 2016 were as followsthe following (in thousands):

 

 

March 31, 2022

 

 

 

Gross Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net

 

Developed technology

 

$

5,007

 

 

$

(3,559

)

 

$

1,448

 

Customer relationships

 

 

5,730

 

 

 

(3,041

)

 

 

2,689

 

In-process research and development

 

 

890

 

 

 

(207

)

 

 

683

 

Total intangible assets, net

 

$

11,627

 

 

$

(6,807

)

 

$

4,820

 

 

 

December 31, 2021

 

 

 

Gross Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net

 

Developed technology

 

$

5,007

 

 

$

(3,464

)

 

$

1,543

 

Customer relationships

 

 

5,730

 

 

 

(2,886

)

 

 

2,844

 

In-process research and development

 

 

890

 

 

 

(162

)

 

 

728

 

Total intangible assets, net

 

$

11,627

 

 

$

(6,512

)

 

$

5,115

 

12

 September 30,
2017		 December 31,
2016
Developed technology$3,060
 $3,060
Customer relationships5,240
 5,240
Backlog2,179
 2,179
Other194
 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, 2017March 31, 2022 and 2021 was $0.3$0.3 million and $1.7$0.4 million, respectively. Amortization

The following table presents the future amortization expense associated withof the Company’s intangible assets for eachas of the three and nine months ended September 30, 2016 was $0.3 million.March 31, 2022 (in thousands):

Remainder of 2022

 

$

883

 

2023

 

 

1,177

 

2024

 

 

1,177

 

2025

 

 

1,177

 

2026

 

 

406

 

Total

 

$

4,820

 


(7)Debt
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.

(7) Debt

The Company had $6.7 million of borrowing availability under the WFB Facility0 debt obligations 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 under2022 and December 31, 2021. During the WFB Facility are secured by substantially allfirst half 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. If2021, the Company defaults underpaid off the WFB Facilityoutstanding balance of debt with related parties, foreign banks and other lending institutions. The Company has no contractual principal payments due to a covenant breach or otherwise, WFB may be entitled to, among other things, requirein 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.
next five years.

Bank and Trade Facilities - Foreign Operations

Certain

During prior periods, 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,During 2021, the Company had an aggregatepaid the entire 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
Asarrangements.

Related Party Debt

During prior periods, certain 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 facilitysubsidiaries entered into term loan arrangements with certain foreign banks.


(8)Non-Controlling Interests

Non-controlling interests forDASAN Networks, Inc. (“DNI”), a related party as discussed in Note 10. During 2021, 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,entire outstanding balance on Septemberthese term loans was repaid.

JPMorgan Credit Facility

On February 9, 2016,2022, the Company entered into a loan agreementCredit Agreement with DNI for a $5.0 million unsecured subordinated term loan facility. Under the loan agreement, the Company, was permitted to request drawdownsas borrower, certain subsidiaries of one or more termthe Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement provides for revolving loans in an aggregate principal amount notof up to exceed $5.0$30 million, up to $15 million of which is available for letters of credit. The Credit Agreement matures on February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments, plus $10 million.

Loans under the Credit Agreement bear interest at the Company’s option at (i) the prime rate plus 2.00%, (ii) the adjusted term SOFR rate plus 2.90% or (iii) the adjusted daily simple SOFR rate plus 2.90%. The Company pays a per annum fee of 2.90% on all letters of credit issued under the Credit Agreement, and a commitment fee of 0.25% per annum on the unused revolving credit availability under the Credit Agreement.

As of September 30, 2017, $5.0 million in term loansMarch 31, 2022, there was0 amount outstanding under the revolving credit facility. Such term loans matureThe Company was in September 2021 and are pre-payable at any timecompliance with all debt covenants as of March 31, 2022.

(8) Employee Benefit Plans

Defined Contribution Plans

The Company maintains a 401(k) plan for its employees in the US whereby eligible employees may contribute up to a specified percentage of their earnings, on a pretax basis, subject to the maximum amount permitted by the Internal Revenue Code. Under the 401(k) plan, the Company without premium or penalty. made discretionary contributions to the plan in 2021. For the three months ended March 31, 2022 and 2021, the Company recorded an expense of $0.2 million and $0.1 million, respectively.

The interest rateCompany maintains a defined contribution plan for its employees in Korea. Under the defined contribution plan, the Company contributes the equivalent of 8.3% of an employee's gross salary into the plan. For the three months ended March 31, 2022 and 2021, the Company recorded an expense of $0.3 million.

13

Defined Benefit Plans

The Company sponsors defined benefit plans for its employees in Germany and Japan. Defined benefit plans provide pension benefits based on compensation and years of service. The Germany plans were frozen as of September 30, 2017 under this facility2003 and have not been offered to new employees after that date. The Company has recorded the underfunded status as of March 31, 2022 and December 31, 2021 as a long-term liability on the unaudited condensed consolidated balance sheets. The accumulated benefit obligation for the plans in Germany and Japan was 4.6% per annum.


In addition,$16.1 million and $16.5 million as of March 31, 2022 and December 31, 2021, respectively. Periodic benefit costs for the three months ended March 31, 2022 and 2021 were $0.1 million.

The Company holds life insurance contracts, with the Company borrowed $1.8as beneficiary, in the amount of $2.8 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 option31, 2022 and $2.9 million as of renewal by mutual agreement, and bore interestDecember 31, 2021, respectively, related to individuals under the pension plans. The Company records these insurance contracts based on their cash surrender value at a rate of 6.9% per annum, payable annually. Effective February 27, 2017,the balance sheet dates. These insurance contracts are classified as other assets on the Company’s unaudited condensed consolidated balance sheet. The Company intends to use any proceeds from these policies to fund the pension plans. However, since the Company amendedis the termsbeneficiary on these policies, these assets have not been designated pension plan assets.

(9) Restructuring and Other Charges

In 2021, the Company made the strategic decision to relocate manufacturing functions of this loanDZS GmbH and Optelian to extend the repayment date from March 2017 to March 2018,Seminole, Florida and to reducetransition the interest rate from 6.9%above subsidiaries to 4.6% per annum.

On June 23, 2017,sales and research and development centers. The Company incurred approximately $12.7 million of restructuring and other charges since the beginning of its restructuring activities in the first quarter of 2021. For the three months ended March 31, 2022, the Company borrowed $3.5recorded $0.4 million of restructuring related costs, consisting primarily of logistics costs and professional services related to legal and accounting support. For the three months ended March 31, 2021, the Company recorded $6.3 million of restructuring related costs, consisting primarily of severance and other termination related benefits of $3.5 million, an impairment of long-lived assets charge of $2.7 million primarily related to right-of-use assets from Solueta, an affiliateoperating leases, and $0.1 million of other charges. The Company paid in full its liability related to termination benefits as of March 31, 2022.

(10) Related Party Transactions

Related Party Debt and Guarantees

The following table sets forth payment guarantees of the Company's obligations as of March 31, 2022 that have been provided by DNI. AsDNI owns approximately 36.6% 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 rateshares of 4.6% per annum, payable monthly.the Company's common stock. The amount guaranteed exceeds the principal amounts of outstanding obligations due to collateral requirements by the banks.

Guarantor

 

Amount Guaranteed
(in thousands)

 

 

Description of Obligations Guaranteed

Dasan Networks, Inc.

 

$

4,375

 

 

Payment guarantee to Industrial Bank of Korea

Dasan Networks, Inc.

 

 

1,486

 

 

Payment guarantee to Shinhan Bank

 

 

$

5,861

 

 

 


Other Related-PartyRelated Party Transactions

Sales, and purchases, cost of revenue, research and product development, selling, marketing, general and administrative, interest expense and other expenses to and from related parties for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands): for the three months ended March 31, 2022 and 2021:

 

 

Three Months Ended March 31, 2022

 

Counterparty

 

Sales

 

 

Cost of
revenue

 

 

Research
and product
development

 

 

Selling,
marketing,
general and
administrative

 

 

Interest
expense

 

 

Other
expenses

 

Dasan Networks, Inc.

 

$

198

 

 

$

177

 

 

$

90

 

 

$

317

 

 

 

 

 

$

17

 

DS Commerce, Inc.

 

 

—

 

 

 

11

 

 

 

1

 

 

 

11

 

 

 

—

 

 

 

—

 

 

 

$

198

 

 

$

188

 

 

$

91

 

 

$

328

 

 

$

—

 

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2021

 

Counterparty

 

Sales

 

 

Cost of
revenue

 

 

Research
and product
development

 

 

Selling,
marketing,
general and
administrative

 

 

Interest
expense

 

 

Other
expenses

 

Dasan Networks, Inc.

 

$

1,770

 

 

$

1,655

 

 

$

261

 

 

$

402

 

 

$

132

 

 

$

85

 

Dasan Invest Co., Ltd.

 

 

—

 

 

 

10

 

 

 

46

 

 

 

18

 

 

 

—

 

 

 

—

 

 

 

$

1,770

 

 

$

1,665

 

 

$

307

 

 

$

420

 

 

$

132

 

 

$

85

 

14

    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 andto sell certain of its subsidiaries. Salesservices 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.

Company. The Company also 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 thesethird party customers. Selling,The above transactions are included in sales and cost of revenue on the unaudited condensed consolidated statement of comprehensive income (loss). Sales to DNI are recorded net of royalty fees for a sales channel arrangement.

DNS Korea had two separate lease agreements with DNI related to the lease of office space and warehouse facilities. In the first quarter of 2022, DNI sold the above facilities to the unrelated third party, and the respective leases were reassigned to the new landlord. Operating lease cost related to the DNI leases totaled $0.2 million and $0.5 million for three months ended March 31, 2022 and 2021, respectively. Operating lease expense is allocated between cost of revenue, research and product development, and selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss). Deposits for the DNI leases were included in other assets on the consolidated balance sheets as of December 31, 2021.

DNS Korea had an agreement with Dasan Invest Co., Ltd. to provide IT services for the Company. The agreement was terminated in the fourth quarter of 2021 and the new agreement was signed with DS Commerce, Inc. Both entities have an affiliation with DZS board members. The expense related to DNI includes a feethe above IT services is allocated between cost of 3%revenue, research and product development, and selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of total salescomprehensive income (loss).

Interest expense represents interest paid to DNI for salesthe related party debt. Refer 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 subsidiariesNote 7 Debt 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.
further information.

Other expenses to related parties represent expenses tocharges from DNI for its payment guarantees relating to the Company's borrowings. The Company pays DNI a guarantee fee which is calculated as 0.9%0.9% of the guaranteed amount.


Refer to the table above for further information about obligations guaranteed by DNI.

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, 2017March 31, 2022 and December 31, 20162021 were included in the following balance sheet captions on the unaudited condensed consolidated balance sheets, as follows (in thousands):

 

 

As of March 31, 2022

 

Counterparty

 

Account
receivables

 

 

Other
receivables

 

 

Other assets

 

 

Accounts
payable

 

Dasan Networks, Inc.

 

$

207

 

 

$

368

 

 

$

—

 

 

$

202

 

DS Commerce, Inc.

 

 

—

 

 

 

—

 

 

 

—

 

 

 

25

 

 

 

$

207

 

 

$

368

 

 

$

—

 

 

$

227

 

 

 

As of December 31, 2021

 

Counterparty

 

Account
receivables

 

 

Other
receivables

 

 

Other assets

 

 

Accounts
payable

 

Dasan Networks, Inc.

 

$

181

 

 

$

215

 

 

$

691

 

 

$

785

 

DS Commerce, Inc.

 

 

—

 

 

 

—

 

 

 

—

 

 

 

46

 

 

 

$

181

 

 

$

215

 

 

$

691

 

 

$

831

 

    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.

(11) Net Income (Loss) Per Share

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 sharesstock equivalents are excluded if their effect is antidilutive. Potential common equivalent sharesstock equivalents are composed of incremental shares of common equivalent sharesstock issuable upon the exercise of stock options and the vesting of restricted stock units.
Basic In periods when a net income (loss)loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is the same as diluted net income (loss)reported, basic and dilutive loss per share forare 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.
same.

15

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): for the three months ended March 31, 2022 and 2021:

 

 

Three months ended March 31

 

 

 

2022

 

 

2021

 

Net income (loss)

 

$

(3,048

)

 

$

(23,225

)

Weighted average number of shares outstanding:

 

 

 

 

 

 

Basic

 

 

27,530

 

 

 

25,252

 

Effect of dilutive securities:

 

 

 

 

 

 

Stock options, restricted stock units and share awards

 

 

—

 

 

 

—

 

Diluted

 

$

27,530

 

 

$

25,252

 

Net income (loss) per share:

 

 

 

 

 

 

Basic

 

$

(0.11

)

 

$

(0.92

)

Diluted

 

$

(0.11

)

 

$

(0.92

)

  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 outstandingfollowing table sets forth potential common equivalent shares excluded from the computation ofstock that is not included in the diluted net income (loss) per share attributable to DASAN Zhone Solutions, Inc.calculation above because their effect would be anti-dilutive for the periods presented because including them would have been antidilutive are as followsindicated (in thousands):

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

Outstanding stock options

 

 

939

 

 

 

628

 

Unvested restricted stock units

 

 

278

 

 

 

197

 

  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

(12) Leases

The Company has entered intoleases certain properties and buildings (including manufacturing facilities, warehouses, and office spaces) and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists of operating leases for certain office spacewhich expire at various dates through 2028.

Assets and equipment, some of which contain renewal options and escalation clauses. Estimated future lease payments under all non-cancellableliabilities related to operating leases with termsare included in excess of one year, including taxesthe consolidated balance sheets as right-of-use assets from operating leases, operating lease liabilities - current and service fees, are as follows (in thousands):

 Operating Leases
Year ending December 31: 
2017 (remainder of the year)$967
20183,359
20192,496
20202,358
20212,264
Thereafter8,722
Total minimum lease payments$20,166
Warranties
operating lease liabilities - non-current. The Company accrues for warranty costsrecognizes minimum rental expense on a straight-line basis based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally two to five years fromfixed components of a lease arrangement. The Company amortizes this expense over the term of the lease beginning with the date of shipment. initial possession, which is the date the lessor makes an underlying asset available for use. For the three months ended March 31, 2022 and 2021, the Company recognized lease expense of $1.2 million and $1.6 million, respectively.

The following table reconciles changes inpresents the maturity of the Company’s accrued warranties and related costs for the nine months ended September 30, 2017 and 2016operating lease liabilities as of March 31, 2022 (in thousands):

Remainder of 2022

 

$

3,572

 

2023

 

 

4,380

 

2024

 

 

3,825

 

2025

 

 

2,550

 

2026

 

 

1,666

 

Thereafter

 

 

830

 

Total operating lease payments

 

 

16,823

 

Less: imputed interest

 

 

(1,867

)

Total operating lease liabilities

 

$

14,956

 

 Nine Months Ended September 30,
 2017 2016
Beginning balance$878
 $441
Charged to cost of revenue126
 227
Claims and settlements(195) (389)
Foreign exchange impact14
 78
Ending balance$823
 $357

(13) Commitments and Contingencies

Performance Bonds

In the normal course of operations, from time to time, the Company arranges for the issuance of various types of suretyperformance bonds, such as performance, warranty, and bid and performance bonds, whichin the form of bank guarantees or surety bonds. These instruments are agreementsarrangements under which the financial institution or surety company guaranteesprovides a financial guarantee that the Company will perform in accordance with contractual or legal obligations. As of September 30, 2017,March 31, 2022, the Company had $1.0$8.0 million of performance bonds and $0.4 millionin the form of warrantybank guarantees or surety bonds guaranteed by third parties.

In addition,

Trade Compliance Matter

During the first quarter of 2022, the Company has entered intoreceived a sales agreement with DNI, that distributes Company's products to a certain customer in Vietnam. Undernotice letter from the agreement withOffice of the customer, DNI is required to provides various typesCommissioner of surety bonds which are guaranteed byCustoms of the bank. AsIndia Department of September 30, 2017,Revenue (the “Notice”) claiming the Company had restricted cash of $1.2 million, $2.1 millionmis-declared 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 setwrongly classified certain products

16

imported to India by the Company at the time of order.clearance of customs. The Notice claims that due to such mis-declaration and wrong classification of the imported products, the Company and its contract manufacturer in India underpaid duties approximating $3.9 million related to such products. The Company intends to vigorously defend itself in this matter. As we have not yet received the full contents of the Notice, we are unable to estimate a potential loss related to this matter, if any, which could range up to the full 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 indebtednessunpaid duties, plus penalties 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 withinterest.

In addition to the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage ofNotice discussed above, from time to time, 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 that 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.operations or cash flows. 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 and cash flows of the reporting period in which the ruling occurs, or future periods.


(14) Income Taxes

Income tax benefit for the three months ended March 31, 2022 was approximately $1.3 million on pre-tax loss of $4.4 million. Income tax expense for the three months ended March 31, 2021 was approximately $0.9 million on pre-tax loss of $22.3 million.

As of March 31, 2022, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America, EMEA and Asia, as well as foreign and state income tax rate differentials.

The total amount of unrecognized tax benefits, including interest and penalties, as of March 31, 2022 was $4.2 million. There were 0 significant changes to unrecognized tax benefits during the three months ended March 31, 2022. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months.


(12)Enterprise-Wide Information

(15) Enterprise-Wide Information

The Company is a global provider of ultra-broadband network access solutions and communications equipment forplatforms deployed by advanced Tier 1, national and regional service providerproviders and enterprise networks.customers. 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.segment. The Company’s chief operating decision makers aremaker is the Company’s Co-ChiefChief Executive Officers,Officer, who reviewreviews financial information presented on a consolidated basis accompanied bywith 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 summarizesRefer to Note 1(e) Disaggregation of Revenue for the required disclosures about geographicon geographical concentrations and revenuerevenues by products and services (in thousands):

source.

 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
Canada1,498
 254
 4,112
 254
Total North America14,566
 3,662
 41,288
 7,686
Latin America7,480
 1,877
 19,425
 2,912
Europe, Middle East, Africa7,378
 2,232
 19,134
 5,209
Korea20,520
 18,372
 69,032
 60,144
Other Asia Pacific16,494
 5,097
 29,612
 14,881
Total International51,872
 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
Services3,181
 2,349
 8,660
 6,166
Total$66,438
 $31,240
 $178,491
 $90,832


The Company's property, plant and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands) as of September 30, 2017March 31, 2022 and December 31, 2016 (in thousands):


2021:

 

 

March 31, 2022

 

 

December 31, 2021

 

United States

 

$

6,826

 

 

$

6,105

 

Korea

 

 

2,169

 

 

 

2,367

 

Japan

 

 

736

 

 

 

799

 

Canada

 

 

270

 

 

 

280

 

Germany

 

 

185

 

 

 

210

 

Other

 

 

91

 

 

 

81

 

 

 

$

10,277

 

 

$

9,842

 

 
September 30,
2017
 
December 31,
2016
United States$3,611
 $4,094
Korea1,449
 1,455
Japan and Vietnam752
 739
 $5,812
 $6,288



(13)Income Taxes
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,

(16) Subsequent Events

On April 29, 2022, the Company recognized income tax benefitentered an Asset Purchase Agreement to acquire certain assets and liabilities of $0.6 millionAdaptive Spectrum and $1.0 million, respectively, on pre-tax losses of $5.4 millionSignal Alignment, Incorporated (“ASSIA”) a software quality-of-experience innovator. These assets include the CloudCheck® Wi-Fi experience management and $10.1 million, respectively. As of September 30, 2017,Expresse® access network optimization software platforms and the income tax rate varied from the United States statutory income tax rate primarily dueacquisition will expand DZS’ footprint into approximately 50 service providers including many Tier I marquee operators in North America, Europe and Asia. The transaction is expected to valuation allowancesclose in the United States and taxable income generated by the Company’s wholly-owned foreign subsidiaries.

Management periodically evaluates the realizabilitysecond quarter 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 assets2022, 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 amountsatisfaction of unrecognized tax benefits,closing conditions, including interest and penalties, at September 30, 2017 was not material. The amountreceipt 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.ASSIA shareholder approval.

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:
•    Federal2013 - 2016
•    California and Canada2012 - 2016
•    Brazil2011 - 2016
•    Germany2012 - 2016
•    Japan2011 - 2016
•    Korea2015 - 2016
•    United Kingdom2014 - 2016
•    Vietnam2016

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.



17

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

As used in this report,Quarterly Report on Form 10-Q, unless the context suggests otherwise, the terms "we", "us", or "our"“DZS,” the “Company” “we,” “our” and “us” refer to (i) Dasan Network Solutions, Inc. (DNS) and its consolidated subsidiaries for periods through September 8, 2016 and (ii) DASAN Zhone Solutions,DZS Inc. and its consolidated subsidiaries (collectively, DZS) for periodssubsidiaries.

Forward-Looking Statements

This Quarterly Report on or after September 9, 2016, the effective date of the Merger (as defined below). In connection with the Merger, Zhone Technologies, Inc. changed its name to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone."

Forward-Looking Statements
This report,Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934.1934 (the “Exchange Act”). These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate, and reflect the beliefs and assumptions of our management. management as of the date hereof.

We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items;items in future periods; anticipated


growth and trends in our business, industry or key markets; cost synergies, growth opportunities and other potential financial and operating benefits of the Merger;our acquisitions; future growth and revenues from our products; our ability to refinance or repayaccess capital to fund our existing indebtedness prior to the applicable maturity date;future operations; future economic conditions and performance; the impact of the global outbreak of COVID-19, also known as the coronavirus; the impact of interest rate and foreign currency fluctuations; anticipated performance of products or services; competition; plans, objectives and strategies for future operations;operations, including our pursuit or strategic acquisitions and our continued investment in research and development; other characterizations of future events or circumstances,circumstances; and all other statements that are not statements of historical fact, are forward-looking statements.statements within the meaning of the Securities Act and the Exchange Act. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Readers are cautioned that thesenot to place undue reliance on such forward-looking statements, which are only predictionsbeing made as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors which could have a material adverse effect on our operations and are subjectfuture prospects or which could cause actual results to risks, uncertainties and assumptions that are difficult to predict, including those identified under the headingdiffer materially from our expectations include factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K, as well as factors described from time to time in Part II, Item 1A, elsewhere in this report and our other filingsfuture reports filed with the U.S. Securities and Exchange Commission (the SEC)“SEC”). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to realize the anticipated cost savings, synergies and other benefits of the Merger and any integration risks relating to the Merger, the ability to generate sufficient revenue to achieve or sustain profitability, the ability to raise additional capital to fund existing and future operations or to refinance or repay our existing indebtedness, defects or other performance problems in our products, any economic slowdown in the telecommunications industry that restricts the ability of our customers to purchase our products, commercial acceptance of our products, intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same networks needs as our products, higher than anticipated expenses that we may incur, any failure to comply with the periodic filing and other requirements of The Nasdaq Stock Market for continued listing, material weaknesses or other deficiencies in our internal control over financial reporting, the initiation of any civil litigation, regulatory proceedings, government enforcement actions or other adverse effects relating to the Audit Committee investigation or errors in the consolidated financial statements of Legacy Zhone and other factors identified elsewhere in this report and in our most recent reports on Forms 10-K, 10-Q and 8-K. We undertake no obligation to revise or update any forward-looking statements for any reason.

OVERVIEW

We are a global provider of networkleading-edge access, solutions and communications equipment for service provider5G transport, and enterprise networks. communications platforms that enable the emerging hyper-connected, hyper-broadband world. We provide 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.

We research, develop, test, sell, manufacture and support communications equipmentplatforms in five major areas:the areas of mobile transport and fixed broadband access, as discussed below. We have extensive regional development and support centers around the world to support our customer needs.

Our solutions and platforms portfolio include products in Broadband Connectivity, Connected Home & Business, Mobile & Optical Edge, and Cloud Software.

•
Broadband Connectivity. Our DZS Velocity portfolio offers a variety of solutions for carriers and service providers to connect residential and business customers, either using high-speed fiber or leveraging their existing deployed copper networks to offer broadband services to customer premises. Once our broadband access products are deployed, the service provider can offer voice, high-definition and ultra-high-definition video, highspeed internet access and business class services to their customers. In addition, the switching and routing products we provide in this space offer a high-performance and manageable solution that bridges the gap from carrier access technologies to the core network. XCelerate by DZS increases the velocity with which service providers can leap to multi-gigabit services at scale by enabling rapid transition from Gigabit Ethernet Passive Optical Network (“GPON”) to 10 Gigabit Symmetrical Passive Optical Network (“XGS-PON”) and Gigabit Ethernet to 10 Gigabit Ethernet via any service port across a range of existing DZS Velocity chassis and 10 gig optimized stackable fixed form factor units.
•
Connected Home & Business. Our DZS Helix connected premises product portfolio offer a large collection of smart gateway platforms for any fiber to the “x” (“FTTx”) deployment. DZS Smart Gateway platforms are designed for high bandwidth services being deployed to the home or business. Our connected premises portfolio

18

consists of indoor/outdoor optical network terminal (“ONT”) gateways delivering best-in-class data throughout to support the most demanding FTTx applications. The product feature set gives service providers an elegant migration path from legacy to soft switch architectures without replacing ONTs.
•
Mobile & Optical Edge. Our DZS Chronos portfolio provides a robust, manageable and scalable solution for mobile operators that enable them to upgrade their mobile fronthaul/midhaul/backhaul (“xHaul”) systems and migrate to fifth generation wireless technologies (“5G”) and beyond. DZS Chronos provides a full range of 5G-ready xHaul solutions that are open, software-defined, and field proven. Our mobile xHaul products may be collocated at the radio access node base station and can aggregate multiple radio access node base stations into a single backhaul for delivery of mobile traffic to the radio access node network controller. Our products support pure Ethernet switching mobile backhaul, passive optical LAN (POLAN)as well as layer 3 IP and Multiprotocol Label Switching (“MPLS”), and we interoperate with other vendors in these networks.
•
Cloud Software. Our DZS Cloud platform accelerates our software capabilities specifically in the areas of network orchestration, application slicing, automation, analytics, and service assurance. We offer a commercial, carrier-grade network-slicing enabled orchestration platform complementing our position with physical network devices supporting Open RAN (“O-RAN”) and 4G/5G networks. Communications service providers are implementing software defined networks (SDN).
As discussed under "Liquiditynetworking (“SDN”) and Capital Resources" below, the maturingnetwork functions virtualization (“NFV”) architectures to reduce reliance on proprietary systems and hardware, which increase service agility, flexibility, and deployment of short-term debt obligations and our recurring losses from operations raise substantial doubt on whether we will be able to continue as a going concern.new network services while lowering costs.
As of September 30, 2017, the total outstanding principal amount of our debt obligations was $26.9 million, consisting of the following:
$18.4 million in short-term debt obligations to other non-related parties;
$3.5 million in short-term debt obligations to related parties; and
$5.0 million in long-term debt obligations to related parties.

Our ability to continue as a “going concern” is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements, our ability to cure any defaults that occur under our debt agreements or to obtain waivers or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due.

Going forward, our key financial objectives include the following:

•
Increasing revenue while continuing to carefully control costs;
Continued•
Continuing investments in strategic research and product development activities that will provide the maximum potential return on investment; and
•
Minimizing consumption of our cash and cash equivalents.

Merger
On September 9, 2016, we acquired DNS through the merger of a wholly owned subsidiary of Zhone Technologies, Inc. with and into DNS, with DNS surviving as our wholly owned subsidiary (the Merger). In connection with the Merger, Zhone Technologies, Inc. changed its name to DASAN Zhone Solutions, Inc. Our common stock continues to be traded on the Nasdaq Capital Market, and our ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016.
At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by its sole shareholder, DASAN Networks, Inc. (DNI), were canceled and converted into the right to receive shares of our common stock in an amount equal to 58% of the issued and outstanding shares of our common stock immediately following the Merger. Accordingly, at the effective time of the Merger, we issued 9,493,016 shares (post reverse stock split) of our common stock to DNI as consideration in the Merger, of which 949,302 shares (post reverse stock split) are being held in escrow as security for claims for indemnifiable losses in accordance with the merger agreement relating to the Merger. As a result, immediately following the effective time of the Merger, DNI held 58% of the outstanding shares of our common stock and the holders of our common stock immediately prior to the Merger retained, in the aggregate, 42% of the outstanding shares of our common stock.
See Note 2 to

RESULTS OF OPERATIONS

The table below presents the unaudited condensed consolidated financial statements set forth in Part I, Item 1statement of this report for additional information regarding the Merger.


ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS
As discussed in Note 1(e) to(loss) income with year-over-year changes (in thousands except percent change).

 

 

Three months ended March 31,

 

 

 

 

 

 

2022

 

 

2021

 

 

% change

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

77,040

 

 

$

81,031

 

 

 

-4.9

%

Cost of revenue

 

 

50,215

 

 

 

52,936

 

 

 

-5.1

%

Gross profit

 

 

26,825

 

 

 

28,095

 

 

 

-4.5

%

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and product development

 

 

11,844

 

 

 

11,119

 

 

 

6.5

%

Selling, marketing, general and administrative

 

 

17,742

 

 

 

31,824

 

 

 

-44.2

%

Restructuring and other charges

 

 

436

 

 

 

6,252

 

 

 

-93.0

%

Impairment of long-lived assets

 

 

—

 

 

 

1,735

 

 

 

-100.0

%

Amortization of intangible assets

 

 

294

 

 

 

262

 

 

 

12.2

%

Total operating expenses

 

 

30,316

 

 

 

51,192

 

 

 

-40.8

%

Operating loss

 

 

(3,491

)

 

 

(23,097

)

 

 

-84.9

%

Interest income

 

 

37

 

 

 

42

 

 

 

-11.9

%

Interest expense

 

 

(127

)

 

 

(249

)

 

 

-49.0

%

Other income (expense), net

 

 

(800

)

 

 

972

 

 

 

-182.3

%

Loss before income taxes

 

 

(4,381

)

 

 

(22,332

)

 

 

-80.4

%

Income tax provision (benefit)

 

 

(1,333

)

 

 

893

 

 

 

-249.3

%

Net loss

 

$

(3,048

)

 

$

(23,225

)

 

 

-86.9

%

19

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the year ended December 31, 2016.




RESULTS OF OPERATIONS
We list in the table below the historical condensed consolidated statement of comprehensive loss data(loss) income as a percentage of total net revenue for the periods indicated.
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
   (As Revised)   (As Revised)
Net revenue:       
Net revenue91 % 79 % 85 % 75 %
Net revenue - related parties9 % 21 % 15 % 25 %
Total net revenue100 % 100 % 100 % 100 %
Cost of revenue:       
Products and services58 % 53 % 54 % 54 %
Products and services - related parties8 % 17 % 13 % 21 %
Amortization of intangible assets0 % 0 % 0 % 0 %
Total cost of revenue67 % 70 % 67 % 75 %
Gross profit33 % 30 % 33 % 25 %
Operating expenses:       
Research and product development14 % 19 % 15 % 17 %
Selling, marketing, general and administrative17 % 26 % 18 % 18 %
Amortization of intangible assets0 % 1 % 1 % 0 %
Total operating expenses31 % 46 % 34 % 35 %
Operating income (loss)2 % (16)% (1)% (10)%
Interest income0 % 0 % 0 % 0 %
Interest expense0 % (1)% 0 % (1)%
Other income, net0 % 0 % 0 % 0 %
Income (loss) before income taxes2 % (17)% (1)% (11)%
Income tax provision (benefit)0 % (2)% 1 % (1)%
Net income (loss)2 % (15)% (2)% (10)%
Net loss attributable to non-controlling interest0 % 0 % 0 % 0 %
Net income (loss) attributable to DASAN Zhone Solutions, Inc.2 % (15)% (2)% (10)%
Foreign currency translation adjustments0 % 7 % 1 % 3 %
Comprehensive income (loss)2 % (8)% (1)% (7)%
Comprehensive income attributable to non-controlling interest0 % 0 % 0 % 0 %
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.2 % (8)% (1)% (7)%

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

Net revenue

 

 

100

%

 

 

100

%

Cost of revenue

 

 

65

%

 

 

65

%

Gross profit

 

 

35

%

 

 

35

%

Operating expenses:

 

 

 

 

 

 

Research and product development

 

 

15

%

 

 

14

%

Selling, marketing, general and administrative

 

 

23

%

 

 

39

%

Restructuring and other charges

 

 

1

%

 

 

8

%

Impairment of long-lived assets

 

 

—

 

 

 

2

%

Amortization of intangible assets

 

 

1

%

 

 

1

%

Total operating expenses

 

 

40

%

 

 

64

%

Operating income (loss)

 

 

(5

)%

 

 

(29

)%

Interest income

 

 

—

 

 

 

—

 

Interest expense

 

 

—

 

 

 

—

 

Other income (expense), net

 

 

(1

)%

 

 

1

%

Income (loss) before income taxes

 

 

(6

)%

 

 

(28

)%

Income tax provision (benefit)

 

 

(2

)%

 

 

1

%

Net income (loss)

 

 

(4

)%

 

 

(29

)%

Net Revenue

Information about

The following table presents our net revenue for products and services for the three and nine months ended September 30, 2017 and 2016 is summarized belowrevenues by source (in millions):

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 Increase/(decrease) % change 2017 2016 Increase/(decrease) % change
   (As Revised)       (As Revised)    
Products$63.2
 $28.9
 $34.3
 119% $169.8
 $84.6
 $85.2
 101%
Services3.2
 2.3
 0.9
 39% 8.7
 6.2
 2.5
 40%
Total$66.4
 $31.2
 $35.2
 113% $178.5
 $90.8
 $87.7
 97%


Information about our net revenue for North America and international markets for the three and nine months ended September 30, 2017 and 2016 is summarized below (in millions):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 Increase/(decrease) % change 2017 2016 Increase/(decrease) % change
   (As Revised)       (As Revised)    
Revenue by geography:               
United States$13.1
 $3.4
 $9.7
 285% $37.2
 $7.4
 $29.8
 403%
Canada1.5
 0.3
 1.2
 100% 4.1
 0.3
 3.8
 100%
Total North America14.6
 3.7
 10.9
 295% 41.3
 7.7
 33.6
 436%
Latin America7.5
 1.9
 5.6
 295% 19.4
 2.9
 16.5
 569%
Europe, Middle East, Africa7.4
 2.2
 5.2
 236% 19.1
 5.2
 13.9
 267%
Korea20.5
 18.4
 2.1
 11% 69.0
 60.1
 8.9
 15%
Asia Pacific16.4
 5.0
 11.4
 228% 29.7
 14.9
 14.8
 99%
Total International51.8
 27.5
 24.3
 88% 137.2
 83.1
 54.1
 65%
Total$66.4
 $31.2
 $35.2
 113% $178.5
 $90.8
 $87.7
 97%

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

 

% change

 

Products

 

$

72.4

 

 

$

76.2

 

 

 

(5.0

)%

Services and other

 

 

4.6

 

 

 

4.8

 

 

 

(4.2

)%

Total

 

$

77.0

 

 

$

81.0

 

 

 

(4.9

)%

For the three months ended September 30, 2017, netMarch 31, 2022, product revenue increased 113%decreased by 5.0% or $35.2$3.8 million to $66.4$72.4 million from $31.2$76.2 million for the same period last year. For the nine months ended September 30, 2017, net revenue increased 97% or $87.7 million to $178.5 million from $90.8 million for the same period last year. For the three months ended September 30, 2017, product revenue increased 119% or $34.3 million to $63.2 million compared to the same period last year. For the nine months ended September 30, 2017, product revenue increased 101% or $85.2 million to $169.8 million compared toin the same period last year. The increasedecrease in netproduct revenue forduring the three and nine months ended September 30, 2017period was primarily relatedattributable to the consummation ofsupply chain disruptions aggravated by the MergerCovid-19 Omicron variant surge and lower spending levels from our major customers in September 2016 (which resulted in the inclusion of net revenue related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods).

Asia. Service revenue represents revenue from maintenance and other services associated with product shipments. The decrease in service revenue was primarily due to the decreased product sales.

The following table presents our revenues by geographical concentration (in millions):

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

 

% change

 

Americas

 

$

23.1

 

 

$

20.2

 

 

 

14.4

%

Europe, Middle East, Africa

 

 

18.6

 

 

 

17.9

 

 

 

3.9

%

Asia

 

 

35.3

 

 

 

42.9

 

 

 

(17.7

)%

Total

 

$

77.0

 

 

$

81.0

 

 

 

(4.9

)%

Our geographic diversification reflects the combination of market demand, a strategic focus on capturing market share through new customer wins and new product introductions.

From a geographical perspective, the decrease in net revenue for the three months ended March 31, 2022 was attributable to decreased revenue in Asia primarily attributable to the supply chain disruptions and lower spending levels from our major customers in Asia. Revenue in Americas and EMEA increased primarily due to the market share gains and new customers.

For the three months ended September 30, 2017, service revenue increased 39% or $0.9 million to $3.2 million compared to the same period last year. For the nine months ended September 30, 2017, service revenue increased 40% or $2.5 million to $8.7 million compared to the same period last year. The increases in service revenue were primarily related to the consummation of the Merger in September 2016 (which resulted in the inclusion of service revenue related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods), as well as an increase in sales of maintenance services.

International net revenue increased 88% or $24.3 million to $51.8 million for the three months ended September 30, 2017 from $27.5 million for the same period last year, and represented 78% of total net revenue compared with 88% during the same period of 2016. International net revenue increased 65% or $54.1 million to $137.2 million for the nine months ended September 30, 2017 from $83.1 million for the same period last year, and represented 77% of total net revenue compared with 92% during the same period of 2016. The increases in international net revenue were primarily related to the consummation of the Merger in September 2016 (which resulted in the inclusion of international net revenue related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods).
For the three months ended September 30, 2017,March 31, 2022, two customers represented, 10% and 9% 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 three months ended September 30, 2016, three customers represented 18%, 16% (a related-party)accounted for 13% and 12% of net revenue, respectively. For the ninethree months ended September 30, 2016, threeMarch 31, 2021, two customers represented 23%, 21% (a related-party)accounted for 18% and 12%10% of net revenue, respectively.

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


20

Cost of Revenue and Gross Margin

Profit

Total cost of revenue increased 102% or $22.4 milliondecreased 5.1% to $44.4$50.2 million for the three months ended September 30, 2017,March 31, 2022, compared to $21.9$52.9 million for the three months ended September 30, 2016.March 31, 2021. Total cost of revenue increased 76% or $51.5 million to $119.4 millionwas 65.2% of net revenue for the ninethree months ended September 30, 2017,March 31, 2022, compared to $67.9 million65.3% of net revenue for the ninethree months ended September 30, 2016.March 31, 2021, which resulted in an increase in gross profit percentage to 34.8% for the three months ended March 31, 2022 from 34.7% for the three months ended March 31, 2021. The increasesdecrease in total cost of revenue werewas primarily due to the consummation of the Mergerchange in September 2016 (which resulted in the inclusion of cost of revenue related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods) as well as increased sales. Gross margin increased slightly in both the threenumber and nine months ended September 30, 2017 compared to the prior year periods due to improved manufacturing efficiencies and product mix.

We expect that in the future our cost of revenue as a percentage of net revenue will vary depending on the mix and average selling prices of products sold. In addition, continued competitive and economic pressures could cause us to reduce our prices, adjustsold, including the carrying valuesgeographic mix of our inventory, or record inventory charges relating to discontinued products and excess or obsolete inventory.
those sales.

Operating Expenses

Research and Product Development Expenses

Expenses:Research and product development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations.

Research and product development expenses increased 50% or $2.9 millionby 6.5% to $8.8$11.8 million for the three months ended September 30, 2017March 31, 2022 compared to $5.9$11.2 million for the three months ended September 30, 2016. Research and product development expenses increased 73% or $11.4 million to $27.0 million for the nine months ended September 30, 2017 compared to $15.6 million for the nine months ended September 30, 2016.March 31, 2021. The increase in research and product development expenses was primarily due to the consummation of the Mergerstrategic hiring decisions in September 2016 (which resulted in the inclusion of research, development, and product development expenses relatedline management with the intent to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods). accelerate growth and capture market share.

We intend to continue to invest in research and product development to attain our strategic product development objectives, while seeking to manage the associated costs through expense controls.

Selling, Marketing, General and Administrative Expenses

Expenses:Selling, marketing, general and administrative expenses increased 38% or $3.2 millioninclude personnel costs for sales, marketing, administration, finance, information technology, human resources and general management as well as legal and accounting expenses, rent, utilities, trade show expenses and related travel costs.

Selling, marketing, general and administrative expenses decreased by 44.2% to $11.5$17.7 million for the three months ended September 30, 2017March 31, 2022 compared to $8.3$31.8 million for the three months ended September 30, 2016. Selling, marketing, generalMarch 31, 2021. The decrease was primarily due to $14.2 million of bad debt expense recorded in the first quarter of 2021 for one customer in India. Refer to Note 1, in the Notes to Unaudited Condensed Consolidated Financial Statements, for further information on the bad debt expense. The above impact was partially offset by strategic hiring decisions across sales and administrative expenses increased 95% or $15.8administration with the intent to accelerate growth and capture market share.

Restructuring and Other Charges:Restructuring and other charges for the three months ended March 31, 2022 and 2021 relate primarily to the strategic decision to transition DZS GmbH and Optelian to sales and research and development centers. For the three months ended March 31, 2022, the Company incurred restructuring and other charges of approximately $0.4 million, consisting primarily of logistics costs and professional services related to $32.5legal and accounting support. For the three months ended March 31, 2021, the Company incurred restructuring and other charges of approximately $6.3 million, consisting primarily of severance and other termination related benefits of $3.5 million, an impairment of long-lived assets charge of $2.7 million primarily related to right-of-use assets from operating leases, and $0.1 million of other charges. See Note 9 Restructuring and Other Charges of the Notes to Unaudited Condensed Consolidated Financial Statements, for further information.

Impairment of Long-lived Assets:Impairment of long-lived assets for the three months ended March 31, 2021 was $1.7 million for the right-of use assets from operating leases related to completion of the headquarters relocation to Plano, Texas. No impairment was recorded during the three months ended March 31, 2022.

Other Income (Expense), net: Other income (expense) relates mainly to realized and unrealized foreign exchange gains and losses. Other expense, net was $0.8 million for the ninethree months ended September 30, 2017March 31, 2022 compared to $16.7other income, net of $1.0 million for the ninethree months ended September 30, 2016.March 31, 2021. The increasesincrease in selling, marketing, general and administrative expenses wereother expense, net was due to foreign currency exchange losses recorded during the first quarter of 2022.

Income Tax Provision:Income tax benefit for the three months ended March 31, 2022 was $1.3 million on a pre-tax loss of $4.4 million. Income tax expense for the three months ended March 31, 2021 was approximately $0.9 million on pre-tax loss of $22.3 million. As of March 31, 2022, the income tax rate varied from the United States statutory income tax rate primarily due to the consummation of the Mergervaluation allowances in September 2016 (which resulted in the inclusion of selling, marketing, generalNorth America, EMEA and administrative expenses related to Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods), offset by higher commission expenses during the threeAsia, as well as foreign and nine months ended September 30, 2016.

Income Tax Provision
During the three and nine months ended September 30, 2017 and 2016, no material provision or benefit forstate income taxes was recorded, due to our recurring operating losses and the significant uncertainty regarding the realization of our net deferred tax assets, against which we have continued to record a full valuation allowance.
OTHER PERFORMANCErate differentials.

NON-GAAP FINANCIAL MEASURES

In managing our business and assessing our financial performance, we supplement the information provided by our U.S. GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-GAAPnon-U.S. GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) stock-based compensation, and (v) the impact of material non-recurring transactions or events that we believe are not indicative of our core operating performance, such as Merger transactionacquisition costs, or a gain (loss) on sale of assets or impairment of fixed assets.goodwill, intangibles or long-lived assets, loss on debt extinguishment, restructuring and other charges,

21

including termination related benefits, headquarters and facilities relocation, executive transition, and bad debt expense primarily related to a large customer in India, any of which may or may not be recurring in nature. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.

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

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

•
Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
although•
Although depreciation and amortization are non-cash charges,expenses, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
non-cash•
Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and
other•
Other companies in our industry may calculate Adjusted EBITDA and similar measures differently than we do, limiting its usefulness as a comparative measure.

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

as a supplemental measure.

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

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
   (As Revised)   (As Revised)
Net income (loss)$1,387
 $(4,789) $(2,985) $(9,083)
Add:       
Interest expense, net227
 173
 711
 463
Income tax provision (benefit)107
 (610) 646
 (1,041)
Depreciation and amortization752
 628
 3,105
 1,165
Stock-based compensation195
 128
 670
 128
Merger-related costs—
 3,536
 —
 3,536
Adjusted EBITDA$2,668
 $(934) $2,147
 $(4,832)

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

Net income (loss)

 

$

(3,048

)

 

$

(23,225

)

Add (deduct):

 

 

 

 

 

 

Interest expense, net

 

 

90

 

 

 

207

 

Income tax provision (benefit)

 

 

(1,333

)

 

 

893

 

Depreciation and amortization

 

 

1,081

 

 

 

1,265

 

Stock-based compensation

 

 

2,671

 

 

 

1,352

 

Headquarters and facilities relocation

 

 

—

 

 

 

1,920

 

Restructuring and other charges

 

 

436

 

 

 

6,252

 

Acquisition costs

 

 

51

 

 

 

643

 

Executive transition

 

 

247

 

 

 

71

 

Bad debt expense, net of recoveries*

 

 

(1,227

)

 

 

14,206

 

Adjusted EBITDA

 

$

(1,032

)

 

$

3,584

 

* See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our unaudited condensed consolidated financial statements, refer to Note 1 Organization and Summary of Significant Accounting Policies in the Notes to our Audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by Note 1 Organization and Summary of Significant Accounting Policies of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

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

As of September 30, 2017,

22

The following table summarizes the information regarding our cash and cash equivalents were $10.1and working capital (in thousands):

 

 

March 31, 2022

 

 

December 31, 2021

 

Cash and cash equivalents

 

$

34,160

 

 

$

46,666

 

Working capital

 

 

121,772

 

 

 

124,498

 

The Company had a net loss of $3.0 million compared to $17.9 and $23.2 million at Decemberfor the three months March 31, 2016. Our2022 and 2021, respectively.

As of March 31, 2022, we had working capital of $121.8 million. As of March 31, 2022, we had $34.2 million in unrestricted cash and cash equivalents, as of September 30, 2017which included $3.4$31.0 million in cash balances held by our Korean subsidiary. The $7.7 million decrease in cash and cash equivalents was attributableinternational subsidiaries.

We continue to net cash used in operating, investing and financing activities of $0.6 million, $5.9 million and $1.8 million, respectively, partially offset by the effect of exchange rate changes on cash of $0.6 million.

Ability to Continue as a Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Accordingly, the unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of DZS to continue as a going concern.
Although we generated $1.4 million of net income for the quarter ended September 30, 2017, we have incurred significant losses to date and our losses from operations may continue. We incurred net losses of $3.0 million and $15.3 million for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. We had accumulated deficit of $23.1 million and working capital of $57.3 million as of September 30, 2017. As of September 30, 2017, we had approximately $10.1 million in cash and cash equivalents, which included $3.4 million in cash balances held by our Korean subsidiary, and $26.9 million in aggregate principal amount of outstanding borrowings under our short-term debt obligations and our loans from DNI and its affiliates. In addition, we had $7.6 million in aggregate borrowing availability under our credit facilities as of

September 30, 2017. We 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 our recurring operating losses, our cash resources may not be sufficient to settle these short-term debt obligations. Our ability to continue as a "going concern" is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements, our ability to cure any defaults that occur under our debt agreements or to obtain waivers or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due. Although the process of amending, replacing or refinancing our short-term debt obligations is ongoing and we are in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide us with the required liquidity to remove the substantial doubt as to our ability to continue as a going concern. If we are unable to amend, replace, refinance our short-term debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, we may experience material adverse impacts on our business, operating results and financial condition.
We have continued our focus on cost control andmanagement, operating efficiency along with restrictions onand efficient discretionary spending. In order to meet our liquidity needs and finance our capital expenditures and working capital needs for our business,addition, if necessary, we may be required to sell assets or issue debt or equity securities, purchase credit insurance or borrow on potentially unfavorable terms. In addition,securities. We may also rationalize the number of products we may be required to reduce the scope ofsell, adjust our planned product development, reduce sales and marketing effortsmanufacturing footprint, and reduce our operations in low margin regions, including reductions in headcount. Based on our current plans and current business conditions, we believe that our focused operating expense disciplinethese measures along with our existing cash and cash equivalents and available credit facilities will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months howeverfrom the factors discussed above raise substantial doubt aboutdate of this Quarterly Report on Form 10-Q.

The following table presents a summary of our ability to continue as a going concern.

cash flow activity for the periods set forth below (in thousands):

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

Consolidated Statements of Cash Flows Data

 

 

 

 

 

 

Net cash used in operating activities

 

$

(10,732

)

 

$

(6,936

)

Net cash used in investing activities

 

 

(1,317

)

 

 

(5,524

)

Net cash provided by (used in) financing activities

 

 

(22

)

 

 

21,302

 

      Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(903

)

 

 

404

 

Net increase in cash, cash equivalents and restricted cash

 

 

(12,974

)

 

 

9,246

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

53,639

 

 

 

54,587

 

Cash, cash equivalents and restricted cash at end of period

 

$

40,665

 

 

$

63,833

 

Operating Activities

Net cash used in operating activities increased by $3.8 million to $10.7 million for the three months ended March 31, 2022 from net cash used in operating activities of $6.9 million for the ninethree months ended September 30, 2017 consisted of a net loss of $3.0 million, adjusted for non-cash charges totaling $3.6 million and a decrease in net operating assets totaling $1.2 million.March 31, 2021. The most significant components of the changes in net operating assets were an increase in accounts receivable of $2.9 million,cash used in operating activities was primarily due to an increase in inventory purchases in anticipation of $0.6 million and a decrease in accrued expenses of $4.3 million offset by an increase in accounts payable of $6.7 million. The increase in accounts receivable was primarily the result of the timing of receivables collections during the current year period. The increase in inventory was due to slower utilization of inventoryincreased shipments later in the current year period. The decrease in accounts payable was mainly due to reclassification of certain balances to short-term debt.


Net cash provided by operating activities for the nine months ended September 30, 2016 consisted ofand as a net loss of $9.1 million, adjusted for non-cash charges totaling $1.9 million and an increase in net operating assets totaling $20.4 million. The most significant components of the changes were a decrease in accounts receivables of $14 million and an increase in accrued expenses of $13.6 million offset by a decrease in accounts payable of $5.8 million. The increase in accounts receivable was primarily due to the timing of receivables collections during the current year period. The decrease in accounts payable was primarily due to timing of payments.

mitigation against long lead times.

Investing Activities


Net cash used in investing activities decreased by $4.2 million to $1.3 million for the ninethree months ended September 30, 2017 consisted of an increase in restricted cash of $6.1March 31, 2022 from $5.5 million and purchase of property of equipment of $0.8 million, offset by proceeds from sale of short-term investments of $1.5 million. The increase in restricted cash was to provide collateral for the various surety bonds issued by DNIthree months ended March 31, 2021. This decrease was primarily due to a certain customer in Vietnam.


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

2021.

Financing Activities

Net cash used in financing activities totaled $0.1 million for the ninethree months ended September 30, 2017March 31, 2022 and consisted primarily of cash used in repaymentspayment of borrowings of $15.6 million,debt issuance cost partially offset by proceeds from short-term borrowingsexercise of $13.8 million.

Netstock awards. This is in comparison to cash provided by financing activities of $21.3 million for the ninethree months ended September 30, 2016March 31, 2021 which consisted primarily of proceeds from short-term borrowingsthe equity offering and proceeds from long-term borrowingsexercise of $19.8 million and $6.8 million, respectively,stock awards offset by repayments of our short-term borrowings of $23.1 million.
and related party term loan.

Cash Management

Our primary source of liquidity comes from our cash, and cash equivalents and restricted cash, which totaled $10.1$40.5 million at September 30, 2017, as well as our credit facilities, under which we had aggregate borrowing availability of $7.6 millionMarch 31, 2022. Our cash, cash equivalents and restricted cash as of September 30, 2017, and under which $8.5March 31, 2022 included $32.0 million was committed as security for letters of credit as of September 30, 2017. Our cash and cash equivalents as of September 30, 2017 included $3.4 million in cash balances held by our Korean subsidiary.

WFB Facility
As of September 30, 2017, we had a $25.0 million credit facility (the WFB Facility) with Wells Fargo Bank (WFB). Underinternational subsidiaries.

Debt Facilities

On February 9, 2022, the WFB Facility, we have the option of borrowing funds at agreed upon interest rates. The amount that we are able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the WFB Facility, as long as the aggregate amount outstanding does not exceed $25.0 million less the amount committed as security for letters of credit. To maintain availability of funds under the WFB Facility, we pay a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense.

As of September 30, 2017, we had no outstanding borrowings under the WFB Facility, and $2.5 million was committed as security for letters of credit. We 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 our 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.
Our obligations under the WFB Facility are secured by substantially all of our personal property assets and those of our subsidiaries that guarantee the WFB Facility, including our intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If we default under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell our assets to satisfy the obligations under the WFB Facility. In the past we have violated the covenants in our former credit facility and received waivers for these violations. As of September 30, 2017, we were in compliance with the covenants under the WFB Facility. We make no assurances that we will be in compliance with these covenants in the future.
Bank and Trade Facilities - Foreign Operations
Certain of our foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries. Payments under such facilities are made in accordance with the given lender’s amortization schedules. As of September 30, 2017 and December 31, 2016, we had an aggregate outstanding balance of $18.4 million and $17.6 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements as of September 30, 2017 and December 31, 2016 ranged from 2.3% to 5.9% and 1.9% to 4.1%, respectively.

Related-Party Debt
In connection with the Merger, on September 9, 2016, weCompany entered into a loan agreementCredit Agreement with DNIthe Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement provides for a $5.0 million unsecured subordinated term loan facility. Under the loan agreement, we were permitted to request drawdowns of one or more termrevolving loans in an aggregate principal amount notof up to exceed $5.0$30 million, up to $15 million of which is available for letters of credit. The Credit Agreement matures on February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments, plus $10 million.

23

As of September 30, 2017, $5.0 million in term loansMarch 31, 2022, there was no amount outstanding under the revolving credit facility. Such term loans matureThe Company was in September 2021 and are pre-payable at any time by us without premium or penalty. The interest ratecompliance with all debt covenants as of September 30, 2017 under this facility was 4.6% per annum.

In addition, we borrowed $1.8 million from DNI for capital investment in February 2016, which amount was outstanding as of September 30, 2017. This loan matured in March 2017 with an option of renewal by mutual agreement, and bore interest at a rate of 6.9% per annum, payable annually. Effective February 27, 2017, we amended the terms of this loan to extend the repayment date from March 2017 to March 2018 and to reduce the interest rate from 6.9% to 4.6% per annum.
On June 23, 2017, we borrowed $3.5 million from Solueta, an affiliate of DNI. As of September 30, 2017, the aggregate outstanding balance under this loan agreement was $1.7 million. This loan matures in November 2017 and bears interest at a rate of 4.6% per annum, payable monthly.
31, 2022.

Future Cash Requirements and Funding Sources

Our fixed commitments for cash expenditures consist primarily of payments under operating leases, and inventory purchase commitments, and payments of principal and interest for debt obligations.

commitments.

From time to time, we may provide or commit to extend credit or credit support to our customers. This financing may include extending the terms for product payments to customers. Any extension of financing to our customers will limit the capital that we have available for other uses.

Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of September 30, 2017, threeMarch 31, 2022 no customers accounted for 16% (a related-party), 11% andrepresented more than 10% of net accounts receivables, respectively, andreceivable. Net receivables from customers in countries other than the United States represented 84% of net accounts receivable.77%. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, and inventory purchase commitmentscommitments.

U.S. Income Tax Changes

Effective January 1, 2022, the Tax Cuts and debt.

As discussed aboveJobs Act (TCJA) eliminates the option to immediately deduct research and development expenditures and requires taxpayers to capitalize and amortize these costs pursuant to IRC Section 174. Although Congress is considering legislation that would defer or repeal this provision, we have no assurance this will be enacted. If this provision of the TCJA is not repealed or otherwise modified, it is expected to negatively impact our operating cash flows in "Ability to Continue as a Going Concern", there is substantial doubt about our ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.


Contractual Commitments2022 and Off-Balance Sheet Arrangements
At September 30, 2017, our future contractual commitments by fiscal year were as follows (in thousands):
   Payments due by period
 Total 2017 2018 2019 2020 2021 Thereafter
Operating leases$20,166
 $967
 $3,359
 $2,496
 $2,358
 $2,264
 $8,722
Purchase commitments2,966
 2,966
 —
 —
 —
 —
 —
Short-term debt18,382
 18,382
 —
 —
 —
 —
 —
Related-party debt8,544
 1,744
 1,800
 —
 —
 5,000
 —
Total future contractual commitments$50,058
 $24,059
 $5,159
 $2,496
 $2,358
 $7,264
 $8,722
years.

Operating Leases

The

Future minimum operating lease amounts shown above representobligations include primarily off-balance sheet arrangements. For operating lease commitments, a liability is generally not recorded onpayments for our balance sheet unless the facility represents an excess facility foroffice locations and manufacturing, research and development locations, which an estimateexpire at various dates through 2028. See Note 12 Leases of the facility exit costs has been recorded on our balance sheet, net of estimated sublease income. For operating leases that include contractual commitments for operating expenses and maintenance, estimates of such amounts are included based on current rates. Payments made under operating leases will be treated as rent expense for the facilities currently being utilized.



Purchase Commitments
The purchase commitments shown above represent non-cancellable inventory purchase commitments as of September 30, 2017.
Short-term Debt
Our short-term debt obligations have been recorded as liabilities on our balance sheet, and comprised $18.4 million in outstanding borrowings under the credit facilities of our foreign subsidiaries as of September 30, 2017. The amount shown above represents scheduled principal repayments under the facilities, but not the associated interest payments which may vary based on changes in market interest rates. At September 30, 2017, the interest rate per annum applicableNotes to outstanding borrowings under the trade facilities of our foreign subsidiaries ranged from 2.3% to 5.9%. The amount shown above excludes $3.5 million in short-term debt obligations to related parties, which is included in the table as related-party debt (as discussed further below).
See above under “Cash Management” for further information about these facilities.
Related-Party Debt
As of September 30, 2017, we had borrowed an aggregate of $8.5 million from related parties, which included $6.8 million from DNI, of which $5.0 million and $1.8 million mature in September 2021 and March 2018, respectively, and $1.7 million from Solueta, an affiliate of DNI, which matures in November 2017. The interest rate per annum applicable to these borrowings was 4.6%.
See above under “Cash Management” for further information about our related-party debt.
RECENT ACCOUNTING PRONOUNCEMENTS

Please refer to “Part I, Item 1. Financial Statements” and “Notes toUnaudited Condensed Consolidated Financial Statements Note 1 (h) – Recent Accounting Pronouncements.”

for further information regarding our operating leases.

Purchase Commitments

We may have short term purchase commitments related to the purchase orders for products and services, within the normal course of business. These arrangements typically have cancellation provisions that allow us to cancel with little to no penalty.

24

Item 3. Quantitative and Qualitative Disclosures about Market Risk


Concentration

Market risk represents the risk of Creditloss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange risks. We do not hold or issue financial instruments for trading purposes.

Interest Rate Risk

Financial instruments which potentially subject us to concentrations of credit risk consist primarily of

We had unrestricted cash and cash equivalents of $34.2 million and accounts receivable. Cash$46.7 million at March 31, 2022 and cash equivalentsDecember 31, 2021, respectively. We do not have material exposure to market risk with respect to investments, as our investments consist principallyprimarily of demand deposit and money market accounts. Cash and cash equivalents are principally heldhighly liquid investments purchased with various domestic financial institutions with highoriginal maturities of three months or less.

Our exposure to interest rate risk also includes the amount of interest we must pay on our borrowings under our Revolving Credit Agreement. The Loan under the Credit Agreement bears interest at the Company’s option at (i) the prime rate plus 2.00%, (ii) the adjusted term SOFR rate plus 2.90% or (iii) the adjusted daily simple SOFR rate plus 2.90%. As of March 31, 2022, there was no amount outstanding under the revolving credit standing. facility.

Foreign Currency Exchange Risk

We perform ongoing credit evaluationshave foreign currency risks related to certain of our customersforeign subsidiaries, primarily in Korea, Japan, and generally do not require collateral. AllowancesGermany. International net revenues and operating expense are maintained for potential doubtful accounts.


We anticipate thattypically denominated in the local currency of each country and result from transactions by our operations in these countries. The local currencies of these foreign subsidiaries are the South Korean Won ("KRW"), Japanese Yen ("JPY"), and Euro ("EUR), respectively. Fluctuations in foreign currencies create volatility in our reported results of operations. If the U.S. Dollar ("USD") had appreciated or depreciated by 10% relative to KRW, JPY, and EUR, our operating income for the first three months of 2022 would have decreased or increased by approximately $0.5 million, respectively.

Foreign exchange rate fluctuations may also adversely impact our financial position as the assets and liabilities of our foreign operations are translated into USD in any given period may depend to a large extentpreparing our unaudited condensed consolidated balance sheets. The effect of foreign exchange rate fluctuations on sales to a small number of large accounts. As a result, our revenueconsolidated financial position for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.

For the three months ended September 30, 2017, two customers represented, 10% and 9% of net revenue, respectively. For the nine months ended September 30, 2017, two customers each represented 9% of net revenue (one of whichMarch 31, 2022 was a related-party). For the three months ended September 30, 2016, three customers represented 18%, 16% (a related-party)net translation loss of $0.3 million. This loss is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive loss. If USD had appreciated or depreciated by 10% relative to KRW, JPY, and 12%EUR, our net assets as of net revenue,March 31, 2022 would have decreased or increased by approximately $2.5 million, respectively. For the nine months ended September 30, 2016, three customers represented 23%, 21% (a related-party)

We have certain assets 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 customersliabilities, primarily inter-company loans, that are denominated in countriescurrencies other than the United States represented 84%relevant entity’s functional currency. Our intercompany loans are primarily denominated in USD and 87%, respectively, of net accounts receivable.

Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our variable rate outstanding debt. As of September 30, 2017, our outstanding debt balance was $26.9 million, which comprised $18.4 million in aggregate principal amount of borrowings under our short-term credit facilities and $8.5 million in loans from DNI and its affiliates (which bear interest at a fixed rate). Amounts borrowed under our short-term credit facilities bore interest ranging from 2.3% to 5.9% as of September 30, 2017. Assuming the outstanding balance on our variable rate debt remains constant over a year, a 2% increaseEUR. Changes in the interest rate would decrease pre-tax incomefunctional currency value of these balances create fluctuations in our reported consolidated financial position, cash flows and cash flow by approximately $0.5 million.
Foreign Currency Risk
We transact business in various foreign countries,results of operations. Transaction gains and a significant portion of our assets is located in Korea. We have sales operations throughout Europe, Asia, the Middle East and Latin America. We are exposed to foreign currency exchange rate risk associated withlosses on these foreign currency denominated assets and liabilities primarily intercompany receivables and payables. Accordingly,are recognized each period within “Other income (expense), net” in our operating results are exposed to changes in exchange rates between the U.S. dollar and those currencies.unaudited condensed consolidated statement of comprehensive income (loss). During the three months ended March 31, 2022, we recognized approximately $0.5 million of expense related to the intercompany loans denominated in foreign currencies. If USD had appreciated or depreciated by 10% relative to EUR, our net income for the first ninethree months of 2017 and during fiscal year 2016, we did not hedge any of our foreign currency exposure.
We2022 would have performed a sensitivity analysis as of September 30, 2017 using a modeling technique that measures the impact on the balance sheet arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign exchange loss of $2.3decreased or increased by approximately $2.0 million, at September 30, 2017. This sensitivity analysis assumes a parallel adverse shift in foreign currency exchange rates, which do not always move in the same direction. Actual results may differ materially.

respectively.

Item 4. Controls and Procedures


Disclosure Controls and Procedures

We are required to maintain disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officersprincipal executive officer and Chief Financial Officer,principal financial officer, as appropriate to allow for timely decisions regarding required disclosures. Our disclosure controls and procedures include those components of our internal control over financial reporting intended to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financials in accordance with U.S. GAAP. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), under the Exchange Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017,March 31, 2022, the end of the period covered by this report.Quarterly Report on Form 10-Q. The evaluation was done under the supervision and with the participation of management, including our Co-Chief Executive Officersprincipal executive officer and our Chief Financial Officer. Based upon this evaluation, our Co-Chief Executive Officers and Chief Financial Officer concluded that, becauseprincipal financial officer. In the course of the material weaknesses inevaluation of our internal control overdisclosure controls and procedures, our principal executive officer and principal financial reporting that existed as of December 31, 2016 and that have not yet been remediated, as described below,officer concluded our disclosure controls and procedures were not effective as of September 30, 2017.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses that management previously identified in connection with its evaluation of our internal control over financial reporting as of DecemberMarch 31, 2016 were as follows: we did not maintain an effective control environment as there was an insufficient complement of personnel with appropriate accounting knowledge, experience and competence, resulting in incorrect application of generally accepted accounting principles. This material weakness contributed to the following material weaknesses. We did not maintain effective controls over our financial close process. Also, we did not design and maintain effective controls over the review of supporting information to determine the completeness and accuracy of the accounting for complex transactions, specifically related to the business combination that occurred on September 9, 2016, which resulted in an incorrect application of generally accepted accounting principles that resulted in material misstatements and a restatement of our unaudited condensed consolidated financial statements for the three and nine months period ended September 30, 2016. Additionally, these material weaknesses could result in a misstatement in the financial statements that would result in a material misstatement in the annual or interim consolidated financial statements that would not be prevented or detected.

In light of the material weakness described above, and based on the criteria set forth in Internal Control —Integrated Framework (2013) issued by the Committee Sponsoring Organizations of the Treadway Commission (COSO), our management concluded that our internal control over financial reporting was not effective as of December 31, 2016.
As of the date of this report, we are re-assessing the design of our controls and modifying processes related to the accounting for significant and unusual transactions as well as enhancing monitoring and oversight controls in the application of applicable accounting guidance related to such transactions. In connection therewith, we anticipate that we will hire additional accounting personnel with relevant skills, training and experience, and conduct further training of accounting and finance personnel.

2022.

25

Changes in Internal Control over Financial Reporting


Except as described above, there

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


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


26

PART II. OTHER INFORMATION



We are

In addition to the Notice discussed in Note 13of the Notes to Unaudited Condensed Consolidated Financial Statements, from time to time, 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, we dothe Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on ourthe unaudited condensed 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 financial position, results of operations and cash flows of the period in which the ruling occurs, or future periods.

Item 1A. Risk Factors


In addition to the other information set forth in this report, you should carefully consider the

A list of factors discussed in Part I, "Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, whichthat could materially affect our business, financial condition or future results.operating results is described in Part I, Item 1A, “Risk Factors” in the 2021 Form 10-K. There have been no material changes to theour risk factors describedfrom those disclosed in Part I, Item 1A, “Risk Factors” in the "Risk Factors" section in our Annual Report on2021 Form 10-K for the year ended December 31, 2016. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.



10-K.

Item 5. Other Information

None.

Item 2.6. Exhibits




The exhibits required to be filed with this quarterly report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

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EXHIBIT INDEX

Exhibit

Number

Description

 3.1

10.1

Letter agreement, dated July 3, 2017, by and amongRestated Certificate of Incorporation of DASAN Zhone Solutions, Inc., ZTI Merger Subsidiary III, (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the SEC on September 27, 2017).

 3.2

Certificate of Amendment to the Restated Certificate of Incorporation of DZS Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 27, 2020).

 3.3

Amended and Restated Bylaws of DZS Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021).

10.23

Credit Agreement, dated as of February 9, 2022, among DZS Inc., Premisys Communications, Inc.as Borrower, the other Loan Parties party thereto, the Lenders from time to time parties thereto and JPMorgan Chase Bank, N.A., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation, Dasan Network Solutions, Inc. and Wells Fargo Bank, National Associationas Administrative Agent (incorporated by reference to Exhibit 10.1 of registrant'sto the Company’s Current Report on Form 8-K dated July 3, 2017)filed with the SEC on February 10, 2022).

10.2

General Release of Claims, dated as of September 11, 2017, by and between DASAN Zhone Solutions, Inc. and James Norrod

10.3

 31.1*

General Release of Claims, dated as of September 11, 2017, by and between DASAN Zhone Solutions, Inc. and Kirk Misaka
31.1

Certification of Chief Executive Officer and ActingPursuant to Rule 13a-14(a)/15d-14(a)

 31.2*

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

32.1

 32.1*

Section 1350 Certification of Chief Executive Officer and Acting Chief Financial Officer

101.INS

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document

101.SCH

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB

101.LAB

Inline XBRL Taxonomy Extension Labels Linkbase

101.PRE

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

104

Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)

*

Filed herewith.

+

Indicates management contract or compensatory plan, contract or arrangement.




28

SIGNATURES

Pursuant to the retirementsrequirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DASAN ZHONE SOLUTIONS,

DZS INC.

Date: November 14, 2017May 3, 2022

By:

/s/    IL YUNG KIM

Name:

By:

Il Yung Kim

/s/ Charles Daniel Vogt

Title:

Name:

Charles Daniel Vogt

Title:

President and Chief Executive Officer and Acting

By:

/s/ Misty Kawecki

Name:

Misty Kawecki

Title:

Chief Financial Officer

(Principal Financial and

Accounting Officer)



39

29