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

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

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

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

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


	September 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	45,505		$	45,219		$	17,125		$	46,666
Restricted cash		6,884			9,200			5,862			6,808
Accounts receivable - trade, net of allowance for doubtful accounts of $18,170 as of September 30, 2021 and $4,000 as of December 31, 2020		84,730			97,253
Accounts receivable - trade, net of allowance for doubtful accounts of $16,304 as of June 30, 2022 and $17,735 as of December 31, 2021								105,343			86,114
Other receivables		12,477			9,165			12,988			10,621
Inventories		58,270			39,572			69,457			56,893
Contract assets		3,466			6,182			1,281			2,184
Prepaid expenses and other current assets		8,906			5,332			12,525			5,690
Total current assets		220,238			211,923			224,581			214,976
Property, plant and equipment, net		9,256			7,146			9,849			9,842
Right-of-use assets from operating leases		12,932			18,483			14,996			12,640
Goodwill		6,145			3,977			28,977			6,145
Intangible assets, net		5,409			3,377			23,156			5,115
Deferred tax assets		1,156			1,405
Other assets		8,826			5,919			10,264			8,950
Total assets	$	263,962		$	252,230		$	311,823		$	257,668
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable - trade	$	67,953		$	49,250		$	79,678		$	64,258
Short-term debt - bank, trade facilities and secured borrowings		-			13,787
Current portion of long-term debt								1,250			—
Contract liabilities		4,585			4,400			20,446			6,091
Operating lease liabilities		4,118			4,494			4,445			4,097
Accrued and other liabilities		21,802			16,707			19,166			16,032
Total current liabilities		98,458			88,638			124,985			90,478
Long-term debt - related party		-			29,754
Long-term debt								23,419			—
Contract liabilities - non-current		2,951			2,471			7,858			3,044
Operating lease liabilities - non-current		12,694			15,959			13,410			12,103
Pension liabilities		18,685			20,052			15,073			16,527
Other long-term liabilities		3,426			1,777			2,990			3,609
Total liabilities		136,214			158,651			187,735			125,761
Commitments and contingencies (Note 14)
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common stock, 36,000 shares authorized, 27,207 and 21,958 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively, at $0.001 par value		27			22
Common stock, 36,000 shares authorized, 27,784 and 27,505 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively, at $0.001 par value								27			27
Additional paid-in capital		218,596			147,997			229,969			223,336
Accumulated other comprehensive loss		(6,159	)		(2,124	)		(9,432	)		(4,457	)
Accumulated deficit		(84,716	)		(52,316	)		(96,476	)		(86,999	)
Total stockholders’ equity		127,748			93,579			124,088			131,907
Total liabilities and stockholders’ equity	$	263,962		$	252,230		$	311,823		$	257,668

See accompanying notes to unaudited condensed consolidated financial statements.

Cost of revenue

56,213

65,755

164,771

144,004

Gross profit

32,199

28,192

87,372

67,955

Operating expenses:

Research and product development

11,707

9,033

34,788

27,238

Selling, marketing, general and administrative

19,539

16,795

69,619

43,472

Restructuring and other charges

6,754

-

12,098

-

Impairment of long-lived assets

-

-

1,735

-

Amortization of intangible assets

312

387

888

1,130

Total operating expenses

38,312

26,215

119,128

71,840

Operating income (loss)

(6,113
)

1,977

(31,756
)

(3,885
)
Interest income

20

14

81

98

Interest expense

(49
)

(446
)

(326
)

(1,503
)
Loss on extinguishment of debt

-

—

-

(1,369
)
Other income (expense), net

922

(41
)

1,633

69

Income (loss) before income taxes

(5,220
)

1,504

(30,368
)

(6,590
)
Income tax provision (benefit)

676

1,619

2,032

2,452

Net income (loss)

(5,896
)

(115
)

(32,400
)

(9,042
)

-

Foreign currency translation adjustments

(2,036
)

1,112

(4,090
)

(1,519
)
Actuarial gain (loss)

—

—

55

285

Comprehensive income (loss)

(7,932
)

$
997

$
(36,435
)

$
(10,276
)
Net income (loss) per share

Basic

(0.22
)

$
(0.01
)

$
(1.22
)

$
(0.42
)
Diluted

(0.22
)

$
(0.01
)

$
(1.22
)

$
(0.42
)
Weighted average shares outstanding used to
compute basic net income (loss) per share

27,201

21,592

26,484

21,532

Weighted average shares outstanding used to
compute diluted net income (loss) per share

27,201

21,592

26,484

21,532

See accompanying notes to unaudited condensed consolidated financial statements.

	Common stock				Additional paid-in		Accumulated other comprehensive			Accumulated			Total stockholders'
	Shares		Amount		capital		loss			deficit			equity			Common stock				Additional paid-in		Accumulated other comprehensive			Accumulated			Total stockholders'
For the Nine-Month Period Ended September 30, 2021:
Balance as of December 31, 2020		21,958	$	22	$	147,997	$	(2,124	)	$	(52,316	)	$	93,579
Issuance of common stock in public offering, net of issuance costs		4,600		5		59,520		—			—			59,525
																Shares		Amount		capital		loss			deficit			equity
Six-months ended March 31, 2022:
Balance as of December 31, 2021																	27,505	$	27	$	223,336	$	(4,457	)	$	(86,999	)	$	131,907
Cumulative effect of ASC 326 adoption																	—		—		—		—			(401	)		(401	)
Exercise of stock awards and employee stock plan purchases																	98		—		156		—			—			156
Stock-based compensation																	—		—		2,671		—			—			2,671
Net income (loss)																	—		—		—		—			(3,048	)		(3,048	)
Subsidiary dissolution																	—		—		—		(68	)		—			(68	)
Other comprehensive loss																	—		—		—		(268	)		—			(268	)
Balance as of March 31, 2022																	27,603	$	27	$	226,163	$	(4,793	)	$	(90,448	)	$	130,949
Exercise of stock awards and employee stock plan purchases		325		—		2,569		—			—			2,569			181		—		938		—			—			938
Stock-based compensation		—		—		1,352		—			—			1,352			—		—		2,868		—			—			2,868
Net income (loss)		—		—		—		—			(23,225	)		(23,225	)		—		—		—		—			(6,028	)		(6,028	)
Other comprehensive loss		—		—		—		(2,298	)		—			(2,298	)		—		—		—		(4,639	)		—			(4,639	)
Balance as of March 31, 2021		26,883	$	27	$	211,438	$	(4,422	)	$	(75,541	)	$	131,502
Exercise of stock awards and employee stock plan purchases		309		—		1,967		—			—			1,967
Stock-based compensation		—		—		1,994		—			—			1,994
Net income (loss)		—		—		—		—			(3,279	)		(3,279	)
Other comprehensive loss		—		—		—		299			—			299
Balance as of June 30, 2021		27,192	$	27	$	215,399	$	(4,123	)	$	(78,820	)	$	132,483
Exercise of stock awards and employee stock plan purchases		15		—		93		—			—			93
Stock-based compensation		—		—		3,104		—			—			3,104
Net income (loss)		—		—		—		—			(5,896	)		(5,896	)
Other comprehensive loss		—		—		—		(2,036	)		—			(2,036	)
Balance as of September 30, 2021		27,207	$	27	$	218,596	$	(6,159	)	$	(84,716	)	$	127,748



For the Nine-Month Period Ended September 30, 2020:
Balance as of December 31, 2019		21,419	$	21	$	139,700	$	(3,939	)	$	(29,234	)	$	106,548
Exercise of stock awards and employee stock plan purchases		94		—		709		—			—			709
Stock-based compensation		—		—		782		—			—			782
Net income (loss)		—		—		—		—			(8,771	)		(8,771	)
Other comprehensive loss		—		—		—		(1,979	)		—			(1,979	)
Balance as of March 31, 2020		21,513	$	21	$	141,191	$	(5,918	)	$	(38,005	)	$	97,289
Exercise of stock awards and employee stock plan purchases		46		—		284		—			—			284
Stock-based compensation		—		—		868		—			—			868
Net income (loss)		—		—		—		—			(156	)		(156	)
Other comprehensive loss		—		—		—		(367	)		—			(367	)
Balance as of June 30, 2020		21,559	$	21	$	142,343	$	(6,285	)	$	(38,161	)	$	97,918
Exercise of stock awards and employee stock plan purchases		63		1		269		—			—			270
Stock-based compensation		—		—		1,660		—			—			1,660
Net income (loss)		—		—		—		—			(115	)		(115	)
Other comprehensive loss		—		—		—		1,112			—			1,112
Balance as of September 30, 2020		21,622	$	22	$	144,272	$	(5,173	)	$	(38,276	)	$	100,845
Balance as of June 30, 2022																	27,784	$	27	$	229,969	$	(9,432	)	$	(96,476	)	$	124,088

See accompanying notes to unaudited condensed consolidated financial statements.

Nine months ended

September 30,

2021

2020

Cash flows from operating activities:

Net income (loss)

$
(32,400
)

$
(9,042
)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:

Depreciation and amortization

3,555

3,935

Impairment of long-lived assets and non-cash restructuring

4,475

—

Gain on Lease termination

(908
)

—

Loss on extinguishment of debt

—

1,343

Amortization of deferred financing costs

12

147

Stock-based compensation

6,450

3,310

Provision for inventory write-down

2,928

4,079

Bad debt expense

14,579

446

Provision for sales returns

873

556

Provision for warranty

636

341

Unrealized gain on foreign currency transactions

47

(405
)
Deferred taxes

139

(224
)
Changes in operating assets and liabilities:

Accounts receivable

(3,945
)

(16,582
)
Other receivable

(7,648
)

(1,153
)
Inventories

(24,256
)

(11,984
)
Contract assets

2,557

11,609

Prepaid expenses and other assets

(7,063
)

(805
)
Accounts payable

21,991

2,217

Contract liabilities

631

(131
)
Accrued and other liabilities

2,282

1,348

Net cash provided by (used in) operating activities

(15,065
)

(10,995
)
Cash flows from investing activities:

Purchases of property, plant and equipment

(4,158
)

(1,947
)
Acquisition of business, net of cash acquired

(4,459
)

—

Net cash used in investing activities

(8,617
)

(1,947
)
Cash flows from financing activities:

Proceeds from issuance of common stock in public offerings, net of issuance costs

59,525

—

Proceeds from short-term borrowings and line of credit

—

13,774

Repayments of short-term borrowings and line of credit

(13,278
)

(12,077
)
Repayments of long-term borrowings

—

(13,125
)
Proceeds from related party term loan

—

18,361

Repayments of related party term loan

(29,298
)

—

Proceeds from factored accounts receivable

—

11,645

Deferred financing costs

—

(20
)
Proceeds from exercise of stock awards and employee stock plan purchases

4,629

1,262

Net cash provided by financing activities

21,578

19,820

Effect of exchange rate changes on cash, cash equivalents and restricted cash

71

47

Net increase in cash, cash equivalents and restricted cash

(2,033
)

6,925

Cash, cash equivalents and restricted cash at beginning of period

54,587

33,635

Cash, cash equivalents and restricted cash at end of period

$
52,554

$
40,560

Reconciliation of cash, cash equivalents and restricted cash to statement of
financial position

Cash and cash equivalents

$
45,505

$
31,307

Restricted cash

6,884

9,087

Long-term restricted cash

165

166

$
52,554

$
40,560

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Interest - bank and trade facilities

$
83

$
616

Interest - related party

$
108

$
888

Income taxes

$
3,029

$
2,587

See accompanying notes to unaudited condensed consolidated financial statements.

(1) Organization and Summary of Significant Accounting Policies

(a) Description of Business

DZS Inc. (referred to, collectively with its subsidiaries, as “DZS” or the “Company”) is a global ~~provider of~~leader in access and optical networking infrastructure and ~~packet-based mobile transport,~~cloud software solutions that enable the emerging hyper-connected, hyper-broadband world and broadband ~~connectivity, and software defined networking solutions deployed by advanced Tier 1, national and regional service providers and enterprise customers.~~experiences. 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,~~software to a diverse customer base.

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

(b) Basis of Presentation

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 83 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 for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission (“SEC”) on March ~~11, 2021.~~9, 2022. 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, ~~2020.~~2021.

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.

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.

~~In December 2019, a strain~~The COVID-19 pandemic continued to adversely affect significant portions of ~~coronavirus, now known to cause COVID-19, was reported to have surfaced~~our business and our financial condition and results of operations in ~~Wuhan, China. Since that time,~~ the ~~widespread and sustained transmission~~first two quarters of 2022. The emergence 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,~~Omicron variant in late 2021 with a resulting increase in COVID cases in 2022 resulted in re-implementation of various measures, including travel bans and restrictions, limitations on public and private gatherings, business and port 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 its variants, and the worldwide response related thereto, it is difficult to predict the full impact of the COVID-19 pandemic on our business. ~~Due~~

We have experienced and continue to experience disruptions in our supply chain 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~~which has also impacted and ~~could result in future impairments of goodwill, intangibles~~may adversely impact our operations (including, without limitation, logistical and other ~~long-lived assets. During~~operational costs) and the ~~nine months ended September 30,~~operations of some of our key suppliers. Supply chain pricing, freight and logistics costs, product and component availability, and extended lead-times became a challenge in 2021 and continue into 2022 as the ~~Company’s revenues increased by 19.0%, compared~~world economy recovers from the COVID-19 pandemic. As we continue to incur elevated costs for components and expedite fees, our supply chain and operations teams continue to focus on managing through a constrained environment, thereby enabling DZS to maximize shipments despite elongated lead times. We remain cautious about continued supply chain headwinds that challenge the industry and anticipate a constrained supply chain environment to persist throughout 2022.

For additional risks to the ~~nine months ended September 30, 2020, however,~~corporation related to the ~~impact of a continued~~ COVID-19 pandemic, ~~or sustained measures taken to limit or contain the outbreak could have a material and adverse effect on~~see Item 1A, Risk Factors of our ~~business, financial condition, results of operations, and cash flows.~~2021 Form 10-K.

(d) Use of Estimates

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.

(e) Disaggregation of Revenue

The following table presents revenues by source (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Products	$	83,335	$	77,920	$	155,797	$	154,172
Services and software		7,745		4,780		12,323		9,559
Total	$	91,080	$	82,700	$	168,120	$	163,731

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Revenue by source:

Products

$
82,911

$
88,910

$
237,083

$
197,832

Services and other

5,501

5,037

15,060

14,127

Total

$
88,412

$
93,947

$
252,143

$
211,959

The following table present revenues by geographical concentration (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Americas	$	28,417	$	26,513	$	51,341	$	46,682
Europe, Middle East, Africa		12,976		16,701		31,802		34,619
Asia		49,687		39,486		84,977		82,430
Total	$	91,080	$	82,700	$	168,120	$	163,731

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Revenue by geography:

Americas

$
27,302

$
16,904

$
73,984

$
43,741

Europe, Middle East, Africa

20,380

19,964

54,999

47,740

Asia

40,730

57,079

123,160

120,478

Total

$
88,412

$
93,947

$
252,143

$
211,959

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.

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.~~receivable using historical loss rates adjusted for customer-specific factors and current economic conditions. The Company ~~bases its allowance~~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, as well as on specific balances where collectability may be uncertain.~~trends.

Activity under the Company’s allowance for doubtful accounts consists of the following (in thousands):


	Six Months Ended June 30,
	2022			2021
Balance at beginning of period	$	17,735		$	3,954
Charged to expense, net of recoveries		(896	)		14,301
Utilization/write offs/exchange rate differences		—			(101	)
Cumulative effect of ASC 326 adoption		401			—
Foreign exchange impact		(936	)		(336	)
Balance at end of period	$	16,304		$	17,818

For the three and six months ended June 30, 2022, 1 customer accounted for 13% of net revenue. For the three months ended ~~September~~June 30, 2021, 2 customers accounted for ~~15%~~22% and ~~11%~~14% of net revenue, respectively. For the ~~nine~~six months ended ~~September~~June 30, 2021, 2 customers accounted for ~~18%~~20% and ~~12%~~12% of net revenue, respectively. ~~For the three months ended September~~

As of June 30, ~~2020, 2 customers accounted for 23% and 12%~~2022, 1 customer represented 10% of net ~~revenue, respectively. For the nine months ended September 30, 2020, 1 customer accounted for 16% of net revenue.~~

accounts receivable. As of ~~September 30,~~December 31, 2021, 2 customers represented ~~18%~~26% and ~~15%~~10% of net accounts receivable, respectively.

As of ~~December 31, 2020, 2 customers represented 17% and 16% of net accounts receivable, respectively.~~

~~As of September~~June 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, net accounts receivables from customers in countries other than the United States represented ~~80%~~77% and ~~89%~~79%, respectively.

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~~$59.0 million and collected payments of approximately ~~$41.7~~$41.7 million leaving a balance of approximately $17.3 million as of December 31, 2020. The Company substantially completed its obligations under the agreement in 2018, and all amounts due were billed under the terms of the agreement by December 31, 2020. The remaining $17.3 million is substantially beyond the customers contractual payment terms, and the Company has been actively working with the customer and third parties in India to arrange payment of the entire remaining balance of $17.3 million. The Company recorded an allowance for doubtful accounts of $3.1 million on December 31, 2020, for a partial payment promised but not received. In late March 2021, the customer’s state government parent experienced difficulty passing a budget ~~further~~ impacting the ability of the customer to make remaining agreed-upon ~~partial~~ payments to us. In light of this development, the Company ~~recognized~~recorded an ~~additional~~ allowance that covered the entire balance unpaid by the customer. Subsequent to March 2021, the Company recovered approximately $1.9 million of ~~$14.2 million during~~accounts receivable related to the ~~three months ended March 31, 2021, to bring~~customer. As of June 30, 2022 the ~~total~~Company has a recorded allowance for ~~the customer~~doubtful accounts of $14.4 million related to ~~$17.3 million, which is the total balance as of September 30, 2021.~~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.

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.

Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (which cannot exceed one year from the acquisition date), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date.

When the consideration transferred by the Company in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the total consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are made retrospectively, with corresponding adjustments against goodwill. Changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments are made in the current period, with corresponding adjustments recognized in earnings.

(h) Restructuring and Other Charges

Restructuring and other charges primarily consists of severance and other termination benefits and non-cash impairment charges related to right-of-use assets from operating leases related to the restructuring activities in Hanover, Germany and Ottawa, Canada. The Company recognizes contractual termination benefits when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. The Company recognizes one-time employee termination benefits when (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement in sufficient detail to enable employees to determine the type and amount of benefits they will receive, and (iv) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. These charges are included in restructuring and other charges in the unaudited condensed consolidated statement of comprehensive income (loss). ~~Refer to Note 9 Restructuring and Other Charges for further information.~~

(i) Recent Accounting Pronouncements

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, whichrequires 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 ~~expects to adopt~~adopted the updated guidance on January 1, 2022, utilizing the modified retrospective transition method ~~through~~and recorded a cumulative-effect adjustment of $0.4 million to retained ~~earnings~~earnings.~~. The~~

~~ASU is not expected to have a material impact on our consolidated financial statements.~~9

In March 2020, the FASB issued ASU No. 2020-04 (Topic 848), Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. The standard was effective upon issuance and may generally be applied through December 31, 2022, to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR. The ASU is ~~not~~not expected to have a material impact on our consolidated financial statements.

(2) Business Combinations

Optelian Acquisition

On February 5, 2021, the Company acquired Optelian Access Networks Corporation (“Optelian”), a corporation incorporated under the laws of Canada and registered extra-provincially in the Province of Ontario, pursuant to an acquisition agreement whereby the Company purchased all the outstanding shares of ~~Optelian (the “Optelian Acquisition”).~~Optelian. Following the closing of the ~~Optelian Acquisition,~~transaction, Optelian became the Company’s wholly owned subsidiary.

Optelian was a leading optical networking solution provider. This acquisition introduced the “O-Series” to the DZS portfolio of carrier grade optical networking products with ~~100~~up to 400 gigabits per second (Gig) and above capability, expanding the DZS product ~~portfolios~~portfolio by providing environmentally hardened, high capacity, and flexible solutions at the network edge.

The purchase price of ~~$7.5~~$7.5 million included cash paid to the shareholders and option holders of Optelian, cash paid to retire Optelian's outstanding debt on the date of acquisition, and contingent payments to ~~shareholders (in thousands):~~shareholders.

Purchase consideration

Retirement of Optelian debt

$
4,929

Payment to shareholders and option holders

664

Contingent payment to shareholders

1,897

Total purchase consideration

$
7,490

The payment to shareholders and option holders includes a ~~$0.3~~$0.3 million holdback and $~~and~~1.9 ~~$1.9~~ million contingent consideration based on a certain percentage of future revenue of certain Optelian products through the end of 2023.

~~Allocation of purchase consideration~~

The acquisition was recorded as a business combination with valuations of the assets acquired and liabilities assumed at their acquisition date fair value using level three inputs, defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. ~~Due to the complexity of valuing the consideration paid and~~ We completed the purchase price allocation ~~and the timing of these activities, certain amounts included~~for Optelian acquisition in ~~the unaudited condensed consolidated financial statements, including~~ ~~long-lived assets, deferred taxes, and goodwill,~~ are provisional and subject to additional adjustments within the measurement period as permitted by Topic 805. In the third quarter of 2021, we recorded a measurement-period adjustment of $0.5 million to reduce the value of intangible assets acquired with a corresponding offset to goodwill.2021. The ~~adjustment did not have a material impact on the amortization expense recorded in the previous quarters.~~

~~The following summarizes the provisional estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the Optelian Acquisition (in thousands):~~

Provisional allocation of purchase consideration

Cash and cash equivalents

$
1,236

Accounts receivable - trade

460

Other receivables

153

Inventories

448

Prepaid expenses and other current assets

49

Property, plant and equipment

718

Intangible assets

3,160

Accounts payable - trade

(390
)
Contract liabilities

(169
)
Accrued and other liabilities

(123
)
Goodwill

1,948

Total purchase consideration

$
7,490

~~The provisional~~ purchase price allocation resulted in the recognition of goodwill of approximately ~~$1.9 million. The following table represents~~$1.9 million, which primarily related to the ~~preliminary estimated fair value and useful lives of identifiable intangible assets acquired (estimated fair value in thousands):~~

Estimated

Estimated

fair value

useful life
Intangible assets acquired

Developed technology

$
1,780

5 years
Customer relationships

490

5 years
In-process research and development

890

5 years
Total intangible assets

$
3,160

expected synergies from combining operations.

~~There were no material differences between total revenue and net loss reported and pro forma total revenues and pro forma net loss that would have been reported for the financial periods presented.~~

RIFT Acquisition

On March 3, 2021, the Company acquired substantially all of the assets of RIFT, Inc., a network automation solutions company, and all the outstanding shares of ~~RIFTIO~~RIFT.IO India Private Limited, a wholly owned subsidiary of RIFT, Inc. (collectively “RIFT”). RIFT developed a carrier-grade RIFT.ware software platform that simplifies the deployment of any slice, service, or application on any cloud. This acquisition introduced DZS Xtreme, a solution within the DZS Cloud portfolio, to the overall portfolio of DZS systems and software solutions. The total purchase consideration was ~~$0.5~~$0.5 million, including a ~~$0.2~~$0.2 million holdback that was released in April of 2021 following the fulfillment of certain requirements in the purchase agreement. ~~The Company allocated~~We completed the purchase price allocation for RIFT acquisition in 2021. The purchase price allocation resulted in the recognition of goodwill of approximately $0.2 million, which primarily related to ~~$0.1~~the expected synergies from combining operations.

ASSIA Acquisition

On May 27, 2022, the Company acquired certain assets and liabilities of Adaptive Spectrum and Signal Alignment, Incorporated (“ASSIA”), an industry pioneer of broadband access quality-of-experience and service assurance software solutions (the “ASSIA Acquisition”). The core assets acquired include the CloudCheck® Wi-Fi experience management and Expresse® access network optimization software solutions. These software solutions add powerful data analytics and network intelligence capabilities to DZS Cloud, including cloud-managed WiFi solutions, access network optimization and intelligent automation tools. The CloudCheck® and Expresse® solutions are currently deployed in over 125 million connected homes globally, and many of these connections now represent recurring software revenue opportunities for DZS.

The total purchase consideration was $25.0 million, including a $2.5 million holdback that will be released in ~~net tangible assets, $0.2 million in developed technologies, and $0.2 million in goodwill.~~13 months following the transaction close date. As

The acquisition was recorded as a ~~result~~business combination with valuation of the assets acquired and liabilities assumed recorded at their acquisition ~~RIFTIO India Private Limited became a wholly owned subsidiary~~date fair value determined using level three inputs, defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the ~~Company.~~assets or liabilities. Due to the complexity of the valuation of the assets acquired and the liabilities assumed, and the timing of these activities, certain amounts included in the unaudited condensed consolidated financial statements, including long-lived assets, intangible assets, deferred taxes and goodwill, are provisional and subject to additional adjustments within the measurement period as permitted by Topic 805.

The following summarizes the provisional estimated fair values of the assets acquired and liabilities assumed at the date of the ASSIA Acquisition (in thousands):


Provisional allocation of purchase consideration
Cash and cash equivalents	$	203
Accounts receivable		2,578
Other assets		364
Right-of-use assets		2,612
Property, plant and equipment		231
Intangible assets		18,800
Accounts payable		(106	)
Contract liabilities		(19,550	)
Operating lease liabilities		(2,612	)
Accrued and other liabilities		(323	)
Goodwill		22,803
Total purchase consideration	$	25,000

The provisional purchase price allocation resulted in the recognition of goodwill of approximately $22.8 million, which included the experienced workforce and the expected synergies from combining operations. The Company expects that the goodwill recognized will be deductible for tax purposes.

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


	Estimated		Estimated
	fair value		useful life
Intangible assets acquired
Customer relationships	$	12,500	15 years
Developed technology		5,800	5 years
Tradenames		500	10 years
Total intangible assets	$	18,800

(3) Fair Value Measurement

The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:


Level 1		Inputs are quoted prices in active markets for identical assets or liabilities.


Level 2		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.


Level 3		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are ~~unobservable.~~unobservable

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

The carrying values of financial instruments such as cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The carrying value of the Company's debt approximates its fair values based on the current rates available to the Company for debt of similar terms and maturities.

The Company classifies its contingent liability from Optelian acquisition within Level 3 as it includes inputs not observable in the market. The Company estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using the revenue forecast for certain Optelian products through the end of 2023. The fair value of contingent liability is generally sensitive to changes in the revenue ~~forecast.~~ ~~Refer to Note 2 Business Combinations for further information.~~

~~The following tables present information about~~forecast during the ~~Company’s assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):~~

September 30, 2021

Level 1

Level 2

Level 3

Total

Cash and cash equivalents

$
45,505

-

-

$
45,505

Restricted cash

6,884

-

-

6,884

Contingent liability

-

-

2,116

2,116

Total

$
52,389

$
-

$
2,116

$
54,505

December 31, 2020

Level 1

Level 2

Level 3

Total

Cash and cash equivalents

$
45,219

-

-

$
45,219

Restricted cash

9,200

-

-

9,200

Total

$
54,419

$
-

$
-

$
54,419

payout period. The change in the respective fair value ~~of the Company’s contingent liability~~ is included in selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss).

The following table reconciles the beginning and ending balances of the Company’s Level 3 contingent liability (in thousands):


	Six Months Ended June 30,
	2022			2021
Balance at beginning of period	$	2,121		$	—
Initial fair value of contingent liability		—			1,897
Cash payments		(558	)		—
Net change in fair value		(303	)		201
Balance at end of period	$	1,260		$	2,098

~~In conjunction with the~~ restructuring in Hanover, Germany and the headquarters relocation to Plano, Texas, we wrote down certain long-lived assets held and used to their fair value of $0.2 million, resulting in an impairment charge of $4.5 million, which was included in earnings for the period. The impaired long-lived assets primarily consisted of right-of-use assets, and we used estimated sub-lease payment data to fair value the respective assets. ~~We concluded that this fair value measurement should be categorized within Level 2.~~

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company's cash, cash equivalents and restricted cash consisted of financial deposits. Cash, cash equivalents and restricted cash held within the U.S. totaled $11.6 million and $22.3 million as of June 30, 2022 and December 31, 2021, respectively. Cash, cash equivalents and restricted cash held within the U.S. are held at FDIC insured depository institutions. Cash, cash equivalents and restricted cash held outside the U.S. totaled ~~$22.3~~$11.5 million and ~~$32.2~~$31.3 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Restricted cash consisted primarily of cash ~~restricted~~collateral for performance bonds and warranty ~~bonds and collateral for borrowings.~~bonds. Long-term restricted cash was ~~$0.2~~$0.2 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 and is included in other assets on the unaudited condensed consolidated balance sheets.

(5) Balance Sheet Details

Balance sheet detail as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 is as follows ~~(in~~(in thousands)::

~~Inventories~~

September 30, 2021

December 31, 2020

Raw materials

$
33,012

$
16,962

Work in process

832

1,486

Finished goods

24,426

21,124

Total inventories

$
58,270

$
39,572

Inventories


	June 30, 2022		December 31, 2021
Raw materials	$	46,954	$	34,512
Work in process		1,075		1,427
Finished goods		21,428		20,954
Total inventories	$	69,457	$	56,893

Inventories are stated at the lower of cost or net realizable value, with cost being computed based on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. ~~The Company had 0 inventories provided as collateral for borrowings from Export-Import Bank of Korea as of September 30, 2021 compared to $9.6 million as of December 31, 2020.~~

Property, plant and equipment


	September 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
Property, plant and equipment, net:
Machinery and equipment	$	13,866		$	13,656		$	16,600		$	14,278
Leasehold improvements		5,202			4,633			5,284			5,219
Computers and software		3,133			2,829			3,493			3,217
Furniture and fixtures		1,685			1,123			1,645			1,771
Construction in progress and other		2,386			716			1,000			2,937
		26,272			22,957			28,022			27,422
Less: accumulated depreciation and amortization		(16,794	)		(15,445	)		(18,063	)		(17,394	)
Less: government grants		(222	)		(366	)		(110	)		(186	)
Total property, plant and equipment, net	$	9,256		$	7,146		$	9,849		$	9,842

Depreciation expense associated with property, plant and equipment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$0.7~~$0.9 million and ~~$2.3~~$1.7 million, respectively. Depreciation expense associated with property, plant and equipment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$0.6~~$0.7 million and ~~$1.6~~$1.6 million, respectively.

The Company receives grants from certain foreign government entities mainly to support capital expenditures in the region. Such grants are deferred and are generally refundable to the extent the Company does not utilize the funds for qualifying

expenditures. Once earned, the Company records the grants as a contra amount to the assets and amortizes such amount over the useful lives of the related assets as a reduction to depreciation expense.

Warranties

The Company accrues warranty costs based on historical trends for the expected material and labor costs to provide warranty services. The Company's standard warranty period is one year from the date of shipment with the ability for customers to

purchase an extended warranty of up to five years from the date of shipment. The following table summarizes the activity related to the product warranty liability:

	Nine Months Ended September 30,
	2021			2020			Six Months Ended June 30,
Balance at the beginning of the period	$	1,522		$	1,610
							2022			2021
Balance at beginning of period							$	1,980		$	1,522
Charged to cost of revenue		636			341			183			469
Claims and settlements		(745	)		(1,026	)		(229	)		(491	)
Foreign exchange impact		68			(15	)		(53	)		63
Balance at the end of the period	$	1,481		$	910
Balance at end of period							$	1,881		$	1,563

Contract Balances

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 majority of the Company's performance obligations in its contracts with customers relate to contracts with duration of less than one ~~year.~~year.

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

Contract
assets

Contract
liabilities

December 31, 2020

$
6,182

$
6,871

September 30, 2021

3,466

7,536

Increase (decrease)

$
(2,716
)

$
665


	Contract assets			Contract liabilities
December 31, 2021	$	2,184		$	9,135
June 30, 2022		1,281			28,304
Increase (decrease)	$	(903	)	$	19,169

The decrease in contract assets during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was primarily due to invoicing that occurred in ~~2021~~2022 from unbilled balances reflected as contract assets as of December 31, ~~2020.~~2021.

The increase in contract liabilities during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was primarily due to ~~amounts being invoiced~~the assumption of ASSIA contract liabilities in conjunction with the ASSIA Acquisition. Refer to Note 2 Business Combinations for ~~certain customers that did not yet meet the revenue recognition criteria.~~further information. The amount of revenue recognized in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 that was included in the prior period contract liability balance was ~~$3.6~~$4.5 million. This revenue consists of services provided to customers who had been invoiced prior to the current year. We expect to recognize approximately ~~61%~~72% of outstanding contract liabilities as revenue over the next 12 months and the remainder thereafter.

The balance of contract cost deferred as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$0.5~~$0.9 million and $0.8 million, respectively. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company recorded ~~$0.4~~$0.5 million in amortization related to contract cost deferred as of December 31, ~~2020.~~2021.

(6) Goodwill and Intangible Assets

The following table summarizes the activity related to goodwill (in thousands):

September 30,

2021

2020

Balance at the beginning of the period, gross

$
4,980

$
4,980

Accumulated impairment at the beginning of the period

(1,003
)

(1,003
)
Goodwill from acquisitions

2,168

-

Balance at the end of the period

$
6,145

$
3,977


	June 30,
	2022			2021
Balance at beginning of period, gross	$	7,148		$	4,980
Accumulated impairment at beginning of period		(1,003	)		(1,003	)
Goodwill from acquisitions		22,803			1,698
Foreign exchange impact		29			—
Balance at end of period	$	28,977		$	5,675

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company recorded goodwill of ~~$1.9~~$22.8 million related to the ~~acquisition of Optelian and $0.2 million related to the acquisition of RIFT,~~ASSIA Acquisition, which was allocated to the Americas reporting unit. Refer to Note 2 Business Combinations for further information. ~~The accumulated impairment of goodwill was $1.0 million as of both September 30, 2021 and 2020.~~

Intangible assets consisted of the following (in thousands):


	June 30, 2022
	Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	10,807	$	(3,750	)	$	7,057
Customer relationships		18,230		(3,266	)		14,964
In-process research and development		890		(251	)		639
Tradenames		500		(4	)		496
Total intangible assets, net	$	30,427	$	(7,271	)	$	23,156


	September 30, 2021							December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Developed technology	$	5,007	$	(3,371	)	$	1,636	$	5,007	$	(3,464	)	$	1,543
Customer relationships		5,730		(2,730	)	$	3,000		5,730		(2,886	)		2,844
In-process research and development		890		(118	)	$	772		890		(162	)		728
Total intangible assets, net	$	11,627	$	(6,218	)	$	5,409	$	11,627	$	(6,512	)	$	5,115

December 31, 2020

Gross Carrying
Amount

Accumulated
Amortization

Net

Developed technology

$
3,060

$
(2,652
)

$
408

Customer relationships

5,240

(2,271
)

$
2,969

Total intangible assets, net

$
8,300

$
(4,923
)

$
3,377

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company recorded ~~$1.9~~$12.5 million, ~~$0.5~~$5.8 million and ~~$0.9~~$0.5 million in customer relationships, developed technology, ~~customer relationships~~ and ~~in-process research and development,~~tradenames, respectively, related to the ~~acquisitions of Optelian and RIFT.~~ASSIA Acquisition. Refer to Note 2 Business Combinations for further information.

~~The following table summarizes the activity related to intangible assets, net (in thousands):~~

September 30, 2021

2021

2020

Balance at the beginning of the period

$
3,377

$
12,381

Intangible assets from acquisitions

3,327

-

Less: amortization expense

(1,295
)

(2,331
)
Foreign exchange impact

-

294

Balance at the end of the period

$
5,409

$
10,344

Amortization expense associated with intangible assets for the ~~nine~~three and six months ended ~~September~~June 30, 2022 was $0.5 million and $0.8 million, respectively. Amortization expense associated with intangible assets for the three and six months ended June 30, 2021 ~~and 2020~~ was ~~$1.3~~$0.5 million and ~~$2.3~~$0.9 million, respectively.

The following table presents the future amortization expense of the Company’s intangible assets as of ~~September~~June 30, ~~2021~~2022 (in thousands):


Remainder of 2022	$	1,610
2023		3,220
2024		3,220
2025		3,220
2026		2,449
Thereafter		9,437
Total	$	23,156

Remainder of 2021

$
294

2022

1,177

2023

1,177

2024

1,177

2025

1,177

Thereafter

407

Total

$
5,409

(7) Debt

~~As of September 30, 2021,~~JPMorgan Credit Agreement

On February 9, 2022, the Company ~~had 0 debt obligations. During the first half of 2021,~~entered into a Credit Agreement (the “Credit Agreement”) with the Company, ~~paid off~~as borrower, certain subsidiaries of the ~~outstanding balance~~Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans (the "Revolving Credit Facility") in an aggregate principal amount of ~~debt with related parties, foreign banks~~up to $30.0 million, up to $15.0 million of which is available for letters of credit, and was scheduled to mature on February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other ~~lending institutions.~~ adjustments, plus $10.0 million.

On May 27, 2022, the Company entered into a First Amendment to Credit Agreement (the “Amendment”), which amends the Credit Agreement dated February 9, 2022 with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.

The ~~Company has no contractual~~Amendment, among other things, (1) provides for a term loan (the “Term Loan”) in an aggregate principal ~~payments due in~~amount of $25.0 million with a maturity date of May 27, 2027, (2) extends the ~~next five years.~~

~~The following tables summarize~~maturity date of the $30.0 million Revolving Credit Facility to May 27, 2025, (3) permits the ASSIA Acquisition, (4) modifies the applicable margin for borrowings under the Credit Agreement to be, at the Company’s ~~debt as of~~option, either (i) the ~~beginning of~~adjusted term SOFR rate plus a margin ranging from 3.0% to 3.5% per year or (ii) the ~~period (in thousands):~~

December 31, 2020

Short-term

Long-term

Total

Bank and Trade Facilities - Foreign Operations

$
13,787

$
—

$
13,787

Related Party

—

29,766

29,766

13,787

29,766

43,553

Less: unamortized deferred financing costs

—

(12
)

(12
)

$
13,787

$
29,754

$
43,541

~~Bank and Trade Facilities - Foreign Operations~~

~~During prior periods, certain of~~prime rate plus a margin ranging from 2.0% to 2.5% per year, in each case depending on the Company's foreign subsidiaries entered into financing arrangements with foreign banks and other lending institutions consisting primarily of revolving lines of credit, trade facilities, term loans and export development loans. As of December 31, 2020,Company’s leverage ratio, (5) modifies the Company had an aggregate outstanding balance of $13.8 million under such financing arrangements. The weighted average borrowing rates as of December 31, 2020 was 1.8%. During the first two quarters of 2021, the Company paid the entire outstanding balance under such financing arrangements. As of September 30, 2021, the Company had 0 borrowings outstanding from banks and other lending institutions.

~~As of December 31, 2020, the Company had$19.0 million available to draw under its~~ letter of credit ~~facilities with NongHyup Bank~~ fee such that it ranges from ~~and Korea Development Bank~~3.0~~. These letter of credit facilities expired in~~% to 3.5%, depending on the ~~third quarter of 2021.~~

~~Related Party Debt~~

~~During prior periods, certain~~Company’s leverage ratio, (6) modifies the commitment fee on the unused portion of the ~~Company's subsidiaries entered into term loan arrangements~~ Revolving Credit Facility to range from 0.25% to 0.35% per year, depending on the Company’s leverage ratio, (7) modifies the method of calculating the leverage ratio, and (8) modifies the financial covenants to (i) increase the maximum permitted leverage ratio to 3.00 to 1.00 through September 30, 2022, 2.50 to 1.00 thereafter

through September 30, 2023, and 2.00 to 1.00 thereafter and (ii) replace the minimum liquidity requirement with ~~DASAN Networks, Inc. (“DNI”).~~a minimum permitted fixed charge coverage ratio of ~~As of December 31, 2020,~~1.25 to 1.00.

On May 27, 2022, the Company ~~had an aggregate outstanding balance~~borrowed the full amount of ~~$29.8 million under such financing arrangements.~~ the Term Loan to finance the ASSIA Acquisition. In the first quarter of ~~2021,~~2022, the ~~entire outstanding~~Company capitalized $0.4 million of debt issuance cost related to execution of the Credit Agreement. Such cost is presented within other assets on the Company’s unaudited condensed consolidated balance sheet. In the second quarter, the Company capitalized $0.3 million of debt issuance cost related to execution of the Amendment. Such cost is presented as a direct deduction from the long-term debt obligation on ~~these term loans~~the Company’s unaudited condensed consolidated balance sheet. As of June 30, 2022, the Company's long-term debt obligation was ~~repaid.~~$

~~Interest expense on related party borrowings was $0.1~~23.4 million, net of the current portion of $1.3 million, and ~~$0.8~~unamortized issuance cost of $0.3 million. There was 0 amount outstanding under the $30.0 million ~~for~~Revolving Credit Facility as of June 30, 2022, and the ~~nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021,~~full $30.0 million was available to the Company. The Company had 0 ~~borrowings outstanding from related parties.~~ debt obligation as of December 31, 2021.

~~PNC Credit Facilities~~

~~On February 27, 2019,~~The future principal maturities of the ~~Company entered into a Revolving Credit,~~ Term Loan ~~Guaranty and Security Agreement~~for each of the next five years are as follows (in thousands):


Remainder of 2022	$	625
2023		1,250
2024		1,563
2025		1,875
2026		2,188
Thereafter		17,499
Total	$	25,000

The Company was in compliance with ~~PNC Bank, National Association (“PNC”) and Citibank, N.A.~~all debt covenants as ~~lenders, and PNC as agent for the lenders (the “PNC Credit Facilities”).~~

On March 26, 2020, the Company paid the outstanding term loan borrowings in full and terminated the PNC Credit Facilities. In association with this debt repayment, the Company recorded a loss on extinguishment of ~~debt of $1.4 million during the three months ended March 31, 2020.~~June 30, 2022.

(8) Employee Benefit Plans

Defined Contribution Plans

~~In the U.S., the~~The Company maintains a 401(k) plan for its employees in the US whereby eligible employees may contribute up to a specified percentage of their earnings, on a pretax basis, subject to the maximum amount permitted by the Internal Revenue Code. Under the 401(k) plan, the Company made discretionary contributions to the plan in 2021. For the three and ~~nine~~six months ended ~~September~~June 30, 2022, the Company recorded an expense of $0.2 million and $0.4 million, respectively. For the three and six months ended June 30, 2021, the Company recorded an expense of ~~$0.1~~$0.2 million and ~~$0.4~~$0.3 million, ~~respectively, compared to 0 expense for the three and nine months ended September 30, 2020.~~respectively.

The Company maintains a defined contribution plan for its employees in Korea. Under the defined contribution plan, the Company contributes the equivalent of ~~8.3%~~8.3% of an employee's gross salary into the plan. For the three and six months ended ~~September~~June 30, ~~2021 and September 30, 2020,~~2022, the Company recorded an expense of ~~$0.3~~$0.3 million and ~~$0.4~~$0.6 million, respectively. For the ~~nine~~three and six months ended ~~September~~June 30, 2021, ~~and September 30, 2020,~~ the Company recorded an expense of ~~$0.9~~$0.3 million and ~~$1.0~~$0.6 million, respectively.

Defined Benefit Plans

The Company sponsors defined benefit plans for its employees in Germany and Japan. Defined benefit plans provide pension benefits based on compensation and years of service. The Germany plans were frozen as of September 30, 2003 and have not been offered to new employees after that date. The Company has recorded the underfunded status as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, respectively,~~2021 as a long-term liability on the unaudited condensed consolidated balance sheets. The accumulated benefit obligation for the plans in Germany and Japan was ~~$18.7~~$15.1 million and ~~$20.1~~$16.5 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Periodic benefit costs for the three and six months ended ~~September~~June 30, ~~2021~~2022 were $0.1 million and ~~2020 were $0.1~~$0.2 million, respectively. Periodic benefit costs for the ~~nine~~three and six months ended ~~September~~June 30, 2021 were $0.1 million and ~~2020 were $0.2~~$0.2 million, respectively.

The Company holds life insurance contracts, with the Company as beneficiary, in the amount of ~~$3.3~~$2.4 million as of ~~September~~June 30, ~~2021~~2022 and ~~$3.5~~$2.9 million as of December 31, ~~2020,~~2021, respectively, related to individuals under the pension plans. The Company records these insurance contracts based on their cash surrender value at the balance sheet dates. These insurance contracts are classified as other assets on the Company’s unaudited condensed consolidated balance sheet. The Company intends to use any proceeds from these policies to fund the pension plans. However, since the Company is the beneficiary on these policies, these assets have not been designated pension plan assets.

(9) Restructuring and Other Charges

For the nine months ended September 30, 2021, the Company incurred restructuring and other charges of approximately $12.1 million mainly related to DZS GmbH. The restructuring and other charges consisting of termination-related benefits of $8.5 million, an impairment of long-lived assets charge of $2.7 million mainly related to right-of-use assets from operating leases, professional services of $0.8 million, and $0.1 million of other charges. The termination-related benefits are comprised of statutory benefits of $2.0 million and one-time severance obligations of $6.5 million.

On March 8, 2021, the Company made the strategic decision to transition DZS GmbH to a sales and research and development center by the end of 2021. On July 15, 2021, the Company came to an agreement with the works council and entered into a social plan that covers statutory benefits and one-time severance obligations. The Company accounted for the statutory benefit obligations in accordance with ASC 712, ~~Nonretirement Postemployment Benefits, and recognized an expense when probable and estimable. The Company accounted for the one-time severance in accordance with ASC 420,~~ ~~Exit or Disposal Cost Obligations~~, and recognized the expense when the final terms of the benefit arrangement were communicated to the affected employees. The Company incurred restructuring and other charges of approximately $6.6 million and $11.8 million for the three and nine months ended September 30, 2021, respectively, consisting primarily of termination-related benefits.

In ~~May~~ 2021, the Company made the strategic decision to relocate manufacturing ~~function~~functions of DZS GmbH and Optelian to Seminole, Florida and ~~eliminate redundant workforces.~~to transition the above subsidiaries to sales and research and development centers. The Company incurred approximately $13.1 million of restructuring and other charges since the beginning of ~~approximately $0.3 million for~~its restructuring activities in the ~~nine~~first quarter of 2021. For the three and six months ended ~~September~~June 30, ~~2021,~~2022, the Company recorded $0.4 million and $0.8 million of restructuring related costs, respectively, consisting primarily of ~~termination-related benefits. NaN such~~logistics costs ~~were incurred during~~and professional services related to legal and accounting support. For the three months ended ~~September 30, 2021.~~

~~As of September~~June 30, 2021, the Company ~~had $7.4~~recorded a $0.9 million reduction to restructuring related costs due to the negotiated decrease of the employee termination benefits. For the six months ended June 30, 2021 the Company recorded $5.3 million of ~~accrued liabilities~~restructuring related costs, consisting primarily of severance and other termination related benefits of $2.4 million, an impairment of long-lived assets charge of $2.7 million primarily related to ~~the restructuring costs.~~right-of-use assets from operating leases, and $0.2 million of other charges. The Company paid in full its liability related to termination benefits as of June 30, 2022.

(10) Related Party Transactions

Related Party Debt and Guarantees

As of September 30, 2021, the Company had 0 outstanding borrowings from related parties compared to $29.8 million as of December 31, 2020. See Note 7 Debt for further information about the Company’s related party debt.

The following table sets forth payment guarantees of the Company's obligations as of ~~September~~June 30, ~~2021~~2022 that have been provided by ~~DNI.~~Dasan Networks, Inc. ("DNI"). DNI owns approximately ~~37.1%~~36.3% of the outstanding shares of the Company's common stock. The amount guaranteed exceeds the principal amounts of outstanding obligations due to collateral requirements by the banks.


Guarantor	Amount Guaranteed (in thousands)		Description of Obligations Guaranteed
Dasan Networks, Inc.	$	5,031	Payment guarantee to Industrial Bank of Korea

Guarantor

Amount Guaranteed
(in thousands)

Description of Obligations Guaranteed
DNI

6,077

Payment guarantee to Industrial Bank of Korea
DNI

1,621

Payment guarantee to Shinhan Bank

$
7,698

Other Related Party Transactions

Sales, cost of revenue, research and product development, selling, marketing, general and administrative, interest expense and other expenses to and from related parties were as follows (in thousands) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020:~~2021:


	Three Months Ended June 30, 2022
Counterparty	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
Dasan Networks, Inc.	$	718	$	629	$	—	$	316		—	$	16
DS Commerce, Inc.		—		11		2		8		—		—
	$	718	$	640	$	2	$	324	$	—	$	16

	Three Months Ended June 30, 2021
Counterparty	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
Dasan Networks, Inc.	$	141	$	92	$	262	$	389	$	—	$	53
Dasan Invest Co., Ltd.		—		10		45		20		—		—
	$	141	$	102	$	307	$	409	$	—	$	53

Three Months Ended September 30, 2021

Counterparty

Sales

Cost of
revenue

Research
and product
development

Selling,
marketing,
general and
administrative

Interest
expense

Other
expenses

DNI

$
54

$
45

$
253

$
394

$
—

$
42

Dasan Invest*

—

10

43

19

—

—

$
54

$
55

$
296

$
413

$
—

$
42

Three Months Ended September 30, 2020

Counterparty

Sales

Cost of
revenue

Research
and product
development

Selling,
marketing,
general and
administrative

Interest
expense

Other
expenses

DNI

$
552

$
485

$
306

$
523

$
324

$
93

$
552

$
485

$
306

$
523

$
324

$
93


	Six Months Ended June 30, 2022
Counterparty	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
Dasan Networks, Inc.	$	916	$	806	$	90	$	633		—	$	33
DS Commerce, Inc.		—		22		3		19		—		—
	$	916	$	828	$	93	$	652	$	—	$	33

	Six Months Ended June 30, 2021
Counterparty	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
Dasan Networks, Inc.	$	1,911	$	1,746	$	523	$	791	$	132	$	138
Dasan Invest Co., Ltd.		—		20		91		38		—		—
	$	1,911	$	1,766	$	614	$	829	$	132	$	138

Nine Months Ended September 30, 2021

Counterparty

Sales

Cost of
revenue

Research
and product
development

Selling,
marketing,
general and
administrative

Interest
expense

Other
expenses

DNI

$
1,965

$
1,791

$
776

$
1,185

$
132

$
180

Dasan Invest*

—

30

134

57

—

—

$
1,965

$
1,821

$
910

$
1,242

$
132

$
180

Nine Months Ended September 30, 2020

Counterparty

Sales

Cost of
revenue

Research
and product
development

Selling,
marketing,
general and
administrative

Interest
expense

Other
expenses

DNI

$
2,077

$
1,887

$
690

$
1,183

$
763

$
263

Dasan Invest*

—

20

81

55

—

—

$
2,077

$
1,907

$
771

$
1,238

$
763

$
263

* Dasan Invest indirectly holds 3.4% of DNI’s shares.

The Company has entered into sales agreements with DNI to sell certain services and finished goods produced by the Company. TheThe Company also has an agreement with DNI in which DNI acts as a sales channel to third party customers. The above transactions are included in sales and cost of revenue on the unaudited condensed consolidated statement of comprehensive income (loss). Sales to DNI are recorded net of royalty fees for a sales channel arrangement.

DNS California shares human resources, treasury and other administrative support with DNI. As such, the Company entered into certain service sharing agreements with DNI and certain of its subsidiaries for the shared office space and shared administrative services.

DNS Korea has ~~two separate~~a lease ~~agreements~~agreement with DNI related to the lease of a warehouse facility. DNS Korea also had a separate office ~~space~~lease agreement with DNI. In the first quarter of 2022, DNI sold the office building to the unrelated third party, and ~~warehouse facilities.~~the respective lease was reassigned to the new landlord. Operating lease cost related to ~~these~~the DNI leases totaled ~~$0.4~~$0.1 million and $0.4 million for the three and six months ended ~~September~~June 30, ~~2021 and 2020,~~2022, respectively. Operating lease cost related to ~~these~~the DNI leases totaled ~~$1.3~~$0.5 million and $0.9 million for the ~~nine~~three and six months ended ~~September~~June 30, 2021, ~~and 2020,~~ respectively. Operating lease expense is allocated between cost of revenue, ~~research and product development, and selling, marketing, general and administrative expenses~~ ~~on the unaudited condensed consolidated statement of comprehensive income (loss)~~. As of September 30, 2021, the right-of-use asset and operating lease liability related to these leases were $6.7 million. As of December 31, 2020, the right-of-use asset and operating lease liability related to these leases were $8.6 million.

~~The Company has an agreement with Dasan Invest to provide IT services for the Company. The respective expense is allocated between cost of revenue,~~ research and product development, and selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss). Deposits for the DNI office lease were included in other assets on the consolidated balance sheets as of December 31, 2021.

DNS Korea had an agreement with Dasan Invest Co., Ltd. to provide IT services for the Company. The agreement was terminated in the fourth quarter of 2021 and the new agreement was signed with DS Commerce, Inc. Both entities have an affiliation with DZS board members. The expense related to the above IT services is allocated between cost of revenue, research and product development, and selling, marketing, general and administrative expenses on the unaudited condensed consolidated statement of comprehensive income (loss).

Interest expense represents interest paid to DNI for the related party debt. ~~Refer to Note 7 Debt for further information.~~The respective debt was fully repaid in the first quarter of 2021.

Other expenses represent ~~expenses to~~charges from DNI for its payment guarantees relating to the Company's borrowings. The Company pays DNI a guarantee fee which is calculated as ~~0.9%~~0.9% of the guaranteed amount. Refer to the table above for further information about obligations guaranteed by DNI.

Balances of Receivables and Payables with Related Parties

Balances of receivables and payables arising from sales and purchases of goods and services with related parties as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 were included in the following balance sheet captions on the unaudited condensed consolidated balance sheets, as follows (in thousands):


	As of June 30, 2022
Counterparty	Account receivables		Other receivables		Other assets		Accounts payable
Dasan Networks, Inc.	$	761	$	466	$	—	$	405
DS Commerce, Inc.		—		—		—		16
	$	761	$	466	$	—	$	421


	As of December 31, 2021
Counterparty	Account receivables		Other receivables		Other assets		Accounts payable
Dasan Networks, Inc.	$	181	$	215	$	691	$	785
DS Commerce, Inc.		—		—		—		46
	$	181	$	215	$	691	$	831

As of September 30, 2021

Counterparty

Account
receivables

Other
receivables

Other assets

Loans Payable

Accounts
payable

DNI

$
106

$
215

$
693

$
—

$
564

Dasan Invest*

—

—

—

—

26

$
106

$
215

$
693

$
—

$
590

As of December 31, 2020

Counterparty

Account
receivables

Other
receivables

Other assets

Loans
Payable

Accounts
payable

DNI

$
2,278

$
247

$
755

$
29,754

$
1,552

Dasan Invest*

—

—

—

—

32

$
2,278

$
247

$
755

$
29,754

$
1,584

* Dasan Invest indirectly holds 3.4% of DNI’s shares.

(~~11) Common Stock~~

~~On January 26, 2021, the Company sold~~ ~~4.6 million shares of common stock (including~~ 0.6 million shares issued pursuant to the underwriters’ option to purchase additional shares) at a price of $14.00 per share in an underwritten public offering. The equity offering closed on January 29, 2021 and resulted in gross proceeds to the Company of approximately $64.4 million and net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, of approximately $59.5 million. The Company used a portion of the net proceeds from the equity offering to pay off the remaining outstanding balance of debt with related parties.

~~(12)~~(11) Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income (loss) per share gives effect to common stock equivalents; however, potential common stock equivalents are excluded if their effect is antidilutive. Potential common stock equivalents are composed of incremental shares of common stock issuable upon the exercise of stock options and the vesting of restricted stock units. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, basic and dilutive loss per share are the same.

The following table is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per share calculation (in thousands, except per share data) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022, and ~~2020:~~2021:


	Three months ended June 30,						Six months ended June 30,
	2022			2021			2022			2021
Net income (loss)	$	(6,028	)	$	(3,279	)	$	(9,076	)	$	(26,504	)
Weighted average number of shares outstanding:
Basic		27,657			26,982			27,593			26,120
Effect of dilutive securities:
Stock options, restricted stock units and share awards		—			—			—			—
Diluted		27,657			26,982			27,593			26,120
Net income (loss) per share:
Basic	$	(0.22	)	$	(0.12	)	$	(0.33	)	$	(1.01	)
Diluted	$	(0.22	)	$	(0.12	)	$	(0.33	)	$	(1.01	)

Three months ended September 30,

Nine months ended September 30,

2021

2020

2021

2020

Net income (loss)

$
(5,896
)

$
(115
)

$
(32,400
)

$
(9,042
)
Weighted average number of shares outstanding:

Basic

27,201

21,592

26,484

21,532

Effect of dilutive securities:

Stock options, restricted stock units and share awards

—

—

—

—

Diluted

27,201

21,592

26,484

21,532

Net income (loss) per share:

Basic

$
(0.22
)

$
(0.01
)

$
(1.22
)

$
(0.42
)
Diluted

$
(0.22
)

$
(0.01
)

$
(1.22
)

$
(0.42
)

The following table sets forth potential common stock that is not included in the diluted net income (loss) per share calculation above because their effect would be anti-dilutive for the periods indicated (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020		2022		2021			2022	2021
Outstanding stock options		389		148		651		286		948		703		943	673
Unvested restricted stock units		312		12		232		16		214		228		236	212

~~(13)~~(12) Leases

The Company leases certain properties and buildings (including manufacturing facilities, warehouses, and office spaces) and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists of operating leases which expire at various dates through 2028.

~~In August 2020,~~Assets and liabilities related to operating leases are included in the consolidated balance sheets as right-of-use assets from operating leases, operating lease liabilities - current and operating lease liabilities - non-current. The Company recognizes minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. The Company amortizes this expense over the term of the lease beginning with the date of initial possession, which is the date the lessor makes an underlying asset available for use. For the three and six months ended June 30, 2022, the Company ~~completed its relocation~~recognized lease expense of ~~its corporate headquarters from Alameda, California to Plano, Texas~~$0.9 million and ~~established a new U.S.-based Engineering Center of Excellence in Plano. In September 2020,~~$2.0 million, respectively. For the ~~Company entered into a lease agreement for additional office space at its headquarters in Plano, Texas. On the commencement date of this lease in March~~three and six months ended June 30, 2021, the Company recognized ~~an aggregate of approximately $1.7 million in right-of-use assets and operating lease liabilities in connection with these leases.~~

During the nine months ended September 30, 2021, the Company recorded $4.2 million in impairment charges on the right-of-use assets, including $2.5 million related to the restructuring in Hanover, Germany and $1.7 million related to the headquarters relocation to Plano, Texas. See Note 9 Restructuring and Other Charges for further information about the Company's restructuring activities in Hanover, Germany.

~~The components of~~ lease expense ~~were as follows (in thousands):~~

of $1.5 million and $3.1 million, respectively.

Three months ended September 30,

Nine months ended September 30,

2021

2020

2021

2020

Operating lease cost

$
952

$
1,335

$
3,301

$
4,024

Short-term lease cost

382

252

1,146

752

Total net lease cost

$
1,334

$
1,587

$
4,447

$
4,776

~~Variable lease cost was 0t significant for the three and nine months ended September 30, 2021 and 2020.~~

~~Supplemental cash flow information related to the Company’s operating leases was as follows (in thousands):~~

Three months ended September 30,

Nine months ended September 30,

2021

2020

2021

2020

Operating cash outflows from operating leases

$
1,923

$
1,357

$
4,690

$
3,903

Right-of-use assets obtained in exchange for operating lease obligations

409

—

2,283

1,364

The following table presents the weighted average remaining lease term and weighted average discount rates related to the Company’s operating leases as of September 30, 2021 and December 31, 2020, respectively (in thousands, excluding years and percentages):

September 30, 2021

December 31, 2020

Lease Assets and Liabilities

Assets:

Right-of-use assets from operating leases

$
12,932

$
18,483

Liabilities:

Operating lease liabilities - current

$
4,118

$
4,494

Operating lease liabilities - non-current

12,694

15,959

Total operating lease liabilities

$
16,812

$
20,453

Weighted average remaining lease term

4.4 years

4.6 years

Weighted average discount rate

5.5
%

5.7
%

The following table presents the maturity of the Company’s operating lease liabilities as of ~~September~~June 30, ~~2021~~2022 (in thousands):


Remainder of 2022	$	2,750
2023		5,237
2024		4,818
2025		3,453
2026		2,108
Thereafter		1,699
Total operating lease payments		20,065
Less: imputed interest		(2,210	)
Total operating lease liabilities	$	17,855

Remainder of 2021

$
1,701

2022

4,877

2023

4,442

2024

3,866

2025

2,531

Thereafter

2,457

Total operating lease payments

19,874

Less: imputed interest

(3,062
)
Total operating lease liabilities

$
16,812

In the normal course of operations, from time to time, the Company arranges for the issuance of various types of performance bonds, such as performance, warranty, and bid bonds, in the form of bank guarantees or surety bonds. These instruments are arrangements under which the financial institution or surety provides a financial guarantee that the Company will perform in accordance with contractual or legal obligations. As of ~~September~~June 30, ~~2021,~~2022, the Company had ~~$7.6~~$9.8 million of performance bonds in the form of bank guarantees or surety bonds guaranteed by third parties.

During the first quarter of 2022, the Company received a notice letter from the Office of the Commissioner of Customs of the India Department of Revenue (the “Notice”) claiming the Company had mis-declared and wrongly classified certain products imported to India by the Company at the time of clearance of customs. The Notice claims that due to such mis-declaration and wrong classification of the imported products, the Company and its contract manufacturer in India underpaid duties approximating $3.9 million related to such products. The Company ~~has, as part~~intends to vigorously defend itself in this matter. As we have not yet received the full contents of the ~~Optelian purchase agreement,~~Notice, we are unable to estimate a ~~contingent liability payable~~potential loss related to this matter, if any, which could range up to the ~~sellers. The contingent consideration is payable based on~~full amount of the ~~achievement of certain future performance targets during~~unpaid duties, plus penalties and interest.

In addition to the ~~three-year~~ period following the acquisition date. The Company records changes in the fair value of contingent consideration liabilities within operating expenses in the unaudited condensed consolidated statement of operations during the period in which a change in the estimate of fair value is made. Refer to Note 2 Business Combinations for further information.

~~From~~Notice discussed above, from time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company records an accrual for legal contingencies that it has determined to be probable to the extent that the amount of the loss can be reasonably estimated. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations and cash flows of the reporting period in which the ruling occurs, or future periods.

(14) Income Taxes

Income tax ~~expense~~benefit for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was approximately ~~$0.7~~$2.9 million and ~~$2.0~~$4.3 million ~~respectively,~~ on pre-tax loss of ~~$5.2~~$9.0 million and pre-tax loss of ~~$30.4~~$13.3 million, respectively. Income tax expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was approximately ~~$1.6~~$0.5 million and ~~$2.5~~$1.4 million respectively, on pre-tax ~~income~~loss of ~~$1.5 million~~$2.8 and pre-tax loss ~~$6.6~~of $25.1 million, respectively.

As of ~~September~~June 30, ~~2021,~~2022, the income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America, ~~and~~ EMEA and ~~taxable~~Asia, as well as foreign and state income ~~generated by the Company’s wholly owned foreign subsidiaries in Asia.~~tax rate differentials.

The total amount of unrecognized tax benefits ~~including interest and penalties, at September~~as of June 30, ~~2021~~2022 was ~~$1.3~~$4.2 million. There were 0 significant changes to unrecognized tax benefits during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months.

The Company is a global provider of ultra-broadband network access solutions and communications platforms deployed by advanced Tier 1, national and regional service providers and enterprise customers. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single operating segment. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a consolidated basis accompanied with disaggregated revenues by geographic region for purposes of making operating decisions and assessing financial performance.

The Company attributes revenue from customers to individual countries based on location shipped. Refer to Note 1(e) Disaggregation of Revenue for the required disclosures on geographical concentrations and revenues by source.

The Company's property, plant and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands) as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
United States	$	5,406	$	2,878	$	6,755	$	6,105
Korea		2,172		2,472		1,913		2,367
Japan		844		952		644		799
Canada		400		—		232		280
Germany		337		761		139		210
Other		97		83		166		81
	$	9,256	$	7,146	$	9,849	$	9,842

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, ~~the negative of such words,~~ and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items in future periods; ~~our ability to satisfy our short- and long-term cash requirements;~~ anticipated growth and trends in our business, industry or key markets; cost synergies, growth opportunities and other potential financial and operating benefits of our acquisitions; future growth and revenues from our products; our plans and our ability to refinance or repay our existing indebtedness prior to the applicable maturity dates; our ability to access ~~other~~ capital to fund our future operations; future economic conditions and performance; the impact of the global outbreak of ~~COVID-19;~~COVID-19, also known as the coronavirus; the impact of interest rate and foreign currency fluctuations; anticipated performance of products or services; competition; plans, objectives and strategies for future operations, including our pursuit or strategic acquisitions and our continued investment in research and development; other characterizations of future events or circumstances; and all other statements that are not statements of historical fact, are forward-looking statements within the meaning of the Securities Act and the Exchange Act. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Readers are cautioned not to place undue reliance on such forward-looking statements, which are being made as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include ~~but are not limited to:~~factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K, as well as factors described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (the “SEC”).

You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement.

We are a global provider of ~~packet-based mobile transport, broadband~~ access ~~network orchestration~~ and ~~cloud-native automation solutions deployed by advanced Tier I, national~~optical networking infrastructure and regional service providers and enterprise customers. Our solutions are deployed worldwide. Our intelligent-edge solutions are focused on creating significant value for our customers by delivering innovativecloud software solutions that ~~empower global communication advancement by shaping~~enable the ~~internet connection experience.~~emerging hyper-connected, hyper-broadband world and broadband experiences. The Company provides a wide array of reliable, cost-effective networking technologies and software to a diverse customer base.

We research, develop, test, sell, manufacture and support platforms in the areas of mobile transport and fixed broadband access, as discussed below. We have extensive regional development and support centers around the world to support our customer needs.

Our ~~network access~~ solutions and ~~communications~~ platforms portfolio include products in ~~Mobile Transport~~the Access Edge, Subscriber Edge, Optical Edge, and ~~Fixed Broadband~~ Cloud Software.

~~We list in the~~The table below presents the unaudited condensed consolidated statement of (loss) income with year-over-year changes (in thousands except percent change).

The table below presents the unaudited condensed consolidated statement of (loss) income as a percentage of total net revenue for the periods indicated.


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
Net revenue		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%
Cost of revenue		64	%		70	%		65	%		68	%		73	%		67	%		69	%		66	%
Gross profit		36	%		30	%		35	%		32	%		27	%		33	%		31	%		34	%
Operating expenses:
Research and product development		13	%		10	%		14	%		13	%		14	%		14	%		14	%		14	%
Selling, marketing, general and administrative		22	%		18	%		28	%		21	%		23	%		22	%		23	%		31	%
Restructuring and other charges		8	%		—			5	%		—			—			(1	)%		1	%		3	%
Impairment of long-lived assets		—			—			1	%		—			—			—			—			1	%
Amortization of intangible assets		—			—			—			—			1	%		—			—			—
Total operating expenses		43	%		28	%		48	%		34	%		38	%		35	%		38	%		49	%
Operating income (loss)		(7	)%		2	%		(13	)%		(2	)%		(11	)%		(2	)%		(7	)%		(15	)%
Interest income		—			—			—			—			—			—			—			—
Interest expense		—			—			—			(1	)%		—			—			—			—
Loss on extinguishment of debt		—			—			—			—
Other income (expense), net		1	%		—			1	%		—			—			—			(1	)%		—
Income (loss) before income taxes		(6	)%		2	%		(12	)%		(3	)%		(11	)%		(2	)%		(8	)%		(15	)%
Income tax provision (benefit)		1	%		2	%		1	%		1	%		(3	)%		1	%		(3	)%		1	%
Net income (loss)		(7	)%		—			(13	)%		(4	)%		(8	)%		(3	)%		(5	)%		(16	)%

For the three months ended ~~September~~June 30, ~~2021,~~2022, product revenue ~~decreased~~increased by ~~6.7%~~6.9% or ~~$6.0~~$5.4 million to ~~$82.9~~$83.3 million from ~~$88.9~~$77.9 million in the same period last year. The ~~decrease~~increase in product revenue during the period was primarily attributable to higher spending levels from our major customers in Asia. Service and software revenue represents revenue from maintenance and other services associated with product shipments as well as software revenue from the ~~very strong prior year results for our mobile transport products.~~ date of the ASSIA Acquisition. The increase in service and software revenue was primarily due to the increased product sales and revenue related to the ASSIA Acquisition.

For the ~~three~~six months ended ~~September~~June 30, ~~2021, service and other revenue of $5.5 million increased by 10.0% partly due to increased product sales.~~

~~For the nine months ended September 30, 2021,~~2022, product revenue increased by ~~19.9%~~1.0% or ~~$39.3~~$1.6 million to ~~$237.1~~$155.8 million from ~~$197.8~~$154.2 million in the same period last year. The increase in product revenue during the period was primarily attributable to increased sales of our mobile transport and fixed broadband connectivity products and partly as a result of recovering from the impacts of the COVID-19 ~~pandemic~~pandemic. The increase in ~~the first half of 2020. For the nine months ended September 30, 2021,~~ service and ~~other~~software revenue ~~of $15.1 million increased by 7.1% partly~~was primarily due to the increased product ~~sales.~~sales and revenue related to the ASSIA Acquisition.

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

Our geographic diversification reflects the combination of market demand, a strategic focus on capturing market share through new customer wins and new product introductions.

From a geographical perspective, the ~~decrease in net revenue~~ ~~for the three months ended September 30,~~ ~~2021 was attributable to decreased revenue in Asia primarily attributable to the very strong prior year results. The~~ increase in net revenue for the ~~nine~~

three and six months ended ~~September~~June 30, ~~2021~~2022 was attributable to increased revenue in ~~all regions driven by our enhanced go-to-market strategy~~Asia and ~~recovery from~~Americas. Revenue fluctuation during the ~~impacts of~~three and six months period is primarily attributable to the ~~early onset of the COVID-19 pandemic~~changes in the ~~first quarter of 2020.~~spending levels from our major customers in the respective regions.

For the three and six months ended June 30, 2022, one customer accounted for 13% of net revenue. For the three months ended ~~September~~June 30, 2021, two customers accounted for ~~15%~~22% and ~~11%~~14% of net revenue, respectively. For the ~~nine~~six months ended ~~September~~June 30, 2021, two customers accounted for ~~18%~~20% and 12% of net revenue, respectively.~~For the three months ended September 30, 2020, two customers accounted for 23% and 12% of net revenue, respectively. For the nine months ended September 30, 2020,~~ ~~one customer accounted for 16% of net revenue.~~

We anticipate that our results of operations in any given period may depend to a ~~large~~significant extent on sales to a small number of large customers. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.

Total cost of revenue ~~decreased 14.5%~~increased by 18.9% to ~~$56.2~~$66.1 million for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$65.8~~$55.6 million for the three months ended ~~September~~June 30, ~~2020.~~2021. Total cost of revenue was ~~63.6%~~72.6% of net revenue for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~70.0%~~67.3% of net revenue for the three months ended ~~September~~June 30, ~~2020,~~2021, which resulted in an ~~increase~~decrease in gross profit percentage to ~~36.4%~~27.4% for the three months ended ~~September~~June 30, ~~2021~~2022 from ~~30.0%~~32.7% for the three months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase in total cost of revenue was primarily due to an increase in revenue and fees paid to expedite certain product components, while the decrease in gross profit percentage was primarily due to the change in number and mix of products sold, including the geographic mix of those ~~sales.~~sales, negative exchange rate impacts on revenues and such expedite fees.

Total cost of revenue increased ~~14.4%~~by 7.2% to ~~$164.8~~$116.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$144.0~~$108.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Total cost of revenue was ~~65.3%~~69.2% of net revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~67.9%~~66.3% of net revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, which resulted in an ~~increase~~decrease in gross profit percentage to ~~34.7%~~30.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 from ~~32.1%~~33.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The increase in total cost of revenue was primarily due to an increase in revenue and fees paid to expedite certain product components, while the ~~increase~~decrease in gross profit percentage was primarily due to the change in number and mix of products sold, including the geographic mix of those ~~sales.~~sales, negative exchange rate impacts on revenues and such expedite fees.

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

Expenses:Research and product development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations.

Research and product development expenses increased by ~~29.6%~~3.2% to ~~$11.7~~$12.3 million for the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$9.0~~$12.0 million for the three months ended ~~September~~June 30, ~~2020.~~2021. Research and product development expenses increased by ~~27.7%~~4.8% to ~~$34.8~~$24.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$27.2~~$23.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The increase in research and product development expenses was primarily due to strategic hiring decisions in research, development, and product line management ~~in the second half of 2020 and into the first half of 2021~~ with the intent to accelerate growth and capture market ~~share.~~share and the ASSIA Acquisition.

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

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

Selling, marketing, general and administrative expenses increased by ~~16.3%~~12.4% to ~~$19.5~~$20.5 million for the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$16.8~~$18.3 million for the three months ended ~~September~~June 30, ~~2020.~~2021. The increase was primarily due to strategic hiring decisions across sales and administration ~~in the second half of 2020 and into the first half of 2021~~ with the intent to accelerate growth and capture market ~~share, along with the full quarter impact of the Optelian and Rift acquisitions.~~share.

Selling, marketing, general and administrative expenses ~~increased~~decreased by ~~60.1%~~23.6% to ~~$69.6~~$38.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$43.5~~$50.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~increase in selling, marketing, general and administrative expenses~~decrease was primarily due to ~~the increase in allowance for doubtful accounts for one customer in India by~~ $14.2 million of bad debt expense recorded in the first quarter of ~~2021.~~2021 for one customer in India. Refer to Note 1 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information on the bad debt expense. The ~~increase~~above impact was ~~also~~ partially ~~due to~~offset by strategic hiring decisions across sales and administration ~~in the second half of 2020 and into the first half of 2021~~ with the intent to accelerate growth and capture market ~~share, along with the impact of the Optelian and Rift acquisitions.~~share.

Charges:Restructuring and other charges for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~were $12.1 million and~~ relate primarily to the strategic decision to transition DZS GmbH and Optelian to a sales and research and development ~~center by~~centers. For the ~~end~~three and six months ended June 30, 2022, the Company recorded $0.4 million and $0.8 million of ~~2021. During July~~restructuring related costs, respectively, consisting primarily of logistics costs and professional services related to legal and accounting support. For the six months ended June 30, 2021, the Company ~~and works council agreed to the terms~~recorded $5.3 million of ~~and entered into a social plan that included employee termination benefits in conjunction with the~~ restructuring ~~in Germany. The Company accounted for the one-time employee termination benefits when the final terms~~related costs, consisting primarily of ~~the benefit arrangement were communicated to the affected employees in the third quarter of 2021, as reflected in the increase to restructuring~~severance and other ~~charges in the statement~~termination related benefits of ~~operations during~~$2.4 million, an impairment of long-lived assets charge of $2.7 million primarily related to right-of-use assets from operating leases, and $0.2 million of other charges. For the three months ended ~~September~~June 30, 2021, the Company recorded a $0.9 million reduction in restructuring related costs due to the negotiated decrease of ~~$6.7 million.~~the employee termination benefits. See Note 9 Restructuring and Other Charges of the Notes to Unaudited Condensed Consolidated Financial Statements, ~~included in this Quarterly Report on Form 10-Q~~ for further information.

Assets:Impairment of long-lived assets for the ~~nine~~six months ended ~~September~~June 30, 2021 was $1.7 million ~~and related to~~for the right-of use assets from operating leases abandoned in connection with the relocation of the headquarters ~~relocation~~ to Plano, ~~Texas~~.Texas. No impairment was recorded during the ~~three~~six months ended ~~September~~June 30, ~~2021. See Note 13 Leases~~2022.

Interest Income (Expense), net: Interest income (expense) relates mainly to earnings from our cash and cash equivalents, interest expense associated with the credit facilities and amortization of debt issuance costs associated with obtaining such credit facilities. For the ~~Notes~~three and six months ended June 30, 2022, the Company recorded $0.2 million and $0.3 million of interest expense, net, respectively. For the three and six months ended June 30, 2021, the Company recorded $0.1 million and $0.2 million of interest expense, net, respectively.

Other Income (Expense), net: Other income (expense) relates mainly to ~~Unaudited Condensed Consolidated Financial Statements included~~realized and unrealized foreign exchange gains and losses. For the three and six months ended June 30, 2022, the Company recorded $0.1 million and $0.9 million of other expense, net, respectively. For the three and six months ended June 30, 2021, the Company recorded $0.3 million of other expense, net and $0.7 million of other income, net, respectively. The change in ~~this Quarterly Report on Form 10-Q for further information.~~

~~Income Tax Provision~~other income (expense), net was primarily due to foreign currency exchange rates fluctuation during the above periods.

Income Tax Provision:Income tax ~~expense~~benefit for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$0.7~~$2.9 million and ~~$2.0~~$4.3 million ~~respectively,~~ on pre-tax loss of ~~$5.2~~$9.0 million and ~~$30.4~~pre-tax loss of $13.3 million, respectively. Income tax expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$1.6~~approximately $0.5 million and ~~$2.5~~$1.4 million respectively, on pre-tax ~~income~~loss of ~~$1.5 million~~$2.8 and pre-tax loss of ~~$6.6~~$25.1 million, respectively. ~~For~~As of June 30, 2022, the ~~three and nine months ended September 30, 2021, the effective~~ income tax rate varied from the United States statutory income tax rate primarily due to valuation allowances in North America, ~~and~~ EMEA and ~~the mix of earnings generated by our wholly owned~~Asia, as well as foreign ~~subsidiaries in Asia.~~and state income tax rate differentials.

In managing our business and assessing our financial performance, we supplement the information provided by our U.S. GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-U.S. GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) stock-based compensation, and (v) the impact of material transactions or events that we believe are not indicative of our core operating performance, such as acquisition costs, ~~goodwill impairment,~~ impairment of goodwill, intangibles or long-lived assets, loss on debt extinguishment, restructuring and other charges, including termination related benefits, headquarters and facilities relocation, executive transition, and bad debt expense primarily related to a large customer in India, any of which may or may not be recurring in nature. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.

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

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) or any other performance measures calculated in accordance with U.S. GAAP or as a measure of liquidity. Management understands these limitations and compensates for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplemental measure.

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

* See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements ~~included in this Quarterly Report on Form 10-Q~~ for further information.

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our unaudited condensed consolidated financial statements, refer to Note 1 Organization and Summary of Significant Accounting Policies in the ~~notes~~Notes to our ~~audited consolidated financial statements~~Audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as supplemented by Note 1 Organization and Summary of Significant Accounting Policies inof the ~~notes~~Notes to ~~our unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

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

The Company had a net loss of ~~$5.9~~$6.0 million and ~~$32.4~~$9.1 million for the three and six months ~~and nine months ended September~~June 30, ~~2021,~~2022, respectively. The Company had a net loss of ~~$0.1~~$3.3 million and ~~$9.0~~$26.5 million for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

As of ~~September~~June 30, ~~2021,~~2022, we had working capital of ~~$121.8~~$99.6 million. As of ~~September~~June 30, ~~2021,~~2022, we had ~~$45.5~~$17.1 million in unrestricted cash and cash equivalents, which included ~~$22.3~~$10.6 million in cash balances held by our international subsidiaries.

~~On January 29, 2021,~~As of June 30, 2022, we ~~closed an equity offering which resulted in gross proceeds~~had $30.0 million available under the Revolving Credit Facility. There was no amount outstanding under the Revolving Credit Facility as of approximately $64.4 million and net proceeds, after deducting underwriting discounts and commissions and offering expenses, of approximately $59.5 million. We used a portion of the net proceeds from the equity offering to pay off the outstanding balance of debt with financial institutions and related parties.June 30, 2022.

We continue to focus on cost management, operating efficiency and efficient discretionary spending. In addition, if necessary, we may ~~sell assets,~~leverage our Revolving Credit Facility or issue debt or equity ~~securities or purchase credit insurance.~~securities. We may also rationalize the number of products we sell, adjust our manufacturing footprint, and reduce our operations in low margin regions, including reductions in headcount. Based on our current plans and current business conditions, we believe that these measures along with our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months from the date of this Quarterly Report on Form 10-Q.

In December 2019, a strain of coronavirus, now known to cause 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 may continue to impact on our 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 our impairment assessments could be negatively impacted and could result in future impairments of goodwill, intangibles and other long-lived assets. During the nine months ended September 30, 2021, our revenues increased by 19.0%, compared to the nine months ended September 30, 2020, however the impact of a continued COVID-19 pandemic or sustained measures taken to limit or contain the outbreak could have a material and adverse effect on our business, financial condition, results of operations, and cash flows.

The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):

Net cash used in operating activities increased by ~~$4.1~~$22.5 million to ~~$15.1~~$30.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 from net cash used in operating activities of ~~$11.0~~$8.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The increase in cash used in operating activities was primarily due to ~~restructuring activities related to our Hanover location,~~ an increase in ~~research~~accounts receivable as shipments were heavily weighted toward the last month of the second quarter 2022 due to component availability, and ~~development expenses, along with~~ an increase in ~~selling, general and administrative expenses, partially offset by an increase~~inventory purchases in ~~gross margin. The increase in research and product development expenses was primarily due to strategic hiring decisions in research, development, and product line management~~anticipation of increased shipments later in the ~~second half of 2020~~year and into the first half of 2021 with the intent to accelerate growth and capture market share. The increase in selling, general and administrative expenses was due to strategic hiring decisions across sales and administration in the second half of 2020 and into the first half of 2021 with the intent to accelerate growth and capture market share, along with the impact of the Optelian and Rift acquisitions.as a mitigation against long lead times.

Net cash used in investing activities increased by ~~$6.7~~$17.4 million to ~~$8.6~~$24.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 from ~~$1.9~~$6.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This increase was primarily due to cash used in the ~~Optelian and RIFT acquisitions.~~ASSIA Acquisition in the second quarter of 2022.

Net cash provided by financing activities totaled ~~$21.6~~$25.3 million for the ~~nine~~six months ended ~~September~~June 30, 2022 and consisted primarily of borrowing under the term loan to fund the ASSIA Acquisition and proceeds from exercise of stock awards, partially offset by payment of debt issuance cost. This is in comparison to cash provided by financing activities of $21.5 million for the six months ended June 30, 2021 ~~and~~which consisted primarily of proceeds from the equity offering and exercise of ~~$59.5 million, partially~~stock awards offset by repayments of our short-term borrowings and related party term loan. This is in comparison to cash provided by financing activities of $19.8 million for the nine months ended September 30, 2020 and consisted primarily of proceeds from a related party loan, factored accounts receivable accounted for as a secured borrowing, and proceeds from short-term borrowings, partially offset by a net outflow associated with the repayment of the PNC Credit Facilities and other short-term borrowings.

Our primary source of liquidity comes from our cash, cash equivalents and restricted cash, which totaled ~~$52.4~~$23.1 million at ~~September~~June 30, ~~2021.~~2022. Our cash, cash equivalents and restricted cash as of ~~September~~June 30, ~~2021~~2022 included ~~$22.3~~$11.5 million held by our international subsidiaries.

On February 9, 2022, the Company entered into a Credit Agreement with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans in an aggregate principal amount of up to $30.0 million, up to $15.0 million of which is available for letters of credit, and ~~Trade Facilities - Foreign Operations~~was scheduled to mature on February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments, plus $10.0 million.

On May 27, 2022, the Company entered into a First Amendment to Credit Agreement, which amends the Credit Agreement dated February 9, 2022. The Amendment, among other things, provides for the Term Loan in an aggregate principal amount of $25.0 million with a maturity date of May 27, 2027 and extends the maturity date of the $30.0 million Revolving Credit Facility to May 27, 2025. On May 27, 2022, the Company borrowed the full amount of the Term Loan to finance the ASSIA Acquisition.

As of ~~September~~June 30, ~~2021, we had~~2022, the Company's long-term debt obligation was $23.4 million, net of the current portion of $1.3 million, and unamortized issuance costs of $0.3 million. There was no amount outstanding ~~balances~~under the Revolving Credit Facility. The Company was in compliance with ~~banks and other lending institutions. As~~all debt covenants as of December 31, 2020, we had an aggregate outstanding balance of $13.8 million under financing arrangements with foreign banks and other lending institutions. During the first half of 2021, we paid off the outstanding balance of debt under such financing arrangements.June 30, 2022.

As of September 30, 2021, we had no related party debt outstanding. As of December 31, 2020, we had an aggregate outstanding balance of $29.8 million of related party debt with DNI. In January and February 2021, we paid off the outstanding balance of debt with related parties with proceeds from the issuance of shares of our common stock during January 2021.

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

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

Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of ~~September~~June 30, ~~2021, two customers~~2022, one customer represented ~~18% and 15%~~10% of net accounts ~~receivable, respectively, and net~~receivable. Net receivables from customers in countries other than the United States represented ~~80%~~77%. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, ~~and~~ inventory purchase ~~commitments.~~commitments and debt obligations.

Future minimum operating lease obligations include primarily payments for our office locations and manufacturing, research and development locations, which expire at various dates through 2028. See Note 1312 Leases of the Notes to Unaudited Condensed Consolidated Financial Statements ~~included in this Quarterly Report on Form 10-Q~~ for further information regarding our operating leases.

We may have short term purchase commitments related to the purchase orders for products and services, within the normal course of business. These arrangements typically have cancellation provisions that allow us to cancel with little to no penalty.

We are required to maintain disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information required to be disclosed in our reports filed or submitted pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosures. Our disclosure controls and procedures include those components of our internal control over financial reporting intended to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financials in accordance with U.S. GAAP. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of ~~September~~June 30, ~~2021,~~2022, the end of the period covered by this Quarterly Report on Form 10-Q. The

evaluation was done under the supervision and with the participation of management, including our principal executive officer and principal financial officer. In the course of the evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer concluded our disclosure controls and procedures were effective as of ~~September~~June 30, ~~2021.~~2022.

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the Notice discussed in Note 13of the Notes to Unaudited Condensed Consolidated Financial Statements, from time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the unaudited condensed consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the financial position, results of operations and cash flows of the period in which the ruling occurs, or future periods.

The exhibits required to be filed with this quarterly report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

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 thereunto duly authorized.


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

5700 Tennyson Parkway, Suite 400 Plano, Texas		75024
(Address of principal executive offices)		(Zip code)


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

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


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


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Unaudited Condensed Consolidated Statements of Stockholders' Equity	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2221
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3029
Item 4.	Controls and Procedures	3029

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
	Signatures	33


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


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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net revenue	$	88,412	$	93,947	$	252,143	$	211,959


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Net revenue	$	91,080		$	82,700		$	168,120		$	163,731
Cost of revenue		66,137			55,622			116,352			108,558
Gross profit		24,943			27,078			51,768			55,173
Operating expenses:
Research and product development		12,348			11,962			24,192			23,081
Selling, marketing, general and administrative		20,513			18,256			38,255			50,080
Restructuring and other charges		356			(908	)		792			5,344
Impairment of long-lived assets		—			—			—			1,735
Amortization of intangible assets		464			314			758			576
Total operating expenses		33,681			29,624			63,997			80,816
Operating loss		(8,738	)		(2,546	)		(12,229	)		(25,643	)
Interest income		36			19			73			61
Interest expense		(200	)		(28	)		(327	)		(277	)
Other income (expense), net		(63	)		(261	)		(863	)		711
Loss before income taxes		(8,965	)		(2,816	)		(13,346	)		(25,148	)
Income tax provision (benefit)		(2,937	)		463			(4,270	)		1,356
Net loss		(6,028	)		(3,279	)		(9,076	)		(26,504	)

Foreign currency translation adjustments		(4,639	)		216			(4,907	)		(2,054	)
Actuarial loss		—			83			—			55
Comprehensive loss	$	(10,667	)	$	(2,980	)	$	(13,983	)	$	(28,503	)
Net loss per share
Basic	$	(0.22	)	$	(0.12	)	$	(0.33	)	$	(1.01	)
Diluted	$	(0.22	)	$	(0.12	)	$	(0.33	)	$	(1.01	)
Weighted average shares outstanding
Basic		27,657			26,982			27,593			26,120
Diluted		27,657			26,982			27,593			26,120

Cost of revenue	56,213			65,755			164,771			144,004
Gross profit	32,199			28,192			87,372			67,955
Operating expenses:
Research and product development	11,707			9,033			34,788			27,238
Selling, marketing, general and administrative	19,539			16,795			69,619			43,472
Restructuring and other charges	6,754			-			12,098			-
Impairment of long-lived assets	-			-			1,735			-
Amortization of intangible assets	312			387			888			1,130
Total operating expenses	38,312			26,215			119,128			71,840
Operating income (loss)	(6,113	)		1,977			(31,756	)		(3,885	)
Interest income	20			14			81			98
Interest expense	(49	)		(446	)		(326	)		(1,503	)
Loss on extinguishment of debt	-			—			-			(1,369	)
Other income (expense), net	922			(41	)		1,633			69
Income (loss) before income taxes	(5,220	)		1,504			(30,368	)		(6,590	)
Income tax provision (benefit)	676			1,619			2,032			2,452
Net income (loss)	(5,896	)		(115	)		(32,400	)		(9,042	)
							-
Foreign currency translation adjustments	(2,036	)		1,112			(4,090	)		(1,519	)
Actuarial gain (loss)	—			—			55			285
Comprehensive income (loss)	(7,932	)	$	997		$	(36,435	)	$	(10,276	)
Net income (loss) per share
Basic	(0.22	)	$	(0.01	)	$	(1.22	)	$	(0.42	)
Diluted	(0.22	)	$	(0.01	)	$	(1.22	)	$	(0.42	)
Weighted average shares outstanding used to compute basic net income (loss) per share	27,201			21,592			26,484			21,532
Weighted average shares outstanding used to compute diluted net income (loss) per share	27,201			21,592			26,484			21,532


Six-months ended March 31, 2021:
Balance as of December 31, 2020	21,958	$	22	$	147,997	$	(2,124	)	$	(52,316	)	$	93,579
Issuance of common stock in public offering, net of issuance costs	4,600		5		59,520								59,525
Exercise of stock awards and employee stock plan purchases	325		—		2,569		—			—			2,569
Stock-based compensation	—		—		1,352		—			—			1,352
Net income (loss)	—		—		—		—			(23,225	)		(23,225	)
Other comprehensive (loss)	—		—		—		(2,298	)		—			(2,298	)
Balance as of March 31, 2021	26,883	$	27	$	211,438	$	(4,422	)	$	(75,541	)	$	131,502
Exercise of stock awards and employee stock plan purchases	309		—		1,967		—			—			1,967
Stock-based compensation	—		—		1,994		—			—			1,994
Net income (loss)	—		—		—		—			(3,279	)		(3,279	)
Other comprehensive loss	—		—		—		299			—			299
Balance as of June 30, 2021	27,192	$	27	$	215,399	$	(4,123	)	$	(78,820	)	$	132,483

Purchase consideration
Retirement of Optelian debt	$	4,929
Payment to shareholders and option holders		664
Contingent payment to shareholders		1,897
Total purchase consideration	$	7,490

Provisional allocation of purchase consideration
Cash and cash equivalents	$	1,236
Accounts receivable - trade		460
Other receivables		153
Inventories		448
Prepaid expenses and other current assets		49
Property, plant and equipment		718
Intangible assets		3,160
Accounts payable - trade		(390	)
Contract liabilities		(169	)
Accrued and other liabilities		(123	)
Goodwill		1,948
Total purchase consideration	$	7,490

Remainder of 2021	$	294
2022		1,177
2023		1,177
2024		1,177
2025		1,177
Thereafter		407
Total	$	5,409

	December 31, 2020
	Short-term		Long-term			Total
Bank and Trade Facilities - Foreign Operations	$	13,787	$	—		$	13,787
Related Party		—		29,766			29,766
		13,787		29,766			43,553
Less: unamortized deferred financing costs		—		(12	)		(12	)
	$	13,787	$	29,754		$	43,541

	Three Months Ended September 30, 2021
Counterparty	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI	$	54	$	45	$	253	$	394	$	—	$	42
Dasan Invest*		—		10		43		19		—		—
	$	54	$	55	$	296	$	413	$	—	$	42

	Three Months Ended September 30, 2020
Counterparty	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI	$	552	$	485	$	306	$	523	$	324	$	93
	$	552	$	485	$	306	$	523	$	324	$	93

	Nine Months Ended September 30, 2021
Counterparty	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI	$	1,965	$	1,791	$	776	$	1,185	$	132	$	180
Dasan Invest*		—		30		134		57		—		—
	$	1,965	$	1,821	$	910	$	1,242	$	132	$	180

	Nine Months Ended September 30, 2020
Counterparty	Sales		Cost of revenue		Research and product development		Selling, marketing, general and administrative		Interest expense		Other expenses
DNI	$	2,077	$	1,887	$	690	$	1,183	$	763	$	263
Dasan Invest*		—		20		81		55		—		—
	$	2,077	$	1,907	$	771	$	1,238	$	763	$	263

	As of September 30, 2021
Counterparty	Account receivables		Other receivables		Other assets		Loans Payable		Accounts payable
DNI	$	106	$	215	$	693	$	—	$	564
Dasan Invest*		—		—		—		—		26
	$	106	$	215	$	693	$	—	$	590

	As of December 31, 2020
Counterparty	Account receivables		Other receivables		Other assets		Loans Payable		Accounts payable
DNI	$	2,278	$	247	$	755	$	29,754	$	1,552
Dasan Invest*		—		—		—		—		32
	$	2,278	$	247	$	755	$	29,754	$	1,584

	September 30, 2021			December 31, 2020
Lease Assets and Liabilities
Assets:
Right-of-use assets from operating leases	$	12,932		$	18,483

Liabilities:
Operating lease liabilities - current	$	4,118		$	4,494
Operating lease liabilities - non-current		12,694			15,959
Total operating lease liabilities	$	16,812		$	20,453
Weighted average remaining lease term	4.4 years			4.6 years
Weighted average discount rate		5.5	%		5.7	%

Remainder of 2021	$	1,701
2022		4,877
2023		4,442
2024		3,866
2025		2,531
Thereafter		2,457
Total operating lease payments		19,874
Less: imputed interest		(3,062	)
Total operating lease liabilities	$	16,812


Exhibit Number		Description

3.1		Restated Certificate of Incorporation of DASAN Zhone Solutions, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the SEC on September 27, 2017).

3.2		Certificate of Amendment to the Restated Certificate of Incorporation of DZS Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 27, 2020).

3.3		Amended and Restated Bylaws of DZS Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021).

~~10.1+~~ 10.1		~~Employment~~Credit Agreement, ~~effective August 2, 2021 by~~dated as of February 9, 2022, among DZS Inc., as Borrower, the other Loan Parties party thereto, the Lenders from time to time parties thereto and ~~between DZS Inc. and Misty D. Kawecki~~JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on ~~August 2, 2021)~~February 10, 2022).

31.1*10.2		First Amendment to Credit Agreement, dated as of May 27, 2022, among DZS Inc., as Borrower, the other Loan Parties party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 1, 2022).

31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1*		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

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*		Filed herewith.
+		Indicates management contract or compensatory plan, contract or arrangement.


	DZS INC.

Date: ~~November 3, 2021~~August 2, 2022
	By:	/s/ Charles Daniel Vogt
	Name:	Charles Daniel Vogt
	~~Name:~~Title:	~~Charles Daniel Vogt~~
	~~Title:~~	President and Chief Executive Officer

	By:	/s/ Misty Kawecki
	Name:	Misty Kawecki
	Title:	Chief Financial Officer
		(Principal Financial and
		Accounting Officer)