Dasan Zhone Solutions Earnings 2019-06-30

DZSI 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 dzsi-10q_20190630.htm 10-Q dzsi-10q_20190630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended June 30, 2019

☐

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

For the transition period from to

000-32743

(Commission File Number)

DASAN ZHONE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

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

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

(510) 777-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Common stock, $0.001 par value	DZSI	The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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

As of August 12, 2019, there were 21,386,231 shares outstanding of the registrant’s common stock, $0.001 par value.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Unaudited Condensed Consolidated Statements of Stockholders' Equity and Non-Controlling Interest	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 5.	Other Information	38
Item 6.	Exhibits	40
	Signatures	41

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)

	June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	56,421		$	27,709
Restricted cash		8,364			7,003
Accounts receivable, net
Third parties		88,372			71,034
Related parties		—			583
Other receivables
Suppliers and others		8,115			12,923
Related parties		17			65
Contract assets		17,093			11,381
Inventories		43,306			33,868
Prepaid expenses and other current assets		4,857			4,185
Total current assets		226,545			168,751
Property, plant and equipment, net		6,173			5,518
Right-of-use assets from operating leases		20,310			—
Goodwill		3,977			3,977
Intangible assets, net		15,831			5,649
Deferred tax assets		2,175			2,752
Long-term restricted cash		572			936
Other assets		4,345			2,424
Total assets	$	279,928		$	190,007
Liabilities, Stockholders’ Equity and Non-controlling Interest
Current liabilities:
Accounts payable - trade
Third parties	$	42,394		$	36,865
Related parties		98			1,743
Short-term debt - bank and trade facilities		28,867			31,762
Other payables
Third parties		2,454			1,792
Related parties		1,586			1,281
Contract liabilities - current		3,365			8,511
Operating lease liabilities - current		3,892			—
Accrued and other liabilities		10,347			11,517
Total current liabilities		93,003			93,471
Long-term debt
Bank and trade facilities		20,866			—
Related party		9,097			14,142
Contract liabilities - non-current		2,467			1,801
Deferred tax liabilities		1,064			—
Operating lease liabilities - non-current		17,542			—
Pension liabilities		13,625			—
Other long-term liabilities		1,715			2,739
Total liabilities		159,379			112,153
Commitments and contingencies (Note 15)
Stockholders’ equity and non-controlling interest:
Common stock, authorized 36,000 shares, 21,380 and 16,587 shares outstanding as of June 30, 2019 and December 31, 2018, respectively, at $0.001 par value		21			16
Additional paid-in capital		137,805			93,192
Accumulated other comprehensive loss		(3,064	)		(192	)
Accumulated deficit		(15,007	)		(15,777	)
Total stockholders’ equity		119,755			77,239
Non-controlling interest		794			615
Total stockholders’ equity and non-controlling interest		120,549			77,854
Total liabilities, stockholders’ equity and non-controlling interest	$	279,928		$	190,007

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net revenue:
Third parties	$	82,790		$	75,187		$	156,115		$	133,093
Related parties		874			1,070			1,638			2,668
Total net revenue		83,664			76,257			157,753			135,761
Cost of revenue:
Products and services - third parties		54,855			52,150			103,050			88,356
Products and services - related parties		621			789			1,237			2,199
Amortization of intangible assets		406			153			814			306
Total cost of revenue		55,882			53,092			105,101			90,861
Gross profit		27,782			23,165			52,652			44,900
Operating expenses:
Research and product development		9,430			8,714			19,614			17,691
Selling, marketing, general and administrative		14,929			11,712			29,968			24,106
Amortization of intangible assets		470			131			942			262
Total operating expenses		24,829			20,557			50,524			42,059
Operating income		2,953			2,608			2,128			2,841
Interest income		62			75			150			161
Interest expense		(1,244	)		(560	)		(2,115	)		(883	)
Other income (loss), net		1,345			(427	)		1,573			(287	)
Income before income taxes		3,116			1,696			1,736			1,832
Income tax provision		732			341			809			336
Net income		2,384			1,355			927			1,496
Net income (loss) attributable to non-controlling interest		(24	)		(61	)		157			(27	)
Net income attributable to DASAN Zhone Solutions, Inc.	$	2,408		$	1,416		$	770		$	1,523

Foreign currency translation adjustments		(573	)		(2,548	)		(1,697	)		(2,230	)
Actuarial loss		(1,153	)		—			(1,153	)		—
Comprehensive income (loss)		658			(1,193	)		(1,923	)		(734	)
Comprehensive income (loss) attributable to non- controlling interest		(2	)		(83	)		178			(19	)
Comprehensive income (loss) attributable to DASAN Zhone Solutions, Inc.	$	660		$	(1,110	)	$	(2,101	)	$	(715	)

Net income per share attributable to DASAN Zhone Solutions, Inc.
Basic	$	0.13		$	0.09		$	0.04		$	0.09
Diluted	$	0.13		$	0.08		$	0.04		$	0.09
Weighted average shares outstanding used to compute basic net income per share		18,166			16,438			17,384			16,425
Weighted average shares outstanding used to compute diluted net income per share		18,482			16,672			17,710			16,645

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Stockholders' Equity and Non-Controlling Interest

(In thousands, except per share data)

	Common stock				Additional paid-in		Accumulated other comprehensive			Accumulated			Total stockholders'			Non- controlling			Total stockholders' equity and non- controlling
	Shares		Amount		capital		income (loss)			deficit			equity			interest			interest
For the Six-Month Period Ended June 30, 2019:
Balance as of December 31, 2018		16,587	$	16	$	93,192	$	(192	)	$	(15,777	)	$	77,239		$	615		$	77,854
Stock-based compensation		9		—		825		—			—			825			—			825
Net income (loss)		—		—		—		—			(1,638	)		(1,638	)		181			(1,457	)
Other comprehensive loss		—		—		—		(1,124	)		—			(1,124	)		(1	)		(1,125	)
Balance as of March 31, 2019		16,596		16		94,017		(1,316	)		(17,415	)		75,302			795			76,097
Issuance of common stock in public offering, net of issuance costs		4,718		5		42,504		—			—			42,509			—			42,509
Exercise of stock options and restricted stock grant		55		—		473		—			—			473			—			473
Stock-based compensation		11		—		811		—			—			811			—			811
Net income (loss)		—		—		—		—			2,408			2,408			(24	)		2,384
Other comprehensive income (loss)		—		—		—		(1,748	)		—			(1,748	)		23			(1,725	)
Balance as of June 30, 2019		21,380	$	21	$	137,805	$	(3,064	)	$	(15,007	)	$	119,755		$	794		$	120,549

For the Six-Month Period Ended June 30, 2018:
Balance as of December 31, 2017		16,410	$	16	$	90,198	$	1,871		$	(18,852	)	$	73,233		$	534		$	73,767
ASC 606 opening balance adjustment		—		—		—		—			342			342			—			342
Exercise of stock options and restricted stock grant		21		—		111		—			—			111			—			111
Stock-based compensation		—		—		363		—			—			363			—			363
Net income		—		—		—		—			107			107			34			141
Other comprehensive income		—		—		—		257			—			257			30			287
Balance as of March 31, 2018		16,431		16		90,672		2,128			(18,403	)		74,413			598			75,011
ASC 606 opening balance adjustment		—		—		—		—			(1	)		(1	)		—			(1	)
Exercise of stock options and restricted stock grant		19		—		77		—			—			77			—			77
Stock-based compensation		—		—		377		—			—			377			—			377
Net income (loss)		—		—		—		—			1,416			1,416			(61	)		1,355
Other comprehensive loss		—		—		—		(2,527	)		—			(2,527	)		(22	)		(2,549	)
Balance as of June 30, 2018		16,450	$	16	$	91,126	$	(399	)	$	(16,988	)	$	73,755		$	515		$	74,270

See accompanying notes to unaudited condensed consolidated financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

	Six Months Ended
	June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	927		$	1,496
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		2,767			1,381
Amortization of deferred financing costs		264			—
Bargain purchase gain on acquisition		(334	)		—
Stock-based compensation		1,636			740
Provision for inventory write-down		1,569			411
Allowance for doubtful accounts		114			—
Provision for sales returns		374			—
Unrealized gain on foreign currency transactions		(1,117	)		(141	)
Deferred taxes		479			(82	)
Changes in operating assets and liabilities:
Accounts receivable		(11,643	)		(17,198	)
Contract assets		(8,236	)		(1,645	)
Inventories		(1,543	)		(14,641	)
Prepaid expenses and other assets		262			219
Accounts payable		6,905			18,498
Contract liabilities		(4,730	)		—
Accrued and other liabilities		(3,528	)		(4,448	)
Net cash used in operating activities		(15,834	)		(15,410	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(811	)		(414	)
Acquisition of business, net of cash acquired		(4,697	)		—
Net cash used in investing activities		(5,508	)		(414	)
Cash flows from financing activities:
Proceeds from issuance of common stock in public offering, net of issuance costs		42,509			—
Proceeds from short-term borrowings and line of credit		22,327			44,368
Repayments of short-term borrowings and line of credit		(31,262	)		(26,455	)
Proceeds from long-term borrowings		25,000			—
Repayments of long-term borrowings		(625	)

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$10.40	17	$173

10-Q	2019-06-30	Quarter: 2019-06-30
10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-10-07	Earnings, Exhibits
8-K	2019-08-26	Officers
8-K	2019-08-13	Earnings, Exhibits
8-K	2019-07-31	Enter Agreement, Exhibits
8-K	2019-06-10	Accountant, Exhibits
8-K	2019-05-28	Shareholder Vote
8-K	2019-05-15	Other Events, Exhibits
8-K	2019-05-14	Officers
8-K	2019-05-09	Earnings, Exhibits
8-K	2019-02-28	Earnings, Exhibits
8-K	2019-02-28	Enter Agreement, Off-BS Arrangement
8-K	2019-01-03	Enter Agreement, M&A, Off-BS Arrangement, Other Events, Exhibits
8-K	2018-11-08	Earnings, Exhibits
8-K	2018-10-05	Enter Agreement, Exhibits
8-K	2018-08-13	Officers
8-K	2018-08-09	Earnings, Exhibits
8-K	2018-07-12	Enter Agreement, Off-BS Arrangement, Exhibits
8-K	2018-05-22	Officers, Shareholder Vote
8-K	2018-05-10	Earnings, Exhibits
8-K	2018-04-09	Officers
8-K	2018-03-27	Enter Agreement, Off-BS Arrangement, Exhibits
8-K	2018-02-28	Earnings, Exhibits

TI	TIM	108,702
PHI	PLDT	4,604
SHEN	Shenandoah Telecommunications	1,601
PLT	Plantronics	1,181
CNSL	Consolidated Communications Holdings	299
UTSI	Utstarcom Holdings	102
FTR	Frontier Communications	81
APWC	Asia Pacific Wire & Cable	37
ABIL	Ability	4
AMX	America Movil	0

EX-10.1	dzsi-ex101_8.htm
EX-10.2	dzsi-ex102_6.htm
EX-10.3	dzsi-ex103_9.htm
EX-31.1	dzsi-ex311_11.htm
EX-31.2	dzsi-ex312_12.htm
EX-32.1	dzsi-ex321_7.htm