PART I. ~~FINANCIAL~~FINANCIAL INFORMATION

Item 1.

Financial Statements

~~Item 1. Financial Statements~~

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)

	March 31, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	26,437		$	28,747
Restricted cash		9,281			4,646
Accounts receivable - trade, net of allowance for doubtful accounts of $417 as of March 31, 2020 and $393 as of December 31, 2019		86,270			96,865
Other receivables		10,020			8,124
Contract assets		3,128			16,680
Inventories		39,912			35,439
Prepaid expenses and other current assets		5,974			4,185
Total current assets		181,022			194,686
Property, plant and equipment, net		6,716			6,769
Right-of-use assets from operating leases		18,778			20,469
Goodwill		3,977			3,977
Intangible assets, net		11,464			12,381
Deferred tax assets		2,364			1,622
Other assets		5,053			6,243
Total assets	$	229,374		$	246,147
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable - trade	$	35,634		$	38,427
Short-term debt - bank and trade facilities		12,323			17,484
Other payables		1,966			3,278
Contract liabilities - current		3,305			3,567
Operating lease liabilities - current		4,005			4,201
Accrued and other liabilities		10,203			12,844
Total current liabilities		67,436			79,801
Long-term debt
Bank and trade facilities		—			9,937
Related party		27,348			9,096
Contract liabilities - non-current		3,152			3,230
Operating lease liabilities - non-current		16,667			18,154
Pension liabilities		15,768			17,671
Other long-term liabilities		1,714			1,710
Total liabilities		132,085			139,599
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock, authorized 36,000 shares, 21,513 and 21,419 shares outstanding as of March 31, 2020 and December 31, 2019, respectively, at $0.001 par value		21			21
Additional paid-in capital		141,191			139,700
Accumulated other comprehensive loss		(5,918	)		(3,939	)
Accumulated deficit		(38,005	)		(29,234	)
Total stockholders’ equity		97,289			106,548
Total liabilities and stockholders’ equity	$	229,374		$	246,147

September 30,
2017 December 31,
2016
Assets
Current assets:
Cash and cash equivalents $ 10,145
$ 17,893
Restricted cash 13,058
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 receivables 43,478
38,324
Related parties 12,941
13,311
Other receivables:
Others 13,851
12,068
Related parties 22
171
Inventories 31,966
31,032
Prepaid expenses and other current assets 3,198
4,131
Total current assets 128,659
124,573
Property and equipment, net 5,812
6,288
Goodwill 3,977
3,977
Intangible assets, net 7,174
8,767
Other assets 1,536
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 parties 106
430
Short-term debt:
Others 18,382
17,599
Related parties 3,544
—
Other payables:
Others 1,691
2,040
Related parties 210
6,940
Deferred revenue 2,073
1,901
Accrued and other liabilities 10,108
8,163
Total current liabilities 71,338
67,754
Long-term debt - related parties 5,000
6,800
Deferred revenue 1,875
1,674
Other long-term liabilities 2,581
2,351
Total liabilities 80,794
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 value 16
16
Additional paid-in capital 89,873
89,174
Other comprehensive income (loss) (1,052 ) (2,815 )
Accumulated deficit (23,080 ) (19,923 )
Total stockholders’ equity 65,757
66,452
Non-controlling interest 607
416
Total stockholders’ equity and non-controlling interest 66,364
66,868
Total liabilities, stockholders’ equity and non-controlling interest $ 147,158
$ 145,447

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except per share data)

	Three Months Ended
	March 31,
	2020			2019
Net revenue:
Third parties	$	47,318		$	73,234
Related parties		162			855
Total net revenue		47,480			74,089
Cost of revenue:
Products and services - third parties		30,956			48,172
Products and services - related parties		133			639
Amortization of intangible assets		396			408
Total cost of revenue		31,485			49,219
Gross profit		15,995			24,870
Operating expenses:
Research and product development		9,600			10,184
Selling, marketing, general and administrative		13,617			15,039
Amortization of intangible assets		372			472
Total operating expenses		23,589			25,695
Operating loss		(7,594	)		(825	)
Interest income		70			88
Interest expense		(643	)		(871	)
Loss on extinguishment of debt		(1,369	)		—
Other income, net		760			228
Loss before income taxes		(8,776	)		(1,380	)
Income tax (benefit) provision		(5	)		77
Net loss		(8,771	)		(1,457	)
Net income attributable to non-controlling interest		—			181
Net loss attributable to DASAN Zhone Solutions, Inc.		(8,771	)		(1,638	)

Foreign currency translation adjustments		(3,435	)		(1,124	)
Actuarial gain		1,456			—
Comprehensive loss		(10,750	)		(2,581	)
Comprehensive loss attributable to non- controlling interest		—			180
Comprehensive loss attributable to DASAN Zhone Solutions, Inc.	$	(10,750	)	$	(2,761	)

Net loss per share attributable to DASAN Zhone Solutions, Inc.
Basic	$	(0.41	)	$	(0.10	)
Diluted	$	(0.41	)	$	(0.10	)
Weighted average shares outstanding used to compute basic net loss per share		21,474			16,593
Weighted average shares outstanding used to compute diluted net loss per share		21,474			16,593

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 parties 5,925
6,468
27,657
22,408
Total net revenue 66,438
31,240
178,491
90,832
Cost of revenue:
Products and services 38,643
16,483
96,127
48,750
Products and services - related parties 5,569
5,406
22,851
19,118
Amortization of intangible assets 153
51
459
51
Total cost of revenue 44,365
21,940
119,437
67,919
Gross profit 22,073
9,300
59,054
22,913
Operating expenses:
Research and product development 8,804
5,885
27,028
15,583
Selling, marketing, general and administrative 11,454
8,278
32,506
16,691
Amortization of intangible assets 154
251
1,191
259
Total operating expenses 20,412
14,414
60,725
32,533
Operating income (loss) 1,661
(5,114 ) (1,671 ) (9,620 )
Interest income 36
31
82
137
Interest expense (263 ) (204 ) (793 ) (600 )
Other income (loss), net 60
(112 ) 43
(41 )
Income (loss) before income taxes 1,494
(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 share 16,382
11,139
16,380
10,046

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of ~~Cash Flows~~

Stockholders' Equity and Non-Controlling Interest

(In ~~thousands)~~thousands, except per share data)

	Common stock				Additional paid-in		Accumulated other comprehensive			Accumulated			Total stockholders'			Non- controlling			Total stockholders' equity and non- controlling
	Shares		Amount		capital		income (loss)			deficit			equity			interest			interest
For the Three-Month Period Ended March 31, 2020:
Balance as of December 31, 2019		21,419	$	21	$	139,700	$	(3,939	)	$	(29,234	)	$	106,548		$	—		$	106,548
Exercise of stock options and restricted stock grant		94		—		709		—			—			709			—			709
Stock-based compensation		—		—		782		—			—			782			—			782
Net loss		—		—		—		—			(8,771	)		(8,771	)		—			(8,771	)
Other comprehensive loss		—		—		—		(1,979	)		—			(1,979	)		—			(1,979	)
Balance as of March 31, 2020		21,513	$	21	$	141,191	$	(5,918	)	$	(38,005	)	$	97,289		$	—		$	97,289

For the Three-Month Period Ended March 31, 2019:
Balance as of December 31, 2018		16,587	$	16	$	93,192	$	(192	)	$	(15,777	)	$	77,239		$	615		$	77,854
Stock-based compensation		9		—		825		—			—			825			—			825
Net loss		—		—		—		—			(1,638	)		(1,638	)		181			(1,457	)
Other comprehensive loss		—		—		—		(1,124	)		—			(1,124	)		(1	)		(1,125	)
Balance as of March 31, 2019		16,596	$	16	$	94,017	$	(1,316	)	$	(17,415	)	$	75,302		$	795		$	76,097

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 amortization 3,105
1,164
Stock-based compensation 670
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 payable 6,713
(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 investments 1,463
—
Purchase of short-term investments (430 ) —
Proceeds from disposal of property and equipment and other assets 6
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 borrowings 13,778
19,769
Proceeds from long-term borrowings —
6,800
Proceeds from issuance of common stock 28
—
Net cash provided by (used in) financing activities (1,821 ) 3,481
Effect of exchange rate changes on cash 630
1,538
Net increase (decrease) in cash and cash equivalents (7,748 ) 24,468
Cash and cash equivalents at beginning of period 17,893
9,095
Cash and cash equivalents at end of period $ 10,145
$ 33,563

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

	Three Months Ended
	March 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(8,771	)	$	(1,457	)
Adjustments to reconcile net loss to net cash Provided by (used in) operating activities:
Depreciation and amortization		1,256			1,417
Loss on extinguishment of debt		1,343			—
Amortization of deferred financing costs		141			73
Bargain purchase gain on acquisition		—			(334	)
Stock-based compensation		782			825
Provision for inventory write-down		1,421			14
Allowance for doubtful accounts		24			223
Provision for sales returns		(231	)		218
Unrealized gain on foreign currency transactions		(1,983	)		(95	)
Deferred taxes		(820	)		19
Changes in operating assets and liabilities:
Accounts receivable		9,109			7,930
Contract assets		14,129			(6,967	)
Inventories		(7,048	)		3,828
Prepaid expenses and other assets		(3,285	)		(207	)
Accounts payable		(1,261	)		(3,966	)
Contract liabilities		(275	)		(5,166	)
Accrued and other liabilities		(3,937	)		(1,331	)
Net cash provided by (used in) operating activities		594			(4,976	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(560	)		(109	)
Acquisition of business, net of cash acquired		—			(4,697	)
Net cash used in investing activities		(560	)		(4,806	)
Cash flows from financing activities:
Proceeds from short-term borrowings and line of credit		1,307			4,324
Repayments of short-term borrowings and line of credit		(4,167	)		—
Proceeds from long-term borrowings		—			25,000
Repayments of borrowings		(13,125	)		(17,052	)
Proceeds from related party term loan		18,361			—
Repayments of related party term loan		—			(5,000	)
Deferred financing costs		—			(2,184	)
Proceeds from exercise of stock options		709			—
Net cash provided by financing activities		3,085			5,088
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		(873	)		(306	)
Net increase in cash, cash equivalents and restricted cash		2,246			(5,000	)
Cash, cash equivalents and restricted cash at beginning of period		33,635			35,648
Cash, cash equivalents and restricted cash at end of period	$	35,881		$	30,648

Reconciliation of cash, cash equivalents and restricted cash to statement of financial position	$	26,437		$	20,872
Cash and cash equivalents		9,281			9,165
Restricted cash		163			611
Long-term restricted cash	$	35,881		$	30,648

Supplemental disclosure of cash flow information:
Shares of the Company's common stock held in escrow		—			—
Cash paid during the period for:
Interest - bank and trade facilities	$	424		$	642
Interest - related party	$	152		$	173
Income taxes	$	1,504		$	589

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed ~~Consolidated~~Consolidated Financial Statements


(1)	Organization and Summary of Significant Accounting Policies


(a)	Description of Business

DASAN Zhone Solutions, 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 ultra-broadband network access solutions and communications ~~equipment for~~platforms deployed by advanced Tier 1, 2 and 3 service ~~provider~~providers and enterprise ~~networks.~~customers. 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~~1,200 customers in more than 50120 countries worldwide.

DZS was incorporated under the laws of the state of Delaware in June ~~1999. On September 9, 2016,~~1999, under the Company acquired Dasan Network Solutions, Inc. ("DNS") through the merger of a wholly owned subsidiary of the Company with and into DNS, with DNS surviving as a wholly owned subsidiary of the Company (the "Merger"). At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DASAN Networks, Inc. ("DNI") were canceled and converted into the right to receive shares of the Company's common stock in an amount equal to 58% of the issued and outstanding shares of the Company's common stock immediately following the Merger. In connection with the Merger, the Company changed its name ~~from~~ Zhone Technologies, Inc. to DASAN Zhone Solutions, Inc. For periods through September 8, 2016, Zhone Technologies, Inc. is referred to as "Legacy Zhone." The Company’s common stock continues to be traded on the Nasdaq Capital Market, and the Company’s ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016. The Company is headquartered in ~~Oakland, California.~~


~~(b)~~	~~Going Concern~~

Alameda, California with flexible in-house production facilities in Seminole, Florida and Hannover, Germany, and contract manufacturers located in China, India, Korea and Vietnam. The ~~accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("U.S. GAAP"), assuming~~Company also maintains offices to provide sales and customer support at global locations. On March 2, 2020, the Company ~~will continue as~~announced its plans to relocate its corporate headquarters from Alameda, California to Plano, Texas and to establish a ~~going concern, which contemplates the realization~~new U.S.-based Engineering Center of ~~assets and satisfaction of liabilities~~Excellence 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.

Plano.

Although the Company generated $1.4 million of net income for the quarter ended September 30, 2017, the Company has incurred significant losses to date and losses from operations may continue. The Company incurred net losses of $3.0 million and $15.3 million for the nine months ended September 30, 2017 and for the year ended December 31, 2016, respectively. The Company had accumulated deficit of $23.1 million and working capital of $57.3 million as of September 30, 2017. As of September 30, 2017, the Company had approximately $10.1 million in cash and cash equivalents, which included $3.4 million in cash balances held by the Company's Korean subsidiary, and $26.9 million in aggregate principal amount of outstanding borrowings under the Company's short-term debt obligations and the Company's loans from DNI and its affiliates. In addition, the Company had $7.6 million in aggregate borrowing availability under its revolving credit facilities as of September 30, 2017. The Company had $8.5 million committed as security for letters of credit under these facilities as of September 30, 2017. Due to the amount of short-term debt obligations maturing within the next 12 months and the Company's recurring operating losses, the Company's cash resources may not be sufficient to settle these short-term debt obligations. The Company's ability to continue as a “going concern” is dependent on many factors, including, among other things, its ability to comply with the covenants in its existing debt agreements, its ability to cure any defaults that occur under its debt agreements or to obtain waivers or forbearances with respect to any such defaults, and its ability to pay, retire, amend, replace or refinance its indebtedness as defaults occur or as interest and principal payments come due. Although the process of amending, replacing or refinancing the Company’s short-term debt obligations is ongoing and the Company is in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide the Company with the required liquidity to remove the substantial doubt as to its ability to continue as a going concern. If the Company is unable to amend, replace or refinance its short-term debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, the Company may experience material adverse impacts on its business, operating results and financial condition.

The Company has continued its focus on cost control and operating efficiency along with restrictions on discretionary spending, however in order to meet the Company's liquidity needs and finance its capital expenditures and working capital needs for its business, the Company may be required to sell assets, issue debt or equity securities, purchase credit insurance or borrow on potentially unfavorable terms. In addition, the Company may be required to reduce the scope of its planned product development, reduce sales and marketing efforts and reduce its operations in low margin regions, including reductions in headcount. Based on the Company's current plans and business conditions, the Company believes that its focused operating expense discipline along with its existing cash, cash equivalents and available credit facilities will be sufficient to satisfy its anticipated cash requirements for at least the next 12 months, however the factors discussed above raise substantial doubt about the Company's ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of the uncertainties set forth above.


~~(c)~~ (b)	~~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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with ~~generally accepted accounting principles~~U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 108 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by ~~generally accepted accounting principles~~U.S. GAAP for complete financial statements.

These financial statements include the accounts of the Company, its wholly owned subsidiaries and a subsidiary in which it had a controlling interest. All inter-company transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. ~~All intercompany transactions and balances have been eliminated in consolidation.~~ The results of operations for the current interim period are not necessarily indicative of results to be expected for

the current year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the ~~unaudited condensed~~ consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 filed with the Securities and Exchange ~~Commission.~~

~~As discussed more fully~~Commission (“SEC”) on March 24, 2020. For a complete description of what the Company believes to be the critical accounting policies and estimates used in ~~Note 2,~~ the ~~Merger is treated~~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, 2019.

(c)

Risks and Uncertainties

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, assuming the Company will continue as a ~~reverse acquisition for accounting purposes, with DNS as the acquirer~~going concern.

The Company had net loss of ~~the Company. As such, the consolidated financial results of the Company~~$8.8 million for the three ~~and nine~~ months ended ~~September 30, 2017 are compared to the financial results for DNS~~March 31, 2020, and ~~its consolidated subsidiaries~~a net loss of $13.3 million for the year ended December 31, 2019. Additionally, the Company incurred significant losses in years prior ~~year period through September 8, 2016~~to 2019. As of March 31, 2020, the Company had an accumulated deficit of $38.0 million and working capital of $113.5 million. As of March 31, 2020, the Company had $26.4 million in cash and cash equivalents, which included $8.7 million in cash balances held by its international subsidiaries, and $39.7 million in aggregate principal debt of which $12.3 million was reflected in current liabilities.

The Company’s liquidity could be impacted by:

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

debt servicing requiring substantial amounts of cash, rather than being available for other purposes, including operations;

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

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

The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next twelve (12) months will depend on its ability to (i) achieve forecasted results of ~~DZS and its consolidated subsidiaries for the period from September 9, 2016~~operations, (ii) access funds approved under existing or new credit facilities and/or raise additional capital through September 30, 2016. The balance sheet of the Company reflects the fair value of the assets and liabilities of Legacy Zhone as of the effective date of the Merger. Those assets include the fair value of acquired intangible assets and goodwill. Due to the foregoing, the Company’s financial results for the three and nine months ended September 30, 2017 are not comparable to its financial results for the three and nine months ended September 30, 2016.

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


~~(f)~~	~~Reverse Stock Split~~

On February 28, 2017, the Company filed a Certificate of Amendment with the Delaware Secretary of State to amend the Company's Restated Certificate of Incorporation, which amendment effected a one-for-five reverse stock split of the Company's common stock and reduced the authorized shares of the Company's common stock from 180 million to 36 million. As a result of the reverse stock split, the number of sharessale of the Company’s common stock ~~then issued~~to the public, and ~~outstanding~~(iii) effectively manage working capital requirements. If the Company cannot raise additional funds when it needs or wants them, its operations and prospects could be negatively affected. Management’s belief that it will achieve forecasted results of operations assumes that, among other things, the Company will continue to be successful in implementing its business strategy. If one or more of these factors do not occur as expected, it could cause the Company to fail to meet its obligations as they come due.

In December 2019, a strain of coronavirus, now known as COVID-19, was ~~reduced from approximately 81.9 million~~reported to ~~approximately 16.4 million. References to shares~~have surfaced in Wuhan, China. Since that time, the widespread and sustained transmission of the virus has reached global pandemic status. In response to the pandemic, many national and international health agencies have recommended, and many countries and state, provincial and local governments have implemented, 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 has 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 the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 outbreak on our business. Due to the uncertainty around the future economic impact of the pandemic, the fair value measurements used in the Company’s impairment assessments could be negatively impacted and could result in future impairments of goodwill, intangibles and other long-lived assets. During the quarter ended March 31, 2020, the Company’s revenues declined relative to its prior expectations, in part due to the COVID-19 pandemic. The impact of a continued COVID-19 outbreak or sustained measures taken to limit or contain the outbreak could continue to have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Based on the Company's ~~common stock, stock options (and associated exercise price)~~current plans and ~~restricted stock units in~~current business conditions, as of the date of this Quarterly Report on Form 10-Q, ~~are provided~~the Company believes that its existing cash, cash equivalents and available credit facilities will be sufficient to satisfy its anticipated cash requirements for at least the next twelve months from the date of this Quarterly Report on ~~a post-reverse stock split basis.~~Form 10-Q.

(d)

Use of Estimates

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

(e)

Revenue Disaggregation Information

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

	Three Months Ended
	March 31,
	2020		2019
Revenue by source:
Products	$	40,644	$	69,582
Services		6,836		4,507
Total	$	47,480	$	74,089

The following summarizes required disclosures about geographical concentrations (in thousands):

	Three Months Ended
	March 31,
	2020		2019
Revenue by geography:
United States	$	7,598	$	9,578
Canada		767		923
Total North America		8,365		10,501
Latin America		2,241		6,585
Europe, Middle East, Africa		12,447		18,414
Korea		9,624		15,851
Other Asia Pacific		14,803		22,738
Total International		39,115		63,588
Total	$	47,480	$	74,089

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 opening and closing balances of contract assets and contract liabilities related to contracts with customers are as follows:

	Contract Assets			Contract Liabilities
December 31, 2019	$	16,680		$	6,797
March 31, 2020		3,128			6,457
Decrease	$	(13,552	)	$	(340	)

The decrease in contract liabilities during the three months ended March 31, 2020 was primarily due to the revenue recognition criteria being met for previously deferred revenue, partially offset by invoiced amounts that did not yet meet the revenue recognition criteria. The amount of revenue recognized in the three months ended March 31, 2020 that was included in the prior period contract liability balance was $1.7 million. This revenue consists of services provided to customers who had been invoiced prior to the current year.

The decrease in contract assets during the three months ended March 31, 2020 was primarily due to billed products and services during the period.


~~(g)~~ (f)	Concentration of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and restricted cash which totaled $35.9 million at March 31, 2020, including $12.9 million held by its international subsidiaries. Cash and cash equivalents consist of financial deposits and money market accounts that are 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, ~~Internet~~internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts.

For the three months ended ~~September 30, 2017,~~March 31, 2020, two ~~customers represented,~~customer accounted for 14% and 10% ~~and 9%~~ of net revenue, respectively. For the three months ended ~~September 30, 2016, three customers represented 18%, 16% (a related-party) and 12%~~March 31, 2019, no customer accounted for 10% of net ~~revenue, respectively. For the nine months ended September 30, 2017,~~revenue.

As of March 31, 2020, two customers each represented 9%19% of net ~~revenue (one~~accounts receivable. As of ~~which was a related-party). For the nine months ended September 30, 2016, three~~December 31, 2019, two customers represented ~~23%, 21% (a related-party)~~18% 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%~~respectively, of net accounts ~~receivable, respectively.~~

receivable.

As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, receivables from customers in countries other than the United States represented ~~84%~~96% and ~~87%~~94%, respectively, of net accounts receivable.

(g)

Business Combinations

~~(h) Recent Accounting Pronouncements~~

~~On May 28, 2014,~~

The Company allocates the ~~Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue~~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 ~~Contracts with Customers, which requires an entity to recognize~~ the ~~amount~~underlying assets and discount rates. Management’s estimates of ~~revenue to which it expects~~fair value are based upon assumptions believed to be ~~entitled for~~reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

(h)

Defined Benefit Plans and Plan Assumptions

The Company provides certain defined benefit pension plans to employees in Germany and Japan. Pension accounting is intended to reflect the ~~transfer~~recognition of ~~promised goods~~future benefit costs over the employees' average expected future service to the Company based on the terms of the plans and investment and funding decisions. To estimate the impact of these future payments and the Company’s decisions concerning funding of these obligations, the Company is required to make assumptions using actuarial concepts within the framework of U.S. GAAP. The critical assumption is the discount rate. Other important assumptions include expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates and portfolio composition. The Company evaluates these assumptions at least annually, or ~~services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP~~more frequently when ~~it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method.~~ certain qualifying events occur.

(i)

Recent Accounting Pronouncements

In ~~August 2015, the~~June 2016, FASB issued ASU ~~2015-14,~~2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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~~requires the Company ~~on January 1, 2018. Early adoption is permitted, but~~to 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, Simplifying the Measurement of Inventory, which requires an entity~~2018-19, Codification Improvements to measure inventory at the lower of cost and net realizable value. The guidance does not apply to inventory that is measured using last-in, first-out ("LIFO") or the retail inventory method. The guidance applies to all other inventory, which includes inventory that is measured using first-in, first-out ("FIFO") or average cost. The guidance is effective for the Company on January 1, 2017, and will be adopted accordingly.Topic 326, Financial Instruments - Credit Losses, ASU No. ~~2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this standard will have no impact~~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 ~~Company's unaudited condensed consolidated financial statements.~~

~~In November 2015, the FASB~~previously issued ~~ASU 2015-17, Income Taxes, Balance Sheet Classification of Deferred Taxes, which simplifies the classification of deferred tax assets and liabilities as non-current in the balance sheet.~~ASU. The updated guidance is effective for the Company on January 1, ~~2017,~~2022, and ~~will be adopted accordingly.~~

~~The~~requires a modified retrospective adoption ~~of this standard will not have a material impact on the Company's unaudited condensed consolidated financial statements.~~

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The updated guidance is effective for the Company on January 1, 2019, and early adoption is permitted. The Company does not plan to early adopt this guidance. The Company expects its assets and liabilities to increase as a result of the adoption of this standard. The Company is currently assessing the potential impact of adopting this new guidance on its unaudited condensed consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires entities to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on statements of cash flows. The guidance is effective for the Company on January 1, 2017, and has been adopted in the first quarter of 2017. The adoption of this standard had no material impact on the Company's unaudited condensed consolidated financial statements.

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The updated guidance is effective for the Company on January 1, 2018. Early adoption is permitted. The Company continues to assess all the potential impacts of the new standard and anticipates this standard may have a material impact on its unaudited condensed consolidated financial statements. The Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its unaudited condensed consolidated financial statements at this time.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, which require that a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. The updated guidance is effective for the Company beginning on January 1, 2018. Early adoption is permitted. Adoption of this ASU is applied using a retrospective approach. As a result, the Company will no longer present transfers between cash and cash equivalents and restricted cash in the consolidated cash flow statements.

In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The updated guidance is effective for the Company on January 1, 2020, and will be adopted accordingly.method. 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,~~August 2018, 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~~2018-14, Disclosure Framework-Changes to the ~~terms or conditions of a share-based payment award require an entity~~Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to ~~apply modification accounting.~~add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The updated guidance is effective

for the Company ~~beginning~~ on January 1, ~~2018.~~2021, with early adoption 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.

(2)
~~(2)~~	~~Merger~~ Business Combinations

Keymile Acquisition

On ~~September 9, 2016, the Company acquired DNS through the~~January 3, 2019, ZTI Merger ofSubsidiary III Inc., a Delaware corporation and a wholly owned subsidiary of the Company ~~with and into DNS, with DNS surviving as~~(“ZTI”), acquired all of the outstanding shares of Keymile GmbH (“Keymile”), a limited liability company organized under the laws of Germany, from Riverside KM Beteiligung GmbH (“Riverside”), a limited liability company organized under the laws of Germany, pursuant to a share purchase agreement (the “Keymile Acquisition”) for a final adjusted acquisition price of $9.3 million. Following the closing of the acquisition, Keymile became a wholly owned subsidiary of the Company. The ~~Merger combines leading technology platforms with a broadened customer base.~~

At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DNI were canceled and converted into the right to receive shares of the Company's common stock in an amount equal to 58% of the issued and outstanding shares of the Company's common stock immediately following the Merger. Accordingly, at the effective time of the Merger, the Company issued 9,493,016 shares (post reverse stock split) of the Company’s common stock to DNI as consideration in the Merger, of which 949,302 shares (post reverse stock split) are being held in escrow as security for claims for indemnifiable losses in accordance with the merger agreement relating to the Merger. As a result, immediately following the effective time of the Merger, DNI held 58% of the outstanding shares of the Company's common stock and the holders of the Company's common stock immediately prior to the Merger retained, in the aggregate, 42% of the outstanding shares of the Company's common stock.

~~The Company accounted for the Merger as a reverse acquisition under the acquisition method of accounting in accordance with ASC 805, "Business Combination." Consequently, for the purpose of the~~ purchase price allocation ~~DNS' assets and liabilities have been retained at their carrying values and Legacy Zhone's assets acquired, and liabilities assumed, by DNS (as the accounting acquirer~~resulted in the ~~Merger) have been recorded at their fair value measured as~~recognition of ~~September 9, 2016.~~

~~The total purchase consideration in the Merger was based on the number~~goodwill of ~~shares of Legacy Zhone common stock~~approximately $1.0 million and ~~Legacy Zhone stock options vested and outstanding immediately prior to~~ the closing of the Merger, and was determined based on the closing price of $5.95 per share (post reverse stock split) of the Company's common stock on the September 9, 2016. The estimated total purchase consideration is calculated as follows (in thousands):

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~~of Keymile are consolidated with the ~~Merger been completed as~~Company subsequent to the date of acquisition. During the fourth quarter of 2019, the Company recognized an impairment charge for the full amount of the ~~date indicated.~~

goodwill recognized in the Keymile Acquisition.

(3)	Fair Value Measurement

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.

The following financial instruments are not measured at fair value on the Company’s condensed consolidated balance sheet as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, but require disclosure of their fair values: cash and cash equivalents, ~~short-term investments,~~restricted cash, accounts ~~receivable,~~and other receivables, accounts payable, accrued liabilities, lease liabilities and debt. 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 carrying value of the Company's lease liabilities and debt approximates their fair values based on the current rates available to the Company for debt of similar terms and maturities.

(4)
~~(4)~~	~~Inventories~~ Cash, Cash Equivalents and Restricted Cash

~~Inventories as~~

As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016 were~~2019, the Company's cash and cash equivalents consisted of financial deposits. Restricted cash consisted primarily of cash restricted for performance bonds, warranty bonds and collateral for borrowings, and Long term restricted cash is included in other assets. Long term restricted cash was $0.2 million as of March 31, 2020 and December 31, 2019, respectively.

(5)	Balance Sheet Details

Balance sheet detail as of March 31, 2020 and December 31, 2019 is as follows (in thousands):

Inventories consisted of the following (in thousands):

	March 31, 2020		December 31, 2019
Raw materials	$	18,695	$	15,774
Work in process		1,890		1,458
Finished goods		19,327		18,207
Total inventories	$	39,912	$	35,439

September 30,
2017 December 31,
2016
Raw materials $ 12,812
$ 13,547
Work in process 3,004
3,705
Finished goods 16,150
13,780
Total inventories $ 31,966
$ 31,032

Inventories provided as collateral for borrowings from Export-Import Bank of Korea amounted to ~~$18.9~~$6.4 million and ~~$14.4~~$6.7 million as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.


~~(5)~~	~~Property and Equipment~~

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

	March 31, 2020			December 31, 2019
Furniture and fixtures	$	10,370		$	10,803
Machinery and equipment		2,846			2,550
Leasehold improvements		4,231			4,267
Computers and software		2,076			1,990
Other		644			660
		20,167			20,270
Less: accumulated depreciation and amortization		(13,133	)		(13,130	)
Less: government grants		(318	)		(371	)
Total property, plant and equipment , net	$	6,716		$	6,769

September 30,
2017 December 31,
2016
Furniture and fixtures $ 21,251
$ 20,040
Machinery and equipment 4,945
4,530
Leasehold improvements 3,386
3,573
Computers and software 567
411
Other 983
922
31,132
29,476
Less accumulated depreciation and amortization (25,109 ) (22,922 )
Less government grants (211 ) (266 )
Total property and equipment, net $ 5,812
$ 6,288

Depreciation ~~and amortization~~ expense associated with property, plant and equipment for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and 2019 was $0.5 million ~~and $1.4 million,~~for each period, respectively. ~~Depreciation and amortization expense associated with property and equipment for the three and nine months ended September 30, 2016 was $0.4 million and $0.9 million, respectively.~~

The Company receives grants from ~~the~~various government entities mainly to support capital expenditures. Such grants are deferred and are generally refundable to the extent the Company does not utilize the funds for qualifying expenditures. Once earned, the Company records the grants as a contra amount to the assets and amortizes such amount over the useful lives of the related assets as a reduction to depreciation expense.

(6)
~~(6)~~	Goodwill and Intangible Assets

Goodwill ~~as of September 30, 2017 and December 31, 2016~~ was as follows (in thousands):

	March 31, 2020			December 31, 2019
Gross carrying amount	$	4,980		$	4,980
Less: accumulated impairment		(1,003	)		(1,003	)
Goodwill, net	$	3,977		$	3,977

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

As of March 31, 2020 and December 31, 2019, the net carrying value of goodwill is all attributable to the Company’s US reporting unit. As of March 31, 2020, the Company performed a goodwill impairment assessment for the US reporting unit, due to operating losses incurred by the US reporting unit during the first quarter of 2020 amid the worldwide effects of the COVID-19 pandemic. The fair value of the US reporting unit was estimated using an equal weighting of the guideline company and discounted cash flow methods. During the quarter ended March 31, 2020, the Company also refined its estimated cost allocations between the US reporting unit and the Korea and German reporting units to more appropriately estimate the projected cash flows expected to be generated from each of the Company’s reporting units used in the valuation models. The refinements in cost allocations had no impact on the Company’s segment conclusions and would not have impacted the 2019 annual goodwill impairment conclusions.

During the quarter ended March 31, 2020, the Company also refined its estimated cost allocations between the US reporting unit and the Korea and German reporting units to more appropriately estimate the projected cash flows expected to be generated from each of the Company’s reporting units used in the valuation models. The refinements in cost allocations had no impact on the Company’s segment conclusions and would not have impacted the 2019 annual goodwill impairment conclusions.

The Company did not recognize any impairment ~~loss on~~of goodwill during the three ~~and nine~~ months ended ~~September 30, 2017 and 2016.~~

March 31, 2020 or 2019.

Intangible assets asconsisted of ~~September 30, 2017 and December 31, 2016 were as follows~~the following (in thousands):

	March 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	7,900	$	(3,335	)	$	4,565
Customer relationships		8,727		(2,642	)		6,085
Trade name		1,320		(506	)		814
Total intangible assets, net	$	17,947	$	(6,483	)	$	11,464

	December 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	7,994	$	(3,027	)	$	4,967
Customer relationships		8,795		(2,458	)		6,337
Trade name		1,346		(269	)		1,077
Total intangible assets, net	$	18,135	$	(5,754	)	$	12,381

September 30,
2017 December 31,
2016
Developed technology $ 3,060
$ 3,060
Customer relationships 5,240
5,240
Backlog 2,179
2,179
Other 194
105
Less accumulated amortization (3,499 ) (1,817 )
Intangible assets, net $ 7,174
$ 8,767

~~Amortization expense associated with intangible assets for the three and nine months ended September 30, 2017 was $0.3 million and $1.7 million, respectively.~~

Amortization expense associated with intangible assets for each of the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2020 and 2019 was ~~$0.3 million.~~$0.8 million

The following table presents the future amortization expense of the Company’s intangible assets as of March 31, 2020 (in thousands):


Remainder of 2020	$	2,299
2021		2,862
2022		2,454
2023		2,454
2014		524
Thereafter		871
Total	$	11,464

Weighted average remaining life:
Developed technology	3.7 years
Customer relationships	5.7 years
Trade name	4.3 years

(7)

Debt

The following tables summarize the Company’s debt (in thousands):

	March 31, 2020
	Short-term		Long-term		Total
Bank and Trade Facilities - Foreign Operations	$	12,323	$	—	$	12,323
Related Party		—		27,348		27,348
	$	12,323	$	27,348	$	39,671

	December 31, 2019
	Short-term			Long-term			Total
PNC Credit Facilities	$	2,500		$	10,625		$	13,125
Bank and Trade Facilities - Foreign Operations		15,779			—			15,779
Related Party		—			9,096			9,096
	$	18,279		$	19,721		$	38,000
Less: unamortized deferred financing costs on the PNC Credit Facilities		(795	)		(688	)		(1,483	)
	$	17,484		$	19,033		$	36,517

The future principal maturities of our Term Loans for each of the next five years are as follows (in thousands):

Year ended December 31, 2020	$	12,323
2021		—
2022		27,348
2023		—
2024		—
Thereafter		—
Total	$	39,671


~~(7)~~	~~Debt~~

~~Wells Fargo Bank Facility~~

~~As of September 30, 2017,~~PNC Credit Facilities

On February 27, 2019, the Company ~~had~~and ZTI (collectively, the “Borrowers”), and certain direct and indirect subsidiaries of the Borrowers, as guarantors, entered into a ~~$25.0 million~~Revolving Credit, Term Loan, Guaranty and Security Agreement (the “Domestic Credit Agreement”) and an Export-Import Revolving Credit, Guaranty and Security Agreement (the “Ex-Im Credit Agreement,” and together with the Domestic Credit Agreement, the “Credit Agreements”), in each case with PNC Bank, National Association (“PNC”) and Citibank, N.A. as lenders, and PNC as agent for the lenders (the “PNC Credit Facilities”), which replaced the Company’s former senior secured credit ~~facility (the "WFB Facility")~~facilities with Wells Fargo Bank ~~("WFB"~~(the “Former WFB Facility”). ~~Under~~We refer to such transactions and the ~~WFB Facility,~~agreements referenced above as the “PNC Credit Facilities.”

The PNC Credit Facilities provided for a $25 million term loan and a $15 million revolving line of credit (including subfacilities for Ex-Im transactions, letters of credit and swing loans) with a $10 million incremental increase option. The amount the Company ~~has the option of borrowing funds at agreed upon interest rates. The amount that the Company is~~was able to borrow ~~under~~on the ~~WFB Facility varies~~revolving line of credit at any time was 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~~other conditions, less ~~the amount committed as security for letters of credit. To maintain availability of funds~~certain reserves. Borrowings 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~~PNC Credit Facilities bore interest ~~expense.~~

As of September 30, 2017, the Company had no outstanding borrowings under its WFB Facility, and $2.5 million was committed as security for letters of credit. The Company had $6.7 million of borrowing availability under the WFB Facility as of September 30, 2017. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to either the ~~three-month~~PNC prime rate or the LIBOR rate for the applicable period, plus a margin that was based on the ~~Company's average excess availability (as calculated~~type of advance.

The Company used a portion of the funds borrowed from the term loan under the PNC Credit Facilities to (i) repay $5.0 million of existing related party indebtedness with Dasan Networks, Inc., the Company’s largest stockholder Dasan Networks, Inc. (“DNI”) plus accrued interest, (ii) repay $1.5 million revolving line of credit outstanding balance plus accrued interest and fees and cash collateralize $3.6 million in outstanding letters of credit under the Former WFB ~~Facility).~~ Facility, and (iii) repay $5.6 million in short-term debt in Korea and Japan. The Company’s obligations under the PNC Credit Facilities were secured by substantially all of the personal property assets of the Company and its subsidiaries that were co-borrowers or guarantors under the PNC Credit Facilities, including their intellectual property.

The PNC Credit Facilities had a three-year term and was scheduled to mature on February 27, 2022. The PNC Credit Facilities contemplated repayment of the term loan in quarterly installments over the term of the loan, with the balance of the term loan and revolving line of credit due at maturity.

As of December 31, 2019, the Company had $13.1 million in outstanding term loan borrowings under the PNC term loan, and no outstanding borrowings under the revolving line of credit. The interest rate on the ~~WFB Facility~~term loan was ~~3.8%~~ 8.12%at ~~September 30, 2017. The maturity date under~~December 31, 2019.

On March 26, 2020, the ~~WFB Facility is~~Company paid the outstanding term loan borrowings in full and terminated the PNC Credit Facilities. In association with this debt repayment, the Company recorded a loss on extinguishment of debt of $1.4 million during the three months ended March 31, ~~2019.~~

The Company’s obligations under the WFB Facility are secured by substantially all of its personal property assets and those of its subsidiaries that guarantee the WFB Facility, including their intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If the Company defaults under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell the Company’s assets to satisfy the obligations under the WFB Facility. As of September 30, 2017, the Company was in compliance with the covenants under the WFB Facility.

2020.

Bank and Trade Facilities - Foreign Operations

Certain of the Company's foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed ~~on an annual basis~~as they mature 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~~March 31, 2020 and December 31, ~~2016,~~2019, the Company had an aggregate outstanding balance of ~~$18.4~~$12.3 million and ~~$17.6~~$15.8 million, respectively, under such financing ~~arrangements,~~arrangements. The maturity dates and ~~the~~ interest rates per annum applicable to outstanding borrowings under these financing arrangements ~~were as~~are listed in the tables ~~below.~~below (amount in thousands).

As of March 31, 2020

Maturity Date

Denomination

Interest rate (%)

Amount

(in U.S.

dollars)

The Export-Import Bank of Korea

Export development loan

7/1/2020

KRW

2.75

4,908

Korea Development Bank

General loan

8/8/2020

KRW

3.0

4,090

Korea Development Bank

Credit facility

8/7/2020

USD

1.80 - 3.05

1,689

LGUPlus

General loan

6/17/2020

KRW

1,636

12,323

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, 2019

Maturity Date

Denomination

Interest rate (%)

Amount

(in U.S.

dollars)

NongHyup Bank

Credit facility

09/30/2020

USD

3.50 ~ 4.50

2,091

The Export-Import Bank of Korea

Export development loan

07/01/2020

KRW

2.75

5,182

Korea Development Bank

General loan

08/08/2020

USD

4,319

Korea Development Bank

Credit facility

08/07/2020

KRW

3.00 ~ 3.15

2,460

LGUPlus

General loan

06/17/2020

KRW

1,727

15,779

As of December 31, 2016
Interest rate (%) Amount
Industrial Bank of Korea Credit facility 2.16 - 2.76 $ 1,106
Shinhan Bank General loan 4.08 3,310
Shinhan Bank Trade finance 3.28 - 3.44 1,752
NongHyup Bank Credit facility 1.92 - 2.66 482
KEB Hana Bank Comprehensive credit loan 2.79 3,501
The Export-Import Bank of Korea Export development loan 3.10 7,448
$ 17,599

As of ~~September 30, 2017,~~March 31, 2020 and December 31, 2019, the Company had ~~$5.0~~$1.7 million and $4.6 million in outstanding borrowings, respectively, and ~~$6.0~~$1.2 million and $0.8 million committed as security for letters of credit under the Company's ~~$12.0~~$19.0 million credit facility with certain foreign banks.


~~(8)~~	~~Non-Controlling Interests~~

~~Non-controlling interests~~

Related Party Debt

In February 2016, DNS California borrowed $1.8 million from DNI for ~~the nine months ended September 30, 2017 and 2016 were as follows (in thousands):~~

Nine Months Ended September 30,
2017 2016
Beginning non-controlling interests $ 416
$ 138
Acquisition of additional interest in a subsidiary —
277
Net income (loss) attributable to non-controlling interests 172
(17 )
Foreign currency translation adjustments (OCI) 19
66
Ending non-controlling interests $ 607
$ 464


~~(9)~~	~~Related-Party Transactions~~

~~Related-Party Debt~~

Incapital investment with an interest rate of 4.6% per annum, payable annually. On February 27, 2019, in connection with the ~~Merger, on~~entry into the PNC Credit Facilities, the Company amended the terms of this loan to extend the repayment date to May 27, 2022. As of March 31, 2020, $1.8 million remained outstanding.

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

In ~~addition,~~February 2019, we repaid the ~~Company~~term loan in full plus accrued interest in connection with the entry into the PNC Credit Facilities, thereby terminating the loan agreement.

In March 2018, DNS Korea borrowed ~~$1.8~~$5.8 million from DNI ~~for capital investment in February 2016,~~of which ~~amount~~$4.5 million was ~~outstanding as of September 30, 2017. This~~repaid on August 8, 2018. The loan ~~matured in March 2017 with an option of renewal by mutual agreement, and bore~~bears interest at a rate of ~~6.9% per annum, payable annually. Effective~~4.6%. On February 27, ~~2017,~~2019, in connection with the ~~Company~~entry into the PNC Credit Facilities, the w amended the terms of this loan to extend the repayment date ~~from~~to May 27, 2022. As of March ~~2017~~31, 2020, $1.3 million remained outstanding.

In December 2018, we entered into a Loan Agreement with DNI for a $6.0 million term loan with an interest rate of 4.6% per annum. On February 27, 2019, in connection with the entry into the PNC Credit Facilities, we amended the terms of the term loan to ~~March 2018,~~extend the repayment date until May 27, 2022 and to ~~reduce~~terminate any security granted to DNI with respect to such term loan. As of March 31, 2020, $6.0 million remained outstanding.

The modifications resulting from the ~~interest rate from 6.9%~~amendments described in the four preceding paragraphs were limited to ~~4.6% per annum.~~

the extension of the maturity dates and removal of the collateral on the outstanding term loans with DNI. There were no fees paid to DNI or external costs otherwise incurred in connection with these modifications.

On ~~June 23, 2017,~~March 5, 2020, DNS Korea, the our wholly-owned, indirect subsidiary entered into a Loan Agreement with DNI (the “March 2020 DNI Loan”). The March 2020 DNI Loan was negotiated and approved on behalf of the Company and its subsidiaries by a special committee of the Board of Directors of the Company (the “Special Committee”) consisting of directors determined to be independent from DNI. The March 2020 DNI Loan consists of a term loan in the amount of KRW 22.4 billion ($18.5 million USD) with interest payable semi-annually at an annual rate of 4.6% and maturing on March 11, 2022. No principal payments are due on the March 2020 DNI Loan until the maturity date, but DNS Korea may prepay the loan, or a portion thereof, without penalty.

As security for the March 2020 DNI Loan (and other existing loans between DNI and DNS Korea and/or DNS California), (i) DNS California, a wholly-owned, direct subsidiary of the Company and the sole stockholder of DNS Korea, agreed to pledge the outstanding shares of DNS Korea to DNI and (ii) DNS Korea granted a security interest in its personal property assets, accounts receivable and intellectual property assets to DNI. The March 2020 DNI Loan includes certain covenants consisting of financial reporting obligations, a maintenance covenant whereby DNS Korea agreed to maintain a minimum stockholders’ equity value in an amount equal to or greater than KRW 43.3 billion ($35.8 million USD), and customary events of default. If an event of default occurs and is not remedied within the applicable cure period, DNI will be entitled to take various actions, including requiring the immediate repayment of all outstanding amounts under the March 2020 DNI Loan and selling the shares or assets of DNS Korea.

DNS Korea loaned the funds borrowed ~~$3.5 million from Solueta, an affiliate~~under the March 2020 DNI Loan to the Company, and the Company utilized a portion of ~~DNI.~~ such funds to repay in full and terminate the PNC Credit Facilities.

As of ~~September 30, 2017, the aggregate~~March 31, 2020, we had had borrowings of $27.3 million in outstanding from DN. The outstanding balance ~~under this~~at March 31, 2020 consisted of the March 2020 DNI Loan of KRW 22.4 billion ($18.5 million USD), a $6.0 million unsecured subordinated term loan ~~agreement was $1.7 million. This loan~~facility which matures in ~~November 2017~~March 2022, a $1.8 million loan for capital investment which matures in May 2022, and ~~bears~~KRW 1.5 billion ($1.3 million) outstanding under a secured loan from DNS Korea which matures in May 2022. All four loans bear interest at a rate of 4.6% per ~~annum, payable monthly.~~annum.

Interest expense on these related party borrowings was $0.2 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively.

(8)	Defined Benefit Plans

The Company sponsors defined benefit plans for its employees in Keymile. Defined benefit plans provide pension benefits based on compensation and years of service. These plans were frozen as of September 30, 2003 and have not been offered to new employees after that date. The Company has recorded the underfunded status as of March 31, 2020 and December 31, 2019, respectively, as a long-term liability on the unaudited condensed consolidated balance sheets. The accumulated benefit obligation for the plans were $15.8 and $17.7 million as of March 31, 2020 and December 31, 2019, respectively.

Periodic benefit costs were as follows (in thousands):
	March 31, 2020		March 31, 2019
Interest costs	$	38	$	100
Net amortization costs		5		—
Period costs	$	43	$	100

During the three months ended March 31, 2020, the Company performed a voluntary interim measurement of the plan obligations, due to a significant increase in the discount rate since the last annual measurement date on December 31, 2019, and recorded an actuarial gain on pension plan of $1.5 million, as reflected on the unaudited condensed consolidated statement of comprehensive loss.

The Company holds life insurance contracts, with the Company as beneficiary, in the amount of $3.3 million as of March 31, 2020, related to individuals under the pension plans. These insurance contracts are classified as other assets on the Company’s consolidate consolidated balance sheet. The Company intends to use any proceeds from these policies to fund the pension plans. However, since the Company is the beneficiary on these policies, these assets have not been designated pension plan assets.

The weighted average assumptions used in determining the benefit obligation related to the plans are as follows:

	March 31, 2020	December 31, 2019
Discount rate	1.5%	0.9%
Rate of pension increase	1.7%	1.7%

(9)	Non-Controlling Interests

Non-controlling interests were as follows (in thousands):

	Three Months Ended March 31,
	2019
Beginning non-controlling interests	$	615
Net income (loss) attributable to non-controlling interests		181
Foreign currency translation adjustments (OCI)		(1	)
Ending non-controlling interests	$	795

On July 31, 2019, the Company acquired the remaining 30.94% non-controlling interest of DZS Japan.

(10)	Related Party Transactions

Related Party Debt

As of March 31, 2020 and December 31, 2019, the Company had $27.3 million and $9.1 million, respectively, outstanding from related party borrowings from DNI. See Note 7 Debt for further information about the Company’s related party debt.

Other ~~Related-Party~~Related Party Transactions

Sales, ~~and purchases,~~ cost of revenue, manufacturing (included in 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, 2020 and March 31, 2019:

		Three Months Ended March 31, 2020
Counterparty	DNI ownership interest	Sales		Cost of revenue		Manufacturing (cost of revenue)*		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI	N/A	$	162	$	133	$	—	$	—	$	571	$	151	$	86
DASAN Ventures	33%		—		—		8		33		38		—		—
		$	162	$	133	$	8	$	33	$	609	$	151	$	86

		Three Months Ended March 31, 2019
Counterparty	DNI ownership interest	Sales		Cost of revenue		Manufacturing (cost of revenue)*		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI	N/A	$	722	$	535	$	—	$	—	$	998	$	141	$	89
Tomato Soft Ltd.	100%		—		—		30		—		—		—		—
Tomato Soft (Xi'an) Ltd.	100%		—		—		—		121		—		—		—
CHASAN Networks Co., Ltd	100%		—		—		278		21		—		—		161
HANDYSOFT, Inc.	18%		91		23		—		—		2		—		—
J-Mobile Corporation	90%		42		81		—		—		—		—		—
		$	855	$	639	$	308	$	142	$	1,000	$	141	$	250

Manufacturing costs represent product purchases from and manufacturing activities performed by related parties, and are included in Cost of revenue on the unaudited consolidated statement of comprehensive loss.

Three Months Ended September 30, 2017
Counterparty DNI Ownership Interest Sales Cost of revenue Manufacturing (Cost of revenue) Research and product development
Selling, marketing,
general and administrative
Other Expenses
DNI (Parent Company) N/A $ 3,976
$ 3,604
$ —
$ —
$ 1,291
$ 51
CHASAN Networks Co., Ltd. 100% —
—
257
20
—
—
DASAN FRANCE 100% 662
576
—
—
83
—
DASAN INDIA Private Limited 100% —
—
—
—
30
—
D-Mobile 100% 1,233
1,077
—
—
122
—
HANDYSOFT, Inc. 17.64% 54
12
—
—
6
4
Tomato Soft Ltd. 100% —
—
43
108
—
—
Tomato Soft (Xi'an) Ltd. 100% —
—
—
144
—
—
$ 5,925
$ 5,269
$ 300
$ 272
$ 1,532
$ 55

Three Months Ended September 30, 2016 (As Revised)
Counterparty DNI Ownership Interest Sales Cost of revenue Manufacturing (Cost of revenue) Research and product development Selling, marketing,
general and administrative Other Expenses
DNI (Parent Company) N/A $ 5,112
$ 4,390
$ —
$ —
$ 946
$ 89
CHASAN Networks Co., Ltd. 100% —
—
130
38
—
—
DASAN FRANCE 100% 3
3
—
—
—
—
D-Mobile 100% 1,267
789
—
—
125
—
HANDYSOFT, Inc. 17.64% 68
58
—
—
—
—
J-Mobile Corporation 90.47% 18
—
—
—
—
—
Tomato Soft Ltd. 100% —
—
36
—
—
—
Tomato Soft (Xi'an) Ltd. 100% —
—
—
181
—
—
$ 6,468
$ 5,240
$ 166
$ 219
$ 1,071
$ 89

Nine Months Ended September 30, 2017
Counterparty DNI Ownership Interest Sales Cost of revenue Manufacturing (Cost of revenue) Research and product development Selling, marketing,
general and administrative Other Expenses
DNI (Parent Company) N/A $ 16,608
$ 14,020
$ —
$ —
$ 3,491
$ 171
CHASAN Networks Co., Ltd. 100% —
—
578
79
—
—
DASAN FRANCE 100% 1,612
1,512
—
—
383
—
DASAN INDIA Private Limited 100% 6,287
4,783
—
—
30
—
D-Mobile 100% 3,054
1,831
—
—
318
—
Fine Solution 100% —
—
—
—
4
—
HANDYSOFT, Inc. 17.64% 88
23
—
—
6
4
J-Mobile Corporation 90.47% 8
—
—
—
132
—
Tomato Soft Ltd. 100% —
—
104
108
—
—
Tomato Soft (Xi'an) Ltd. 100% —
—
—
448
37
—
Solueta 27.21% —
—
—
—
—
3
$ 27,657
$ 22,169
$ 682
$ 635
$ 4,401
$ 178

Nine Months Ended September 30, 2016 (As Revised)
Counterparty DNI Ownership Interest Sales Cost of revenue Manufacturing (Cost of revenue) Research and product development Selling, marketing,
general and administrative Other Expenses
DNI (Parent Company) N/A $ 19,080
$ 16,219
$ —
$ —
$ 4,255
$ 309
CHASAN Networks Co., Ltd. 100% —
—
436
106
—
—
DASAN FRANCE 100% 3
3
—
—
—
—
DASAN INDIA Private Limited 100% —
—
—
—
—
—
D-Mobile 100% 3,135
2,231
—
—
318
—
DMC, Inc. 27.21% 1
1
—
—
—
—
HANDYSOFT, Inc. 17.64% 150
130
—
—
—
—
J-Mobile Corporation 90.47% 39
—
—
—
634
—
PANDA Media, Inc. 100% —
—
—
—
2
—
Tomato Soft Ltd. 100% —
—
98
—
—
—
Tomato Soft (Xi'an) Ltd. 100% —
—
—
560
—
—
$ 22,408
$ 18,584
$ 534
$ 666
$ 5,209
$ 309

The Company has entered into ~~certain~~ sales agreements with DNI and certain of its subsidiaries. Sales and cost of revenue to DNI, DASAN France, DASAN INDIA Private Limited, and D-Mobile, represent finished goods produced by the Company that are sold to these related parties who sell the Company's products in Korea, France, India and Taiwan, respectively.

The Company has entered into ~~agreements~~an agreement 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 Ltd, a wholly owned subsidiary of DNI, to provide manufacturing and research and development services for the Company.

The Company has entered into an agreement with Tomato Soft (Xi'an) Ltd. to provide research and development services for the Company. Under the agreement with Tomato Soft (Xi'an) Ltd., the Company is charged an expected annual fee of ~~$0.8~~$0.7 million for the development of certain deliverables.

On September 9, 2016, DZS acquired DNS California, through the merger of a wholly owned subsidiary of Zhone Technologies, Inc. with and into DNS California, with DNS California surviving as our wholly owned subsidiary (the “Merger”). Prior to the Merger, as DNS California was then a wholly owned subsidiary of DNI, DNI had sales agreements with certain customers on ~~DNS'~~DNS California's behalf. Since the Merger, due to these prior sales agreements, the Company has entered into an agreement with DNI in which DNI acts as a sales channel to these customers. ~~Selling, marketing, general and administrative expense~~Sales to DNI ~~includes a fee~~necessary for DNI to fulfill agreements with its customers are recorded net of ~~3% of total sales to DNI for sales to these customers.~~royalty fees in related party revenue.

The Company shares office space with DNI and certain of DNI's subsidiaries. Prior to the Merger, DNS California, then a wholly owned subsidiary of DNI, shared human resources, treasury and other administrative support with DNI. As such, the Company entered into certain service sharing agreements with DNI and certain of its subsidiaries for the shared office

space and shared administrative services. Expenses related to rent and administrative services are allocated to the Company based on square footage occupied and headcount, respectively.

The Company has entered into sales agreement with Handysoft, Inc., provider of software and system integration solutions in Korea, to supply networks equipment, research and development and logistics services through DASAN Networks, Inc.

~~The Company has entered into sales agreement with J-Mobile Corporation to supply networks equipment in Japan. J-Mobile Corporation also provides marketing services in Japan.~~

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

Refer to Note 14 Commitments and Contingencies for more details 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~~serviced with related parties as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 were included in the following balance sheet captions on the unaudited consolidated balance sheet, as follows (in thousands):

		As of March 31.2020
Counterparty	DNI ownership interest	Account receivables		Other receivables		Deposits for lease *		Long- term debt		Accounts payable		Other payables		Accrued and other liabilities
DNI	N/A	$	28	$	30	$	672	$	27,348	$	180	$	57	$	118
DASAN Ventures	33%		—		—		—		—		—		28		—
		$	28	$	30	$	672	$	27,348	$	180	$	85	$	118

		As of December 31, 2019
Counterparty	DNI ownership interest	Account receivables		Other receivables		Deposits for lease*		Loan Payable		Accounts payable		Other payables		Accrued and other liabilities
DNI	N/A	$	—	$	32	$	709	$	9,096	$	—	$	1,475	$	119
Tomato Soft Ltd.	100%		—		—		—		—		—		10		—
Tomato Soft (Xi'an), Ltd	100%		—		—		—		—		—		45		—
Chasan Networks Co., Ltd.	100%		—		—		—		—		96		—		—
		$	—	$	32	$	709	$	9,096	$	96	$	1,530	$	119

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

The related ~~to deposits for lease~~party receivables and payables balances are reflected in the ~~condensed consolidated~~respective balance sheet ~~as of September 30, 2017 and~~captions noted in the ~~consolidated balance sheet as of December 31, 2016.~~

table headers above, other than:

Deposits for leases are included in Other assets in the unaudited condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.

~~(10)~~

(11)

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

Basic net income ~~(loss)~~ per share attributable to DASAN Zhone Solutions, Inc. is computed by dividing the net income ~~(loss)~~ attributable to DASAN Zhone Solutions, Inc. for the period by the weighted average number of shares of common

stock outstanding during the period. The calculation of diluted net income ~~(loss)~~ per share attributable to DASAN Zhone Solutions, Inc. gives effect to common stock equivalents; however, potential common ~~equivalent shares~~stock equivalents are excluded if their effect is antidilutive. Potential common ~~equivalent shares~~stock equivalents are composed of incremental shares of common ~~equivalent shares~~stock 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 ~~for~~are 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.

The following table is a reconciliation of the numerator and denominator in the basic and diluted net ~~income (loss)~~loss per share calculation (in thousands, except per share data) for the three months ended March 31, 2020 and March 31, 2019:

	Three Months Ended March 31,
	2020			2019
Net loss attributable to DASAN Zhone Solutions, Inc.	$	(8,771	)	$	(1,638	)
Weighted average number of shares outstanding:
Basic		21,474			16,593
Effect of dilutive securities:
Stock options, restricted stock units and share awards		—			—
Diluted		21,474			16,593
Net loss per share attributable to DASAN Zhone Solutions, Inc.:
Basic	$	(0.41	)	$	(0.10	)
Diluted	$	(0.41	)	$	(0.10	)

(12)

Leases

The Company leases 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 which expire at various dates through 2027.

The components of lease expense were as follows for the three months ended March 31, 2020 and 2019, respectively (in thousands):

	March 31, 2020		March 31, 2019
Operating lease cost	$	1,410	$	1,123
Variable lease cost		158		164
Short-term lease cost		36		101
Total net lease cost	$	1,604	$	1,388

Supplemental cash flow information related to the Company’s operating leases was as follows for the three months ended March 31, 2020 and 2019, respectively (in thousands):

	March 31, 2020		March 31, 2019
Operating cash flows from operating leases	$	1,403	$	1,304
ROU assets obtained in exchange for operating lease obligations	$	26	$	—

The following table presents the weighted average remaining lease term and weighted average discount rates related to the Company’s operating leases as of March 31, 2020 and December 31, 2019, respectively:

	March 31, 2020			December 31, 2019
Weighted average remaining lease term	2.3 years			3.5 years
Weighted average discount rate		6.1	%		6.0	%

The following table presents the maturity of the Company’s operating lease liabilities as of March 31, 2020 (in thousands):

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 )

Remainder of 2020	$	3,793
2021		4,825
2022		4,417
2023		3,991
2024		3,553
Thereafter		3,376
Total operating lease payments		23,955
Less: imputed interest		(3,283	)
Total operating lease liabilities	$	20,672

~~The outstanding common equivalent shares excluded~~

On March 2, 2020, the Company announced its plans to relocate its corporate headquarters from Oakland, California to Plano, Texas and establish a new U.S.-based Engineering Center of Excellence in Plano. On February 24, 2020, in connection with the ~~computation~~planned relocation of the ~~diluted net income (loss) per share attributable~~Company headquarters to ~~DASAN Zhone Solutions, Inc.~~Plano, the Company entered into two separate sublease agreements for office and laboratory space in Plano, TX. The commencement date of these leases is expected to occur in the ~~periods presented because including them would have been antidilutive are as follows (in thousands):~~

second quarter of 2020. On the commencement date of these leases, the Company will recognize an aggregate of approximately $1.2 million in right-of-use assets and operating lease liabilities in connection with these leases.

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

(13)
~~(11)~~	Commitments and Contingencies

~~Operating Leases~~

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

Operating Leases
Year ending December 31:
2017 (remainder of the year) $ 967
2018 3,359
2019 2,496
2020 2,358
2021 2,264
Thereafter 8,722
Total minimum lease payments $ 20,166

Warranties

The Company accrues ~~for~~ warranty costs based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally ~~two~~one to five years from the date of shipment. The following table reconciles changes in the Company’s accrued warranties and related costs included in accrued and other liabilities (in thousands) for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016 (in thousands):~~ March 31, 2019:

	Three Months Ended March 31,
	2020			2019
Beginning balance	$	1,610		$	1,549
Charged to cost of revenue		33			140
Claims and settlements		(495	)		(194	)
Foreign exchange impact		(37	)		(11	)
Ending balance	$	1,111		$	1,484

Nine Months Ended September 30,
2017 2016
Beginning balance $ 878
$ 441
Charged to cost of revenue 126
227
Claims and settlements (195 ) (389 )
Foreign exchange impact 14
78
Ending balance $ 823
$ 357

Performance Bonds

In the normal course of operations, from time to time, the Company arranges for the issuance of various types of surety bonds, such as bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. As of ~~September 30, 2017,~~March 31, 2020, the Company had ~~$1.0~~$7.3 million of ~~performance bonds and $0.4 million of warranty~~surety bonds guaranteed by third parties.

In addition, the Company has entered into a sales agreement with DNI, that distributes Company's products to a certain customer in Vietnam. Under the agreement with the customer, DNI is required to provides various types of surety bonds which are guaranteed by the bank. As of September 30, 2017, the Company had restricted cash of $1.2 million, $2.1 million and $2.0 million as a collateral for the advance payment bonds, performance bonds and warranty bonds, respectively, issued by DNI.

Purchase Commitments

~~The Company has agreements with various contract manufacturers which include non-cancellable inventory purchase commitments.~~

The Company’s inventory purchase commitments typically allow for cancellation of orders 30 days in advance of the required inventory availability date as set by the Company at time of order. However, the Company has agreements with various contract manufacturers which include non-cancellable inventory purchase commitments. The amount of non-cancellable purchase commitments outstanding, net of reserve, was ~~$3.0~~$5.6 million as of ~~September 30, 2017~~.

~~Payment Guarantees~~

~~The following table sets forth third parties that have provided payment guarantees of the Company's indebtedness and other obligations as of September 30, 2017 (in thousands):~~

Guarantor Amount Guaranteed Description of Obligations Guaranteed
DNI (Parent Company) $ 3,349
Borrowings from Shinhan Bank
DNI (Parent Company) 1,884
Purchasing card from Shinhan Bank
DNI (Parent Company) 10,493
Credit facility & purchasing card from Industrial Bank of Korea
DNI (Parent Company) 6,000
Credit facility from NongHyup Bank
DNI (Parent Company) 523
Purchasing card from NongHyup Bank
Industrial Bank of Korea 6,512
Credit facility
Industrial Bank of Korea 864
Performance bonds
NongHyup Bank 4,567
Credit facility
Shinhan Bank 191
Purchasing card
KEB Hana Bank 33
Performance bonds
State Bank of India 38
Performance bonds
Seoul Guarantee Insurance Co. 54
Performance bonds
Seoul Guarantee Insurance Co. 373
Warranty bonds
$ 34,881

March 31, 2020.

Royalties

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

Payment Guarantees provided by Third Parties and DNI

The following table sets forth payment guarantees of the Company's indebtedness and other obligations as of March 31, 2020 that have been provided by third parties and DNI. DNI owns approximately 44.1% of the outstanding shares of the Company's common stock. The amount guaranteed exceeds the principal amounts of outstanding obligations due to collateral requirements by the banks.

~~Legal Proceedings~~

Guarantor	Amount Guaranteed (in thousands)		Description of Obligations Guaranteed
DNI	$	8,400	Credit facility from Industrial Bank of Korea
DNI		1,963	Purchasing Card from Industrial Bank of Korea
DNI		8,400	Credit facility from Korea Development Bank
DNI		4,908	Borrowings from Korea Development Bank
DNI		6,000	Credit facility from NongHyup Bank
DNI		3,504	Borrowings from Export-Import Bank of Korea
DNI		3,000	Payment Guarantee from Shinhan Bank
DNI		1,570	Backed Loan from Shinhan Bank
PNC Bank, N.A.		4,859	Collateral for Standby Letter of Credit
Seoul Guarantee Insurance Co.		5,690	Performance Bond, Warranty Bond, etc. (*)
Industrial Bank of Korea		508	Bank Guarantee
Korea Development Bank		2,105	Letter of Credit
NongHyup Bank		765	Letter of Credit
Woori Bank		968	Bank Guarantee
Shinhan Bank		266	Purchasing Card
Shinhan Bank		685	Payment Guarantee
Citibank		291	Collateral for Standby Letter of Credit
	$	53,882

*The Company is generally responsible for warranty liabilities for a period of two years with respect to major product sales and has, therefore, contracted for surety insurance for a portion of the warranty liabilities.

Litigation

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, 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 expense (benefit) for the three months ended March 31, 2020 and 2019 was approximately $0.0 million and $0.1 million respectively, on pre-tax loss of $8.8 million and $1.4 million, respectively.

As of March 31, 2020, 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 some of the Company’s wholly-owned foreign subsidiaries.

The total amount of unrecognized tax benefits, including interest and penalties, at March 31, 2020 was $1.0 million. There were no significant changes to unrecognized tax benefits during the quarter ended March 31, 2020. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available.

(15)
~~(12)~~	Enterprise-Wide Information

The Company is a global provider of ultra-broadband network access solutions and communications ~~equipment for~~platforms deployed by advanced Tier 1, 2 and 3 service ~~provider~~providers 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. The Company’s chief operating decision ~~makers are~~maker is the Company’s ~~Co-Chief~~Chief Executive ~~Officers,~~Officer, who ~~review~~reviews 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 summarizes~~Refer to Note 1(e) Revenue disaggregation information, for the required disclosures about ~~geographic~~geographical concentrations and revenue by products and services ~~(in thousands):~~

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(As Revised) (As Revised)
Revenue by geography:
United States $ 13,068
$ 3,408
$ 37,176
$ 7,432
Canada 1,498
254
4,112
254
Total North America 14,566
3,662
41,288
7,686
Latin America 7,480
1,877
19,425
2,912
Europe, Middle East, Africa 7,378
2,232
19,134
5,209
Korea 20,520
18,372
69,032
60,144
Other Asia Pacific 16,494
5,097
29,612
14,881
Total International 51,872
27,578
137,203
83,146
Total $ 66,438
$ 31,240
$ 178,491
$ 90,832

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(As Revised) (As Revised)
Revenue by products and services:
Products $ 63,257
$ 28,891
$ 169,831
$ 84,666
Services 3,181
2,349
8,660
6,166
Total $ 66,438
$ 31,240
$ 178,491
$ 90,832

and geography.

The Company's property, plant and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands) as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016 (in thousands):~~2019:

	March 31, 2020		December 31, 2019
United States	$	3,007	$	2,809
Korea		1,883		2,020
Japan and Vietnam		1,049		1,074
Taiwan and India		21		24
Germany		756		842
	$	6,716	$	6,769

September 30,
2017

December 31,
2016
United States $ 3,611
$ 4,094
Korea 1,449
1,455
Japan and Vietnam 752
739
$ 5,812
$ 6,288


~~(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, the Company recognized income tax benefit of $0.6 million and $1.0 million, respectively, on pre-tax losses of $5.4 million and $10.1 million, respectively. As of September 30, 2017, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in the United States and taxable income generated by the Company’s wholly-owned foreign subsidiaries.

Management periodically evaluates the realizability of the Company's net deferred tax assets based on all available evidence, both positive and negative. The Company evaluates on a jurisdictional basis and certain jurisdictions could result in a realization of net deferred tax assets sooner than others. The realization of net deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income, on a jurisdictional basis, during periods prior to the expiration of tax attributes to fully utilize these assets. The Company weighed both positive and negative evidence and determined that there is a continued need for a full valuation allowance on its deferred tax assets in certain jurisdictions as of September 30, 2017. The Company currently believes there is not sufficient positive evidence of future profitability to change its judgment regarding the need for a full valuation allowance on its deferred tax assets in these jurisdictions. The continued improvement in the Company's operating results, conditioned on successfully commercializing new business arrangements and managing costs would provide additional positive evidence in determining the need for a valuation allowance in certain jurisdictions and could lead to reversal of substantially all of the Company's valuation allowance on its deferred tax assets. Until such time, consumption of tax attributes to offset profits will reduce the overall level of deferred tax assets subject to valuation allowance. Should the Company determine that it would be able to realize its remaining deferred tax assets in the foreseeable future, on a jurisdictional basis, an adjustment to its remaining deferred tax assets would cause a material increase to income in the period such determination is made.

~~The total amount of unrecognized tax benefits, including interest and penalties, at~~ ~~September 30, 2017~~ was not material. The amount of tax benefits that would impact the effective income tax rate, if recognized, is not expected to be material. There were no significant changes to unrecognized tax benefits during the quarters ended September 30, 2017 and 2016. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.

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


Item 2.
~~• Federal~~	~~2013 - 2016~~
~~• California~~ Management’s Discussion and ~~Canada~~	~~2012 - 2016~~
~~• Brazil~~	~~2011 - 2016~~
~~• Germany~~	~~2012 - 2016~~
~~• Japan~~	~~2011 - 2016~~
~~• Korea~~	~~2015 - 2016~~
~~• United Kingdom~~	~~2014 - 2016~~
~~• Vietnam~~	~~2016~~Analysis of Financial Condition and Results of Operations

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.~~

~~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,” “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, Inc. and its ~~consolidated subsidiaries (collectively, DZS) for periods~~subsidiaries.

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;~~Merger and the acquisition of Keymile; future growth and revenues from our products; our plans and our ability to refinance or repay our existing indebtedness prior to the applicable maturity ~~date;~~dates; our ability to access other capital to fund our future operations; future economic conditions and performance; the impact of the global outbreak of COVID-19; the impact of interest rate and foreign currency fluctuations; the anticipated relocation of our corporate headquarters to Texas; 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. Readers are cautioned~~statements within the meaning of the Securities Act and the Exchange Act. Although we believe that ~~these~~the assumptions underlying the forward-looking statements are ~~only predictions~~reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified under the heading “Risk Factors” in Part II, Item 1A, elsewhere in this report and our other filings with the Securities and Exchange Commission (the SEC). Therefore,future prospects or which could cause actual results ~~may~~to differ materially ~~and adversely~~ from ~~those expressed in any forward-looking statements. Factors that might cause such a difference~~our expectations include, but are not limited ~~to, our ability to realize~~ to:

the ~~anticipated cost savings, synergies and other benefits~~impact of the ~~Merger~~global COVID-19 outbreak on the Company’s business and ~~any integration risks relating to~~operations, including as a result of travel bans related thereto, the ~~Merger, the ability to generate sufficient revenue to achieve or sustain profitability,~~health and wellbeing of our employees in affected areas, disruption of our supply chain and softening of demands for our products;

•

our ability to realize the anticipated cost savings, synergies and other benefits of the Merger and the acquisition of Keymile and any integration risks relating to the acquisition of Keymile;

•

our ability to generate sufficient revenue to achieve or sustain profitability;

our ability to raise additional capital to fund existing and future operations or to refinance or repay our existing ~~indebtedness,~~ indebtedness;

our ability to hire and retain key management and other personnel;

defects or other performance problems in our ~~products, any economic slowdown in the telecommunications industry that restricts the ability~~products;

•

any economic slowdown in the telecommunications industry that restricts or delays the purchase of ~~our customers to purchase~~ our products by our customers;

commercial acceptance of our ~~products,~~ products;

intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same ~~networks~~network needs as our ~~products,~~ products;

higher than anticipated expenses that we may ~~incur,~~ incur;

any failure to comply with the periodic report filing and other requirements of The Nasdaq Stock Market for continued ~~listing,~~ listing;

material weaknesses or other deficiencies in our internal control over financial ~~reporting, the initiation~~reporting; and

additional factors discussed in Part II, Item 1A “Risk Factors” and Part I, Item 2 “Management’s Discussion and Analysis 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~~Financial Condition and Results of ~~Legacy Zhone and other factors identified elsewhere in~~Operations” of this ~~report and~~Quarterly Report on Form 10-Q, as well as those described in our ~~most recent~~Annual Report on Form 10-K for the year ended December 31, 2019 and from time to time in our other reports ~~on Forms 10-K, 10-Q~~filed with the U.S. Securities and ~~8-K. We undertake no obligation to revise or update any forward-looking statements for any reason.~~Exchange Commission (the “SEC”).

OVERVIEW

We are a global provider of ultra-broadband network access solutions and communications ~~equipment for~~platforms deployed by advanced Tier 1, 2 and 3 service ~~provider~~providers and enterprise ~~networks.~~customers. We operate in a single reporting segment. We research, develop, test, sell, manufacture and support communications equipment in five major areas: broadband access, Ethernet switching, mobile fronthaul/backhaul, ~~passive optical~~Passive Optical LAN ~~(POLAN)~~ and ~~software defined~~SDN/NFV solutions:

Our broadband access products offer 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 ~~(SDN).~~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, high-speed internet access and business class services to their customers.

~~As discussed under "Liquidity~~

Our Ethernet switching products provide a high-performance and ~~Capital Resources" below,~~manageable solution that bridges the ~~maturing~~gap from carrier access technologies to the core network. Our products support pure Ethernet switching as well as layer 3 IP and MPLS and are currently being developed for deployment as part of ~~short-term debt obligations~~SDNs.

Our mobile fronthaul/backhaul products provide a robust, manageable and scalable solution for mobile operators that enable them to upgrade their mobile fronthaul/backhaul systems and migrate to 5G and beyond. Our mobile backhaul 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. We provide standard Ethernet/IP or MPLS interfaces and interoperate with other vendors in these networks.

Our FiberLAN portfolio of POL products are designed for enterprise, campus, hospitality, and entertainment arena usage. Our FiberLAN portfolio includes our ~~recurring losses from operations raise substantial doubt on whether we~~high-performance, high-bandwidth GPON OLTs connected to the industry’s most diverse ONT product line, which include units with integrated PoE to power a wide range of PoE-enabled access devices.

Our SDN/NFV strategy is to develop tools and building blocks that will ~~be able~~allow service providers to ~~continue as~~migrate their networks’ full complement of legacy control plane and data plane devices to a ~~going concern.~~

~~As of September 30, 2017,~~centralized intelligent controller that can reconfigure the ~~total outstanding principal amount of our debt obligations was $26.9 million, consisting~~services of the ~~following:~~

~~$18.4 million~~hundreds of network elements in ~~short-term debt obligations~~real time for more controlled and efficient provision of bandwidth and latency across the network. The migration move to ~~other non-related parties;~~

~~$3.5 million in short-term debt obligations to related parties;~~SDN/NFV will provide better service for end customers 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,more efficient and ~~our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due.~~cost-effective use of hardware resources for service providers.

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~~

As of March 31, 2020, we employed over 830 personnel worldwide. We consider the relationships with our employees to be positive. Competition for technical personnel in our industry is intense. We believe that our future success depends in part on our continued ability to hire, assimilate and retain qualified personnel. To date, we believe that we have been successful in recruiting qualified employees, but there is no assurance that we will continue to be successful in the future.

RECENT DEVELOPMENTS

On ~~September 9, 2016, we acquired DNS through~~March 2, 2020, the ~~merger~~Company announced its plans to relocate its corporate headquarters from California to Plano, Texas and establish a new U.S.-based Engineering Center of ~~a wholly owned subsidiary of Zhone Technologies, Inc. with and into DNS, with DNS surviving as our wholly owned subsidiary (the Merger).~~Excellence in Plano. In connection with the ~~Merger, Zhone~~planned relocation, the Company entered into sublease agreements with Huawei Technologies, Inc. ~~changed its name~~and Futurewei Technologies, Inc. to ~~DASAN Zhone Solutions, Inc. Our common stock continues~~sublease an aggregate of approximately 16,300 square feet located at Legacy Place, 5700 Tennyson Parkway, Plano, Texas.

On March 5, 2020, DNS Korea entered into a Loan Agreement with DNI, pursuant to ~~be traded on~~which DNS Korea borrowed KRW 22.4 billion ($18.5 million USD) from DNI. DNS Korea subsequently loaned all of such borrowed funds to 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,Company, a portion of which ~~949,302 shares (post reverse stock split) are being held in escrow as security for claims for indemnifiable losses in accordance with~~were used to repay and terminate 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.~~

PNC Credit Facilities.

~~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 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~~ as a percentage of total net revenue for the periods indicated.

	Three Months Ended March 31,
	2020			2019
Net revenue:
Third parties		100	%		99	%
Related parties		—			1	%
Total net revenue		100	%		100	%
Cost of revenue:
Products and services - third parties		65	%		65	%
Products and services - related parties		—			1	%
Amortization of intangible assets		1	%		—
Total cost of revenue		66	%		66	%
Gross profit		34	%		34	%
Operating expenses:
Research and product development		20	%		14	%
Selling, marketing, general and administrative		29	%		20	%
Amortization of intangible assets		1	%		1	%
Total operating expenses		50	%		35	%
Operating loss		(16	)%		(1	)%
Interest income		—			—
Interest expense		(1	)%		(1	)%
Loss on extinguishment of debt		(3	)%		—
Other income (loss), net		2	%		—
Loss before income taxes		(18	)%		(2	)%
Income tax provision		—			—
Net loss		(18	)%		(2	)%
Net income attributable to non-controlling interest		—			—
Net loss attributable to DASAN Zhone Solutions, Inc.		(18	)%		(2	)%

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(As Revised) (As Revised)
Net revenue:
Net revenue 91 % 79 % 85 % 75 %
Net revenue - related parties 9 % 21 % 15 % 25 %
Total net revenue 100 % 100 % 100 % 100 %
Cost of revenue:
Products and services 58 % 53 % 54 % 54 %
Products and services - related parties 8 % 17 % 13 % 21 %
Amortization of intangible assets 0 % 0 % 0 % 0 %
Total cost of revenue 67 % 70 % 67 % 75 %
Gross profit 33 % 30 % 33 % 25 %
Operating expenses:
Research and product development 14 % 19 % 15 % 17 %
Selling, marketing, general and administrative 17 % 26 % 18 % 18 %
Amortization of intangible assets 0 % 1 % 1 % 0 %
Total operating expenses 31 % 46 % 34 % 35 %
Operating income (loss) 2 % (16 )% (1 )% (10 )%
Interest income 0 % 0 % 0 % 0 %
Interest expense 0 % (1 )% 0 % (1 )%
Other income, net 0 % 0 % 0 % 0 %
Income (loss) before income taxes 2 % (17 )% (1 )% (11 )%
Income tax provision (benefit) 0 % (2 )% 1 % (1 )%
Net income (loss) 2 % (15 )% (2 )% (10 )%
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~~

The following table presents our ~~net revenue for products and services for~~revenues by source (in millions):

	Three Months Ended March 31,
	2020		2019		Increase/ (Decrease)			% change
Products	$	40.7	$	69.6	$	(28.9	)		(42	)%
Services		6.8		4.5		2.3			51	%
Total	$	47.5	$	74.1	$	(26.6	)		(36	)%

For the three ~~and~~ ~~nine~~ months ended ~~September 30, 2017~~March 31, 2020, product revenue decreased by 42% or $28.9 million to $40.7 million from $69.6 million in the same period last year. For the three months ended March 31, 2020, service revenue increased by 51% or $2.3 million to $6.8 million from $4.5 million in the same period last year. The decrease in product revenue during the period was primarily attributable to impacts from the worldwide COVID-19 pandemic, which resulted in disruptions to our supply chain, as well as decreased business operations by certain of our customers. The increase in service revenue was primarily related to a greater number of products under contract for maintenance and ~~2016 is summarized below (in millions):~~extended warranty.

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 %
Services 3.2
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 March 31,
	2020		2019		Increase/ (decrease)			% change
Revenue by geography:
United States	$	7.6	$	9.6	$	(2.0	)		(21	)%
Canada		0.8		0.9		(0.1	)		(11	)%
Total North America		8.4		10.5		(2.1	)		(20	)%
Latin America		2.2		6.6		(4.4	)		(67	)%
Europe, Middle East, Africa		12.4		18.4		(6.0	)		(33	)%
Korea		9.6		15.9		(6.3	)		(40	)%
Other Asia Pacific		14.9		22.7		(7.8	)		(34	)%
Total International		39.1		63.6		(24.5	)		(39	)%
Total	$	47.5	$	74.1	$	(26.6	)		(36	)%

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 %
Canada 1.5
0.3
1.2
100 % 4.1
0.3
3.8
100 %
Total North America 14.6
3.7
10.9
295 % 41.3
7.7
33.6
436 %
Latin America 7.5
1.9
5.6
295 % 19.4
2.9
16.5
569 %
Europe, Middle East, Africa 7.4
2.2
5.2
236 % 19.1
5.2
13.9
267 %
Korea 20.5
18.4
2.1
11 % 69.0
60.1
8.9
15 %
Asia Pacific 16.4
5.0
11.4
228 % 29.7
14.9
14.8
99 %
Total International 51.8
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 %

~~For~~

From a geographical perspective, the three months ended September 30, 2017, net revenue increased 113% or $35.2 million to $66.4 million from $31.2 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 to the same period last year. The increasedecrease in net revenue for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 was ~~primarily related~~attributable to declining revenue in all regions except for Korea, and was largely attributed to impacts from the ~~consummation~~worldwide COVID-19 pandemic, resulting in disruptions to our supply chain and decreased business operations by certain of ~~the Merger in September 2016 (which resulted in the inclusion of~~our customers.

Across non-U.S. markets, net revenue ~~related to the Legacy Zhone business for the entire current year periods, compared to only 22 days in the prior year periods).~~

Service revenue represents revenue from maintenance and other services associated with product shipments. 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~~March 31, 2020 decreased 39% or $24.5 million to $39.1 million from ~~$27.5~~$63.6 million ~~for~~from the same period last year, and represented ~~78%~~82% of total net revenue compared with ~~88%~~86% 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 2016.2019. The ~~increases~~decrease in international net revenue ~~were~~was primarily ~~related~~attributed to impacts from 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).

worldwide COVID-19 pandemic.

For the three months ended ~~September 30, 2017,~~March 31, 2020 two ~~customers represented,~~customer accounted for 14% and 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) and 12%~~March 31, 2019, no customer accounted for more 10% 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.~~ revenue.

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.

Cost of Revenue and Gross ~~Margin~~

Profit

Total cost of revenue ~~increased 102%~~decreased 36% or ~~$22.4~~$17.7 million to ~~$44.4~~$31.5 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$21.9~~$49.2 million for the three months ended ~~September 30, 2016.~~March 31, 2019. Total cost of revenue ~~increased 76% or $51.5 million to $119.4 million~~was 66% of net revenue for each of the ~~nine~~three months ended September 30, 2017, compared to $67.9 million for the nine months ended September 30, 2016. The increases in total cost of revenue were primarily due to the consummation of the Merger 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 threeMarch 31, 2020 and ~~nine months ended September 30, 2017 compared to the prior year periods due to improved manufacturing efficiencies and product mix.~~

March 31, 2019.

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 6% or ~~$2.9~~$0.6 million to ~~$8.8~~$9.6 million for the three months ended ~~September 30, 2017~~March 31, 2020, compared to ~~$5.9~~$10.2 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. The increase inMarch 31, 2019. As a percentage of sales, research and product development expenses ~~was primarily due to the consummation of the Merger in September 2016 (which resulted in the inclusion of research and product development expenses related to the Legacy Zhone business~~were 20% for the ~~entire current year periods,~~three months ended March 31, 2020, compared to ~~only 22 days in~~14% for the ~~prior year periods).~~ three months ended March 31, 2019.

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%~~include 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 9% or ~~$3.2~~$1.4 million to ~~$11.5~~$13.6 million for the three months ended ~~September 30, 2017~~March 31, 2020, compared to ~~$8.3~~$15.0 million for the three months ended ~~September 30, 2016. Selling,~~March 31, 2019. The decrease in selling, marketing, general and administrative ~~expenses increased 95% or $15.8 million to $32.5 million for~~costs in the ~~nine~~three months ended ~~September 30, 2017 compared~~March 31, 2020 relative to ~~$16.7 million for~~ the ~~nine months ended September 30, 2016. The increases~~same period in 2019 is largely due to restructuring activities, including reductions in force, undertaken during 2019. As a percentage of sales, selling, marketing, general and administrative expenses were ~~primarily due~~29% for the three months ended March 31, 2020, compared to 20% for the ~~consummation of the Merger~~three months ended March 31, 2019. The increase in ~~September 2016 (which resulted in the inclusion of~~ selling, marketing, general and administrative ~~expenses related~~costs as a percentage of sales in the period relative to ~~Legacy Zhone business~~the first quarter of 2019 is due to the lower overall level of revenues in the three months ended March 31, 2020.

Income Tax Provision

Income tax benefit for the ~~entire current year periods,~~three months ended March 31, 2020 was approximately $5,000, compared to ~~only 22 days~~income tax expense for the three months ended March 31, 2019 of $0.1 million, on pre-tax loss of $8.8 million and $1.4 million, respectively. As of March 31, 2020, the income tax rate varied from the United States statutory income tax rate, primarily due to valuation allowances in the ~~prior year periods), offset~~United States and taxable income generated by ~~higher commission expenses during~~some of the ~~three 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 for income taxes was recorded, due to our recurring operating losses and the significant uncertainty regarding the realization of our net deferred tax assets, against which we have continued to record a full valuation allowance.

Company’s 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~~non-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~~merger and acquisition transaction costs, ~~or a~~inventory valuation step-up amortization, purchase price adjustments, restructuring and other charges, goodwill impairment, bargain purchase gain, gain (loss) on sale of assets, or impairment of ~~fixed assets.~~long-lived assets or loss on debt extinguishment, 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 loss to~~ Adjusted EBITDA and net income, which we consider to be the most directly comparable U.S. GAAP financial measure to Adjusted EBITDA (in thousands):

	Three Months Ended March 31,
	2020			2019
Net income (loss)	$	(8,771	)	$	(1,457	)
Add (less):
Interest expense, net		573			783
Income tax (benefit) expense		(5	)		77
Depreciation and amortization		1,256			1,417
Stock-based compensation		782			825
Acquisition costs		—			337
Inventory step-up valuation amortization		—			201
Bargain purchase gain		—			(334	)
Loss on debt extinguishment		1,369			—
Adjusted EBITDA	$	(4,796	)	$	1,849

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, net 227
173
711
463
Income tax provision (benefit) 107
(610 ) 646
(1,041 )
Depreciation and amortization 752
628
3,105
1,165
Stock-based compensation 195
128
670
128
Merger-related costs —
3,536
—
3,536
Adjusted EBITDA $ 2,668
$ (934 ) $ 2,147
$ (4,832 )

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, 2019, as supplemented by Note 1, Organization and Summary of Significant Accounting Policies, in the notes to our 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~~,

The following table summarizes the information regarding our cash and cash equivalents ~~were~~ ~~$10.1 million~~ ~~compared to $17.9 million at December 31, 2016. Our cash~~ and ~~cash equivalents as~~working capital (in thousands):

	March 31, 2020		December 31, 2019
Cash and cash equivalents	$	26,437	$	28,747
Working capital		113,586		114,885

The Company had net loss 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 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$8.8 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and a net loss of $13.3 million for the year ended December 31, ~~2016, respectively. We~~2019. Additionally, the Company incurred significant losses in years prior to 2019. As of March 31, 2020, the Company had an accumulated deficit of ~~$23.1~~$38.0 million and working capital of ~~$57.3 million as of September 30, 2017.~~$113.6 million. As of ~~September 30, 2017, we~~March 31, 2020, the Company had ~~approximately $10.1~~$26.4 million in cash and cash equivalents, which included ~~$3.4~~$8.7 million in cash balances held by ~~our Korean subsidiary,~~its international subsidiaries, and ~~$26.9~~$39.7 million in aggregate principal ~~amount~~debt of ~~outstanding borrowings under~~which $12.3 million was reflected in current liabilities.

Our current lack of liquidity could harm us by:

increasing our ~~short-term~~vulnerability to adverse economic conditions in our industry or the economy in general;

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

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,

limiting our ability to ~~comply with the covenants~~plan for, or react to, changes in our ~~existing debt agreements,~~business and industry; and

influencing investor and customer perceptions about our financial stability and limiting our ability to ~~cure any defaults that occur under our debt agreements~~obtain financing 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 andacquire customers.

However, we ~~are in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient~~continue 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 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 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. In March 2020, as described below under the header March 2020 DNI Loan, we entered into a Loan Agreement with DNI, and used a portion of such funds to repay in full and terminate the Company’s existing credit facility with PNC Bank. Based on our current plans and current business conditions, as of the date of this Quarterly Report on Form 10-Q, we believe that ~~our focused operating expense discipline~~these 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 12twelve (12) months ~~however~~from the ~~factors discussed above raise substantial doubt about~~date of this Quarterly Report on Form 10-Q.

Our ability to meet our obligations as they become due in the ordinary course of business for the next twelve (12) months will depend on our ability (i) to achieve forecasted results of operations, (ii) access funds under new credit facilities and/or raise additional capital through sale of our common stock to the public, and (iii) effectively manage working capital requirements. If we cannot raise additional funds when we need or wants them, our operations and prospects could be negatively affected. While we believe that we are likely to achieve forecasted results of operations if we are successful in implementing our business, the impact of the COVID-19 pandemic provides great uncertainty with respect to our future operations, could result in a material decline in our operating cash flows and could cause us to fail to meet our obligations as they come due.

In December 2019, a strain of coronavirus, now known as COVID-19, was reported to have surfaced in Wuhan, China. Since that time, the widespread and sustained transmission of the virus has reached global pandemic status. In response to the pandemic, many national and international health agencies have recommended, and many countries and state, provincial and local governments have implemented, 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 has materially impacted and will likely continue ~~as a going concern.~~

~~Operating Activities~~

~~Net~~to impact the Company’s financial condition, results of operations and cash flows. Given the ongoing and dynamic nature of the virus and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 outbreak on our business. During the quarter ended March 31, 2020, the Company’s revenues declined relative to its prior expectations, in part due to the COVID-19 pandemic. Due to the uncertainty around the future economic impact of the pandemic, the fair value measurements used in ~~operating activities for~~ the ~~nine months ended September 30, 2017 consisted~~Company’s impairment assessments could be negatively impacted and could result in future impairments of goodwill, intangibles and other long-lived assets. The impact of a ~~net loss~~continued COVID-19 outbreak or sustained measures taken to limit or contain the outbreak could continue to have a material adverse effect on our business, financial condition, results of ~~$3.0 million, adjusted for non-cash charges totaling $3.6 million~~operations, 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 inventory 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.

cash flows.

Operating Activities

Net cash provided by operating activities increased by $5.6 million to $0.6 million for the ~~nine~~three months ended ~~September 30, 2016 consisted~~March 31, 2020 from net cash used in operating activities of ~~a net loss of $9.1~~$5.0 million ~~adjusted~~ for ~~non-cash charges totaling $1.9 million and an increase~~the three months ended March 31, 2019. The improvement in ~~net~~cash from changes in 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~~liabilities was primarily due to ~~the timing of~~collection accounts receivables, ~~collections during the current year period. The decrease~~including amounts reflected in ~~accounts payable was primarily due to timing of payments.~~

contract assets.

Investing Activities

Net cash used in investing activities decreased by $4.2 million to $0.6 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 from $4.8 million for the three months ended March 31, 2019. This decrease was primarily due to the acquisition of Keymile in 2019.

Financing Activities

Cash provided by financing activities totaled $3.1 million for the three months ended March 31, 2020 and consisted primarily 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.~~

Net cash used in investing activities for the nine months ended September 30, 2016 consisted 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,related party loan, partially offset by a ~~decrease in short-term and long-term loans~~net outflow associated with the repayment of ~~$1.9 million.~~

~~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~~PNC credit facility. This compared to cash provided by financing activities of $5.1 million for the ~~nine~~three months ended September 30, 2016 consisted of proceeds from short-term borrowings and proceeds from long-term borrowings of $19.8 million and $6.8 million, respectively, offset by repayments of borrowings of $23.1 million.

March 31, 2019.

Cash Management

Our primary source of liquidity comes from our cash, ~~and~~ cash equivalents and restricted cash, which totaled ~~$10.1~~$35.9 million at ~~September 30, 2017~~, as well as our credit facilities, under which we had aggregate borrowing availability of $7.6 million as of September 30, 2017, and under which $8.5 million was committed as security for letters of credit as of September 30, 2017.March 31, 2020. Our cash and cash equivalents as of ~~September 30, 2017~~March 31, 2020 included ~~$3.4~~$12.9 million in cash balances held by our ~~Korean subsidiary.~~

~~WFB Facility~~

Asinternational subsidiaries.

Debt Facilities

PNC Credit Facilities

On February 27, 2019, the Company and certain of ~~September 30, 2017, we had~~its subsidiaries (as co-borrowers or guarantors) entered into that certain Revolving Credit, Term Loan, Guaranty and Security Agreement and that certain Export-Import Revolving Credit, Guaranty and Security Agreement, in each case with PNC Bank, National Association (“PNC Bank”) and Citibank, N.A. as lenders, and PNC as agent for the lenders. We refer to such transactions and the agreements referenced above as the “PNC Credit Facilities”.

The PNC Credit Facilities provided for a ~~$25.0~~$25 million term loan and a $15 million revolving line of credit ~~facility (the WFB Facility)~~(including subfacilities for Ex-Im transactions, letters of credit and swing loans) with ~~Wells Fargo Bank (WFB). Under the WFB Facility, we have the option of borrowing funds at agreed upon interest rates.~~a $10 million incremental increase option. The amount ~~that we are~~the Company was able to borrow ~~under~~on the ~~WFB Facility varies~~revolving line of credit at any time was 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~~other conditions, less ~~the amount committed as security for letters of credit. To maintain availability of funds~~certain reserves. Borrowings 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~~PNC Credit Facilities bore 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 either the ~~three-month~~PNC prime rate or the LIBOR rate for the applicable period, plus a margin that was based on ~~our average excess availability (as calculated~~the type of advance.

The PNC Credit Facilities had a three-year term and were scheduled to mature on February 27, 2022. The PNC Credit Facilities contemplated repayment of the term loan in quarterly installments over the term of the loan, with the balance of the term loan and revolving line of credit due at maturity.

The Company used a portion of the proceeds of the March 2020 DNI Loan to repay in full and terminate the PNC Credit Facilities. Covenants under the ~~WFB Facility). The interest rate on the WFB Facility was 3.8% at September 30, 2017. The maturity date~~March 2020 DNI Loan are significantly less restrictive than 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.

PNC Credit Facilities.

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~~March 31, 2020 and December 31, ~~2016,~~2019, we had an aggregate outstanding balance of ~~$18.4~~$12.3 million and ~~$17.6~~$15.8 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements ranged from 0% to 3.05% as of ~~September 30, 2017 and December~~March 31, 2020.

Related Party Debt

In February 2016, ~~ranged~~DNS California borrowed $1.8 million from ~~2.3% to 5.9% and 1.9% to 4.1%, respectively.~~

~~Related-Party Debt~~

InDNI for capital investment with an interest rate of 4.6% per annum. On February 27, 2019, in connection with the ~~Merger, on~~entry into the PNC Credit Facilities, the Company amended the terms of this loan to extend the repayment date to May 27, 2022. As of March 31, 2020, the $1.8 million remained outstanding.

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

In ~~addition, we~~February 2019, the Company repaid the term loan in full plus accrued interest in connection with the entry into the PNC Credit Facilities, thereby terminating the loan agreement.

In March 2018, DNS Korea borrowed ~~$1.8~~$5.8 million from DNI, ~~for capital investment in February 2016,~~of which ~~amount~~$4.5 million was ~~outstanding as of September 30, 2017. This~~repaid on August 8, 2018. The loan ~~matured in March 2017 with an option of renewal by mutual agreement, and bore~~bears interest at a rate of ~~6.9% per annum, payable annually. Effective~~4.6%. On February 27, ~~2017, we~~2019, in connection with the entry into the PNC Credit Facilities, the Company amended the terms of this loan to extend the repayment date ~~from~~to May 27, 2022. As of March ~~2017~~31, 2020, $1.3 million remained outstanding.

In December, 2018, the Company entered into a loan agreement with DNI, for a $6.0 million term loan with an interest rate of 4.6% per annum. On February 27, 2019, in connection with the entry into the PNC Credit Facilities, the Company amended the terms of the term loan to ~~March 2018~~extend the repayment date to May 27, 2022 and to ~~reduce the interest rate from 6.9%~~terminate any security granted to ~~4.6% per annum.~~

~~On June 23, 2017, we borrowed $3.5 million from Solueta, an affiliate of DNI.~~DNI with respect to such term loan. As of ~~September 30, 2017,~~March 31, 2020, the ~~aggregate~~$6.0 million remained outstanding.

The modifications resulting from the amendments described in the four preceding paragraphs were limited to the extension of the maturity dates and removal of the collateral on the outstanding term loans with DNI. There were no fees paid to DNI or external costs otherwise incurred in connection with these modifications.

On March 5, 2020, DNS Korea, the Company’s wholly-owned, indirect subsidiary entered into a Loan Agreement with DNI (the “March 2020 DNI Loan”). The March 2020 DNI Loan was negotiated and approved on behalf of the Company and its subsidiaries by a special committee of the Board of Directors of the Company (the “Special Committee”) consisting of directors determined to be independent from DNI. The March 2020 DNI Loan consists of a term loan in the amount of KRW 22.4 billion ($18.5 million USD) with interest payable semi-annually at an annual rate of 4.6% and maturing on March 11, 2022. No principal payments are due on the March 2020 DNI Loan until the maturity date, but DNS Korea may prepay the loan, or a portion thereof, without penalty.

As security for the March 2020 DNI Loan (and other existing loans between DNI and DNS Korea and/or DNS California), (i) DNS California, a wholly-owned, direct subsidiary of the Company and the sole stockholder of DNS Korea, agreed to pledge the outstanding shares of DNS Korea to DNI and (ii) DNS Korea granted a security interest in its personal property assets, accounts receivable and intellectual property assets to DNI. The March 2020 DNI Loan includes certain covenants consisting of financial reporting obligations, a maintenance covenant whereby DNS Korea agreed to maintain a minimum stockholders’ equity value in an amount equal to or greater than KRW 43.3 billion ($35.8 million), and customary events of default. If an event of default occurs and is not remedied within the applicable cure period, DNI will be entitled to take various actions, including requiring the immediate repayment of all outstanding amounts under the March 2020 DNI Loan and selling the shares or assets of DNS Korea.

DNS Korea loaned the funds borrowed under the March 2020 DNI Loan to the Company, and the Company used a portion of such funds to repay in full and terminate the PNC Credit Facilities, described below.

As of March 31, 2020, the Company had borrowings of $27.3 million outstanding from DNI. The outstanding balance ~~under this~~at March 31, 2020 consisted of the March 2020 DNI Loan of KRW 22.4 billion ($18.5 million USD), a $6.0 million unsecured subordinated term loan ~~agreement was $1.7 million. This loan~~facility which matures in ~~November 2017~~May 2022, a $1.8 million loan for capital investment which matures in May 2022, and ~~bears~~KRW 1.5 billion ($1.3 million) outstanding under a secured loan to DNS Korea which matures in May 2022. All four loans bear interest at a rate of 4.6% per ~~annum, payable monthly.~~

annum.

Interest expense on these related party borrowings was $0.2 million and $0.1 million during the three months ended March 31, 2020 and 2019, respectively.

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~~March 31, 2020, two customers ~~accounted for 16% (a related-party), 11% and 10%~~each represented 19% of net accounts ~~receivables,~~receivable, respectively, and receivables from customers in countries other than the United States represented ~~84%~~96% of net accounts receivable. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt.

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,~~March 31, 2020, our future contractual commitments by fiscal year were as follows (in thousands):

			Payments due by period
	Total		2020		2021		2022		2023		2024		Thereafter
Operating lease payments	$	25,436	$	3,890	$	5,090	$	4,691	$	4,273	$	3,842	$	3,650
Short-term debt		12,323		12,323		—		—		—		—		—
Purchase commitments		5,565		5,565		—		—		—		—		—
Long-term debt - related party		27,348		—		—		27,348		—		—		—
Total future contractual commitments	$	70,672	$	21,778	$	5,090	$	32,039	$	4,273	$	3,842	$	3,650

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 commitments 2,966
2,966
—
—
—
—
—
Short-term debt 18,382
18,382
—
—
—
—
—
Related-party debt 8,544
1,744
1,800
—
—
5,000
—
Total future contractual commitments $ 50,058
$ 24,059
$ 5,159
$ 2,496
$ 2,358
$ 7,264
$ 8,722

Operating Leases

~~The~~

Future minimum operating lease ~~amounts shown~~obligations in the table above ~~represent~~include primarily ~~off-balance sheet arrangements. For operating lease commitments, a liability is generally not recorded on~~payments for our ~~balance sheet unless the facility represents an excess facility for~~office locations and manufacturing, research and development locations, which ~~an estimate~~expire at various dates through 2025. See Note 14 “Leases” of the ~~facility exit costs has been recorded~~Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further discussion regarding 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.

leases.

Purchase Commitments

The purchase commitments shown above represent non-cancellable inventory purchase commitments as of ~~September 30, 2017.~~

March 31, 2020.

Short-term and Long-term Debt

~~Our short-term~~

The 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. Theobligation 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,~~See Note 7 “Debt” of the ~~interest rate per annum applicable~~Notes 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 to~~Unaudited Condensed Consolidated Financial Statements ~~Note 1 (h) – Recent Accounting Pronouncements~~.”

included in this Quarterly Report on Form 10-Q for further discussion regarding our debt agreements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not required.

~~Item 3. Quantitative and Qualitative Disclosures about Market Risk~~

Item 4.

Controls and Procedures

~~Concentration of Credit Risk~~

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

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

For the three months ended 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 which was a 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.

As of September 30, 2017, three customers represented 16% (a related-party), 11% and 10% of net accounts receivable, respectively. As of December 31, 2016, two customers represented 13% (a related-party) and 10% of net accounts receivable, respectively.

~~As of September 30, 2017 and December 31, 2016, receivables from customers in countries other than the United States represented 84% and 87%, respectively, of net accounts receivable.~~

~~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% increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.5 million.~~

~~Foreign Currency Risk~~

We transact business in various foreign countries, 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 with foreign currency denominated assets and liabilities, primarily intercompany receivables and payables. Accordingly, our operating results are exposed to changes in exchange rates between the U.S. dollar and those currencies. During the first nine months of 2017 and during fiscal year 2016, we did not hedge any of our foreign currency exposure.

~~We 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 $2.3 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.~~

~~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 Officers~~principal 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, 2020, 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 Officers~~principal executive officer and principal financial officer. In the course of the evaluation of our ~~Chief Financial Officer. Based upon this evaluation,~~disclosure controls and procedures, our ~~Co-Chief Executive Officers~~principal executive officer and ~~Chief Financial Officer~~principal financial officer concluded that, because of the unresolved material weaknesses in our internal control over financial reporting ~~that existed as of December 31, 2016 and that have not yet been remediated,~~ as described below, our disclosure controls and procedures were not effective as of ~~September 30, 2017.~~

March 31, 2020.

Material Weakness in Internal Control Over Financial Reporting

In connection with the Company’s annual evaluation of its internal control over financial reporting conducted in accordance with SEC Rule 13a-15(c), the Company’s management, including our Chief Executive Officer and Chief Financial Officer, identified a material weakness in the Company’s internal control over financial reporting, and as a result thereof, determined that the Company’s internal control over financial reporting was not effective as of December 31, 2019.

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~~Management determined that ~~management previously identified in connection with its evaluation of our internal control over financial reporting as of December 31, 2016 were as follows: we~~the Company did not maintain ~~an effective control environment as there was an insufficient~~a sufficient complement of personnel with appropriate accounting knowledge, experience and ~~competence, resulting~~training in ~~incorrect~~the application of ~~generally accepted~~US GAAP, including accounting ~~principles. This material weakness contributed to~~for significant unusual transactions. In addition, the ~~following material weaknesses. We~~Company did not maintain an effective control environment as it did not appropriately identify internal controls over ~~our financial close process.~~inventory valuation and revenue. Also, weManagement determined that the Company did not design and maintain effective controls over the financial closing process, including controls surrounding monitoring and review of ~~supporting information~~the activity of its foreign subsidiaries.

We continue to ~~determine~~evaluate and assess the ~~completeness~~design 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~~operation of our controls and ~~modifying~~are taking steps to modify 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 have hired and we anticipate that we will hire additional accounting personnel with relevant skills, training and experience, and conduct further training of our accounting and finance personnel.

Changes in Internal Control over Financial Reporting

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

~~Inherent Limitations on Effectiveness of Controls~~

Our management, including our 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.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

~~Item 1. Legal Proceedings~~

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

Item 1A.

Risk Factors

~~Item 1A. Risk Factors~~

~~In addition to the other information set forth~~An investment in ~~this report, you~~our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2019 and in other filings we make with the SEC before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.

Risks Directly Related to the COVID-19 Pandemic

The COVID-19 pandemic has had a material impact on our business and could have a further material adverse effect on our business, financial condition and results of operations.

The COVID-19 pandemic has had a significant impact on our first quarter 2020 results, resulting in decreased revenues, and may continue to have a significant impact on our results for the remainder of 2020 and beyond, as we have experienced a negative impact on our global supply chain and softer product demand due to the effects of the pandemic. Given the ongoing and dynamic nature of the virus and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The impact of a continued COVID-19 outbreak or sustained measures taken to limit or contain the outbreak could continue to have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our suppliers and contract manufacturers could fail to provide equipment or service on a timely basis as a result of disruption to the global supply chain due to the ongoing COVID-19 pandemic. If such failures occur, we may be unable to provide products and services as and when requested by our customers, or we may be unable to continue to maintain or upgrade our networks. Because of the cost and delays that can be associated with transitioning from one supplier to another, our business could be substantially disrupted if we were required to, or chose to, replace the products or services of one or more major suppliers with products or services from another source, especially if the replacement became necessary on short notice. Any such disruption could increase our costs, decrease our operating efficiencies and have a material adverse effect on our business and financial condition.

The extent to which the ongoing COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that we are not able to predict, including:

the duration of the pandemic;

governmental, business and other actions (which could include limitations on our operations or mandates to provide products or services) taken to limit the reach of the virus and the and impact of the pandemic;

the impact on our supply chain;

our eligibility for and receipt of government assistance offered through the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and any other legislation enacted by the U.S. to mitigate the economic effect of the COVID-19 pandemic;

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the impact of the pandemic on worldwide economic activity;

the health of and the effect on our workforce and our ability to meet the staffing needs of our critical functions, particularly if members of our work force are quarantined as a result of exposure or unable to work remotely in areas subject to shelter-in-place orders;

any impairment in value of our tangible or intangible assets that could be recorded as a result of a weaker economic conditions; and

the potential effects on our internal controls including those over financial reporting as a result of changes in working environments such as shelter-in-place and similar orders that are applicable to our team members and business partners, among others.

A sustained shelter-in-place order could adversely impact our operations and workforce, and remote working conditions could increase our susceptibility to a data breach.

In response to the ongoing COVID-19 pandemic, many local and state governments, including the state of California where our corporate headquarters are presently located, have instituted emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. As a result, the majority of our workforce is working remotely from their homes. Remote working conditions may negatively affect our workforce’s productivity, result in disruptions to workflow and operations or make it more difficult for us to maintain proper internal controls over our financial reporting. Further, while we have taken steps to ensure the security of our data and to prevent security breaches, including through the use of authentications and VPNs, many of these measures are being deployed for the first time on a widespread and sustained basis, and there is no guarantee the data security and privacy safeguards we have put in place will be completely effective or that we will not encounter some of the common risks associated with employees accessing Company data and systems remotely. As a result, we may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by security breaches.

Many of our customers operate in industries that have been disproportionately impacted by the COVID-19 pandemic, and the virus’s negative impact on their financial conditions and results of operations could have an adverse impact on our revenue.

While the industry in which we operate has not directly impacted to the same extent as other industries, many of our customers in our Enterprise FiberLAN™ business operate in industries such as hospitality, education and stadiums/facilities management, each of which has been greatly impacted by the ongoing COVID-19 pandemic and the protective measures put in place by the local and state governments of the regions in which they operate, such as shelter-in-place orders, business closures, travel restrictions and cancellations of large events. The adverse impacts that the virus and the accompanying protective measures have on our customers may influence their ability to purchase our products and solutions, make payments under their contracts with us, or it may lower their demand for our products and solutions as they take measures to cut costs and protect their businesses. As a result, our revenue may decline, which could have a material adverse effect on our results of operations and financial condition.

The ongoing COVID-19 pandemic could have a negative impact on the health of our employees which could be disruptive to our business and operations and may negatively impact productivity.

The ongoing COVID-19 pandemic has spread rapidly throughout the United States and the other regions in which we operate. As of March 31, 2020, there have been more than 900,000 positive tests for COVID-19 across the globe, with approximately 200,000 in the United States. The longer the pandemic continues, the more likely it is that one or more of our employees could contract the virus. If the virus spreads over a large portion of our workforce, it could have a material adverse effect on our operations. Additionally, if any of our executive officers were to test positive for COVID-19, it could have an adverse effect on our operations, including increased responsibilities for other executives, disruptions in operations or the inability of our executives to focus on essential Company business.

In addition, depending on the extent and duration of the ongoing COVID-19 pandemic, we may be subject to significant increases in healthcare costs if a significant number of our personnel become infected with COVID-19 and require medical treatment. As a result, any significant increases in healthcare costs as a result of COVID-19 or otherwise could have a material adverse impact on our business, financial condition and results of operations.

We have applied for government assistance under the CARES Act and a small business aid program administered by the German government. There can be no assurance that we or our subsidiaries will qualify for assistance under these or other programs. If we or our subsidiaries do qualify, there is no certainty as to the amount of assistance we will receive.

The CARES Act was enacted on March 27, 2020 and is an approximate $2 trillion emergency economic stimulus package passed in response to the COVID-19 pandemic. The CARES Act includes broad sweeping provisions including direct financial assistance to Americans in the form of one-time payments to individuals; aid to certain eligible businesses in the form of loans and grants; efforts to stabilize the U.S. economy and keep Americans employed in general; and support for healthcare professionals, patients and hospitals. Also included in the CARES Act are numerous income tax provisions including changes to the Net Operating Loss (“NOL”) rules and the business interest expense deduction rules under Internal Revenue Code Section 163(j). Factors that could affect our ability to receive funding include the finalization of regulations under the CARES Act and exhaustion of available funds, among other factors. Due to the recent enactment of this legislation, there is a high degree of uncertainty around its implementation and we continue to assess the potential impacts of this legislation on our business, results of operations, financial condition and cash flows. While the Company has made application for aid under the CARES Act and may make future application under other provisions of the act, there can be no assurance that we will receive any aid or funding under the CARES Act.

Additionally, the Company has applied for a loan under the German COVID-19 government aid package and may evaluate and consider application under other COVID-19 related foreign and domestic aid programs in the future. There can be no assurances that the Company will be approved for aid under any of these programs, and if approved, whether funding will be available at all or on conditions that are acceptable to the Company. While we may receive financial, tax or other relief and other benefits under and as a result of these assistance programs or others, it is not possible to estimate at this time the extent or impact of any such relief.

Risks Related to our Business

We have a significant amount of indebtedness.

As of March 31, 2020, the aggregate principal amount of our outstanding indebtedness was $39.7 million, consisting of $12.3 million in principal amount of outstanding borrowings under our short-term debt obligations and $27.4 million in long-term related party borrowings. On March 5, 2020, DASAN Network Solutions, Inc., a corporation organized under the laws of the Republic of Korea, and an indirect, wholly owned subsidiary of the Company (“DNS Korea”) entered into a Loan Agreement with DNI, pursuant to which DNS Korea borrowed KRW 22.4 billion ($18.5 million USD) from DNI (the “March 2020 DNI Loan”). DNS Korea loaned such borrowed funds to the Company, a portion of which were used to repay and terminate the Company’s prior credit facilities with PNC Bank, National Association.

In the event of a default and acceleration of our obligations under the March 2020 DNI Loan, we may not be able to obtain replacement financing at all or on commercially reasonable terms or on terms that are acceptable to us. Our level of indebtedness could have important consequences and could materially and adversely affect us in a number of ways, including:

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

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

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

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

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

The agreements governing the March 2020 DNI Loan and the instruments governing our other indebtedness contain certain covenants, limitations, and conditions with respect to the Company and its subsidiaries, including financial reporting obligations and customary events of default and require that certain of our assets be pledged as collateral for such loans. These terms, conditions and collateral requirements could restrict our ability to operate our business. If an event of default occurs under the March 2020 DNI Loan, DNI will be entitled to take various actions, including requiring the immediate repayment of all outstanding amounts borrowed under the March 2020 DNI Loan and seizing and/or selling the assets of the Company and the subsidiary guarantors to satisfy the obligations under the March 2020 DNI Loan.

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

We may need additional capital, and we cannot be certain that additional financing will be available.

We need sufficient capital to fund our ongoing operations and may require additional financing in the future to expand our business, acquire assets or repay or refinance our existing debt. Our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing, any of which have been and may continue to be adversely impacted by the ongoing COVID-19 pandemic. We cannot assure you that additional financing will be available to us on favorable terms when required, or at all. Additionally, while there are no covenants in the March 2020 DNI Loan restricting our ability, or the ability of our subsidiaries, to borrow additional funds, the collateral requirements under the March 2020 DNI Loan may make it difficult to for us to obtain additional secured financing. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution.

If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

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maintain existing operations;

pay ordinary expenses;

fund our business expansion or product innovation;

pursue future business opportunities, including acquisitions;

respond to unanticipated capital requirements;

repay or refinance our existing debt;

hire, train and retain employees; or

respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could seriously harm our business, financial condition, liquidity and operating results. In addition, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions that we have previously taken, and reduce operations in low margin regions, including reductions in headcount, which could have a material adverse effect on our business, operations, financial condition and liquidity.

We may not have the liquidity to support our future operations and capital requirements.

As of March 31, 2020, we had approximately $26.4 million in cash and cash equivalents, including $8.7 million in cash balances held by our international subsidiaries. If our operating performance does not improve, and we are unable to raise additional capital (as discussed in the prior risk factor), we may be unable to adequately fund our existing operations. Our current liquidity condition exposes us to the following risks:

vulnerability to adverse economic conditions in our industry or the economy in general, including those created or exacerbated by the COVID-19 pandemic;

a substantial portion of available cash is dedicated to debt servicing, rather than other purposes, including operations and new product innovation;

limitations on our ability to adequately plan for, or react to, changes in our business and industry, including those created by the COVID-19 pandemic; and

negative investor and customer perceptions about our financial stability, which could limit our ability to obtain financing or acquire customers.

Our current liquidity condition could be further harmed, and we may incur significant losses or expend significant amounts of capital if:

the market for our products develops more slowly than anticipated or if it retracts;

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

•

our capital expenditure forecasts change or prove to be inaccurate;

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

the impact of the COVID-19 pandemic continues to negatively impact our business or further exacerbates any of the foregoing risks.

To meet our liquidity needs and to finance our capital expenditures and working capital needs for our business, we may be required to raise substantial additional capital, reduce our operations (including through the sale of assets or expense reduction measures) or both.

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

We had a net loss of $8.8 million for the three months ended March 31, 2020, and a net loss of $13.3 million for the year ended December 31, 2019. Additionally, we have incurred significant losses in years prior to 2019. We have an accumulated deficit of $38.0 million as of March 31, 2020. We have significant fixed expenses and expect that we will continue to incur substantial manufacturing, research and product development, sales and marketing, customer support, administrative and other expenses in connection with the operation of our business. In addition, we may be required to spend more on research and product development than originally budgeted to respond to industry trends. We may also incur significant new costs related to acquisitions and the integration of new technologies and other acquisitions that may occur in the future. We may not be able to adequately manage costs and expenses or achieve or maintain adequate operating margins. As a result, our ability to sustain profitability in future periods will depend on our ability to generate and sustain higher revenue while maintaining reasonable costs and expense levels. If we fail to generate sufficient revenue to sustain profitability in future periods, we may continue to incur operating losses, which could be substantial, and our stock price could decline.

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

As a result of a variety of factors discussed in ~~Part I, "Item 1A, Risk Factors”~~this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019, our revenues for a particular quarter are difficult to predict. Our revenue and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. The primary factors that could affect our results of operations include the following:

commercial acceptance of our products and services;

fluctuations in demand for network access products;

fluctuation in gross margin;

our ability to attract and retain qualified and key personnel;

the timing and size of orders from customers;

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

new product introductions, enhancements or announcements by our competitors;

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

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

the loss of or failure to renew on commercially reasonable terms any third-party licenses necessary for or relating to our products;

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

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

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

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

changes in accounting rules;

integrating and operating any acquired businesses;

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our ability to achieve targeted cost reductions;

how well we execute on our strategy and operating plans;

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

the economic uncertainty created by the ongoing COVID-19 pandemic, including its potentially adverse impact on all the foregoing factors.

Any of the foregoing factors, or any other factors discussed elsewhere herein or in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, could have a material adverse effect on our business, operations, financial condition and liquidity that could adversely affect our stock price. Further, the ongoing COVID-19 pandemic has resulted in severe disruption and volatility in the financial markets. We anticipate that our stock price and trading volume may be volatile in the future, whether due to the factors described above, volatility in public stock markets generally or otherwise.

In connection with the Keymile Acquisition, we assumed certain of Keymile’s liabilities, which could ~~materially affect~~harm our business, operations, financial condition, ~~or future results. There have been no material changes~~and liquidity.

Pursuant to the ~~risk factors described~~definitive agreement for the Keymile Acquisition, we assumed certain of Keymile’s liabilities, including tax and pension liabilities, and any liabilities that may arise related to breaches of representations and warranties made by Keymile in connection with a prior sale of assets by Keymile that survive through 2022. Although the definitive agreement for the Keymile Acquisition entitles us to indemnification for certain losses incurred related to those assumed liabilities, our right to indemnification from the Keymile sellers is limited by the survival period of the representations and warranties included in the ~~"Risk Factors" section~~Keymile Acquisition definitive agreement and recovery is limited in amount to the purchase price of Keymile, or EUR 10.3 million. Additionally, our ~~Annual Report on Form 10-K for the year ended December 31, 2016. The risks described in~~rights to recovery against such losses is limited under our ~~Annual Report on Form 10-K~~and third party provided warranty and indemnity liability insurance coverage of up to EUR 35.3 million. If such claims or losses exceed such amount, or if they are not indemnifiable under the ~~only risks facing~~Keymile Acquisition definitive agreement, any such losses could negatively impact our ~~company. Additional risks~~financial situation. In addition, our closing of the Keymile Acquisition could give rise to substantial tax liabilities under German law, which could negatively impact our financial condition and ~~uncertainties not currently known to us~~liquidity.

Strategic acquisitions or investments that we have made or that we ~~currently deem~~could pursue or make in the future may disrupt our operations and harm our business, operations, financial condition, and liquidity.

As part of our business strategy, we have made investments in and acquired other companies, including Keymile in 2019, that we believe are complementary to our core business. In the future we may continue to make investments in or acquire other companies or complementary solutions or technologies. Any such acquisition or investment may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable opportunities, whether or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. These transactions could also result in dilutive issuances of equity securities, the incurrence of debt or assumption of liabilities, and increase our risk of litigation exposure, which could adversely affect our operating results. In addition, if the resulting business from such a transaction fails to meet our expectations, our operating results, business, and financial condition may suffer or we may be ~~immaterial also~~exposed to unknown risks or liabilities.

Additionally, any significant acquisition would require the consent of our lenders. Any failure to receive such consent could delay or prohibit us from acquiring companies that we believe could enhance our business. Furthermore, we may dedicate significant time and capital resources in the pursuit of acquisition opportunities and may be unable to find and identify desirable acquisition targets or business opportunities or be successful in entering into an agreement with any particular strategic partner.

Upon the closing of any acquisition transaction, we will need to integrate the acquired organization and its products and services with our legacy operations. The integration process may be expensive, time-consuming and a strain on our resources and our relationships with employees, customers, distributors and suppliers, and ultimately may not be successful. The benefits or synergies we may expect from the acquisition of complementary or supplementary businesses may not be realized to the extent or in the time frame we initially anticipated. Mergers and acquisitions of high-technology companies are inherently subject to increased risk and to many factors outside of our control, and we cannot be certain that our previous or future acquisitions will be successful and will not materially adversely affect our business, operations, financial condition, ~~and/or operating results.~~and liquidity. Any failure to successfully acquire and integrate acquired organizations and their products and services could seriously harm our business, operations, financial condition, and liquidity.

Some of the risks that could affect our ability to successfully integrate acquired businesses, including Keymile’s telecommunication systems business, include those associated with:

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failure to successfully further develop the acquired products or technology;

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

conforming the acquired company’s standards, policies, processes, procedures and controls with our operations;

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

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

coordinating new product and process development, especially with respect to highly complex technologies;

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

hiring and training additional management and other critical personnel;

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

increasing the scope, geographic diversity and complexity of our operations;

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

consolidation of facilities, integration of the acquired company’s accounting, human resource and other administrative functions and coordination of product, engineering and sales and marketing functions;

the geographic distance between the companies;

failure to comply with covenants related to the acquired business;

unknown, underestimated, and/or undisclosed liabilities for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, employment claims, pension liabilities, commercial disputes, tax liabilities and other known and unknown liabilities;

litigation or other claims in connection with the acquired company, including claims for terminated employees, customers, former stockholders or other third parties; and

the disruption, economic and otherwise, created by the COVID-19 pandemic, including its potentially compounding effect on all the foregoing factors.

We have material weaknesses in our internal control over financial reporting, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and which may lead to a decline in our stock price.

~~Item 2. Exhibits~~

We are responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. We assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, the end of our fiscal year. In making this assessment, management used the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee Sponsoring Organizations of the Treadway Commission. Based on our assessment, we have concluded that, as of December 31, 2019, our internal control over financial reporting was not effective because of the unremediated material weaknesses in our internal control over financial reporting described below.

Management determined that the Company did not maintain a sufficient complement of personnel with appropriate accounting knowledge, experience and training in the application of generally accepted accounting principles in the United States (“U.S. GAAP”), including accounting for significant unusual transactions. In addition, the Company did not maintain an effective control environment as it did not appropriately identify internal controls over inventory valuation and revenue. Also, management determined that the Company did not design and maintain effective controls over the financial closing process, including controls surrounding monitoring and review of the activity of its foreign subsidiaries. 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.

If we are not able to correct material weaknesses or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the SEC’s rules and forms will be adversely affected. Such a result could negatively impact the market price and trading liquidity of our common stock, weaken investor confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely affect our business and financial condition.

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

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

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

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

In our markets, principal competitive factors include:

product performance;

interoperability with existing products;

scalability and upgradeability;

conformance to standards;

breadth of services;

reliability;

ease of installation and use;

geographic footprints for products;

ability to provide customer financing;

pricing;

technical support and customer service; and

brand recognition.

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

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

Our future revenue depends significantly on our ability to successfully develop, enhance and market our products and solutions to our target markets. Most network service providers have made substantial investments in their current infrastructure, and they may elect to remain with their current architectures or to adopt new architectures in limited stages or over extended periods of time. A decision by a customer to purchase our products will involve a significant capital investment. We must convince our service provider customers that they will achieve substantial benefits by deploying our products for future upgrades or expansions. We may experience difficulties with product reliability, partnering, and sales and marketing efforts that could adversely affect our business and divert management attention and resources from our core business. We do not know whether a viable market for our products and solutions will develop or be sustainable in our businesses. If these markets do not develop or develop more slowly than we expect, including as a result of conditions created by the ongoing COVID-19 pandemic, our business, operations, financial condition and liquidity will be materially harmed.

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

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

Because our products are complex and are deployed in complex environments, our products may have defects that we discover only after full deployment by our customers, which could have a material adverse effect on our business.

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

Increased tariffs on products and goods that we purchase from off-shore sources (particularly Chinese sources) and changes in international trade policies and relations could have an adverse effect on our customers and operating results.

The pricing of our products to customers and our ability to conduct business with certain customers can be affected by changes in U.S. and other countries’ trade policies. For example, while a trade deal was signed between the U.S. and China on January 15, 2020 that signals a cooling of tensions between the U.S. and China over trade, concerns over the stability of bilateral trade relations remain. Before the trade deal, the United States had recently imposed tariffs on a wide-range of products and goods manufactured in China that are directly or indirectly imported into the United States. In response, various countries and economic regions announced plans or intentions to impose retaliatory tariffs on a wide-range of products they import from the United States. Any newly imposed, announced and threatened U.S. tariffs and retaliatory tariffs could have the effect of increasing the cost of materials we use to manufacture certain products, which could result in lower margins. The tariffs could also result in disruptions to our supply chain, as suppliers struggle to fill orders from companies trying to purchase goods in bulk ahead of announced tariffs. Although we believe that the incremental costs to us of recent tariffs was immaterial, if new tariffs are imposed or if new tariffs apply to additional categories of components used in our manufacturing activities, and if we are unable to pass on the costs of tariffs to our customers, our operating results would be harmed. In addition, changes in the political environment, governmental policies, international trade policies and relations, or U.S.-China relations could result in revisions to laws or regulations or their interpretation and enforcement, trade sanctions, or retaliatory actions by China in response to U.S. actions, which could have an adverse effect on our customers, business plans and operating results.

Sales to communications service providers are especially volatile, and weakness in sales orders from this industry could harm our business, operations, financial condition and liquidity.

Sales activity in the service provider industry depends upon the stage of completion of expanding network infrastructures, the availability of funding, and the extent to which service providers are affected by regulatory, economic and business conditions in the country of operations. Although some service providers may be increasing capital expenditures over the depressed levels that have prevailed over the last few years, weakness in orders from this industry could have a material adverse effect on our business, operations, financial condition and liquidity. Changes in technology, competition, overcapacity, changes in the service provider market, regulatory developments, adverse economic effects caused by the COVID-19 pandemic and constraints on capital availability have had a material adverse effect on many of our service provider customers, with many of these customers going out of business or substantially reducing their expansion plans. These conditions have materially harmed our business and operating results, and we expect that some or all of these conditions may continue for the foreseeable future. Finally, service provider customers typically have longer implementation cycles; require a broader range of services including design services; demand that vendors take on a larger share of risks; often require acceptance provisions, which can lead to a delay in revenue recognition; and expect financing from vendors. All these factors can add further risk to business conducted with service providers.

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

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

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

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

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

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

~~EXHIBIT INDEX~~

The loss of a key customer or a significant deterioration in the financial condition of a key customer could have a material adverse effect on the Company’s results of operations.

The Company’s revenue is dependent on several key customers. A loss of one or more of the Company’s key customers, or a dispute or litigation with one of these key customers could affect adversely our revenue and results of operations. A significant deterioration in the financial condition or bankruptcy filing of a key customer could affect adversely the Company’s business, results of operations, and financial condition.

In addition, the Company is subject to credit risk associated with the concentration of accounts receivable from its key customers. As of March 31, 2020, two (2) customers each represented 19% of net accounts receivable, respectively. As of December 31, 2019, two (2) customers represented 18% and 11% of net accounts receivable. If one or more of the Company’s top customers were to become bankrupt or insolvent or otherwise were unable to pay for the products and services provided by the Company, including as a result of conditions created by the COVID-19 pandemic, the Company may incur significant write-offs of accounts receivable or incur other impairment charges, which may have a material adverse effect on the Company’s results of operations.

We have experienced significant turnover with respect to our executives and our board, and our business could be adversely affected by these and other transitions in our senior management team or if any future vacancies cannot be filled with qualified replacements in a timely manner.

We experienced significant turnover on our executive team and board in both 2018 and 2019, including the departure of our former Chief Financial Officer. As a result of this turnover, our remaining management team has been required to take on increased responsibilities, which could divert attention from key business areas. If we continue to experience similar turnover in the future, we may be unable to timely replace the talent and skills of our management team and directors.

Management transitions are often difficult and inherently cause some loss of institutional knowledge, which could negatively affect our results of operations and financial condition. Our ability to execute our business strategies may be adversely affected by the uncertainty associated with these transitions and the time and attention from the board and management needed to fill any future vacant roles could disrupt our business. If we are unable to successfully identify and attract adequate replacements for future vacancies in our management roles in a timely manner, we could experience increased employee turnover and harm to our business, growth, financial condition, results of operations and cash flows. We face significant competition for executives with the qualifications and experience we seek.

Further, we cannot guarantee that we will not face similar turnover in the future. Our senior management’s knowledge of our business and industry would be difficult to replace, and any further turnover could negatively affect our business, growth, financial conditions, results of operations and cash flows.

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

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

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

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

We rely on the availability of third-party licenses.

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

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

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

There are additional risks to our intellectual property as a result on our international business operations.

We may face risks to our technology and intellectual property as a result of our conducting strategic business discussions outside of the United States, and particularly in jurisdictions that do not have comparable levels of protection of corporate proprietary information and assets such as intellectual property, trademarks, trade secrets, know-how and customer information and records. While these risks are common to many companies, conducting business in certain foreign jurisdictions, housing technology, data and intellectual property abroad, or licensing technology to joint ventures with foreign partners may have more significant exposure. For example, we have shared intellectual properties with entities in China, South Korea, India, Thailand, and Vietnam pursuant to confidentiality agreements in connection with discussions on potential strategic collaborations, which may expose us to material risks of theft of our proprietary information and other intellectual property, including technical data, manufacturing processes, data sets or other sensitive information. For example, our technology may be reverse engineered by the parties or other parties, which could result in our patents being infringed or our know-how or trade secrets stolen. The risk can be by direct intrusion wherein technology and intellectual property is stolen or compromised through cyber intrusions or physical theft through corporate espionage, including with the assistance of insiders, or via more indirect routes.

Claims that our current or future products or components contained in our products infringe the intellectual property rights of others may be costly and time consuming to defend and could adversely affect our ability to sell our products.

The communications equipment industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent, copyright, trademark and other intellectual property rights, that may relate to technologies and related standards that are relevant to us. From time to time, we receive correspondence from companies claiming that our products are using technology covered by or related to the intellectual property rights of these companies and inviting us to discuss or demanding licensing or royalty arrangements for the use of the technology or seeking payment for damages, injunctive relief and other available legal remedies through litigation. These companies also include third-party non-practicing entities (also known as patent trolls) that focus on extracting royalties and settlements by enforcing patent rights through litigation or the threat of litigation. These companies typically have little or no product revenues and therefore our patents could provide little or no deterrence against such companies filing patent infringement lawsuits against us. In addition, third parties have initiated and could continue to initiate litigation against our manufacturers, suppliers, distributors or even our customers alleging infringement or misappropriation of their proprietary rights with respect to existing or future products, or components of our products. For example, various proceedings were commenced against Broadcom Inc. (“Broadcom”), a manufacturer of products for the wireless and broadband communications industry, and other parties alleging patent infringement in various jurisdictions, and in some cases the courts issued rulings adverse to Broadcom enjoining Broadcom from offering, distributing, using or importing products that include the challenged intellectual property. In February 2020, a federal jury found that Broadcom, among others, must pay $1.1 billion to the California Institute of Technology for infringing upon patents. Although we are not party to these proceedings, adverse rulings or injunctive relief awarded against Broadcom or other key suppliers of components for our products could result in delays or stoppages in the shipment of affected components, or require us to recall,

modify or redesign our products containing such components. Regardless of the merit of claims against us or our manufacturers, suppliers, distributors or customers, intellectual property litigation can be time consuming and costly, and result in the diversion of the attention of technical and management personnel. Any such litigation could force us to stop manufacturing, selling, distributing, exporting, incorporating or using products or components that include the challenged intellectual property, or to recall, modify or redesign such products. In addition, if a party accuses us of infringing upon its proprietary rights, we may have to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all. If we are unsuccessful in any such litigation, we could be subject to significant liability for damages and loss of our proprietary rights. Any of these events or results could have a material adverse effect on our business, operations, financial condition and liquidity.

Our collection, processing, storage, use, and transmission of personal data could give rise to liabilities as a result of governmental regulation, increasing legal requirements.

We collect, process, store, use, and transmit personal data on a daily basis. Personal data is increasingly subject to legal and regulatory protections around the world, which vary widely in approach and which possibly conflict with one another. In recent years, for example, U.S. legislators and regulatory agencies, such as the Federal Trade Commission, as well as U.S. states have increased their focus on protecting personal data by law and regulation and have increased enforcement actions for violations of privacy and data protection requirements. The European Commission also recently approved and adopted the General Data Protection Regulation (GDPR), a recent data protection law, which became effective in May 2018. These data protection laws and regulations are intended to protect the privacy and security of personal data that is collected, processed, and transmitted in or from the relevant jurisdiction. The GDPR established new requirements applicable to the processing of personal data, affords new data protection rights to individuals and imposes significant penalties for data breaches. Individuals also have a right to compensation under the GDPR for financial or non-financial losses. Implementation of and compliance with these laws and regulations may be more costly or take longer than we anticipate, or could otherwise adversely affect our business operations, which could negatively impact our financial position or cash flows. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us, subject us to negative publicity and significant penalties and ultimately cause an adverse effect on our business.

If we experience a significant disruption in, or breach in security of, our information technology systems, our business could be adversely affected.

We rely on several centralized information technology systems to provide products and services, maintain financial records, process orders, manage inventory, process shipments to customers and operate other critical functions. If we experience a prolonged system disruption in the information technology systems that involve our interactions with customers or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In addition, our information technology systems could be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. Furthermore, security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to the company or our employees, partners, customers or suppliers, which could result in significant financial, legal or reputational damage to the Company. In response to the COVID-19 pandemic, a large portion of our workforce is working remotely, and such remote working could exacerbate any of the foregoing risks.

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

We are subject to a variety of federal, state, local and foreign environmental regulations. If we fail to comply with any present or future regulations, we could be subject to liabilities, the suspension of production or prohibitions on the sale of our products. In addition, such regulations could require us to incur other significant expenses to comply with environmental regulations, including expenses associated with the redesign of any non-compliant product. From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced and the impact that they could have on our operations or results. For example, in 2003 the European Union enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive and the Waste Electrical and Electronic Equipment Directive, for implementation in European Union member states. We are aware of similar legislation that is currently in force or has been considered in the U.S., as well as other countries, such as Japan and China. Implementation of and compliance with these laws may be costly or could otherwise adversely affect our business operations, which could negatively impact our financial position or cash flows. Our failure to comply with any such regulatory requirements or contractual obligations could result in us being liable for costs, fines, penalties or third-party claims, and could jeopardize our ability to conduct business in countries or jurisdictions where such regulations apply.

Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our international activities could subject us to significant civil or criminal penalties.

Failure to comply with the Foreign Corrupt Practices Act could subject us to significant civil or criminal penalties. A significant portion of our revenues is generated from sales outside of the United States. As a result, we are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”). The FCPA generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by employees, strategic or local partners or other representatives. If we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the U.S. and elsewhere could seek to impose civil and/or criminal fines and penalties which could have an adverse effect on our results of operations, financial condition and cash flow.

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

Market turbulence and weak economic conditions, including those caused by the COVID-19 pandemic, as well as concerns about energy costs, geopolitical issues, the availability and cost of credit, business and consumer confidence, and unemployment could impact our business in a number of ways, including:

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

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

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

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

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

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

We currently have significant operations in India, Korea, and Vietnam, as well as sales and technical support teams in various locations around the world. We continue to consider opportunities to expand our international operations in the future. The successful management and expansion of our international operations requires significant human effort and the commitment of substantial financial resources. Further, our international operations may be subject to certain risks, disruptions and challenges that could materially harm our business, operations, financial condition, and liquidity, inclu ding:

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

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

political unrest or instability, acts of terrorism or war in countries where we or our suppliers or customers have operations, including heightened security concerns stemming from North Korea in relation to our operations in Korea;

political considerations that affect service provider and government spending patterns;

differing technology standards or customer requirements;

developing and customizing our products for foreign countries;

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

longer accounts receivable collection cycles and financial instability of customers;

requirements for additional liquidity to fund our international operations;

pandemics, epidemics and other public health crises, such as the COVID-19 pandemic;

difficulties and excessive costs for staffing and managing foreign operations;

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

potentially adverse tax consequences; and

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

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

We face exposure to foreign currency exchange rate fluctuations.

We conduct significant business in Korea, Japan, India, Vietnam, Europe, Middle East and Latin America, all of which subject us to foreign currency exchange rate risk.

We have in the past and may in the future undertake a hedging program to mitigate the impact of foreign currency exchange rate fluctuations. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign currency exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments, which could adversely affect our business, operations, financial condition, and liquidity. As such, our results of operations and our cash flows could be impacted by changes in foreign currency exchange rates.

Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may damage our facilities or the facilities of third parties on which we depend, and could materially impact our supply chain and the operations of our customers and suppliers.

Our global headquarters are located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other natural disaster or power shortages or outages could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, in the event any of our facilities or the facilities of our suppliers, contract manufacturers, third-party service providers, or customers, is affected by natural disasters, such as earthquakes, tsunamis, power shortages or outages, floods or monsoons, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic to the extent not already occurring, political crises, such as terrorism, war, political instability or other conflict, or other events outside of our control, our business and operating results could suffer. Disasters occurring at our or our vendors’ facilities also could impact our reputation.

Risks Related to our Industry

The telecommunications networking business requires the application of complex revenue and expense recognition rules and the regulatory environment affecting generally accepted accounting principles is uncertain. Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our business.

The nature of our business requires the application of complex revenue and expense recognition rules and the current regulatory environment affecting U.S. GAAP is uncertain. Significant changes in U.S. GAAP could affect our financial statements going forward and may cause adverse, unexpected financial reporting fluctuations and harm our operating results. U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission (SEC) and various bodies formed to promulgate and interpret appropriate accounting principles. In addition, we have in the past and may in the future need to significantly change our customer contracts, accounting systems and processes when we adopt future or proposed changes in accounting principles. The cost and effect of these changes may negatively impact our results of operations during the periods of transition.

Changes in government regulations related to our business could harm our operations, financial condition, and liquidity.

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

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

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

Risks Related to our Common Stock

DNI owns a significant amount of our outstanding common stock and has the ability to exert significant influence or control over any matters that require stockholder approval, including the election of directors and the approval of certain transactions, and DNI’s interests may conflict with our interests and the interests of other stockholders.

As of March 31, 2020, DNI owned approximately 44.1% of the outstanding shares of our common stock, representing a significant amount of the votes entitled to be cast by the holders of our outstanding common stock at a stockholder meeting. Due to its significant ownership percentage of our common stock, DNI has the ability to substantially influence or control the outcome of any matter submitted for the vote of our stockholders, including the election of directors and the approval of certain transactions. The interests of DNI may conflict with the interests of our other stockholders or with holders of our indebtedness and may cause us to take actions that our other stockholders or holders of our indebtedness do not view as beneficial.

DNI’s large concentration of stock ownership may make it more difficult for a third party to acquire us or discourage a third party from seeking to acquire us. Any potential third-party acquirer would most likely need to negotiate any such transaction with DNI, and the interests of DNI with respect to such transaction may be different from the interests of our other stockholders or with holders of our indebtedness.

Additionally, two of the Company’s directors serve as executive officers of DNI – Min Woo Nam is the Chief Executive Officer and Chairman of the Board of Directors of DNI and Choon Yul Yoo is the Chief Operating Officer of DNI. Messrs. Nam and Yoo owe fiduciary duties to us and, in addition, have duties to DNI. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and DNI.

Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders (except for causes of action arising under the federal securities laws), which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated bylaws (the “Bylaws”) provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for:

any derivative action or proceeding brought on behalf of the Company;

any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s stockholders;

any action asserting a claim against the Company arising pursuant to any provision of the General Corporation Law of the State of Delaware, the Certificate of Incorporation or our Bylaws; and

any action asserting a claim against the Corporation governed by the internal affairs doctrine, in each such case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein; provided, that with respect to any derivative action or proceeding brought on our behalf to enforce any liability or duty created by the Exchange Act or the rules and regulations thereunder, the exclusive forum will be the federal district courts of the United States. The exclusive forum provision in our Bylaws does not apply to resolving any complaint asserting a cause of action arising under the Securities Act of 1933.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. The Supreme Court of the State of Delaware recently determined that the exclusive forum provision of federal district courts of the United States for resolving any complaint asserting a cause of action arising under the Securities Act is enforceable.

The limitation of liability and indemnification provisions could harm our stockholders’ investments and discourage them from suing our directors for breach of their fiduciary duties.

The limitation of liability and indemnification provisions in our Certificate of Incorporation, as restated, may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

There is a limited public market of our common stock.

There is a limited public market for our common stock. The average daily trading volume in our common stock during the 3 months ended March 31, 2020 was approximately 67,000 shares per day. We cannot provide assurances that a more active trading market will develop or be sustained. As a result of low trading volume in our common stock, the purchase or sale of a relatively small number of shares of our common stock could result in significant price fluctuations and it may be difficult for holders to sell their shares without depressing the market price of our common stock.

DNI, our largest stockholder, owned 9.5 million shares of our common stock as of March 31, 2020 and has the right to require us to register, from time to time, the resale of those shares with the SEC. If DNI were to exercise its registration rights, its shares would become eligible for resale upon registration without restriction as to volume limitations. Our stock price could suffer a significant decline as a result of any sudden increase in the number of shares sold in the public market or market perception that the increased number of shares available for sale will exceed the demand for our common stock.

We do not expect to declare or pay dividends in the foreseeable future.

We do not expect to declare or pay dividends in the foreseeable future, as we anticipate that we will invest future earnings in the development and growth of our business. Therefore, holders of our common stock will not receive any return on their investment unless they sell their securities, and holders may be unable to sell their securities on favorable terms or at all.

Future issuances of additional equity securities could result in dilution of existing stockholders’ equity ownership.

We may determine from time to time to issue additional equity securities to raise additional capital, support growth, or, as we have in recent years, to make acquisitions. Further, we may issue stock options, grant restricted stock awards or other equity awards to retain, compensate and/or motivate our employees and directors. These issuances of our securities could dilute the voting and economic interests of existing stockholders.

Item 5.

Other Information

None.

Item 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.

EXHIBIT INDEX

Exhibit Number		Description

~~Exhibit~~ ~~Number~~ 2.1	~~Description~~


~~10.1~~	~~Letter agreement,~~Share Transfer Agreement dated as of July ~~3, 2017,~~31, 2019 by and ~~among~~between Handysoft, Inc. and DASAN Zhone Solutions, Inc.~~, ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne~~ (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 5, 2019).

10.1		Loan Agreement dated March 3, 2020 and entered into as of March 4, 2020 by and between DASAN Networks, Inc.~~, Paradyne Corporation, Dasan~~ and DASAN Network Solutions, Inc. ~~and Wells Fargo Bank, National Association~~(Korea) (incorporated by reference to Exhibit 10.1 ~~of registrant's~~to the Company’s Current Report on Form 8-K ~~dated July 3, 2017)~~filed with the SEC on March 10, 2020).
~~10.2~~
10.2		~~General Release of Claims,~~Intellectual Property Pledge Agreement dated March 3, 2020 and entered into as of ~~September 11, 2017,~~March 4, 2020 by and between DASAN Networks, Inc. and DASAN Network Solutions, Inc. (Korea) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 10, 2020).

10.3		Share Pledge Agreement dated March 3, 2020 and entered into as of March 4, 2020 by and among DASAN Networks, Inc., DASAN Network Solutions, Inc. (Korea) and DASAN Network Solutions, Inc. (California) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 10, 2020).

10.4		Agreement of Sublease dated February 24, 2020 by and between Huawei Technologies USA, Inc. and Dasan Zhone Solutions, Inc. ~~and James Norrod~~(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2020).
~~10.3~~
10.5		~~General Release~~Agreement of ~~Claims,~~Sublease dated ~~as of September 11, 2017,~~February 24, 2020 by and between ~~DASAN~~Futurewei Technologies, Inc. and Dasan Zhone Solutions, Inc. ~~and Kirk Misaka~~(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2020).
~~31.1~~
31.1		Certification of Chief Executive Officer ~~and Acting~~Pursuant 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~~	~~XBRL Instance Document~~
101.SCH		XBRL Taxonomy Extension Schema
~~101.CAL~~
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
~~101.DEF~~
101.DEF		XBRL Taxonomy Extension Definition Linkbase
~~101.LAB~~
101.LAB		XBRL Taxonomy Extension Labels Linkbase
~~101.PRE~~
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

~~SIGNATURES~~

SIGNATURES

Pursuant to the ~~retirements~~requirements 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, INC.

Date: ~~November 14, 2017~~May 11, 2020	~~By:~~
	By:	/s/ IL YUNG KIM
	Name:	Il Yung Kim
	Title:	President and Chief Executive Officer ~~and Acting~~

	By:	/s/ THOMAS J. CANCRO
	Name:	Thomas J. Cancro
	Title:	Chief Financial Officer and Treasurer
		(Principal Financial and
		Accounting Officer)



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

~~7195 Oakport Street~~ ~~Oakland,~~ 1350 South Loop Road, Suite 130 Alameda, California		~~94621~~ 94502
(Address of principal executive offices)		(Zip code)

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



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



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



		As of May 5, 2020 there were 21,513,373 shares outstanding of the registrant’s common stock, $0.001 par value.

		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 Loss	6 4
	Unaudited Condensed Consolidated Statements of Stockholders' Equity and Non-Controlling Interest	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 23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34 32
Item 4.	Controls and Procedures	35 32

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	37 33
Item 1A.	Risk Factors	37 33
Item 2.5.	~~Exhibits~~Other Information	37 50
Item 6.	Exhibits	50
	Signatures	38 52



	September 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	10,145		$	17,893
Restricted cash	13,058			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 receivables	43,478			38,324
Related parties	12,941			13,311
Other receivables:
Others	13,851			12,068
Related parties	22			171
Inventories	31,966			31,032
Prepaid expenses and other current assets	3,198			4,131
Total current assets	128,659			124,573
Property and equipment, net	5,812			6,288
Goodwill	3,977			3,977
Intangible assets, net	7,174			8,767
Other assets	1,536			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 parties	106			430
Short-term debt:
Others	18,382			17,599
Related parties	3,544			—
Other payables:
Others	1,691			2,040
Related parties	210			6,940
Deferred revenue	2,073			1,901
Accrued and other liabilities	10,108			8,163
Total current liabilities	71,338			67,754
Long-term debt - related parties	5,000			6,800
Deferred revenue	1,875			1,674
Other long-term liabilities	2,581			2,351
Total liabilities	80,794			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 value	16			16
Additional paid-in capital	89,873			89,174
Other comprehensive income (loss)	(1,052		)	(2,815		)
Accumulated deficit	(23,080		)	(19,923		)
Total stockholders’ equity	65,757			66,452
Non-controlling interest	607			416
Total stockholders’ equity and non-controlling interest	66,364			66,868
Total liabilities, stockholders’ equity and non-controlling interest	$	147,158		$	145,447



	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 parties	5,925			6,468			27,657			22,408
Total net revenue	66,438			31,240			178,491			90,832
Cost of revenue:
Products and services	38,643			16,483			96,127			48,750
Products and services - related parties	5,569			5,406			22,851			19,118
Amortization of intangible assets	153			51			459			51
Total cost of revenue	44,365			21,940			119,437			67,919
Gross profit	22,073			9,300			59,054			22,913
Operating expenses:
Research and product development	8,804			5,885			27,028			15,583
Selling, marketing, general and administrative	11,454			8,278			32,506			16,691
Amortization of intangible assets	154			251			1,191			259
Total operating expenses	20,412			14,414			60,725			32,533
Operating income (loss)	1,661			(5,114		)	(1,671		)	(9,620		)
Interest income	36			31			82			137
Interest expense	(263		)	(204		)	(793		)	(600		)
Other income (loss), net	60			(112		)	43			(41		)
Income (loss) before income taxes	1,494			(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 share	16,382			11,139			16,380			10,046



	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



	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		)

Delaware		22-3509099



		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



	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



		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



		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



	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	)



	Operating Leases
Year ending December 31:
2017 (remainder of the year)	$	967
2018	3,359
2019	2,496
2020	2,358
2021	2,264
Thereafter	8,722
Total minimum lease payments	$	20,166



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