Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nasdaq  >  DASAN Zhone Solutions, Inc.    DZSI

DASAN ZHONE SOLUTIONS, INC.

(DZSI)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsPress ReleasesOfficial PublicationsSector news

DASAN ZHONE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

share with twitter share with LinkedIn share with facebook
08/10/2020 | 04:48pm EDT

As used in this Quarterly Report on Form 10-Q, unless the context suggests otherwise, the terms "DZS," "we," "our" and "us" refer to DASAN Zhone Solutions, Inc. and its subsidiaries.

Forward-Looking Statements


This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contains
forward-looking statements regarding future events and our future results that
are subject to the safe harbors created under the Securities Act of 1933 (the
"Securities Act") and the Securities Exchange Act of 1934 (the "Exchange
Act"). These statements are based on current expectations, estimates, forecasts,
and projections about the industries in which we operate, and reflect the
beliefs and assumptions of our management as of the date hereof.

We use words such as "anticipate," "believe," "continue," "could," "estimate,"
"expect," "forecast," "goal," "intend," "may," "plan," "project," "seek,"
"should," "target," "will," "would," variations of such words, and similar
expressions to identify forward-looking statements. In addition, statements that
refer to projections of earnings, revenue, costs or other financial items in
future periods; our ability to satisfy our short- and long-term cash
requirements; anticipated anticipated growth and trends in our business,
industry or key markets; cost synergies, growth opportunities and other
potential financial and operating benefits of the Merger and the acquisition of
Keymile; future growth and revenues from our products; our plans and our ability
to refinance or repay our existing indebtedness prior to the applicable maturity
dates; our ability to access other capital to fund our future operations; future
economic conditions and performance; the impact of the global outbreak of
COVID-19; the impact of interest rate and foreign currency fluctuations; the
impact of the completed relocation of our corporate headquarters to Texas;
anticipated performance of products or services; competition; plans, objectives
and strategies for future operations, including our pursuit or strategic
acquisitions and our continued investment in research and development; other
characterizations of future events or circumstances; and all other statements
that are not statements of historical fact, are forward-looking statements
within the meaning of the Securities Act and the Exchange Act. Although we
believe that the assumptions underlying the forward-looking statements are
reasonable, we can give no assurance that our expectations will be attained.
Factors which could have a material adverse effect on our operations and future
prospects or which could cause actual results to differ materially from our
expectations include, but are not limited to:

• the impact of the global COVID-19 pandemic on the Company's business and

operations, including as a result of travel bans related thereto, the health

and wellbeing of our employees in affected areas, disruption of our supply

      chain and softening of demands for our products;




   •  our ability to realize the anticipated cost savings, synergies and other

benefits of the Merger and the acquisition of Keymile and any integration

      risks relating to the acquisition of Keymile;




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




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




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




  • defects or other performance problems in our products;



• any economic slowdown in the telecommunications industry that restricts or

delays the purchase of our products by our customers, or delays in payments

      of accounts receivable by our customers;




  • 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 network needs as our products;




  • higher than anticipated expenses that we may incur;



• any failure to comply with the periodic report filing and other requirements

      of The Nasdaq Stock Market for continued listing;




   •  material weaknesses or other deficiencies in our internal control over
      financial reporting; and



• additional factors discussed in Part II, Item 1A "Risk Factors" and Part I,

Item 2 "Management's Discussion and Analysis of Financial Condition and

Results of Operations" of this Quarterly Report on Form 10-Q, as well as

      those


                                       25
--------------------------------------------------------------------------------

described in our Annual Report on Form 10-K for the year ended December 31,

2019 and from time to time in our other reports filed with the U.S.

Securities and Exchange Commission (the "SEC").

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 and

scalable solution for mobile operators that enable them to upgrade their

mobile fronthaul/backhaul systems and migrate to 5G and beyond. Our mobile

backhaul products may be collocated at the radio access node base station

and can aggregate multiple radio access node base stations into a single

backhaul for delivery of mobile traffic to the radio access node network

      controller. We provide standard Ethernet/IP or MPLS interfaces and
      interoperate with other vendors in these networks.

• Our FiberLAN portfolio of POL products are designed for enterprise, campus,

hospitality, and entertainment arena usage. Our FiberLAN portfolio includes

our 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 and

latency 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.



As of June 30, 2020, we employed over 750 personnel worldwide. We consider the
relationships with our employees to be positive. Competition for technical
personnel in our industry is intense. We believe that our future success depends
in part on our continued ability to hire, assimilate and retain qualified
personnel. To date, we believe that we have been successful in recruiting
qualified employees, but there is no assurance that we will continue to be
successful in the future.

RECENT DEVELOPMENTS



Effective August 1, 2020, Charlie Vogt was appointed as the President and Chief
Executive Officer of the Company. In addition, Mr. Vogt was elected as a new
member of the Board, also effective August 1, 2020. In connection with Mr.
Vogt's appointment, Il Yung Kim ceased to serve as President and Chief Executive
Officer of the Company and as a member of the Board effective July 31, 2020.
Prior to joining the Company, Mr. Vogt was most recently President and Chief
Executive Officer of ATX Networks, a leader in broadband access and media
distribution, where he led the company through extensive transformation and
growth since February 2018 and will remain a member of the board. From July 2013
to January 2018, Mr. Vogt served as President and Chief Executive Officer of
Imagine Communications, where he directed the company through revolutionary
change as it evolved its core technology, including large-scale restructuring
and rebranding and multiple technology acquisitions as he implemented a
disruptive vision and growth strategy. Before joining Imagine Communications,
Mr. Vogt was President and Chief Executive Officer of GENBAND (today known as
Ribbon Communications), where he transformed the company from a startup to the
industry's global leader in voice over IP and real-time IP communications

                                       26

--------------------------------------------------------------------------------


solutions. His professional career has also included leadership roles at Taqua
(Tekelec), Lucent Technology (Nokia), Ascend Communications (Lucent), ADTRAN,
Motorola and IBM.

On August 1, 2020, the Company completed its relocation of its corporate
headquarters from California to Plano, Texas and establish a new U.S.-based
Engineering Center of Excellence in Plano. In connection with the relocation,
the Company entered into sublease agreements with Huawei Technologies, Inc. and
Futurewei Technologies, Inc. to sublease an aggregate of approximately 16,300
square feet located at Legacy Place, 5700 Tennyson Parkway, Plano, Texas.

On June 1, 2020, DZS Japan entered into an assignment agreement with JECC
Corporation to factor 1,258,822,828 YEN (approximately $11.6 million USD) of
accounts receivables from one of its customers. JECC assessed a discount
equivalent to 5,964,328 YEN (approximately $0.05 million USD) (or approximately
0.474% of the amount factored, with a stated factoring rate of 1.575% based on
the days remaining from factoring to expected receivable collection). DZS Japan
received 1,252,588,500 YEN (approximately $11.65 million USD) on June 19, 2020.

On March 5, 2020, DNS Korea entered into a Loan Agreement with DNI, pursuant to
which DNS Korea borrowed KRW 22.4 billion ($18.5 million USD) from DNI. DNS
Korea subsequently loaned all of such borrowed funds to the Company, a portion
of which were used to repay and terminate the PNC Credit Facilities.



RESULTS OF OPERATIONS


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





                                                Three Months Ended                 Six Months Ended
                                                     June 30,                          June 30,
                                              2020               2019            2020             2019
Net revenue:
Third parties                                      98 %               99 %            99 %             99 %
Related parties                                     2 %                1 %             1 %              1 %
Total net revenue                                 100 %              100 %           100 %            100 %
Cost of revenue:
Products and services - third parties              64 %               66 %            65 %             65 %
Products and services - related parties             2 %                1 %             1 %              1 %
Amortization of intangible assets                   0 %                0 %             1 %              1 %
Total cost of revenue                              66 %               67 %            67 %             67 %
Gross profit                                       34 %               33 %            33 %             33 %
Operating expenses:
Research and product development                   12 %               11 %            15 %             12 %
Selling, marketing, general and
administrative                                     19 %               18 %            23 %             19 %
Amortization of intangible assets                   0 %                1 %             1 %              1 %
Total operating expenses                           31 %               30 %            39 %             32 %
Operating income (loss)                             3 %                3 %            (6 )%             1 %
Interest income                                     0 %                0 %             0 %              1 %
Interest expense                                   (1 )%              (1 )%           (1 )%             0 %
Loss on extinguishment of debt                      0 %                0 %            (1 )%             0 %
Other income (expense), net                        (1 )%               2 %             0 %             (1 )%
Income (loss) before income taxes                   1 %                4 %            (8 )%             1 %
Income tax provision                                1 %                1 %             0 %              -
Net income (loss)                                  (0 )%               3 %            (8 )%             1 %
Net income (loss) attributable to
non-controlling interest                            0 %                0 %             0 %              0 %
Net income (loss) attributable to DASAN
Zhone Solutions, Inc.                              (0 )%               3 %            (8 )%             1 %








                                       27
--------------------------------------------------------------------------------

Net Revenue


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



                                Three Months Ended June 30,                               Six Months Ended June 30,
                                              Increase/                                                Increase/
                      2020        2019        (Decrease)      % change        2020        2019         (Decrease)       % change
Products            $   66.2$  78.9$      (12.7 )         (16 )%   $ 108.9$ 148.5$        (39.6 )         (27 )%
Services                 4.3         4.8             (0.5 )         (10 )%       9.1         9.3               (0.2 )          (2 )%
Total               $   70.5$  83.7$      (13.2 )         (16 )%   $ 118.0$ 157.8$        (39.8 )         (25 )%




For the three months ended June 30, 2020, product revenue decreased by 16% or
$12.7 million to $66.2 million from $78.9 million in the same period last year.
The decrease in product revenue during the period was primarily attributable to
impacts from the worldwide COVID-19 pandemic, which resulted in disruptions to
our supply chain, as well as decreased business operations by certain of our
customers. For the three months ended June 30, 2020, service revenue decreased
by 10% or $0.5 million to $4.3 million from $4.8 million in the same period last
year. The decrease in service revenue was primarily related to a fewer number of
products under contract for maintenance and extended warranty.



For the six months ended June 30, 2020, product revenue decreased by 27% or
$39.6 million to $108.9 million from $148.5 million in the same period last
year. The decrease in product revenue during the period was primarily
attributable to impacts from the worldwide COVID-19 pandemic, which resulted in
disruptions to our supply chain, as well as decreased business operations by
certain of our customers. For the six months ended June 30, 2020, service
revenue decreased by 2% or $0.2 million to $9.1 million from $9.3 million in the
same period last year.  The decrease in service revenue was primarily related to
a fewer number of products under contract for maintenance and extended warranty.



Information about our net revenue for North America and international markets is summarized below (in millions):




                                    Three Months Ended June 30,                              Six Months Ended June 30,
                                                  Increase/                                               Increase/
                          2020        2019        (decrease)      % change        2020        2019        (decrease)      % change
Revenue by geography:
United States           $    8.8$   9.7$       (0.9 )          (9 )%   $  16.5$  19.3$       (2.8 )         (15 )%
Canada                       2.3         1.0              1.3           130 %        3.1         1.9              1.2            63 %
Total North America         11.1        10.7              0.4             4 %       19.6        21.2             (1.6 )          (8 )%
Latin America                3.7         6.0             (2.3 )         (38 )%       5.9        12.6             (6.7 )         (53 )%
Europe, Middle East,
  Africa                    16.7        25.2             (8.5 )         (34 )%      29.0        43.6            (14.6 )         (33 )%
Korea                       14.8        19.0             (4.2 )         (22 )%      31.5        34.8             (3.3 )          (9 )%
Other Asia Pacific          24.2        22.8              1.4             6 %       32.0        45.6            (13.6 )         (30 )%
Total International         59.4        73.0            (13.6 )         (19 )%      98.4       136.6            (38.2 )         (28 )%
Total                   $   70.5$  83.7$      (13.2 )         (16 )%   $ 118.0$ 157.8$      (39.8 )         (25 )%




From a geographical perspective, the decrease in net revenue for the three and
six months ended June 30, 2020, was attributable to declining revenue in most
regions, and was largely attributed to impacts from the worldwide COVID-19
pandemic, resulting in disruptions to our supply chain and decreased business
operations by certain of our customers. The decrease in revenue by geography was
mainly attributable to a decrease in revenue in International markets.



International net revenue for the three months ended June 30, 2020 decreased 19%
or $13.6 million to $59.4 million from $73.0 million from the same period last
year, and represented 84% of total net revenue compared with 87% during the same
period of 2019.  International net revenue for the six months ended June 30,
2020 decreased 28% or $38.3 million to $98.4 million from $136.6 million for the
same period last year, and represented 84% of total net revenue compared with
83% during the same period of 2019. The decrease in international net revenue
was primarily attributed to impacts from the worldwide COVID-19 pandemic.



For the three months ended June 30, 2020, one customer accounted for 19% of net
revenue. For the six months ended June 30, 2020, one customer accounted for 11%
of net revenue. For the three months ended June 30, 2019, one customer accounted
for 12% of net revenue. For the six months ended June 30, 2019, no single
customer accounted for 10% or more of net revenue.

                                       28

--------------------------------------------------------------------------------


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 customers. As a result, our
revenue for any quarter may be subject to significant volatility based upon
changes in orders from one or a small number of key customers.

Cost of Revenue and Gross Profit


Total cost of revenue decreased 16% or $9.1 million to $46.8 million for the
three months ended June 30, 2020, compared to $55.9 million for the three months
ended June 30, 2019. Total cost of revenue was 66% and 67% of net revenue for
the three months ended June 30, 2020 and June 30, 2019, respectively. Total cost
of revenue decreased 26% or $26.9 million to $78.2 million for the six months
ended June 30, 2020, compared to $105.1 million for the six months ended
June 30, 2019. Total cost of revenue was 67% of net revenue for each of the six
months ended June 30, 2020 and 2019.

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

Research and Product Development Expenses


Research and product development expenses decreased 11% or $1.1 million to $8.4
million for the three months ended June 30, 2020, compared to $9.4 million for
the three months ended June 30, 2019. Research and product development expenses
were 12% as a percentage of sales for the three months ended June 30, 2020,
compared to 11% for the three months ended June 30, 2019. Research and product
development expenses decreased 8% or $1.7 million to $18.0 million for the six
months ended June 30, 2020 compared to $19.6 million for the six months ended
June 30, 2019. Research and product development expenses were 15% as a
percentage of sales, for the six months ended June 30, 2020, compared to 12% for
the six months ended June 30, 2019. The decrease in research and development
expenses were mainly attributable to the restructuring activities, and reduction
in force, during 2019.

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

Selling, Marketing, General and Administrative Expenses


Selling, marketing, general and administrative expenses include personnel costs
for sales, marketing, administration, finance, information technology, human
resources and general management as well as legal and accounting expenses, rent,
utilities, trade show expenses and related travel costs.

Selling, marketing, general and administrative expenses decreased 11% or $1.6
million to $13.3 million for the three months ended June 30, 2020, compared to
$14.9 million for the three months ended June 30, 2019. Selling, marketing,
general and administrative expenses were 19% as a percentage of sales, for both
the three months ended June 30, 2020 and 2019. Selling, marketing, general and
administrative expenses decreased 10% or $3.1 million to $26.9 million for the
six months ended June 30, 2020, compared to $30.0 million for the six months
ended June 30, 2019. Selling, marketing, general and administrative expenses
were 21% as a percentage of sales, for the six months ended June 30, 2019,
compared to 19% of sales for the six months ended June 30, 2018. The increase in
selling, marketing, general and administrative costs as a percentage of sales
for the six months ended June 30, 2020 is primarily due to the lower revenues in
the period.

Income Tax Provision

Income tax expense for the three and six months ended June 30, 2020 was $0.8
million for both periods, on pre-tax income of $0.7 million and pre-tax loss of
$8.1 million, respectively. Income tax expense for the three and six months
ended June 30, 2019 was $0.7 million and $0.8 million, respectively, on pre-tax
income of $3.1 million and $1.7 million, respectively. For the three and six
months ended June 30, 2020, the effective income tax rate varied from the United
States statutory income tax rate primarily due to valuation allowances in the
United States and the mix of earnings generated by our wholly owned foreign
subsidiaries.

OTHER PERFORMANCE MEASURES


In managing our business and assessing our financial performance, we supplement
the information provided by our U.S. GAAP results with adjusted earnings before
stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA,
a non-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 merger and acquisition transaction
costs, inventory valuation step-up amortization, purchase price adjustments,
restructuring and other charges,

                                       29

--------------------------------------------------------------------------------


goodwill impairment, bargain purchase gain, gain (loss) on sale of assets,
impairment of long-lived assets or loss on debt extinguishment, any of which may
or may not be recurring in nature. We believe that the presentation of Adjusted
EBITDA enhances the usefulness of our financial information by presenting a
measure that management uses internally to monitor and evaluate our operating
performance and to evaluate the effectiveness of our business strategies. We
believe Adjusted EBITDA also assists investors and analysts in comparing our
performance across reporting periods on a consistent basis because it excludes
the impact of items that we do not believe reflect our core operating
performance.



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

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

• Adjusted EBITDA does not reflect changes in, or cash requirements for, our

      working capital needs;


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

• Although 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 with U.S. GAAP or as a measure of
liquidity. Management understands these limitations and compensates for these
limitations by relying primarily on our U.S. GAAP results and using Adjusted
EBITDA only as a supplemental measure.

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




                                              Three Months Ended June 30,           Six Months Ended June 30,
                                               2020                2019              2020                2019
Net income (loss)                          $        (156 )$       2,384$      (8,927 )$        927
Add (less):
Interest expense, net                                400               1,182               973              1,965
Income tax expense                                   838                 732               833                809
Depreciation and amortization                      1,293               1,350             2,549              2,767
Stock-based compensation                             868                 811             1,650              1,636
Acquisition costs                                      -                   -                 -                337
Inventory step-up valuation amortization               -                 201                 -                402
Bargain purchase gain                                  -                   -                 -               (334 )
Loss on debt extinguishment                            -                   -             1,369                  -
Adjusted EBITDA                            $       3,243$       6,660$      (1,553 )$      8,509

CRITICAL ACCOUNTING POLICIES AND ESTIMATES


For a complete description of what we believe to be the critical accounting
policies and estimates used in the preparation of our unaudited condensed
consolidated financial Statements, refer to Note 1, Organization and Summary of
Significant Accounting Policies, in the notes to our audited consolidated
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2019, as supplemented by Note 1, Organization and Summary of
Significant Accounting Policies, in the notes to our unaudited condensed
consolidated financial statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

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

                                       30

--------------------------------------------------------------------------------

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




                             June 30, 2020       December 31, 2019
Cash and cash equivalents   $        37,971     $            28,747
Working capital                     116,094                 114,885




The Company had a net loss of $8.9 million for the six months ended June 30,
2020 and a net loss of $13.3 million for the year ended December 31, 2019.
Additionally, the Company incurred significant losses in years prior to 2019. As
of June 30, 2020, the Company had an accumulated deficit of $38.2 million and
working capital of $116.1 million.



In March 2020, as described below under the header Related Party Debt,
we entered into a Loan Agreement with DNI, and used a portion of such funds to
repay in full and terminate the Company's existing credit facility with PNC
Bank. In June 2020, we entered into an assignment agreement with a third party
to factor accounts receivables from a customer, and we received approximately
$11.7 million from this arrangement.



As of June 30, 2020, the Company had $38.0 million in cash and cash equivalents, which included $18.2 million in cash balances held by its international subsidiaries, and $56.8 million in aggregate principal debt of which $29.1 million was reflected in current liabilities.

If our liquidity proves to be insufficient, our business could suffer due to:

• increased vulnerability to adverse economic conditions in our industry or

the economy in general;

• substantial amounts of cash required to be used for debt servicing, rather

than other purposes, including operations;

• limitations on our ability to plan for, or react to, changes in our business

and industry; and

• 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. Based on our current plans and current business
conditions, as of the date of this Quarterly Report on Form 10-Q, 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 months from the date of this Quarterly Report on Form 10-Q.

Our ability to meet our obligations as they become due in the ordinary course of
business for the next twelve (12) months will depend on our ability to (i)
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 want them, our operations and
prospects could be negatively affected. While we believe that we are likely to
achieve forecasted results of operations if we are successful in implementing
our business strategies, the impact of the COVID-19 pandemic provides great
uncertainty with respect to our future operations, could result in a material
decline in our operating cash flows and could cause us to fail to meet our
obligations as they come due.

In December 2019, a strain of coronavirus, now known as COVID-19, was reported
to have surfaced in Wuhan, China. Since that time, the widespread and sustained
transmission of the virus has reached global pandemic status. In response to the
pandemic, many national and international health agencies have recommended, and
many countries and state, provincial and local governments have implemented,
various measures, including travel bans and restrictions, limitations on public
and private gatherings, business closures or operating restrictions, social
distancing, and shelter-in-place orders. The health effects of the pandemic and
the above measures taken in response thereto have had an effect on the global
economy in general and has materially impacted and will likely continue to
impact the Company's financial condition, results of operations and cash flows.
Given the ongoing and dynamic nature of the virus and the worldwide response
related thereto, it is difficult to predict the full impact of the COVID-19
pandemic on our business. During the six months ended June 30, 2020, the
Company's revenues declined relative to its prior expectations, in part due to
the COVID-19 pandemic. Due to the uncertainty around the future economic impact
of the pandemic, the fair value measurements used in the Company's impairment
assessments could be negatively impacted and could result in future impairments
of goodwill, intangibles and other long-lived assets. The impact of a continued
COVID-19 pandemic or sustained measures taken to limit or contain the outbreak
could continue to have a material adverse effect on our business, financial
condition, results of operations, and cash flows.

Operating Activities

Net cash used in operating activities decreased by $11.8 million to $4.0 million for the six months ended June 30, 2020 from net cash used in operating activities of $15.8 million for the six months ended June 30, 2019. The improvement in cash from

                                       31

--------------------------------------------------------------------------------


changes in operating assets and liabilities was primarily due to collection of
accounts receivables, including amounts previously reflected in contract assets,
partially offset by increases in inventory.

Investing Activities

Net cash used in investing activities decreased by $3.9 million to $1.6 million for the six months ended June 30, 2020 from $5.5 million for the six months ended June 30, 2019. This decrease was primarily due to cash used in the acquisition of Keymile in 2019.

Financing Activities


Net cash provided by financing activities totaled $19.9 million for the six
months ended June 30, 2020 and consisted primarily of proceeds from a related
party loan, factored accounts receivable accounted for as a secured borrowing,
and proceeds from short-term borrowings, partially offset by a net outflow
associated with the repayment of the PNC Credit Facilities and other short-term
borrowings. This is in comparison to cash provided by financing activities of
$51.4 million for the six months ended June 30, 2019 and consisted primarily of
proceeds from a public stock offering in May 2019 in which we received $42.5
million in net proceeds.

Cash Management

Our primary source of liquidity comes from our cash, cash equivalents and
restricted cash, which totaled $47.3 million at June 30, 2020. Our cash, cash
equivalents and restricted cash as of June 30, 2020 included $22.4 million in
cash balances held by our international subsidiaries.

Debt Facilities

Bank, Trade Facilities and Secured Borrowings - Foreign Operations


On June 1, 2020, DZS Japan entered into an assignment agreement with JECC
Corporation to factor 1,258,822,828 YEN (approximately $11.6 million USD) of
accounts receivables from a customer. JECC assessed a discount equivalent to
5,964,328 YEN (approximately $0.05 million USD) (or approximately 0.474% of the
amount factored, with a stated factoring rate of 1.575% based on the days
remaining from factoring to expected receivable collection). DZS Japan received
1,252,858,500 YEN (approximately $11.65 million USD) on June 19, 2020.

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 of June 30, 2020 and December 31, 2019, we had an aggregate outstanding
balance of $29.1million and $17.5 million, respectively, under such financing
arrangements, and the interest rate per annum applicable to outstanding
borrowings under these financing arrangements ranged from 0% to 3.00% as of June
30 2020.

Related Party Debt

In February 2016, DNS California borrowed $1.8 million from DNI for capital
investment with an interest rate of 4.6% per annum. On February 27, 2019, in
connection with the entry into the PNC Credit Facilities, the Company amended
the terms of this loan to extend the repayment date to May 27, 2022. As of June
30, 2020, the $1.8 million was 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 in September 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. In February 2019, the Company repaid the term loan in full plus accrued
interest in connection with the entry into the PNC Credit Facilities, thereby
terminating the loan agreement.

In March 2018, DNS Korea borrowed $5.8 million from DNI, of which $4.5 million
was repaid on August 8, 2018. The loan bears interest at a rate of 4.6%. On
February 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 to May
27, 2022. As of June 30, 2020, $1.2 million was outstanding.

In December 2018, the Company entered into a loan agreement with DNI, for a $6.0
million term loan with an interest rate of 4.6% per annum. On February 27, 2019,
in connection with the entry into the PNC Credit Facilities, the Company amended

                                       32

--------------------------------------------------------------------------------


the terms of the term loan to extend the repayment date to May 27, 2022 and to
terminate any security granted to DNI with respect to such term loan. As of June
30, 2020, the $6.0 million was outstanding.

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



On March 5, 2020, DNS Korea, the Company's wholly-owned, indirect subsidiary
entered into a Loan Agreement with DNI (the "March 2020 DNI Loan"). The March
2020 DNI Loan was negotiated and approved on behalf of the Company and its
subsidiaries by a special committee of the Board of Directors of the Company
(the "Special Committee") consisting of directors determined to be independent
from DNI. The March 2020 DNI Loan consists of a term loan in the amount of KRW
22.4 billion ($18.5 million USD) with interest payable semi-annually at an
annual rate of 4.6% and maturing on March 11, 2022. No principal payments are
due on the March 2020 DNI Loan until the maturity date, but DNS Korea may prepay
the loan, or a portion thereof, without penalty. As of June 30, 2020, $18.7
million was outstanding.



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



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


As of June 30, 2020, the Company had borrowings of $27.7 million outstanding
from DNI. The outstanding balance at June 30, 2020 consisted of the March 2020
DNI Loan of KRW 22.4 billion ($18.7 million USD), a $6.0 million unsecured
subordinated term loan facility which matures in May 2022, a $1.8 million loan
for capital investment which matures in May 2022, and KRW 1.5 billion ($1.2
million USD) outstanding under a secured loan which matures in May 2022. All
four loans bear interest at a rate of 4.6% per annum.

Interest expense on these related party borrowings was $0.3 million and $0.4
million during the three months ended June 30, 2020 and 2019, respectively.
Interest expense on these related party borrowings was $0.1 million and $0.2
million during the six months ended June 30, 2020 and 2019, respectively.

Future Requirements and Funding Sources


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

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

Our accounts receivable, while not considered a primary source of liquidity,
represent a concentration of credit risk because a significant portion of the
accounts receivable balance at any point in time typically consists of a
relatively small number of customer account balances. As of June 30, 2020, two
customers each represented 19% and 18% of net accounts receivable, respectively,
and receivables from customers in countries other than the United States
represented 93% 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.

                                       33
--------------------------------------------------------------------------------

Contractual Commitments


At June 30, 2020, our future contractual commitments by fiscal year were as
follows (in thousands):



                                                              Payments due by period
                       Total         2020         2021         2022         2023         2024        Thereafter
Operating lease
payments              $ 24,706$  2,674$  5,200$  4,771$  4,339$  3,895$      3,827
Short-term debt         29,144       20,815        8,329            -            -            -                -
Purchase
commitments              4,518        4,518            -            -            -            -                -
Long-term debt -
related party           27,705            -            -       27,705            -            -                -
Total future
contractual
  commitments         $ 86,073$ 28,007$ 13,529$ 32,476$  4,339$  3,895$      3,827




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 2027. See Note 13 "Leases" of
the Notes to Unaudited Condensed Consolidated Financial Statements included in
this Quarterly Report on Form 10-Q for further discussion regarding our
operating leases.

Purchase Commitments

The purchase commitments shown above represent non-cancellable inventory purchase commitments as of June 30, 2020.

Short-term and Long-term Debt


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 Unaudited
Condensed Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q for further discussion regarding our debt agreements.

                                       34

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses


share with twitter share with LinkedIn share with facebook
All news about DASAN ZHONE SOLUTIONS, INC.
10/22DASAN ZHONE : DZS Pulls Forward Earnings Release and Conference Call to New Date..
AQ
10/22DZS Pulls Forward Earnings Release and Conference Call to New Date and Time
GL
10/22DASAN ZHONE : DZS Pulls Forward Earnings Release and Conference Call to New Date..
PU
10/19DZS INC : . Sets Third Quarter 2020 Earnings Call for Monday, November 2, 2020
AQ
10/19DZS Inc. Sets Third Quarter 2020 Earnings Call for Monday, November 2, 2020
GL
10/16DASAN ZHONE : DZS gets amped for RDOF
PU
10/15DASAN ZHONE : DZS Launches “RDOF Amplify!” Program Designed to Maxim..
AQ
10/15DZS Launches “RDOF Amplify!” Program Designed to Maximize Fund Re..
GL
10/15DASAN ZHONE : DZS Launches “RDOF Amplify!” Program Designed to Maxim..
PU
10/14DASAN ZHONE : FanVestor Builds Up Team As It Readies for Significant Growth in 2..
AQ
More news