DZS INC. Overview
We are a global provider of ultra-broadband network access solutions and communications platforms deployed by advanced Tier 1, 2 and 3 service providers and enterprise customers. We operate in a single reporting segment. We research, develop, test, sell, manufacture and support communications equipment in five major areas: broadband access, Ethernet switching, mobile fronthaul/backhaul, Passive Optical LAN and SDN/NFV solutions:
• Our broadband access products offer a variety of solutions for carriers and
service providers to connect residential and business customers, either
using high-speed fiber or leveraging their existing deployed copper networks
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.
• Our Ethernet switching products provide a high-performance and manageable
solution that bridges the gap from carrier access technologies to the core
network. Our products support pure Ethernet switching as well as layer 3 IP
and MPLS and are currently being developed for deployment as part of SDNs.
• Our mobile fronthaul/backhaul products provide a robust, manageable andscalable solution for mobile operators that enable them to upgrade their
mobile fronthaul/backhaul systems and migrate to 5G and beyond. Our mobile
backhaul products may be collocated at the radio access node base station
and can aggregate multiple radio access node base stations into a single
backhaul for delivery of mobile traffic to the radio access node network
controller. We provide standard Ethernet/IP or MPLS interfaces and
interoperate with other vendors in these networks.
• Our FiberLAN portfolio of POL products are designed for enterprise, campus,
hospitality, and entertainment arena usage. Our FiberLAN portfolio includes
our high-performance, high-bandwidth GPON OLTs connected to the industry's
most diverse ONT product line, which include units with integrated PoE to
power a wide range of PoE-enabled access devices.
• Our SDN/NFV strategy is to develop tools and building blocks that will 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 andlatency across the network. The migration move to SDN/NFV will provide
better service for end customers and a more efficient and cost-effective use
of hardware resources for service providers.
Going forward, our key financial objectives include the following:
• Increasing revenue while continuing to carefully control costs;
• Continuing investments in strategic research and product development
activities that will provide the maximum potential return on investment; and
• Minimizing consumption of our cash and cash equivalents.
Recent Developments DNI OnMarch 5, 2020 ,DASAN Network Solutions, Inc. , a corporation organized under the laws of theRepublic of Korea , and an indirect, wholly-owned subsidiary of the Company ("DNS Korea") entered into a Loan Agreement with DNI, pursuant to which DNS Korea borrowedKRW 22.4 billion ($18.5 million USD ) from DNI (the "March 2020 DNI Loan"). DNS Korea will fully loan such borrowed funds to the Company, which will be used to repay and terminate the PNC Credit Facilities.
Relocation of Corporation Headquarters and New Facilities in
OnMarch 2, 2020 , the Company announced its plans to relocate its corporate headquarters fromCalifornia toPlano, Texas and establish a newU.S. -basedEngineering Center of Excellence inPlano . In connection with the planned relocation, the Company entered into sublease agreements withHuawei Technologies, Inc. andFuturewei Technologies, Inc. to sublease an aggregate of approximately 16,300 square feet located atLegacy Place ,5700 Tennyson Parkway ,Plano, Texas . OnJuly 9, 2019 , the Company entered into a lease agreement withFamily Stations, Inc. to lease approximately 16,500 square feet located at1350 South Loop Road ,Alameda, California . TheAlameda location will replace the Company's current facilities inOakland, California . 25 --------------------------------------------------------------------------------
Appointment of New Chief Financial Officer
OnNovember 25, 2019 , the Company appointedThomas J. Cancro to the position of Chief Financial Officer and Corporate Treasurer.Mr. Cancro recently served as Controller ofGE Global Research , General Electric Company's technology research and IP-licensing business unit. Prior roles include executive positions at Verizon Communications Inc. ("Verizon"), including Chief Financial Officer of Verizon's joint venture with AT&T Inc. and Deutsche Telekom AG, and an executive role in Verizon'sTreasury organization, where he advised the company as to capital markets strategy. He also served as Chief Accounting Officer and Corporate Controller ofGFI Group Inc. , a FinTech provider of wholesale brokerage services and SaaS software solutions (now a subsidiary of BGC Partners, Inc.), and as Senior Vice President and Corporate Controller of MasTec, Inc., a Fortune 500 telecommunications and energy infrastructure service provider.Mr. Cancro holds a Bachelor of Science degree in Accounting from thePennsylvania State University and began his career atPricewaterhouseCoopers LLP . He is a Certified Public Accountant and also holds a CFA Charter.
Keymile Acquisition
OnJanuary 3, 2019 ,ZTI Merger Subsidiary III Inc. , aDelaware corporation and our wholly owned subsidiary, acquired all of the outstanding shares ofKeymile GmbH , a limited liability company organized under the laws ofGermany ("Keymile"), fromRiverside KM Beteiligung GmbH , also a limited liability company organized under the laws ofGermany ("Riverside"), pursuant to a share purchase agreement. The Company refers to this transaction as the "Keymile Acquisition." The aggregate cash purchase price paid for all of the shares of Keymile and certain of its subsidiaries wasEUR 10,250,000 ($11.8 million ), which was paid with a combination of cash, a loan from DNI, and a draw under ourWells Fargo Bank ("Wells Fargo") credit facility (as amended, the "Wells Fargo Facility"). Following the closing of the Keymile Acquisition, Keymile became our indirect wholly owned subsidiary. Keymile is a leading solution provider and manufacturer of telecommunication systems for broadband access. The Company believes the Keymile Acquisition complements and strengthens our portfolio of broadband access solutions, which now includes a series of multi-service access platforms, including ultra-fast broadband copper access based on very-high-bit-rate DSL ("VDSL/Vectoring") &G. Fast technology. DZS Japan OnJuly 31, 2019 , the Company acquired the remaining 30.9% non-controlling interest ofDZS Japan, Inc. ("DZS Japan"), and DZS Japan became a wholly owned subsidiary of the Company. The Company acquired the remaining interest in DZSJapan for total cash consideration of$950,000 , consisting entirely of payments to the former shareholder (Handysoft).
Trends and Uncertainties
InDecember 2019 , a strain of coronavirus, now known as COVID-19, was reported to have surfaced inWuhan, China , resulting in increased travel restrictions and the extended shutdown of certain businesses in the region and withinGreater China . Since that time, other countries includingthe United States ,South Korea ,Italy andJapan have experienced widespread or sustained transmission of the virus, and there is a risk that the virus will continue to spread to additional countries. The Company relies on suppliers and contract manufacturers located inChina and has significant business operations inSouth Korea andJapan . The outbreak has had a significant impact on our first quarter 2020 results, as we have experienced a negative impact on our Chinese supply chain and softer product demand in EMEA due to the effects of the virus. These effects include travel restrictions, business closures, public health concerns, and other actions affecting the supply of labor and the export of raw materials and finished products. If the virus continues to spread, the effects of the virus could continue to materially and adversely affect our financial condition and results of operations. If we are forced to arrange alternative manufacturing and supply sources, our cost of production could increase materially, negatively affecting our financial condition and results of operations Given the ongoing and dynamic nature of the virus and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The impact of a continued COVID-19 outbreak could have a material adverse effect on our business, financial condition and results of operations. 26
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Impact of Inflation and Changing Price
The financial statements and related data presented herein have been prepared in accordance withU.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during our fiscal year endedDecember 31, 2019 .
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The policies discussed below are considered by management to be critical because changes in such estimates can materially affect the amount of our reported net income or loss. For all of these policies, management cautions that actual results could differ materially from such estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenues when we transfer control of promised goods or services to
our customers in an amount that reflects the consideration to which we expect to
be entitled to in exchange for those goods or services.
We generate revenue primarily from sales of products and services, including,
extended warranty service and customer support. Our revenue from product sales
is recognized at a point in time when control of the goods is transferred to our
customers, generally occurring upon shipment or delivery, dependent upon the
terms of the underlying contract. Our revenue from services is generally
recognized over time on a ratable basis over the contract term, using an output
measure of progress, as the contracts usually provide our customers equal
benefit throughout the contract period. We typically invoice customers for
support contracts in advance, for periods ranging from one (1) to five (5)
years.
Our transaction price is calculated as selling price net of variable
consideration. Our sales to certain distributors are made under arrangements
which provide our distributors with volume discounts, price adjustments, and
other allowances under certain circumstances. These adjustments and allowances
are accounted for as variable consideration. To estimate variable consideration,
we analyze historical data, channel inventory levels, current economic trends
and changes in our customer demand for our products, among other factors.
Historically, variable consideration has not been a significant component of our
contracts with customers.
For contracts with customers that contain multiple performance obligations, we
account for the promises separately as individual performance obligations if
they are distinct. In determining whether performance obligations meet the
criteria for being distinct, we consider a number of factors, including the
degree of interrelation and interdependence between obligations and whether or
not the good or service significantly modifies or transforms another good or
service in the contract. After identifying the separate performance obligations,
we allocate transaction price to the separate performance obligations on a
relative standalone selling price basis. Standalone selling prices for products
are determined using either an adjusted market assessment or expected cost-plus
margin. For customer support and extended warranty services, standalone selling
price is primarily based on the prices charged to our customers on a standalone
basis. Unsatisfied and partially unsatisfied performance obligations as of the
end of the reporting period primarily consist of products and services for which
our customer purchase orders have been accepted and that are in the process of
being delivered.
We record contract assets when it has a right to consideration and record
accounts receivable when it has an "unconditional" right to consideration. We
record deferred revenue when cash payments received (or unconditional rights to
receive cash) in advance of fulfilling our performance obligations.
Our payment terms vary by the type and location of our customer and the products
or services offered. For certain products or services and customer types, we
require payment before the products or services are delivered to the customer.
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Allowances for Sales Returns and Doubtful Accounts
We record an allowance for sales returns for estimated future product returns related to current period product revenue. The allowance for sales returns is recorded as a reduction of revenue and accrued and other liabilities. We base our allowance for sales returns on periodic assessments of historical trends in product return rates and current approved returned products. If the actual future returns were to deviate from the historical data on which the reserve had been established, our future revenue could be adversely affected. We record an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments for amounts owed to us. The allowance for doubtful accounts is recorded as a charge to general and administrative expenses. We base our allowance on periodic assessments of our customers' liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement reviews and historical collection trends. Additional allowances may be required in the future if the liquidity or financial condition of our customers deteriorates, resulting in doubts about their ability to make payments.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost being determined using the first-in, first-out (FIFO) method. In assessing the net realizable value of inventories, we are required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. Once inventory has been written down to its estimated net realizable value, its carrying value cannot be increased due to subsequent changes in demand forecasts. To the extent that a severe decline in forecasted demand occurs, or we experience a higher incidence of inventory obsolescence due to rapidly changing technology and customer requirements, we may incur significant charges for excess inventory. We also evaluate the terms of its agreements with its suppliers and establish accruals for estimated losses on adverse purchase commitments as necessary, applying the same lower of cost or net realizable value approach that is used to value inventory.
Goodwill and other acquisition-related intangible assets not subject to amortization are tested annually for impairment and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. Factors we consider important which could trigger an impairment review, include, but are not limited to, significant changes in the manner of use of its acquired assets, significant changes in the strategy for the Company's 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 period, the net carrying value of the related intangible asset will be reduced to fair value and the remaining amortization period may be adjusted. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. In the application of 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.
Business Combination
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets and certain tangible assets such as inventory acquired in the transaction. Critical estimates in valuing certain tangible and intangible assets include but are not limited to future expected cash flows from the underlying assets and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Income Tax
We use 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.
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RESULTS OF OPERATIONS
We list in the table below the historical consolidated statement of
comprehensive income (loss) as a percentage of total net revenue for the periods
indicated.
Year ended December 31,
2019 2018
Net revenue:
Third parties 99 % 98 %
Related parties 1 % 2 %
Total net revenue 100 % 100 %
Cost of revenue:
Products and services - third parties 66 % 66 %
Products and services - related parties - 2 %
Amortization of intangible assets 1 % -
Total cost of revenue 67 % 68 %
Gross profit 33 % 32 %
Operating expenses:
Research and product development 13 % 13 %
Selling, marketing, general and administrative 20 % 17 %
Restructuring and other charges 2 % -
Amortization of intangible assets - -
Goodwill impairment charge - -
Total operating expenses 35 % 30 %
Operating income (loss) (2 )% 3 %
Interest income - -
Interest expense (1 )% (1 )%
Other income (expense), net - -
Income (loss) before income taxes (3 )% 2 %
Income tax provision (benefit) 1 % 1 %
Net income (loss) (4 )% 1 %
Net income (loss) attributable to non-controlling
interest - -
Net income (loss) attributable to DASAN Zhone
Solutions, Inc. (4 )% 1 %
2019 COMPARED WITH 2018
Net Revenue
The following table presents our revenues by source (in millions):
Increase %
2019 2018 (Decrease) change
Products $ 286.3 $ 269.3 $ 17.0 6.3 %
Services 20.6 13.0 7.6 58.5 %
$ 306.9 $ 282.3 $ 24.6 8.7 %
Net revenue increased 8.7% or $24.6 million to $306.9 million for 2019 compared
to $282.3 million for 2018. The increase in product revenue was primarily due to
product lines added with the acquisition of KEYMILE.
Service revenue represents revenue from maintenance and other services associated with product shipments. The increase in service revenue was primarily related to a greater number of products under contract for maintenance and extended warranty.
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Information about our net revenue by geography is summarized below (in
millions):
Increase %
2019 2018 (Decrease) change
Revenue by geography:
United States $ 36.4 $ 50.8 $ (14.4 ) -28.3 %
Canada 4.7 4.4 0.3 6.8 %
Total North America 41.1 55.2 (14.1 ) -25.5 %
Latin America 23.8 27.6 (3.8 ) -13.8 %
Europe, Middle East, Africa 78.4 34.7 43.7 125.9 %
Korea 79.1 76.0 3.1 4.1 %
Other Asia Pacific 84.5 88.8 (4.3 ) -4.8 %
Total International 265.8 227.1 38.7 17.0 %
Total $ 306.9 $ 282.3 $ 24.6 8.7 %
Net revenue increased 8.7% or $24.6 million to $306.9 million for 2019 compared
to $282.3 million for 2018. The increase in net revenue was primarily due to the
acquisition of KEYMILE and, to a lesser extent, growth from the Middle East and
Africa region, which more than offset the decline in North America . Across
international markets, Asia-Pacific (including Korea ) contributed approximately
53.4% of net revenue and EMEA contributed approximately 25.5% of net revenue in
2019, primarily due to the acquisition of KEYMILE.
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 Profit
Total cost of revenue increased 8.2% to$206.8 million for 2019, compared to$191.0 million for 2018. Total cost of revenue was 67.4% of net revenue for 2019, compared to 67.7% of net revenue for 2018, which resulted in an increase in gross profit percentage to 32.6% in 2019 from 32.3% in 2018. The increase in total cost of revenue, was primarily due to the acquisition of KEYMILE. The decrease in the total cost of revenue as a percentage of sales was primarily due to the mix of products sold. We expect that in the future our cost of revenue as a percentage of net revenue will vary depending on the mix and average selling prices of products sold. In addition, continued competitive and economic pressures could cause us to reduce our prices, adjust the carrying values of our inventory, or record inventory expenses relating to discontinued products and excess or obsolete inventory.
Research and Product Development Expenses
Research and development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations. Research and product development expenses increased by 12.6% to$38.5 million for 2019 compared to$35.3 million for 2018. The increase was primarily due to research and product development expenses related to Keymile of$5.3 million , partially offset by a decrease in these expenses in theU.S. and Other Asia Pacific region, in part due to lower headcount related costs.
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 include personnel costs for sales, marketing, administration, finance, information technology, human resources and general management as well as legal and accounting expenses, rent, utilities, trade show expenses and related travel costs. Selling, marketing, general and administrative expenses increased 26.7% to$61.2 million for 2019 compared to$48.3 million for 2018. The increase in selling, marketing, general and administrative expenses was primarily due to the inclusion of KEYMILE's operations in 2019. 30 --------------------------------------------------------------------------------
Restructuring and Other Charges and Goodwill Impairment
During the fourth quarter of 2019, the Company recorded restructuring and other charges of$4.9 million consisting primarily of severance and other termination related benefits of$3.9 million , and an impairment charge of$1.0 million related to a right-of-use asset from an operating lease, associated with cost reductions implemented at KEYMILE. During the fourth quarter of 2019, the Company recorded an impairment of goodwill of$1.0 million associated with KEYMILE as part of the Company's annual evaluation of goodwill for impairment.
Interest Expense, net
Interest expense, net was
Other Income (Expense), net
Other income, net was$0.9 million for 2019 compared to Other expense, net of$1.1 million in 2018. The main reason for the increase in Other Income, net was due to foreign currency exchange gains in 2019 compared to foreign currency exchange losses in 2018.
Income Tax Provision (Benefit)
We recorded an income tax expense of
OTHER PERFORMANCE MEASURES
In managing our business and assessing our financial performance, we supplement the information provided by ourU.S. GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-U.S. GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) stock-based compensation, and (v) the impact of material transactions or events that we believe are not indicative of our core operating performance, such as restructuring and other charges, goodwill impairment, bargain purchase gain, any of which may or may not be recurring in nature. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
• Adjusted EBITDA does not reflect our cash expenditures, or future
requirements for capital expenditures or contractual requirements;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
• Adjusted EBITDA does not reflect the interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debts;
• Although depreciation and amortization are non-cash expenses, the assets
being depreciated and amortized will often have to be replaced in the
future, and Adjusted EBITDA does not reflect any cash requirements for such
replacements;
• Non-cash compensation is and will remain a key element of our overall
long-term incentive compensation package, 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 withU.S. GAAP or as a measure of liquidity. Management understands these limitations and compensates for these limitations by relying primarily on ourU.S. GAAP results and using Adjusted EBITDA only as a supplemental measure. 31
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Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA,
which we consider to be the most directly comparable GAAP financial measure to
Adjusted EBITDA (in thousands):
Year Ended December 31,
2019 2018
Net income (loss) $ (13,263 ) $ 2,836
Add (deduct):
Interest expense, net 3,525 1,474
Income tax (benefit) provision 3,585 1,724
Restructuring and other charges 4,908 -
Goodwill impairment charge 1,003 -
Depreciation and amortization 5,115 2,702
Stock-based compensation 3,508 2,080
Inventory step-up amortization 577 -
Merger and acquisition transaction costs 337
1,404
Adjusted EBITDA $ 9,295 $ 12,220 LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically and continue to be financed through a combination of our existing cash and cash equivalents, cash generated in the business, borrowings, and sales of equity.
The following table summarizes the information regarding our cash and cash equivalents and working capital (in thousands):
December 31, December 31,
2019 2018
Cash and cash equivalents $ 28,747 $ 27,709
Working capital 114,885 75,280
The Company had a net loss of
As ofDecember 31, 2019 , we had an accumulated deficit of$29.2 million and working capital of$114.9 million . As ofDecember 31, 2019 , we had$28.7 million in cash and cash equivalents, which included$14.2 million in cash balances held by our international subsidiaries, and$38.0 million in aggregate debt. In addition, as ofDecember 31, 2019 , we had$4.5 million committed as security for letters of credit under our revolving credit facilities.
Our current lack of liquidity could harm us by:
• increasing our vulnerability to adverse economic conditions in our industry
or the economy in general;
• requiring substantial amounts of cash to be used for debt servicing, rather
than other purposes, including operations;
• limiting our ability to plan for, or react to, changes in our business and
industry; and
• influencing investor and customer perceptions about our financial stability
and limiting our ability to obtain financing or acquire customers.
However, we continue to focus on cost management, operating efficiency and restrictions on discretionary spending. In addition, if necessary, we may sell assets, issue debt or equity securities or purchase credit insurance. We may also reduce the scope of our planned product development, reduce sales and marketing efforts and reduce our operations in low margin regions, including reductions in headcount. SinceDecember 31, 2019 , and as described below under the headerMarch 2020 DNI Loan, we entered into a Loan Agreement with DNI, and the Company intends to use a portion of such funds to repay in full and terminate the Company's existing credit facility withPNC Bank . Based on our current plans and current business conditions, we believe that these measures along with our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next twelve (12) months from the date of this Annual Report on Form 10-K. Our ability to meet our obligations as they become due in the ordinary course of business for the next twelve (12) months will depend on our ability (i) to achieve forecasted results of operations, (ii) access funds under new credit facilities and/or raise additional capital through sale of our common stock to the public, and (iii) effectively manage working capital requirements. If we cannot raise additional funds when we need or wants them, our operations and prospects could be negatively affected. We believe that we will achieve forecasted results of operations assumes that, among other things, we will continue to be successful in implementing its business strategy and that there will be no material adverse development in our business, liquidity or capital 32
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requirements. If one or more of these factors do not occur as expected, it could cause us to fail to meet its obligations as they come due.
Operating Activities
Net cash used for operating activities was$22.7 million and$12.2 million in 2019 and 2018, respectively. The$10.5 million increase in cash used for operating activities in 2019 was primarily due to an increase of$7.5 million in our net loss (excluding non-cash items) compared to 2018, as well as a$3.0 million increase in cash used for working capital.
Investing Activities
Cash flow used in investing activities of
Financing Activities Cash provided by financing activities totaled$28.0 million in 2019. and consisted primarily of proceeds from issuance of common stock of$42.5 million , as well as proceeds from borrowings of$25.0 million , partially offset by a net outflow associated with the repayment of short term borrowings of$20.1 million , the repayment of long term debt of$11.9 million , as well as the repayment of a related party loan of$5.0 million . This compared to cash provided by financing activities of$19.0 million in 2018. Debt Facilities DNI Loan OnMarch 5, 2020 , DNS Korea, the Company's wholly-owned, indirect subsidiary entered into a Loan Agreement with DNI (the "March 2020 DNI Loan"). TheMarch 2020 DNI Loan was negotiated and approved on behalf of the Company and its subsidiaries by a special committee of the Board of Directors of the Company (the "Special Committee") consisting of directors determined to be independent from DNI. TheMarch 2020 DNI Loan consists of a term loan in the amount ofKRW 22.4 billion ($18.5 million USD ) with interest payable semi-annually at an annual rate of 4.6% and maturing onMarch 11, 2022 . No principal payments are due on theMarch 2020 DNI Loan until the maturity date, but DNS Korea may prepay the loan, or a portion thereof, without penalty. As security for theMarch 2020 DNI Loan (and other existing loans between DNI and DNS Korea and/or DNS California), (i) DNS California, a wholly-owned, direct subsidiary of the Company and the sole stockholder of DNS Korea, agreed to pledge the outstanding shares of DNS Korea to DNI and (ii) DNS Korea granted a security interest in its personal property assets, accounts receivable and intellectual property assets to DNI. TheMarch 2020 DNI Loan includes certain covenants consisting of financial reporting obligations, a maintenance covenant whereby DNS Korea agreed to maintain a minimum stockholders' equity value in an amount equal to or greater thanKRW 43.3 billion ($35.8 million ), and customary events of default. If an event of default occurs and is not remedied within the applicable cure period, DNI will be entitled to take various actions, including requiring the immediate repayment of all outstanding amounts under theMarch 2020 DNI Loan and selling the shares or assets of DNS Korea.
DNS Korea loaned the funds borrowed under the
PNC Credit Facilities OnFebruary 27, 2019 , the Company and certain of its subsidiaries (as co-borrowers or guarantors) entered into that certain Revolving Credit, Term Loan, Guaranty and Security Agreement and that certain Export-Import Revolving Credit, Guaranty and Security Agreement, in each case withPNC Bank, National Association ("PNC Bank ") andCitibank, N.A . as lenders, and PNC as agent for the lenders. We refer to such transactions and the agreements referenced above as the "PNC Credit Facilities". The PNC Credit Facilities provided for a$25 million term loan and a$15 million revolving line of credit (including subfacilities for Ex-Im transactions, letters of credit and swing loans) with a$10 million incremental increase option. The amount the Company was able to borrow on the revolving line of credit at any time was based on eligible accounts receivable and other conditions, less certain reserves. Borrowings under the PNC Credit Facilities bore interest at a floating rate equal to either the PNC prime rate or the LIBOR rate for the applicable period, plus a margin that was based on the type of advance. The Company used a portion of the funds borrowed from the term loan under the PNC Credit Facilities to (i) repay$5.0 million of existing related party indebtedness with DNI plus accrued interest, (ii) repay$1.5 million revolving line of credit outstanding balance plus accrued interest and fees and cash collateralize$3.6 million in outstanding letters of credit under the Company's former senior secured credit facilities withWells Fargo Bank (the "Former WFB Facility"), described below, and (iii) repay$5.6 million in short-term debt inKorea andJapan . The Company's obligations under the PNC Credit Facilities were secured by substantially all of the personal property assets of the Company and its subsidiaries that were co-borrowers or guarantors under the PNC Credit Facilities, including their intellectual property. 33 -------------------------------------------------------------------------------- The PNC Credit Facilities had a three-year term and were scheduled to mature onFebruary 27, 2022 . The PNC Credit Facilities contemplated repayment of the term loan in quarterly installments over the term of the loan, with the balance of the term loan and revolving line of credit due at maturity. The PNC Credit Facilities had a three-year term and were scheduled to mature onFebruary 27, 2022 . The PNC Credit Facilities contemplated repayment of the term loan in quarterly installments over the term of the loan, with the balance of the term loan and revolving line of credit due at maturity. The interest rate on the term loan was 8.12% atDecember 31, 2019 . OnJuly 2, 2019 ,$4.4 million in outstanding borrowings under the revolving line of credit (which represented all outstanding borrowings under the revolving line of credit) was repaid in full. The PNC Credit Facilities contained certain covenants, limitations, and conditions with respect to the Company, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a minimum liquidity covenant, as well as financial reporting obligations, and usual and customary events of default. AtSeptember 30, 2019 , the Company was not in compliance with the maximum leverage ratio financial covenant in the PNC Credit Facilities, which represented an event of default thereunder. OnNovember 8, 2019 , the Company obtained a waiver of the foregoing event of default fromPNC Bank . As a condition for the issuance of such waiver, the Company voluntarily prepaid$10.0 million of the outstanding term loan and paid a one-time fee of$150,000 . The Company would have been in further breach of this financial covenant as ofDecember 31, 2019 . As discussed further in Note 7 to the consolidated financial statements, inMarch 2020 , the Company entered into a term loan with DNI in the amount ofKRW 22.4 billion ($18.5 million ). The Company plans to use the proceeds of such loan to repay in full the PNC Credit Facilities, and thus does not expect to be in breach of its financial covenants for the period endedDecember 31, 2019 . Covenants under theMarch 2020 DNI loan are significantly less restrictive than under the PNC Credit Facilities. As ofDecember 31, 2019 , the Company had$13.1 million in outstanding term loan borrowings under the PNC Credit Facilities, and no outstanding borrowings under the revolving line of credit.
Former Wells Fargo Bank Facility
OnFebruary 27, 2019 , in connection with the entry into the PNC Credit Facilities, the Company repaid$1.5 million in principal amount of outstanding borrowings plus accrued interest and fees under the Former WFB Facility and cash collateralized$3.6 million in outstanding letters of credit under the Former WFB Facility and terminated the Former WFB Facility. Refer to footnote 7. Debt, of the Consolidated Financial Statements, included in this Form 10-K, for further details about the Former WFB Facility.
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 and supported by guarantees given by DNI or third parties. Payments under such facilities are made in accordance with the given lender's amortization schedules. As ofDecember 31, 2019 andDecember 31, 2018 , we had an aggregate outstanding balance of$15.8 million and$24.8 million , respectively, under such financing arrangements, and the interest rate per annum applicable to outstanding borrowings under these financing arrangements as ofDecember 31, 2019 andDecember 31, 2018 ranged from 0% to 4.5% and 0% to 6.1%, respectively.
Related - Party Debt
InFebruary 2016 , DNS borrowed$1.8 million from DNI for capital investment with an interest rate of 4.6% per annum. OnFebruary 27, 2019 , in connection with the entry into the PNC Credit Facilities, the Company amended the terms of this loan to extend the repayment date toMay 27, 2022 . As ofDecember 31, 2019 , the$1.8 million remained outstanding. In September, 2016, the Company entered into a loan agreement with DNI for a$5.0 million unsecured subordinated term loan facility. The term loan was scheduled to mature inSeptember 2021 and was pre-payable at any time by the Company without premium or penalty. The interest rate under this facility was 4.6% per annum. InFebruary 2019 , the Company repaid the term loan in full plus accrued interest in connection with the entry into the PNC Credit Facilities, thereby terminating the loan agreement. InMarch 2018 ,Dasan Network Solutions, Inc. , a subsidiary of the Company incorporated under the laws ofKorea ("DNS Korea") borrowed$5.8 million from DNI, of which$4.5 million was repaid onAugust 8, 2018 . The loan bears interest at a rate of 4.6%. OnFebruary 27, 2019 , in connection with the entry into the PNC Credit Facilities, the Company amended the terms of this loan to extend the repayment date toMay 27, 2022 . As ofDecember 31, 2019 ,$1.3 million remained outstanding. OnDecember 27, 2018 , the Company entered into a loan agreement with DNI, for a$6.0 million term loan with an interest rate of 4.6% per annum. OnFebruary 27, 2019 , in connection with the entry into the PNC Credit Facilities, the Company amended 34
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the terms of the term loan to extend the repayment date to
The modifications resulting from the amendments described in the four preceding paragraphs were limited to the extension of the maturity dates and removal of the collateral on the outstanding term loans with DNI. There were no fees paid to DNI or external costs otherwise incurred in connection with these modifications. Interest expense on these related party borrowings was$0.4 million in both 2019 and 2018. As ofDecember 31, 2019 and 2018, the Company had borrowings of$9.1 million and$14.1 million , respectively, outstanding from DNI. The outstanding balance atDecember 31, 2019 consisted of a$6.0 million unsecured subordinated term loan facility which matures inMay 2022 , a$1.8 million loan for capital investment which matures inMay 2022 , andKRW 1.5 billion ($1.3 million ) outstanding under a secured loan to DNS Korea which matures inMay 2022 . All three loans bear interest at a rate of 4.6% per annum. As noted above under "Debt Facilities - DNI Loan," onMarch 5, 2020 , DNS Korea entered into a subsequent loan transaction with DNI in the amount ofKRW 22.4 billion ($18.5 million USD ), which loan matures onMarch 11, 2022 . The loan bears interest at a rate of 4.6% and is secured by accounts receivable, personal property, intellectual property and the shares of DNS Korea. All four loans are secured by the same collateral and are pre-payable without premium or penalty.
Future Requirements and Funding Sources
Our fixed commitments for cash expenditures consist primarily of payments under operating leases, inventory purchase commitments, and payments of principal and interest for debt obligations. From time to time, we may provide or commit to extend credit or credit support to our customers. This financing may include extending the terms for product payments to customers. Any extension of financing to our customers will limit the capital that we have available for other uses. Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As ofDecember 31, 2019 , two (2) customers, APSFL and Softbank, accounted for 18% and 11%, respectively, of our net accounts receivable. Our receivables from customers in countries other than theU.S represented 94% of accounts receivable. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt.
Contractual Commitments and Off-Balance Sheet Arrangements
AtDecember 31, 2019 , our future contractual commitments by fiscal year were as follows (in thousands): Payments due by period 2024 and Total 2020 2021 2022 2023 thereafter Operating leases$ 24,725 $ 5,287 $ 4,655 $ 4,211 $ 3,795 $ 6,777 Purchase commitments 4,354 4,354 - - - -
Short-term debt - bank and trade
facilities 18,279 18,279 - - - -
Long-term debt - bank and trade
facilities 10,625 - 3,438 7,187 - - Long-term debt - related party 9,096 - - 9,096 - -
Total future contractual commitments
$ 20,494 $ 3,795 $ 6,777 Operating Leases Future minimum operating lease obligations in the table above include primarily payments for our office locations and manufacturing, research and development locations, which expire at various dates through 2025. See Note 14 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our operating leases. Purchase Commitments
The purchase commitments shown above represent non-cancellable inventory
purchase commitments as of
35
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The debt obligation amount shown above represents scheduled principal repayments, but not the associated interest payments which may vary based on changes in market interest rates. See Note 7 "Debt" of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our operating leases.
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