

~~• Federal~~(15)	~~2013 - 2016~~
~~• California and Canada~~	~~2012 - 2016~~
~~• Brazil~~	~~2011 - 2016~~
~~• Germany~~	~~2012 - 2016~~
~~• Japan~~	~~2011 - 2016~~
~~• Korea~~	~~2015 - 2016~~
~~• United Kingdom~~	~~2014 - 2016~~
~~• Vietnam~~	~~2016~~Subsequent Events

Keymile Acquisition / Share Purchase Agreement

~~However, due to the fact~~On October 5, 2018, ZTI Merger Subsidiary III, Inc., a Delaware corporation, and wholly owned subsidiary of the Company ~~had net operating losses~~(the “Purchaser”) and ~~credits carried forward~~Riverside KM Beteiligung GmbH, a limited liability company organized under the laws of Germany (the “Seller”) entered into a Share Purchase Agreement (the “Purchase Agreement”) whereby the Purchaser agreed to purchase from the Seller all shares in ~~most jurisdictions,~~Keymile GmbH (“Keymile”), a limited liability company organized under the laws of Germany, and certain ~~items attributable~~of its subsidiaries, for an aggregate cash purchase price of EUR 10.25 million ($11.9 million) (the “Keymile Acquisition��). The purchase price is to ~~closed years are still~~be paid at closing and is subject to ~~adjustment~~customary regulatory approval and satisfaction of certain closing conditions. Certain liabilities including unfunded pension liabilities are to be assumed by the ~~relevant taxing authority through an adjustment~~Purchaser.

Keymile offers a series of multi-service access platforms for FTTx network architectures, including ultra-fast broadband copper access based on VDSL/Vectoring & G. Fast technology. The Company has pursued the acquisition to ~~tax attributes carried forward to open years.~~

enable the strengthening of its global broadband access service market.

The Company ~~estimates that its foreign income will generally be subject~~has $42,000 of outstanding receivables and $59,000 of sales to ~~taxation in~~Keymile as of and for the ~~United States on a current basis~~nine months period ended September 30, 2018.

Guarantee Agreement and ~~that its foreign subsidiaries~~Working Capital Facility

In connection with the Keymile Acquisition 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~~Purchase Agreement, the Company has ~~not filed an income tax return~~also entered into a guarantee agreement with the Seller, dated October 5, 2018, which guarantees the purchase price of EUR 10.25 million ($11.9 million) and guarantees a working capital facility of EUR 4.0 million ($4.6 million). Both the guarantee agreement and the working capital facility are to be provided at closing of the Keymile Acquisition, which is expected to be completed in ~~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~~fourth quarter of ~~years it may examine.~~

2018.

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

Wells Fargo Bank Facility

On October 22, 2018, the Company borrowed $3.0 million under ~~examination for income taxes~~the Amended WFB Facility. On October 31, 2018, the Company repaid the $3.0 million in ~~any material jurisdiction.~~full.

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

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

Forward-Looking Statements

This report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. We use

Table of Contents

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

growth and trends in our business or key markets; cost synergies, growth opportunities and other financial and operating benefits of the Merger; future growth and revenues from our products; our ability to refinance or repay our existing indebtedness prior to the applicable maturity date; future economic conditions and performance; anticipated performance of products or services; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and that they are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified or referenced under the heading “Risk Factors” in Part II, Item 1A, elsewhere in this report and in our other filings with the Securities and Exchange Commission (the SEC). ~~Therefore, actual~~Actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, ~~our ability to realize the anticipated cost savings, synergies and other benefits of the Merger and any integration risks relating to the Merger,~~ the ability to generate sufficient revenue to achieve or sustain profitability, the ability to raise additional capital to fund existing and future operations or to refinance or repay our existing indebtedness, defects or other performance problems in our products, any economic slowdown in the telecommunications industry that restricts the ability of our customers to purchase our products, commercial acceptance of our products, intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same networks needs as our products, higher than anticipated expenses that we may incur, any failure to comply with the periodic filing and other requirements of The Nasdaq Stock Market for continued listing, material weaknesses or other deficiencies in our internal control over financial reporting, the initiation of any civil litigation, regulatory proceedings, government enforcement actions or other adverse effects relating to ~~the Audit Committee investigation or~~ errors in the consolidated financial statements of ~~Legacy~~ Zhone Technologies, Inc., and other factors identified elsewhere in this report and in our most recent reports on Forms 10-K, 10-Q and 8-K. We undertake no obligation to revise or update any forward-looking statements for any reason.

OVERVIEW

We are a global provider of network access solutions and communications equipment for service provider and enterprise networks. We research, develop, test, sell, manufacture and support communications equipment in five major areas: broadband access, Ethernet switching, mobile backhaul, passive optical LAN (POLAN) and software defined networks (SDN).

As discussed under "Liquidity and Capital Resources" below, the maturing 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.

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

~~ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS~~

As discussed in Note 1(e) to 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~~For a complete description of what we believe to ~~our~~be the critical accounting policies and estimates ~~from~~used in the ~~information provided in Part II, “Item 7. Management’s Discussion and Analysis~~preparation of our Unaudited Condensed Consolidated Financial ~~Condition and Results of Operations – Critical Accounting Policies and Estimates” included in~~Statements, refer to our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. Refer to Note 1 (g) Recent Accounting Pronouncements in the Notes to Unaudited Condensed Consolidated Balance Sheets in Item 1 of Part I of this Quarterly Report on Form 10-Q, for the updated accounting policy of revenue recognition upon the adoption of ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606) as of January 1, 2018.

Table of Contents

RESULTS OF OPERATIONS

We list in the table below the historical condensed consolidated statement of ~~comprehensive loss data~~income (loss) 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		Three Months Ended September 30,				Nine Months Ended September 30,
			(As Revised)				(As Revised)		2018		2017		2018		2017
Net revenue:
Net revenue	91	%	79	%	85	%	75	%
Net revenue - related parties	9	%	21	%	15	%	25	%
Third parties									98	%	91	%	98	%	85	%
Related parties									2	%	9	%	2	%	15	%
Total net revenue	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%
Cost of revenue:
Products and services	58	%	53	%	54	%	54	%
Products and services - third parties									65	%	58	%	65	%	53	%
Products and services - related parties	8	%	17	%	13	%	21	%	2	%	8	%	2	%	13	%
Amortization of intangible assets	0	%	0	%	0	%	0	%	—	%	—	%	—	%	—	%
Total cost of revenue	67	%	70	%	67	%	75	%	67	%	66	%	67	%	66	%
Gross profit	33	%	30	%	33	%	25	%	33	%	34	%	33	%	34	%
Operating expenses:
Research and product development	14	%	19	%	15	%	17	%	12	%	13	%	13	%	15	%
Selling, marketing, general and administrative	17	%	26	%	18	%	18	%	16	%	18	%	17	%	19	%
Amortization of intangible assets	0	%	1	%	1	%	0	%	—	%	—	%	—	%	1	%
Total operating expenses	31	%	46	%	34	%	35	%	28	%	31	%	30	%	35	%
Operating income (loss)	2	%	(16	)%	(1	)%	(10	)%	5	%	3	%	3	%	(1	)%
Interest income	0	%	0	%	0	%	0	%	—	%	—	%	—	%	—	%
Interest expense	0	%	(1	)%	0	%	(1	)%	—	%	(1	)%	—	%	—	%
Other income, net	0	%	0	%	0	%	0	%	(1	)%	—	%	—	%	—	%
Income (loss) before income taxes	2	%	(17	)%	(1	)%	(11	)%	4	%	2	%	3	%	(1	)%
Income tax provision (benefit)	0	%	(2	)%	1	%	(1	)%
Income tax provision									1	%	—	%	1	%	—	%
Net income (loss)	2	%	(15	)%	(2	)%	(10	)%	3	%	2	%	2	%	(1	)%
Net loss attributable to non-controlling interest	0	%	0	%	0	%	0	%
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	2	%	(15	)%	(2	)%	(10	)%
Foreign currency translation adjustments	0	%	7	%	1	%	3	%
Comprehensive income (loss)	2	%	(8	)%	(1	)%	(7	)%
Comprehensive income attributable to non-controlling interest	0	%	0	%	0	%	0	%
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.	2	%	(8	)%	(1	)%	(7	)%

Net Revenue

Information about our net revenue for products and services for the ~~three and~~ nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 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		Three Months Ended September 30,									Nine Months Ended September 30,
			(As Revised)								(As Revised)						2018		2017		Increase/ (decrease)			% change		2018		2017		Increase		% change
Products	$	63.2	$	28.9	$	34.3	119	%	$	169.8	$	84.6	$	85.2	101	%	$	68.8	$	63.2	$	5.6		9	%	$	198.8	$	169.8	$	29.0	17	%
Services	3.2		2.3		0.9		39	%	8.7		6.2		2.5		40	%	3.1		3.2		(0.1		)	(3	)%	8.9		8.7		0.2		2	%
Total	$	66.4	$	31.2	$	35.2	113	%	$	178.5	$	90.8	$	87.7	97	%	$	71.9	$	66.4	$	5.5		8	%	$	207.7	$	178.5	$	29.2	16	%

Table of Contents

Information about our net revenue for North America and international markets for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 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		Three Months Ended September 30,									Nine Months Ended September 30,
			(As Revised)								(As Revised)						2018		2017		Increase/(decrease)			% change		2018		2017		Increase/(decrease)			% change
Revenue by geography:
United States	$	13.1	$	3.4	$	9.7	285	%	$	37.2	$	7.4	$	29.8	403	%	$	11.2	$	13.1	$	(1.9	)	(15	)%	$	41.4	$	37.2	$	4.2		11	%
Canada	1.5		0.3		1.2		100	%	4.1		0.3		3.8		100	%	1.1		1.5		(0.4		)	(27	)%	3.3		4.1		(0.8		)	(20	)%
Total North America	14.6		3.7		10.9		295	%	41.3		7.7		33.6		436	%	12.3		14.6		(2.3		)	(16	)%	44.7		41.3		3.4			8	%
Latin America	7.5		1.9		5.6		295	%	19.4		2.9		16.5		569	%	6.8		7.5		(0.7		)	(9	)%	21.7		19.5		2.2			11	%
Europe, Middle East, Africa	7.4		2.2		5.2		236	%	19.1		5.2		13.9		267	%
Europe, Middle East, Africa (EMEA)																	10.4		7.4		3.0			41	%	27.3		19.1		8.2			43	%
Korea	20.5		18.4		2.1		11	%	69.0		60.1		8.9		15	%	19.6		20.4		(0.8		)	(4	)%	50.9		69.0		(18.1		)	(26	)%
Asia Pacific	16.4		5.0		11.4		228	%	29.7		14.9		14.8		99	%
Other Asia Pacific																	22.8		16.5		6.3			38	%	63.1		29.6		33.5			113	%
Total International	51.8		27.5		24.3		88	%	137.2		83.1		54.1		65	%	59.6		51.8		7.8			15	%	163.0		137.2		25.8			19	%
Total	$	66.4	$	31.2	$	35.2	113	%	$	178.5	$	90.8	$	87.7	97	%	$	71.9	$	66.4	$	5.5		8	%	$	207.7	$	178.5	$	29.2		16	%

For the three months ended September 30, ~~2017,~~2018, net revenue increased ~~113%~~8% or ~~$35.2~~$5.5 million to ~~$66.4~~$71.9 million from ~~$31.2~~$66.4 million for the same period last year. For the nine months ended September 30, ~~2017,~~2018, net revenue increased ~~97%~~16% or ~~$87.7~~$29.2 million to ~~$178.5~~$207.7 million from ~~$90.8~~$178.5 million for the same period of last year. For the three months ended September 30, ~~2017,~~2018, product revenue increased ~~119%~~9% or ~~$34.3~~$5.6 million to $68.8 million from $63.2 million ~~compared to~~for the same period last year. For the nine months ended September 30, ~~2017,~~2018, product revenue increased ~~101%~~17% or ~~$85.2~~$29.0 million to $198.8 million from $169.8 million ~~compared to~~for the same period last year. The increase in net revenue for both the three and nine ~~months~~month periods ended September 30, ~~2017~~2018 was primarily ~~related~~due to increased products sales in the Europe, Middle East and Africa ("EMEA") and Other Asia Pacific, primarily in India, offset by decreased product sales in Korea. We also added customers in late 2017, which contributed to the ~~consummation of~~revenue increase during the ~~Merger in September 2016 (which resulted in the inclusion of net revenue related~~first three quarters this year as compared to the ~~Legacy Zhone business for the entire current year~~same periods ~~compared to only 22 days in the prior year periods).~~last year.

Service revenue represents revenue from maintenance and other services associated with product shipments. For the three months ended September 30, ~~2017,~~2018, service revenue ~~increased 39%~~decreased 3% or ~~$0.9~~$0.1 million to $3.1 million from $3.2 million ~~compared to~~for the same period last year. For the nine months ended September 30, ~~2017,~~2018, service revenue increased ~~40%~~2% or ~~$2.5~~$0.2 million to $8.9 million from $8.7 million ~~compared to~~for the same period last year. The ~~increases~~increase in service revenue ~~were~~was primarily related to ~~the consummation~~a greater number of ~~the Merger in September 2016 (which resulted in the inclusion of service revenue related to the Legacy Zhone business~~products under contract 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.~~and extended warranty.

International net revenue increased ~~88%~~15% or ~~$24.3~~$7.8 million to ~~$51.8~~$59.6 million for the three months ended September 30, ~~2017~~2018 from ~~$27.5~~$51.8 million for the same period last year, and represented 83% of total net revenue compared with 78% during the same period of 2017. International net revenue increased 19% or $25.8 million to $163.0 million for the nine months ended September 30, 2018, from $137.2 million for the same period last year, and represented 78% of total net revenue compared with ~~88%~~77% 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.~~year. The increases in international net revenue were primarily related to increased product sales in Other Asia Pacific, primarily in India.

For both the ~~consummation~~three and nine months ended September 30, 2018, one customer each accounted for 11% 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).~~

revenue. For the three months ended September 30, 2017, two customers represented 10% and 9% (a related party) of net revenue, respectively. For the nine months ended September 30, 2017, two customers ~~each~~ represented 9% of net revenue (one of which was a ~~related-party)~~related party). For the three months ended September 30, 2016, three customers represented 18%, 16% (a related-party) and 12% of net revenue, respectively. For the nine months ended September 30, 2016, three customers represented 23%, 21% (a related-party) and 12% of net revenue, respectively.

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

Table of Contents

Cost of Revenue and Gross ~~Margin~~Profit

Total cost of revenue increased ~~102%~~10% or ~~$22.4~~$4.5 million to ~~$44.4~~$48.5 million for the three months ended September 30, ~~2017,~~2018, compared to ~~$21.9~~$44.0 million for the three months ended September 30, ~~2016.~~2017. Total cost of revenue was 67% of net revenue for the three months ended September 30, 2018, compared to 66% for the three months ended September 30, 2017. Total cost of revenue increased ~~76%~~18% or ~~$51.5~~$20.9 million to ~~$119.4~~$139.3 million for the nine months ended September 30, ~~2017, compared to $67.9~~2018, from $118.4 million for the nine months ended September 30, ~~2016.~~2017. Total cost of revenue was 67% of net revenue for the nine months ended September 30, 2018 compared to 66% for the nine months ended September 30, 2017. The ~~increases~~increase in total cost of revenue, ~~were~~as a percentage of sales, was primarily due to ~~the consummation of the Merger~~an increase in ~~September 2016 (which resulted~~revenues 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 threeEMEA and ~~nine months ended September 30, 2017 compared to the prior year periods due to improved manufacturing efficiencies and product mix.~~certain Other Asia Pacific customers.

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

Research and Product Development Expenses

Research and product development expenses ~~increased 50%~~decreased 3% or ~~$2.9~~$0.2 million to ~~$8.8~~$8.7 million for the three months ended September 30, ~~2017~~2018 compared to ~~$5.9~~$8.9 million for the three months ended September 30, ~~2016.~~2017. As a percentage of sales, research and product development expenses were 12% for the three months ended September 30, 2018, compared to 13% for the three months ended September 30, 2017. Research and product development expenses ~~increased 73%~~decreased 4% or ~~$11.4~~$1.1 million to ~~$27.0~~$26.3 million for the nine months ended September 30, ~~2017~~2018 compared to ~~$15.6~~$27.5 million for the nine months ended September 30, ~~2016.~~2017. As a percentage of sales, research and product development expenses were 13% for the nine months ended September 30, 2018, compared to 15% for the nine months ended September 30, 2017. The ~~increase~~decrease in research and product development expenses was primarily due to ~~the consummation of the Merger in September 2016 (which resulted in the inclusion of research~~cost containment initiatives and more focused product development ~~expenses related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods).~~activities. We intend to continue to invest in research and product development to attain our strategic product development objectives, while seeking to manage the associated costs through expense controls.

Selling, Marketing, General and Administrative Expenses

Selling, marketing, general and administrative expenses ~~increased 38%~~decreased 5% or ~~$3.2~~$0.6 million to ~~$11.5~~$11.1 million for the three months ended September 30, ~~2017~~2018, compared to ~~$8.3~~$11.7 million for the three months ended September 30, ~~2016.~~2017. As a percentage of sales, selling, marketing, general and administrative expenses were 16% for the three months ended September 30, 2018, compared to 18% for the three months ended September 30, 2017. Selling, marketing, general and administrative expenses increased ~~95%~~6% or ~~$15.8~~$2.1 million to ~~$32.5~~$35.2 million for the nine months ended September 30, ~~2017~~2018, compared to ~~$16.7~~$33.1 million for the nine months ended September 30, ~~2016.~~2017. As a percentage of sales, selling, marketing, general and administrative expenses were 17% for the nine months ended September 30, 2018, compared to 19% for the nine months ended September 30, 2017. The ~~increases~~decrease in selling, marketing, general and administrative expenses ~~were~~for the three months ended September 30, 2018 was primarily ~~due~~related to ~~the consummation of the Merger~~a continued focus on our cost containment initiatives. The increase in ~~September 2016 (which resulted in the inclusion of~~ selling, marketing, general and administrative expenses for the nine months ended September 30, 2018 was primarily related to ~~Legacy Zhone business~~higher personnel expenses due to increased headcount, as well as increased legal and outside service fees.

Income Tax Provision

Income tax expense for ~~the entire current year periods, compared to only 22 days in the prior year periods), offset by higher commission expenses during~~ the three and nine months ended September 30, ~~2016.~~

~~Income Tax Provision~~

~~During~~2018 was $0.7 million and $1.1 million, respectively, on pre-tax income of $2.6 million and $4.4 million, respectively. For the three and nine months ended September 30, 2017, income tax expense was $0.1 million and ~~2016, no material provision or benefit for~~$0.6 million, respectively, on pre-tax income ~~taxes was recorded,~~(loss) of $1.5 million and $(2.3) million, respectively. As of September 30, 2018, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in the United States and taxable income generated by 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.~~wholly-owned foreign subsidiaries.

OTHER PERFORMANCE MEASURES

In managing our business and assessing our financial performance, we supplement the information provided by our U.S. GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) stock-based compensation expenses, and (v) material non-recurring transactions or events, such as ~~Merger~~merger and acquisition transaction costs or a gain (loss) on sale of assets or impairment of fixed assets. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our core operating business strategies. We believe Adjusted EBITDA also assists investors and analysts in

Table of Contents

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

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

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

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

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

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

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

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

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

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017			2016			Three Months Ended September 30,				Nine Months Ended September 30,
			(As Revised)						(As Revised)			2018		2017		2018		2017
Net income (loss)	$	1,387	$	(4,789	)	$	(2,985	)	$	(9,083	)	$	1,827	$	1,387	$	3,323	$	(2,985	)
Add:
Interest expense, net	227		173			711			463			405		227		1,127		711
Income tax provision (benefit)	107		(610		)	646			(1,041		)
Income tax expense												735		107		1,071		646
Depreciation and amortization	752		628			3,105			1,165			652		752		2,033		3,105
Stock-based compensation	195		128			670			128			617		195		1,357		670
Merger-related costs	—		3,536			—			3,536
Non-recurring merger and acquisition costs												139		—		139		—
Adjusted EBITDA	$	2,668	$	(934	)	$	2,147		$	(4,832	)	$	4,375	$	2,668	$	9,050	$	2,147

LIQUIDITY AND CAPITAL RESOURCES

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

~~As of~~ ~~September 30, 2017, our cash and cash equivalents were~~ ~~$10.1 million~~ compared to $17.9 million at December 31, 2016. Our cash and cash equivalents as of September 30, 2017 included $3.4 million in cash balances held by our Korean subsidiary. The $7.7 million decrease in cash and cash equivalents was attributable 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~~We had 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~~$3.3 million for the nine months ended September 30, ~~2017~~2018, and $1.2 million for the year ended December 31, ~~2016, respectively. We~~2017. As of September 30, 2018, we had an accumulated deficit of ~~$23.1~~$15.2 million and working capital of ~~$57.3~~$66.9 million. In addition, we had a net cash outflow from operations of $15.7 million ~~as of~~for the nine months ended September 30, ~~2017.~~2018. As of September 30, ~~2017,~~2018, we had ~~approximately $10.1~~$20.0 million in cash and cash equivalents, which included ~~$3.4~~$6.0 million in cash balances held by our ~~Korean subsidiary,~~international subsidiaries and ~~$26.9~~$42.3 million in aggregate principal ~~amount~~debt of ~~outstanding borrowings under our short-term debt obligations and our loans from DNI and its affiliates.~~which $37.3 million was in current liabilities. In addition, as of September 30, 2018 we had ~~$7.6 million in aggregate borrowing availability under our credit facilities as of~~

~~September 30, 2017. We had $8.5~~$6.4 million committed as ~~security~~cash collateral for letters of credit under our revolving credit facilities, leaving $21.3 million in aggregate financing availability under these ~~facilities~~facilities. Our current lack of liquidity could harm us by:

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

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

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

limiting its ability to complete Keymile acquisition; and

Table of Contents

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

These factors indicate that cash flows might not be sufficient for us to meet our obligations as they come due in the ordinary course of ~~September 30, 2017. Due~~business for a period of 12 months from the date of this Quarterly Report on Form 10-Q.

Our ability to meet our obligations as they become due in the ~~amount~~ordinary course of ~~short-term debt obligations maturing within~~business for the next 12 months ~~and~~will depend on 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,~~(i) achieve forecasted results, (ii) access funds approved under existing or new credit facilities and/or to raise additional capital through sales of our common stock to the public and (iii) effectively manage inventory procurement. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected. Management’s belief that we will achieve these results assumes that, among other things, we will continue to be successful in implementing our ~~ability to comply with the covenants~~business strategy and that there will be no material adverse development in our ~~existing debt agreements, our ability~~business, liquidity or capital requirements. If one or more of these factors do not occur as expected, it could cause us 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 neededfail 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.~~obligations as they come due.

We ~~have continued our~~plan to focus on capital raising, cost ~~control and~~management, operating efficiency ~~along with~~and restrictions on 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, issue or enter into amendments of our debt or equity securities, or purchase credit ~~insurance or borrow on potentially unfavorable terms. In addition, we~~insurance. We may ~~be required to~~also reduce the scope of our planned product development, reduce sales and marketing efforts and reduce our operations in low margin regions, including reductions in headcount. On July 12, 2018, we entered into the A&R Domestic Credit Agreement and the A&R Ex-Im Credit Agreement with WFB, which amended and replaced our existing senior secured revolving line of credit and letter of credit facilities with WFB and revised certain reporting and compliance provisions, as described more fully in Note 7 to the unaudited condensed consolidated financial statements.

Based on our current plans and current business conditions, we believe that ~~our focused operating expense discipline~~these measures along with our existing cash, cash equivalents and available credit facilities will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months ~~however~~from the ~~factors discussed above raise substantial doubt about our ability to continue as a going concern.~~date of this Quarterly Report on Form 10-Q.

Operating Activities

Net cash used in operating activities was $15.7 million for the nine months ended September 30, ~~2017 consisted of a~~2018, compared with 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. The most significant components of the changes in net operating assets were an increase in accounts receivable of $2.9 million, an increase in inventorycash used 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 inventory 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 of a net loss of $9.1 million, adjusted for non-cash charges totaling $1.9 million and an~~2017. This 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~~changes in operating assets and liabilities, resulting in using $23.4 million of ~~receivables collections during the current year period. The decrease in accounts payable was primarily due to timing of payments.~~

~~Investing Activities~~

~~Net~~ cash ~~used in investing activities~~ for ~~the~~ nine months ended September 30, ~~2017~~ ~~consisted~~2018, compared to using $2.2 million of ~~an increase in restricted~~ cash ~~of $6.1 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 DNI to a certain customer in Vietnam.~~nine months ended September 30, 2017.

Investing Activities

Net cash used in investing activities was $0.8 million for the nine months ended September 30, ~~2016 consisted~~2018 compared to net cash provided by investing activities of ~~an increase in short-term and long-term loans to others of $1.4~~$0.1 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.~~for the nine months ended September 30, 2017.

Financing Activities

~~Net cash used in financing activities for the~~ ~~nine months ended September 30, 2017~~ ~~consisted of cash used in repayments of borrowings of $15.6 million, offset by proceeds from short-term borrowings of $13.8 million.~~

Net cash provided by financing activities was $15.2 million for the nine months ended September 30, ~~2016 consisted~~2018 compared to net cash used in financing activities of $1.8 million for the nine months ended September 30, 2017. This change was primarily due to the proceeds from short-term borrowings ~~and proceeds from long-term borrowings~~ of ~~$19.8~~$67.5 million, ~~and $6.8 million, respectively,~~ offset by repayments of short-term borrowings of ~~$23.1~~$53.2 million.

Cash Management

Our primary source of liquidity comes from our cash and cash equivalents, which totaled ~~$10.1~~$20.0 million at September 30, ~~2017~~2018, as well as our credit facilities, under which we had aggregate ~~borrowing~~financing availability of ~~$7.6~~$21.3 million as of September 30, ~~2017,~~2018, and under which ~~$8.5~~$6.4 million was committed as ~~security~~cash collateral for letters of credit as of September 30, ~~2017.~~2018. Our cash and cash equivalents as of September 30, ~~2017~~2018 included ~~$3.4~~$6.0 million in cash balances held by our ~~Korean subsidiary.~~international subsidiaries.

Table of Contents

WFB Facility

~~As of September 30, 2017, we had a $25.0 million credit facility (the WFB Facility) with~~

Wells Fargo Bank ~~(WFB). Under~~Facility

On July 12, 2018, we entered into the A&R Domestic Credit Agreement and the A&R Ex-Im Credit Agreement with WFB, which amended and replaced our existing senior secured revolving line of credit and letter of credit facilities with WFB and revised certain reporting and compliance provisions. The Amended WFB Facility ~~we have~~provides for a revolving line of credit of $25.0 million (including up to $5.0 million of letters of credit), with the ~~option of borrowing funds at agreed upon interest rates. The~~ amount that we are able to borrow ~~under the WFB Facility varies~~ based on eligible accounts receivable and inventory, ~~as defined in the WFB Facility, as long as the aggregate amount outstanding does not exceed $25.0 million~~ less the amount committed as ~~security~~cash collateral for letters of credit. ~~To maintain availability of funds under the WFB Facility, we pay a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense.~~

As of 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 Amended WFB Facility ~~bear~~bears interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin based on our average excess availability (as calculated under the WFB Facility). To maintain availability of funds under the Amended WFB Facility, we pay a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense. The maturity date of the Amended WFB Facility is July 12, 2021.

As of September 30, 2018, we had $6.0 million in outstanding borrowings under its WFB Facility, and 2.1 million was committed as cash collateral for letters of credit. Subsequent to the end of the quarter, we repaid $6.0 million in borrowings under the WFB Facility. Based on our eligible accounts receivable and inventory, we had $6.5 million of financing availability under the WFB Facility as of September 30, 2018. The interest rate on the WFB Facility was ~~3.8%~~4.4% at September 30, ~~2017. The maturity date under the WFB Facility is March 31, 2019.~~2018.

Our obligations under the Amended WFB Facility are secured by substantially all of our ~~personal property~~ assets and those of our subsidiaries that guarantee the Amended WFB Facility, including ~~our~~their intellectual property. The Amended WFB Facility contains certain financial covenants, and customary affirmative ~~covenants~~ and negative covenants. If we default under the Amended WFB Facility due to a covenant breach or otherwise, after any applicable grace periods. WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell our assets to satisfy the obligations under the Amended WFB Facility. ~~In the past we have violated the covenants in our former credit facility and received waivers for these violations.~~ As of September 30, ~~2017,~~2018, we were in compliance with the covenants under the Amended WFB Facility.

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

Bank and Trade Facilities - Foreign Operations

Certain of our foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis and are generally secured by a security interest in certain assets of the applicable foreign ~~subsidiaries.~~subsidiaries and supported by guarantees given by DNI or third parties. Payments under such facilities are made in accordance with the given lender’s amortization schedules. As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we had an aggregate outstanding balance of ~~$18.4~~$28.2 million and ~~$17.6~~$22.8 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements ranged from 1.3% to 6.82% as of September 30, ~~2017~~2018, 1.58% to 8.90% and December 31, ~~2016 ranged from 2.3% to 5.9% and 1.9% to 4.1%, respectively.~~

2017.

Related-Party Debt

In connection with the Merger, on September 9, 2016, we entered into a loan agreement with DNI for a $5.0 million unsecured subordinated term loan facility. Under the loan agreement, we were permitted to request drawdowns of one or more term loans in an aggregate principal amount not to exceed $5.0 million. As of September 30, ~~2017,~~2018, $5.0 million in term loans was outstanding under the facility. Such term loans mature in September 2021 and are pre-payable at any time by us without premium or penalty. The interest rate as of September 30, ~~2017~~2018 under this facility was 4.6% per annum.

~~In addition,~~Also, we borrowed $1.8 million from DNI for capital investment in February 2016, which amount was outstanding as of 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.~~2018. This loan matures in ~~November 2017~~July 2019 and bears interest at a rate of 4.6% per annum, payable ~~monthly.~~annually.

On March 21, 2018, DNS borrowed $5.8 million from DNI, of which $4.5 million was repaid on August 8, 2018. As of September 30, 2018, $1.3 million remained outstanding. The loan bears interest at a rate of 4.6% and matures on June 27, 2019, and is secured by certain accounts receivable of DNS Korea.

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

Table of Contents

Future Requirements and Funding Sources

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

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

Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of September 30, ~~2017, three customers accounted for 16% (a related-party), 11% and 10%~~2018, one customer represented 12% of net accounts ~~receivables,~~receivable, respectively, and receivables from customers in countries other than the United States represented ~~84%~~89% of net accounts receivable. Additionally, Dasan Networks Japan has factoring arrangements in relation to certain accounts receivable with certain financial institutions as of September 30, 2018. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt.

As discussed above 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 Commitments and Off-Balance Sheet Arrangements

At September 30, ~~2017,~~2018, our future contractual commitments by fiscal year were as follows (in thousands):


			Payments due by period														Payments due by period
	Total		2017		2018		2019		2020		2021		Thereafter		Total		2018		2019		2020		2021		2022		Thereafter
Operating leases	$	20,166	$	967	$	3,359	$	2,496	$	2,358	$	2,264	$	8,722	$	21,816	$	1,053	$	4,088	$	2,998	$	2,590	$	2,664	$	8,423
Purchase commitments	2,966		2,966		—		—		—		—		—		2,403		2,403		—		—		—		—		—
Short-term debt	18,382		18,382		—		—		—		—		—
Related-party debt	8,544		1,744		1,800		—		—		5,000		—
Short-term debt - bank and trade facilities															34,171		34,171		—		—		—		—		—
Short-term debt - related party															3,148		3,148		—		—		—		—		—
Long-term debt -related party															5,000		—				—		5,000		—		—
Other payable - related party															1,859		1,859		—		—		—		—		—
Royalty obligations															250		250		—		—		—		—		—
Total future contractual commitments	$	50,058	$	24,059	$	5,159	$	2,496	$	2,358	$	7,264	$	8,722	$	68,647	$	42,884	$	4,088	$	2,998	$	7,590	$	2,664	$	8,423



Delaware		22-3509099
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

7195 Oakport Street Oakland, California		94621
(Address of principal executive offices)		(Zip code)



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



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss)	6
	Unaudited Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2428
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3437
Item 4.	Controls and Procedures	3538

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3740
Item 1A.	Risk Factors	3740
Item 2.6.	Exhibits	3741
	Signatures	3842


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	10,145		$	17,893		$	20,028		$	17,475
Restricted cash	13,058			6,650			7,825			12,425
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 receivables	43,478			38,324
Accounts receivable - trade, net
Third parties							58,880			48,257
Related parties	12,941			13,311			2,139			13,498
Other receivables:
Others	13,851			12,068
Other receivables
Suppliers and others							28,097			12,494
Related parties	22			171			91			164
Inventories	31,966			31,032			45,457			25,344
Prepaid expenses and other current assets	3,198			4,131			12,256			3,652
Total current assets	128,659			124,573			174,773			133,309
Property and equipment, net	5,812			6,288			5,374			5,873
Goodwill	3,977			3,977			3,977			3,977
Intangible assets, net	7,174			8,767			5,933			6,785
Non-current deferred taxes							2,895			2,954
Long-term restricted cash							847			1,512
Other assets	1,536			1,842			1,400			4,717
Total assets	$	147,158		$	145,447		$	195,199		$	159,127
Liabilities, Stockholders’ Equity and Non-controlling Interest
Current liabilities:
Accounts payable:
Others	$	35,224		$	30,681
Accounts payable - trade
Third parties							$	52,943		$	31,441
Related parties	106			430			1,302			1,351
Short-term debt:
Others	18,382			17,599
Short-term debts
Bank and trade facilities							34,171			19,790
Related party							3,148			—
Other payables
Third parties							1,769			2,032
Related parties	3,544			—			1,859			1,956
Other payables:
Others	1,691			2,040
Related parties	210			6,940
Deferred revenue	2,073			1,901
Contract liabilities - current							2,394			3,279
Accrued and other liabilities	10,108			8,163			10,315			11,174
Total current liabilities	71,338			67,754			107,901			71,023
Long-term debt - related parties	5,000			6,800
Deferred revenue	1,875			1,674
Long-term debts
Bank and trade facilities							—			2,987
Related parties							5,000			6,800
Contract liabilities - non-current							1,851			1,883
Other long-term liabilities	2,581			2,351			2,677			2,667
Total liabilities	80,794			78,579			117,429			85,360
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 value	16			16
Common stock, authorized 36,000 shares, 16,566 shares and 16,410 shares outstanding as of September 30, 2018 and December 31, 2017 at $0.001 par value							16			16
Additional paid-in capital	89,873			89,174			92,408			90,198
Other comprehensive income (loss)	(1,052		)	(2,815		)
Accumulated other comprehensive income							5			1,871
Accumulated deficit	(23,080		)	(19,923		)	(15,190		)	(18,852		)
Total stockholders’ equity	65,757			66,452			77,239			73,233
Non-controlling interest	607			416			531			534
Total stockholders’ equity and non-controlling interest	66,364			66,868			77,770			73,767
Total liabilities, stockholders’ equity and non-controlling interest	$	147,158		$	145,447		$	195,199		$	159,127


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net revenue:
Net revenue	$	60,513		$	24,772		$	150,834		$	68,424
Net revenue - related parties	5,925			6,468			27,657			22,408
Third parties													$	70,227		$	60,513		$	203,317		$	150,834
Related parties													1,687			5,925			4,358			27,657
Total net revenue	66,438			31,240			178,491			90,832			71,914			66,438			207,675			178,491
Cost of revenue:
Products and services	38,643			16,483			96,127			48,750
Products and services - third parties													46,565			38,301			134,234			95,103
Products and services - related parties	5,569			5,406			22,851			19,118			1,765			5,569			4,651			22,851
Amortization of intangible assets	153			51			459			51			153			153			459			459
Total cost of revenue	44,365			21,940			119,437			67,919			48,483			44,023			139,344			118,413
Gross profit	22,073			9,300			59,054			22,913			23,431			22,415			68,331			60,078
Operating expenses:
Research and product development	8,804			5,885			27,028			15,583			8,655			8,939			26,346			27,462
Selling, marketing, general and administrative	11,454			8,278			32,506			16,691			11,106			11,661			35,212			33,096
Amortization of intangible assets	154			251			1,191			259			131			154			393			1,191
Total operating expenses	20,412			14,414			60,725			32,533			19,892			20,754			61,951			61,749
Operating income (loss)	1,661			(5,114		)	(1,671		)	(9,620		)	3,539			1,661			6,380			(1,671		)
Interest income	36			31			82			137			42			36			203			82
Interest expense	(263		)	(204		)	(793		)	(600		)	(447		)	(263		)	(1,330		)	(793		)
Other income (loss), net	60			(112		)	43			(41		)
Other income (expense), net													(572		)	60			(859		)	43
Income (loss) before income taxes	1,494			(5,399		)	(2,339		)	(10,124		)	2,562			1,494			4,394			(2,339		)
Income tax expense (benefit)	107			(610		)	646			(1,041		)
Income tax expense													735			107			1,071			646
Net income (loss)	1,387			(4,789		)	(2,985		)	(9,083		)	1,827			1,387			3,323			(2,985		)
Net income (loss) attributable to non-controlling interest	(12		)	(56		)	172			(17		)	29			(12		)	2			172
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	$	1,399		$	(4,733	)	$	(3,157	)	$	(9,066	)	$	1,798		$	1,399		$	3,321		$	(3,157	)

Foreign currency translation adjustments	(284		)	2,291			1,782			2,690			391			(284		)	(1,839		)	1,782
Comprehensive income (loss)	1,103			(2,498		)	(1,203		)	(6,393		)	2,218			1,103			1,484			(1,203		)
Comprehensive income (loss) attributable to non-controlling interest	(14		)	(54		)	191			48			16			(14		)	(3		)	191
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.	$	1,117		$	(2,444	)	$	(1,394	)	$	(6,441	)	$	2,202		$	1,117		$	1,487		$	(1,394	)

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 share	16,382			11,139			16,380			10,046
Net income (loss) per share attributable to DASAN Zhone Solutions, Inc.
Basic													$	0.11		$	0.09		$	0.20		$	(0.19	)
Diluted													$	0.11		$	0.09		$	0.20		$	(0.19	)

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



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



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


(1)	Organization and Summary of Significant Accounting Policies



	As of January 1, 2018
	Balance after adoption of ASC 606			Adjustments				Balance without adoption of ASC 606
Assets
Accounts receivable, net	$	62,099		$	344		⁽¹⁾	$	61,755
Inventories	25,239			(105		)	⁽²⁾	25,344
Liabilities
Contract liabilities - current	3,038			(241		)	⁽²⁾	3,279
Accrued and other liabilities	11,518			344			⁽¹⁾	11,174
Contract liabilities - non-current	1,711			(172		)	⁽²⁾	1,883
Stockholders’ equity
Accumulated deficit	(18,544		)	308				(18,852		)



	As of September 30, 2018
	As reported			Adjustments					Balance without adoption of ASC 606
Assets
Accounts receivable, net	$	61,019		$	(5,356	)	⁽¹⁾	⁽³⁾	$	66,375
Inventories	45,457			62			⁽²⁾		45,395
Prepaid expenses and other current assets	12,256			5,984			⁽³⁾		6,272
Liabilities
Contract liabilities - current	2,394			(75		)	⁽²⁾		2,469
Accrued and other liabilities	10,315			628			⁽¹⁾		9,687
Contract liabilities - non-current	1,851			36			⁽²⁾		1,815
Stockholders’ equity
Accumulated deficit	(15,190		)	101					(15,291		)



	Three Months Ended September 30, 2018
	As reported			Adjustments		Balance without adoption of ASC 606
Net revenue	$	71,914		$	386	$	71,528
Cost of revenue - products and services	48,483			5		48,478
Gross profit	23,431			381		23,050
Income tax expense	(735		)	—		(735		)
Net income	1,827			381		1,446



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



Item	Balance Sheet Location	September 30, 2018		January 1, 2018		$ change			% change
Contract assets	Prepaid expenses and other current assets	$	5,984	$	—	$	5,984		—
Contract liabilities - current	Contract liabilities - current	2,394		3,038		(644		)	(21	)%
Contract liabilities - non-current	Contract liabilities - non-current	1,851		1,711		140			8	%



	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



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


(a)	Description of Business


(b)	~~Going Concern~~Risks and Uncertainties


~~(c)~~	~~Risks and Uncertainties~~


(c)	Reclassifications



	Useful life (in Years)	Fair Value
Developed technology	5	$	3,060
Customer relationships	10	5,240
Backlog	1	2,179
		$	10,479



	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		)



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.



	September 30, 2018				December 31, 2017
Gross accounts receivable	$	61,324			$	63,446
Allowance for doubtful accounts	(305		)		(922		)
Allowance for sales returns	—			⁽¹⁾	(769		)
Total allowances	(305		)		(1,691		)
Accounts receivable - trade, net	$	61,019			$	61,755


							September 30, 2018
	September 30, 2017			December 31, 2016			Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	3,060		$	3,060		$	3,060	$	(1,276	)	$	1,784
Customer relationships	5,240			5,240			5,240		(1,091		)	4,149
Backlog	2,179			2,179			2,179		(2,179		)	—
Other	194			105
Less accumulated amortization	(3,499		)	(1,817		)
Intangible assets, net	$	7,174		$	8,767
Total intangible assets							$	10,479	$	(4,546	)	$	5,933



	December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	3,060	$	(816	)	$	2,244
Customer relationships	5,240		(699		)	4,541
Backlog	2,179		(2,179		)	—
Total intangible assets	$	10,479	$	(3,694	)	$	6,785


		As of December 31, 2016				As of December 31, 2017
		Interest rate (%)	Amount			Maturity Date	Denomination	Interest rate (%)	Amount
Industrial Bank of Korea	Credit facility	2.16 - 2.76	$	1,106	Credit facility	1/2/2018 - 5/2/2018	USD	2.89 - 3.26	$	2,328
Industrial Bank of Korea					Trade Finance	1/2/2018 - 5/23/2018	USD	4.47 - 5.97	2,401
Shinhan Bank	General loan	4.08	3,310		General loan	3/30/2019	KRW	5.91	2,987
Shinhan Bank	Trade finance	3.28 - 3.44	1,752		Trade finance	2/19/2018- 3/26/2018	KRW	3.90 - 4.14	3,050
NongHyup Bank	Credit facility	1.92 - 2.66	482
KEB Hana Bank	Comprehensive credit loan	2.79	3,501
NongHyup Bank (Korea)					Credit facility	1/8/2018- 6/18/2018	USD	2.83 - 3.42	860
The Export-Import Bank of Korea	Export development loan	3.10	7,448		Export development loan	2/13/2018 & 6/29/2018	KRW	3.20 - 3.28	7,570
Mitsubishi Bank (Japan)					AR factoring	1/31/2018 - 5/31/2018	JPY	1.58	1,872
Shinhan Bank (India)					General loan	4/24/2018 - 11/12/2018	INR	8.70 - 8.90	1,709
			$	17,599					$	22,777



		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



		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


(10)	Net Income (Loss) Per Share Attributable to DASAN Zhone Solutions, Inc.



	Three and Nine Months Ended September 30,
	2017	2016
		(As Revised)
Stock options	915	795
Restricted stock units	2	9
	917	804


	Operating Leases		Operating Leases
Year ending December 31:
2017 (remainder of the year)	$	967
2018	3,359
2018 (remainder of the year)			$	1,053
2019	2,496		4,088
2020	2,358		2,998
2021	2,264		2,590
2022			2,664
Thereafter	8,722		8,423
Total minimum lease payments	$	20,166	$	21,816



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



Guarantor	Amount Guaranteed		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


	September 30, 2017		December 31, 2016		As of September 30, 2018		As of December 31, 2017
United States	$	3,611	$	4,094	$	3,131	$	3,393
Korea	1,449		1,455		1,441		1,633
Japan and Vietnam	752		739
Other Asia Pacific					802		847
	$	5,812	$	6,288	$	5,374	$	5,873



Exhibit Number	Description


~~10.1~~	Letter agreement, dated July 3, 2017, by and among DASAN Zhone Solutions, Inc., ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation, Dasan Network Solutions, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 of registrant's Current Report on Form 8-K dated July 3, 2017)
~~10.2~~	~~General Release of Claims, dated as of September 11, 2017, by and between DASAN Zhone Solutions, Inc. and James Norrod~~
~~10.3~~	~~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 Acting~~Pursuant to Securities Exchange Rules 13a-14(a)/15d-14(a), as Adopted, Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to ~~Rule 13a-14(a)~~Securities Exchange Rules 13a14(a)/15d-14(a), as Adopted, Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1	Section 1350 Certification of Chief Executive Officer and ~~Acting~~ Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Labels Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase



	DASAN ZHONE SOLUTIONS, INC.

Date: November ~~14, 2017~~8, 2018
	By:	/s/ IL YUNG KIM
	Name:	Il Yung Kim
	Title:	President and Chief Executive Officer ~~and Acting~~


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