DASAN ZHONE SOLUTIONS INC (Form: 8-K/A, Received: 03/18/2019 17:33:06)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): January 3, 2019

DASAN ZHONE SOLUTIONS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

000-32743

22-3509099

(State or Other Jurisdiction

of Incorporation)

(Commission

File No.)

(I.R.S. Employer

Identification No.)

7195 Oakport Street

Oakland, California 94621

(Address of Principal Executive Offices, Including Zip Code)

(510) 777-7000

(Registrant’s Telephone Number, Including Area Code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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. ☐

EXPLANATORY NOTE

This current report on Form 8-K/A (this “Amendment”) of DASAN Zhone Solutions, Inc. (the “Company”) amends the Current Report on Form 8-K filed on January 3, 2019 (the “Original Form 8-K”) related to the Company’s acquisition of Keymile GmbH (“Keymile”). This Amendment includes the unaudited pro forma condensed combined financial statements of the Company and audited financial statements of Keymile and supplements the information in the Original Form 8-K. Accordingly, this Amendment should be read in conjunction with the Original Form 8-K.

Item 7.01 Regulation FD Disclosure.

A copy of the press release of the Company dated March 18, 2019 announcing the updated information relating to the previously announced acquisition of Keymile GmbH is attached hereto as Exhibit 99.2 and incorporated herein by reference.

The information in this Item 7.01 (including Exhibit 99.2) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933, as amended or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 9.01 Financial Statements and Exhibits.

(a)	Financial statements of Business Acquired

The audited consolidated financial statements of Keymile GmbH and the notes thereto, as of December 31, 2018 and for the year then ended are included as Exhibit 99.3 to this Amendment and are incorporated herein by reference.

(b) Pro Forma Financial Information

The unaudited pro forma condensed combined financial statements as of and for the year ended December 31, 2018 are included as Exhibit 99.1 to this Amendment and are incorporated herein by reference.

(d) Exhibits

The exhibits required to be filed by Item 601 of Regulation S-K are listed in the “Index to Exhibits” immediately preceding the exhibits hereto and such listing is incorporated herein by reference.

EXHIBIT INDEX

Exhibit Number		Description

99.1		Unaudited pro forma condensed combined financial statements of the Company and Keymile as of and for the year ended December 31, 2018

99.2		Press release of the Company dated March 18, 2019

99.2a		Financial overview March 2019

99.3		Keymile GmbH audited consolidated financial statements as of and for the year ended December 31, 2018

99.4		Consent of Independent Auditors

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

March 18, 2019	DASAN Zhone Solutions, Inc.

	By:	/s/ Michael Golomb
		Michael Golomb
		Chief Financial Officer, Corporate Treasurer and Secretary

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On January 3, 2019, ZTI Merger Subsidiary III Inc., a Delaware corporation and DASAN Zhone Solutions, Inc.’s (“the Company” or “DZSI”) wholly owned subsidiary, acquired all of the outstanding shares of Keymile GmbH (“Keymile”), a limited liability company organized under the laws of Germany, from Riverside KM Beteiligung GmbH (“Riverside”), a limited liability company organized under the laws of Germany, pursuant to a share purchase agreement (the “Keymile Acquisition”). The aggregate cash purchase price paid for all of the shares of Keymile and certain of its subsidiaries, was € 10,250,000 ($11.8 million). The Company also assumed pension obligations of approximately $12.7 million, net of pension assets of $3.5 million. Following the closing of the Keymile Acquisition, Keymile became the Company’s wholly-owned subsidiary.

Keymile is a leading solution provider and manufacturer of telecommunication systems for broadband access. The Company believes Keymile strengthens its portfolio of broadband access solutions, which now includes a series of multi-service access platforms for FTTx network architectures, including ultra-fast broadband copper access based on VDSL/Vectoring & G. Fast technology.

The unaudited pro forma condensed combined financial statements were prepared in accordance with Article 11 of Regulation S-X. The pro forma adjustments reflecting the Keymile Acquisition have been prepared in accordance with business combination accounting guidance as provided in Accounting Standards Codification (“ASC”) 805, Business Combinations, and reflect the preliminary allocation of the purchase price to the assets acquired and liabilities assumed based upon a preliminary estimate of fair value, using available information and the assumptions set forth in the notes to the unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined financial statements have been prepared by the Company and give pro forma effect to the Keymile Acquisition and related transactions. For a more detailed discussion of the basis of presentation, see Note 1 to the unaudited pro forma condensed combined financial statements. The pro forma information does not purport to represent what the Company’s actual results of operations or financial position would have been had the matters described above occurred on the dates assumed, nor is it necessarily indicative of the Company’s future operating results or combined financial position.

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Keymile prepares its financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standard Board (“IASB”), which differs in certain respects from U.S. GAAP. For a discussion of the principal differences between IFRS and U.S. GAAP as they relate to Keymile and the Company on a pro forma basis, see Note 5 to the unaudited pro forma condensed combined financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

(In thousands)


	Historical
	DZSI December 31, 2018			Keymile U.S. GAAP (USD) December 31, 2018 (Note 5)			Pro Forma Adjustments (Note 4)				Pro Forma Combined
Assets
Current assets:
Cash and cash equivalents	$	27,709		$	7,116		$	(11,822	)	(a)(e)	$	23,003
Restricted cash		7,003			—			—				7,003
Accounts receivable - trade, net		71,617			6,820			(129	)	(a)		78,308
Other receivables		12,988			797			—				13,785
Inventories		33,868			9,307			(44	)	(a)		43,131
Contract assets		11,381			—			—				11,381
Prepaid expenses and other current assets		4,185			—			—				4,185
Total current assets		168,751			24,040			(11,995	)			180,796
Property, plant and equipment, net		5,518			836			—				6,354
Goodwill		3,977			—			—				3,977
Intangible assets, net		5,649			5,545			7,286		(d)		18,480
Deferred tax assets		2,752			128			(128	)	(b)		2,752
Long-term restricted cash		936			—			—				936
Other assets		2,424			3,698			(3,535	)	(c)		2,587
Total assets	$	190,007		$	34,248		$	(8,372	)		$	215,883
Liabilities, Stockholders’ Equity and Non-controlling Interest
Current liabilities:
Accounts payable - trade	$	38,608		$	3,303		$	(27	)	(a)	$	41,884
Short-term debt		31,762			4,620							36,382
Other payables		3,073			14,810			(14,810	)	(l)		3,073
Contract liabilities - current		8,511			364			—				8,875
Accrued and other liabilities		11,517			3,614			(153	)	(a) (b)		14,978
Total current liabilities		93,471			26,712			(14,990	)			105,193
Long-term debts		14,142			—			—				14,142
Contract liabilities - non-current		1,801			—			—				1,801
Pension obligations		—			16,191			(3,535	)	(c)		12,656
Other long-term liabilities		2,739			115			327		(b)		3,181
Total liabilities		112,153			43,017			(18,198	)			136,972
Commitments and contingencies
Stockholders’ equity and non-controlling interest
Common stock		16			29			(29	)	(f)		16
Additional paid-in capital		93,192			—			—				93,192
Accumulated other comprehensive loss		(192	)		(5,022	)		5,022		(f)		(192	)
Accumulated deficit		(15,777	)		(3,776	)		4,833		(a)(f) (l) (n)		(14,720	)
Total stockholders' equity		77,239			(8,770	)		9,826				78,295
Non-controlling interest		615			—			—				615
Total stockholders' equity and non-controlling interest		77,854			(8,770	)		9,826				78,910
Total liabilities, stockholders’ equity and non-controlling interest	$	190,007		$	34,248		$	(8,372	)		$	215,883

See accompanying notes to unaudited pro forma condensed combined financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

(In thousands, except per share data)

	Historical
	DZSI December 31, 2018			Keymile U.S. GAAP (USD) December 31, 2018 (Note 5)			Pro Forma Adjustments (Note 4)				Pro Forma Combined

Revenue	$	282,348		$	50,550		$	(326	)	(a)	$	332,572
Cost of revenue		191,017			30,556			600		(a) (g) (h)		222,173
Gross profit		91,331			19,994			(926	)			110,399
Operating expenses:
Research and product development		35,306			7,586			(1,639	)	(g) (h)		41,253
Selling, marketing, general and administrative		48,845			15,149			(2,214	)	(g) (h) (m)		61,780
Total operating expenses		84,151			22,735			(3,853	)			103,033
Operating income (loss)		7,180			(2,741	)		2,927				7,366
Interest income		264			130			—				394
Interest expense		(1,738	)		(143	)		(437	)	(i) (j)		(2,318	)
Other expense, net		(1,146	)		2,442			40		(a)		1,336
Income (loss) before income taxes		4,560			(312	)		2,530				6,778
Income tax provision		1,724			303			641		(k)		2,668
Net income (loss)		2,836			(615	)		1,889				4,110
Net income attributable to non-controlling interest		69			—			—				69
Net income (loss) attributable to DASAN Zhone Solutions, Inc.	$	2,767		$	(615	)	$	1,889			$	4,041
Basic earnings per share attributable to DASAN Zhone Solutions, Inc.	$	0.17									$	0.25
Diluted earnings per share attributable to DASAN Zhone Solutions, Inc.	$	0.17									$	0.24
Weighted average shares outstanding used to compute basic net income per share		16,482										16,482
Weighted average shares outstanding used to compute diluted net income per share		16,746										16,746

See accompanying notes to unaudited pro forma condensed combined financial statements.

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Unaudited Pro Forma Condensed Combined Financial Statements (In thousands, unless otherwise stated)

Note 1. Basis of Presentation

The historical financial information has been adjusted to give pro forma effect to events that are: (a) directly attributable to the transaction, (b) factually supportable, and (c) with respect to the unaudited pro forma condensed combined statement of operations, expected to have continuing impact on the combined results. The pro forma adjustments are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed, and have been prepared to illustrate the estimated effect of the acquisition and certain other adjustments as discussed in Note 4. The final determination of the purchase price allocation will be based on the final valuation of the fair value of assets acquired and liabilities assumed.

The unaudited pro forma condensed combined balance sheet as of December 31, 2018 is based on the historical financial statements of the Company and Keymile and reflect preliminary pro forma adjustments resulting from the acquisition. Keymile’s historical financial statements are prepared in accordance IFRS as issued by the IASB and are reported in Euros (“€”). For purposes of preparing these pro forma condensed combined financial statements, Keymile’s historical financial statements have been adjusted to U.S. GAAP and converted to U.S. dollars (see Note 5). The unaudited pro forma condensed combined balance sheet as of December, 31 2018 is presented as if the acquisition and related transactions had occurred on December 31, 2018. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2018 is presented as if the acquisition had occurred on January 1, 2018.

The acquisition has been accounted for using the acquisition method of accounting in accordance with ASC 805 - Business Combinations. Under the acquisition method of accounting, the total purchase consideration for the acquisition is allocated to the tangible assets and identifiable intangible assets and liabilities assumed based on their fair values. The excess of the purchase consideration over the preliminary fair value of identifiable assets and liabilities, if any, is recorded as goodwill. The excess of the fair value of identifiable assets and liabilities over the purchase consideration, if any, is recorded immediately as a gain for a bargain purchase in the statement of operations. The preliminary purchase price allocation is based on estimates, assumptions, third party valuations and other studies of the preliminary value of the acquired assets which have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the purchase price allocation and adjustments reported herein will remain preliminary until the Company has all of the information necessary to finalize the allocation of the purchase price, and the final acquisition accounting adjustments could differ materially from the proforma adjustments presented herein. Any increase or decrease in the preliminary fair value of Keymile’s tangible and identifiable intangible assets and assumed liabilities, as compared to the information shown herein, would also change the portion of purchase price allocable to goodwill and could impact the operating results of the Company due to differences in amortization related to these assets and liabilities. The Company intends to complete the purchase price allocation within twelve months of the closing of the acquisition on January 3, 2019.

The unaudited pro forma condensed combined financial information is for informational purposes only and does not purport to represent what the Company’s actual results would have been if the acquisition had been completed as of the dates indicated above, or that may be achieved in the future. The unaudited pro forma condensed combined statement of operations does not include the effects of any cost savings from operating efficiencies or synergies that may result from the acquisition.

The unaudited pro forma condensed combined financial statements, including the notes thereto, should be read in conjunction with the Company’s historical financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2018 filed on March 12, 2019 with the SEC, as well as the audited financial statements and related notes of Keymile as of and for the year ended December 31, 2018 which are attached as Exhibit 99.3 to this Current Report on Form 8-K/A.

Note 2. Significant Accounting Policies

The accounting policies used in the preparation of these unaudited pro forma condensed combined financial statements are those set out in DZSI’s audited consolidated financial statements for the year ended December 31, 2018. Keymile follows IFRS as issued by IASB; as a result, in preparation of the pro forma condensed combined financial statements, several adjustments were made to the Keymile’s consolidated financial statements to conform to U.S. GAAP. The differences between IFRS as issued by IASB and U.S. GAAP are reflected in Note 5. The unaudited pro forma condensed combined financial statements are presented in U.S. dollars (“$” or “dollars”), DZSI’s reporting currency. Keymile’s consolidated financial statements are presented in Euros (“€”). The Company translated Keymile’s consolidated balance sheet to dollars using the exchange rate at December 31, 2018 ($1.1456 to €1.00) and translated Keymile’s consolidated statement of operations at the average rate of exchange for the year ended December 31, 2018 ($1.1817 to €1.00).

Note 3. Acquisition

The aggregate cash purchase price paid for all of the shares of Keymile and certain of its subsidiaries, was €10,250,000 ($11.8 million). The Company also assumed pensions obligation of approximately $12.7 million, net of pension assets of $3.5 million. The Keymile Acquisition agreement also provides for a lockbox mechanism such that normal operations are observed by Keymile management and any excess cash flows generated from operating activities for the period from October 1, 2018 to December 31, 2018 remains with Keymile, with DZSI as the beneficiary, as the purchaser of Keymile. At December 31, 2018, cash received from the lockbox mechanism amounted to $2.5 million.

In October 2018, as a condition for the Keymile Acquisition, Riverside extended €4.0 million working capital loan to Keymile. The working capital loan bears interest at a rate of 3.5% per annum and is scheduled for repayment in two equal installments in April and November 2019.

On December 27, 2018, the Company entered into a Loan Agreement with DASAN Networks, Inc. (“DNI”), a related party , for a $6.0 million term loan with an interest rate of 4.6% per annum to partially fund the acquisition of Keymile. The term loan will mature in May 2022.

The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial statements is based upon preliminary estimates. These preliminary estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as we finalize the valuations of the tangible and intangible assets acquired and liabilities assumed in connection with the acquisition of Keymile.

A summary of the estimated purchase price allocation to the fair value of assets acquired and liabilities assumed is as follows (in thousands):


Purchase consideration
Cash consideration	$	11,776
Cash received from lockbox mechanism		(2,497	)
Total purchase consideration	$	9,279

Allocation of purchase consideration
Current assets
Accounts receivable - trade, net	$	6,691
Other receivables		797
Inventories		9,263
Property, plant and equipment		836
Intangible assets		12,831
Other assets		164
Accounts payable - trade		(3,276	)
Contract liabilities		(364	)
Accrued liabilities		(3,461	)
Pension obligations		(12,656	)
Other long term liabilities		(442	)
Goodwill (bargain purchase)		(1,104	)
Total purchase consideration	$	9,279

The estimated weighted average useful lives of the acquired property, plant and equipment is 5 years. Depreciation is calculated using straight-line method.

The following table represents the preliminary estimated fair value and useful lives of identifiable intangible assets acquired:


	Estimated Fair Value (in thousands)		Estimated Useful Life
Intangible assets acquired
Customer relationship	$	6,759	5 years
Trade name		2,062	5 years
Technology - developed core		4,010	5 years
Total intangible assets	$	12,831

The Company valued the customer relationships using the Income Approach, specifically the Multi-Period Excess Earnings Method (“MPEEM”). As of the valuation date, there was value attributable to Keymile’s existing customer relationships. Keymile’s key customer base is made up of independent telecommunication service providers and network operators, a base of customers that have seen growth since 2012. Keymile is seen as a market leader and has low historical customer attrition. In addition, switching costs are considered to be high due to the disruption of switching platforms as well as the additional training necessary. Keymile has a proven ability to quickly address any changes in the regulatory environment.

The Company utilized the Relief from Royalty Method (“RFRM”) to value the tradename and developed technology. The RFRM assumes that the value of the asset equals the amount a third party would pay to use the asset and capitalize on the related benefits of the asset. Therefore, a revenue stream for the asset is estimated, and then an appropriate royalty rate is applied to the forecasted revenue to estimate the pre-tax income associated with the asset. The pre-tax income is then tax-effected to estimate the after-tax net income associated with the asset. Finally, the after tax net income is discounted to the present value using an appropriate rate of return that considers both the risk of the asset and the associated cash flow estimates.

Note 4. Pro Forma Assumption and Adjustments

The historical financial information has been adjusted to give the effect to pro forma events that are 1) directly attributable to the acquisition, 2) factually supportable, and 3) with respect to the statement of operations, expected to have continued impact on the combined results of the companies. The following pro forma adjustments are included in the unaudited pro forma condensed combined financial statements.

Adjustment to remove cash and cash equivalents of $46 thousand, accounts receivable – trade of $129 thousand, inventories of $44 thousand, accounts payable – trade of $27 thousand, accrued and other liabilities of $153 thousand, and retained earnings of $38 thousand in the condensed combined balance sheet and revenue of $326 thusand, cost of revenues of $141 thousand, selling, marketing, general and administrative of $537 thousand

and other expenses of $40 thousand in the condensed combined statement of operations attributable to a subsidiary of Keymile located in Poland. The Company did not acquire the operations of Keymile Poland.

b)	Adjustment to record estimated deferred tax effect of the acquired intangible assets.

c)	Adjustment to offset $3.5 million of pension assets (reinsurance policy that is legally for the benefit of the employees) against the $16.2 million pension obligation.

d)	Adjustment to record the preliminary fair value of acquired intangible assets of $12.8 million.

e)	To record the cash payment of $11.8 million for all the outstanding common shares of Keymile.

f)	Adjustment to eliminate Keymile’s historical stockholders’ equity as a result of the application of acquisition accounting.

Adjustments to record amortization related to acquired intangible assets of $0.8 million in cost of revenue and $1.8 million selling, marketing, general and administrative expenses partially offset by the elimination of historical amortization recorded by Keymile of $1.6 million in research and product development, $1.4 million in selling, marketing, general and administrative expenses.

h)	To record depreciation expense related to property, plant and equipment of $139 thousand in costs of revenue, partially offset by the elimination of historical deprecation recorded by Keymile of $201 thousand in costs of revenue.

Adjustment for interest expense of $276 thousand related to the $6.0 million loan with DNI, a related party, which was entered into on December 27, 2018 and was used to partially fund the purchase price of Keymile. The loan will mature in May 2022 and bears interest at a rate of 4.6% per annum. The loan is included in DZSI’s consolidated balance sheet as long-term debt as of December 31, 2018.

Adjustment for interest expense of $160 thousand related to the $4.6 million working capital loan from Riverside which was entered into in October 2018 by Keymile as a condition of the acquisition to fund the working capital of Keymile. The loan bears interest at a rate of 3.5% per annum and is scheduled for repayment in two equal installments in April and November 2019. As of December 31, 2018, the loan is included in the Keymile consolidated balance sheet as related party loan.

k)	The tax effect of the pro forma adjustments which were tax effected using the statutory rate of 21% for DZSI and 30% for Keymile.

l)	Adjustment to eliminate dividends payable transferred to DZSI by Riverside under under a profit transfer agreement which was terminated as a result of the Keymile Acquisition.

m)	Adjustment to eliminate the merger and acquisition costs at DZSI of $1.4 million and at Keymile of $0.6 million. These costs were adjusted because they have no continuing impact to the combined operations.

n)	Adjustment to record a gain for a bargain purchase.

Note 5. U.S. GAAP Differences and Reconciliations

Keymile prepared its historical financial statements in accordance with IFRS as issued by IASB. For the purposes of these pro forma condensed combined financial statements, certain adjustments were required to align Keymile’s accounting policies under IFRS as issued by IASB with U.S. GAAP. The adjustments are further described below .

Additionally, Keymile’s consolidated financial statements are presented in Euros (“€”). The Company translated Keymile’s consolidated balance sheet to dollars using the exchange rate at December 31, 2018 ($1.1456 to €1.00) and translated Keymile’s consolidated statement of operations at the average rate of exchange for the year ended December 31, 2018 ($1.1817 to €1.00).

CONSOLIDATED BALANCE SHEET OF KEYMILE GMBH

As of December 31, 2018



	Keymile IFRS (EURO) December 31, 2018			U.S. GAAP Adjustment				Keymile U.S. GAAP Adjusted (EURO) December 31, 2018			Keymile U.S. GAAP (USD) December 31, 2018			Pro Forma Adjustments (Note 4)					Keymile Pro Forma (USD) December 31, 2018
Assets
Current assets:
Cash and cash equivalents	€	6,212		€	—			€	6,212		$	7,116		$	(46	)	(a)		$	7,070
Accounts receivable - trade, net		5,953			—				5,953			6,820			(129	)	(a)			6,691
Other receivables		696			—				696			797								797
Inventories		8,124			—				8,124			9,307			(44	)	(a)			9,263
Total current assets		20,985			—				20,985			24,040			(219	)				23,821
Property, plant and equipment, net		730			—				730			836								836
Goodwill		—			—				—			—			—					—
Intangible assets, net		7,976			(3,136	)	(a)		4,840			5,545			7,286		(d)			12,831
Deferred tax assets		112			—				112			128			(128	)	(b)			—
Other assets		3,228			—				3,228			3,698			(3,535	)	(c)			164
Total assets	€	33,031		€	(3,136	)		€	29,895		$	34,248		$	3,404				$	37,652
Liabilities, Stockholders’ Equity and Non-controlling Interest
Current liabilities:
Accounts payable	€	2,883		€	—			€	2,883		$	3,303		$	(27	)	(a)		$	3,276
Short-term debt		4,033			—				4,033			4,620								4,620
Other payables		12,928			—				12,928			14,810			(14,810	)		(1)		—
Contract liabilities - current		318			—				318			364								364
Accrued and other liabilities		3,155			—				3,155			3,614			(153	)	(a)			3,461
Total current liabilities		23,317			—				23,317			26,712			(14,990	)				11,722
Pension obligations		14,133			—				14,133			16,191			(3,535	)	(c)			12,656
Other long-term liabilities		100			—				100			115			327		(b)			442
Total liabilities		37,550			—				37,550			43,017			(18,198	)				24,819
Commitments and contingencies
Stockholders’ equity and non-controlling interest
Common stock		25			—				25			29			(29	)	(f)			—
Accumulated other comprehensive income (loss)		(7,877	)		3,493		(b)		(4,384	)		(5,022	)		5,022		(f)			—
Retained earnings (accumulated deficit)		3,333			(6,629	)	(a) (b)		(3,296	)		(3,776	)		16,609		(f) (l)			12,833
Total stockholders' equity		(4,519	)		(3,136	)			(7,655	)		(8,770	)		21,602					12,833
Non-controlling interest		—			—				—			—			—					—
Total stockholders' equity and non-controlling interest		(4,519	)		(3,136	)			(7,655	)		(8,770	)		21,602					12,833
Total liabilities, stockholders’ equity and non-controlling interest	€	33,031		€	(3,136	)		€	29,895		$	34,248		$	3,404				$	37,652

CONSOLIDATED STATEMENT OF OPERATIONS OF KEYMILE GMBH

Year ended December 31, 2018


	Keymile IFRS (EURO) December 31, 2018			U.S. GAAP Adjustment				Keymile U.S. GAAP Adjusted (EURO) December 31, 2018			Keymile U.S. GAAP (USD) December 31, 2018			Pro forma Adjustments (Note 4)				Keymile Pro Forma (USD) December 31, 2018

Revenue	€	42,777		€	—			€	42,777		$	50,550		$	(326	)	(a)	$	50,224
Cost of revenue		25,787			71		(b)		25,858			30,556		600			(a) (g) (h)		31,156
Gross profit		16,990			(71	)			16,919			19,994			(926	)			19,068
Operating expenses
Research and product development		5,612			808		(a)(b)		6,420			7,586			(1,639	)	(g) (h)		5,947
Selling, marketing, general and administrative		12,746			72		(b)		12,818			15,149			(810	)	(g) (h) (m)		14,339
Total operating expenses		18,358			880				19,238			22,735			(2,449	)			20,286
Operating income (loss)		(1,368	)		(951	)			(2,319	)		(2,741	)		1,523				(1,218	)
Interest income		110			—				110			130							130
Interest expense		(290	)		169		(b)		(121	)		(143	)		(437	)	(i) (j)		(580	)
Other expense, net		2,067			—				2,067			2,442			40		(a)		2,482
Income (loss) before income taxes		519			(782	)			(263	)		(312	)		1,126				814
Income tax provision		492			(235	)	(c)		257			303			360		(k)		663
Net income (loss)	€	27		€	(547	)		€	(520	)	$	(615	)	$	766			$	151

Adjustments from IFRS to U.S. GAAP:

Reflect adjustments to remove capitalized software and product development costs from Keymile's historical consolidated balance sheet which did not meet the criteria for capitalization under U.S. GAAP. The net book value of development activities intangible asset of € 3.1 million was written off as of December 31, 2018 with an offsetting adjustment to retained earnings in the consolidated balance sheet. Additionally, the current year’s capitalized costs of € 2.2 million were expensed as research and product development costs in the consolidated statement of operations. The historical intangible amortization previously recognized within research and product development costs of € 1.5 million was subsequently reversed within the condensed combined statement of operations as these amounts would have been expensed in prior periods under U.S. GAAP.

Under IFRS actuarial gains and losses related to Keymile’s pension plan were recognized in Keymile’s other comprehensive income in its consolidated statement of operations and as a component of accumulated other comprehensive income in its consolidated balance sheet and are were not subsequently amortized through the statement of operations. U.S. GAAP requires recognition of actuarial gains and losses within other comprehensive income as a component of accumulated other comprehensive income, however, then it requires the gains and losses to be recognized through net income over future periods. The adjustments to the consolidated statement of operations reflect the net impact of the reclassification of the net pension actuarial losses of € 25 thousand recorded in AOCI for the year ended December 31, 2018 and reclassification of the interest expense of € 169 thousand. The net adjustments in the consolidated statement of operations are an increase of personnel expenses of € 71 thousand in cost of revenues, € 50 thousand in research and product development expense and € 72 thousand in selling, marketing, general and administrative. The € 3.5 million adjustment to the consolidated balance sheet is to release portion of the historical accumulated other comprehensive loss of Keymile to accumulated deficit that would have been recognized in prior periods under U.S. GAAP.

c)	Tax effect of adjustments to U.S. GAAP at the effective rate of 30%.

Pro forma adjustments for Keymile were presented in the above table to disclose the standalone Keymile pro forma condensed combined financial statements. Refer to Note 4 for the explanation on the pro forma adjustments.

Exhibit 99.2

Contacts
Pei Hung, DASAN Zhone Investor Relations		DZSI Strategic Communications:
Tel: +1 510.777.7386		Matt Glover or Najim Mostamand, CFA
Fax: +1 510.777.7001		Tel: +1 949.574.3860
E: phung@dasanzhone.com		E: dzsi@liolios.com

DASAN Zhone Solutions Updates Guidance for Q1’19 and Full Year 2019 and Discloses Pro Forma Combined Financial Results for 2018, Inclusive of KEYMILE

Oakland, Calif., March 18, 2019 - DASAN Zhone Solutions, Inc. (NASDAQ: DZSI or the "Company" or “DZSI”), 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, today announced revised guidance for the first quarter ending March 31, 2019 and the net revenue guidance for the full year 2019, which ends December 31, 2019. Additionally, the Company is introducing GAAP gross margin and non-GAAP adjusted EBITDA guidance for the full year 2019.

The Company today also disclosed the results of the KEYMILE purchase price allocation analysis and the adjusted pro forma combined financial results for the full year ended December 31, 2018, as if the company acquired KEYMILE on January 1, 2018. Additional information relating to the KEYMILE purchase price allocation and the adjusted pro forma combined financial results for 2018 can be found in the accompanying 8-K filing the Company filed today with the Securities and Exchange Commission as well as in an accompanying corporate presentation posted today on the Company’s investor website at https://investor-dzsi.com/.

Pro Forma Combined Results for Full Year 2018, Inclusive of KEYMILE:

($ in mm’s)	DZSI As Adjusted	KEYMILE As Adjusted	Pro Forma Combined
Revenue % vs. Prior Year (2017)	$282.3 million 14.3%	$50.2 million	$332.6 million 34.6%
Gross Margin %	32.3%	38.0%	33.2%
GAAP Operating Expenses	$82.7 million ⁽¹⁾	$20.3 million ⁽¹⁾	$103.0 million
Adj. EBITDA	$12.2 million	$5.1 million	$17.3 million
Adj. EBITDA Margin (%)	4.3%	10.1%	5.2%
Net Income (Attributable to DZSI)	$3.9 million ⁽¹⁾	$0.2 million ⁽¹⁾	$4.0 million
Diluted EPS	$0.23 ⁽¹⁾		$0.24

(1)

Reflects pro forma adjustments to remove items that will not have a continuing impact on the combined entity.
DZSI: Reflects pro forma adjustments to remove items associated with the KEYMILE transaction that will not have a continuing impact on the combined entity, such as $1.4M of M&A transaction expenses.

KEYMILE: SG&A expenses reflect removal of $645k of M&A transaction expenses (no continuing impact on the combined entity), reversal of $537k from discontinued operations net against reversal of $372k in D&A expenses related to legacy purchase price allocation from the sale of the MCS business to ABB. R&D expenses reflect reversal of $1.6M in D&A expenses related to legacy purchase price allocation from the sale of the MCS business to ABB.

•

Organic revenue of $282.3 million (+14.3% y/y growth); Inclusive of KEYMILE, revenue of $332.6 million

•

Organic GAAP gross margin of 32.3%; Inclusive of KEYMILE, GAAP gross margin of 33.2%

•

Organic pro forma GAAP operating expenses of $82.7 million; Inclusive of KEYMILE, pro forma GAAP operating expenses of $103.0 million

•

Organic adjusted EBITDA of $12.2 million, or 4.3% margin; Inclusive of KEYMILE, adjusted EBITDA of $17.3 million

•

Organic pro forma net income of $3.9 million, or diluted EPS (attributable to DZSI) of $0.23; Inclusive of KEYMILE, net income of $4.0 million, or diluted EPS (attributable to DZSI) of $0.24

KEYMILE Purchase Price Allocation Analysis


Purchase Consideration ($ in mm's)
Cash Consideration	$11.8
Cash received from Q4'18 lockbox mechanism	(2.5)
Total Purchase Consideration	$9.3

Allocation of Purchase Consideration ($ in mm's)
Accounts Receivable - trade, net	$6.7
Other receivable	0.8
Inventories	9.3
PP&E and other L-T assets	1.0
Intangible assets	12.8
Accounts Payable - trade, net	(3.3)
Other S-T Liabilities	(3.8)
Pension Obligation	(12.7)
Other L-T Liabilities	(0.4)
Goodwill (bargain purchase)	(1.1)
Total Purchase Consideration	$9.3

•

Reflects a purchase price consideration of $9.3 million, which reflects a cash purchase price of $11.8 million net of $2.5 million of cash received from a lockbox arrangement with the Seller for Q4 2018 cash generated in the KEYMILE business.

Revised Business Outlook:

DZSI’s business outlook is based on current expectations. The following statements are forward-looking, and actual results can differ materially based on market conditions and factors set forth under “Forward-Looking Statements” below.

Revised First Quarter 2019 Guidance:

($ in mm’s)	Revised (3/18/19)	Delta compared with Outlook provided on 2/28/19
Revenue (organic) % vs. Prior Year (Q1’2018)	$63-$66 million 6%-11%	Unchanged
Revenue (Including KEYMILE) % vs. Prior Year (Q1’2018)	$70-$74 million 18%-24%	Unchanged
Gross Margin %	31% to 33%	Unchanged
Non-GAAP Adj. Operating Expenses (excl. SBC and D&A expenses)	$25.5-$27.0 million	Reduction in OpEx from $26-$29 million in prior guidance
Adj. EBITDA	$(3.8)-$(2.6) million	Improvement in EBITDA loss from $(4)million in prior guidance

•

Organic revenue of $63 million to $66 million (+6% to 11% y/y growth); Inclusive of KEYMILE, revenue of $70 million to $74 million

•

GAAP gross margin of 31% to 33%

•

Non-GAAP adjusted operating expenses of $25.5 million to $27 million (versus prior guidance of $26 million to $29 million)

•

Adjusted EBITDA of $(3.8) million to $(2.6) million (versus prior guidance of $(4) million)

Additional Guidance for Full Year 2019:

($ in mm’s)	Revised (3/18/19)	Delta compared with Outlook provided on 2/28/19
Revenue (organic) % vs. Prior Year (2018)	$304-$310 million 8%-10%	New
Revenue (Including KEYMILE) % vs. Prior Year (2018)	$350-$360 million 24%-28%	Tightened 2019 revenue range from $345-$360 million
Gross Margin %	32.5% to 34%	New
Non-GAAP Adj. Operating Expenses (excl. SBC and D&A expenses)	$97-$102 million	New
Adj. EBITDA	$17-$20 million	New
Adj. EBITDA Margin (%)	5% to 6%	New

•

Organic revenue of $304 million to $310 million (+8% to 10% y/y growth); Inclusive of KEYMILE, revenue of $350 million to $360 million

•

GAAP gross margin of 32.5% to 34%

•

Non-GAAP adjusted operating expenses of $97 million to $102 million

•

Adjusted EBITDA of $17 million to $20 million, or margin of between 5% and 6%

Management Commentary:

"We are stronger as an organization than ever before from a financial, product and technology, and market leadership perspective. The strategic KEYMILE acquisition positions us for increased scale and profitability, and allows us to deliver more value to our customers in Europe and globally,” said Yung Kim, CEO of DZSI. “The purchase price allocation study for KEYMILE demonstrates that we continue to be good stewards of capital.”

Michael Golomb, CFO of DZSI, said:” We revised and improved our guidance for the first quarter of 2019 and for the full year 2019 to demonstrate our continued commitment to scale profitably. For full year 2019, we expect to deliver revenue of between $350 million to $360 million and adjusted EBITDA of between $17 million and $20 million, and expect to drive further upside as we integrate the KEYMILE business.”

Non-GAAP Financial Measures

To supplement DZSI's consolidated financial statements presented in accordance with GAAP, DZSI uses adjusted EBITDA, a non-GAAP measure DZSI believes is appropriate to enhance an overall understanding of DZSI's past financial performance and prospects for the future. These adjustments to GAAP results are made with the intent of providing greater transparency to supplemental information used by management in its financial and operational decision-making. These non-GAAP results are among the primary indicators that management uses as a basis for making operating decisions because they provide meaningful supplemental information regarding the Company's operational performance, including the Company's ability to provide cash flows to invest in research and development, and to fund capital expenditures. In addition, these non-GAAP financial measures facilitate

management's internal comparisons to the Company's historical operating results and comparisons to competitors' operating results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between net income (loss) and adjusted EBITDA is provided in a table immediately following the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) below.

Forward-Looking Statements

This press release contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, and similar expressions are intended to identify forward-looking statements. Readers are cautioned that actual results could differ materially from those expressed in or contemplated by the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, commercial acceptance of the Company’s products; intense competition in the communications equipment market; the Company’s ability to execute on its strategy and operating plans; and economic conditions. In addition, please refer to the risk factors contained in the Company’s SEC filings available at www.sec.gov, including without limitation, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update or revise any forward-looking statements for any reason.

About DASAN Zhone Solutions, Inc.

DASAN Zhone Solutions, Inc. (NASDAQ: DZSI) is 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. Our solutions are deployed by over 900 customers in more than 80 countries worldwide. Our ultra-broadband solutions are focused on creating significant value for our customers by delivering innovative solutions that empower global communication advancement by shaping the internet connection experience. Every connection matters, and the first connection to the internet and cloud services applications matters the most. Our principal focus is centered around enabling our customers to connect everything and everyone to the internet-cloud economy via ultra-broadband connectivity solutions. The Company provides a wide array of reliable, cost-effective networking technologies-including: broadband access, mobile backhaul, Ethernet switching with Software Defined Networking (“SDN”) capabilities, new enterprise solutions based on Passive Optical LAN (“POL”), and new generation of SDN/ Network Function Virtualization (“NFV”) solutions for unified wired and wireless networks.

DASAN Zhone Solutions, the DASAN Zhone Solutions logo, and DASAN Zhone product names are trademarks of DASAN Zhone Solutions, Inc. Other brand and product names are trademarks of their respective holders. Specifications, products, and/or products names are all subject to change without notice.

DZSI Financial Overview March 2019 Exhibit 99.2a

Safe Harbor Statement This presentation contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, and similar expressions are intended to identify forward-looking statements. In addition, forward-looking statements include, among others, statements that refer to financial estimates; projections of revenue, margins, expenses or other financial items. Readers are cautioned that actual results could differ materially from those expressed in or contemplated by the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, commercial acceptance of the Company's products; intense competition in the communications equipment market; the Company's ability to execute on its strategy and operating plans; and economic conditions specific to the communications, networking, internet and related industries. In addition, please refer to the risk factors contained in the Company's SEC filings available at www.sec.gov, including without limitation, the Company's annual report on Form 10-K and quarterly reports on Forms 10-Q. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update or revise any forward-looking statements for any reason.

DZSI At A Glance © 2019 DASAN Zhone Solutions, Inc. – Proprietary and Confidential http://dasanzhone.com – http://investor-dzsi.com Annual Revenue: $210M for 2016 pro forma $247M for 2017 $282M for 2018 $350-360M for 2019E (Guidance) NASDAQ: DZSI Headquarters: Oakland, CA >900 Customers in >80 Countries supported by >800 Employees More than half are based in Asia Pacific

$210 Financial Highlights Revenue Gross Margin (%) Excludes KEYMILE ($ in Millions, except per share data) 1 Pro forma for the merger between DASAN and Zhone. Guidance reflects high-single-digit to low-double-digit organic growth for DZSI $350-360 Adj. EBITDA EPS (Attributable to DZSI) Guidance Inclusive of KEYMILE © 2019 DASAN Zhone Solutions, Inc. –Proprietary and Confidential 4 $210 $150 $247 $282 $0 $100 $200 $300 $400 2016PF 2017A 2018A 2019E 1 Financial Highlights 4 Revenue Gross Margin (%) 27% 33% 32% 0% 10% 20% 30% 40% 50% 2016A 2017A 2018A ($8) $5 $12 ($10) ($5) $0 $5 $10 $15 2016A 2017A 2018A Excludes KEYMILE ($ in Millions, except per share data) 1 Pro forma for the merger between DASAN and Zhone. Guidance reflects high - single - digit to low - double - digit organic growth for DZSI $ 350 - 360 Adj. EBITDA EPS (Attributable to DZSI) Guidance Inclusive of KEYMILE ($1.32) $0.07 $0.17 ($2) ($1) ($1) $0 $1 2016A 2017A 2018A

KEYMILE Purchase Price Allocation Analysis ($ in mm’s) © 2019 DASAN Zhone Solutions, Inc. – Proprietary and Confidential 5 Cash Consideration $11.8 Cash received from Q4'18 lockbox mechanism (2.5) Total Purchase Consideration$9.3Accounts Receivable - trade, net$6.7Other receivable0.8Inventories9.3PP&E and other L-T assets1.0Intangible assets12.8Accounts Payable - trade, net(3.3) Other S-T Liabilities(3.8) Pension Obligation(12.7) Other L-T Liabilities(0.4) Goodwill (bargain purchase)(1.1) Total Purchase Consideration$9.3Purchase ConsiderationAllocation of Purchase ConsiderationKEYMILE Purchase Price Allocation Analysis 5 ($ in mm’s)

DZSI 2018 Pro Forma Combined Financials 1 2018 organic revenue of $282.3M (+14.3% y/y growth) 2 Inclusive of KEYMILE: 2018 pro forma combined revenue of $332.6M 3 Inclusive of KEYMILE: 2018 pro forma gross margin of 33.2% (vs. 32.3% organic) 4 Inclusive of KEYMILE: 2018 pro forma Adj. EBITDA of $17.3M or margin of 5.2% (vs. $12.2M and 4.3% organic) 5 Inclusive of KEYMILE: 2018 pro forma net income of $4.0M or pro forma diluted EPS (attributable to DZSI) of $0.24 (vs. $2.8M and $0.17 organic1) (1) Reflects as reported financials in DZSI’s 2018 10-K filing, excluding pro forma adjustments that will not have a continuing impact on the combined entity, such as $1.4M of M&A transaction expenses.

Pro Forma Combined 2018 Results (1) DZSI: Reflects pro forma adjustments to remove items associated with the KEYMILE transaction that will not have a continuing impact on the combined entity, such as $1.4M of M&A transaction expenses. KEYMILE: SG&A expenses reflect removal of $645k of M&A transaction expenses (no continuing impact on the combined entity), reversal of $537k from discontinued operations net against reversal of $372k in D&A expenses related to legacy purchase price allocation from the sale of the MCS business to ABB. KEYMILE: R&D expenses reflect reversal of $1.6M in D&A expenses related to legacy purchase price allocation from the sale of the MCS business to ABB. (2) Reflects net income attributable to DZSI (less minority interest). © 2019 DASAN Zhone Solutions, Inc. – Proprietary and Confidential 7 ($M's)DZSI (10-K) Pro forma AdjustmentsDZSI as AdjustedKEYMILE IFRSUS GAAP AdjustmentsKEYMILE US GAAPPro forma AdjustmentsKEYMILE as AdjustedDZSI as AdjustedKEYMILE as AdjustedTotal Pro forma Combined Revenue $282.3 $282.3 $50.6 $50.6 $(0.3) $50.2 $282.3 $50.2 $332.6 Gross Profit 91.391.320.1(0.1)20.0(0.9)19.191.319.1110.4GM %32.3%32.3%39.7%39.6%38.0%32.3%38.0%33.2% GAAP OpEx(1)84.2(1.4)82.721.71.022.7(2.4)20.382.720.3103.0Pre-Tax Income4.61.46.00.6(0.9)(0.3)1.10.86.00.86.8Net Income(2)2.81.13.90.0(0.6)(0.6)0.80.23.90.24.0EPS (Diluted)$0.17$0.23$0.23$0.24Adj. EBITDA12.2(0.3)12.27.6(2.9)4.70.45.112.25.117.3Margin %4.3%4.3%14.9%10.1%4.3%10.1%5.2% DZSI 2018 Pro formaKEYMILE 2018 Pro formaTotal Combined 2018 Pro formaPro Forma Combined 2018 Results 7 (1) DZSI: Reflects pro forma adjustments to remove items associated with the KEYMILE transaction that will not have a continuing impact o n the combined entity, such as $1.4M of M&A transaction expenses. KEYMILE : SG&A expenses reflect removal of $645k of M&A transaction expenses (no continuing impact on the combined entity), reversal of $ 537k from discontinued operations net against reversal of $ 372k in D&A expenses related to legacy purchase price allocation from the sale of the MCS business to ABB . KEYMILE : R&D expenses reflect reversal of $1.6M in D&A expenses related to legacy purchase price allocation from the sale of the MCS b us iness to ABB. (2) Reflects net income attributable to DZSI (less minority interest).

DZSI Q1’19 and 2019 Outlook 1 Q1’19 organic revenue growth of c. 6-11% y/y; 2019 organic revenue growth of c. 8-10% y/y 2 Inclusive of KEYMILE: Q1’19 revenue of $70-74M (c. 18-24% y/y); 2019 revenue of $350-360M (c. 24-28% y/y) 3 Inclusive of KEYMILE: 2019 gross margin between 32.5% and 34% 4 Inclusive of KEYMILE: 2019 Adjusted EBITDA of between $17-$20M, or margin of between 5% and 6%

DZSI Q1’19 and 2019 Outlook (continued) © 2019 DASAN Zhone Solutions, Inc. – Proprietary and Confidential 9 DZSI Q1’19 and 2019 Outlook (continued) 9 2018 Actual (10-K) ($M's)DZSIDZSIKeymileTotalDZSIKeymileTotalRevenue$282$63 - $66$7 - $8$70 - $74$304 - $310$46 - $50$350 - $360y/y14%6% - 11%Flat18% - 24%(1)8% - 10%Flat24% - 28%(1) GM %32%31% - 33%32.5% - 34% Adj. Opex(excl. SBC, D&A) $79 $25.5 - $27.0$97 - $102Adj. EBITDA$12($3.8) - ($2.6)$17 - $20Adj. EBITDA Margin %4%5% - 6% (1) Reflects Q1'18- Q1'19 and FY2018-FY2019 actual revenue growthQ1'19 Guidance2019 Guidance

Thank you!

Exhibit 99.3

Report of Independent Auditors

To the KEYMILE GmbH, Hannover

We have audited the accompanying consolidated financial statements of KEYMILE GmbH, Hannover, and its subsidiaries (the “Group”), which comprise the consolidated balance sheet as of December 31, 2018 and the related consolidated statements of comprehensive loss, shareholder’s equity and cash flows for the year ended December 31, 2018, including the related notes.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Group's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

As discussed in Note 1, the accompanying consolidated financial statements are not presented in accordance with IFRS 1, First-time adoption of International Financial Reporting Standards, as they do not include comparative figures or required transition disclosures, which constitute departures from International Financial Reporting Standards as issued by the International Accounting Standards Board.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KEYMILE GmbH and its subsidiaries as of December 31, 2018 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Hannover, Germany

March 18, 2019

PricewaterhouseCoopers GmbH

Wirtschaftsprüfungsgesellschaft


/s/ Jens Wedekind		/s/ ppa. Michael Meseberg
Wirtschaftsprüfer		Wirtschaftsprüfer
(German Public Auditor)		(German Public Auditor)

KEYMILE GmbH

CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2018

–ASSETS–
NON-CURRENT ASSETS:	Note
Property, plant and equipment, net	16	€	729,710
Intangible assets, net	17		7,975,712
Other financial assets	18		3,086,072
Other assets, non-current	19		142,317
Deferred tax assets	15		111,950
TOTAL NON-CURRENT ASSETS			12,045,761

CURRENT ASSETS:
Inventories	20	€	8,124,487
Trade receivables, net	21		5,952,679
Other assets	19		633,865
Related party receivables	31		21,970
Income tax receivables	15		40,472
Cash	22		6,212,082
TOTAL CURRENT ASSETS			20,985,555

TOTAL ASSETS		€	33,031,316

– EQUITY AND LIABILITIES –
EQUITY:
Share capital	23	€	25,000
Retained earnings			3,333,879
Accumulated other comprehensive loss	23		(7,877,183)
TOTAL STOCKHOLDERS’ EQUITY		€	(4,518,304)

NON-CURRENT LIABILITIES:
Employee benefit obligation	24	€	14,132,781
Other non-current provisions	26		100,067
TOTAL NON-CURRENT LIABILITIES			14,232,848

CURRENT LIABILITIES:
Related party loan	25	€	4,032,603
Trade payables	29		2,883,041
Contract liabilities	27		318,214
Other liabilities	28		2,420,776
Dividends payable	31		12,928,088
Provisions	26		726,778
Income tax liabilities	15		7,272
TOTAL CURRENT LIABILITIES			23,316,772

TOTAL LIABILITIES		€	37,549,620

TOTAL EQUITY AND LIABILITIES		€	33,031,316

The following notes are an integral part of the consolidated financial statements.

KEYMILE GmbH

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

FOR THE YEAR ENDED DECEMBER 31, 2018

	Note
Revenue	8	€	42,777,261
Cost of Sales	9,10,11		(25,786,706)

Gross Profit			16,990,555

Other income	13		1,665,963
Research and development costs	9,10,11		(5,612,426)
Selling costs	9,10,11		(6,652,327)
Administrative expenses	9,10,11		(5,237,939)
Other expenses	12		(1,063,170)

Operating profit			90,656

Finance expenses	14		(353,293)
Finance income	14		780,780
Finance income, net			427,487

Profit before income tax			518,143

Income tax expense	15		(491,960)

Net profit		€	26,183

OTHER COMPREHENSIVE LOSS:
Items that may be reclassified to profit or loss
Foreign currency translation		€	(639,582)
Items that may be reclassified to profit or loss, net			(639,582)

Items that will not be reclassified to profit or loss
Remeasurements of post-employment benefit obligations	24		(24,624)
Income tax relating to this item	15		8,031
Items that will not be reclassified to profit or loss, net			(16,593)

Other comprehensive loss, net of tax			(656,175)

Total comprehensive loss for the period		€	(629,992)

The following notes are an integral part of the consolidated financial statements.

KEYMILE GmbH

CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2018

									Accumulated other comprehensive loss
	Note		Share Capital		Additional paid-in Capital		Retained earnings		Foreign currency translation		Remeasurement of post-employment benefits		Total
Balance at January 1, 2018		€	25,000	€	50,175,000	€	16,541,839	€	(3,744,746)	€	(3,476,262)	€	59,520,831
Profit transfer agreement	23, 31						(13,234,143)						(13,234,143)
Distribution of additional paid in capital to shareholder	23, 31				(50,175,000)								(50,175,000)
Net profit							26,183						26,183
Other comprehensive loss									(639,582)		(16,593)		(656,175)
Total comprehensive loss							26,183		(639,582)		(16,593)		(629,992)
Balance at December 31, 2018		€	25,000	€	-	€	3,333,879	€	(4,384,328)	€	(3,492,855)	€	(4,518,304)

The following notes are an integral part of the consolidated financial statements.

KEYMILE GmbH

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED December 31, 2018

	Note
OPERATING ACTIVITIES:
Net profit		€	26,183
Adjustments:
Depreciation and amortization	11		4,241,611
Interest result			180,030
Income taxes	15		491,960
Non-cash items			–
Gains from sale of property, plant and equipment			(2,297)
Income from other investments/sale of other investments			(477,099)
Foreign exchange effects from non-monetary items			(204,553)
Change in other assets, non-current			270,794
Change in other provisions, non-current			(340,105)
Change in inventory			(654,453)
Change in trade and other assets			7,851,598
Change in trade and other payables and provisions	26,29		(6,736,928)
Income taxes paid			(944,847)
Interest received			109,983
Net cash inflow (outflow) from operating activities			3,811,877

INVESTING ACTIVITIES:
Payments for property, plant and equipment			(358,373)
Payments for intangible assets	17		(2,237,753)
Proceed from sale of property, plant and equipment			28,281
Dividends from investments			124,935
Proceeds from sale and liquidation of investments			395,911
Net cash outflow from investing activities			(2,046,999)

FINANCING ACTIVITIES:
Repayment of additional paid in capital	31		(30,875,411)
Repayment of related party loan	31		(7,000,000)
Repayment of borrowings to shareholder	31		(5,858,740)
Payments due to profit transfer agreement	31		(3,529,719)
Interest paid on related party loan	31		(5,130,687)
Interest paid on bank loans			(29,971)
Net cash outflow from financing activities			(52,424,528)

Net decrease in cash		€	(50,659,650)

Cash at the beginning of the year			57,285,803
Effects of exchange rate changes on cash			(414,071)
Cash at the end of the year	22	€	6,212,082

The following notes are an integral part of the consolidated financial statements.

Notes to the consolidated financial statements for the financial year 2018

1. Reporting entity and purpose of these financial statements

These financial statements pertain to KEYMILE GmbH, Hannover (the “Parent”) and its four consolidated subsidiaries (collectively referred to as “the Group”). The Group has its headquarters at Wohlenbergstrasse 3, 30179 Hannover, Germany. As of December 31, 2018, all subsidiaries are fully-owned by KEYMILE GmbH.

The subsidiaries consolidated within the Group are as follows:

- KEYMILE Networks GmbH, Hannover, Germany

- KEYMILE Sp.z o.o., Warsaw, Poland

- KEYMILE Ltd., Hertford, Great Britain

- KEYMILE Ltda., Rio de Janeiro, Brazil

KEYMILE is a leading solution provider and manufacturer of telecommunication systems for broadband access. The Group develops and manufactures innovative data transmission systems under the “KEYMILE” brand. In 2017, the Group disposed of its MCS business in 2017 through a sale to ABB Ltd. (ABB). Following the sale of MCS, the Group concentrates on providing broadband systems and support services, in addition to providing post-divestiture support to ABB.

Effective January 3, 2019, DASAN Zhone Solutions, Inc., Delaware, USA (DZS Group) became the sole shareholder of the KEYMILE Group. T he purpose of these financial statements is to meet the reporting requirements of Rule 8-04 of Regulation S-X of the Securities and Exchange Commission (SEC). As a result, these financial statements do not include comparative figures or required transition disclosures, which constitute departures from International Financial Reporting Standards as issued by the International Accounting Standards Board.

The consolidated financial statements were approved on March 18, 2019 by the management board of the Group.

2. Principles of preparing financial statements

2.1 First-time adoption of IFRS

These are the Group’s first financial statements for the consolidated Group KEYMILE GmbH and its subsidiaries. The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standard Board (“IASB”). The Group has adopted IFRS as issued by IASB for the annual period beginning on January 1, 2017. In accordance with IFRS 1, First-time adoption of International Financial Reporting Standards (“IFRS 1”), the Group’s transition date to IFRS is January 1, 2017.

Prior to the sale of DZS Group, KEYMILE GmbH and its subsidiaries consolidated into Riverside KM Beteiligung GmbH. The results of KEYMILE Group were historically included in the consolidated financial statements of Riverside KM Beteiligung GmbH. During 2018, KEYMILE Group underwent a legal entity restructuring in order to effectuate its sale to DZS Group. As part of the restructuring, KEYMILE GmbH liquidated its subsidiaries in Singapore (KEYMILE Asia Pte. Ltd.) and Hungary (KEYMILE Kft.), in addition to transferring its ownership interest in its Russian subsidiary (KEYMILE LLC) to Riverside KM Beteiligung GmbH. The accounting policies used to prepare these consolidated financial statements is consistent with those previously used to prepare the Riverside KM Beteiligung GmbH financial statements. Further, the carrying amounts reported in these financial statements for KEYMILE Group are comparable to those that would be included in Riverside KM Beteiligung GmbH’s consolidated financial statements.

As the Group did not previously prepare any consolidated financial statements, no reconciliation of equity according to IFRS 1 is required for the purpose of these consolidated financial statements. The Group did not apply any optional exemptions from retrospective application of IFRS, aside from the exclusion of comparative periods per SEC Rule 8-04.

2.2 Basis of presentation

The consolidated financial statements have been prepared on the historical cost basis, except for certain assets and liabilities as separately stated in Note 3 “Significant accounting policies”. The consolidated financial statements were prepared under the assumption that the business will continue as a going concern. All figures are presented in Euro, which is the functional currency of the Parent.

3 . Significant a ccounting p olicies

The following accounting principles have been applied consistently to all Group member companies.

3.1 Foreign currency

Foreign currency transactions are translated into the functional currency using the spot exchange rate at the transaction date. Foreign currency monetary items are translated into the functional currency using the exchange rate as of the end of the reporting period. Non-monetary items measured at historical cost in foreign currencies are translated into the functional currency using the exchange rates at the transaction date. Non-monetary items measured at fair value that are denominated in foreign currencies are translated into the functional currency using the exchange rates at the date when the fair value is measured. Exchange differences arising from the translation or settlement are recognized in profit or loss, except for those recognized in other comprehensive loss.

3.2 Property, plant and equipment

Tangible assets, which are in use for more than one year by the Group, are recognised at cost of acquisition and/or manufacture less accumulated depreciation and impairment charges. Depreciation is calculated using the straight-line method based on each asset’s anticipated useful life. The anticipated useful lives are as follows:

Buildings		5 to 25 years
Technical equipment and machinery		3 to 7 years
Other equipment, furniture and fixtures		2 to 20 years

Methods of depreciation, useful lives and residual book values are reviewed annually.

3.3 Intangible assets

Individually acquired intangible assets are recognised at cost less accumulated amortization. Intangible assets arising from business combinations (IFRS 3) are recognised at fair value at date of acquisition.

Expenses arising from product development and product maintenance of the Group are generally expensed at the time they occur. Certain internal development expenditures, including personnel costs, for individually identifiable products for sale or internal use are capitalized when the following criteria are met:

Demonstrated technical feasibility,

Sufficient management intention and resources to complete development,

Ability exists to use or sell the product and generate probable future economic benefit, and

Development expenditures can be reliably measured.

Except for the brand “KEYMILE” which is considered an intangible asset with unlimited operating life, all remaining intangible assets of the Group are categorized to have a limited economic (useful) life. Amortization is recorded on a straight-line basis using the following useful lives:

Patents, trademarks and other rights		3 to 5 years
Customer relations		6 to 8 years
Intellectual property rights		14 to 19 years
Capitalized technologies		3 to 14 years
Development activities		4 to 5 years

The Company accounts for amortization expense of internally developed intangibles within Research and development costs.

The Company considers the trade name “KEYMILE” to be an indefinite lived intangible asset, because there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Company.

3.4 Impairment testing of assets

For non-financial assets other than inventories and deferred tax assets, the Group assesses whether there is any indication of impairment on each asset or the cash-generating unit to which the asset belongs at the end of each reporting period. If any indication of impairment exists, the recoverable amount of the asset or the cash-generating unit to which the asset belongs is estimated and an impairment test is performed. If the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, being the higher of fair value less cost of disposal and value in use, the assets will be subject to impairment.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually and whenever an indication of impairment exists.

3.5 Leasing

The conclusion whether an agreement includes a leasing relationship is based on the economic content of the agreement at the time of its conclusion. It requires an assessment if the fulfilment of the contractual agreement depends on the use of a certain asset or of certain assets and whether the agreement allows the right of use for the respective asset(s).

The Group leases buildings and office equipment. Payments within the scope of operating lease agreements are recorded as an expense on a straight-line basis for the duration of the contract. The average term of the Groups leases is between three and five years for office equipment and up to ten years for buildings.

As at December 31, 2018 the Group did not have any obligations from finance lease contracts.

3.6 Financial assets

As of December 31, 2018, financial assets classified as current include trade receivables and cash and cash equivalents.

Other financial assets classified as non-current as of December 31, 2018 consists entirely of a liability insurance contract, which covers the risk of default for the Group’s existing pension obligations. The carrying amount is revalued on an annual basis in order to reflect their fair value.

3.7 Inventories

Inventories are valued at the lower of cost of acquisition or manufacture and their net realizable value. Net realizable value is determined from the expected sales revenues less selling costs. The valuation of materials at their cost of acquisition is performed in accordance with IAS 2.21 on a simplified basis at their average cost of acquisition, excluding financing costs. Work in progress and finished goods are measured at cost of manufacture plus indirectly apportionable labour costs. Costs of borrowing are generally not considered.

3.8 Trade receivables

Trade receivables are amounts due from customers for goods sold or services rendered in the course of ordinary business. Their normal payment terms are within 30 days. Trade receivables are recorded at their original invoice amount (less provision for impairment) when the Group has issued an invoice and has an unconditional right to receive payment.

The Group uses the simplified approach in accordance with IFRS 9 to measure the expected credit losses. Consequently, expected credit losses are considered for all trade receivables. To measure the contingent bad debt losses, trade receivables are categorized based on common risk characteristics and days overdue.

The expected loss rates are based on payment profiles from historic revenues and their corresponding bad debt quotas during the respective reporting period. The Group regularly reviews its expected loss rates based trends in customer collectability.

3.9 Cash and cash equivalents

Cash and cash equivalents comprise cash balances and bank deposits with an original maturity of three months or less.

3.10 Pension obligations

Defined contribution and defined benefit plans are in place for active and former employees of KEYMILE GmbH and KEYMILE Networks GmbH and their surviving dependants.

3.10.1 Defined contribution pension plan

The Group makes fixed payments to external pension funds, which it recognises as current expense.

Employer contributions to defined contribution pension insurance plans, amounted to EUR 795,142 in 2018.

3.10.2 Defined benefit pension plan

The Group provides certain unfunded defined benefit pension plans to employees in Germany. These plans are frozen and no longer offered to new employees (refer to Note 24 for further information). The Group’s employee benefit obligations are determined separately for each plan by estimating the present value of future benefits that employees have earned in prior periods. The present value of the defined benefit obligation is measured using actuarial techniques and assumptions that are unbiased and mutually compatible and attributes benefits to periods in which the obligation to provide post-employment benefits arise by using the projected unit credit method in accordance with IAS 19. Given that all plans are frozen and unfunded, the Group does not have any current service costs or gains/losses from plan assets to recognize within its defined benefit obligation or pension expense.

The only component of pension expense relates to interest expense on the defined benefit obligation, which is recognized in the consolidated statement of comprehensive income as a financial expense. The interest expense is determined by multiplying the defined benefit obligation by the discount rate used to determine the defined benefit obligation. Actuarial gains and losses from changes in assumptions are included in other comprehensive loss.

3.11 Trade payables

Trade payables and other financial liabilities are recorded at their fair value.

3.12 Other provisions

Accruals are set up whenever there is an obligation to third parties that is based on an event in the past, where the extent of an obligation can be reliably estimated and a future outflow of funds is probable. Provisions with an original term of more than one year are recognised at their performance amount discounted as of the balance sheet date.

Provisions for warranties are set up for goods and services. Their extent is based on assumptions made concerning historical product warranty costs.

3.13 Revenue recognition

The Group develops, produces and sells a variety of hardware and software products to end customers. The resulting revenues are recognized as soon as control over these products is transferred to the end customer. In general, this is the case when delivery or hand-over to the customer takes place. The Group does not have any variable pricing arrangements. In addition, the Group does not regularly offer financing arrangements to its customers. Regular payment terms are 30 days.

The Group also performs various services. Revenues are recognized based on service level agreements. The client is provided with predefined support for core business as well as for rapid and qualified technical solutions in case of operational disruptions. These services are normally agreed in fixed price contracts. These revenues are realized over time reflecting that the customer is being provided with continuous and ongoing services. In case these services are paid in advance, the Group is recording a contractual liability until the services are performed. If services are generally invoiced after delivery - based on hourly or daily rates - the resulting revenues are recognized in the same period in which the services are performed.

3.14 Current and deferred tax

The tax expense for the period consists of current and deferred tax. Current and deferred taxes are recognized in profit or loss, except to the extent that it relates to components of other comprehensive loss. In these cases, the tax is recognized in other comprehensive loss.

The tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates and tax laws enacted or substantively enacted by the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation.

Deferred income tax is provided in full, using the liability method, based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not recognized for items arising from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognized only if it is probable that future taxable income will be available to utilize those temporary differences.

The Group recognizes a deferred tax liability all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint arrangements, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, the Group recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends to settle on a net basis.

4. Recent adopted accounting standards

IFRS 9 - Financial instruments

IFRS 9 is effective for annual periods beginning on or after January 1, 2018.

In July 2014, the IASB finalised the reform of financial instruments accounting and issued IFRS 9, which contains the requirements for a) the classification and measurement of financial assets and financial liabilities, b) impairment methodology, and c) general hedge accounting. IFRS 9 superseded IAS 39 Financial instruments.

With respect to the classification and measurement, the number of categories of financial assets under IFRS 9 has been reduced; all recognised financial assets that have been in the past within the scope of IAS 39 will be subsequently measured at either amortized cost or fair value under IFRS 9.

IFRS 9 also contains requirements for the classification and measurement of financial liabilities and derecognition requirements. Under IFRS 9, such changes are presented in other comprehensive loss . Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss.

The impairment model under IFRS 9 reflects expected credit losses, as opposed to incurred credit losses under IAS 39. Under the impairment approach in IFRS 9, it is no longer necessary for a credit event to have occurred before credit losses are recognised. The amount of expected credit losses should be updated at each reporting date to reflect changes in credit risk since initial recognition.

The general hedge accounting requirements of IFRS 9 retain the three types of accounting mechanisms in IAS 39. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting.

In principle, IFRS 1 requires retrospective implementation of all accounting and evaluation methods valid as of December 31, 2018. All regulations shall be used from the first balance sheet date onwards as if they had been in place ever since. However, for first-time adopters, IFRS 9 is an exception for which according to IFRS 1.E certain transition regulations must be observed. As such, IFRS 9 is being applied by the Group only from January 1, 2018 onwards. However, the implications by applying IFRS 9 regulations were immaterial as of January 1, 2018 and for the financial year 2018 for the Group.

IFRS 15 - Revenue from contracts with customers

As a first-time adopter of IFRS 1, these consolidated financial statements are prepared in accordance with IFRS 15.

IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 only covers revenue arising from contracts with customers. Under IFRS 15, a customer of an entity is a party that has contracted with the entity to obtain goods or services that are output of the entity’s ordinary activities in exchange for consideration.

The new revenue standard has a single model to account for revenue from contracts with customers. Its core principle is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

IFRS 15 introduces a 5-step approach to revenue recognition and measurement:

Step 1: Identify the contract with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Overall, the application of IFRS 15 had no material impact on the financial statements of the KEYMILE Group.

With regards to details on the policies being applied, we refer to section 3.13 “Revenue recognition”.

5. New standards and amendments issued but not yet effective

IFRS 16 - Leases

IFRS 16 is effective for annual periods beginning on or after January 1, 2019.

The IFRS 16 “Leases” adopted in January 2016 replaces IAS 17 “leasing relationship” as well as the associated interpretations (IFRIC 4, SIC-15, SIC-27). IFRS 16 Leases is effective for annual periods beginning on or after January 1, 2019. Early application is permitted if IFRS 15 is also adopted.

IFRS 16 provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors.

A leasing contract is an arrangement that at its inception can be fulfilled only through the use of a specific asset or assets, and that conveys a right to use that asset or those assets, is a lease or contains a lease.

A lease is classified as either a finance lease or an operating lease. Lease classification depends on whether substantially all of the risks and rewards incidental to ownership of the leased asset have been transferred from the lessor to the lessee. A lessee may classify a property interest held under an operating lease as an investment property. If this is done, then the lessee accounts for that lease as if it were a finance lease, measures investment property using the fair value model and recognises a lease liability for future lease payments.

A lease of land with a building is treated as two separate leases: a lease of the land and a lease of the building; the two leases may be classified differently. In determining whether the lease of land is a finance lease or an operating lease, an important consideration is that land normally has an indefinite economic life.

Lease classification is made at inception of the lease and is not revised unless the lease agreement is modified.

The Group will apply the standard from its mandatory adoption date of January 1, 2019. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets for property leases will be measured on transition as if the new rules had always been applied. All other right-of-use assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).

The Group will apply the definition of a lease and related guidance set out in IFRS 16 to all lease contracts entered into or modified on or after January 1, 2019 (whether it is a lessor or a lessee in the lease contract). In preparation for the first‑time application of IFRS 16, the Group has carried out an implementation project. The project has shown that the new definition in IFRS 16 will not change significantly the scope of contracts that meet the definition of a lease for the Group.

On initial application of IFRS 16, for all leases (except as noted below), the Group will:

a) Recognise right‑of‑use assets and lease liabilities in the consolidated statement of financial position, initially measured at the present value of the future lease payments;

b) Recognise depreciation of right‑of‑use assets and interest on lease liabilities in the consolidated statement of profit or loss;

c) Separate the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the combined cash flow statement.

Lease incentives (e.g. rent‑free period) will be recognised as part of the measurement of the right‑of‑use assets and lease liabilities whereas under IAS 17 they resulted in the recognition of a lease liability incentive, amortized as a reduction of rental expenses on a straight‑line basis. Under IFRS 16, right‑of‑use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets.

This will replace the previous requirement to recognise a provision for onerous lease contracts. For first-time application, the right-of-use assets are not tested for impairment. Instead, existing provisions from onerous leases are offset against the corresponding right-of-use assets.

For short term leases (lease term of 12 months or less) and leases of low value assets (such as personal computers and office furniture), the Group will opt to recognize a lease expense on a straight line basis as permitted by IFRS 16. As at December 31, 2018, the Group has non-cancellable operating lease commitments of EUR 5,214,496. A preliminary assessment indicates that the Group will recognize a lease liability as at January 1, 2019 of approximately EUR 5,000,000. The corresponding right of use asset will be reduced by the existing provision for onerous lease contracts and finally amount to approximately EUR 4,600,000. The impact on operating result/EBIT (Earnings before interest and taxes) is expected not to be material for the Group. Under IAS 17, all lease payments on operating leases are presented as part of cash flows from operating activities. The impact of the changes under IFRS 16 would be to increase the cash generated by operating activities and to decrease net cash used in financing activities by the same amount.

6. Significant judgements and estimates

The preparation of the financial statements in conformity with the IFRSs commits management to make certain estimates and judgements that may relate to the valuation of assets, liabilities, revenues and expenses. Actual circumstances may differ from these assumptions. Estimates and their underlying assumptions are reviewed on a regular basis. In particular, the following information was affected by significant estimates and judgements made by management:

Impairment tests of assets

In accordance with the impairment policy set out in note 3.4, the smallest cash-generating units reported are subjected to an impairment test. The Group as a whole represents one single CGU.

ii.

Personnel-related provisions

The Group has various types of retirement benefit plans, including defined benefit plans. The present value of defined benefit obligations on each of these plans and the related service costs are calculated based on actuarial assumptions, which require estimates and judgments on variables, such as discount rates. The Group obtains advice from external pension actuaries with respect to the appropriateness of these actuarial assumptions including these variables. The actuarial assumptions are determined based on the best estimates and judgments made by management. However, there is a possibility that these assumptions may be affected by changes in uncertain future economic conditions, or by the publication or the amendment of related laws, which may have a material impact on the consolidated financial statements in future periods. These actuarial assumptions and related sensitivity analysis are described in Note 24 “Employee benefit obligation”.

iii.

Deferred tax assets

In assessing the realizability of deferred tax assets, the Group considers whether it is probable that a portion or all of the deferred tax assets will not be realized. When assessing the realizability of the deferred tax assets, the Group considered its performance, general economic environment, projected future taxable income, and periods available to deduct tax loss and tax credit carryforwards. The ultimate realization of deferred tax assets is dependent on whether the Group is able to generate future taxable income in specific tax jurisdictions during the periods in which temporary differences are deductible. However, the amount of deferred tax assets may be different if the Group does not realize estimated future taxable income during the carry forward periods as originally expected.

7. Risk management of f inancial instruments

The Group's multinational operations expose it to a variety of financial risks which include the effects of changes in foreign currency exchange rates, interest rates and liquidity risk. Interest rate risk and liquidity risk are managed by the Parent. The Group has a risk management policy in place that seeks to limit the adverse effects on financial performance by using derivative instruments, primarily forward contracts.

The financial risk management policies have not changed during the year and are summarized below.

7.1 Market risk

Market risk is defined as a risk arising from changes in present value of financial instruments, caused by volatile market conditions. Future cash flows might be impacted. Specific market risks affecting the Group are discussed in detail below.

7.1.1 Foreign currency risks

The Group is exposed to currency risks arising from sales, purchases and consolidation of subsidiaries in foreign currencies. The material risks exist in the currencies USD (US Dollar), GBP (British Pound) and BRL (Brazilian Real). Firmly contracted agreements are included in the currency exposure along with planned payments to be classified as having a high probability of occurring. Foreign currency risks with no influence on consolidated cash flows are not hedged. For instance, these are risks resulting from the translation of assets and liabilities from financial statements of consolidated foreign subsidiaries. Foreign currency risks in the field of financing result from financial liabilities and loans in foreign currency used to finance Group member companies. These transactions are not hedged. The effects of currency translation are recognised in equity in other comprehensive loss.

Volume of foreign currency items at their nominal value as at December 31, 2018:

		In EUR	In BRL	In GBP	In USD	Other	Total
Financial assets	€	7,166,769	2,044,912	2,546,426	71,541	335,114	12,164,762
Financial liabilities		(19,111,483)	(51,864)	(330,848)	(270,748)	(78,789)	(19,843,732)
Net exposure	€	(11,944,714)	1,993,048	2,215,578	(199,207)	256,325	(7,678,970)

IFRS 7 requires sensitivity analyses to be carried out to take account of market risks. These show what consequences hypothetical changes to relevant risk variables can have on earnings and equity. The periodic effects are determined by comparing the hypothetical changes to risk variables with the portfolio of financial instruments. It is assumed that the portfolio as at the balance sheet date is indicative for the year as a whole and that all other variables, especially interest rates, remain constant.

The table below details the impact on net loss of a 10 per cent change in all currencies against the Euro.

		Increase fx- rate by 10 per cent	Decrease fx- rate by 10 per cent
Equity effect sensitivities arising from foreign currency effects as at 31 December 2018
Brazilian Real	€	221,450	(181,186)
British Pound		246,175	(201,416)
Other		11,412	(9,337)

7.1.2 Credit risks

Within the scope of its operations, the Group is exposed to the risk of default associated with customer receivables. However, this risks of default is largely mitigated due to the fact that a majority of the Group’s receivables are covered by a credit risk insurance policy. In addition, the Group regularly evaluates the creditworthiness of its customers based on their financial condition, past experience and other factors.

7.1. 3 Customer concentration risk

Approximately 39 % of the total revenues and 33 % of the trade receivables as of and for the 12 months ended December 31, 2018 resulted from business with customers accounting for more than 10 % of total revenues.

Maturities of receivables as of December 31, 2018:

		Trade receivables	Allowance for doubtful accounts
Not due	€	5,060,395	-
Overdue for 1 to 30 days		1,020,058	(127,774)
Overdue for 31 to 60 days		19,151	(19,151)
Overdue for more than 60 days		101,758	(101,758)
Total	€	6,201,362	(248,683)

As of December 31, 2018 the Group had EUR 892,284 of overdue trade receivables, not subject to provision. These trade receivables came from long-term customers with excellent payment track records.

With regard to trade receivables which are neither overdue nor impaired, there were no indications for potential value impairment as at balance sheet date.

Activity related to the allowance for doubtful accounts for 2018 consisted of the following:

Balance as of January 1, 2018	€	159,650
Currency differences		3,375
Consumption		-
Reversals		(80,570)
Additions		166,228
Balance as of December 31, 2018	€	248,683

Impairment charges on doubtful debts comprise assessments and appraisals of specific receivables based on the credit status of the respective customers, current economic trends and the analysis of historic default cases. The creditworthiness of a customer is assessed according his or her payment behaviour and ability to repay debts.

Specific allowances for doubtful accounts are made if a customer is in substantial financial difficulties or there is an increased likelihood of insolvency. Expenses of this kind are booked to an allowance for doubtful account as a contra-asset. In the event of indications of a debt being uncollectible, the receivable in question is taken off the books.

7.2 Liquidity risks

As of December 31, 2018 the Group had cash and cash equivalents of EUR 6,212,082. This cash balance resulted from a working capital loan from the Group’s former shareholder received in the fourth quarter of 2018 and from the Group’s own cash flows during this period. The Group has no bank loans and, therefore, no financial covenants to meet.

The working capital loan is due for repayment in two equal payments in April and November 2019. The Group’s business and financial planning on a monthly basis for 2019 and 2020 indicates no liquidity shortage. In addition, the Group is monitoring its liquidity in a detailed 13-weeks-forecast maintained on a weekly basis.

For maturities of financial liabilities see breakdown below:

			Carrying value December 31, 2018	Contractual cash flows	Due in up to 1 year	Due in 1 to 5 years	Due in over 5 years
	Note
Related party loan	31	€	4,032,603	4,032,603	4,032,603	-	-
Trade payables			2,883,041	2,883,041	2,883,041	-	-
Dividends payable	31		12,928,088	12,928,088	12,928,088	-	-
Total financial liabilities		€	19,843,732	19,843,732	19,843,732	0	0

As of December 31, 2018 a profit transfer agreement between KEYMILE GmbH and Riverside KM Beteiligung GmbH is in place. In the course of 2018 EUR 13,234,143 were subject to transfer to Riverside KM Beteiligung GmbH based on this agreement, of which EUR 306,056 had been released prior to December 31, 2018. EUR 205,319 were paid out, the remaining balance was offset against other assets from Riverside KM Beteiligung GmbH and Riverside KM Finance S.a.r.l. & Co. KG.

8. R evenue

The Group primarily operates in the telecommunication industry. During 2018, the Group had revenues in the following markets:

Revenues under geographical aspects
Europe
Germany	€	12,714,015
Switzerland		16,084,749
UK (United Kingdom)		6,991,973
CIS (Commonwealth of Independent States)		74,421
Poland		327,365
Europe, other countries		1,455,092
Total Europe		37,647,615
Rest of the world
Brazil		3,926,290
Africa, Middle East		320,799
Asia and Australia		329,891
South and Central America, except Brazil		552,666
Total rest of the world		5,129,646
Total revenues	€	42,777,261

During 2018, revenues consisted of the following:

Revenues per category
Hardware and Software	€	32,523,503
Services		10,253,758
Total revenues	€	42,777,261

In the course of the MCS-transaction a two-year-contract regarding delivery of hardware and software products had been agreed. Apart from this contract there are very few other agreements in the broadband business with an original contract period of more than one year.

Service obligations from long-term contracts add up to EUR 3,648,150 as of December 31, 2018 for which fulfilment and revenue recognition is expected to be completed in 2019.

All other contracts at KEYMILE regarding delivery of hardware and software products as well as services normally have a maximum contract period of one year.

9. Classification of expenses by nature

Cost of sales, Research and development costs, Selling costs, Administrative expenses and Other expenses consisted of the following in 2018:

Raw materials, supplies and trading stock	€	20,659,721
Personnel expenses		12,686,591
Amortization and depreciation		4,241,611
Other expenses		8,565,650
External products and services		639,564
Change in inventory		(202,816)
Capitalization of internally generated intangible assets		(2,237,753)
Total	€	44,352,568

10. Personnel expenses by functional area

During 2018, Personnel expenses were classified by the following functional areas:

Costs of sales	€	4,179,536
Research and development costs		2,962,641
Selling costs		3,649,813
Administrative expenses		1,894,601
Total	€	12,686,591

11. Amorti z ation and depreciation by functional area

During 2018, Amortization and depreciation expenses were classified in the following functional areas:

		Depreciation	Amortization
Cost of sales	€	125,106	45,129
Research and development costs		80,092	2,787,064
Selling costs		71,480	969,689
Administrative expenses		64,512	98,539
Total	€	341,190	3,900,421

12. Other expenses

Other expenses for the year ended December 31, 2018 consist of the following:

Restructuring expenses	€	258,318
Insurance expense		226,100
Changes in assets for reinsurance policy		207,189
Patent costs		200,000
Consulting expenses		120,461
Other		51,102
Total	€	1,063,170

13. Other income

Other income for the year ended December 31, 2018 consists of the following:

Transition services	€	1,642,809
Other		23,154
Total	€	1,665,963

The Group disposed of its MCS business in 2017 through a sale to ABB Ltd. (ABB). As part of the sale to ABB, Keymile GmbH continues to provide services to the MCS business under a transition services agreement (TSA). These services pertain primarily to back office services, including information technology support and personnel-related services.

14. Finance expenses and income

Finance expenses and income during 2018 consisted of the following:

Interest expenses from defined benefit obligation	€	(224,278)
Exchange losses		(44,068)
Other		(84,947)
Total financing expenses		(353,293)
Interest income on bank balances		XX,XXX
Liquidation income		371,375
Exchange profits		174,486
Dividend income		124,935
Interest income on bank balances		90,364
Other		19,620
Total financing income		780,480
Net financial income	€	427,487

15. Income Taxes

Income tax expense for the year ended December 31, 2018 consisted of the following:

Tax expense for current reporting period	€	(443,790)
Deferred taxes		(48,170)
Income tax expense	€	(491,960)

A reconciliation between the expected and actual income tax expense is shown below. The expected corporate income tax expense is computed by applying the German corporation tax rate (including the solidarity surcharge) and the trade tax rate on income before income taxes. The German combined statutory tax rate was 32.63 for the year ended December 31, 2018.

Profit before income tax	€	518,143
Statutory tax rate in percent	%	32.63
Expected income tax expense		(169,070)
Effects of different tax rates within the Group		(108,196)
Non-deductible expenses		(276,530)
Transfer of taxable profit to the head of the German Tax Group		(328,497)
Other		390,333
Income tax expense	€	(491,960)
Effective tax rate in percent	%	94,95

Deferred income tax assets and liabilities recognized in the consolidated balance sheet for the year ended December 31, 2018 are presented below:

Deferred tax assets
Property, plant and equipment	€	11,095
Inventories and trade receivables		173,458
Loss carry forwards		11,047
Pension obligations		973,490
Financial liabilities		126,782
Liabilities and accruals		295,980
Total deferred tax assets		1,591,852
Deferred tax liabilities
Property, plant and equipment		1,062
Intangible assets		1,106,363
Inventories and trade receivables		326,384
Liabilities and accruals		46,093
Total deferred tax liabilities		1,479,902
Net deferred tax assets	€	111,950

Deferred tax assets of EUR 1,591,852, EUR 480,485, can be realized within 12 months; EUR 2,565,335 can be realized after 12 months.

Deferred tax liabilities of EUR 1,479,902, EUR 372,477, can be realized within 12 months. EUR 2,561,393 can be realized after 12 months.

Deferred tax assets in the amount of EUR 2,989,979 on deductible temporary differences of EUR 9,419,448 in the Group were revalued due to impairment. These temporary differences will not expire in future years. As of December 31, 2018, the Group had tax loss carryforwards of EUR 58,142 available.

In 2015, KEYMILE GmbH merged with Riverside KM Verwaltung GmbH, Vienna, Austria (Austria KM). As part of the merger, KEYMILE GmbH inherited certain intangible assets from KM Austria, including the KEYMILE tradename. In the event KEYMILE GmbH disposes of these assets prior to January 1, 2026, it would trigger a tax liability to the Austria government. As of December 31, 2018, this contingent liability was EUR 3,817,750. If the intangible assets remain within the group for at least ten years from the date of merger, the tax liability will likely not be enforced. The Group does not recognize a liability for this contingency, because it expects to retain the intangible asset beyond 2025.

16. Property, plant and equipment

At December 31, 2018, the acquisition and manufacturing costs and accumulated depreciation of property, plant and equipment consisted of the following:

		Buildings	Technical equipment and machinery	Other equipment, furniture and fixture	Assets under construction	Total
Cost:
Balance as of January 1, 2018	€	285,723	723,768	3,505,111	29,970	4,544,572
Additions		-	94,065	128,698	39,324	262,087
Disposals		-	-	(528,546)	-	(528,546)
Reclassifications		-	(199,948)	199,948	-	-
Foreign exchange adjustments		-	-	(45,440)	-	(45,440)
Balance as of December 31, 2018		285,723	617,885	3,259,771	69,294	4,232,673

Accumulated depreciation:
Balance as of January 1, 2018		(184,109)	(520,204)	(2,992,903)	-	(3,697,216)
Depreciation charge for the year		(27,623)	(78,239)	(213,574)	-	(319,436)
Impairment charge for the year		-	-	(21,754)	-	(21,754)
Derecognitions and disposals		-	-	502,567	-	502,567
Reclassifications		-	127,581	(127,581)	-	-
Foreign exchange adjustments		-	-	32,876	-	32,876
Balance as of December 31, 2018		(211,732)	(470,862)	(2,820,369)	-	(3,502,963)
Carrying amount at December 31, 2018	€	73,991	147,023	439,402	69,294	729,710

17. Intangible assets

At December 31, 2018, the acquisition or manufacturing costs and the accumulated amortization of intangible assets and goodwill consisted of the following:

		Patents, trademarks and other rights	Customer relations	Intellectual property rights	Capitalized technologies	Development activities	Goodwill	Total

Cost:
Balance as of January 1, 2018	€	2,573,435	9,300,000	5,400,000	10,950,000	8,560,229	22,842,000	59,625,664
Additions		96,286	-	-	-	2,237,753	-	2,334,039
Derecognitions and disposals		(32,188)	-	-	-	-	-	(32,188)
Foreign exchange adjustments		(119)	-	-	-	-	-	(119)
Balance as of December 31, 2018		2,637,414	9,300,000	5,400,000	10,950,000	10,797,982	22,842,000	61,927,396

Accumulated amortization:
Balance as of January 1, 2018		(2,278,930)	(8,466,642)	(822,954)	(9,487,500)	(6,181,825)	(22,842,000)	(50,079,851)
Amortization charge for the year		(259,118)	(833,358)	(133,452)	(1,194,064)	(1,480,429)	-	(3,900,421)
Derecognitions and disposals		28,574	-	-	-	-	-	28,574
Foreign exchange adjustments		14	-	-	-	-	-	14
Balance as of December 31, 2018		(2,509,460)	(9,300,000)	(956,406)	(10,681,564)	(7,662,254)	(22,842,000)	(53,951,684)

Carrying amount at December 31, 2018	€	127,954	0	4,443,594	268,436	3,135,728	0	7,975,712

17.1 Tradename impairment test

The KEYMILE tradename represents an intangible asset with a value of EUR 2,900,000 and an indefinite useful life. The Group plans to continue use of the tradename indefinitely and it sees no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group. The Group assessed the KEYMILE tradename for impairment as of December 31, 2018. The recoverable amount used in the impairment assessment was based on the selling price of the Group as part of the sale to Dasan Zhone. Based on this assessment, the Group determined that the asset was not impaired as of December 31, 2018 and it continued to have an indefinite useful life.

18. Non-current other financial assets

Other financial assets consists of a reinsurance policy amounting to EUR 3,086,072. The reinsurance policy covers the pension liabilities existing at KEYMILE GmbH, Hannover, Germany and is recorded at fair value. See Note 24 – “Employee Benefit Obligation” for further details.

19. Other assets

Other non-current assets as of December 31, 2018 consists of a EUR 142,317 import sales tax receivable.

Other assets classified as current assets on the balance sheet as of December 31, 2018 consist of the following:

Advance payments	€	275,328
Prepaid expenses		102,865
Other taxes		166,635
Other		89,037
Total	€	633,865

20. Inventories

At December 31, 2018, inventories consisted of the following:

Raw materials, supplies and consumables	€	3,267,277
Finished goods and merchandise		4,385,471
Work in progress		471,739
Total	€	8,124,487

In the reporting year the cost of materials included in cost of sales totalled EUR 20,456,905.

21. Trade receivables

As of December 31, 2018, Trade receivables, net consisted of the following:

Trade receivables, gross	€	6,201,362
Less: allowance for doubtful accounts		(248,683)
Total	€	5,952,679

The carrying amount of trade receivables is commensurate with their fair value, taking customer specific allowance for doubtful accounts into account.

The value of foreign currency items at their nominal value as of December 31, 2018 is as follows:

Euro	€	2,734,932
Swiss Franc		163,494
Brazilian Real		1,120,655
British Pound		1,766,486
US Dollar		54,692
Polish Złoty		112,420
Total	€	5,952,679

22 . Cash and cash equivalents

On December 31, 2018, cash and cash equivalents totaled EUR 6,212,082. The Group had EUR 58,693 of restricted cash as of December 31, 2018.

23. Equity

23.1 Changes in equity

The share capital of KEYMILE GmbH, Hannover is EUR 25,000.

During 2018, the Group released EUR 50,175,000 of the additional paid in capital to its shareholders. See Note 31 “Related Party Transactions-Release of additional paid in capital” for more information.

During 2018, the Group authorized total dividends of EUR 13,234,143, of which EUR 306,055 was prior to December 31, 2018. For further information, see Note 31 “Related Party Transactions- Transactions from regular business activities”.

23.2 Accumulated other comprehensive loss

Accumulated other comprehensive loss consists of the following as of December 31, 2018:

Revaluation of pension reserves
Aggregated actuarial losses from pension obligation	€	(5,128,667)
Tax effect from aggregated actuarial losses		1,635,812
Remeasurements of post-employment benefit obligations		(3,492,855)

Exchange differences on translation of foreign operations		(4,384,328)
Accumulated other comprehensive loss	€	(7,877,183)

24. Employee benefit obligation

The Group offers two defined benefit pension plans through its KEYMILE GmbH, Hannover and KEYMILE Networks GmbH, Hannover subsidiaries.

KEYMILE GmbH, Hannover offers pension benefits to employees under the BAV-Richtlinien der betrieblichen Altersversorgung, (general plan) and GHH-Richtlinien (individual plan) plans. The plans, which were initiated on December 18, 1991, cover the employees of KEYMILE GmbH and their surviving dependents. These benefits were promised upon employees either reaching retirement age or becoming disabled. Benefits paid are dependant on each employee’s years of service and annual earnings. Based on a bargaining agreement dated September 18, 2003, frozen as of December 31, 2003. Employees employed after September 18, 2003 do not receive any post-employment benefits, per the bargaining agreements from 1991 or 2003. Post-employment benefits, including changes in benefits related to salary increases, were frozen for plan participants as part of the 2003 bargaining agreement.

KEYMILE Networks GmbH, Hannover also offers pension benefits to its employees on under three separate agreements (Company pension scheme, transition to capital account scheme RBI, payment principles for capital account scheme), each dated November 18, 1998. It is a modular benefit plan, offering plan participants a selection of benefit packages. As of December 31, 2018, the plan had 29 participants and a defined benefit obligation of approximately €3,549,000.

24.1 Financing

In order to finance the Group’s pension obligations a reinsurance policy has been established. The fair value of the reinsurance policy is EUR 3,086,072 as of December 31, 2018, which is classified as Other financial assets (non-current).

24.2 Employee benefit obligation

The Group’s employee benefit obligation under the defined benefit plans, which is classified as non-current, is EUR 14,143,781 as of December 31, 2018. Pension expenses amounted to EUR 224,278 for the year ended December 31, 2018 and consisted entirely of interest expense. The Company classifies interest expense as Finance expenses on the consolidated statement of comprehensive loss. Actuarial gains and losses associated with the defined benefit plans, which the Company classifies as other comprehensive loss, consist of the following for 2018:

Change in financial assumptions	€	214,644
Change in demographic assumptions		(221,795)
Change in experience-related assumptions		(17,473)
Actuarial profit on plan assets		-
Total actuarial loss	€	(24,624)

The following table shows the changes in benefit obligations for the year ended December 31, 2018 .

Defined benefit obligation (DBO) as of January 1, 2018	€	14,254,289
Interest expense		224,278
Actuarial gains and losses		24,624
Benefits paid		(370,410)
Defined benefit obligation as of December 31, 2018	€	14,132,781

24.4 Actuarial assumptions

The following basic actuarial assumptions were made in determining the benefit obligation as of December 31, 2018:

Discount rate	1.70%
Salary trend Germany	/
Rate of pension increase	1.70%
Retirement age	62 - 64 years

The weighted duration of the obligations amounts to 16 years.

24.5 Sensitivity analysis

Increases and decreases in principal actuarial assumptions would affect the pension liability as of December 31, 2018 as follows:

	Change		Impact on Obligation
Actuarial assumption	Change		Increase		Decrease
Discount rate	1.00 per cent	€	(1,896,496)	€	2,395,372
Rate of pension increase	0.25 per cent		446,677		(426,193)
Longevity	1 year	€	504,609		(499,733)

The sensitivities are based on the change of one assumption, whereas other variables remain unchanged in each case. It should be noted in this context that there may be correlations between the individual assumptions. No adjustments were made with regard to the evaluation method. The same methods were used, to calculate the pension obligations. Pension obligations are determined by using the projected unit credit method.

25. Related party loan

As of December 31, 2018, the Group reported Related party loan, including accumulated interest, of EUR 4,032,603. The loan is scheduled for repayment in two equal instalments in April and November 2019 including accumulated interest.

26. Provisions

26.1 Provision schedule

		Warranties & guarantees	Restructuring	Other	Total provisions, current	Other provisions, non-current

As of January 1, 2018	€	199,010	787,178	621	986,809	69,762
Additions		15,510	144,000	382,388	541,898	-
Releases		-	(1,530)	-	(1,530)	30,305
Consumptions		(13,710)	(785,648)	(1,041)	(800,399)	-
As of December 31, 2018	€	200,810	144,000	381,968	726,778	100,067

26.2 Provisions for warranties and guarantees

The KEYMILE Group guarantees for its products and services within the framework of ordinary legal regulations. Other than that, KEYMILE does not offer any exclusive or extended warranties. Based on historic track records, accruals for warranties and guarantees are calculated and set aside on an ongoing and regular basis.

26.3 Restructuring

The Group had a restructuring provision of EUR 787,178 as of December 31, 2017, which it almost entirely consumed in 2018. The restructuring charges mainly covered outstanding personnel expenses for settlements from severance plans related to the Group’s restructuring programme successfully completed in 2017.

26.4 Other provisions, current

The Other provisions, current balance consists primarily of an onerous lease contract on a leased building. The onerous lease contract expires in 2024.

27. Contract liabilities

The contract liabilities contain KEYMILE’s obligation to transfer goods or services to a customer from which the Group has already received consideration. Previously, these amounts have been disclosed as advance payments received and deferred income. As of January 1, 2018 the contract liabilities amounted to EUR 490,123, and have been recognised in revenue in 2018. The reduction to the balance sheet date amount of EUR 318,214 is purely due to less advance received before the balance sheet date.

28. Other liabilities, current

Other liabilities classified as current as of December 31, 2018 consist of the following:

Accrued management bonuses and severance payments	€	827,459
Payables due to tax authorities		584,366
Accrued legal, audit and consulting expenses		361,749
Holiday accrual		280,641
Other liabilities and accruals		151,228
Statutory archiving accrual		101,300
Personnel-related accrual for extra payments, Christmas and overtime		44,265
Payables due to social security		43,942
Accrual for outstanding invoices		25,826
Total	€	2,420,776

29. Financial instruments

		December 31, 2018
		Financial assets at amortized cost
Trade receivables, net	€	5,952,679
Cash and cash equivalents		6,212,082
Total financial assets	€	12,164,761

The carrying amount of the current financial assets is commensurate with their fair value.

		December 31, 2018
		Financial liabilities at amortized cost
Financial liabilities (excluding trade payables)	€	16,960,691
Trade payables		2,883,041
Total financial liabilities	€	19,843,732

The carrying amount of the current financial liabilities corresponds to their fair value.

Net profits/losses recorded in the statement of comprehensive loss for 2018 are as follows:

Loans and receivables	€	(114,623)
Financial liabilities at carrying amount		(290,014)

Financial liabil i ties in the reporting year developed as follows:

		Shareholder loan (non-current)	Shareholder loan (curent)	Related party loan (non-current)

As of January 1, 2018	€	12,129,058	-	7,398,593
Proceeds from borrowings		-	4,000,000	-
Repayments		(12,129,058)	-	(7,398,593)
Increase due to interests		-	32,603	-
As of December 31, 2018	€	-	4,032,603	-

30. Contingent liabilities and other financial obligations

As of December 31, 2018, the Group has guarantees and other commitments in the amount of EUR 323,075. Outside of the leases described below, none of these commitments are material and none of these contingent liabilities had turned into actual liabilities as of December 31, 2018. Management assumes that this will also be the case for the future.

30.2 Other obligations

On December 31, 2018, the following obligations existed from rent and lease agreements.

within the

following year

from one to five

years

more than five

years

Operating leases under IAS 17

€

1,199,728

3,357,859

656,909

In the financial year, lease payments amounting to EUR 198,016 were recorded under operating expenses. The parent company, KEYMILE GmbH, Hannover, and its subsidiary KEYMILE Ltd., Hertford, UK, leased cars (EUR 37,766) and machinery (EUR 160,250). In 2018 the Group spent EUR 1,131,465 for rented buildings.

31. Related party transactions

All transactions with related parties took place under conditions similar to normal market conditions

1) Transactions from regular business activities

During 2018, the following related party transactions from regular business activities occurred, which were transferred into the profit transfer agreement account as of December 31, 2018. See section 5 “Settlement of Payables and Receivables to/from Shareholder” for more information.

		Related Parties as of Balance Sheet Date 2018
BS / IS		Riverside KM	KEYMILE	KEYMILE	KEYMILE	Total
Position		Beteiligung	Asia PTE LTE,	LLC	Kft.	Related
		GmbH	Singapore	Russia	HUNGARY	Parties
Trade receivable	€	21,970	-	-	-	21,970
Dividends payable ¹		12,928,088	-	-	-	12,928,088
Related party loan ²		4,032,603	-	-	-	4,032,603

Related Parties P&L Transactions 2018
Interest income	€	6,596	-	-	-	6,596
Gains from Liquidation		-	14,536	-	371,375	385,911
Losses from Liquidation		-	(33,747)	-	-	(33,747)
Interest expense		(33,216)	-	-	-	(33,216)
Dividend income		-	-	60,584	64,361	124,945
P&L transfer agreements ³		(13,234,143)	-	-	-	(13,234,143)

(1)

This balance represents a dividend due to shareholder as calculated in section 5 of this Note.

(2)

This balance represents the working capital facility and accumulated interest as described in section 6 of this Note.

(3)

This P&L transfer agreement is based on an underlying agreement between Riverside KM Beteiligung GmbH and Keymile GmbH in order to transfer the statutory profit from the standalone Keymile GmbH to Riverside. This profit largely consists of a dividend from Keymile Brazil and Keymile UK of nearly €11 million, the rest is due to operating performance of the standalone entity.

2) M&A-related transactions

KEYMILE GmbH sold 100 percent of its shares in KEYMILE LLC, Moscow, Russia to Riverside KM Beteiligung GmbH. Sales agreement was signed in Moscow on November 22, 2018. The agreed price for the shares was at EUR 39,300.

3 ) Repayment of Related party loan and interest

On January 30 and February 2, 2018, the following loan repayments to Related party were made:


Lender		Loan	Interest	Total
REF IV Luxembourg Sarl	€	4,666,900	3,419,543	8,086,443
Halder GIMV Germany II GmbH & Co kG		2,223,200	1,630,618	3,853,818
CAP4CAP VL 7 Administration GmbH		109,900	80,526	190,426
Total	€	7,000,000	5,130,687	12,130,687

4) Distribution of additional paid-in capital

Based on corresponding agreements and shareholder resolutions the following transactions were made to fully release EUR 50,175,000 worth of additional paid-in capital at KEYMILE GmbH to Riverside KM Beteiligung GmbH.


Transfer of cash	€	30,875,411
Transfer of escrow account receivable from ABB to shareholder (see section 7 below)		15,000,000
Convert to shareholder loan payable (see Note 25)	€	4,000,000
Forgive net receivables balance from shareholder		240,000
Forgive interest receivable from shareholder		19,579
Forgive corporate tax and solidarity surcharge refund due from shareholder		40,010
Total offset against APIC	€	50,175,000

5) Settlement of Payables and Receivables to/ from Shareholder

Based on corresponding agreements and shareholder resolutions, the following transactions were made:


Dividends payable as of January 1, 2018	€	80,736,272
Cash transactions
Repayment of borrowings (including interest) on loans payable to shareholder		(5,858,740)
Payment of dividends		(3,529,719)
Non cash transactions
Transfer of 2017 loan receivable balance with shareholder		(71,828,800)
Transfer of 2017 net receivables balance with shareholder		(1,418,835)
Transfer of 2017 net interest receivable with shareholder		1,593,767
2018 activity based on P&L transfer agreement		13,234,143
Dividends payable as of December 31, 2018	€	12,928,088

6) Working Capital Facility of 4,000,000 EUR - Loan to KEYMILE Group

Effective October 1, 2018, Riverside KM Beteiligung GmbH provided a EUR 4,000,000 working capital facility to the KEYMILE Group (refer to (1)).

The loan is scheduled for repayment in two equal instalments in April and November 2019.

Interest rate for this loan is at 3.5 percent, accrued interest is due for payment together with each instalment.

7) Other: Assignment of receivables and transfer of price reduction benefits

Based on an assignment agreement dated July 5, 2018, ABB - the buyer of the MCS business -transferred receivables from Telekom companies worth CHF 303,401 to KEYMILE GmbH, along with a resulting purchase price reduction for the MCS business in the amount of EUR 467,907.

In the coursed of the negotiations with DZS Group, Riverside KM Beteiligung had taken over the obligations from the purchase price reduction agreement as well as the benefits from the TELEKOM companies transferred.

Both regulations will not have any future impact on the KEYMILE Group in its new structure as a member of the DZS Group.

8) Compensation of Key Management Personnel

The renumeration of key management personnel during the fiscal year 2018 was as follows:


Salaries	€	251,677
Other short-term benefits		137,811

In September 2017, KEYMILE's parent, Riverside KM Beteiligung GmbH, entered into a share-based-payment-agreement entitling the Managing Director of KEYMILE GmbH to a bonus payment after a successful sale of KEYMILE. As the bonus payment is based on the selling price of KEYMILE that agreement must be treated as an equity-settled-plan according to IFRS 2. The approximate value of the equity based award is EUR 26,000.

In January 2019, after completion of the sale and purchase agreement with the DZS Group, Riverside KM Beteiligung GmbH, paid an extraordinary management bonus of EUR 300,000 to the Managing Director, to reward his work and performance during the M&A process.

32. Subsequent events

The profit transfer agreement between Riverside KM Beteiligung GmbH, Hannover and KEYMILE GmbH, Hannover, dated December 5, 2011, was terminated by extraordinary notice of dismissal on January 3, 2019. Termination was registered at local court Hannover under HRB 193450.

The sale and purchase agreement regarding the KEYMILE Group was completed on January 3, 2019 and a dividend payable of EUR 12,928,088 shall be transferred to DASAN Zhone Solutions, Inc.

On February 15, 2019 KEYMILE gave a EUR 3,000,000 short-term loan to DASAN Zhone Solutions, Inc. which is due for repayment on March 25, 2019. The agreed interest rate is at 3.0 percent p.a.

The Group historically relied on Riverside KM Beteiligung, its former parent, to provide short-term financing and working capital support. The Group is required to repay a EUR 4.0 million loan to its former parent in two equal instalments in April and November 2019. Subsequent to its acquisition of the group, DZS Group entered into a legally binding commitment to provide the Group with liquidity to meet its current and future obligations through a minimum period ending December 31, 2020.

Exhibit 99.4

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-230236, 333-228276, 333-221568, 333-202580, 333-194334, 333-180148, 333-172876, 333-165510, 333-158009, 333-155321, 333-149598, 333-141153, 333-134217, 333-132336, 333-123369, 333-88732, 333-83422, 333-73352, and 333-61956) of DASAN Zhone Solutions, Inc. of our report dated March 18, 2019 relating to the financial statements of Keymile GmbH, which appears in this Current Report on Form 8-K.

Hannover, Germany

March 18, 2019

PricewaterhouseCoopers GmbH

Wirtschaftsprüfungsgesellschaft

/s/ Jens Wedekind		/s/ ppa. Michael Meseberg
Wirtschaftsprüfer		Wirtschaftsprüfer
(German Public Auditor)		(German Public Auditor)