UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10-Q/A~~

~~(Amendment No. 1)~~10-Q

(Mark One)



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

For the quarterly period ended ~~September~~June 30, ~~2016~~2017



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

For the transition period from to

000-32743

(Commission File Number)

DASAN ZHONE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)



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

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

(510) 777-7000

(Registrant’s telephone number, including area code)

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

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

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



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

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

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

As of ~~November 2, 2016,~~September 20, 2017, there were approximately ~~16,374,770~~16,385,455 shares ~~(post reverse split)~~ of the registrant’s common stock outstanding.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets	4
	Unaudited Condensed Consolidated Statements of Comprehensive Loss	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2823
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4032
Item 4.	Controls and Procedures	4033

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4335
Item 1A.	Risk Factors	4335
Item 6.	Exhibits	5535
	Signatures	5636

~~EXPLANATORY NOTE~~

DASAN Zhone Solutions, Inc. (the "Company") is filing this Amendment No. 1 on Form 10-Q/A (this "Form 10-Q/A") to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, which was originally filed on November 14, 2016 (the "Original Form 10-Q"), to restate and amend the Company’s previously issued unaudited condensed consolidated financial statements and related financial formation as of, and for the three and nine months ended, September 30, 2016, which were included in the Original Form 10-Q. In addition, this Form 10-Q/A amends certain related disclosures (including amended disclosure relating to our evaluation of our disclosure controls and procedures and the removal of the references to “Not Reviewed” in the unaudited condensed consolidated financial statements and in the headings of tables of financial information), and includes certain expanded disclosures in “Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” related to the expected impact of the Merger (defined below).

As previously reported, on September 9, 2016, the acquisition of Dasan Network Solutions, Inc. ("DNS") was consummated 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"). The Merger has been accounted for as a reverse acquisition under which DNS was considered the accounting acquirer of the Company. 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 herein as "Legacy Zhone."

As previously disclosed in the Company’s Current Report on Form 8-K filed on February 24, 2017 with the Securities and Exchange Commission (the "SEC"), on February 20, 2017, the Audit Committee of the Company’s Board of Directors concluded, in consultation with management and after informing the Company’s independent registered public accounting firm, that, the incorrect application of generally accepted accounting principles resulted in material misstatements and a restatement of the Company's unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016. As a result, the Company's unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016 contained in the Original Form 10-Q should no longer be relied upon. Refer to Note 1 of the Notes to Consolidated Financial Statements for additional information.

To assist in review of this filing, this Form 10-Q/A sets forth the Original Form 10-Q in its entirety; however, this Form 10-Q/A amends and restates only the following Items of the Original Form 10-Q and only with respect to matters affected by the restatement and the associated material weaknesses and certain expanded disclosures related to the expected impact of the Merger: Items 1, 2 and 4 of Part I and Item 1A of Part II. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Form 10-Q has been amended to include currently dated certifications from the Company’s Co-Chief Executive Officers and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except for the foregoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Form 10-Q and the Company has not updated the disclosure contained herein to reflect events that occurred as of a later date.

The financial results of the Company for the three and nine months ended September 30, 2016 presented in the Original Form 10-Q and this Form 10-Q/A reflect the operating results of DNS and its consolidated subsidiaries for the period commencing on the first day of the applicable period through September 8, 2016 and the operating results of both DNS and Legacy Zhone and their respective consolidated subsidiaries for the period September 9 through September 30, 2016. Such results are compared to the financial results of DNS and its consolidated subsidiaries for the three and nine months ended September 30, 2015. The balance sheet of the Company as of September 30, 2016 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, the Company’s financial results for the three and nine months ended September 30, 2016 are not comparable to its financial results for the three and nine months ended September 30, 2015. Refer to Notes 1 and 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)

September 30,
2016 December 31,
2015
(As restated)
Assets
Current assets:
Cash and cash equivalents $ 33,563
$ 10,015
Restricted cash 5,209
3,844
Short-term financial instruments 821
—
Accounts receivable, net of allowances for sales returns and doubtful accounts of $5,512 as of September 30, 2016 and $868 as of December 31, 2015
Trade receivables 30,247
27,084
Related parties 9,031
5,644
Other receivables
Related parties 385
1,742
Others 12,383
11,268
Current deferred income tax assets 459
327
Inventories, net 34,596
13,900
Prepaid expenses and other current assets 3,959
951
Total current assets 130,653
74,775
Property and equipment, net 6,258
2,251
Goodwill 3,513
693
Intangible assets, net 10,236
3
Non-current deferred income tax assets 2,114
1,058
Other assets 1,778
4,811
Total assets $ 154,552
$ 83,591
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 20,859
$ 14,936
Short-term debt 20,141
21,848
Other payables
Related parties 13,096
133
Others 1,603
1,352
Accrued and other liabilities 10,562
2,982
Total current liabilities 66,261
41,251
Long-term debt - related party 6,800
—
Other long-term liabilities 3,681
—
Other non-current financial liabilities 233
510
Total liabilities 76,975
41,761
Commitments and contingencies (Note 11) —
—
Stockholders’ equity:
Common stock, authorized 36,000 shares, 16,375 shares and 9,493 shares of the Company outstanding as of September 30, 2016 and December 31, 2015, respectively, at $0.001 par value (as restated for stock split) (1). 16
9
Additional paid-in capital (1) 88,966
47,680
Other comprehensive loss (income) 905
(1,775 )
Accumulated deficit (12,774 ) (4,222 )
Non-controlling interest 464
138
Total stockholders’ equity 77,577
41,830
Total liabilities and stockholders’ equity $ 154,552
$ 83,591

~~(1) Authorized and outstanding share amounts reflect the one-for-five reverse stock split effected on February 28, 2017.~~



	June 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	9,902		$	17,893
Restricted cash	8,340			6,650
Short-term investments	—			993
Accounts receivable, net of allowances for sales returns and doubtful accounts of $1,305 as of June 30, 2017 and $1,143 as of December 31, 2016:
Trade receivables	38,051			38,324
Related parties	23,266			13,311
Other receivables:
Others	14,234			12,068
Related parties	—			171
Inventories	35,149			31,032
Prepaid expenses and other current assets	3,817			4,131
Total current assets	132,759			124,573
Property and equipment, net	6,079			6,288
Goodwill	3,977			3,977
Intangible assets, net	7,447			8,767
Other assets	1,797			1,842
Total assets	$	152,059		$	145,447
Liabilities, Stockholders’ Equity and Non-controlling Interest
Current liabilities:
Accounts payable:
Others	$	32,610		$	30,681
Related parties	442			430
Short-term debt:
Others	16,686			17,599
Related parties	5,310			—
Other payables:
Others	1,438			2,040
Related parties	8,939			6,940
Deferred revenue	2,845			1,901
Accrued and other liabilities	9,270			8,163
Total current liabilities	77,540			67,754
Long-term debt - related parties	5,000			6,800
Deferred revenue	1,947			1,674
Other long-term liabilities	2,534			2,351
Total liabilities	87,021			78,579
Commitments and contingencies (Note 11)
Stockholders’ equity and non-controlling interest:
Common stock, authorized 36,000 shares, 16,381 shares and 16,375 shares outstanding as of June 30, 2017 and December 31, 2016 at $0.001 par value	16			16
Additional paid-in capital	89,650			89,174
Other comprehensive income (loss)	(770		)	(2,815		)
Accumulated deficit	(24,479		)	(19,923		)
Total stockholders' equity	64,417			66,452
Non-controlling interest	621			416
Total stockholders’ equity and non-controlling interest	65,038			66,868
Total liabilities, stockholders’ equity and non-controlling interest	$	152,059		$	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						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
	(As Restated)						(As Restated)
Net revenue:
Net revenue	$	32,080		$	22,591		$	92,664		$	93,339		$	49,080		$	25,619		90,321			$	43,652
Cost of revenue
Net revenue - related parties													10,861			8,633			21,732			15,940
Total net revenue													59,941			34,252			112,053			59,592
Cost of revenue:
Products and services	22,510			16,774			68,814			69,287			32,025			17,935			57,484			32,267
Products and services - related parties													8,574			7,315			17,282			13,712
Amortization of intangible assets	51			—			51			—			153			—			306			—
Total cost of revenue													40,752			25,250			75,072			45,979
Gross profit	9,519			5,817			23,799			24,052			19,189			9,002			36,981			13,613
Operating expenses:
Research and product development	5,885			4,859			15,582			16,546			8,995			5,019			18,224			9,698
Selling, general and administrative	8,283			3,937			16,976			12,454
Selling, marketing, general and administrative													10,453			4,148			21,052			8,413
Amortization of intangible assets	251			2			259			4			544			—			1,037			8
Total operating expenses	14,419			8,798			32,817			29,004			19,992			9,167			40,313			18,119
Operating loss	(4,900		)	(2,981		)	(9,018		)	(4,952		)	(803		)	(165		)	(3,332		)	(4,506		)
Interest income	31			27			138			92			20			58			46			106
Interest expense	(204		)	(114		)	(601		)	(378		)	(256		)	(202		)	(530		)	(396		)
Other income, net	(193		)	583			(128		)	780			264			(28		)	(17		)	71
Loss before income taxes	(5,266		)	(2,485		)	(9,609		)	(4,458		)	(775		)	(337		)	(3,833		)	(4,725		)
Income tax (benefit) expense	(610		)	295			(1,041		)	480
Income tax expense (benefit)													99			196			539			(431		)
Net loss	(4,656		)	(2,780		)	(8,568		)	(4,938		)	(874		)	(533		)	(4,372		)	(4,294		)
Less: Net loss attributable to non-controlling interest	(56		)	—			(17		)	—
Net income attributable to non-controlling interest													(65		)	33			184			39
Net loss attributable to DASAN Zhone Solutions, Inc.	(4,600		)	(2,780		)	(8,551		)	(4,938		)	$	(809	)	$	(566	)	$	(4,556	)	$	(4,333	)
Other comprehensive income, net of foreign currency translation adjustments	2,340			1,009			2,741			107

Foreign currency translation adjustments													(824		)	(110		)	2,066			399
Comprehensive loss	$	(2,316	)	$	(1,771	)	$	(5,827	)	$	(4,831	)	(1,698		)	(643		)	(2,306		)	(3,895		)
Less: Comprehensive income attributable to non-controlling interest	(54		)	—			48			—
Comprehensive income attributable to non-controlling interest													(64		)	88			205			102
Comprehensive loss attributable to DASAN Zhone Solutions, Inc.	$	(2,262	)	$	(1,771	)	$	(5,875	)	$	(4,831	)	$	(1,634	)	$	(731	)	$	(2,511	)	$	(3,997	)
Basic and diluted net loss per share (as restated) (1)	$	(0.42	)	$	(0.30	)	$	(0.85	)	$	(0.53	)
Weighted average shares outstanding used to compute basic and diluted net loss per share (as restated) (1)	11,139			9,331			10,046			9,266

Basic and diluted net loss per share attributable to DASAN Zhone Solutions, Inc.													$	(0.05	)	$	(0.06	)	$	(0.28	)	$	(0.46	)
Weighted average shares outstanding used to compute basic and diluted net loss per share													16,380			9,493			16,380			9,493

~~(1) All per share and weighted average share amounts have been adjusted to retroactively reflect the one-for-five reverse stock split effected on February 28, 2017.~~

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)


	Nine Months Ended
	September 30,						Six Months Ended
	2016			2015			June 30,
	(As Restated)						2017			2016
Cash flows from operating activities:
Net loss	$	(8,568	)	$	(4,938	)	$	(4,372	)	$	(4,294	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,164			1,112			2,353			537
Stock-based compensation	128			—			475			—
Unrealized loss (gain) on foreign currency transactions	1,655			(2,342		)
Deferred income taxes	(1,069		)	480
Unrealized gain on foreign currency transactions							240			407
Deferred taxes							—			(723		)
Changes in operating assets and liabilities:
Accounts receivable	12,876			11,122			(8,659		)	(1,921		)
Inventories	(3,102		)	1,331			(3,720		)	(3,459		)
Prepaid expenses and other assets	2,320			(2,504		)	(936		)	(7,995		)
Accounts payable	(5,814		)	(16,779		)	3,689			803
Accrued and other liabilities	13,598			5,019
Accrued expenses							4,118			17,155
Net cash provided by (used in) operating activities	13,188			(7,499		)	(6,812		)	510
Cash flows from investing activities:
Cash acquired through the Merger	7,013			—
(Increase) decrease in restricted cash	(1,046		)	2,526
Decrease (increase) in restricted cash							(1,285		)	(248		)
Decrease in short-term and long-term loans to others	1,891			285						429
Increase in short-term and long-term loans to others	(1,386		)	(645		)	—			(2,169		)
Acquisition of other current financial assets	(821		)	106
Proceeds of other current financial assets	—			86
Proceeds from disposal of property and equipment	98			6
Proceeds from short-term investments							1,463			—
Purchase of short-term investments							(430		)	—
Proceeds from disposal of property and equipment and other assets							6			41
Purchase of property and equipment	(401		)	(541		)	(663		)	(143		)
Purchase of intangible assets	(92		)	—
Net cash provided by investing activities	5,256			1,823
Purchase of intangible asset							(31		)	(90		)
Net cash provided by (used in) investing activities							(940		)	(2,180		)
Cash flows from financing activities:
Repayments of borrowings	(23,088		)	(16,407		)	(9,581		)	(1,308		)
Proceeds from short-term borrowings	19,769			22,177			8,679			194
Proceeds from long-term borrowings	6,800			—			—			1,800
Government grants received	31			156			—			30
Proceeds from issuance of common stock	—			1,600			1			—
Decrease in capital surplus	—			(3,002		)
Net cash provided by financing activities	3,512			4,524
Net cash provided by (used in) financing activities							(901		)	716
Effect of exchange rate changes on cash	1,592			(440		)	662			59
Net increase (decrease) in cash and cash equivalents	23,548			(1,592		)	(7,991		)	(895		)
Cash and cash equivalents at beginning of period	10,015			6,786			17,893			9,095
Cash and cash equivalents at end of period	$	33,563		$	5,194		$	9,902		$	8,200
Supplemental disclosures of cash flow information:
Shares of the Company's common stock held in escrow	949			—
Cash paid during period for:
Taxes	$	463		$	1,482
Interest	577			704

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed 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 to, collectively with its subsidiaries, as ~~"DASAN Zhone"~~"DZS" or the "Company") is a global ~~leader in broad-based~~provider of network access ~~solutions.~~solutions and communications equipment for service provider and enterprise networks. The Company provides ~~solutions in five major product areas:~~a wide array of reliable, cost-effective networking technologies, including broadband access, Ethernet switching, mobile backhaul, ~~passive optical~~Passive Optical LAN ~~("POLAN")~~ and ~~software defined~~software-defined networks, ~~("SDN"). More~~to a diverse customer base that includes more than ~~750 of the world's most innovative network operators, service providers and enterprises turn to DASAN Zhone for fiber access transformation.~~1,000 customers in more than 50 countries worldwide.

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


(b)	~~Consolidated Subsidiaries~~Going Concern

~~Details~~The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("U.S. GAAP"), assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Accordingly, the 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's consolidated subsidiaries~~Company to continue as a going concern.

The Company has incurred significant losses to date and losses from operations may continue. The Company incurred net losses of $4.4 million and $15.3 million for the six months ended June 30, 2017 and for the year ended December 31, 2016, respectively. The Company had accumulated deficit of $24.5 million and working capital of $55.2 million as of ~~September~~June 30, ~~2016~~2017. As of June 30, 2017, the Company had approximately $9.9 million in cash and ~~December 31, 2015~~cash equivalents, which included $0.9 million in cash balances held by the Company's Korean subsidiary, and $27.0 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 $4.1 million in aggregate borrowing availability under its revolving credit facilities as of June 30, 2017. The Company had $8.6 million committed as security for letters of credit under these facilities as of June 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 ~~follows:~~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

Percentage of ownership (%)
Location September 30, 2016 December 31, 2015
Dasan Network Solutions, Inc. ("DNS") US 100.00 % 100.00 %
Dasan Network Solutions, Inc. ("DNS Korea") Korea 100.00 % 100.00 %
DASAN Network Solutions Japan Co., Ltd. (formerly: HandySoft Japan Co., Ltd.) Japan 69.09 % 50.25 %
DASAN Vietnam Co., Ltd Vietnam 100.00 % N/A

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 condensed consolidated financial statements do not include any adjustments that may result from the outcome of the uncertainties set forth above.


(c)	Risks and Uncertainties

As result of the Merger, DNI owned approximately 58% of the outstanding shares of the Company's common stock as of June 30, 2017. Thereafter, 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. 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 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 June 30, 2016. Correction of this error resulted in a decrease in total net revenue of $1.1 million, an increase in net loss of $0.6 million and an increase in basic and diluted net loss per share attributable to DZSI of $0.06 for the quarter ended June 30, 2016 as well as a decrease in net revenue of $1.5 million, an increase in net loss of $0.9 million and an increase in basic and diluted net loss per share attributable to DZSI of $0.09 for the six months ended June 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 $4.6 million to related party revenues and costs of $3.6 million to related party cost of revenue for the quarter ended June 30, 2016. This further resulted in the Company reclassifying revenues of $9.4 million to related party revenues and costs of $7.5 million to related party cost of revenue for the six months ended June 30, 2016. Finally, an understatement of the cash flows used in investing activities of $0.7 million was corrected in the statement of cashflows for the six months ended June 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 contained in our proxy statement filed with the SEC on August 8, 2016 affected by the errors has not been amended.


(e)	Basis of Presentation

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

The 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 in accordance with accounting principles generally accepted in the United States of America ("GAAP").~~presented. All ~~significant inter-company~~intercompany transactions and balances have been eliminated in consolidation. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the

Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission.

As discussed more fully in Note 2, ~~on September 9, 2016, the acquisition of Dasan Network Solutions, Inc. ("DNS") was consummated 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. For periods through September 8, 2016, Zhone Technologies, Inc.~~ is ~~referred to as "Legacy Zhone."~~

At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by DASAN 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. As a result, immediately following the effective time of the Merger, DASAN 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 Merger has been accounted for~~treated as a reverse acquisition ~~under which~~for accounting purposes, with DNS ~~was considered~~as the ~~accounting~~ acquirer of the Company. As such, the consolidated financial results of the Company for the three and ~~nine~~six months ended ~~September~~June 30, 2016 presented in this Form 10-Q/A reflect the operating results of DNS and its consolidated subsidiaries for the period commencing on the first day of the applicable period through September 8, 2016 and the operating results of both DNS and Legacy Zhone and their respective consolidated subsidiaries for the period

~~September 9 through September 30, 2016. Such results~~2017 are compared to the financial results offor DNS and its consolidated subsidiaries for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The balance sheet of the Company ~~as of September 30, 2016 includes~~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~~six months ended ~~September~~June 30, ~~2016~~2017 are not comparable to its financial results for the three and ~~nine~~six months ended ~~September~~June 30, 2015. The fourth quarter ending December 31, 2016 will be the first quarter in which the Company's financial results reflect a full quarter of operating results for both DNS and Legacy Zhone and their respective consolidated subsidiaries.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.


~~(d)~~	~~Reclassification of Prior Year Presentation~~

~~Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.~~


~~(e)~~(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 ~~its common stock. All share and per share information included in~~ the Company's ~~unaudited condensed consolidated financial statements~~common stock and ~~accompanying notes presented herein reflect~~reduced the ~~retroactive effect~~authorized shares of the ~~one-for-five~~Company's common stock from 180 million to 36 million. As a result of the reverse stock split, ~~as discussed in Note 14.~~


~~(f)~~	~~Risks and Uncertainties~~

~~The accompanying condensed consolidated financial statements have been prepared assuming that~~ the ~~Company will continue as a going concern. The Company incurred a net loss~~number of $3.0 million for the year ended December 31, 2015 and a net loss of $8.6 million for the nine months ended September 30, 2016, which net losses have continued to reduce cash and cash equivalents. As of ~~September 30, 2016, the Company had approximately~~ ~~$33.6 million~~ ~~in cash and cash equivalents and~~ ~~$26.9 million~~ in aggregate principal amount of outstanding borrowings under short-term loans and the Company's loan agreement with DASAN. In addition, the Company had an aggregate of $37.0 million in revolving line of credit and letter of credit facilities as of September 30, 2016. The Company had $9.5 million committed as security for letters of credit under these facilities as of September 30, 2016. The $25.0 million revolving line of credit and letter of credit facility with Wells Fargo Bank (the "WFB Facility") contains certain financial covenants, and customary affirmative covenants and negative covenants. See Note 7 and Note 9 for additional information.

~~The Company’s current lack of liquidity could harm it by:~~

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

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

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

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

In order to meet the Company’s liquidity needs and finance its capital expenditures and working capital needs for the business, the Company may be required to sell assets, issue debt or equity securities, purchase credit insurance or borrow on unfavorable terms. In addition, the Company may be required to reduce its operations in low margin regions, including reductions in headcount. The Company may be unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict the Company’s ability to operate its business. Likewise, any equity financing could result in additional dilutionshares of the Company’s ~~stockholders. If~~common stock then issued and outstanding was reduced from approximately 81.9 million to approximately 16.4 million. References to shares of the ~~Company is unable to sell assets, issue securities or access additional indebtedness to meet these needs~~Company's common stock, stock options (and associated exercise price) and restricted stock units in this Quarterly Report on ~~favorable terms, or at all, the Company may become unable to pay its ordinary expenses, including its debt service,~~Form 10-Q are provided on a timely basis and may be required to reduce the scope of its planned product development and sales and marketing efforts beyond the reductions it has previously taken. Based on the Company’s current plans and business conditions, it 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 twelve months.

~~The Company's financial condition and results of operations could be materially and adversely affected by various factors, including:~~

~~Potential deferment of purchases and orders by customers;~~

~~Customers’ inability to obtain financing to make purchases from the Company and/or maintain their business;~~

~~Negative impact from increased financial pressures on third-party dealers, distributors and retailers;~~

~~Intense competition in the communication equipment market;~~

~~Commercial acceptance of the Company’s products; and~~

~~Negative impact from increased financial pressures on key suppliers.~~

The Company may experience material adverse impacts on its business, operating results and financial condition as a result of weak or recessionary economic or market conditions in the United States, Korea or the rest of the world.post-reverse stock split basis.


(g)	~~Restatement of Previously Reported Consolidated Financial Statements~~

The Company has determined that the incorrect application of generally accepted accounting principles, resulted in material misstatements and a restatement of the Company's unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016. The Company concluded that the impact of the errors was immaterial to the unaudited condensed consolidated financial statements for the quarter ended September 30, 2015, except for the impact relating to the error in not calculating EPS by retroactively adjusting the weighted average shares for the impact from the Merger.

The following schedules reconcile the amounts as previously reported in the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016 to the corresponding restated amounts (in thousands, except per share data):

Unaudited Condensed Consolidated Balance Sheet
September 30, 2016
As Previously Reported Restatement Adjustments As Restated
Total current assets $ 127,626
$ 3,027
$ 130,653
Intangible assets (1) 22,573
(8,824 ) 13,749
Total assets 160,349
(5,797 ) 154,552
Total current liabilities 69,285
(3,024 ) 66,261
Other long-term liabilities (1) 8,024
(4,110 ) 3,914
Total liabilities 82,309
(5,334 ) 76,975
Common stock (2) 81,874
(81,858 ) 16
Additional paid-in-capital (2) 7,283
81,683
88,966
Other comprehensive loss 908
(3 ) 905
Accumulated deficit (12,743 ) (31 ) (12,774 )
Non-controlling interest 718
(254 ) 464
Total stockholders' equity 78,040
(463 ) 77,577
Total liabilities and stockholders' equity 160,349
(5,797 ) 154,552

~~(1) Amount presented has been reclassified for comparability purposes.~~

~~(2) Amount presented has been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.~~

Unaudited Condensed Consolidated Balance Sheet
December 31, 2015
As Previously Reported Restatement Adjustments As Restated
Common stock (1) 56,579
(56,570 ) 9
Additional paid-in-capital (1) (8,890 ) 56,570
47,680

~~(1) Amount presented has been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.~~

Unaudited Condensed Consolidated Statements of Comprehensive Loss
Three Months Ended Nine Months Ended
September 30, 2016 September 30, 2016
As Previously Reported Restatement Adjustments As Restated As Previously Reported Restatement Adjustments As Restated
Net revenue (1) $ 32,166
$ (86 ) $ 32,080
$ 93,256
$ (592 ) $ 92,664
Cost of revenue (2) 22,693
(132 ) 22,561
68,997
(132 ) 68,865
Selling, general and administrative 8,202
81
8,283
16,903
73
16,976
Net loss (4,881 ) 225
(4,656 ) (8,287 ) (281 ) (8,568 )
Comprehensive loss (2,612 ) 296
(2,316 ) (5,617 ) (210 ) (5,827 )
Basic and diluted net loss per share (3) $ (0.30 ) $ (0.12 ) $ (0.42 ) $ (0.51 ) $ (0.34 ) $ (0.85 )

(1) The Company incorrectly recorded $0.5 million of revenue on one of its customer contracts in the second quarter of 2016, which should have been recorded in the third quarter of 2016. The Company has properly presented this revenue in the three and nine months ended September 30, 2016 in the accompanying unaudited condensed consolidated financial statements and will revise the second quarter of 2016 unaudited consolidated condensed financial statements in the unaudited quarterly footnote included in the Company's Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the second quarter of 2017 when comparative financial information is presented. Management has concluded that these adjustments were immaterial to prior period financial statements.

~~(2) Amount presented has been reclassified for comparability purposes.~~

~~(3) Amount presented has been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.~~

Unaudited Condensed Consolidated Statements of Comprehensive Loss
Three Months Ended Nine Months Ended
September 30, 2016 September 30, 2016
As Previously Reported As Restated As Previously Reported As Restated
Basic and diluted net loss per share (1) $ (0.30 ) $ (0.42 ) $ (0.51 ) $ (0.85 )
Weighted average shares outstanding used to computer basic and diluted net loss per share (1) 16,368
11,139
16,348
10,046

~~(1) Amount presented has been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.~~

Unaudited Condensed Consolidated Statements of Comprehensive Loss
Three Months Ended Nine Months Ended
September 30, 2015 September 30, 2015
As Previously Reported As Restated As Previously Reported As Restated
Basic and diluted net loss per share (1) $ (0.04 ) $ (0.30 ) $ (0.07 ) $ (0.53 )
Weighted average shares outstanding used to computer basic and diluted net loss per share (1) 69,401
9,331
69,401
9,266

~~(1) Amount presented has been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.~~

Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended
September 30, 2016
As Previously Reported Restatement Adjustments As Restated
Cash acquired through Merger (1) $ —
$ 7,013
$ 7,013
Movement to and from restricted cash (2) (1,055 ) (812 ) (1,867 )
Net cash (used in ) provided by investing activities (945 ) 6,201
5,256

(1) This amount includes Legacy Zhone's cash balance of $7.0 million as of the effective date of the Merger, which was originally included in the cash and cash equivalents at the beginning of period in the cash flow statement, partially offset by the reclassification of $0.8 million as cash outflow originally included in closing cash and cash equivalents as of September 30, 2016.

~~(2) The Company~~ did not appropriately classify restricted cash of $0.9 million separately from cash and cash equivalents as of December 31, 2015. The Company has corrected for this error as cumulative adjustment as of September 30, 2016. Management has concluded that this is not material to the current or prior period.

In addition, certain disclosures included in the unaudited condensed consolidated financial statements previously filed were also restated. These disclosures in this Form 10Q/A include schedules reconciling the amounts previously reported to the corresponding restated amounts in their respective sections.


~~(h)~~	~~Use of Estimates~~

The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.


~~(i)~~	~~Revenue Recognition~~

The Company recognizes revenue when the earnings process is complete. The Company recognizes product revenue upon shipment of product under contractual terms which transfer title to customers upon shipment, under normal credit terms, net of estimated sales returns and allowances at the time of shipment. Revenue is deferred if there are significant post-delivery obligations or if the fees are not fixed or determinable. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. The Company’s arrangements generally do not have any significant post-delivery obligations. If the Company’s arrangements include customer acceptance provisions, revenue is recognized upon obtaining the signed acceptance certificate from the customer, unless the Company can objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement prior to obtaining the signed acceptance. In those instances where revenue is recognized prior to obtaining the signed acceptance certificate, the Company uses successful completion of customer testing as the basis to objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement. The Company also considers historical acceptance experience with the customer, as well as the payment terms specified in the arrangement, when revenue is recognized prior to obtaining the signed acceptance certificate. When collectability is not reasonably assured, revenue is recognized when cash is collected.

The Company makes certain sales to product distributors. These customers are given certain privileges to return a portion of inventory. Return privileges generally allow distributors to return inventory based on a percent of purchases made within a specific period of time. The Company recognizes revenue on sales to distributors that have contractual return rights when the products have been sold by the distributors, unless there is sufficient customer specific sales and sales returns history to support revenue recognition upon shipment. In those instances when revenue is recognized upon shipment to distributors, the Company uses historical rates of return from the distributors to provide for estimated product returns.

The Company derives revenue primarily from stand-alone sales of its products. In certain cases, the Company’s products are sold along with services, which include education, training, installation, and/or extended warranty services. As such, some of the Company’s sales have multiple deliverables. The Company’s products and services qualify as separate units of accounting and are deemed to be non-contingent deliverables as the Company’s arrangements typically do not have any significant performance, cancellation, termination and refund type provisions. Products are typically considered delivered upon shipment. Revenue from services is recognized ratably over the period during which the services are to be performed.

For multiple deliverable revenue arrangements, the Company allocates revenue to products and services using the relative selling price method to recognize revenue when the revenue recognition criteria for each deliverable are met. The selling price of a deliverable is based on a hierarchy and if the Company is unable to establish vendor-specific objective evidence of selling price (“VSOE”) it uses third-party evidence of selling price (“TPE”), and if no such data is available, it uses a best estimated selling price (“BSP”). In most instances, particularly as it relates to products, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history. When VSOE cannot be established, the Company attempts to establish the selling price of each element based on TPE. Generally, the Company’s marketing strategy differs from that of the Company’s peers and the Company’s offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company is typically not able to determine TPE for the Company’s products.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses BSP. The objective of BSP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The BSP of each deliverable is determined using average discounts from list price from historical sales transactions or cost plus margin approaches based on the factors, including but not limited to, the Company’s gross margin objectives and pricing practices plus customer and market specific considerations.

The Company has established TPE for its training, education and installation services. TPE is determined based on competitor prices for similar deliverables when sold separately. These service arrangements are typically short term in nature and are largely completed shortly after delivery of the product. Training and education services are based on a daily rate per person and vary according to the type of class offered. Installation services are based on daily rate per person and vary according to the complexity of the products being installed.

~~Extended warranty services are priced based on the type of product and are sold in~~ ~~one~~ to ~~five~~ year durations. Extended warranty services include the right to warranty coverage beyond the standard warranty period. In substantially all of the arrangements with multiple deliverables pertaining to arrangements with these services, the Company has used and intends to continue using VSOE to determine the selling price for the services. The Company determines VSOE based on its normal pricing practices for these specific services when sold separately.


~~(j)~~	~~Fair Value of Financial Instruments~~

~~As of~~ ~~September 30, 2016~~ and December 31, 2015, the Company's financial instruments included cash and cash equivalents, short-term investments, trade and other receivables, other current assets, accounts payable, other current liabilities and debt. Due to the short-term maturities of cash and cash equivalents, trade and other receivables, other current assets, accounts payable and other current liabilities, the carrying amounts approximate fair value at the applicable balance sheet date. The carrying value of debt approximated its fair value based on a comparison with then-prevailing market interest rates. Due to the short-term maturities of the Company’s investments, carrying amounts approximated fair value at the applicable balance sheet date. The fair value of these instruments would be categorized as Level 2 in the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level 1.


~~(k)~~	Concentration of Risk

The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, Internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts. For the three months ended ~~September~~June 30, ~~2016~~ ~~and 2015,~~ ~~three~~2017, two customers represented ~~55%~~11% and ~~63%~~14% (a related-party) of net revenue, respectively. For the ~~nine~~three months ended ~~September~~June 30, 2016, ~~and 2015,~~ three customers represented ~~48%~~34%, 21% (a related-party) and ~~55%~~12% of net revenue, respectively. ~~SK Broadband, LG Uplus~~For the six months ended June 30, 2017, one customer represented 12% (a related-party) of net revenue. For the six months ended June 30, 2016, three customers represented 25%, 23% (a related-party) and ~~DASAN (a related party) each accounted for more than 10%~~12% of net revenue, ~~for the~~respectively.

As of June 30, 2017, three ~~months ended September 30, 2016. SK Broadband, LG Uplus, Viettel Group~~customers represented 22%, 14% and DASAN (a related party) each accounted for more than 10% of net revenue for the nine months ended September 30, 2016. LG Uplus, Korea Telecom and SK Broadband each accounted for more than 10% of net revenue for the three months ended September 30, 2015. LG Uplus, Korea Telecom and Viettel Group each accounted for more than 10% of net revenue for the nine months ended September 30, 2015. Each of the foregoing customers was a customer of DNS prior to the Merger. No Legacy Zhone customers and no other DNS customers accounted for more than 10% of net revenue during the three and nine months ended September 30, 2016 and 2015.

~~Three~~ ~~customers accounted for 37% and 66%~~12% of net accounts receivable, asrespectively. The customers who represented 22% and 12% were related parties. As of ~~September~~December 31, 2016, two customers represented 13% (a related-party) and 10% of net accounts receivable, respectively.

As of June 30, ~~2016~~2017 and December 31, ~~2015, respectively.~~

~~As of~~ ~~September 30,~~ 2016, ~~and December 31, 2015,~~ receivables from customers in countries other than the United States represented ~~86%~~88% and ~~93%~~87%, respectively, of net accounts receivable.


~~(l)~~	~~Comprehensive Loss~~

~~There have been no items reclassified out of accumulated other comprehensive loss and into net loss. The Company’s other comprehensive loss for the three and~~ ~~nine months ended September 30, 2016~~ ~~and 2015 is comprised of only foreign exchange translation adjustments.~~


~~(m)~~	~~Recent Accounting Pronouncements~~

On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of the guidance in ASU No. 2014-09, Revenue from Contracts with Customer, for all entities by one year. With the deferral, the new standard is effective for the Company on January 1, 2018. Early adoption is permitted, but not before the original effective date of January 1, 2017. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, which provides clarification on how to assess collectibility, present sales tax, treat noncash

consideration, and account for completed and modified contracts at the time of transition of ASU 2014-09. The effective date of this updated guidance for the Company is the same as the effective date of ASU 2014-09, which is January 1, 2018. The Company does not plan to early adopt this guidance. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in financial statements. The new standard is effective for the annual reporting period ending after December 31, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value. The guidance does not apply to inventory that is measured using last-in, first-out ("LIFO") or the retail inventory method. The guidance applies to all other inventory, which includes inventory that is measured using first-in, first-out ("FIFO") or average cost. The guidance is effective for the Company on January 1, 2017, which will be adopted accordingly. ASU No. 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Income Taxes, Balance Sheet Classification of Deferred Taxes, which simplifies the classification of deferred tax assets and liabilities as non-currrent in the balance sheet. The updated guidance is effective for the Company on January 1, 2017, which will be adopted accordingly, and early adoption is permitted. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

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, which the Company does not plan to early adopt. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

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, which will be adopted accordingly, and early adoption is permitted. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

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, and early adoption is permitted. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements and related disclosures.


(2)	Merger

On September 9, 2016, the Company acquired DNS through the Merger of a wholly owned subsidiary of the Company with and into DNS, with DNS surviving as a wholly owned subsidiary of the Company. The Merger combines leading technology platforms with a broadened customer base.

At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by ~~DASAN~~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 ~~DASAN~~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, ~~DASAN~~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.

As described in Note 1,1(d), 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 ("PPA")~~purchase price allocation, DNS' assets and liabilities have been retained at their carrying values and Legacy Zhone's assets acquired, and liabilities assumed, by DNS (as the accounting acquirer in the Merger) have been recorded at their fair value measured as of September 9, 2016.

The total purchase consideration in the Merger is based on the number of shares of Legacy Zhone common stock and Legacy Zhone stock options vested and outstanding immediately prior to the closing of the Merger, and was determined based on the closing price of $5.95 per share (post reverse stock split) of the Company's common stock on the September 9, ~~2016 (the effective date of the Merger) and the 6,874,253 shares (post reverse split).~~2016. The estimated total purchase consideration is calculated as follows (in thousands):

Shares Estimated Fair Value As Previously Reported Restatement Adjustments As Restated
Shares of Legacy Zhone stock as of September 8, 2016 (1) 6,874
$ 40,902
$ —
$ 40,902
Legacy Zhone stock options (1) 265
715
(175 ) 540
Assumed liabilities 25,717
(5,474 ) 20,243
Total Purchase Consideration $ 67,334
$ (5,649 ) $ 61,685

~~(1) Amount presented has been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.~~



	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 ~~preliminary~~ allocation of the fair value consideration transferred ~~as of~~for the acquisition date ~~(unaudited, in~~(in thousands)~~. The purchase price allocation is preliminary because the Company is still in the process of finalizing the valuation of acquired inventory balances:~~:

Fair Value of Total Assets As Previously Reported Restatement Adjustments As Restated
Current tangible assets $ 40,747
$ 3,175
$ 43,922
Non-current tangible assets 4,464
—
4,464
Total tangible assets $ 45,211
$ 3,175
$ 48,386

Identifiable Intangible Assets
Developed technology 3,040
20
3,060
Customer relationships 6,740
(1,500 ) 5,240
Backlog 2,017
162
2,179
Total Intangible Assets $ 11,797
$ (1,318 ) $ 10,479

Goodwill $ 10,326
$ (7,506 ) $ 2,820

Total Indicated Fair Value of Assets $ 67,334
$ (5,649 ) $ 61,685



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~~goodwill arising from the Merger is not tax deductible.

~~The fair value of the assets acquired included trade receivables of $17.7 million, net of allowances for sales returns and doubtful accounts of $4.6 million.~~

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 ~~Company recorded $1.3 million in Merger-related costs during the three and nine months ended September 30, 2016. These expenses are included in selling, general and administrative expense.~~

~~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		Accumulated Amortization			Net		Useful life (in Years)	Fair Value
Developed technology	5	$	3,060	$	(51	)	$	3,009	5	$	3,060
Customer relationships	10	5,240		(80		)	5,160		10	5,240
Backlog	1	2,179		(168		)	2,011		1	2,179
		$	10,479	$	(299	)	$	10,180		$	10,479

The following unaudited pro forma condensed combined financial information for the three and ~~nine~~six months ended ~~September~~June 30, 2016 ~~and 2015~~ gives effect to the Merger as if it had occurred at the beginning of ~~each period presented.~~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~~Company's financial position or results of operations might have been had the Merger been completed as of the ~~dates~~date indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or results of operations of the combined company. The unaudited pro forma condensed combined financial information reflects adjustments related to the Merger, such as to record certain incremental expenses resulting from purchase accounting adjustments (such as amortization expenses in connection with the fair value adjustments to intangible assets and Merger-related costs).

Three Months Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015
(As Restated) (As Restated)
Pro forma total net revenue $ 40,580
$ 44,719
$ 144,362
$ 170,082
Pro forma net loss (15,436 ) (4,516 ) (24,989 ) (13,052 )

For the period from September 9, 2016 (the effective date of the Merger) through September 30, 2016, the Company's income statement included $5.7 million of revenues and $2.3 million of net loss from the Legacy Zhone business.



	June 30, 2016
(in thousands)	Three Months Ended			Six Months Ended
Pro forma total net revenue	$	56,987		$	103,070
Pro forma net loss	(3,513		)	(12,045		)

(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:



~~(3)~~Level 1 –	~~Cash~~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 ~~Cash Equivalents and Restricted Cash~~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.

AsThe following financial instruments are not measured at fair value on the Company’s consolidated balance sheet as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015, the Company's~~2016, but require disclosure of their fair values: cash and cash equivalents, ~~comprised~~short-term investments, accounts receivable, accounts payable and debt. The carrying values of financial ~~deposits~~instruments such as cash and ~~money market accounts. Restricted~~ cash ~~comprised cash restricted~~equivalents, short-term investments, accounts receivable and accounts payable approximate their fair values based on their short-term nature. The carrying value of the Company's debt approximates their fair values based on the current rates available to the Company for ~~research~~debt of similar terms and ~~development activities and collateral for borrowings.~~maturities.


(4)	Inventories ~~net~~

Inventories ~~net~~ as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows (in thousands):


	September 30, 2016		December 31, 2015
	(As Restated)				June 30, 2017		December 31, 2016
Raw materials	$	13,094	$	5,519	$	14,365	$	13,547
Work in process	3,383		2,074		3,709		3,705
Finished goods	18,119		6,307		17,075		13,780
	$	34,596	$	13,900
Total inventories					$	35,149	$	31,032

Inventories provided as collateral for borrowings from Export-Import Bank of Korea amounted to $21.0 million as of June 30, 2017.


(5)	Property and Equipment ~~net~~

Property and equipment ~~net,~~ as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows (in thousands):


	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
	(As Restated)
Furniture and fixtures	$	23,521		$	21,524		$	21,309		$	20,040
Machinery and equipment	5,709			3,173			4,930			4,530
Leasehold improvements	2,981			—			3,390			3,573
Computers and software	410			—			433			411
Other	77			74			1,054			922
	32,698			24,771			31,116			29,476
Less accumulated depreciation and amortization	(26,097		)	(22,121		)	(24,792		)	(22,922		)
Less government grants	(343		)	(399		)	(245		)	(266		)
	$	6,258		$	2,251
Total property and equipment, net							$	6,079		$	6,288

Depreciation ~~expense associated with property~~ and ~~equipment for each of the three months ended September 30, 2016 and 2015 amounted to $0.3 million. Depreciation~~amortization expense associated with property and equipment for the ~~nine~~three and six months ended ~~September~~June 30, 2017 was $0.5 million and $1.0 million, respectively. Depreciation and amortization expense associated with property and equipment for the three and six months ended June 30, 2016 was $0.4 million and ~~2015 amounted to $0.8 million~~ ~~and $1.1~~$0.9 million, respectively.

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


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

Goodwill as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 was as follows (in thousands):


	September 30, 2016		December 31, 2015
	(As Restated)				June 30, 2017		December 31, 2016
Beginning balance	$	693	$	—	$	3,977	$	693
Addition due to acquisition	2,820		693
Addition from Merger					—		3,284
Less: accumulated impairment	—		—		—		—
Ending balance	$	3,513	$	693	$	3,977	$	3,977

The Company did not recognize impairment loss on goodwill during the three and six months ended June 30, 2017 and 2016. Intangible assets as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015.~~

~~Intangible assets, net, as of September 30,~~ 2016 ~~and December 31, 2015~~ were as follows (in thousands):


	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
	(As Restated)
Developed Technology	$	3,060		$	—
Customer Relationships	5,240			—
Developed technology							$	3,060		$	3,060
Customer relationships							5,240			5,240
Backlog	2,179			—			2,179			2,179
Other	137			40			153			105
Less accumulated amortization	(380		)	(37		)	(3,185		)	(1,817		)
Intangible assets, net	$	10,236		$	3		$	7,447		$	8,767

Amortization expense associated with intangible assets for the three and six months ended ~~September~~June 30, ~~2016 and 2015 amounted to $0.3~~2017 was $0.7 million and ~~less than $0.1~~$1.4 million, respectively. Amortization expense associated with intangible assets for the ~~nine~~three and six months ended ~~September~~June 30, 2016 ~~and 2015 amounted to $0.4 million and less than $0.1 million,~~was $6.0 thousand, respectively.

~~As of September 30, 2016, expected future amortization expense for the fiscal years indicated was as follows (in thousands):~~

Period Expected Amortization Expense
Remainder of 2016 $ 1,470
2017 2,087
2018 1,145
2019 1,166
2020 1,136
Thereafter 3,232
Total $ 10,236


(7)	Debt

Wells Fargo Bank Facility

As of ~~September~~June 30, ~~2016,~~2017, the Company had a ~~$25.0~~$25.0 million ~~revolving line of credit and letter of~~ credit facility (the "WFB Facility") with Wells Fargo Bank ("WFB"). Under the WFB Facility, the Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company is able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the agreement, as long as the aggregate amount outstanding does not exceed ~~$25.0~~$25.0 million less the amount committed as security for letters of ~~credit, which as of September 30, 2016 was $3.8 million.~~credit. To maintain availability of funds under the WFB Facility, the Company pays a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense.

~~Based on eligible accounts receivable and inventory, as defined in the WFB Facility,~~As of June 30, 2017, the Company had ~~$2.9~~no outstanding borrowings under its WFB Facility, and $2.5 million was committed as security for letters of credit. The Company had $4.1 million of borrowing availability under the WFB Facility as of ~~September~~June 30, ~~2016. The Company had no outstanding borrowings under its WFB Facility as of September 30, 2016.~~2017. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin based on ~~our~~the Company's average excess availability (as calculated under the WFB Facility). The interest rate on the WFB Facility was ~~3.35%~~3.8% at ~~September~~June 30, ~~2016~~.2017. The maturity date under the WFB Facility is March 31, 2019.

The Company’s obligations under the WFB Facility are secured by substantially all of its personal property assets and those of its subsidiaries that guarantee the WFB Facility, including their intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If the Company defaults under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell the Company’s assets to satisfy the obligations under the WFB Facility. On July 3, 2017, the Company executed an agreement with WFB to extend the due date for delivery for the Company's audited financial statements for the year ended December 31, 2016 to September 27, 2017. As of ~~September~~June 30, ~~2016~~,2017, the Company was in compliance with ~~these covenants.~~

the covenants under the WFB Facility.

Bank and Trade Facilities - Foreign Operations

Certain of the Company's foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries. Payments under such facilities are made in accordance with the given lender’s amortization schedules.

As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the Company had an aggregate outstanding balance of ~~$20.1~~$16.7 million and ~~$21.8~~$17.6 million, respectively, under such financing arrangements, and the interest rates per annum applicable to outstanding borrowings under these financing arrangements were as listed in the tables below.



		As of June 30, 2017
		Interest rate (%)	Amount
Industrial Bank of Korea	Credit facility	2.7 - 2.9	$	687
Shinhan Bank	General loan	5.89	2,808
Shinhan Bank	Trade finance	3.6 - 3.7	2,700
NongHyup Bank	Credit facility	2.3 - 3.0	3,471
The Export-Import Bank of Korea	Export development loan	3.1	7,020
			$	16,686

As of September 30, 2016
Interest rate (%) Amount
Industrial Bank of Korea Trade loan 2.06-2.38 $ 941
Shinhan Bank General loan 4.26 3,649
Shinhan Bank Trade finance 3.23-3.29 3,100
NongHyup Bank Trade loan 1.66-2.31 207
KEB Han Bank Comprehensive credit loan 2.89 4,034
The Export-Import Bank of Korea Export development loan 2.88 8,210
$ 20,141


		As of December 31, 2015				As of December 31, 2016
		Interest rate (%)	Amount			Interest rate (%)	Amount
Industrial Bank of Korea	Trade loan	2.04-2.34	$	3,431	Credit facility	2.16 - 2.76	$	1,106
Shinhan Bank	General loan	2.94	3,413		General loan	4.08	3,310
Shinhan Bank	Trade finance	2.80	329		Trade finance	3.28 - 3.44	1,752
NongHyup Bank	Trade loan	1.60-1.95	1,574		Credit facility	1.92 - 2.66	482
KEB Han Bank	Comprehensive credit loan	3.55	5,421
KEB Hana Bank					Comprehensive credit loan	2.79	3,501
The Export-Import Bank of Korea	Export development loan	2.94	7,680		Export development loan	3.10	7,448
			$	21,848			$	17,599

As of ~~September~~June 30, ~~2016,~~2017, the Company ~~also~~ had ~~a $12.0~~$4.2 million ~~letter of credit facility with certain foreign banks, under which $5.7~~in outstanding borrowings and $6.1 million ~~was~~ committed as security for letters of ~~credit.~~credit under the Company's $12.0 million credit facility with certain foreign banks.


(8)	Non-Controlling Interests

Non-controlling interests for the three and six months ended June 30, 2017 and 2016 were as follows (in thousands):


	Nine Months Ended September 30,					Six Months Ended June 30,
	2016			2015		2017		2016
Beginning non-controlling interests	$	138		$	—	$	416	$	138
Acquisition of additional interest in a subsidiary	277			—		—		277
Net income attributable to non-controlling interests	(17		)	—		184		39
Foreign currency translation adjustments (OCI)	66			—		21		63
Ending non-controlling interests	$	464		$	—	$	621	$	517


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

~~Related Party~~

Related-Party Debt

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

In addition, the ~~Company's subsidiary DNS~~Company borrowed $1.8 million from ~~DASAN~~DNI for capital investment in February 2016, which amount was outstanding as of ~~September~~June 30, ~~2016.~~2017. This loan matured in March 2017 with an option of renewal by mutual agreement, and bore interest at a rate of 6.9% per annum, payable annually. Effective February 27, 2017, ~~DNS~~the Company amended the terms of this loan to extend the repayment date from March 2017 to March 2018, and to reduce the interest rate from 6.9% to 4.6% per annum.

On June 23, 2017, the Company borrowed $3.5 million from Solueta, an affiliate of DNI, which amount was outstanding as of June 30, 2017. This loan matures in November 2017 and bears interest at a rate of 4.6% per annum, payable monthly.

Other ~~Related Party~~Related-Party Transactions

Sales and ~~Purchases to~~purchases, cost of revenue, research and ~~from Related Parties~~

~~Sales~~product development, selling, marketing, general and ~~purchases~~administrative and other expenses to and from related parties for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 were as follows (in thousands):

Three Months Ended September 30, 2016
Counterparty Sales Selling, Administrative and R&D Expenses Other Expenses
Parent Company DASAN $ 4,960
$ 1,032
$ 89
Other related parties DASAN RND Co., LTD —
—
—
PANDA Media, Inc. —
—
—
DMC, Inc. —
—
—
Tomato Soft Ltd. —
38
—
Tomato Soft (Xi'an) Ltd. —
188
—
CHASAN Networks (Shenzhen) Co., Ltd. —
175
—
D-Mobile 1,267
128
—
DASAN FRANCE 3
—
—
HANDYSOFT, Inc. 68
—
—
J-Mobile Corporation —
11
—
$ 6,298
$ 1,572
$ 89



		Three Months Ended June 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	$	8,480	$	7,095	$	—	$	—	$	1,326	$	57
CHASAN Networks Co., Ltd.	100%	—		—		187		32		—		—
DASAN FRANCE	100%	556		549		—		—		300		—
D-Mobile	100%	1,811		741		—		—		94		—
Fine Solution	100%	—		—		—		—		1		—
HANDYSOFT, Inc.	17.64%	14		2		—		—		—		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		133		37		—
Solueta	27.21%	—		—		—		—		—		3
		$	10,861	$	8,387	$	187	$	165	$	1,758	$	60



		Three Months Ended June 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	$	7,260	$	6,110	$	—	$	—	$	1,549	$	104
CHASAN Networks Co., Ltd.	100%	—		—		170		40		—		—
D-Mobile	100%	1,325		1,010		—		—		99		—
HANDYSOFT, Inc.	17.64%	30		25		—		—		—		—
J-Mobile Corporation	68.56%	18		—		—		—		—		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		203		—		—
		$	8,633	$	7,145	$	170	$	243	$	1,648	$	104

Nine Months Ended September 30, 2016
Counterparty Sales Selling, Administrative and R&D Expenses Other Expenses
Parent Company DASAN $ 9,857
$ 4,620
$ 309
Other related parties DASAN RND Co., LTD —
—
—
PANDA Media, Inc. —
2
—
DMC, Inc. 1
—
—
Tomato Soft Ltd. —
98
—
Tomato Soft (Xi'an) Ltd. —
559
—
CHASAN Networks (Shenzhen) Co., Ltd. —
545
—
D-Mobile 3,135
317
—
DASAN FRANCE 3
—
—
HANDYSOFT, Inc. 151
—
—
J-Mobile Corporation 3
633
—
$ 13,150
$ 6,774
$ 309



		Six Months Ended June 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	$	12,631	$	10,416	$	—	$	—	$	2,200	$	120
CHASAN Networks Co., Ltd.	100%	—		—		382		59		—		—
DASAN FRANCE	100%	950		936		—		—		300		—
DASAN INDIA Private Limited	100%	6,287		4,783		—		—		—		—
D-Mobile	100%	1,822		754		—		—		196		—
Fine Solution	100%	—		—		—		—		4		—
HANDYSOFT, Inc.	17.64%	34		11		—		—		—		—
J-Mobile Corporation	68.56%	8		—		—		—		132		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		304		37		—
Solueta	27.21%	—		—		—		—		—		3
		$	21,732	$	16,900	$	382	$	363	$	2,869	$	123

Three Months Ended September 30, 2015
Counterparty Sales Selling, Administrative and R&D Expenses Other Expenses
Parent Company DASAN $ 2,630
$ 1,285
$ 96
Other related parties DASAN RND Co., LTD —
35
—
PANDA Media, Inc. —
—
—
DMC, Inc. —
—
—
Tomato Soft Ltd. —
37
—
Tomato Soft (Xi'an) Ltd. —
161
—
CHASAN Networks (Shenzhen) Co., Ltd. —
234
—
D-Mobile —
—
—
DASAN FRANCE —
—
—
HANDYSOFT, Inc. 69
—
1
J-Mobile Corporation —
576
—
$ 2,699
$ 2,328
$ 97



		Six Months Ended June 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	$	13,968	$	11,829	$	—	$	—	$	3,309	$	220
CHASAN Networks Co., Ltd.	100%	—		—		368		68		—		—
DMC, Inc.	100%	1		1		—		—		—		—
D-Mobile	100%	1,868		1,442		—		—		193		—
HANDYSOFT, Inc.	17.64%	82		72		—		—		—		—
J-Mobile Corporation	68.56%	21		—		—		—		634		—
PANDA Media, Inc.	90%	—		—		—		—		2		—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		379		—		—
		$	15,940	$	13,344	$	368	$	447	$	4,138	$	220

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 an agreement with CHASAN Networks Co., Ltd. to provide manufacturing and research and development services for the Company. Under the agreement with CHASAN Networks., Ltd., the Company is charged a cost plus 7% fee for the manufacturing and development of certain deliverables.

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

Prior to the Merger, as DNS was then a wholly owned subsidiary of DNI, DNI had sales agreements with certain customers on DNS' behalf. Since the Merger, due to these prior sales agreements, the Company has entered into an agreement with DNI in which DNI acts as a sales channel to these customers. Selling, marketing, general and administrative expense to DNI includes a fee of 3% of total sales to DNI for sales to these customers.

The Company shares office space with DNI and certain of DNI's subsidiaries. Prior to the Merger, DNS, then a wholly owned subsidiary of DNI, shared human resources, treasury and other administrative support with DNI. As such, the Company entered into certain service sharing agreements with DNI and certain of its subsidiaries for the shared office space and shared administrative services. Expenses related to rent and administrative services are allocated to the Company based on square footage occupied and headcount, respectively.

Other income from J-Mobile Corporation represents interest income earned on a loan receivable from J-Mobile Corporation. The loan receivable was issued for the amount of $0.5 million and earned an interest rate of 6.9% per annum. The loan receivable was scheduled to mature on July 1, 2020, but was fully paid off on September 3, 2016.

Nine Months Ended September 30, 2015
Counterparty Sales Selling, Administrative and R&D Expenses Other Expenses Acquisition of Tangible and Intangible Assets
Parent Company DASAN $ 8,385
$ 5,339
$ 436
$ —
Other related parties DASAN RND Co., LTD —
335
—
—
PANDA Media, Inc. —
—
—
—
DMC, Inc. —
—
—
—
Tomato Soft Ltd. —
70
—
—
Tomato Soft (Xi'an) Ltd. —
316
—
—
CHASAN Networks (Shenzhen) Co., Ltd. —
487
—
—
D-Mobile —
—
—
—
DASAN FRANCE —
—
—
—
HANDYSOFT, Inc. 1,292
—
21
187
J-Mobile Corporation —
646
—
—
$ 9,677
$ 7,193
$ 457
$ 187

~~The Selling, administrative and R&D~~Other expenses to ~~DASAN~~related parties represent expenses to DNI for its payment guarantees relating to the ~~three and nine months ended September 30, 2016 and 2015, represent~~Company's borrowings. The Company pays DNI a guarantee fee which is calculated as 0.9% of the ~~service fee paid for human resources, administrative, finance and accounting services, and other shared services provided by DASAN to DNS Korea.~~guaranteed amount.

Balances of Receivables and Payables with Related Parties

Balances of receivables and payables arising from sales and purchases of goods and services with related parties as of ~~September 31, 2016~~June 30, 2017 and December 31, ~~2015~~2016 were as follows (in thousands):

As of September 30, 2016
Counterparty Account Receivables Loans Other* Other Receivables Other Payables
Parent Company DASAN $ 5,893
$ —
$ 780
$ 70
$ 12,665
Other related parties PANDA Media, Inc. —
—
—
—
—
DMC, Inc. —
—
—
—
—
Tomato Soft Ltd. —
—
—
—
9
Tomato Soft (Xi'an) Ltd. —
—
—
—
63
CHASAN Networks —
—
—
—
—
(Shenzhen) Co., Ltd. —
—
—
—
63
D-Mobile 3,107
—
—
13
—
ABLE 3
—
—
—
—
DASAN France —
—
—
4
—
HANDYSOFT, Inc. 28
—
—
—
—
J-Mobile Corporation —
298
296
$ 9,031
$ —
$ 780
$ 385
$ 13,096



		As of June 30, 2017
Counterparty	DNI Ownership Interest	Account receivables		Other receivables		Deposits for lease*		Accounts payable		Other payables			Loans
DNI (Parent Company)	N/A	$	13,340	$	—	$	731	$	382	$	8,874		$	6,800
ABLE	61.99%	56		—		—		—		—			—
CHASAN Networks Co., Ltd.	100%	—		—		—		60		—			—
DASAN France	100%	4		—		—		—		—			—
DASAN INDIA Private Limited	100%	7,344		—		—		—		—			—
D-Mobile	100%	2,517		—		—		—		—			—
HANDYSOFT, Inc.	17.64%	5		—		—		—		—			—
Solueta	27.21%	—		—		—		—		—			3,510
Tomato Soft Ltd.	100%	—		—		—		—		9		—	—
Tomato Soft (Xi'an) Ltd.	100%	—		—		—		—		56			—
		$	23,266	$	—	$	731	$	442	$	8,939		$	10,310

As of December 31, 2015
Counterparty Account Receivables Loans Other* Other Receivables Other Payables
Parent Company DASAN $ 5,622
$ —
$ 3,137
$ 1,431
$ —
Other related parties PANDA Media, Inc. —
—
—
—
—
DMC, Inc. —
—
—
1
—
Tomato Soft Ltd. —
—
—
—
16
Tomato Soft (Xi'an) Ltd. —
—
—
—
55
CHASAN Networks
(Shenzhen) Co., Ltd. —
—
—
—
62
D-Mobile —
—
—
—
—
ABLE —
—
—
—
—
DASAN France —
—
—
—
—
HANDYSOFT, Inc. 22
—
—
—
—
J-Mobile Corporation —
430
310
—
$ 5,644
$ 430
$ 3,137
$ 1,742
$ 133



		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		—		—		—
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%	—		—		—		70		63		—
		$	13,311	$	171	$	699	$	430	$	6,940	$	6,800

* Included in other assets related to deposits for lease in the ~~unaudited~~ condensed consolidated balance sheet as of ~~September~~June 30, ~~2016~~2017 and the ~~audited~~ consolidated balance sheet as of December 31, ~~2015.~~2016.


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

Basic net loss per share attributable to DASAN Zhone Solutions, Inc. is computed by dividing the net loss ~~applicable~~attributable to ~~holders of common stock~~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 loss per share attributable to DASAN Zhone Solutions, Inc. gives effect to common stock equivalents; however, potential common equivalent shares are excluded if their effect is antidilutive. Potential common equivalent shares are composed of incremental shares of common equivalent shares issuable upon the exercise of stock options and ~~warrants.~~the vesting of restricted stock units.

Basic net loss per share is the same as diluted net loss per share for the three and six months ended June 30, 2016 because DNS did not issue the potentially dilutive common stock. Basic net loss per share is the same as diluted net loss

per share for the three and six months ended June 30, 2017 because the effects of stock options and restricted stock units would have been anti-dilutive.

The following table is a reconciliation of the numerator and denominator in the basic and diluted net loss per share calculation (in thousands, except per share data):

Three Months Ended
September 30,

Nine Months Ended
September 30,
2016 2015 2016 2015
(As Restated) (As Restated)
Net loss: $ (4,656 ) $ (2,780 ) $ (8,568 ) $ (4,938 )
Weighted average number of shares outstanding:
Basic (as restated) (1) 11,139
9,331
10,046
9,266
Effect of dilutive securities:
Stock options and share awards —
—
—
—
Diluted (as restated) (1) 11,139
9,331
10,046
9,266
Net loss per share
Basic (as restated) (1) $ (0.42 ) $ (0.30 ) $ (0.85 ) $ (0.53 )
Diluted (as restated) (1) $ (0.42 ) $ (0.30 ) $ (0.85 ) $ (0.53 )

~~(1) Amount presented has been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.~~

The following tables set forth potential shares of the Company's common stock that are not included in the diluted net loss per share calculation for the three and nine months ended September 30, 2016 because their effect would be antidilutive for the periods indicated (in thousands, except exercise price per share data):

Three Months Ended
September 30, 2016

Weighted
Average
Exercise
Price

Nine Months Ended
September 30, 2016

Weighted
Average
Exercise
Price
Outstanding stock options (1) 804
$ 1.38
804
$ 1.38



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
				(As Revised)						(As Revised)
Net loss attributable to DASAN Zhone Solutions, Inc.	$	(809	)	$	(566	)	$	(4,556	)	$	(4,333	)
Weighted average number of shares outstanding:
Basic	16,380			9,493			16,380			9,493
Effect of dilutive securities:
Stock options, restricted stock units and share awards	—			—			—			—
Diluted	16,380			9,493			16,380			9,493
Net loss per share attributable to DASAN Zhone Solutions, Inc.:
Basic	$	(0.05	)	$	(0.06	)	$	(0.28	)	$	(0.46	)
Diluted	$	(0.05	)	$	(0.06	)	$	(0.28	)	$	(0.46	)

~~(1) Amount presented has been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.~~

~~There were no shares that had anti-dilutive effect on the calculation of diluted net loss per share for the three and nine months ended September 30, 2015.~~


(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.~~options and escalation clauses. Estimated future lease payments under all ~~non-cancelable~~non-cancellable operating leases with terms in excess of one year, including taxes and service fees, are as follows (in thousands):


	Operating Leases
	As Previously Reported		Restatement Adjustments		As Restated		Operating Leases
Year ending December 31:
2016 (remainder of the year)	$	272	$	564	$	836
2017	1,470		2,156		3,626
2017 (remainder of the year)							$	1,862
2018	1,066		1,852		2,918		3,227
2019	597		1,738		2,335		2,496
2020 and thereafter	4,237		8,299		12,536
2020							2,358
2021							2,264
Thereafter							8,597
Total minimum lease payments	$	7,642	$	14,609	$	22,251	$	20,804

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 uptwo to ~~two~~five years from the date of shipment. The following table reconciles changes in the Company’s accrued warranties and related costs for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 (in thousands):


							Six Months Ended June 30,
	Nine Months Ended September 30,						2017			2016
	2016			2015
Beginning balance	$	441		$	389		$	878		$	441
Warranty liabilities acquired	652			—
Charged to cost of revenue	703			289			239			180
Claims and settlements	(805		)	(297		)	(381		)	(224		)
Foreign exchange impact							15			2
Ending balance	$	991		$	381		$	751		$	399

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~~June 30, ~~2016,~~2017, the Company ~~did not have any outstanding~~had $0.5 million of surety ~~bonds.~~bonds guaranteed by third parties.

Purchase Commitments

The Company has agreements with various contract manufacturers which include non-cancellable inventory purchase commitments. The Company’s inventory purchase commitments typically allow for cancellation of orders 30 days in advance of the required inventory availability date as set by the Company at time of order. The amount of ~~unrecognized~~non-cancellable purchase commitments outstanding, net of reserve, was $~~10.2~~8.4 million as of ~~September~~June 30, ~~2016~~2017.

On July 16, 2017, the Company reached an agreement with a supplier to cancel a purchase arrangement for certain inventory which was committed through 2020. Under the settlement, the Company is no longer required to fulfill its commitment to purchase $4.3 million in inventory. In connection with the settlement, the Company entered into a technical support services arrangement with the supplier through April 30, 2021.

Payment Guarantees Provided by Third Parties

The following table sets forth third parties that have provided payment guarantees of the Company's indebtedness and other obligations as of ~~September~~June 30, ~~2016~~2017 (in thousands):

Guarantor Amount Guaranteed Description of Obligations Guaranteed
DASAN $ 4,378
Borrowings from Shinhan Bank
DASAN 4,800
Borrowings from KEB Hana Bank
DASAN 11,684
Borrowings from Industrial Bank of Korea
DASAN 6,000
Letter of credit from Nonghyup Bank
Industrial Bank of Korea 3,593
Letter of credit
NongHyup Bank 2,156
Letter of credit
Other 1,438
Performance payment guarantee
$ 34,049



Guarantor	Amount Guaranteed		Description of Obligations Guaranteed
DNI	$	3,370	Borrowings from Shinhan Bank
DNI	1,895		Purchasing card from Shinhan Bank
DNI	10,506		Credit facility & purchasing card from Industrial Bank of Korea
DNI	6,000		Credit facility from NongHyup Bank
DNI	1,053		Purchasing card from NongHyup Bank
Industrial Bank of Korea	5,357		Credit facility
Industrial Bank of Korea	391		Performance bonds
NongHyup Bank	4,918		Credit facility
Shinhan Bank	435		Purchasing card
KEB Hana Bank	32		Performance bonds
State Bank of India	39		Performance bonds
Seoul Guarantee Insurance Co.	420		Performance payment guarantee
	$	34,416

Royalties

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

Legal Proceedings

The Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal contingencies that it has determined to be probable to the extent the amount of the loss can be reasonably estimated. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.


(12)	Enterprise-Wide Information

The Company is a global ~~leader in broad-based~~provider of network access ~~solutions.~~solutions and communications equipment for service provider and enterprise networks. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. The Company’s chief operating decision makers are the Company’s Co-Chief Executive Officers, who review financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. The Company attributes revenue from customers to individual countries based on location shipped. The following summarizes required disclosures about geographic concentrations and revenue by products and services (in thousands):



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
			(As Revised)				(As Revised)
Revenue by geography:
United States	$	11,961	$	1,658	$	24,108	$	4,010
Canada	1,422		14		2,614		14
Total North America	13,383		1,672		26,722		4,024
Latin America	7,075		621		11,945		1,035
Europe, Middle East, Africa	6,253		1,850		11,756		2,977
Korea	32,197		25,418		48,513		41,771
Other Asia Pacific	1,033		4,691		13,117		9,785
Total International	46,558		32,580		85,331		55,568
Total	$	59,941	$	34,252	$	112,053	$	59,592

Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
(As restated) (As restated)
Revenue by Geography:
United States $ 6,558
$ 550
$ 7,495
$ 3,988
Canada 255
—
255
—
Total North America 6,813
550
7,750
3,988
Latin America 1,406
—
1,406
—
Europe, Middle East, Africa 1,301
—
1,301
—
Korea 18,073
18,453
52,337
67,116
Other Asia Pacific 4,487
3,588
29,870
22,235
Total International 25,267
22,041
84,914
89,351
$ 32,080
$ 22,591
$ 92,664
$ 93,339


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
	(As restated)				(As restated)						(As Revised)				(As Revised)
Revenue by Products and Services:
Revenue by products and services:
Products	$	29,731	$	22,371	$	86,498	$	88,946	$	57,278	$	32,919	$	107,003	$	57,404
Services	2,349		220		6,166		4,393		2,663		1,333		5,050		2,188
Total	$	32,080	$	22,591	$	92,664	$	93,339	$	59,941	$	34,252	$	112,053	$	59,592

The ~~following summarizes required disclosures about assets that are available to allocate by country, which are only~~Company's property and equipment, net of accumulated depreciation, were located in the following geographical areas as of June 30, 2017 and ~~not the remainder long-lived assets as they cannot separately be attributed to a location~~December 31, 2016 (in thousands):


	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Assets by Geography:

United States	$	4,363	$	113	$	3,772	$	4,094
Korea	1,732		2,138		1,546		1,455
Japan and Vietnam	163		—		761		739
	$	6,258	$	2,251	$	6,079	$	6,288


(13)	Income Taxes

Income tax expense per the three and six months ended June 30, 2017 was $0.1 million and $0.5 million, respectively, on pre-tax losses of $0.8 million and $3.8 million, respectively. For the three and six months ended June 30, 2016, the Company recognized income tax expense (benefit) of $0.2 million and -$0.4 million, respectively, on pre-tax losses of $0.3 million and $4.7 million, respectively. As of June 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.

The total amount of unrecognized tax benefits, including interest and penalties, at ~~September~~June 30, ~~2016~~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 ~~three~~quarters ended June 30, 2017 and ~~nine months ended September 30, 2016 and 2015.~~2016. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.

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



• Federal		~~2012 – 2015~~
		2013 - 2016
• California and Canada		~~2011 – 2015~~
		2012 - 2016
• Brazil		~~2010 – 2015~~
		2011 - 2016
• Germany		~~2008 – 2015~~
		2012 - 2016
• Japan		2011 ~~– 2015~~
		- 2016
• Korea		~~2014 –~~ 2015
		- 2016
• United Kingdom	2014 - 2016
• Vietnam	~~2011 – 2015~~2016

However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to ~~technically~~ 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 uses the asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and the income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

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 a 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.

The deferred tax liabilities arising from the Merger were applied to the acquiree's deferred tax assets first. Accordingly, the tax benefit arising from those deferred tax liabilities was used to offset the corresponding deferred tax assets as part of the purchase price allocation.

The Company recognizes deferred tax liabilities associated with undistributed earnings of foreign subsidiaries, unless the earnings are expected to be reinvested permanently. Thus, the Company has not recorded deferred taxes on undistributed earnings, as they are intended to be permanently reinvested. If circumstances change and it becomes apparent that some or all of the undistributed earnings will not be invested indefinitely, or will be remitted in the foreseeable future, an additional deferred tax liability will be recorded for some or all of the undistributed earnings.


(14)	Subsequent Events

~~Reverse Stock Split~~

Management Transition

On ~~February 28,~~June 27, 2017, the Company ~~filed~~and the former Chief Technology Officer of the Company, entered into an agreement setting for the terms pursuant to which the former Chief Technology Officer ceased to be an officer and employee of the Company effective July 11, 2017. Under the terms of this agreement, the former Chief Technology Officer: (a) received a ~~Certificate~~severance payment equivalent to two months and two weeks of ~~Amendment~~his base salary; (b) received an acceleration of unvested stock options to purchase 5,000 shares then held by the former Chief Technology Officer and an extension of exercise period with respect to such options until December 31, 2017; (c) has until October 9, 2017 to exercise his remaining vested options; and (d) received COBRA benefits for up to one month.

On September 11, 2017, the Company announced management transition changes in connection with the ~~Delaware Secretary of State to amend the Company's Restated Certificate of Incorporation, which the amendment effected a one-for-five reverse stock split~~first anniversary of the ~~Company's common~~Merger and the progress successfully attained in the integration of the businesses of Legacy Zhone and DNS. The Legacy Zhone senior management team of James Norrod and Kirk Misaka had been serving as the Company’s Co-Chief Executive Officer and Chief Financial Officer, respectively, since the completion of the DNS acquisition under one-year employment agreements to ensure a smooth transition and integration of the businesses of legacy Zhone and DNS. Given the successful integration over the past year, the Company agreed with Messrs. Norrod

and Misaka that they would step down from their management roles effective as of September 11, 2017. On September 11, 2017, Mr. Norrod also agreed to step down as a member of the Board of Directors of the Company. In connection with their resignations from their management roles, Messrs. Norrod and Misaka entered into release agreements with the Company. Pursuant to his release agreement, Mr. Norrod is entitled to receive a lump sum cash payment of $300,000, continued health benefits at Company expense for a period of six months following his termination of employment and an extension of the period of time to exercise his vested stock options through September 11, 2018. Pursuant to his release agreement, Mr. Misaka is entitled to receive a lump sum cash payment of $232,500 and ~~reduced~~an extension of the ~~authorized shares~~period of ~~common~~time to exercise his vested stock ~~from 180 million~~options through September 11, 2018. Mr. Misaka has agreed to ~~36 million.~~remain in the employ of the Company as its Corporate Treasurer and Secretary for a transitional period to assist with the transition of his responsibilities, with the same base salary as was in effect prior to the management transition, and continued vesting of his outstanding stock options during the term of his employment, although his continued employment will no longer be governed by the terms of his employment agreement, which was terminated effective September 11, 2017. As part of this management transition, effective September 11, 2017, the Board of Directors of the Company appointed Il Yung Kim to serve as President, Chief Executive Officer and Acting Chief Financial Officer of the Company.

Patent Infringement Injunction Relating to Supplier

In July 2017, a supplier of the Company lost a patent infringement case relating to certain components that are used in Company products. As a result of this injunction, the ~~reverse stock split, the number of shares of the Company's common stock then issued and outstanding was reduced from approximately 81.9 million~~Company will no longer sell or ship these products to approximately 16.4 million. References to shares of the Company's common stock, stock options (and associated exercise price) and restricted stock units in this Form 10-Q/A are provided on a post-reverse stock split basis.Germany.

~~Amendment of DNS Loan~~

The Company's subsidiary DNS borrowed $1.8 million from DASAN for capital investment in February 2016, which amount was outstanding as of September 30, 2016. This loan matured in March 2017 with an option of renewal by mutual agreement, and bore interest at a rate of 6.9% per annum, payable annually. Effective, February 27, 2017, DNS amended the terms of this loan to extend the repayment date from March 2017 to March 2018, and to reduce the interest rate from 6.9% to 4.6% per annum.

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

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

Forward-Looking Statements

This report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; cost synergies, growth opportunities and other financial and operating benefits of the Merger; future growth and revenues from our products; our ability to refinance or repay our existing indebtedness prior to the applicable maturity date; future economic conditions and performance; anticipated performance of products or services; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and 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, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to realize the anticipated cost savings, synergies and other benefits of the Merger ~~(as defined below)~~ and any integration risks relating to the Merger, the ability to generate sufficient revenue to achieve or sustain profitability, the ability to raise additional capital to fund existing and future operations or to refinance or repay our existing indebtedness, defects or other performance problems in our products, ~~the~~any economic slowdown in the telecommunications industry that ~~has restricted~~restricts the ability of our customers to purchase our products, commercial acceptance of our products, intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same networks needs as our products, higher than anticipated expenses that we may incur, any failure to comply with the periodic filing and other requirements of The Nasdaq Stock Market for continued listing, material weaknesses or other deficiencies in our internal control over financial reporting, the initiation of any civil litigation, regulatory proceedings, government enforcement actions or other adverse effects relating to the Audit Committee investigation or errors in the consolidated financial statements of Legacy Zhone and other factors identified elsewhere in this report and in our most recent reports on Forms 10-K, 10-Q and 8-K. We undertake no obligation to revise or update any forward-looking statements for any reason.

~~RESTATEMENT OF PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS~~

OVERVIEW

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

As discussed under "Liquidity and Capital Resources" below, the maturing of short-term debt obligations and our recurring losses from operations raise substantial doubt on whether we will be able to continue as a going concern.

~~Broadband Access~~As of June 30, 2017, the total outstanding principal amount of our debt obligations was $27.0 million, consisting of the following:

$16.7 million in short-term debt obligations;

$5.3 million in short-term debt obligations to related parties; and

$5.0 million in long-term debt obligations to related parties.

Our ~~broadband access products offer~~ability to continue as a ~~variety of options for carriers~~“going concern” is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements, our ability to cure any defaults that occur under our debt agreements or to obtain waivers or forbearances with respect to any such defaults, and ~~service providers~~our ability to ~~connect residential~~pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and business customers. Our solutions allow carriers and service providers to either use high-speed fiber or leverage their existing deployed copper networks to offer broadband services to customer premises. Once our broadband access products are deployed, the service provider can offer voice, high-definition and ultra-high-definition video, high-speed internet access and business class services to their customers. We develop our broadband access products for all aspects of carrier and service provider access networks: customer premise equipment (such as DSL modems), Ethernet access demarcation devices, Gigabit passive optical network (GPON) and Gigabit Ethernet passive optical network (GEPON) optical network terminals (ONTs). We also develop central office products, such as broadband loop carriers for digital subscriber lines (DSL) and voice-grade telephone service (POTS), high-speed digital subscriber line access multiplexers (DSLAMs) with G.fast and very-high-bit-rate DSL (VDSL) capabilities, optical line terminals (OLTs) for passive optical distribution networks like GPON and GEPON as well as point-to-point Ethernet service for 1 Gigabit to 10 Gigabit access. Both DNS and Legacy Zhone were market leaders in the broadband access market prior to the Merger, and the combination of DNS and Legacy Zhone is expected to enhance our leadership position for both carrier and enterprise solutions in this market following the Merger.

~~Ethernet Switching~~

Our Ethernet switching products provide a high-performance and manageable solution that bridges the gap from carrier access technologies to the core network. Over the past ten years carriers have migrated access infrastructure to Ethernet from time-division multiplexing and asynchronous transfer mode systems. Our products can also be deployed in data centers, blurring the line between central office and data center. Our products support pure Ethernet switching as well as layer 3 IP and MPLS capabilities, and are currently being developed for interfacing with SDNs. Legacy Zhone did not offer comparable Ethernet switching products prior to the Merger, and therefore the Ethernet switching market is expected to provide an opportunity for growth for the combined company following the Merger.

~~Mobile Backhaul~~

Our mobile backhaul products provide a robust, manageable and scalable solution for mobile operators that enable them to upgrade their mobile backhaul systems and migrate from 3G networks to LTE and beyond. We provide our mobile backhaul products to mobile operators or carriers who provide the transport for mobile operators. Our mobile backhaul products may be collocated at the radio access node (RAN) base station (BS) and can aggregate multiple RAN BS in to a single backhaul for delivery of mobile traffic to the RAN network controller. We provide standard Ethernet/IP or multiprotocol label switching (MPLS) interfaces and interoperate with other vendors in these networks. With mobile backhaul networks providing carriers with significant revenue growth in recent years, mobile backhaul has become one of the most important parts of their networks. Legacy Zhone did not offer comparable mobile backhaul products prior to the Merger, and therefore the mobile backhaul market is expected to provide an opportunity for growth for the combined company following the Merger.

~~Passive Optical LAN~~

Our FiberLAN portfolio of POLAN products are designed for enterprise, campus, hospitality, and entertainment arena usage. Our FiberLAN portfolio includes our high-performance, high-bandwidth GPON OLTs connected to the industry’s most diverse ONT product line, which include units with integrated Power over Ethernet (PoE) to power a wide range of devices such as our full range of WIFI access points (APs) and scalable WIFI AP controller. Our environmentally friendly FiberLAN POLAN solutions are one of the most cost effective LAN technologies that can be deployed, allowing network managers to deploy a future proof, low-maintenance, manageable solution that requires less space, air conditioning, copper and electricity than other alternatives. Our FiberLAN portfolio relates primarily to Legacy Zhone products, while our WIFI access points and controllers consist primarily of DNS products. We expect the combination of Legacy Zhone and DNS products in this market to enhance the functionality of our product offerings and provide an opportunity for growth for the combined company following the Merger.

~~Software Defined Networks~~

Our SDN and network function virtualization (NFV) tools and building blocks to allow service providers to migrate their networks’ full complement of legacy control plane and data plane devices to a centralized intelligent controller that can reconfigure the services of the hundreds of network elements in real time for more controlled and efficient provision of bandwidth and latency across the network. This move to SDN and NFV provides better service for end customers and a more efficient and cost-effective use of hardware resources for service providers. We leverage our broadband access, mobile backhaul and Ethernet switching expertise to extract and virtualize many of the traditional legacy control and data plane functions to allow them to be run from the cloud. The latest evolution of our hardware-based solution was designed to support SDN and NFV. Our SDN and NFV tools reflect the combined experience and technologies of DNS and Legacy Zhone.

We have incurred significant losses to date and expect that our operating losses and negative cash flows from operations may continue. We incurred a net loss of $3.0 million for the year ended December 31, 2015 and a net loss of $8.6 million for the nine months ended September 30, 2016, which net losses have continued to reduce cash and cash equivalents. We had an accumulated deficit of ~~$12.8 million~~ ~~as of~~ ~~September 30, 2016~~. If we are unable to access or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, or if the economic, market and geopolitical conditions in the United States, Korea and the rest of the world deteriorate, we may experience material adverse impacts on our business, operating results and financial condition. We have continued our focus on cost control and operating efficiency along with restrictions on discretionary spending.principal payments come due.

Going forward, our key financial objectives include the following:

Increasing revenue while continuing to carefully control costs;

Continued investments in strategic research and product development activities that will provide the maximum potential return on investment; and

Minimizing consumption of our cash and cash equivalents.

~~MERGER~~Merger

On September 9, 2016, we acquired DNS through the merger of a wholly owned subsidiary of Zhone Technologies, Inc. with and into DNS, with DNS surviving as our wholly owned subsidiary (the Merger). In connection with the Merger, Zhone Technologies, Inc. changed its name to DASAN Zhone Solutions, Inc. Our common stock continues to be traded on the Nasdaq Capital Market, and our ticker symbol was changed from "ZHNE" to "DZSI" effective September 12, 2016.

At the effective time of the Merger, all issued and outstanding shares of capital stock of DNS held by its sole shareholder, DASAN Networks, Inc. ~~(DASAN)~~(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 ~~commons~~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 ~~DASAN~~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, ~~DASAN~~DNI held 58% of the outstanding shares of our common stock and the holders of our common stock immediately prior to the Merger retained, in the aggregate, 42% of the outstanding shares of our common stock.

See Note 2 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report for additional information regarding the Merger.

ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS

As discussed in Note 11(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~~six months ended ~~September~~June 30, ~~2016~~2017 presented in this Form 10-Q/A reflect the operating results of DNS and its consolidated subsidiaries for the period commencing on the first day of the applicable period through September 8, 2016 and the operating results of both DNS and Legacy Zhone and their respective consolidated subsidiaries for the period September 9 through September 30, 2016. Such resultsreport are compared to the financial results of DNS and its consolidated subsidiaries for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. Our balance sheet ~~as of September 30, 2016~~ 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~~six months ended ~~September~~June 30, ~~2016~~2017 are not comparable to our financial results for the three and ~~nine~~six months ended ~~September~~June 30, 2015. The fourth quarter ending December 31, 2016 will be the first quarter in which our financial results reflect a full quarter of operating results for both DNS and Legacy Zhone and their respective consolidated subsidiaries.2016.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from the ~~critical accounting policies~~information provided in Part II, “Item 7. Management’s Discussion and ~~estimates~~Analysis of ~~DNS set forth in the consolidated financial statements~~Financial Condition and Results of ~~DNS~~Operations – Critical Accounting Policies and ~~the notes thereto and elsewhere~~Estimates” included in our ~~Definitive Proxy Statement filed with~~Annual Report on Form 10-K for the ~~SEC on August 8, 2016, except for Goodwill and Other Acquisition-Related Intangible Assets as described below.~~

~~Goodwill and Other Acquisition-Related Intangible Assets~~

Goodwill and other acquisition-related intangible assets not subject to amortization are tested annually for impairment using a two-step approach, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. In the application of the impairment testing, we are required to make estimates of future operating trends and resulting cash flows and judgments on discount rates and other variables. Actual future results and other assumed variables could differ from these estimates. Our future operating performance will be impacted by the future amortization of intangible assets, potential charges related to purchased in-process research and development for future acquisitions, and potential impairment charges related to goodwill. Accordingly, the allocation of the purchase price of the acquired companies to intangible assets and goodwill has a significant impact on our future operating results. The allocation process requires management to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for these cash flows. Should different conditions prevail, we would have to perform an impairment review that might result in material write-downs of intangible assets and/or goodwill. Other factors we consider important which could trigger an impairment review, include, but are not limited to, significant changes in the manner of use of our acquired assets, significant changes in the strategy for our overall business or significant negative economic trends. If this evaluation indicates that the value of an intangible asset may be impaired, an assessment of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this assessment indicates that the cost of an intangible asset is not recoverable, based on the estimated undiscounted future cash flows or other comparable market valuations of the entity or technology acquired over the remaining amortization, the net carrying value of the related intangible asset will be reduced to fair value and the remaining amortization period may be adjusted. Due to uncertain market conditions and potential changes in our strategy and product portfolio, it is possible that forecasts used to support our intangible assets may change in the future, which could result in additional non-cash charges that would adversely affect our results of operations and financial condition.

year ended December 31, 2016.

~~EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS~~

See Note 1 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.

RESULTS OF OPERATIONS

We list in the table below the historical condensed consolidated statement of comprehensive loss data as a percentage of net revenue for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
	(As Restated)				(As Restated)
Net revenue:
Net revenue	100	%	100	%	100	%	100	%	82	%	75	%	81	%	73	%
Cost of revenue
Net revenue - related parties									18	%	25	%	19	%	27	%
Total net revenue									100	%	100	%	100	%	100	%
Cost of revenue:
Products and services	70	%	74	%	74	%	74	%	54	%	52	%	52	%	54	%
Products and services - related parties									14	%	21	%	15	%	23	%
Amortization of intangible assets	0	%	0	%	0	%	0	%	0	%	0	%	0	%	0	%
Total cost of revenue									68	%	74	%	67	%	77	%
Gross profit	30	%	26	%	26	%	26	%	32	%	26	%	33	%	23	%
Operating expenses:
Research and product development	18	%	22	%	17	%	18	%	15	%	15	%	16	%	16	%
Selling, general and administrative	26	%	17	%	18	%	13	%
Selling, marketing, general and administrative									17	%	12	%	19	%	14	%
Amortization of intangible assets	1	%	0	%	0	%	0	%	1	%	0	%	1	%	0	%
Total operating expenses	45	%	39	%	35	%	31	%	33	%	27	%	36	%	30	%
Operating loss	(15	)%	(13	)%	(10	)%	(5	)%	(1	)%	0	%	(3	)%	(8	)%
Interest expense, net	(1	)%	(1	)%	(1	)%	0	%
Interest income									0	%	0	%	0	%	0	%
Interest expense									0	%	(1	)%	0	%	(1	)%
Other income, net	(1	)%	3	%	0	%	1	%	0	%	0	%	0	%	0	%
Loss before income taxes	(16	)%	(11	)%	(10	)%	(5	)%	(1	)%	(1	)%	(3	)%	(8	)%
Income tax provision (benefit)	(2	)%	1	%	(1	)%	1	%	0	%	1	%	0	%	(1	)%
Net loss	(15	)%	(12	)%	(9	)%	(5	)%	(1	)%	(2	)%	(4	)%	(7	)%
Less: Net loss attributable to non-controlling interest	0	%	0	%	0	%	0	%
Net loss attributable to non-controlling interest									0	%	0	%	0	%	0	%
Net loss attributable to DASAN Zhone Solutions, Inc.	(14	)%	(12	)%	(9	)%	(5	)%	(1	)%	(2	)%	(4	)%	(7	)%
Other comprehensive income, net of foreign currency translation adjustments	7	%	4	%	3	%	0	%
Foreign currency translation adjustments									(1	)%	0	%	2	%	1	%
Comprehensive loss	(7	)%	(8	)%	(6	)%	(5	)%	(3	)%	(2	)%	(2	)%	(7	)%
Less: Comprehensive income attributable to non-controlling interest	0	%	0	%	0	%	0	%
Comprehensive income attributable to non-controlling interest									0	%	0	%	0	%	0	%
Comprehensive loss attributable to DASAN Zhone Solutions, Inc.	(7	)%	(8	)%	(6	)%	(5	)%	(3	)%	(2	)%	(2	)%	(7	)%

Net Revenue

Prior to the Merger, DNS was a leading telecommunications equipment provider in the Asia-Pacific region, providing products and services to some of the largest carriers in the region with a particular focus on Korea, Japan and Vietnam. DNS typically generated approximately 85% of its net revenue from the Asia-Pacific region prior to the Merger. In contrast, Legacy Zhone typically generated less than 5% of its net revenue from the Asia-Pacific region prior to the Merger, with instead the majority of its net revenue derived from the Americas and the EMEA region. Given DNS’ pre-Merger market share in Korea and in the Asia-Pacific region generally, we expect that net revenue from Korea and elsewhere in the Asia-Pacific region will continue to be significant for the combined company following the Merger, with growth opportunities for the combined company to expand sales of legacy DNS products in the geographic regions where Legacy Zhone had a strong presence.

Information about our net revenue for products and services for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 is summarized below (in millions):


	Three Months Ended September 30,								Nine Months Ended September 30,									Three Months Ended June 30,								Six Months Ended June 30,
	2016		2015		Increase		% change		2016		2015		Increase (Decrease)			% change		2017		2016		Increase (Decrease)		% change		2017	2016	Increase (Decrease)	% change
	(As restated)								(As restated)											(As Revised)							(As Revised)
Products	$	29.7	$	22.4	$	7.3	33	%	$	86.5	$	88.9	$	(2.4	)	(3	)%	$	57.3	$	32.9	$	24.4	74	%	107.0	57.4	49.6	86	%
Services	2.4		0.2		2.2		1,100	%	6.2		4.4		1.8			41	%	2.7		1.3		1.4		108	%	5.1	2.2	2.9	132	%
Total	$	32.1	$	22.6	$	9.5	42	%	$	92.7	$	93.3	$	(0.6	)	(1	)%	$	60.0	$	34.2	$	25.8	75	%	112.1	59.6	52.5	88	%

Information about our net revenue for North America and international markets for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 is summarized below (in millions):


	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended June 30,									Six Months Ended June 30,
	2016		2015		Increase			% change		2016		2015		Increase (Decrease)			% change		2017		2016		Increase (Decrease)			% change		2017	2016	Increase (Decrease)	% change
	(As restated)									(As restated)											(As Revised)								(As Revised)
Revenue by geography:
United States	$	6.5	$	0.6	$	5.9		983	%	$	7.5	$	4.0	$	3.5		88	%	$	12.0	$	1.7	$	10.3		606	%	24.1	4.0	20.1	503	%
Canada	0.3		—		0.3			100	%	0.3		—		0.3			100	%	1.4		—		1.4			100	%	2.6	0.0	2.6	100	%
Total North America	6.8		0.6		6.2			1,033	%	7.8		4.0		3.8			95	%	13.4		1.7		11.7			688	%	26.7	4.0	22.7	568	%
Latin America	1.4		—		1.4			100	%	1.4		—		1.4			100	%	7.1		0.6		6.5			1,083	%	11.9	1.0	10.9	1,090	%
Europe, Middle East, Africa	1.3		—		1.3			100	%	1.3		—		1.3			100	%	6.3		1.9		4.4			232	%	11.8	3.0	8.8	293	%
Korea	18.1		18.5		(0.4		)	(2	)%	52.3		67.1		(14.8		)	(22	)%	32.2		25.4		6.8			27	%	48.5	41.8	6.7	16	%
Other Asia Pacific	4.5		3.6		0.9			25	%	29.9		22.2		7.7			35	%
Asia Pacific																			1.0		4.7		(3.7		)	(79	)%	13.1	9.8	3.3	34	%
Total International	25.3		22.1		3.2			14	%	84.9		89.4		(4.5		)	(5	)%	46.6		32.6		14.0			43	%	85.3	55.6	29.7	53	%
Total	$	32.1	$	22.6	$	9.5		42	%	$	92.7	$	93.3	$	(0.6	)	(1	)%	$	60.0	$	34.3	$	25.7		75	%	112.1	59.6	52.5	88	%

For the three months ended ~~September~~June 30, ~~2016~~,2017, net revenue increased ~~42%~~75% or ~~$9.5~~$25.7 million to ~~$32.1~~$60.0 million from ~~$22.6~~$34.3 million for the same period last year. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, net revenue ~~remained constant~~increased 88% or $52.5 million to $112.1 million from $59.6 million for the same period last year. For the three months ended June 30, 2017, product revenue increased 74% or $24.4 million to $57.3 million compared to the same period last year. For the ~~three~~six months ended ~~September~~June 30, ~~2016~~,2017, product revenue increased ~~33%~~86% or ~~$7.3~~$49.6 million to ~~$29.7~~$107.0 million compared to ~~$22.4 million for the same period last year. For the nine months ended September 30, 2016, product revenue decreased 3% or $2.4 million to $86.5 million, compared to $88.9 million for~~ the same period last year. The increase in net revenue for the three and six months ended ~~September~~June 30, ~~2016~~2017 was primarily related to the consummation of the Merger in September 2016 (which resulted in the inclusion of net revenue related to the Legacy Zhone business for ~~22 days of~~ the current year ~~quarter)~~periods). The relatively flat net revenues for the nine months ended September 30 2016 compared to the prior year period was primarily attributable to decreased sales in the Korea, offset by the inclusion of net revenue related to the Legacy Zhone business for 22 days of the current year period.

Service revenue ~~mainly~~ represents revenue from ~~service~~ maintenance ~~contracts.~~and other services associated with product shipments. For the three months ended ~~September~~June 30, ~~2016~~ ~~and 2015,~~2017, service revenue increased ~~1,100%~~108% or ~~$2.2~~$1.4 million to ~~$2.3~~$2.7 million compared to ~~$0.2 million for~~ the same period last year. For the ~~nine~~six months ended ~~September~~June 30, ~~2015,~~2017, service revenue increased ~~by 41%~~132% or ~~$1.8~~$2.9 million to ~~$6.2~~$5.1 million compared to ~~$4.4 million for~~ the same period last year. The ~~increase~~increases in service revenue ~~for the three and~~ ~~nine months ended September 30, 2016~~ ~~was~~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 ~~22 days of~~ the current year ~~period)~~periods), as well as an increase in sales of maintenance services.

International net revenue increased ~~14%~~43% or ~~$3.2~~$14.0 million to ~~$25.3~~$46.6 million for the three months ended ~~September~~June 30, ~~2016~~2017 from ~~$22.1~~$32.6 million for the same period last year, and represented ~~79%~~78% of total net revenue compared with ~~98%~~95% during the same period of ~~2015.~~2016. International net revenue ~~decreased 5%~~increased 53% or ~~$4.5~~$29.7 million to ~~$84.9~~$85.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 from ~~$89.4~~$55.6 million for the same period last year, and represented ~~92%~~76% of total net revenue

compared with ~~96%~~93% during the same period of ~~2015.~~2016. The ~~increase~~increases in international net revenue ~~for the three months ended September 30, 2016 was~~were primarily related to the consummation of the Merger in September 2016 (which resulted in the inclusion of international net revenue related to the Legacy Zhone business for ~~22 days of~~ the current year ~~quarter)~~periods). The decrease in international net revenue for the nine months ended September 30, 2016 compared to the prior year period was primarily due to decreased sales in Korea, partially offset by the inclusion of net revenue related to the Legacy Zhone business for 22 days of the current year period.

For the three months ended ~~September~~June 30, ~~2016~~ ~~and 2015, three~~2017, two customers represented ~~55%~~11% and ~~63%~~14% (a related-party) of net revenue, respectively. For the ~~nine~~six months ended ~~September~~June 30, 2017, one customer represented 11% (a related-party) of net revenue. For the three months ended June 30, 2016, ~~and 2015,~~ three customers represented ~~48%~~34%, 21% (a related-party) and ~~55%~~12% of net revenue, respectively. ~~SK Broadband, LG Uplus~~For the six months ended June 30, 2016 three customers represented 25%, 23% (a related-party) and ~~DASAN (a related party) each accounted for more than 10%~~12% of net revenue, for the three months ended September 30, 2016. SK Broadband, LG Uplus, Viettel Group and DASAN (a related party) each accounted for more than 10% of net revenue for the nine months ended September 30, 2016. LG Uplus, Korea Telecom and SK Broadband each accounted for more than 10% of net revenue for the three months ended September 30, 2015. LG Uplus, Korea Telecom and Viettel Group each accounted for more than 10% of net revenue for the nine months ended September 30, 2015. Each of the foregoing customers was a customer of DNS prior to the Merger. No Legacy Zhone customers and no other DNS customers accounted for more than 10% of net revenue during the three and nine months ended September 30, 2016 and 2015.

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

Cost of Revenue and Gross Margin

Total cost of revenue ~~including stock-based compensation and amortization of intangibles,~~ increased ~~34%~~61% or ~~$5.8~~$15.5 million to ~~$22.6~~$40.8 million for the three months ended ~~September~~June 30, ~~2016,~~2017, compared to ~~$16.8~~$25.3 million for the three months ended ~~September~~June 30, ~~2015.~~2016. Total cost of revenue ~~including stock-based compensation and amortization of intangibles slightly decreased 0.6%~~increased 63% or ~~$0.4~~$29.1 million to ~~$68.9~~$75.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017, compared to ~~$69.3~~$46.0 million for the ~~same period last year.~~six months ended June 30, 2016. The ~~increase~~increases in total cost of revenue ~~for the three months ended September 30, 2016 was~~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 ~~22 days of~~ the current year ~~period)~~periods) as well as increased ~~sales in the current year period.~~sales. Gross margin increased slightly ~~increased~~in both the three and six months ended June 30, 2017 compared to the prior year periods due to improved manufacturing efficiencies and product mix.

We expect that in the future our cost of revenue as a percentage of net revenue will vary depending on the mix and average selling prices of products ~~sold, with longer term gross margin expansion expected to come from product cost reductions and manufacturing economies of scale resulting from the Merger.~~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 relating to discontinued products and excess or obsolete inventory.

Research and Product Development Expenses

Research and product development expenses increased ~~21%~~79% or ~~$1.0~~$4.0 million to ~~$5.9~~$9.0 million for the three months ended ~~September~~June 30, ~~2016~~2017 compared to ~~$4.9~~$5.0 million for the three months ended ~~September~~June 30, ~~2015.~~2016. Research and product development expenses ~~decreased 6%~~increased 88% or ~~$1.0~~$8.5 million to ~~$15.6~~$18.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 compared to ~~$16.5~~$9.7 million for the ~~same period last year.~~six months ended June 30, 2016. The increase in research and product development expenses ~~for the three months ended September 30, 2016~~ 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 for ~~22 days of~~ the current year period. The decrease in research and product development expenses for the nine months ended September 30, 2016 was primarily due to a reduction in personnel-related expenses from lower headcount as compared to the same period last year, partially offset by the inclusion of research and product development expenses relating to the Legacy Zhone business in the current year period as a result of the consummation of the Merger in September 2016.period). 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 ~~110%~~152% or ~~$4.3~~$6.3 million to ~~$8.3~~$10.5 million for the three months ended ~~September~~June 30, ~~2016~~2017 compared to ~~$3.9~~$4.1 million for the three months ended ~~September~~June 30, ~~2015,~~2016. Selling, marketing, general and administrative expenses increased ~~36%~~150% or ~~$4.5~~$12.6 million to ~~$17.0~~$21.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 compared to ~~$12.5~~$8.4 million for the ~~same period last year.~~six months ended June 30, 2016. The increases in selling, marketing, general and administrative expenses were primarily due to the consummation of the Merger in September 2016 (which resulted in the inclusion of selling, marketing, general and administrative expenses related to Legacy Zhone business for ~~22 days of~~ the current year ~~period)~~periods), offset by higher commission expenses during the three and ~~inclusion in the current year periods of $1.3 million in Merger-related costs.~~

We expect selling, general and administrative expenses to increase following the Merger, primarily driven by an increase in sales commission expense resulting from expected additional sales opportunities primarily related to the combined company's mobile backhaul and FiberLAN POLAN products.six months ended June 30, 2016.

Income Tax Provision

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~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.

OTHER PERFORMANCE MEASURES

In managing our business and assessing our financial performance, we supplement the information provided by our GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) ~~Merger-related costs~~stock-based compensation, and (v) ~~non-cash equity-based compensation expense, and (vi)~~ material non-recurring ~~non-cash~~ transactions or events, such as Merger transaction costs or a gain (loss) on sale of assets or impairment of fixed assets. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our 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 depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

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

other companies in our industry may calculate Adjusted EBITDA and similar measures differently than we do, 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 GAAP or as a measure of liquidity. Management understands these limitations and compensates for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
	(As Restated)						(As Restated)
Net loss	$	(4,656	)	$	(2,780	)	$	(8,568	)	$	(4,938	)	$	(874	)	$	(533	)	$	(4,372	)	$	(4,294	)
Add:
Interest expense, net	173			87			463			286			236			144			484			290
Provision for taxes	(610		)	295			(1,041		)	480
Income tax provision (benefit)													99			196			539			(431		)
Depreciation and amortization	628			338			1,164			1,112			1,171			195			2,351			463
Merger-related costs	1,273			—			1,273			—
Non-cash equity-based compensation expense	128			—			128			—
Stock-based compensation													220			—			475			—
Adjusted EBITDA	$	(3,064	)	$	(2,060	)	$	(6,581	)	$	(3,060	)	$	852		$	2		$	(523	)	$	(3,972	)

LIQUIDITY AND CAPITAL RESOURCES ~~(AS RESTATED)~~

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~~June 30, ~~2016~~2017, our cash and cash equivalents were $~~33.6~~9.9 million compared to ~~$10.0~~$17.9 million at December 31, ~~2015, which~~2016. Our cash and cash equivalents as of June 30, 2017 included ~~$24.8~~$0.9 million in ~~international~~ cash ~~balances.~~balances held by our Korean subsidiary. The ~~$23.6~~$8.0 million ~~increase~~decrease in cash and cash equivalents was attributable to net cash ~~provided by~~used in operating ~~investing~~ and financing activities of ~~$13.2 million, $5.3~~$6.8 million and ~~$3.5~~$0.9 million, respectively, ~~and~~partially offset by the effect of exchange rate changes on cash of ~~$1.6~~$0.7 million and net cash provided by investing activities of $0.9 million.

Ability to Continue as a Going Concern

The accompanying 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 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.

We have incurred significant losses to date and our losses from operations may continue. We incurred net losses of $0.9 million and $15.3 million for the six months ended June 30, 2017 and the year ended December 31, 2016, respectively. We had accumulated deficit of $24.5 million and working capital of $55.2 million as of June 30, 2017. As of June 30, 2017, we had

approximately $9.9 million in cash and cash equivalents, which included $0.9 million in cash balances held by our Korean subsidiary, and $27.0 million in aggregate principal amount of outstanding borrowings under our short-term debt obligations and our loans from DNI and its affiliates. In addition, we had $5.5 million in aggregate borrowing availability under our credit facilities as of June 30, 2017. We had $9.0 million committed as security for letters of credit under these facilities as of June 30, 2017. Due to the amount of short-term debt obligations maturing within the next 12 months and our recurring operating losses, our cash resources may not be sufficient to settle these short-term debt obligations. Our ability to continue as a "going concern" is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements, our ability to cure any defaults that occur under our debt agreements or to obtain waivers or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due. Although the process of amending, replacing or refinancing our short-term debt obligations is ongoing and we are in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide us with the required liquidity to remove the substantial doubt as to our ability to continue as a going concern. If we are unable to amend, replace, refinance our short-term debt obligations or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, we may experience material adverse impacts on our business, operating results and financial condition.

We have continued our focus on cost control and operating efficiency along with restrictions on discretionary spending. In order to meet our liquidity needs and finance our capital expenditures and working capital needs for our business, we may be required to sell assets, issue debt or equity securities, purchase credit insurance or borrow on potentially unfavorable terms. In addition, we may be required to 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. Based on our current plans and business conditions, we believe that our focused operating expense discipline along with our existing cash, cash equivalents and available credit facilities will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months, however the factors discussed above raise substantial doubt about our ability to continue as a going concern.

Operating Activities

Net cash ~~provided by~~used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 consisted of a net loss of ~~$8.6~~$4.4 million, adjusted for non-cash charges totaling ~~$1.9~~$3.1 million and ~~an increase~~a decrease in net operating assets totaling ~~$19.9~~$5.5 million. The most significant components of the changes in net operating assets were an increase in accounts receivable of ~~$12.9~~$8.7 million and an increase in inventory of $3.7 million, offset by ~~decreases~~a decrease in accounts payable ~~and inventory~~ of ~~$5.8~~$3.7 million and ~~$3.1 million, respectively.~~a decrease in accrued expenses of $4.1 million. The increase in accounts receivable was primarily the result of ~~increased sales to several large customers in~~ the ~~third quarter of 2016 and~~ timing of receivables collections during the current year period. The ~~decrease in accounts payable was primarily due to timing of payments. The decrease~~increase in inventory was due to ~~better~~slower utilization of inventory in the current year period. The decrease in accounts payable was mainly due to reclassification of certain balances to short-term debt.

Net cash ~~used in~~provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2015~~2016 consisted of a net loss of ~~$4.9~~$4.3 million, adjusted for non-cash charges totaling ~~$0.8~~$0.2 million and an increase in net operating assets totaling ~~$1.8~~$4.6 million. The most significant components of the changes in net operating assets were a decrease in accrued expenses of $17.2 million offset by an increase in ~~accounts receivable~~prepaid expenses and other current assets of ~~$11.2 million offset by a decrease of accounts payable of $16.8~~$8.0 million. ~~The increase in accounts receivable was primarily due to the timing of receivables collections during the current year period. The decrease in accounts payable was primarily due to timing of payments.~~

Investing Activities

Net cash ~~provided~~used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 consisted of cash acquired through the Merger of $7.0 million, offset by a decrease in restricted cash of $1.0 million. Cash acquired through the Merger represented the Legacy Zhone cash balance at the time of Merger.

~~Net cash provided by investing activities for the nine months ended September 30, 2015~~ consisted of an increase in restricted cash of ~~$2.6~~$1.3 million and purchase of property of equipment of $0.7 million, offset by ~~purchases~~proceeds from short-term investments of ~~property~~$1.5 million.

Net cash used in investing activities for the six months ended June 30, 2016 consisted of an increase in short-term and ~~equipment~~long-term loans to others of ~~$0.5~~$2.2 million and an increase in restricted cash of $0.2 million, offset by a decrease in short-term and long-term loans of $0.4 million.

Financing Activities

Net cash ~~provided by~~used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 consisted of cash used in repayments of borrowings of $9.6 million, offset by proceeds from short-term borrowings of ~~$19.8 million and proceeds from long-term borrowings of $6.8 million, offset by repayments of short-term borrowings of $23.1~~$8.7 million.

Net cash provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2015~~2016 consisted of proceeds from short-term borrowings and proceeds from ~~issuance~~long-term borrowings of ~~common stock of $22.2~~$0.2 million and ~~$1.6~~$1.8 million, respectively, offset by repayments of ~~short-term~~ borrowings of ~~$16.4~~$1.3 million.

Cash Management

Our primary source of liquidity comes from our cash and cash equivalents, which totaled $~~33.6~~9.9 million at ~~September~~June 30, ~~2016~~2017~~. This included $24.8 million of cash and cash equivalents of DNS. In addition,~~, as well as our credit facilities, under which we had an aggregate borrowing availability of ~~$37.0~~$4.1 million ~~in revolving credit facilities~~ as of ~~September~~June 30, ~~2016,~~2017, and under which ~~$9.5~~$2.5 million was committed as security for letters of credit as of ~~September~~June 30, ~~2016.~~2017. Our cash and cash equivalents as of June 30, 2017 included $0.9 million in cash balances held by our Korean subsidiary.

~~Wells Fargo Bank~~WFB Facility

As of ~~September~~June 30, ~~2016~~,2017, we had a $25.0 million ~~revolving line of credit and letter of~~ credit facility (the WFB Facility) with Wells Fargo Bank (WFB). Under the WFB Facility, we have the option of borrowing funds at agreed upon interest rates. The amount that we are able to borrow under the WFB Facility varies based on eligible accounts receivable and inventory, as defined in the WFB Facility, as long as the aggregate amount outstanding does not exceed $25.0 million less the amount committed as security for letters of credit. To maintain availability of funds under the WFB Facility, we pay a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense.

~~Based on eligible accounts receivable and inventory, as defined in~~As of June 30, 2017, we had no outstanding borrowings under the WFB Facility, weand $2.5 million was committed as security for letters of credit. We had ~~$2.9~~$4.1 million of borrowing availability under the WFB Facility as of ~~September~~June 30, ~~2016. We had no outstanding borrowings under our WFB Facility as of September 30, 2016.~~2017. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin based on our average excess availability (as calculated under the WFB Facility). The interest rate on the WFB Facility was ~~3.35%~~3.8% at ~~September~~June 30, ~~2016.~~2017. The maturity date under the WFB Facility is March 31, 2019.

Our obligations under the WFB Facility are secured by substantially all of our personal property assets and those of our subsidiaries that guarantee the WFB Facility, including our intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If we default under the WFB Facility due to a covenant breach or otherwise, WFB may be entitled to, among other things, require the immediate repayment of all outstanding amounts and sell our assets to satisfy the obligations under the WFB Facility. In ~~addition, WFB may be entitled to, among other things, sell our assets to satisfy the obligations under the WFB Facility. In~~ the past we have violated the covenants in our former ~~revolving line of credit and letter of~~ credit facility and received waivers for these violations. On July 3, 2017, we executed an agreement with WFB to extend the due date for delivery of our audited financial statements for the year ended December 31, 2016 to September 27, 2017. As of ~~September~~June 30, ~~2016~~,2017, we were in compliance with ~~these covenants.~~the covenants under the WFB Facility. We make no assurances that we will be in compliance with these covenants in the future.

Bank and Trade Facilities - Foreign Operations

Certain of our foreign subsidiaries have entered into various financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. These facilities are renewed on an annual basis and are generally secured by a security interest in certain assets of the applicable foreign subsidiaries. Payments under such facilities are made in accordance with the given lender’s amortization schedules. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, we had an aggregate outstanding balance of ~~$20.1~~$16.7 million and ~~$21.8~~$17.6 million, respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 ranged from ~~1.66%~~2.3% to ~~4.26%~~5.9% and ~~2.04%~~1.9% to ~~3.55%~~4.1%, respectively.

~~As of September 30, 2016, we had a $12.0 million letter of credit facility with certain foreign banks under which $5.7 million was committed as security for letters of credit.~~

~~Related Party~~Related-Party Debt

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

In addition, ~~DNS~~we borrowed $1.8 million from ~~DASAN~~DNI for capital investment in February 2016, which amount was outstanding as of ~~September~~June 30, ~~2016.~~2017. This loan ~~matures~~matured in March 2017 with an option of renewal by mutual agreement, and ~~bears~~bore interest at a rate of 6.9% per annum, payable annually. Effective February 27, 2017, we amended the terms of this loan to extend the repayment date from March 2017 to March 2018 and to reduce the interest rate from 6.9% to 4.6% per annum.

On June 23, 2017, we borrowed $3.5 million from Solueta, an affiliate of DNI, which amount was outstanding as of June 30, 2017. This loan matures in November 2017 and bears interest at a rate of 4.6% per annum, payable monthly.

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~~June 30, ~~2016~~,2017, three customers accounted for ~~37%~~22%, 14% and 12% of net accounts ~~receivable~~receivables, respectively, and receivables from customers in countries other than the United States represented ~~86%~~88% 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.

~~We have incurred significant losses~~As discussed above in "Ability to ~~date and expect that our operating losses and negative cash flows from operations may continue. We incurred~~Continue as a net loss of $3.0 million for the year ended December 31, 2015 and a net loss of $8.6 million for the nine months ended September 30, 2016, which net losses have continued to reduce cash and cash equivalents. We had an accumulated deficit of $12.8 million at September 30, 2016. In order to meet our liquidity needs and finance our capital expenditures and working capital needs for our business, we may be required to sell assets, issue debt or equity securities, purchase credit insurance or borrow on potentially unfavorable terms. In addition, we may be required to reduce our operations in low margin regions, including reductions in headcount. We may be unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all. If additional capitalGoing Concern", there is ~~raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict~~substantial doubt about our ability to ~~operate our business. Likewise,~~continue as a going concern. The accompanying condensed consolidated financial statements do not include any ~~equity financing could result in additional dilution of our stockholders. If~~adjustments that might be necessary if we are unable to obtain additional capital or are required to obtain additional capital on terms that are not favorable to us, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. Based on our current plans and business conditions, we believe that our focused operating expense discipline along with our existing cash, cash equivalents and available credit facilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.continue as a going concern.

Contractual Commitments and Off-Balance Sheet Arrangements

The contractual commitments discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Commitments and Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2015 have changed significantly due to the consummation of the Merger on September 9, 2016; 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.

At ~~September~~June 30, ~~2016,~~2017, our future contractual commitments by fiscal year were as follows (in thousands):

Payments due by period
Total 2016 2017 2018 2019 2020 Thereafter
(As Restated)
Operating leases $ 22,251
$ 836
$ 3,626
$ 2,918
$ 2,335
$ 2,192
$ 10,344
Unrecognized purchase commitments 10,216
6,329
1,398
1,383
1,106
—
—
Lines of credit 5,749
5,749
—
—
—
—
—
Related party debt 6,800
—
—
1,800
—
—
5,000
Total future contractual commitments $ 45,016
$ 12,914
$ 5,024
$ 6,101
$ 3,441
$ 2,192
$ 15,344



			Payments due by period
	Total		2017		2018		2019		2020		2021		Thereafter

Operating leases	$	20,804	$	1,862	$	3,227	$	2,496	$	2,358	$	2,264	$	8,597
Purchase commitments	8,412		4,525		1,398		1,383		1,106		—		—
Short-term debt	16,686		16,686		—		—		—		—		—
Related-party debt	10,310		3,510		1,800		—		—		5,000		—
Total future contractual commitments	$	56,212	$	26,583	$	6,425	$	3,879	$	3,464	$	7,264	$	8,597

Operating Leases

The operating lease amounts shown above represent primarily off-balance sheet arrangements. For operating lease commitments, a liability is generally not recorded on our balance sheet unless the facility represents an excess facility for which an estimate of the facility exit costs has been recorded on our balance sheet, net of estimated sublease income. For operating leases that include contractual commitments for operating expenses and maintenance, estimates of such amounts are included based on current rates. Payments made under operating leases will be treated as rent expense for the facilities currently being utilized.

~~Unrecognized~~

Purchase Commitments

The ~~unrecognized~~ purchase commitments shown above represent non-cancellable inventory purchase commitments as of ~~September~~June 30, ~~2016~~.2017.

~~Lines of Credit~~On July 16, 2017, we reached an agreement with a supplier to cancel a purchase arrangement for certain inventory which was committed through 2020. Under the settlement, we are no longer required to fulfill our commitment to purchase $4.3 million in inventory. In connection with the settlement, we also entered into a technical support services arrangement with the supplier through April 30, 2021.

~~The lines of credit~~Short-term Debt

Our short-term debt obligations have been recorded as liabilities on our balance sheet, and ~~comprise $5.7~~comprised $16.7 million in outstanding borrowings under the ~~trade~~credit facilities of our foreign ~~subsidiaries.~~subsidiaries as of June 30, 2017. The ~~lines of credit obligation~~ 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~~June 30, ~~2016~~,2017, the interest rate per annum applicable to outstanding borrowings under the trade facilities of our foreign subsidiaries ranged from ~~1.66%~~2.3% to ~~2.38%~~5.9%. The amount shown above excludes $5.3 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~~Related-Party Debt

As of ~~September~~June 30, ~~2016,~~2017, we had borrowed an aggregate of $10.3 million from related parties, which included $6.8 million from ~~DASAN,~~DNI, of which $5.0 million and $1.8 million mature in September 2021 and March 2018, respectively, and ~~the~~$3.5 million from Solueta, an affiliate of DNI, which matures in November 2017. The interest rate per annum applicable to these borrowings was 4.6% ~~and 6.9%, respectively.~~.

See above under “Cash Management” for further information about our ~~related party borrowings.~~related-party debt.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 ~~financial deposits~~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~~June 30, ~~2016~~2017 ~~and 2015,~~ ~~three~~, two customers represented ~~55%~~11% and ~~63%~~14% of net revenue, respectively. For the ~~nine~~six months ended ~~September~~June 30, 2017, one customer represented 11% ( a related-party) of net revenue. For the three months ended June 30, 2016, ~~and 2015,~~ three customers represented ~~48%~~34%, 21% ( a related-party) and ~~55%~~12% of net revenue, respectively. ~~SK Broadband, LG Uplus~~For the six months ended June 30, 2016, three customers represented 25%, 23% (a related-party) and ~~DASAN (a related party) each accounted for more than 10%~~12% of net revenue, for the three and nine months ended September 30, 2016. LG Uplus, Korea Telecom and SK Broadband each accounted for more than 10% of net revenue for the three months ended September 30, 2015. LG Uplus, Korea Telecom and Viettel Group each accounted for more than 10% of net revenue for the nine months ended September 30, 2015. Each of the foregoing customers was a customer of DNS prior to the Merger. No Legacy Zhone customers and no other DNS customers accounted for more than 10% of net revenue during the three and nine months ended September 30, 2016 and 2015.respectively.

As of ~~September~~June 30, ~~2016~~2017 ~~and December 31, 2015,~~, three customers ~~accounted for 37%~~represented 22%, 14% and 12% of net accounts ~~receivable.~~receivable, respectively. The customers who represented 22% and 12% were related parties. As of December 31, 2016, two customers represented 13% (a related-party) and 10% of net accounts receivable, respectively.

As of ~~September~~June 30, ~~2016~~2017, and December 31, ~~2015,~~2016, receivables from customers in countries other than the United States represented ~~86%~~88% and ~~93%~~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 ~~short-term~~ debt. As of ~~September~~June 30, ~~2016~~2017, our outstanding ~~short-term~~ debt balance was ~~$21.9 million.~~$27.0 million, which comprised $16.7 million in aggregate principal amount of borrowings under our short-term credit facilities and $10.3 million in loans from DNI and its affiliates (which bear interest at a fixed rate). Amounts borrowed under ~~the~~our short-term ~~debt~~credit facilities bear interest ranging from ~~1.66%~~2.3% to ~~4.26%~~5.9% as of ~~September~~June 30, ~~2016~~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 ~~$0.4~~$0.3 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~~six months of ~~2016~~2017 and during ~~2015,~~fiscal year 2016, we did not hedge any of our foreign currency exposure.

We have performed a sensitivity ~~analyses~~analysis as of ~~September~~June 30, ~~2016~~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 ~~analyses~~analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign exchange loss of ~~$0.3~~$2.6 million at ~~September~~June 30, ~~2016~~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 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 and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In ~~connection with~~designing and evaluating the ~~filing~~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 ~~Original Form 10-Q on November 14, 2016,~~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), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017, the end of the period covered by this report. The ~~controls~~ evaluation was done under the supervision and with the participation of management, including our Co-Chief Executive Officers and our Chief Financial Officer. Based upon this evaluation, our Co-Chief Executive

Officers and Chief Financial Officer concluded that, subject to the limitations noted in Part I, Item 4 of the Original Form 10-Q, as of the end of the period covered by this report, our disclosure controls and procedures were effective, except for those pertaining to DNS, to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to DASAN Zhone and its consolidated subsidiaries is made known to management, including our Co-Chief Executive Officers and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

Subsequent to that evaluation, in connection with the restatement discussed in Note 1 of the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report and the filing of this Form 10-Q/A, we re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. This re-evaluation was done under the supervision and with the participation of management, including our Co-Chief Executive Officers and our Chief Financial Officer. Based upon this reevaluation, our Co-Chief Executive Officers and Chief Financial Officer have concluded that, because of the material weaknesses in our internal control over financial reporting that existed as of December 31, 2016, as described below, our disclosure controls and procedures were not effective as of ~~September~~June 30, ~~2016.~~2017.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. Due to the incorrect application of generally accepted accounting principles that resulted in material misstatements and a restatement of our unaudited condensed consolidated financial statement discussed in Note 1 of the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report, management identifiedThe material weaknesses that management previously identified in connection with its evaluation of our internal control over financial ~~reporting. Specifically,~~reporting as of December 31, 2016 were as follows: we did not maintain an effective control environment as there was an insufficient complement of personnel with appropriate accounting knowledge, experience and competence, resulting in incorrect application of generally accepted accounting principles. This material weakness contributed to the following material weaknesses. We did not maintain effective controls over ~~its~~our financial close process. Also, we did not design and maintain effective controls over the review of supporting information to determine the completeness and accuracy of the accounting for complex transactions, specifically related to the business combination that occurred on September 9, 2016, which resulted in an incorrect application of generally accepted accounting principles that resulted in material misstatements and a restatement of our unaudited condensed consolidated financial statements for the three and nine months period ended September 30, 2016. Additionally, these material weaknesses could result in a misstatement in the financial statements that would result in a material misstatement in the annual or interim consolidated financial statements that would not be prevented or detected.

In light of the material weakness described above, and based on the criteria set forth in Internal Control —Integrated Framework (2013) issued by the Committee Sponsoring Organizations of the Treadway Commission (COSO), our management concluded that our internal control over financial reporting was not effective as of December 31, 2016.

As of the date of this ~~Form 10-Q/A,~~report, we are re-assessing the design of our controls and modifying processes related to the accounting for significant and unusual transactions as well as enhancing monitoring and oversight controls in the application of applicable accounting guidance related to such transactions. In connection therewith, we anticipate that we will hire additional accounting personnel with relevant skills, training and experience, and conduct further training of accounting and finance personnel.

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

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 results of operations of the period in which the ruling occurs, or future periods.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed ~~below, which we are including in this report as a result of the consummation of the Merger on September 9, 2016, and which replace and supersede the risk factors previously described~~ in Part ~~1, Item~~I, "Item 1A, ~~“Risk~~Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in the "Risk Factors" section in our Annual Report on Form 10-K for the year ended December 31, 2016. The risks described ~~below and elsewhere~~ in ~~this report~~our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our ~~businesses, financial condition, results of operations or prospects.~~

~~The integration of Legacy Zhone and DNS may not be completed successfully, cost-effectively or on a timely basis, and we may not realize the full benefits of the Merger.~~

Our ability to realize the anticipated benefits of the Merger will depend, to a large extent, on our ability to successfully integrate the Legacy Zhone and DNS businesses. Integrating and coordinating certain aspects of the operations and personnel of the two businesses and managing the expansion in the scope of our operations and financial systems involves complex operational, technological and personnel-related challenges. Our management will be required to devote a significant amount of time and attention to the process of integrating the Legacy Zhone operations with those of DNS. The potential difficulties, and resulting costs and delays, relating to the integration of the Legacy Zhone and DNS businesses include, among others:

•~~the diversion of management’s attention from day-to-day operations;~~

•~~the management of a significantly larger company than before the Merger;~~

•~~the assimilation of DNS employees and the integration of the two business cultures;~~

•~~challenges in attracting and retaining key personnel;~~

•~~the need to integrate information, accounting, finance, sales, billing, payroll and regulatory compliance systems;~~

•~~challenges in keeping existing customers and obtaining new customers; and~~

•~~challenges in combining product offerings and sales and marketing activities.~~

There is no assurance that we will successfully or cost-effectively integrate the Legacy Zhone and DNS operations. The costs of achieving systems integration may substantially exceed our current estimates. As a non-public company prior to the Merger, DNS did not have to comply with the requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, for internal control over financial reporting and other procedures. Accordingly, neither DNS nor its independent auditors undertook a formal assessment or audit of DNS’ internal control over financial reporting prior to the Merger. However, in connection with the preparation and external audit of DNS’ consolidated financial statements as of and for the three years ended December 31, 2015 and the preparation and review of DNS’ unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2016, DNS and its independent auditors noted two material weaknesses in DNS’ internal control over financial reporting. The material weaknesses that were identified were (a) lack of resources that are knowledgeable about U.S. GAAP and SEC reporting matters to allow the company to prepare the required filings on an accurate and timely basis as a U.S. domestic registrant, and (b) lack of knowledge and experience in preparing financial statements under U.S. GAAP and that comply with SEC reporting matters on a timely and accurate basis as a U.S. domestic registrant. Bringing the legacy systems for the DNS business into compliance with requirements under the Sarbanes-Oxley Act may cause us to incur substantial additional expense. In addition, the integration process may cause an interruption of, or loss of momentum in, the activities of our business. If our management is not able to effectively manage the integration process, or if any significant business activities are

~~interrupted as a result of the integration process, our business could suffer and its results of operations and financial condition may be harmed.~~

Even if the businesses of Legacy Zhone and DNS are successfully integrated, we may not realize the full benefits of the Merger, including anticipated cost synergies, growth opportunities and other financial and operating benefits, within the expected timeframe or at all. In addition, we expect to incur significant integration and restructuring expenses to realize synergies. However, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from elimination of duplicative expenses and the realization of economies of scale and cost savings. Although we expect that the realization of efficiencies related to the integration of the businesses may offset incremental transaction, Merger-related and restructuring costs over time, we cannot give any assurance that this net benefit will be achieved in the near term, or at all. Any of these matters could adversely affect our businesses or harm our financial condition, results of operations and prospects.

~~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 this report, 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 may affect our results of operations include the following:

~~commercial acceptance of our products and services;~~

~~fluctuations in demand for network access products;~~

~~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 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, such as recording expenses for employee stock option grants;~~

~~integrating and operating any acquired businesses;~~

~~our ability to achieve targeted cost reductions;~~

~~how well we execute on our strategy and operating plans; and~~

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

Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations, and financial condition that could adversely affect our stock price. We anticipate that our stock price and trading volume may continue to be volatile in the future, whether due to the factors described above, volatility in public stock markets generally (particularly in the technology sector) or otherwise.

~~Our common stock may be delisted from The Nasdaq Capital Market, which could negatively impact the price of our common stock and our ability to access the capital markets.~~

On September 12, 2016, we received a staff delisting determination letter from The Nasdaq Stock Market (Nasdaq) notifying us that, because we did not satisfy Nasdaq’s initial listing standard requiring a minimum bid price of $4 per share (or a minimum closing price of $3 per share for five consecutive trading days or $2 per share for 90 consecutive trading days) at the closing of the Merger, our common stock would be subject to delisting unless we timely requested a hearing before a Nasdaq Hearings Panel (the Panel). We timely requested a hearing before the Panel with respect to the staff’s delisting determination letter, which was held on November 3, 2016. At the hearing, we presented our plan to gain

compliance with the initial listing minimum bid or closing price requirement, including via the implementation of a reverse stock split if necessary. On November 8, 2016, Nasdaq notified us that the Panel had granted our request for continued listing on Nasdaq, subject to us evidencing compliance with the initial listing minimum bid or closing price requirement by March 13, 2017. The compliance period granted by the Panel through March 13, 2017 is subject to us filing a preliminary proxy statement and a definitive proxy statement seeking stockholder approval of a reverse stock split with the SEC by January 31, 2017 and February 13, 2017, respectively. Although we intend to comply with the conditions set forth in the Panel’s determination, there can be no assurance that we will be successful in regaining compliance by the March 13, 2017 deadline, in which event the Panel will issue a final determination to delist and suspend trading of our shares on Nasdaq. Delisting from the Nasdaq Capital Market could have a material adverse effect on our business and on the trading of our common stock.

We have identified 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.

As discussed in the “Explanatory Note” and in Note 1 of our unaudited condensed consolidated financial statements for the quarterly period ended September 30, 2016, on February 20, 2017, the Audit Committee of our Board of Directors concluded, in consultation with management and after informing our independent registered public accounting firm, that, due to incorrect application of generally accepted accounting principles that resulted in material misstatements and a restatement of the Company's unaudited condensed consolidated financial statements, our previously issued interim unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016 should no longer be relied upon and required restatement. Furthermore, as discussed in “Part I, Item 4. Controls and Procedures,” our management has identified material weaknesses in our internal control over financial reporting as of September 30, 2016. 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 Company did not maintain an effective control environment as there was an insufficient complement of personnel with appropriate accounting knowledge, experience and competence, resulting in incorrect application of generally accepted accounting principles. This material weakness contributed to the following material weaknesses. The Company did not maintain effective controls over its financial close process. Also, the Company did not design and maintain effective controls over the review of supporting information to determine the completeness and accuracy of the accounting for complex transactions, specifically related to the business combination that occurred on September 9, 2016, which resulted in an incorrect application of generally accepted accounting principles that resulted in material misstatements and a restatement of the our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016.

As of the date of this Form 10-Q/A, we are re-assessing the design of our controls and modifying processes related to the accounting for significant and unusual transactions as well as enhancing monitoring and oversight controls in the application of applicable accounting guidance related to such transactions. In connection therewith, we anticipate that we will hire additional accounting personnel with relevant skills, training and experience, and conduct further training of accounting and finance personnel. We believe that these initiatives will remediate the material weaknesses in internal control over financial reporting described above. However, there can be no assurance that we will be able to fully remediate our existing material weaknesses or that our internal control over financial reporting will not suffer in the future from other material weaknesses, thus making us unable to prevent or detect on a timely basis material misstatements in our periodic reports with the SEC. If we fail to remediate these material weaknesses or otherwise maintain effective internal control over financial reporting in the future, the existence of one or more internal control deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify internal control deficiencies. If we cannot produce reliable financial reports, we may have difficulty in filing timely periodic reports with the SEC, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be materially harmed. In addition, any failure to remediate the existing material weaknesses or a failure to maintain effective internal control over financial reporting could negatively impact our results of operations, cash flows and financial condition, subject us to potential litigation and regulatory inquiry and cause us to incur additional costs in future periods relating to the implementation of remedial measures.

~~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 have incurred significant losses to date and expect that our operating losses and negative cash flows from operations may continue. Our net loss was $8.6 million and$3.0 million for the nine months ended September 30, 2016 and year ended December 31, 2015, respectively, and we had an accumulated deficit of $12.8 millionat September 30, 2016. 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 ongoing development 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 control 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 cost 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 level of indebtedness could adversely affect our business, operating results and financial condition.~~

We have a significant amount of indebtedness. As of September 30, 2016, the aggregate principal amount of our total outstanding indebtedness was $26.9 million, which comprised $20.1 million in short-term borrowings under various financing arrangements of our foreign subsidiaries and $6.8 million in related party borrowings. We may incur additional indebtedness in the future, including additional borrowings under the WFB Facility. The 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 may 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 WFB Facility and the instruments governing our other indebtedness include covenants (including, in the case of the WFB Facility, financial ratios) that may restrict our ability to operate our business. These covenants restrict, among other matters, our ability to incur additional indebtedness, grant liens, sell or dispose of assets, make loans and investments, pay dividends, redeem or repurchase capital stock, enter into affiliate transactions and consolidate or merger with, or sell substantially all of our assets to, another person. If we default under the WFB Facility or other instrument governing our other indebtedness because of a covenant breach or otherwise, all amounts outstanding thereunder could become immediately due and payable. In addition, WFB may be entitled to, among other things, sell our assets to satisfy the obligations under the WFB Facility. In the past we have violated the covenants in our former revolving line of credit and letter of credit facility and received waivers for these violations. We were in compliance with our covenants under our WFB Facility as of September 30, 2016. We cannot assure you that we will be able to comply with our financial or other covenants in the future or that any covenant violations will be waived in the future. Any acceleration of amounts due could have a material adverse effect on our liquidity and financial condition.

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, due to borrowing base restrictions or otherwise, 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.

If we are unable to obtain additional capital to fund our existing and future operations, we may be required to reduce the scope of our planned product development, and marketing and sales efforts, which would harm our business, financial condition ~~and results of operations.~~

The development and marketing of new products, and the expansion of our direct sales operations and associated support personnel requires a significant commitment of resources. We may incur significant losses or expend significant amounts of capital if:

•~~the market for our products develops more slowly than anticipated;~~

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

•~~our capital expenditure forecasts change or prove inaccurate; or~~

•~~we fail to respond to unforeseen challenges or take advantage of unanticipated opportunities.~~

As a result, we may need to raise substantial additional capital. Additional capital, if required, may not be available on acceptable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. In addition, volatility in our stock price may make it more difficult or costly for us to raise capital through the issuance of common stock, preferred stock or other equity securities. If we elect to raise equity capital, this may be dilutive to existing stockholders and could reduce the trading price of our common stock. If we are unable to obtain additional capital or are required to obtain additional capital on terms that are not favorable to us, 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, which could have a material adverse effect on our business, financial condition and results of operations.

~~Our lack of liquid funds and other sources of financing may limit our ability to maintain our existing operations, grow our business and compete effectively.~~

As of September 30, 2016, we had approximately $33.6 million in cash and cash equivalents and $26.9 million in aggregate principal amount outstanding under our debt facilities and other financing arrangements. Our current lack of liquidity could harm us by:

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

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

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

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

In order to meet our liquidity needs and finance our capital expenditures and working capital needs for our business, we may be required to sell assets, issue debt or equity securities, purchase credit insurance, or borrow on potentially unfavorable terms. In addition, we may be required to reduce our operations in low margin regions, including reductions in headcount. We may be unable to sell assets, access additional indebtedness or undertake other actions to meet these needs. As a result, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. Likewise, any equity financing could result in additional dilution of our stockholders. If we are unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis and may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. In addition, we may not be able to fund our business expansion, take advantage of future opportunities, or respond to competitive pressures or unanticipated capital requirements, any of which could have a material adverse effect on our business, financial condition and results of operations.

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

Market turbulence and weak economic conditions, 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 may 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 from us~~ 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 financial condition and results of operations. To sell to some of these customers, we may be required to assume incremental risks of uncollectible accounts or to extend credit or credit support. 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 results of operations and financial condition. If our customers become insolvent due to market and economic conditions or otherwise, it could have a material adverse impact on our business, financial condition and results of operations.

~~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 financial condition and results of operations.

~~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 Zhone, impacting our cash flow.

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

~~If demand for our products and solutions does not develop as we anticipate, then our results of operations and financial condition 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, our business, financial condition and results of operations will be seriously 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, financial condition and results of operations 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 seriously harm our business.

We produce highly complex products that incorporate leading-edge technology, including both hardware and software. Software typically 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, after they have been fully deployed by our customers. 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 financial or other damages to our customers. Our customers could seek damages for related losses from us, which could seriously harm our business, financial condition and results of operations. 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, financial condition and results of operations.

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 Korea, as well sales and technical support teams in various locations around the world. Many of our international sales may be denominated in foreign currencies. Because we do not currently engage in material foreign currency hedging transactions related to international sales, a decrease in the value of foreign currencies relative to the U.S. dollar could result in losses from transactions denominated in foreign currencies. We expect to continue expanding 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 and challenges that could harm our operating results, including:

•~~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 may affect our ability to import or export our products into or from various countries;~~

•~~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;~~

•~~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, which may differ significantly from U.S. laws. 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 are subject to Korean foreign currency exchange rate risk.~~

We conduct significant business in Korea, which subjects us to foreign currency exchange rate risk. Currently, we do not hold or issue foreign currency forward contracts, option contracts or other derivative financial instruments to mitigate the currency exchange rate risk. Our results of operations and our cash flows could be impacted by changes in foreign currency exchange rates.

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 may 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 when the components are actually used, 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 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 product 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.

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, operating results and financial condition and could materially damage customer relationships.

~~Our target customer base is concentrated, and the loss of one or more of our customers could harm our business.~~

The target customers for our products are network service providers that operate voice, data and video communications networks. There are a limited number of potential customers in our target market. For the nine months ended September 30, 2016 and year ended December 31, 2015, three customers represented 55% and 63% of net revenue, respectively. SK Broadband, LG Uplus and DASAN (a related party) each accounted for more than 10% of net revenue for the three months ended September 30, 2016. SK Broadband, LG Uplus,Viettel and DASAN (a related party) each accounted for more than 10% of net revenue for the nine months ended September 30, 2016. LG Uplus, Korea Telecom and SK Broadband each accounted for more than 10% of net revenue for the three months ended September 30, 2015. LG Uplus, Korea Telecom and Viettel Group each accounted for more than 10% of net revenue for the nine months ended September 30, 2015. Each of the foregoing customers was a customer of DNS prior to the Merger. No Legacy Zhone customers and no other DNS customers accounted for more than 10% of net revenue during the three and nine months ended September 30, 2016 and 2015. We expect that a significant portion of our future revenue will depend on sales of our products to a limited number of customers. As a result, our revenue for any quarter may be subject to significant volatility based on changes in orders from one or a small number of key customers. Any failure of one or more customers to purchase products from us for any reason, including any downturn in their businesses, would seriously harm our business, financial condition and results of operations.

~~Industry consolidation may lead to increased competition and may 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, financial condition and results of operations. Furthermore, rapid consolidation could result in a decrease in the number of customers we serve. Loss of a major customer could have a material adverse effect on our business, financial condition and results of operations.

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

Competition in the communications equipment market is intense. This market is 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 Alcatel-Lucent, Calix, Adtran, Huawei, and ZTE, among others. In our FiberLAN business, our competitors include Tellabs and Cisco. We also may face competition from other large communications equipment companies or other companies that may enter our market in the future. In addition, a number of companies have introduced products that address the same network needs that our products address, both domestically and abroad. 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;~~

•~~price;~~

•~~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, financial condition and results of operations.

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

Our future success depends upon the continued services of our Co-Chief Executive Officers and our other executive officers, 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 our business. The loss of the services of any of our key employees, including our Co-Chief Executive Officers and our Chief Financial Officer, could delay the

development and production of our products and negatively impact our ability to maintain customer relationships, which would harm our business, financial condition and results of operations. Moreover, our inability to attract and retain sufficient qualified accounting personnel with expertise in GAAP following the Merger may adversely affect our ability to maintain an effective system of internal controls or our ability to produce reliable financial reports, which may materially and adversely affect our business.

~~Any strategic acquisitions or investments we make could disrupt our operations and harm our operating results.~~

On an ongoing basis, we may evaluate acquisitions of, or investments in, complementary companies, products or technologies to supplement our internal growth, may acquire additional businesses, products or technologies in the future. If we do complete future acquisitions, we could:

•~~issue stock that would dilute our current stockholders’ percentage ownership;~~

•~~consume a substantial portion of our cash resources;~~

•~~incur substantial debt;~~

•~~assume liabilities;~~

•~~increase our ongoing operating expenses and level of fixed costs;~~

•~~record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges;~~

•~~incur amortization expenses related to certain intangible assets;~~

•~~incur large and immediate write-offs; and~~

•~~become subject to litigation.~~

~~Any acquisitions or investments that we make in the future will involve numerous risks, including:~~

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

•~~unanticipated costs;~~

•~~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;~~

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

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

•~~potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans.~~

Mergers and acquisitions of high-technology companies are inherently risky and subject 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, operating results or financial condition. We do not know whether we will be able to successfully integrate the businesses, products, technologies or personnel that we might acquire in the future or that any strategic investments we make will meet our financial or other investment objectives. Any failure to do so could seriously harm our business, financial condition and results of operations.

~~Sales to communications service providers are especially volatile, and weakness in sales orders from this industry may harm our operating results and financial condition.~~

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, operating results and financial condition. Slowdowns in the general economy, overcapacity, changes in the service provider market, regulatory developments 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 service 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.

~~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 and future regulations, we could be subject to future liabilities, the suspension of production or a prohibition 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. For example, in 2003 the European Union enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE), for implementation in European Union member states. We are aware of similar legislation that is currently in force or is being considered in the United States, as well as other countries, such as Japan and China. Our failure to comply with any of such regulatory requirements or contractual obligations could result in our being liable for costs, fines, penalties and third-party claims, and could jeopardize our ability to conduct business in countries in the jurisdictions where these regulations apply.

~~Adverse resolution of litigation may harm our operating results or financial condition.~~

We are a party to various lawsuits and claims in the normal course of our business. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, operating results and financial condition.

~~Our intellectual property rights may prove difficult to protect and enforce.~~

We generally rely on a combination of copyrights, patents, trademarks and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our technology is difficult, and we do not know whether the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the 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. 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.

~~We may be subject to intellectual property infringement claims that are costly and time consuming to defend and could limit our ability to use some technologies in the future.~~

Third parties have in the past and may in the future assert claims or initiate litigation related to patent, copyright, trademark and other intellectual property rights to technologies and related standards that are relevant to us. The asserted claims or initiated litigation can include claims against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights with respect to our existing or future products, or components of those products. We have received correspondence from companies claiming that many of our products are using technology covered by or related to the intellectual property rights of these companies and inviting us to discuss licensing arrangements for the use of the technology. Regardless of the merit of these claims, intellectual property litigation can be time consuming and costly, and result in the diversion of technical and management personnel. Any such litigation could force us to stop selling, incorporating or using our products that include the challenged intellectual property, or redesign those products that use the technology. 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 results could have a material adverse effect on our business, financial condition and results of operations.

~~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 and 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.

~~The long and variable sales cycles for our products may 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 expense 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 may 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 may vary significantly from quarter to quarter.

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

We have historically used 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 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 industry is subject to government regulations, which could harm our business.~~

Our operations are subject to various laws and regulations, including those regulations promulgated by the 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. 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 (DRC) 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 DRC “conflict free” components and parts, and we may not be able to obtain DRC 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. 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 would harm our business, financial condition and results of operations. Further, we cannot be certain that we will be successful in obtaining or maintaining regulatory approvals that may, in the future, be required to operate our business.

~~Our business and operations are especially subject to the risks of earthquakes and other natural catastrophic events.~~

Our corporate headquarters, including a significant portion of our research and development operations, are located in Northern California, a region known for seismic activity. Additionally, some of our facilities, including our manufacturing facilities, are located near geographic areas that have experienced hurricanes in the past. A significant natural disaster, such

as an earthquake, hurricane, fire, flood or other catastrophic event, could severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially and adversely affected.

~~Our executive officers and directors and entities affiliated with them own or control a large percentage of our common stock, which permits them to exercise significant control over us.~~

As of September 30, 2016, our executive officers and directors and entities affiliated with them owned, in the aggregate, approximately 64% of the outstanding shares of our common stock. Accordingly, these stockholders will be able to substantially influence all matters requiring approval by our shareholders, including the approval of mergers or other business combination transactions and the composition of our Board of Directors. This concentration of ownership may also delay, defer or even prevent a change in control of our company and would make some transactions more difficult or impossible without their support, even if such a transaction would be beneficial to our other stockholders. Circumstances may arise in which the interests of these stockholders could conflict with the interests of our other stockholders. In addition, provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to certain stockholders.

~~Future sales of our common stock could lower our stock price and dilute existing shareholders.~~

We issued a total of approximately 9.5 million shares (post reverse split) of our common stock to DASAN in connection with the Merger, and may issue additional shares of common stock to finance future acquisitions through the use of equity. DASAN has the right to require us to register with the SEC resales of the shares issued in connection with the Merger from time to time. In the event that DASAN exercises its registration rights with respect to such shares, such shares would become eligible for resale upon registration. Additionally, shares of our common stock are available for future sale pursuant to awards granted under our equity incentive plans. Our stock price may 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.

~~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 nine months ended September 30, 2016 was approximately 16,600 shares (post reverse split) 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 for our common stock.

Item 6. Exhibits

The Exhibit Index on page 4637 is incorporated herein by reference as the list of exhibits required as part of this report.

SIGNATURES

Pursuant to the retirements 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: ~~March 9,~~September 27, 2017	~~By:~~	~~/s/ JAMES NORROD~~
	~~Name:~~	~~James Norrod~~
	~~Title:~~	~~Co-Chief Executive Officer~~

	By:	/s/ IL YUNG KIM
	Name:	Il Yung Kim
	Title:	~~Co-Chief~~President, Chief Executive Officer and Acting Chief Financial Officer

	~~By:~~	~~/s/ KIRK MISAKA~~
	~~Name:~~	~~Kirk Misaka~~
	~~Title:~~	~~Chief Financial Officer~~

EXHIBIT INDEX



Exhibit Number	Description


3.1*10.1	~~Restated Certificate of Incorporation of DASAN Zhone Solutions, Inc., as amended through September 9, 2016~~

~~3.2~~	Amended and Restated Bylaws of DASAN Zhone Solutions, Inc. (incorporated by reference to Exhibit 3.2 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

~~10.1#~~	DASAN Zhone Solutions, Inc. Amended and Restated 2001 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.6 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

~~10.2#~~	Form of Stock Option Agreement for the DASAN Zhone Solutions, Inc. Amended and Restated 2001 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.7 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

~~10.3*#~~	~~Form of Restricted Stock Unit Award Agreement for the DASAN Zhone Solutions, Inc. Amended and Restated 2001 Stock Incentive Plan, as amended~~

~~10.4#~~	~~Employment Agreement,~~ Consent Memorandum, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and Il Yung Kim (incorporated by reference to Exhibit 10.1 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

~~10.5#~~	Amended and Restated Employment Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and James Norrod (incorporated by reference to Exhibit 10.2 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

~~10.6#~~	Employment Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and Kirk Misaka (incorporated by reference to Exhibit 10.3 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

~~10.7#~~	Transaction Bonus Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and James Norrod (incorporated by reference to Exhibit 10.4 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

~~10.8#~~	Transaction Bonus Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and Kirk Misaka (incorporated by reference to Exhibit 10.5 of registrant’s Current Report on Form 8-K dated September 8, 2016 and filed on September 13, 2016)

~~10.9#~~	Letter Agreement, dated November 10, 2016, between DASAN Zhone Solutions, Inc. and Eric Presworsky (incorporated by reference to Exhibit 10.1 of registrant’s Current Report on Form 8-K dated November 8, 2016 and filed on November 14, 2016)

~~10.10~~	Stockholder Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and DASAN Networks, Inc. (incorporated by reference to Exhibit 10.1 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

~~10.11~~	Lock-Up Agreement, dated as of September 9, 2016, by and among DASAN Zhone Solutions, Inc., DASAN Networks, Inc. and the other parties thereto (incorporated by reference to Exhibit 10.2 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

~~10.12~~	Registration Rights Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and DASAN Networks, Inc. (incorporated by reference to Exhibit 10.3 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

~~10.13~~	Loan Agreement, dated as of September 9, 2016, by and between DASAN Zhone Solutions, Inc. and DASAN Networks, Inc. (incorporated by reference to Exhibit 10.4 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)

~~10.14~~	Sixth Amendment to Credit and Security Agreements and Consent, dated as of September 9, 2016, by and among Zhone Technologies, Inc., ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.5 of registrant’s Current Report on Form 8-K dated September 6, 2016 and filed on September 12, 2016)



10.15*	~~Joinder and Seventh Amendment to Credit and Security Agreements, dated as of October 7, 2016,~~May 5, 2017, by and among DASAN Zhone Solutions, Inc., ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation, Dasan Network Solutions, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 of registrant's Current Report on Form 8-K dated May 9, 2017)
10.2	Letter agreement, dated July 3, 2017, by and among DASAN Zhone Solutions, Inc., ZTI Merger Subsidiary III, Inc., Premisys Communications, Inc., Zhone Technologies International, Inc., Paradyne Networks, Inc., Paradyne Corporation, Dasan Network Solutions, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 of registrant's Current Report on Form 8-K dated July 3, 2017)
31.1	Certification of ~~Co-Chief~~Chief Executive Officer ~~Pursuant to Rule 13a-14(a)/15d-14(a)~~

~~31.2~~	~~Certification of Co-Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)~~

~~31.3~~	~~Certification of~~and Acting Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1	Section 1350 Certification of ~~Co-Chief~~Chief Executive ~~Officers~~Officer and Acting Chief Financial Officer

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Labels Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

* Previously filed.

~~# Management contract or compensatory plan or arrangement in which one or more executive officers or directors participates.~~

5837



		Percentage of ownership (%)
	Location	September 30, 2016		December 31, 2015
Dasan Network Solutions, Inc. ("DNS")	US	100.00	%	100.00	%
Dasan Network Solutions, Inc. ("DNS Korea")	Korea	100.00	%	100.00	%
DASAN Network Solutions Japan Co., Ltd. (formerly: HandySoft Japan Co., Ltd.)	Japan	69.09	%	50.25	%
DASAN Vietnam Co., Ltd	Vietnam	100.00	%	N/A



	Shares	Estimated Fair Value As Previously Reported		Restatement Adjustments			As Restated
Shares of Legacy Zhone stock as of September 8, 2016 (1)	6,874	$	40,902	$	—		$	40,902
Legacy Zhone stock options (1)	265	715		(175		)	540
Assumed liabilities		25,717		(5,474		)	20,243
Total Purchase Consideration		$	67,334	$	(5,649	)	$	61,685



Fair Value of Total Assets	As Previously Reported		Restatement Adjustments			As Restated
Current tangible assets	$	40,747	$	3,175		$	43,922
Non-current tangible assets	4,464		—			4,464
Total tangible assets	$	45,211	$	3,175		$	48,386

Identifiable Intangible Assets
Developed technology	3,040		20			3,060
Customer relationships	6,740		(1,500		)	5,240
Backlog	2,017		162			2,179
Total Intangible Assets	$	11,797	$	(1,318	)	$	10,479

Goodwill	$	10,326	$	(7,506	)	$	2,820

Total Indicated Fair Value of Assets	$	67,334	$	(5,649	)	$	61,685



Period	Expected Amortization Expense
Remainder of 2016	$	1,470
2017	2,087
2018	1,145
2019	1,166
2020	1,136
Thereafter	3,232
Total	$	10,236



		As of September 30, 2016
		Interest rate (%)	Amount
Industrial Bank of Korea	Trade loan	2.06-2.38	$	941
Shinhan Bank	General loan	4.26	3,649
Shinhan Bank	Trade finance	3.23-3.29	3,100
NongHyup Bank	Trade loan	1.66-2.31	207
KEB Han Bank	Comprehensive credit loan	2.89	4,034
The Export-Import Bank of Korea	Export development loan	2.88	8,210
			$	20,141



		Three Months Ended September 30, 2016
	Counterparty	Sales		Selling, Administrative and R&D Expenses		Other Expenses
Parent Company	DASAN	$	4,960	$	1,032	$	89
Other related parties	DASAN RND Co., LTD	—		—		—
	PANDA Media, Inc.	—		—		—
	DMC, Inc.	—		—		—
	Tomato Soft Ltd.	—		38		—
	Tomato Soft (Xi'an) Ltd.	—		188		—
	CHASAN Networks (Shenzhen) Co., Ltd.	—		175		—
	D-Mobile	1,267		128		—
	DASAN FRANCE	3		—		—
	HANDYSOFT, Inc.	68		—		—
	J-Mobile Corporation	—		11		—
		$	6,298	$	1,572	$	89



		Nine Months Ended September 30, 2016
	Counterparty	Sales		Selling, Administrative and R&D Expenses		Other Expenses
Parent Company	DASAN	$	9,857	$	4,620	$	309
Other related parties	DASAN RND Co., LTD	—		—		—
	PANDA Media, Inc.	—		2		—
	DMC, Inc.	1		—		—
	Tomato Soft Ltd.	—		98		—
	Tomato Soft (Xi'an) Ltd.	—		559		—
	CHASAN Networks (Shenzhen) Co., Ltd.	—		545		—
	D-Mobile	3,135		317		—
	DASAN FRANCE	3		—		—
	HANDYSOFT, Inc.	151		—		—
	J-Mobile Corporation	3		633		—
		$	13,150	$	6,774	$	309



		Three Months Ended September 30, 2015
	Counterparty	Sales		Selling, Administrative and R&D Expenses		Other Expenses
Parent Company	DASAN	$	2,630	$	1,285	$	96
Other related parties	DASAN RND Co., LTD	—		35		—
	PANDA Media, Inc.	—		—		—
	DMC, Inc.	—		—		—
	Tomato Soft Ltd.	—		37		—
	Tomato Soft (Xi'an) Ltd.	—		161		—
	CHASAN Networks (Shenzhen) Co., Ltd.	—		234		—
	D-Mobile	—		—		—
	DASAN FRANCE	—		—		—
	HANDYSOFT, Inc.	69		—		1
	J-Mobile Corporation	—		576		—
		$	2,699	$	2,328	$	97



		Nine Months Ended September 30, 2015
	Counterparty	Sales		Selling, Administrative and R&D Expenses		Other Expenses		Acquisition of Tangible and Intangible Assets
Parent Company	DASAN	$	8,385	$	5,339	$	436	$	—
Other related parties	DASAN RND Co., LTD	—		335		—		—
	PANDA Media, Inc.	—		—		—		—
	DMC, Inc.	—		—		—		—
	Tomato Soft Ltd.	—		70		—		—
	Tomato Soft (Xi'an) Ltd.	—		316		—		—
	CHASAN Networks (Shenzhen) Co., Ltd.	—		487		—		—
	D-Mobile	—		—		—		—
	DASAN FRANCE	—		—		—		—
	HANDYSOFT, Inc.	1,292		—		21		187
	J-Mobile Corporation	—		646		—		—
		$	9,677	$	7,193	$	457	$	187



	Three Months Ended September 30, 2016	Weighted Average Exercise Price		Nine Months Ended September 30, 2016	Weighted Average Exercise Price
Outstanding stock options (1)	804	$	1.38	804	$	1.38