DZS was incorporated under the laws of the state of Delaware in June 1999. The Company is headquartered in Plano, Texas with contract manufacturers and original design manufacturers located in the U.S, India, Korea, China, Taiwan, and Vietnam. The Company also maintains offices to provide sales and customer support at global locations. Through 2022, we also utilized our in-house manufacturing facility in Seminole, Florida. In October 2022, we announced an agreement with Fabrinet, a third-party provider of electro-mechanical and electronic manufacturing and distribution services, to transition the sourcing, procurement, order-fulfillment, manufacturing and return merchandise authorization activities in the Company's Seminole facility to Fabrinet. The transition began in October 2022 and substantially completed in the beginning of 2023, whereupon the Company no longer manufactures its products.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 3 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements include the accounts of the Company and its wholly owned subsidiaries. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on August 12, 2024. For a complete description of what the Company believes to be the critical accounting policies and estimates used in the preparation of its unaudited condensed consolidated financial statements, refer to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2022.

All intercompany transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period.

We continue to be exposed to macroeconomic pressures in the post-COVID-19 environment, including concerns about energy costs, geopolitical issues, inflation, the availability and cost of credit, business and consumer confidence, and unemployment. We have seen improvement in our supply chain in 2023 as supply chain pricing, freight and logistics costs, product and component availability, and extended lead-times which were a challenge in 2021 and 2022 begin to alleviate in 2023 as the world economy recovers from the COVID-19 pandemic. We expect elevated costs for components and expedite fees to further improve throughout 2023.

We conduct significant business in South Korea, Japan, Vietnam, India, Spain, and Canada, as well as in other countries in Europe, Asia-Pacific, Middle East and Latin America, all of which subject us to foreign currency exchange rate risk. The local currencies of our significant foreign subsidiaries are the South Korean Won ("KRW"), Japanese Yen ("JPY"), Euro ("EUR), and Pound Sterling ("GBP"). Revenues and operating expenses are typically denominated in the local currency of each country and result from transactions by our operations in these countries. However, a significant portion of our international cost of sales is denominated in the U.S. Dollar (“USD”).

As of March 31, 2023, the Company's debt obligation under the Term Loan was $23.7 million, net of unamortized issuance cost of $0.4 million, of which $1.3 million is scheduled for payment in the next 12 months. Due to the risk of non-compliance with certain financial covenants in the next 12 months we classified the entire amount as a current liability. As of March 31, 2023, we were in discussion with the lenders to amend the debt agreement to mitigate the risk of non-compliance. Refer to Note 16 Subsequent events for further information about the amendment and subsequent termination of the JPMorgan Credit Agreement.

In addition to negotiating for revised financial covenants, we continue to focus on cost management, operating efficiency and efficient discretionary spending. Management is actively taking measures to enhance profitability and liquidity, including reducing the Company’s cost structure and cash outflows, including its investment in inventory, and managing receivable balances through aggressive collection efforts and tighter customers payment terms. These plans are not completely within the Company’s control, as some actions are dependent on the Company’s lenders, vendors and customers. However, the Company believes that it will maintain liquidity in the next 12 months to support its operations.

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

Subsequent to the issuance of the unaudited condensed consolidated financial statements as of March 31, 2023 and as previously disclosed on June 1, 2023, Management determined that the Company’s previously issued unaudited consolidated financial statements as of and for the three months ended March 31, 2023 (the “Q1 2023 Financial Statements”) contained an accounting error relating to the timing of revenue recognition with respect to certain customer projects. As a result of this error, the Audit Committee determined that the Company’s Q1 2023 Financial Statements should no longer be relied upon and should be restated. In addition, as a result of the error, the Audit Committee initiated a review of the Company’s accounting for revenue recognition and the extent to which these matters affect the Company’s internal controls over financial reporting (the “Review”).

On November 9, 2023, the Company disclosed that although the Review was still ongoing, based on preliminary findings, management had determined that the Company’s previously issued audited condensed consolidated financial statements as of and for the year ended December 31, 2022 (the “2022 Annual Financial Statements”), as well as the Company’s previously issued unaudited condensed consolidated financial statements as of and for each of the three months ended March 31, 2022, the three and six months ended June 30, 2022 and the three and nine months ended September 30, 2022 (collectively, the “2022 Interim Financial Statements” and, together with the 2022 Annual Financial Statements, the “2022 Financial Statements” and, together with the Q1 2023 Financial Statements, the “Affected Financial Statements”), should no longer be relied upon and should be restated due to accounting errors in each of the 2022 Financial Statements relating to revenue recognition.

During the course of the Review, and during the Company's subsequent assessment of its accounting practices, accounting and financial reporting errors were identified. Specifically, errors in timing of revenue recognition relating to incorrect shipping dates, incorrect or unapproved shipping terms, incorrect timing of the transfer of control, and incorrect evaluation of the existence of contracts. As a result, revenue, accounts receivable, contract assets and liabilities, and inventory and cost of sales contained errors which resulted in corrections in accounting under U.S. GAAP related to the timing of revenue recognition under certain customer projects. Accordingly, the Company is restating its unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and March 31, 2023, to correct these errors, the most significant of which are described below.

The amounts in the "As Previously Reported" columns are amounts derived from the Company's previously filed financial statements in its Quarterly Report on Form 10-Q, originally filed with the Securities and Exchange Commission on May 9, 2023. The amounts in the "Adjustments" columns present the impact of the accounting error corrections relating to the timing of revenue recognition with respect to certain customer projects along with other corrections to the Company's previously filed financial statements. The description of the corrections is referenced by (a) through (d) in the tables below. The amounts in the "As Restated" columns are the updated amounts including the impacts from the adjustments.


	March 31, 2023
	As Previously Reported		Adjustments			As Restated
Assets
Current assets:
Cash and cash equivalents	$	28,892	$	—		$	28,892
Restricted cash	1,975		—			1,975
Accounts receivable - trade, net	141,029		(34,738)		(a)	106,291
Other receivables	21,518		(766)		(d)	20,752
Inventories	69,722		27,589		(a)(d)	97,311
Contract assets	605		—			605
Prepaid expenses and other current assets	10,689		(281)		(b)	10,408
Total current assets	274,430		(8,196)			266,234
Property, plant and equipment, net	7,135		—			7,135
Right-of-use assets from operating leases	11,971		—			11,971
Goodwill	19,952		(7,358)		(c)	12,594
Intangible assets, net	30,422		—			30,422
Other assets	17,013		—			17,013
Total assets	$	360,923	$	(15,554)		$	345,369
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable - trade	$	107,904	$	—		$	107,904
Short-term debt – bank, trade facilities and secured borrowings	16,746		—			16,746
Current portion of long-term debt	23,660		—			23,660
Contract liabilities	19,476		(2,862)		(a)(c)	16,614
Operating lease liabilities	4,859		—			4,859
Accrued and other liabilities	29,615		(1,970)		(b)	27,645
Total current liabilities	202,260		(4,832)			197,428
Long-term debt	—		—			—
Contract liabilities - non-current	6,636		(52)		(a)	6,584
Operating lease liabilities - non-current	10,499		—			10,499
Pension liabilities	11,060		—			11,060
Other long-term liabilities	2,583		—			2,583
Total liabilities	233,038		(4,884)			228,154

Stockholders’ equity:
Common stock	31		—			31
Additional paid-in capital	276,282		—			276,282
Accumulated other comprehensive loss	(6,462)		(149)		(a)	(6,611)
Accumulated deficit	(141,966)		(10,521)		(a)(b)	(152,487)
Total stockholders’ equity	127,885		(10,670)			117,215
Total liabilities and stockholders’ equity	$	360,923	$	(15,554)		$	345,369


	December 31, 2022
	As Previously Reported			Adjustments			As Restated
Assets
Current assets:
Cash and cash equivalents	$	34,347		$	—		$	34,347
Restricted cash	3,969			—			3,969
Accounts receivable - trade, net	153,780			(19,309)		(a)(d)	134,471
Other receivables	16,144			—			16,144
Inventories	78,513			15,775		(a)(d)	94,288
Contract assets	576			—			576
Prepaid expenses and other current assets	8,371			(961)		(b)	7,410
Total current assets	295,700			(4,495)			291,205
Property, plant and equipment, net	9,478			—			9,478
Right-of-use assets from operating leases	12,606			—			12,606
Goodwill	19,952			(7,358)		(c)	12,594
Intangible assets, net	31,742			—			31,742
Other assets	15,536			—			15,536
Total assets	$	385,014		$	(11,853)		$	373,161
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable - trade	$	121,225		$	(2,558)	(d)	$	118,667
Short-term debt – bank, trade facilities and secured borrowings	9,706			—			9,706
Current portion of long-term debt	24,073			—			24,073
Contract liabilities	21,777			(3,072)		(a)(c)	18,705
Operating lease liabilities	4,834			—			4,834
Accrued and other liabilities	27,559			(1,997)		(b)	25,562
Total current liabilities	209,174			(7,627)			201,547
Long-term debt	—			—			—
Contract liabilities - non-current	7,864			(76)		(a)	7,788
Operating lease liabilities - non-current	11,417			—			11,417
Pension liabilities	11,021			—			11,021
Other long-term liabilities	2,806			—			2,806
Total liabilities	242,282		242,282	(7,703)			234,579

Stockholders’ equity:
Common stock	30			—			30
Additional paid-in capital	271,884			—			271,884
Accumulated other comprehensive loss	(4,351)			(311)		(a)	(4,662)
Accumulated deficit	(124,831)			(3,839)		(a)(b)	(128,670)
Total stockholders’ equity	142,732			(4,150)			138,582
Total liabilities and stockholders’ equity	$	385,014		$	(11,853)		$	373,161


	Three Months Ended March 31, 2023
	As Previously Reported		Adjustments			As Restated
Net revenue	$	90,812	$	(21,000)	(a)	$	69,812
Cost of revenue	60,985		(13,667)		(a)	47,318
Gross profit	29,827		(7,333)			22,494
Operating expenses:
Research and product development	14,851		—			14,851
Selling, marketing, general and administrative	24,781		—			24,781
Restructuring and other charges	4,152		—			4,152
Amortization of intangible assets	1,271		—			1,271
Total operating expenses	45,055		—			45,055
Operating loss	(15,228)		(7,333)			(22,561)
Interest expense, net	(792)		—			(792)
Other income, net	728		—			728
Loss before income taxes	(15,292)		(7,333)			(22,625)
Income tax provision (benefit)	1,843		(651)		(b)	1,192
Net loss	(17,135)		(6,682)			(23,817)

Foreign currency translation adjustments	(2,051)		162		(a)	(1,889)
Actuarial loss	(60)		—			(60)
Comprehensive loss	$	(19,246)	$	(6,520)		$	(25,766)
Net loss per share
Basic	$	(0.55)	$	(0.22)		$	(0.77)
Diluted	$	(0.55)	$	(0.22)		$	(0.77)
Weighted average shares outstanding
Basic	31,045					31,045
Diluted	31,045					31,045


	Three Months Ended March 31, 2022
	As Previously Reported		Adjustments			As Restated
Net revenue	$	77,040	$	(5,050)	(a)	$	71,990
Cost of revenue	50,215		(3,616)		(a)	46,599
Gross profit	26,825		(1,434)			25,391
Operating expenses:
Research and product development	11,844		—			11,844
Selling, marketing, general and administrative	17,742		—			17,742
Restructuring and other charges	436		—			436

Amortization of intangible assets	294		—			294
Total operating expenses	30,316		—			30,316
Operating loss	(3,491)		(1,434)			(4,925)
Interest income	37		—			37
Interest expense	(127)		—			(127)
Other expense, net	(800)		—			(800)
Loss before income taxes	(4,381)		(1,434)			(5,815)
Income tax provision (benefit)	(1,333)		3,104		(b)	1,771
Net loss	(3,048)		(4,538)			(7,586)

Foreign currency translation adjustments	(268)		—			(268)

Comprehensive loss	$	(3,316)	$	(4,538)		$	(7,854)
Net loss per share
Basic	$	(0.11)	$	(0.17)		$	(0.28)
Diluted	$	(0.11)	$	(0.17)		$	(0.28)
Weighted average shares outstanding
Basic	27,530					27,530
Diluted	27,530					27,530


	Three Months Ended March 31, 2023
	As Previously Reported		Adjustments			As Restated
Cash flows from operating activities:
Net loss	$	(17,135)	$	(6,682)	(a)(b)	$	(23,817)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,465		—			2,465

Amortization of deferred financing costs	60		—			60
Stock-based compensation	4,486		—			4,486
Provision for inventory write-down	1,086		—			1,086
Provision for credit losses, net of recoveries	(184)		—			(184)
Provision for sales returns	541		—			541
Provision for warranty	70		—			70
Unrealized loss on foreign currency transactions	1,396		—			1,396

Loss on disposal of property, plant and equipment	40		—			40

Changes in operating assets and liabilities:
Accounts receivable	11,033		15,433		(a)(d)	26,466
Other receivable	(5,511)		(1,938)		(d)	(7,449)
Inventories	7,051		(9,111)		(a)(d)	(2,060)
Contract assets	(29)		—			(29)
Prepaid expenses and other assets	(3,138)		(680)		(b)	(3,818)
Accounts payable	(13,875)		2,559		(d)	(11,316)
Contract liabilities	(3,493)		228		(a)	(3,265)
Accrued and other liabilities	131		28		(b)	159
Net cash used in operating activities	(15,006)		(163)			(15,169)
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment and other assets	1,790		—			1,790
Purchases of property, plant and equipment	(775)		—			(775)

Net cash provided by investing activities	1,015		—			1,015
Cash flows from financing activities:


Repayments of long-term borrowings	(313)		—			(313)
Proceeds from short-term borrowings and line of credit, net	8,918		—			8,918

Proceeds from related party term loan	4,059		—			4,059
Repayments of related party term loan	(5,845)		—			(5,845)
Payments for debt issue costs	(122)		—			(122)

Proceeds from exercise of stock awards and employee stock plan purchases	(87)		—			(87)
Net cash provided by financing activities	6,610		—			6,610
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(67)		163		(a)	96
Net change in cash, cash equivalents and restricted cash	(7,448)		—			(7,448)
Cash, cash equivalents and restricted cash at beginning of period	38,464		—			38,464
Cash, cash equivalents and restricted cash at end of period	$	31,016	$	—		$	31,016


	Three Months Ended March 31, 2022
	As Previously Reported		Adjustments			As Restated
Cash flows from operating activities:
Net loss	$	(3,048)	$	(4,538)	(a)(b)	$	(7,586)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,081		—			1,081


Stock-based compensation	2,671		—			2,671
Provision for inventory write-down	705		—			705
Provision for credit losses, net of recoveries	(752)		—			(752)
Provision for sales returns	1,448		—			1,448
Provision for warranty expense	121		—			121
Unrealized loss on foreign currency transactions	874		—			874
Subsidiary dissolution	(68)		—			(68)

Changes in operating assets and liabilities:
Accounts receivable	2,761		3,657		(a)	6,418
Other receivable	126		—			126
Inventories	(10,931)		(3,626)		(a)	(14,557)
Contract assets	1,261		—			1,261
Prepaid expenses and other assets	(7,577)		3,020		(b)	(4,557)
Accounts payable	1,586		—			1,586
Contract liabilities	(1,446)		1,403		(a)	(43)
Accrued and other liabilities	456		84		(b)	540
Net cash used in operating activities	(10,732)		—			(10,732)
Cash flows from investing activities:
Purchases of property, plant and equipment	(1,317)		—			(1,317)

Net cash used in investing activities	(1,317)		—			(1,317)
Cash flows from financing activities:



Payments for debt issue costs	(178)		—			(178)
Proceeds from exercise of stock awards and employee stock plan purchases	156		—			156
Net cash used in financing activities	(22)		—			(22)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(903)		—			(903)
Net increase in cash, cash equivalents and restricted cash	(12,974)		—			(12,974)
Cash, cash equivalents and restricted cash at beginning of period	53,639		—			53,639
Cash, cash equivalents and restricted cash at end of period	$	40,665	$	—		$	40,665

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash, accounts receivables, and contract assets. Cash, cash equivalents and restricted cash consist of financial deposits and money market accounts that are principally held with various domestic and international financial institutions with high credit standing. As of March 31, 2023, the Company had cash accounts in excess of Federal Deposit Insurance Corporation ("FDIC") insured limits.

The Company’s customers include competitive and incumbent local exchange carriers, competitive access providers, internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts based upon the expected collectability of accounts receivable using historical loss rates adjusted for customer-specific factors and current economic conditions. The Company determines historical loss rates on a rational and systematic basis. The Company performs periodic assessments of its customers’ liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement review and historical and current collection trends.

In 2017, the Company entered into an agreement with a customer in India to supply product for a state sponsored broadband project. The Company substantially completed its obligations under the agreement in 2018. The Company billed the customer, which is a state government sponsored entity, approximately $59.0 million and collected payments of approximately $41.7 million by December 31, 2020. In late March 2021, the customer’s state government parent experienced difficulty passing a budget impacting the ability of the customer to make remaining agreed-upon payments to us. In light of this development, the Company recorded an allowance that covered the entire balance unpaid by the customer. Subsequent to March 2021, the Company recovered approximately $2.5 million of accounts receivable related to the customer. As of March 31, 2023 the Company has a recorded allowance for credit losses of $13.1 million related to this receivable. The Company will continue to pursue collection of the entire outstanding balance and any amounts collected will be recognized in the period which they are received. In the event the Company’s efforts to collect from this customer prove unsuccessful, DZS may seek payment through other means, including through legal action.

We account for business combinations using the acquisition method, which requires the identification of the acquirer, the determination of the acquisition date and the allocation of the purchase price paid by the acquirer to the identifiable tangible and intangible assets acquired, the liabilities assumed, including any contingent consideration and any noncontrolling interest in the acquiree at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their expected useful lives. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.

From time to time, the Company takes actions to align its workforce, facilities and operating costs with perceived market opportunities, business strategies and changes in market and business conditions. The Company recognizes a liability for the cost associated with an exit or disposal activity in the period in which the liability is incurred, except for one-time employee termination benefits, which are measured at the communication date and recognized ratably over the required service period, if any.

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires the Company to apply ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. Before the update such balances were measured and recognized at fair value on the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods. The Company adopted these requirements prospectively, effective on the first day of the second quarter of year 2022. There was no material impact on our consolidated financial statements on the adoption date.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, which provided additional implementation guidance on the previously issued ASU. The Company adopted the updated guidance on January 1, 2022, utilizing the modified retrospective transition method and recorded a cumulative-effect adjustment of $0.4 million to accumulated deficit.