DZS Inc. (referred to, collectively with its subsidiaries, as “DZS” or the “Company”) 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. On August 26, 2020, the Company filed a Certificate of Amendment to our Restated Certificate of Incorporation with the Delaware Secretary of State reflecting a company name change from Dasan Zhone Solutions, Inc to DZS Inc. The Company provides a wide array of reliable, cost-effective networking technologies, including broadband access, Ethernet switching, mobile backhaul, Passive Optical LAN and software-defined networks, to a diverse customer base that includes more than 1,000 customers in more than 100 countries worldwide.

DZS was incorporated under the laws of the state of Delaware in June 1999, under the name Zhone Technologies, Inc. The Company is headquartered in Plano, Texas with flexible in-house production facilities in Seminole, Florida and Hannover, Germany, and contract manufacturers located in China, India, Korea and Vietnam. The Company also maintains offices to provide sales and customer support at global locations.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 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, its wholly owned subsidiaries and a subsidiary in which it had a controlling interest. All intercompany transactions and balances have been eliminated in consolidation.

Certain prior-year amounts have been reclassified to conform to the current-quarter presentation. 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. 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 for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 24, 2020. 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 for the year ended December 31, 2019.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, assuming the Company will continue as a going concern.

The Company had net loss of $0.1 million and net loss of $9.0 million for the three and nine months ended September 30, 2020. Additionally, the Company had a net loss of $13.3 million for the year ended December 31, 2019 and incurred significant losses in years prior to 2019. As of September 30, 2020, the Company had an accumulated deficit of $38.3 million and working capital of $120.7 million. As of September 30, 2020, the Company had $31.3 million in cash and cash equivalents, which included $13.7 million in cash balances held by its international subsidiaries, and $51.5 million in aggregate principal debt of which $23.3 million was reflected in current liabilities.

The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next twelve (12) months will depend on its ability to (i) achieve forecasted results of operations, (ii) access funds approved under existing or new credit facilities and/or raise additional capital through sale of the Company’s common stock to the public, and (iii) effectively manage working capital requirements. If the Company cannot raise additional funds when it needs or want them, or if customers are unable or unwilling to pay on a timely basis, its operations and prospects could be negatively affected. Management’s belief that it will achieve forecasted results of operations assumes that, among other things, the Company will continue to be successful in implementing its business strategy. If one or more of these factors do not occur as expected, it could cause the Company to fail to meet its obligations as they come due.

In December 2019, a strain of coronavirus, now known as COVID-19, was reported to have surfaced in Wuhan, China. Since that time, the widespread and sustained transmission of the virus has reached global pandemic status. In response to the pandemic, many national and international health agencies have recommended, and many countries and state, provincial and local governments have implemented, various measures, including travel bans and restrictions, limitations on public and private gatherings, business closures or operating restrictions, social distancing, and shelter-in-place orders. The health effects of the pandemic and the above measures taken in response thereto have had an effect on the global economy in general and have materially impacted and will likely continue to impact the Company’s financial condition, results of operations and cash flows. Given the ongoing and dynamic nature of the virus and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 pandemic on our business. Due to the uncertainty around the future economic impact of the pandemic, the fair value measurements used in the Company’s impairment assessments could be negatively impacted and could result in future impairments of goodwill, intangibles and other long-lived assets. For the nine months ended September 30, 2020 the Company’s revenues decreased by approximately 8% compared to the same period of last year in part due to the COVID-19 pandemic. However, during the quarter ended September 30, 2020, the Company’s revenues increased by 31% compared to the quarter ended September 30, 2019 and 33% compared to the quarter ended June 30, 2020. The impact of a continued COVID-19 pandemic or sustained measures taken to limit or contain the outbreak could continue to have a material and adverse effect on our business, financial condition, results of operations, and cash flows.

Based on the Company's current plans and current business conditions, as of the date of this Quarterly Report on Form 10-Q, the Company believes that its existing cash, cash equivalents and available credit facilities will be sufficient to satisfy its anticipated cash requirements for at least the next twelve months from the date of this Quarterly Report on Form 10-Q.

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.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenue by source:
Products	$	88,910	$	66,447	$	197,832	$	214,891
Services		5,037		5,077		14,127		14,386
Total	$	93,947	$	71,524	$	211,959	$	229,277

The following summarizes required disclosures about geographical concentrations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenue by geography:
United States	$	10,566	$	9,662	$	27,543	$	28,993
Canada		1,319	$	1,062		4,395		2,950
Total North America		11,885	$	10,724		31,938		31,943
Latin America		5,094	$	6,273		12,089		18,829
Europe, Middle East, Africa		19,911	$	15,838		47,526		59,429
Korea		15,423	$	20,877		39,090		55,682
Japan		32,966	$	9,308		66,288		28,680
Other Asia Pacific		8,668	$	8,504		15,028		34,714
Total International		82,062	$	60,800		180,021		197,334
Total	$	93,947	$	71,524	$	211,959	$	229,277

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations.

The opening and closing balances of contract assets and contract liabilities related to contracts with customers are as follows:

The decrease in contract assets during the nine months ended September 30, 2020 was primarily due to invoicing that occurred in 2020 from unbilled balances reflected as contract assets as of December 31, 2019.

The decrease in contract liabilities during the nine months ended September 30, 2020 was primarily due to the deferral of revenue due to shipments not meeting the criteria for revenue recognition as of September 30, 2020, as compared to December 31, 2019. The amount of revenue recognized in the nine months ended September 30, 2020 that was included in the prior period contract liability balance was $2.8 million. This revenue consists of products and services provided to customers who had been invoiced prior to the current year.

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and restricted cash which totaled $40.6 million at September 30, 2020, including $17.8 million held by international subsidiaries. Cash and cash equivalents consist of financial deposits and money market accounts that are principally held with various domestic and international financial institutions with high credit standing.

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.

For the three months ended September 30, 2020, two customers accounted for 35% of net revenue in the aggregate. For the nine months ended September 30, 2020, one customer accounted for 16% of net revenue. For the three months ended September 30, 2019, one customer accounted for 11% of net revenue. For the nine months ended September 30, 2019, no single customer accounted for 10% or more of net revenue.

As of September 30, 2020, three customers each represented 17%, 16% and 16% of net accounts receivable, respectively. As of December 31, 2019, two customers represented 18% and 11% of net accounts receivable, respectively.

As of September 30, 2020 and December 31, 2019, receivables from customers in countries other than the United States represented 93% and 94%, respectively, of net accounts receivable.

The Company is currently evaluating the collectability of certain accounts receivable totaling $17.1 million that are due from a customer with a favorable payment history, located in India, that are past due under the original sales terms. It is difficult to determine when this receivable will be collected and the ultimate amount to be collected. The Company is actively working with the customer to arrange payment. The Company is currently unable to determine whether any loss will ultimately occur in connection with the resolution of this matter and has not accrued any loss in the accompanying unaudited condensed consolidated financial statements based on its current expectations regarding the collectability of the receivable. Management will continue to evaluate the collectability of this receivable as more information becomes available.

The Company allocates the fair value of purchase consideration to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets and certain tangible assets such as inventory.

Critical estimates in valuing certain tangible and intangible assets include but are not limited to future expected cash flows from the underlying assets and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

The Company provides certain defined benefit pension plans to employees in Germany and Japan. Pension accounting is intended to reflect the recognition of future benefit costs over the employees' average expected future service to the Company based on the terms of the plans and investment and funding decisions. To estimate the impact of these future payments and the Company’s decisions concerning funding of these obligations, the Company is required to make assumptions using actuarial concepts within the framework of U.S. GAAP. The critical assumption is the discount rate and other important assumptions include expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates and portfolio composition. The Company evaluates these assumptions at least annually, or more frequently when certain qualifying events occur, such as a significant change in interest rates.

In June 2016, FASB issued 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 updated guidance is effective for the Company on January 1, 2022, and requires a modified retrospective adoption method. Early adoption is permitted. The Company is currently assessing the potential impact of adopting this new guidance on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The updated guidance is effective for the Company on January 1, 2021, with early adoption permitted. The Company is currently assessing the potential impact of adopting this new guidance but does not expect adoption to have a material impact on the Company’s consolidated financial statements.

In November 2019, the FASB issued ASU 2019-08, Compensation - Stock Compensation (ASC 718). This ASU requires an entity measure and classify share-based payment awards granted to a customer by applying the guidance in ASC 718. The amount of the share-based payment award that is recorded as a reduction of the transaction price is required to be measured at the grant-date fair value in accordance with ASC 718. The Company adopted this guidance as of January 1, 2020. There was no material impact on the Company’s consolidated financial statements or disclosures resulting from the adoption of this standard.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other Internal-Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement. The update reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for annual and interim periods beginning after December 15, 2019, and retrospective or prospective application is permitted. The Company adopted this guidance as of January 1, 2020. There was no material impact on the Company’s consolidated financial statements or disclosures resulting from the adoption of this standard.

In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted this guidance as of January 1, 2020. There was no material impact on the Company’s consolidated financial statements or disclosures, resulting from the adoption of this standard.

On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. The Company adopted this guidance as of January 1, 2020. There was no material impact on the Company’s consolidated financial statements or disclosures, resulting from the adoption of this standard.

In December 2019, the FASB issued ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting standard but does not expect adoption to have a material impact on the Company's consolidated financial statements or disclosures.